This week’s topic: Tax effect accounting

For the financial year ending 30 June 20X6, Taxalot Ltd reported a before-tax operating profit of

$720,000 in its Income Statement.

Extracts of items included in the income statement:

Entertainment expense 20,000

Goodwill impairment loss 50,000

Bad debt expense $100,000

Interest Revenue 150,000

Depreciation on plant and equipment 200,000

Gain on sale of plant and equipment 70,000

Insurance expense 55,000

Interest expense 220,000

Rent revenue 55,000

Long service leave expense 320,000

The following information has been extracted from the current income tax working file of Taxalot Ltd:

Depreciation on plant and equipment for tax using the diminishing value method $260,000

Accumulated depreciation on plant and equipment for tax 2,000,000

Accumulated depreciation on plant and equipment sold during the year 90,000

Other information:

The company tax rate is 30%.

Land is accounted for on the fair value basis. During the year, Taxalot Ltd revalued land upwards

by $400,000. The revaluation increment was credited to an asset revaluation surplus.

Plant and equipment is accounted for on the cost basis. To date, no write-downs to recoverable

amount have been recorded for plant and equipment.

During the year plant and equipment was sold for $210,000. At the date of sale, the asset had an

original cost of $200,000 and accumulated depreciation of $60,000.

The deferred tax balances at 30 June 20X5 were as follows:

Deferred tax asset $159,000

Deferred tax liability $147,900

Topic 1 – Tutorial Question UNSW Business School

business.unsw.edu.au

Last Updated 05/05/204 CRICOS Provider Code 00098G

Extracts of Taxalot Ltd’s Balance Sheet for 20X5 and 20X6 are shown below.

30 June 20X6

$

30 June 20X5

$

Assets

Cash 400,000 320,000

Accounts receivable 600,000 520,000

Less: Allowance for doubtful debts (45,000) (40,000)

Interest receivable 80,000 63,000

Inventory 700,000 610,000

Prepaid insurance 28,000 20,000

Investment in debentures 1,800,000 1,800,000

Land 4,200,000 3,100,000

Plant and equipment 4,500,000 3,900,000

Less: Accumulated depreciation (1,540,000) (1,400,000)

Goodwill 250,000 250,000

Less: Accumulated goodwill impairment loss (50,000)

Liabilities

Trade creditors 300,000 280,000

Interest payable 80,000 65,000

Rent received in advance 45,000 30,000

Provision for long service leave 600,000 470,000

Loan payable 1,110,000 1,200,000

Shareholders’ Equity

Asset revaluation surplus 400,000 NIL

Required:

a) Prepare a schedule to compute the current tax liability and prepare journal entries to record

the current tax for the year ended 30 June 20X6.

b) Complete the deferred tax worksheet shown at the end of this question (insert the

completed worksheet into your solutions) and prepare journal entries to record deferred

taxes for the year ended 30 June 20X6. Show your workings.