Question 1 (30 Marks)

The accounting profit before tax of Joffrey Ltd for the year ended 30 June 2017 was $114,780. It included the following revenue and expense items:

Accounting fees

$6,700

Amoristion of development costs

15,000

Carrying amount of plant sold

30,000

Depreciation expense - equipment

5,500

Depreciation expense - plant

24,000

Doubtful debts expense

9,200

Employee benefits expense

11,400

Entertainment expense

5,400

Goodwill impairment

2,500

Government grant (exempt income)

4,200

Insurance expense

12,900

Proceeds from insurance claim for loss of profits

41,200

Proceeds from sale of plant

33,000

Warranty expense

100

The draft statement of financial position as at 30 June 2017 included the following assets and liabilities:

2017

2016

Assets

Cash

$15,300

$13,200

Accounts receivable

37,000

36,500

Allowance for doubtful debts

(3,200)

(2,000)

Inventories

22,000

16,500

Prepaid insurance

5,400

6,700

Development costs

45,000

-

Accumulated amortisation

(15,000)

-

Plant - at cost

240,000

290,000

Accumulated depreciation - plant

(134,400)

(130,400)

Equipment - at cost

58,000

58,000

Accumulated depreciation - equipment

(24,500)

(19,000)

Land - at fair value

450,000

300,000

Deferred tax asset

?

10,200

Goodwill

7,000

7,000

Goodwill - accumulated impairment losses

(4,500)

(2,000)

Other debtors

142,400

-

Liabilities

Provision for employee benefits

14,100

9,700

Deferred tax liability

?

42,834

Borrowings

160,000

140,000

Other creditors

12,000

-

Provision for warranties

2,200

3,100

Additional information:

a)In January 2017, the company received an amended assessment for the year ended 30 June 2016 from the Australian Taxation Office (ATO). The amended notice indicated that an amount of $5,400 claimed as a deduction had been disallowed. Joffrey Ltd has not yet adjusted its accounts to reflect the amendment.

b)In the previous year, Joffrey Ltd has made a tax loss of $17,200. Joffrey Ltd recognised a deferred tax asset in respect of this loss.

c)For tax purposes, the carrying amount of plant sold was $26,000. This sale was the only movement in plant for the year.

d)The tax deduction for equipment was $7,000. Accumulated depreciation at 30 June 2016 for tax purposes was $28,000.

e) The tax deduction for plant depreciation was $28,800. Accumulated depreciation at 30 June 2016 for tax purposes was $156,480.

f)The original cost of the land was $200,000

g)Other creditors at 30 June 2017 include an accrual for accounting fees of $5,000 for work not yet performed. For tax purposes, the accounting fees are deductible only if work has been performed.

h)Other debtors at 30 June 2017 include $41,200 relating to an insurance claim that is in process. Income is assessable for tax purposes only after the insurance proceeds have been received.

i)No deduction is allowed for tax purposes in relation to entertainment.

j)A tax deduction for development expenditure of 125% of the $45,000 spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.

k)No journal entries related to tax have been recorded for the year ended 30 June 2017. Assume the tax balances at 30 June 2016 are correct.

l)The tax rate is 30%.

Required:

1. Prepare the journal entry necessary to record the amendment to the prior year's taxation return.(1 mark)

2. Prepare the current tax worksheet to calculate the current tax liability for the year ended 30 June 2017

(show all working).(14 marks)

3. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2017. Include all accounts and net balances where appropriate.(13 marks)

4. Prepare the journal entries to recognise the current tax liability, deferred tax assets and liabilities at 30 June 2017.(2 marks)

(Source: adapted fromLoftus, J., Leo, K., Picker, R., Wise, V., & Clark, K. (2013). Understanding Australian Accounting Standards. (1st edition). Brisbane: John Wiley & Sons, Australia.)

Marking Guide - Question 1

Max. marks awarded

1)

Journal entry and workings

1

2)

Determination of taxable income and accompanying journal entries

11

Workings

3

3)

Determination of deferred tax balances and adjustments

13

4)

Journal entries

2

Total

30

Question 1 (30 Marks) The accounting profit before tax of Joffrey Ltd for the year ended 30 June 2017 was $114,780. It included the following revenue and expense items: Accounting fees Amoristion of development costs Carrying amount of plant sold Depreciation expense - equipment Depreciation expense - plant Doubtful debts expense Employee benefits expense Entertainment expense Goodwill impairment Government grant (exempt income) Insurance expense Proceeds from insurance claim for loss of profits Proceeds from sale of plant Warranty expense $6,700 15,000 30,000 5,500 24,000 9,200 11,400 5,400 2,500 4,200 12,900 41,200 33,000 100 The draft statement of financial position as at 30 June 2017 included the following assets and liabilities: 2017 2016 Assets Cash $15,300 $13,200 Accounts receivable 37,000 36,500 Allowance for doubtful debts (3,200) (2,000) Inventories 22,000 16,500 Prepaid insurance 5,400 6,700 Development costs 45,000 Accumulated amortisation (15,000) Plant - at cost 240,000 290,000 Accumulated depreciation - plant (134,400) (130,400) Equipment - at cost 58,000 58,000 Accumulated depreciation - equipment (24,500) (19,000) Land - at fair value 450,000 300,000 Deferred tax asset ? 10,200 Goodwill 7,000 7,000 Goodwill - accumulated impairment losses (4,500) (2,000) Other debtors 142,400 Liabilities Provision for employee benefits Deferred tax liability Borrowings Other creditors Provision for warranties 14,100 ? 160,000 12,000 2,200 9,700 42,834 140,000 3,100 Additional information: a) In January 2017, the company received an amended assessment for the year ended 30 June 2016 from the Australian Taxation Office (ATO). The amended notice indicated that an amount of $5,400 claimed as a deduction had been disallowed. Joffrey Ltd has not yet adjusted its accounts to reflect the amendment. b) In the previous year, Joffrey Ltd has made a tax loss of $17,200. Joffrey Ltd recognised a deferred tax asset in respect of this loss. c) For tax purposes, the carrying amount of plant sold was $26,000. This sale was the only movement in plant for the year. d) The tax deduction for equipment was $7,000. Accumulated depreciation at 30 June 2016 for tax purposes was $28,000. e) The tax deduction for plant depreciation was $28,800. Accumulated depreciation at 30 June 2016 for tax purposes was $156,480. f) The original cost of the land was $200,000 g) Other creditors at 30 June 2017 include an accrual for accounting fees of $5,000 for work not yet performed. For tax purposes, the accounting fees are deductible only if work has been performed. h) Other debtors at 30 June 2017 include $41,200 relating to an insurance claim that is in process. Income is assessable for tax purposes only after the insurance proceeds have been received. i) No deduction is allowed for tax purposes in relation to entertainment. j) A tax deduction for development expenditure of 125% of the $45,000 spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period. k) No journal entries related to tax have been recorded for the year ended 30 June 2017. Assume the tax balances at 30 June 2016 are correct. l)The tax rate is 30%. Required: 1. Prepare the journal entry necessary to record the amendment to the prior year's taxation return. (1 mark) 2. Prepare the current tax worksheet to calculate the current tax liability for the year ended 30 June 2017 (show all working). (14 marks) 3. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2017. Include all accounts and net balances where appropriate. (13 marks) 4. Prepare the journal entries to recognise the current tax liability, deferred tax assets and liabilities at 30 June 2017. (2 marks) (Source: adapted from Loftus, J., Leo, K., Picker, R., Wise, V., & Clark, K. (2013). Understanding Australian Accounting Standards. (1st edition). Brisbane: John Wiley & Sons, Australia.) Marking Guide - Question 1 1) Journal entry and workings 2) Determination of taxable income and accompanying journal entries Workings 3) Determination of deferred tax balances and adjustments 4) Journal entries Total Max. marks awarded 1 11 3 13 2 30