Question

Newcastle Ltd determined an accounting profit before tax of $256,000 for the year ended 30 June 2014. Included in this profit are the following items: Royalty revenue (non-assessable) Annual leave expense Depreciation expense - buildings Depreciation expense - plant Doubtful debts expense Entertainment expense Insurance expense 6 000 (45 000) (8 000) (22 500) (3 500) (2 000) (7000) An extract of the company's draft balance sheet at 30 June 2014 showed the following: $ 2 500 $ 21 500 (4 000) 17 500 Assets Cash Accounts receivable less allowance for doubtful debts Inventory Prepaid insurance Plant less Accumulated depreciation Buildings less Accumulated depreciation Land 32 000 4 500 82 500 150 000 (67 500) 170 000 (60 000) 110 000 75 000 Deferred tax assets (net) as at 1 July 2013 4 500 328 500 Liabilities Accounts payable Provision for annual leave 25 000 10 000 140 000 Loan $175 000

Additional information

1. a) Quarterly income tax instalments paid during the year were: 28 October 2013

   28 January 2014
   28 April 2014
   Note: Final instalment due on July 28

2. b) The following items are exempt from tax rules:

   1. Royalties are non-assessable

   2. Entertainment expenses are non-deductible

$18,000 18,000 17,000

c) The tax depreciation rate for plant (purchased 3 years ago for $150,000) is 20%.

4. d) Tax depreciation on buildings is equal to accounting depreciation on buildings.

5. e) During the year, the following cash amounts were paid:

   Annual leave $52,000

   Insurance 6,500

6. f) Bad debts of $2,500 were written off against the allowance for doubtful debts during the year.

7. g) Newcastle Ltd has tax losses amounting to $15,000 carried forward from prior years. These c a nbe offset against current year’s taxable profit.

8. h) Land was incrementally revalued by $10 000 during the current period.

9. i) The deferred tax balances at 30 June 2013 were:

   1. Deferred tax assets $10,500

   2. Deferred tax liabilities $6,000

10. j) The company tax rate is 30%.

Required

1. Determine the balance of any current and deferred tax assets and liabilities for Newcastle Ltd at 30 June 2014.

2. Prepare the journal entries for the year ended 30 June 2014.

3. Calculate the income tax expense for the year ended 30 June 2014.

4. Extension: explain the impact if the Land revaluation had occurred in a prior period rather than the current period.

Answer 1

Balance of Deferred Tax Assets and Liabilities for Newcastle Ltd. At 30 June 2014
Asset	Accounting Depreciation	Tax Depreciation
Buildings	8,000.00	8,000.00
Plant	22,500.00	19,200.00	Note 1
	30,500.00	27,200.00
Accounting Depreciation is more than Tax Depreciation, therefore there will be Deferred Tax Asset in current Year.
Deferred Tax Asset for the current year	(Accounting Depreciation-Tax Depreciation)*Tax Rate
	(30,500-27,200)*30%		990.00
Note 1
Original Cost of Plant	150,000.00
Less:- Depreciation for 1st Year @ 20%	30,000.00
Written Down Value at the end of 1st Year	120,000.00
Less:- Depreciation for 2nd Year @ 20%	24,000.00
Written Down Value at the end of 2nd Year	96,000.00
Less:- Depreciation for 3rd Year @ 20%	19,200.00
Written Down Value at the end of 3rd Year	76,800.00
Closing Balance of Deferred Tax Liability
Opening Balance	6,000.00
Add:- Current Year Deferred Tax Liability	-
Closing Balance	6,000.00
Closing Balance of Deferred Tax Assets
Opening Balance	10,500.00
Add:- Current Year Deferred Tax Asset	990.00
Closing Balance	11,490.00
Closing Balance of Deferred Tax Assets(Net)	5,490.00
Journal Entry
Deferred Tax Assets Account	Dr.	990.00
To Profit & loss Account		990.00
(Being Deferred Tax Assets for the current year)
Note 2: It is assumed Depreciation is being charged on written Down Value Method.
Note 3: All amount are in dollars ($)
Calculation of Income Tax Expense for the year ended 30 June 2014
Particulars			Amount (in $)
Accounting Profit			256,000.00
Less: Royalty Revenue			6,000.00
Add: Annual Leave Exp			45,000.00
Less: Actual Annual Leave Exp			52,000.00
Add: Doubtful Debt Exp			3,500.00
Less: Actual Doubtful Debt Exp			2,500.00
Add: Entertainment Exp			2,000.00
Add: Insurance Exp			7,000.00
Less: Actual Insurance Exp			6,500.00
			246,500.00
Add: Accounting Depreciation -buildings			8,000.00
Less: Tax Depreciation -buildings			8,000.00
Add: Accounting Depreciation -plant			22,500.00
Less: Tax Depreciation -plant			19,200.00
Profit before Tax			249,800.00
Less: Prior Years Tax Losses			15,000.00
Taxable Profit			234,800.00
Tax Rate			30%
Total Income Tax Expense			70,440.00
Less: Tax already paid (18,000+18,000+17,000)			53,000.00
Net Tax Payable			17,440.00
Journal Entry
Income Tax Expense Account	Dr.		17,440.00
To Provision for Tax Account			17,440.00
(Being Provision for current year tax made)
Note 4: It is assumed annual leave of 52,000 and insurance of 6,500 paid in cash are the total amount of expense
in respective expense head during the year.
Impact of Land Revaluation in prior period
Journal Entry
Land Account	Dr.	10,000.00
To Revaluation Reserve		10,000.00
(Being Land revalued)
Impact: As no depreciation is charged on land the only impact will be of the above mentioned journal entry.
Land will be appraised by 10,000 while a revaluation reserve of the same amount will be shown on liabilities side.