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Galaxy Ltd needs your assistance in calculating and disclosing the taxation expense for the financial year ended 30 June 2018. Hamish Ltd has supplied you

Galaxy Ltd needs your assistance in calculating and disclosing the taxation expense for the financial year ended 30 June 2018. Hamish Ltd has supplied you with an extract from their income statement and from their balance sheet as well as a list of other information that need to be considered.

Gaxaxy Ltd

Income statement for the year ended 30 June 2018

$

Income

904,000

Revenue from Sales

850,000

Interest Revenue

18,000

Rent Revenue

36,000

Expenses

647,000

Administration and selling expenses

133,000

Wages and salary expenses

250,000

Doubtful debts expense

20,000

Goodwill impairment

20,000

Insurance expense

54,000

Depreciation expense - plant

90,000

Long-service leave expenses

35,000

Warrantee expenses

45,000

Net Profit before tax

257,000

Galaxy Ltd

Extract from the Balance sheet as at 30 June 2018

$

Assets

Cash

40,000

Inventory

90,000

Accounts receivable (net)

80,000

Prepaid insurance

?

Interest receivable

6,000

Goodwill

?

Plant

?

Liabilities

Accounts payable

50,000

Wages and salaries owing

30,000

Provision for long-service leave expenses

25,000

Rent revenue received in advance

?

Provision for warrantee expenses

30,000

Loan payable

200,000

The following information relates to the year ended 30 June 2018. Revenue from sales, including those on credit terms, is taxable when the sales are made. Administration and salary expenses are tax deductible when they are incurred. This also applies to wages and salary expenses. The following items that are included in the financial statements of Hamish Ltd are treated differently for accounting and tax purposes:

At year end, accounts receivable owed to Galaxy Ltd was $80,000 net after the allowance for doubtful debts. Since Galaxy Ltd expects that some of its debtors may be doubtful, it creates an allowance for doubtful debts. The opening balance (on 1 July 2017) of the allowance for doubtful debts was $5,000. The doubtful debts expense is not tax deductible until the debtor is actually written off as bad.

The insurance expense amounts to $4,500 per month. During the year $60,000 was actually paid for insurance and on 30 June 2017 $13,500 was prepaid for the 2017 financial year. Insurance expense is tax deductible when it is paid.

Interest amounting to $12,000 was received during the year and an additional $6,000 was accrued to account for the total interest earned of $18,000 for the year. Interest is taxable when it is received.

The plant was acquired on 1 July 2016 at a cost of $500,000. The plant has an economic life of 5 years with a residual value of $50,000. The straight line method of depreciation is used to depreciate the plant for accounting purposes. For taxation purposes, the straight line method over 4 years is used to calculate the depreciation, but only the cost of the plant is depreciable (ignore the residual for tax purposes).

Galaxy Ltd paid an amount of $10,000 during the year in respect of long service leave. In addition an amount of $25,000 had been accrued for accounting purposes during the year in respect of long service leave. Tax deductions for this item are available only when the amount is paid. At 30 June 2017 there was no accrual for long service leave.

During the year $45,000 was received with respect to rent revenue, of which $36,000 relates to the current year. This is the first year that Galaxy Ltd received any rent. Rent received is taxable when it is received.

Warrantee expenses incurred amount to $45,000, of which $15,000 has been paid by year end. Warrantee expenses are only tax deductible if they have been paid. At 30 June 2017 there was no accrual for warrantee expenses.

During the year the goodwill with an opening balance of $100,000 was impaired by $20,000. Goodwill impairment is not a deductible expense for tax purposes.

At the beginning of the year (i.e., at the 1st of July 2017), total taxable temporary differences amounted to $48,500 and total deductible temporary differences amounted to $5,000.

The tax rate was always 33% but changed to 28% during the current year.

Required:

1.Calculate the deferred taxation that Galaxy Ltd should provide for the year ended 30 June 2018. Complete the worksheet for this purpose. Prepare the journal entries (with narrations) to account for Galaxy Ltds tax expense for the year ended 30 June 2018 in accordance with NZ IAS 12.

2.Calculate the taxable income and current tax for Galaxy Ltd for the year ended 30 June 2018. Provide the journal entries that will be needed to account for current tax for the 2018 financial year.

3.Show an extract from the income statement and the notes to the income statement of Galaxy Ltd that clearly shows the required disclosure of the tax expense for the year ended 30 June 2018 in accordance with NZ IAS 12.

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