Taxation Question

Question 2: Income and deductions

You have been asked to determine the income tax treatment of the following

transactions for Wonderland Enterprises Ltd, an IT retailer located at central Auckland.

Please explain their income tax treatment and whether they are assessable income or

deductible expenses. Please also advise whether they can be depreciated and at what

tax depreciation rate.

The firm had the following transactions during the year:

1. Demolition and removal of the dilapidated building in April 2019.

2. Compensation of $17,000 paid to difficult customer for defective product on 12

May 2019.

3. Loose tools purchased for $500 on 5 August 2019.

4. The firm bought a new Honda car for $60,000 on 1 December 2019.

5. Goodwill paid to previous owner on 15 December 2019 for the purchase of the

business (not as a going concern and including a restrictive covenant) of

$40,000.

6. The managers car was damaged in a traffic accident in March 2020. The firm

received a cheque for $10,000 in final settlement of the claim on 18 March 2020

from their insurer.

7. Accrued incentive bonuses of $12,000 for staff to 31 March 2020 to be paid 15

July 2020.

Required

a) Explain the income tax treatment of the above transactions for the

company.

b) Use the template provided in Appendix 1 to complete the

depreciation schedule for the year ended 31 March 2020.

c) For capital expenditure, calculate depreciation and gain or loss on

disposal (if any). If there is a gain or loss on disposal, advise the

manager of the income tax treatment on the disposal.

d) Advise the manager of the firm what the Pool method of

depreciation is, and the criteria for using this method. Also,

identify one advantage and one disadvantage for using this

method.

e) Advise the manager of the firm the type of property is not

depreciable

210220 - 21 em 1 Alimentos APPEN (1) Home Page Layout Formula Data Review View Insert Cu Copy G 21 F22 C car C Wonderland Enterprises Ltd 2 Depreciation Schedule for the year ended 31 March 2019 o 4 5 Cost Addition Depn Rate Opening Tax Value Period (mood Acum Current Year Depreciation Disposal Depo Closing Tax Value 50,000.00 35.700.00 10 500.00 * Property Plant & Equipment Motor Vehicle Computer 30 Furniture & fittings 11 Total 13 4.000,00 21,000.00 25,000.00 SON 79 DV DV SL 12 6 3 1000 25.500.00 1000 1673 266750 24 S00.00 3,000.00 2012.95 48,182.50 50,000.00 35,000.00 3675 11.867.50 0.00 Depreciation Schedule for the year ended 31 March 2020 Opening Tas Value Disposal Current Year Depreciation Aceum Depe Period (mon Closing Tax Value 16 Depo 12 Cost Addition Rate IN 10 Property Plant & Equipment 20 Motor Vehicle (old) 50,000.00 30% 21 Computer 4,000.00 50% >> Furniture & fittings 21.000,00 2 Motor Vehicle (new) 60,000.00 20 Total 75,000.00 60,000.00 25 20 27 Mark allocation 21 Total 6 marks for 20 entries on depreciation schedule (0.3 marks cach entry) DV DV SL DV 12 12 12 4 30% 000 0.00 0.00 000 0.00 02 Danko Heady 210220 - 21 em 1 Alimentos APPEN (1) Home Page Layout Formula Data Review View Insert Cu Copy G 21 F22 C car C Wonderland Enterprises Ltd 2 Depreciation Schedule for the year ended 31 March 2019 o 4 5 Cost Addition Depn Rate Opening Tax Value Period (mood Acum Current Year Depreciation Disposal Depo Closing Tax Value 50,000.00 35.700.00 10 500.00 * Property Plant & Equipment Motor Vehicle Computer 30 Furniture & fittings 11 Total 13 4.000,00 21,000.00 25,000.00 SON 79 DV DV SL 12 6 3 1000 25.500.00 1000 1673 266750 24 S00.00 3,000.00 2012.95 48,182.50 50,000.00 35,000.00 3675 11.867.50 0.00 Depreciation Schedule for the year ended 31 March 2020 Opening Tas Value Disposal Current Year Depreciation Aceum Depe Period (mon Closing Tax Value 16 Depo 12 Cost Addition Rate IN 10 Property Plant & Equipment 20 Motor Vehicle (old) 50,000.00 30% 21 Computer 4,000.00 50% >> Furniture & fittings 21.000,00 2 Motor Vehicle (new) 60,000.00 20 Total 75,000.00 60,000.00 25 20 27 Mark allocation 21 Total 6 marks for 20 entries on depreciation schedule (0.3 marks cach entry) DV DV SL DV 12 12 12 4 30% 000 0.00 0.00 000 0.00 02 Danko Heady