Question

1. consider whether $ 18000 is a repair or capital improvement

2. S25-10 ITAA 97 - taxpayer can deduct expenditure on the repair of depreciating asset

3. capital improvement - FCT vs western suburbs

question 2.

a. explain what is the difference between cash and accrual basis bent vs FCT (1971)b decide which method do you think is suitable for holmes finance

B. Henderson VS FCT (1970)

considered as untaxed earnings s- when changing from cash to accruals method the uncollected fees earned in the prior year considered as untaxed earnings

question 3

office concerns pty ltd decided to replace the motor of its one of delivery van the original as the motor has been broken and needs to be replaced. they decided to replace it with a much more efficient engine to the cost $18000 it will only cost them $9500 if they replace it with exactly the same motor.

the $18000 cost is an allowable deduction.

question 4.

holmes financial services pty ltd is a financial and gold cost they employ approximately 45 peoples all over the offices up until 019, they assessed their income based on cost basis instead of accrual basis but because their transactions becoming more complex they decided to move to accrual basis.

a. do you think the ATO will accept their proposal to move to an accrual basis? why

B. if holmes financial services earned $325000 in FY 19 but haven't been received, what will be the treatment of that $325000.

Answer 1

Question 3 -

In my view, $18000 can be taken as capital improvement owing to the below reasons-

• Motor is one of the critical components of the van
• The company not only decided to replace the old part but to replace with a better engine available at higher cost for better efficiencies.
• Replacing the van with better engine shall increase the useful life of the asset or  increase the productivity of the van thereby increasing earnings over a period of time.

Thus, it should be treated as capital improvement and capitalized.

If we treat $18000 as an expense, we are assuming the benefits of this efficient engine to last only for a year, which seems incorrect in this case.

Question 4 -

a. If the company accounts for the effect of the change prospectively in the period of change and in future periods or the employer recognizes the cumulative effect of the change in net income of the period of the change. The nature and justification for, and method of accounting for an accounting change should be disclosed in the financial statements for the period in which the change is adopted. The justification for the change should be explained clearly why the newly adopted accounting method is preferable. If the company follows the above process and the company has been regular in reporting its income and paying taxes timely, the ATO shall accept their proposal.

b. If the company is following cash system of accounting, the same shall be recorded in Books when the amount is received. However, if accrual method of accounting is followed, the below entry to be recorded-

Accounts Receivable	325000
To Sales		325000

Question 2 -

a. Cash method of accounting involves accounting of transactions based on the company’s cash inflows and outflows. e.g., revenue is recorded when the cash is received from customers and expenses are recorded when payments are made to vendors.

Accrual method of accounting records transactions when the transaction occurs or is earned, regardless of when the cash is paid or received. Income is recorded when the sale occurs (at point of sale) and expenses are recorded when the goods or services are received (at point of incurrence of expense).

Holmes Finance should opt for Accrual method of Accounting owing to the below reasons-

• This method enables to “match” revenues and related expenses within particular periods which provides correct profitability margins. It also enables to analyze profitability over different periods and make important financial decisions.
• Increased ease of budgeting and forecasting since there is consistency in recording of transactions.
• For raising money/additional financing opportunities, banks, FI's and investors ask for financial information based on accrual method of accounting.
• This method provides a better picture into the financial results of the company.
• It allows users of the financial information to make more informed decisions, ultimately providing additional value to the company.

b. As per the mentioned case law, the uncollected fees were not taxed.