On 1 July 2017, IT Ltd purchased office equipment for $500,000. For accounting purposes the equipment is depreciated over 5 years on a straight line basis with a residual value of $50,000. For tax purposes, the cost of the equipment is depreciated over 4 years using the straight line method. At the end of the financial year 30 June 2020, the equipment was revalued to $300,000 and will continue to be used in the operations of the business. During the year, IT Ltd planned to expand into the US market and expected to make a sale of US$500,000 on 31 March 2021. IT Ltd was concerned about the exchange rate risk associated with this forecast sale. As a result, IT Ltd entered into a forward contract to hedge the exchange rate risk, with the settlement date on 30 June 2021. At year end (i.e., 30 June 2020), the fair value of the forward contract was $85,000. The hedge was deemed to be effective and the gain from the forward was fully recognised an equity account called "hedge reserve". For tax purposes, the gain is not taxable until the forward contract is settled. The amount of goodwill was initially recorded at $200,000. At year end, IT Ltd believed that the goodwill had been impaired by $50,000 and recognised the impairment in its Income Statement. This is the first time that IT Ltd has recognised goodwill impairment. However, goodwill impairment is not allowed as a deductible expense for taxation purposes. As at 1 July 2019, total deductible temporary differences were $158,000 and total taxable temporary differences were $70,000. The tax rate changed from 25 percent to 28 percent at the beginning of the current financial year (i.e., on 1 July 2019). . REQUIRED: (a) In accordance with NZ IAS 12, calculate IT Ltd's taxable profit and provide the journal entry for its current tax for the year ended 30 June 2020. Use WORKSHEET 3 on page 13 of the ANSWER BOOKLET for your answer. (4 marks) (b) In accordance with NZ IAS 12, calculate IT Ltd's deferred tax assets and liabilities, and provide the journal entries to account for its deferred tax for the year ended 30 June 2020. Use WORKSHEET 4 on pages 14 and 15 of the ANSWER BOOKLET for your answer. (7 marks) (c) Prepare the income Statement extract for IT Ltd to disclose its tax expense for the year ended 30 June 2020. Also prepare the Balance Sheet extract to show how to disclose its current tax payable and deferred tax balance as at 30 June 2020. Use WORKSHEET 5 on page 17 of the ANSWER BOOKLET for your answer. (4 marks) (d) Prepare a numerical reconciliation between IT Ltd's tax expense and accounting profit. That is, clearly show why the total reported tax expense is not equal to the expected tax expense (i.e., the product between accounting profit before tax and the current tax rate). Use WORKSHEET 6 on page 19 of the ANSWER BOOKLET for your answer. (2 marks) On 1 July 2017, IT Ltd purchased office equipment for $500,000. For accounting purposes the equipment is depreciated over 5 years on a straight line basis with a residual value of $50,000. For tax purposes, the cost of the equipment is depreciated over 4 years using the straight line method. At the end of the financial year 30 June 2020, the equipment was revalued to $300,000 and will continue to be used in the operations of the business. During the year, IT Ltd planned to expand into the US market and expected to make a sale of US$500,000 on 31 March 2021. IT Ltd was concerned about the exchange rate risk associated with this forecast sale. As a result, IT Ltd entered into a forward contract to hedge the exchange rate risk, with the settlement date on 30 June 2021. At year end (i.e., 30 June 2020), the fair value of the forward contract was $85,000. The hedge was deemed to be effective and the gain from the forward was fully recognised an equity account called "hedge reserve". For tax purposes, the gain is not taxable until the forward contract is settled. The amount of goodwill was initially recorded at $200,000. At year end, IT Ltd believed that the goodwill had been impaired by $50,000 and recognised the impairment in its Income Statement. This is the first time that IT Ltd has recognised goodwill impairment. However, goodwill impairment is not allowed as a deductible expense for taxation purposes. As at 1 July 2019, total deductible temporary differences were $158,000 and total taxable temporary differences were $70,000. The tax rate changed from 25 percent to 28 percent at the beginning of the current financial year (i.e., on 1 July 2019). . REQUIRED: (a) In accordance with NZ IAS 12, calculate IT Ltd's taxable profit and provide the journal entry for its current tax for the year ended 30 June 2020. Use WORKSHEET 3 on page 13 of the ANSWER BOOKLET for your answer. (4 marks) (b) In accordance with NZ IAS 12, calculate IT Ltd's deferred tax assets and liabilities, and provide the journal entries to account for its deferred tax for the year ended 30 June 2020. Use WORKSHEET 4 on pages 14 and 15 of the ANSWER BOOKLET for your answer. (7 marks) (c) Prepare the income Statement extract for IT Ltd to disclose its tax expense for the year ended 30 June 2020. Also prepare the Balance Sheet extract to show how to disclose its current tax payable and deferred tax balance as at 30 June 2020. Use WORKSHEET 5 on page 17 of the ANSWER BOOKLET for your answer. (4 marks) (d) Prepare a numerical reconciliation between IT Ltd's tax expense and accounting profit. That is, clearly show why the total reported tax expense is not equal to the expected tax expense (i.e., the product between accounting profit before tax and the current tax rate). Use WORKSHEET 6 on page 19 of the ANSWER BOOKLET for your answer. (2 marks)
