Question 3 [17 marks]

Accounting for income tax

Snowstorm Ltd, a ski/snowboard sales and hire business, commenced operations on 1 July 2016 and presents its first Statement of Profit or Loss and Other Comprehensive Income, and first Statement of Financial Position on 30 June 2017. The statements are prepared before considering taxation. The following information is available:

Extract from statement of profit or loss and other comprehensive income for the year ended 30 June 2017

	$	$
Sales revenue - snow/ski equipment	686,000
Hire revenue - snow/ski equipment	140,000
Government grant (exempt income)	20,000	846,000
Expenses:
Cost of sales	250,000
Administration expenses	104,000
Doubtful debts expense	5,000
Salaries	260,000
Annual leave	23,000
Warranty expenses	12,000
Depreciation expense - equipment	60,000
Rent expense	26,000
Insurance	40,000	780,000
Accounting profit before tax		66,000

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

	$
Assets:
Cash	10,000
Inventory	60,000
Trade receivables	125,000
Less Allowance for doubtful debts	(4,000)
Prepaid insurance	10,000
Goodwill	20,000
Equipment - cost	300,000
Less Accumulated depreciation	(60,000)
Liabilities:
Trade payables	35,000
Provision for annual leave	20,000
Provision for warranties	10,000
Loan payable	90,000

Additional information:

All administration, rent and salaries expenses incurred have been paid as at year end.

Tax deductions for annual leave, warranties and insurance are available when the amounts are paid, and not as amounts are accrued.

Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.

Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.

The equipment is depreciated over five years for accounting purposes, but over six years for taxation purposes (straight-line method, and with an estimated residual value of nil).

The tax rate is 30%.

Required:

i) Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.

ii) Prepare the journal entries to record the current tax liability, and deferred tax asset and liability balances at 30 June 2017.

iii) Now assume that Sales revenue snow/ski equipment is actually $576,000 (instead of $686,000), and hence accounting profit/(loss) before tax is ($44,000). In addition, Trade receivables is actually $15,000 (instead of $125,000). Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017 in this scenario, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.

Marking Guide Question 3	Max. marks awarded
i) Determination of taxable income and current tax liability	6
i) Determination of deferred tax assets and liabilities in deferred tax worksheet	5
ii) Journal entries	2
iii) Determination of taxable income, current tax liability and deferred tax assets and liabilities	4