Cost Accounting- Compute the taxable income or loss

| January 30, 2017

Question
(i) Compute the taxable income or loss. (ii) Complete the Taxation Worksheet on the next page in accordance with AASB 112 Income Taxes. (iii) Prepare the applicable journal entries at 30 June 2015 to account for tax using the balance sheet method.

Geelong Ltd began operations on 1 July 2014. One year after operations, the entity presents its first Statement of Comprehensive Income and Statement of Financial Position on 30 June 2015. However, the statements were prepared for internal purposes but income tax calculations were ignored. Accounting profit before income tax for the year 30 June 2015 of Geelong Ltd amounted to $12,410,000, including the following revenue and expenses.

Income

$

Sales Revenue

21,500,000

Expenses

Cost of goods sold

6,100,000

Salaries

820,000

Wages

170,000

Rent of premises

56,000

Administrative expenses

492,200

Entertainment costs

36,000

Doubtful debts

50,000

Long service leave

308,000

Warranty expenses

163,200

Insurance

125,600

Depreciation expense – Plant and Equipment

335,000

Depreciation expense – Vehicles

324,000

Depreciation expense – Buildings

110,000

Profit before Income Tax

12,410,000

Geelong Ltd

Assets and Liabilities disclosed in the Statement of Financial Position for the year ended 30 June 2015

$

$

Assets

Cash/ Bank

85,000

Accounts Receivables (net)

346,000

Inventory

464,800

Prepaid insurance

43,600

Plants & Equipments – cost

4,020,000

Less – Accumulated depreciation

335,000

3,685,000

Vehicles- cost

1,296,000

Less – Accumulated depreciation

324,000

972,000

Buildings- cost

1,650,000

Less – Accumulated depreciation

110,000

1,540,000

Land

2,250,000

Total assets

9,386,400

Liabilities

Accounts payables

851,200

Rent payable

38,000

Provision for warranty expenses

120,200

Provision for long service leave

119,000

Loan payable

1,658,000

Total liabilities

2,786,400

Net assets

6,600,000

Additional information:

The plants & equipments are depreciated over 12 years for accounting purposes, but over 10 years for taxation purposes. The useful life of vehicles is 3 years for the tax purposes and 4 years for accounting purposes. Therefore, there is a temporary difference between accounting and taxation depreciation for plants & equipments, and computers.
Geelong Ltd has some land which cost $1,630,000 and has been re-valued to its fair value of $2,250,000.
All administration, salaries and wages expenses incurred have been paid as at year-end.
Total bad debts written off for the year were $30,000.
The amount of $189,000 long service leave expense has been paid.
Amounts received from sales, including those on credit terms, are taxed at the time of the sale is made.
Warranty expenses were accrued and, at the year-end, actual payments of $43,000 has been made (leaving an accrued balance of $120,200). Deductions for tax purposes are only available when the amounts are paid and not as they accrued.
Insurance was initially prepaid to the amount of $169,200. At the year-end, the unused component of the prepaid insurance amounted to $43,600. Actual amounts paid are allowed as a tax deduction.
Entertainment expenses and depreciation of buildings are not allowed as deductions for income tax.
The tax rate is 30 per cent.
Required:

(i) Compute the taxable income or loss.

(ii) Complete the Taxation Worksheet on the next page in accordance with AASB 112 Income Taxes.

(iii) Prepare the applicable journal entries at 30 June 2015 to account for tax using the balance sheet method.

Item

Carrying amount

$

Tax Base

$

Deductable

Temporary Difference

$

Taxable Temporary Difference

$

Tax Expense

$

Revaluation Surplus

$

Tax Payable

$

Assets

Cash/ Bank

Receivables (net)

Prepaid insurance

Inventory

Property & Plant – net

Vehicles – net

Buildings – net

Land

Liabilities

Accounts payables

Rent payable

Provision for long service leave

Provision for warranty

Loan payable

Net assets

Temporary difference for year

Loss carried forward

Movement for the period

Tax effected at 30%

Taxable income $6,332,200@30%)

Income tax adjustment

Geelong Ltd

Taxation Worksheet as at 30 June 2015

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