Question:

And here is answer booklet:

QUESTION 4: Accounting for income tax WRITE YOUR ANSWER TO QUESTION 4 IN THE INDICATED PLACES ON PAGES 13-19 OF THE ANSWER BOOKLET, WHICH INCLUDES WORKSHEETS (WORKSHEET 3, WORKSHEET 4, WORKSHEET 5, & WORKSHEET 6). It is the year ended 30 June 2020 and IT Ltd has prepared the following Income Statement: $ 3,000,000 IT Ltd Income Statement for the year ended 30 June 2020 Revenue Sales revenue Less Expenses Administration and salary expense Doubtful debts expense Long service leave expense Goodwill impairment expense Depreciation expense 1,500,000 80,000 70,000 50,000 90,000 (1,790,000) 1,210,000 Profit before tax Also, the following information is extracted from the Balance Sheet as at 30 June 2020, with some of the carrying amounts of its assets and liabilities still to be calculated: $ IT Ltd Balance Sheet as at 30 June 2020 Assets (extracts) Accounts receivable - net Office equipment - net Derivative - Forward contract Goodwill 350,000 holku Derivative - Forward contract Goodwill kolko Liabilities (extracts) Provision for long service leave ? IT Ltd also has the following information for the year ended 30 June 2020: Sales revenue, including those on credit terms, are taxed at the time the sales are made. All the administration and salary expense have been paid. For tax purposes, the actual amounts paid are deductible. The opening balance (on 1 July 2019) of the allowance for doubtful debts was $100,000. During the year, IT Ltd recognised $80,000 as doubtful debts expense. At year end, the closing balance of the allowance for doubtful debts is $45,000. The doubtful debts expense is not tax deductible until the accounts receivable is actually written off as bad. During the year, IT Ltd recognised $70,000 for its long-service leave expense. At year end, the provision for long service leave has a balance of $26,000. On 1 July 2019, the opening balance for the provision for long service leave was $58,000. Only actual amounts paid are allowed as a tax deduction. . Question 4 continues on the next page Question 4 continued: . 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 (.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 in 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. (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) QUESTION 4: Accounting for income tax (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) WORKSHEET 3: to calculate taxable profit and current tax Profit before tax Implement tax Difference Back out accounting Provide journal entry: QUESTION 4: Continued (b) In accordance with NZIAS 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) WORKSHEET 4: to determine temporary differences and deferred tax Deductible Carrying amounts Tax base Taxable TDs TDS Assets (extracts) Accounts receivable - net Office equipment-net Derivative - Forward contract Goodwill Liabilities (extracts) Provision for long service leave Total TDs before exempt differences Less: Exempt differences Total TDs after exemptions Multiplied by: Current tax rate at 28% Equals: Closing balances of DTA and DTL Less: Beginning balances of DTA and DTL (at 25% rate) Adjust for: Movements during the year - adjustments related to rate change Adjust for: Movements during the year-adjustments related to equity account Remaining adjustments be made in journal entry X 28% X 28% QUESTION 4: Continued (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) WORKSHEET 5: Income Statement extract for the year ended 30 June 2020 $ Profit before tax Balance Sheet extract as at 30 June 2020 QUESTION 4: Continued (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) WORKSHEET 6: Reconciliation between tax expense and accounting profit $ Profit before tax Prima facie income tax expense at 28% (expected) Adjust for tax effect from: QUESTION 4: Accounting for income tax WRITE YOUR ANSWER TO QUESTION 4 IN THE INDICATED PLACES ON PAGES 13-19 OF THE ANSWER BOOKLET, WHICH INCLUDES WORKSHEETS (WORKSHEET 3, WORKSHEET 4, WORKSHEET 5, & WORKSHEET 6). It is the year ended 30 June 2020 and IT Ltd has prepared the following Income Statement: $ 3,000,000 IT Ltd Income Statement for the year ended 30 June 2020 Revenue Sales revenue Less Expenses Administration and salary expense Doubtful debts expense Long service leave expense Goodwill impairment expense Depreciation expense 1,500,000 80,000 70,000 50,000 90,000 (1,790,000) 1,210,000 Profit before tax Also, the following information is extracted from the Balance Sheet as at 30 June 2020, with some of the carrying amounts of its assets and liabilities still to be calculated: $ IT Ltd Balance Sheet as at 30 June 2020 Assets (extracts) Accounts receivable - net Office equipment - net Derivative - Forward contract Goodwill 350,000 holku Derivative - Forward contract Goodwill kolko Liabilities (extracts) Provision for long service leave ? IT Ltd also has the following information for the year ended 30 June 2020: Sales revenue, including those on credit terms, are taxed at the time the sales are made. All the administration and salary expense have been paid. For tax purposes, the actual amounts paid are deductible. The opening balance (on 1 July 2019) of the allowance for doubtful debts was $100,000. During the year, IT Ltd recognised $80,000 as doubtful debts expense. At year end, the closing balance of the allowance for doubtful debts is $45,000. The doubtful debts expense is not tax deductible until the accounts receivable is actually written off as bad. During the year, IT Ltd recognised $70,000 for its long-service leave expense. At year end, the provision for long service leave has a balance of $26,000. On 1 July 2019, the opening balance for the provision for long service leave was $58,000. Only actual amounts paid are allowed as a tax deduction. . Question 4 continues on the next page Question 4 continued: . 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 (.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 in 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. (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) QUESTION 4: Accounting for income tax (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) WORKSHEET 3: to calculate taxable profit and current tax Profit before tax Implement tax Difference Back out accounting Provide journal entry: QUESTION 4: Continued (b) In accordance with NZIAS 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) WORKSHEET 4: to determine temporary differences and deferred tax Deductible Carrying amounts Tax base Taxable TDs TDS Assets (extracts) Accounts receivable - net Office equipment-net Derivative - Forward contract Goodwill Liabilities (extracts) Provision for long service leave Total TDs before exempt differences Less: Exempt differences Total TDs after exemptions Multiplied by: Current tax rate at 28% Equals: Closing balances of DTA and DTL Less: Beginning balances of DTA and DTL (at 25% rate) Adjust for: Movements during the year - adjustments related to rate change Adjust for: Movements during the year-adjustments related to equity account Remaining adjustments be made in journal entry X 28% X 28% QUESTION 4: Continued (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) WORKSHEET 5: Income Statement extract for the year ended 30 June 2020 $ Profit before tax Balance Sheet extract as at 30 June 2020 QUESTION 4: Continued (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) WORKSHEET 6: Reconciliation between tax expense and accounting profit $ Profit before tax Prima facie income tax expense at 28% (expected) Adjust for tax effect from