Financial Accounting Paper Question

1) Mali, CFO of AppleTreeHouse is curious about deferred tax and has asked you for help. For the year ending 31 March 2018, AppleTreeHouse made an accounting profit of $200,000. The tax rate is 28%. The following information was also provided to you:

As at the end of the 2018 financial year AppleTreeHouse has six year-old piece of machinery. The machinery cost $76,000 and is depreciated over a total useful life of 12 years with an expected residual or salvage value of $4,000. For tax purposes the machinery is depreciated using a 10% depreciation rate.

At the start of the 2016 financial year $119,000 of R&D expenditure was capitalized and turned into an intangible asset to be amortized of seven years. For tax purposes such expenditure is fully deductible in the year incurred (note there was no R&D tax credit in 2016-2018).

Rent of $16,000 for the next year was paid in advance. Tax deductions for this item are available for amounts paid.

At the start of the year there was a provision for annual long service leave of $17,000. $6,000 of long service leave was taken during the year and the long service leave expense for the year was $8,000. Tax deductions for this item are available for amounts paid.

There were entertainment expenses incurred and paid of $4,000. For tax purposes only 50% of the amount paid for entertainment expenses are tax deductible.

The allowance for doubtful debts at the start and end of the year was $2,000. No debts during the year were written-off. Tax deductions for this item are available when debts are written-off.

The opening balances for Deductible Temporary Differences and Taxable Temporary Differences were 19,000 and 93,000, respectively.

The tax rate is 28%.

Using the below templates, fill in the current tax worksheet, deferred tax worksheet and do any journal entries relating to tax for the year.

2) The CAT political party is proposing to reduce the company tax rate to 18%. Mali has asked you to calculate what the opening Deferred Tax Asset and Deferred Tax Liability balances would be for AppleTreeHouse at the start of 2019 (i.e. the next financial year) if the tax rate was changed and provide the adjusting journal entry.

Current tax worksheet 200,000 Profit before income tax Add: Deduct: Taxable Income Current tax liability @ 28% Deferred tax worksheet Carrying Tax Amount Base Deductible TDs Taxable TDs Assets Cash Inventory Accounts Receivable Prepaid Rent Machinery Intangible Asset 20,000 43,000 78,000 16,000 40,000 68,000 Liabilities Accounts payable Provision for Long Service Leave Loan payable 38,000 19,000 150,000 Total TDs Total TDS Less: Prior period amounts (i.e., beginning balances) Movement for the period Adjustment to be made to tax entry during 2018 financial year Current tax worksheet 200,000 Profit before income tax Add: Deduct: Taxable Income Current tax liability @ 28% Deferred tax worksheet Carrying Tax Amount Base Deductible TDs Taxable TDs Assets Cash Inventory Accounts Receivable Prepaid Rent Machinery Intangible Asset 20,000 43,000 78,000 16,000 40,000 68,000 Liabilities Accounts payable Provision for Long Service Leave Loan payable 38,000 19,000 150,000 Total TDs Total TDS Less: Prior period amounts (i.e., beginning balances) Movement for the period Adjustment to be made to tax entry during 2018 financial year