Assignment Task
Question 1
You are currently preparing the income tax note for inclusion in the 2022 financial statements of Totalconcept Pty Ltd, a small proprietary company, which is considered to be a reporting entity. Note that the 2022 tax balances in the financial statements (particularly the DTA and DTL balances) have not been updated from the previous year.
Totalconcept Pty Ltd Income
Statement for the year ended 30 June 2022
(before tax adjustments)
Income $
Sales revenue 11,410,000
Rental income 11,410,000
Total Income 32,000
Less: Cost of Goods Sold 11,442,000
Gross profit (10,745,000)
Less: Expenses 697,000
Accounting depreciation – Plant and equipment 30,000
Accounting depreciation – Buildings 5,000
Annual leave expense 4,000
Bad debts expense 25,000
Entertainment – clients 12,000
Goodwill impairment 13,000
Other tax-deductible expenses 161,000
Prepayment expensed 50,000
Warranties expense 30,000
Total Expenses 330,000
Net profit before income tax $ 367,000
Question 1 (Cont.)
Totalconcept Pty Ltd
Balance Sheet as at 30 June 2022
(before tax adjustments)
Account 2022 $ 2021 $
Assets
Cash and cash equivalents 282,940 90,940
Inventory, at cost 68,000 77,000
Accounts receivable 585,000 430,000
Less: Provision for doubtful debts (40,000) (20,000)
Prepayments 90,000 50,000
Plant and equipment, at cost 350,000 350,000
Less: Accumulated depreciation (109,000) (79,000)
Buildings, at cost 100,000 100,000
Less: Accumulated depreciation (30,000) (25,000)
Goodwill, at cost 70,000 70,000
Less: Accumulated impairment (39,000) (26,000)
Deferred tax asset 28,240 28,240
Total Assets 1,356,180 1,046,180
Liabilities
Accounts payable 171,440 240,440
Provision for annual leave 22,000 30,000
Provision for warranties 25,000 20,000
Unearned rental income 15,000 –
Deferred tax liability 29,740 29,740
Total Liabilities 263,180 320,180
Net Assets $ 1,093,000 $ 726,000
Shareholders Equity
Share capital 100,000 100,000
Retained profits 993,000 626,000
Total Shareholders Equity $ 1,093,000 $ 726,000
Question 1 (Cont.)
Additional Information:
(i) Unearned rental income of $15,000 shown as a current liability in the Balance Sheet relates to non-refundable rental income received in advance from tenants.
(ii) The tax written down value of the plant and equipment at 30 June 2021 was $245,000. Tax depreciation for the year ended 30 June 2022 was $67,000. The tax written down value of the plant and equipment at 30 June 2022 was therefore $178,000.
(iii) The tax written down value of the building at 30 June 2021 was $75,000. Tax depreciation of the building for the year ended 30 June 2022 was $10,000. The tax written down value of the building at 30 June 2022 was therefore $65,000.
(iv) The prepayments shown in the Balance Sheet relates to the payment for business licences and registrations required by Government regulations. As such, they are fully deductible under Section 82KZM of the ITAA (1936) when initially paid.
(v) The company uses the “actual method” to value meal entertainment fringe benefits. The entertainment of $12,000 shown in the Income Statement relates exclusively to client lunches and dinners. No entertainment was provided to employees.
(vi) Warranties are claimed as an allowable deduction under Section 8-1 of the ITAA (1997) when paid. (vii) Assume that the company has not paid any PAYG instalments to the Australian Taxation Office during the 2022 income year.
(viii) Ignore the effects of GST. Assume that the company has correctly recorded (and reconciled the GST in its financial statements).
(ix) The company tax rate is 25% as the company has a turnover of less than $50 million in respect of the year ended 30 June 2022.
(x) Please round all calculations to the nearest whole dollar.
Question 1 (Cont.)
Required:
(i) Prepare a tax reconciliation for Totalconcept Pty Ltd. Please start with the net profit before income tax and end with the company’s taxable income. Once completed, please record the journal entry required to record the current tax expense and current tax liability for Totalconcept Pty Ltd for the year ended 30 June 2022.
(ii) Complete the attached worksheet (on the following page) to determine the balances of the deferred tax assets and deferred tax liabilities of Totalconcept Pty Ltd for the year ended 30 June 2022. Once completed, please prepare the journal entry to recognise the movement in the deferred tax asset and deferred tax liability accounts for the year ended 30 June 2022.
(iii) Prepare the disclosures required in the financial report of Totalconcept Pty Ltd for the year ended 30 June 2022 in accordance with AASB 112 Income Taxes.
Question 1 (Cont.)
Totalconcept Pty Ltd
Deferred Tax-Effect Worksheet
as at 30 June 2022
Account
Assets
Cash and cash equivalents
Inventory
Accounts receivable (net)
Prepayments
Plant and equipment (net)
Buildings (net)
Goodwill (net of impairment)
Liabilities
Accounts payable
Provision for annual leave
Provision for warranties
Unearned rental income
Gross Temporary Differences
Less: Excluded TD’s
Net Temporary Differences
DTL/DTA balance (@ 25%)
Less: Opening balances relating to temporary differences
Journal Entry Required
Question 2
Maximus Holdings Pty Ltd (ACN: 091 782 071) is an Australian resident proprietary company. The company has an annual turnover of $34 million. The company was incorporated with ASIC on 13 January 2016.
The company has 100 fully paid ordinary shares x $1.00 each totaling $100.
The 100 shares are held by the following four shareholders:
Adrian Gardiner – 25 shares
Joanne Howard – 25 shares
Phil Hocken – 25 shares
Louise McMillan – 25 shares
The four shareholders are also the four directors of the company. Adrian is the managing director and is also the company secretary of the company.
You are the external accountant and tax agent for Maximus Holdings Pty Ltd.
On 3 March 2022, you receive a phone call from Adrian advising that the four shareholders have just finished a meeting and are contemplating changing the name of the company from Maximus Holdings Pty Ltd to Gigantor Holdings Pty Ltd.
They seek your advice.
Question 2 (Cont.)
Required:
You are asked to:
(i) Advise what are the corporate law (and in particular, the ASIC) requirements in relation to changing the company’s name?
(ii) Assume that the directors proceed with changing the company’s name on 16 March 2022. Draft the appropriate Minute of Meeting and ASIC form(s). Advise if there will be any ASIC fees payable in relation to the proposed change of company name.
(iii) From an accounting perspective, where will the ASIC lodgement fees appear in the financial statements of the company (ie. as an expense in the Income Statement or as an asset in the Balance Sheet)? Please quote appropriate references to relevant AASB Accounting Standards in your answer.
(iv) Advise as to whether the ASIC lodgement fees are tax-deductible to the company? Please quote appropriate references to the ITAA (1997) in your answer.
Question 3
You have been presented with an extract of the management accounts (and in particular, the Balance Sheet) of Wine World Pty Ltd as at 30 June 2022.
Wine World Pty Ltd is a wholesaler/distributor of Australian wines. It is based in Brisbane and buys Australian wines from wine producers, based in the Hunter Valley (in New South Wales) and the Margaret River (in Western Australia) and on-sells these wines to bottle shop retailers in Queensland. It has recently started selling some wine to a Japanese-based bottle shop located in Tokyo.
The company is a large proprietary company and is considered a reporting entity. The company was incorporated on 9 May 2010. The company is in the process of preparing its external financial statements for the year ended 30 June 2022.
Assume that the company tax rate of 30% applies to Wine World Pty Ltd.
The managing director of the company, Billy Field, has drawn your attention to three assets which appear in the management accounts which have been prepared by the company’s management accountant, Peter Gabriel.
Neither Billy, nor Peter have any knowledge of IFRS, and as such, ask your group to prepare the notes to the accounts for inclusion in the company’s 2022 external financial statements.
An extract of the company’s 2022 management accounts is presented below:
Wine World Pty Ltd
Extract of the Balance Sheet
(taken from the management accounts)
as at 30 June 2022
Assets: Note $
Inventories 1 1,160,000
Shares in CSR Limited, at cost 2 100,000
Land, at cost 3 560,000
Liabilities
Provision for redundancies 4 65,000
Amount owing to NAB 3 375,000
Question 3 (Cont.)
Note 1: Inventories – $1,160,000 Inventory consists of Australian wines which are held for resale. All wine is held in a large warehouse (rented by the company).
On 23 June 2022, the company sold ¥8 million worth of wine to a Japanese wine retailer. An invoice was sent on this date. As at 23 June 2022, the exchange rate was A$1 = ¥80. Based on the ¥/$A exchange rate on this date, Peter put through the following journal entry
DATE PARTICULARS POST REF DEBIT CREDIT
23 June Accounts receivable 100,000
Sales revenue 100,000
(Recording the sale of inventory totalling $100,000)
As the company adopts a perpetual inventory system, the following entry was automatically recorded in the accounting system on the same date.
DATE PARTICULARS POST REF DEBIT CREDIT
23 June Cost of goods sold 40,000
Inventories (wine) 40,000
(Recording the COGS entry)
Hence, the balance of inventory at 30 June of $1,160,000 is correct and takes into account the $40,000 inventory sold (at cost price). The goods were packaged and shipped on 28 June 2022. The terms of shipment were FOB shipping point. At 30 June 2022, the goods were still on the ship somewhere in the middle of the Pacific Ocean. The exchange rate at 30 June 2022 is A$1 = ¥78.
The goods are not received in Tokyo until 8 July 2022.
Question 3 (Cont.)
Note 1: Inventories – $1,160,000 (Continued)
Payment of the ¥8.0 million is made by the Japanese retailer on 23 July 2022. On this date, the exchange rate is A$1 = ¥82.
A stocktake was conducted at 30 June 2022 and there is no evidence of any inventory losses, theft or obsolescence.
Note 2: Shares in CSR Limited – $100,000
On 15 December 2021, Wine World Pty Ltd purchased 4,000 fully-paid ordinary shares in CSR Ltd at $25 per share (total investment = $100,000).
The company plans to hold these shares as a long-term investment and has made an irrevocable election under AASB 9 to present gains and losses on this investment in other comprehensive income instead of recording the unrealised gains/(losses) through profit and loss.
As at 30 June 2022, the share price of CSR Ltd was $30 per share. No dividends were paid by CSR Limited between 15 December 2021 and 30 June 2022.
Note 3: Land – $560,000 and NAB Loan $375,000
On 12 May 2012, the company acquired a block on land at Rochedale (6 acres) with the intention of building a warehouse on. The land cost $560,000. This was inclusive of incidental costs such as legal fees and stamp duty. This is the only block of land that the company owns.
The company borrowed $450,000 from National Australia Bank (NAB) to fund the acquisition of the land. The bank took a registered mortgage over the land as security. The term of the loan was 15 years.
On 12 June 2022, the directors of the company unanimously resolved to sell the land as they needed cash for working capital purposes. As at 30 June 2022, the land is currently in the hands of a local real estate agent.
Question 3 (Cont.)
Note 3: Land – $560,000 and NAB Loan $375,000 (Continued)
However, the real estate agent (and the directors) are extremely confident that the land will sell for their asking price of $500,000 within the next 3-4 weeks as there have been many interested buyers.
The real estate agent’s fees and advertising costs (as well as other incidental costs, such legal fees) will amount to a fixed $10,000 and is payable when the land is sold. The company still owes NAB bank $375,000 at 30 June 2022.
The company has formally advised that they will pay out this loan once the land sells.
Note 4: Provision for Redundancies – $65,000
The company employs 18 employees (before the proposed redundancy). Due to declining sales, rising costs and increased competition from new wine distributors, the company is faced with the prospect of terminating the employment of 5 workers (mainly sales staff and warehouse employees).
The directors unanimously resolved at a board meeting held on 26 June 2022 that the 5 employees (all full-time) would be made redundant.
The directors were presented with a detailed plan involving the termination, which had been drawn up detailing the type of staff, number of employees to be terminated, the costs involved and the time when the termination will occur. The plan was discussed and adopted by the board of directors via unanimous resolution on 26 June 2022.
Each employee will be paid out $5,000 for each year of service. Based on the 5 workers identified to be made redundant, the company has calculated the total payout for all 5 workers to be $65,000 (excluding leave entitlements).
All leave entitlements (such as annual leave, long service leave and superannuation) will be separately paid out. Hence, ignore these employee entitlements in the question. By 30 June 2022, the company had not held discussions with employees, their representatives nor has made any public announcement.
The announcement to the 5 affected staff is expected to be made on the morning of 7 July 2022.
The announcement to the other affected parties (eg. customers, suppliers etc) will be made later that afternoon. It is proposed that the last day of work for the 5 employees will be 7 August 2022.
This is when the $65,000 will be paid out. There are no pay increases planned for employees between now and 7 August 2022. In other words, the payouts are based on current rates, not planned increases.
Question 3 (Cont.)
Required:
For each of the four items detailed above, please prepare an extract of the notes to the 2021 external financial statements showing how each of these items will be measured and disclosed in the notes to the financial statements.
This will include relevant disclosures relating to the Income Statement, Statement of Comprehensive Income and Balance Sheet (but not disclosures relating to the Statement of Cash Flows).
Please ensure that you comply with the relevant AASB Accounting Standards (including their disclosure requirements) when presenting the detailed notes to the accounts for each item.
Please note that in the case of publicly traded financial instruments, Wine World Pty Ltd has made an irrevocable election under AASB 9 Financial Instruments to present subsequent changes in the fair value of equity instruments through Other Comprehensive Income (OCI) instead of recording increases and decreases in fair value through profit or loss
Question 4
On 16 November 2022, Bright Ideas Pty Ltd, a management consultancy company, purchased a new vehicle costing $85,200 from a GST-registered car dealer and immediately provided it to one of its directors, Susan.
The $85,200 was broken down as follows:
Purchase price of car, inclusive of luxury car tax (GST-inclusive) – 80,000
Dealer delivery charges (GST-inclusive) – 1,500
Stamp duty (no GST) – 1,200
Customized wheels installed (GST-inclusive) – 2,500
Susan maintained a log book for the entire 136-day period from 16 November 2022 to 31 March 2023. The logbook revealed that the vehicle travelled 16,400 km of which 12,464 km were business-related.
The car was garaged at Susan’s home each night of the 136 days from 16 November 2022 to 31 March 2023, except for 16 days, where the car was garaged at a smash repairs company as a result of an accident that occurred on 4 February 2023 and was, therefore, off the road.
The car keys were left with the repair company. Susan made an after-tax cash contribution of $200 towards the running costs of the vehicle for the period 16 November 2022 to 31 March 2023, for which she was not reimbursed by her employee
Furthermore, Susan also paid repair costs of $480 (GST-inclusive) directly to Smash & Bash Repairs for damages sustained to the car on 22 February 2023 as a result of the accident.
Motor vehicle costs incurred by Bright Ideas Pty Ltd for the period 136-day period from 16
November 2022 to 31 March 2023 are as follows:
Registration (GST-free for the period 16 November 2022 to 31 March 2023) – 335
Insurance (GST-inclusive for period 16 November 2022 to 31 March 2023) – 229
Petrol and oil (GST-inclusive) – 3,924
Repairs and maintenance paid by the company (GST-inclusive) ** – 1,314
Question 4 (Cont.)
Required:
In respect of the abovementioned car benefit, calculate:
(i) the fringe benefits taxable value of the car fringe benefit under the statutory formula method. There are 136 days from 16 November 2022 to 31 March 2023.
(ii) the fringe benefits taxable value of the car fringe benefit under the operating cost method. There are 136 days from 16 November 2022 to 31 March 2023.
(iii) calculate the fringe benefits tax payable by the company in respect of the car fringe benefit. Assume that the company wishes to minimise its FBT tax payable.
Please show all calculations. Round all calculations to the nearest whole dollar. For income tax purposes, the company depreciates the motor vehicle over 8 years using the diminishing value deprecation method.