Calculate the taxable income for the year ending 30 june

Question

QUESTION ONE -

Gomez Ltd commences construction of a machine on 1 July 2018 for Hendrie Ltd.  The construction contract is considered to represent one 'performance obligation' and will be the unit of account for contract accounting.  A fixed price contract is signed for total revenues amounting to $6 million.  The project is expected to be completed by 30 June 2021.  The expected total cost, as estimated at the commencement of construction, is $4.8 million.

The following data relates to the construction of the machine over the three year period:

	30 June 2019 $000	30 June 2020    $000	30 June    2021    $000
Construction cost for the year	1 200	2 400	2 700
Estimated costs to complete	3 600	2 700	nil
Progress billings during the year	1 350	2 550	2 100
Cash collected during the year	1 050	2 250	2 700

Additional Information - Gomez Ltd uses cost (an input measure) as the basis for measuring progress towards satisfaction of the performance obligation. The asset under construction is deemed to be under the control of Hendrie Ltd throughout the period of construction.  Actual costs to complete the project deviate from expectations as can be seen from the table provided.

Required -

(i) Assuming the stage of completion and outcome of the contract can be reliably measured:

(a) Calculate the gross profit or (loss) to be brought to account for each of the three years using the percentage-of-completion cost basis method. Round any calculations to the second decimal place and show all calculations.

(b) Prepare the journal entries for the year ending 30 June 2020 ONLY using the percentage of completion method (narrations not required).

(ii) Assuming the outcome of the contract cannot be reliably estimated, prepare the journal entry to account for revenue recognition only for the year ending 30 June 2019. Explain the rationale for this journal entry.

QUESTION TWO - Accounting for Construction Contracts

Ithica Construction Company commenced construction of a bridge on 1 July 2018 for Jeeves Ltd.  The construction contract is considered to represent one 'performance obligation' and will be the unit of account for contract accounting.  A fixed price contract is signed for total revenues amounting to $10 million.  The project is expected to be completed by 30 June 2021.  The expected total cost, as estimated at the commencement of construction, is $7.6 million.

Data related to the project over the three year period of construction is as follows:

	30 June 2019 $	30 June 2020 $	30 June 2021 $
Costs Incurred for the Year	1 800 000	2 400 000	4 200 000
Estimated Costs to Complete	5 800 000	3 800 000	-
Progress Billings During the Year	1 800 000	2 200 000	6 000 000
Cash Collected During the Year	1 400 000	2 400 000	6 200 000

Additional Information - Ithica Construction Company uses cost (an input measure) as the basis for measuring progress towards satisfaction of the performance obligation. The asset under construction is deemed to be under the control of Jeeves Ltd throughout the period of construction.  Actual costs to complete the project deviate from expectations as can be seen from the table provided.

Required -

(i) Using the above data, calculate the gross profit to be recognised for each of the three years assuming the outcome of the contract can be reliably measured. Round to the second decimal place (eg 34.58%) and show all calculations.

(ii) Prepare the journal entries for the 2020 financial year ONLY assuming the percentage-of-completion cost basis method is applied.  Narrations are not required. 

(iii) Assuming the stage of completion cannot be reliably assessed, prepare the general journal entry to account for revenue recognition and profit (if appropriate) for the year ending 30 June 2020.

(iv) Revised costing data for the year ending 30 June 2020 is as follows:

	30 June 2020 $
Costs Incurred for the Year	3 600 000
Estimated Costs to Complete	5 000 000

For the year ending 30 June 2020:

(a) Calculate the loss to be accounted for.  Show ALL workings.

(b) Prepare ALL journal entries required as a result of the loss.

(c) Prepare the journal entry to account for revenue for the year ending 30 June 2020.

QUESTION THREE - Accounting for Income Taxes

Klover Ltd commences operations on 1 July 2018.  On the same day it purchases machinery at a cost of $600 000. The machine is expected to have a useful life of four years, with benefits being uniform throughout its life.  It will have no residual value at the end of the four years.  For taxation purposes however, the allowable deduction for depreciation is based on three years.

The accounting profit before tax based on accrual accounting concepts for each of the next four years ending 30 June 2019, 2020, 2021 and 2022 is $500 000, $600 000, $700 000, and $800 000 respectively.  The company tax rate is 30%.

Required - Prepare separate journal entries (include narrations) to account for both the current tax consequences and future tax consequences for the year ending 30 June 2020 showing all workings.

QUESTION FOUR - Accounting for Income Taxes

In accounting for income tax, can deferred tax assets be offset against deferred tax liabilities?  In your answer make specific reference to the appropriate accounting standard.

QUESTION FIVE - Accounting for Income Taxes

For each of the following:

(a) Calculate the tax base of the asset or liability showing all workings and formula applied,

(b) Determine whether the temporary difference leads to a deferred tax asset or liability as well as explain your rationale, and

(c) Prepare the appropriate journal entry to account for the temporary difference between carrying amount and tax base.

The company tax rate is 30%.

(i) Leon Ltd has a building that has just been revalued to its fair value of $450 000.  It was initially acquired at a cost of $300 000.  The accumulated depreciation for tax purposes at the time of the revaluation was $24 000.

(ii) Forrest Ltd's statement of financial position includes a 'Provision for Warranty Expense' amounting to $100 000 as at 30 June 2018.  The provision was created in the current financial year (ending 30 June 2018) and no amounts have been paid.

(iii) Foo Ltd has received $30 000 subscription income in advance.  The Australian Tax Office taxes revenue when received.

QUESTION SIX - Accounting for Income Taxes

Casper Ltd commences operations on 1July 2018 and presents its first statement of profit or loss and other comprehensive income for the year ending 30 June 2019 and statement of financial position as at 30 June 2019.  The statements are prepared before considering taxation.  The following information is made available to you:

Casper Ltd Statement of Profit or Loss and Other Comprehensive Income for the year ending 30 June 2019

	$	$
Gross Profit		72 000
Less Expenses
Administration	12 000
Salaries	6 600
Long Service Leave	1 200
Warranty Expense	2 400
Depreciation Expense - Plant and Equipment	9 000
Insurance	1 200	32 400
Accounting Profit Before Tax		39 600

Assets and Liabilities as Disclosed in the Statement of Financial Position of Casper Ltd as at 30 June 2019

	$	$
Assets
Cash at Bank		36 800
Accounts Receivable		9 600
Inventory		10 800
Prepaid Insurance		480
Plant and Equipment at Cost	36 000
Accumulated Depreciation - Plant and Equipment	9 000	27 000
Total Assets		84 680
Liabilities
Accounts Payable		6 000
Provision for Warranty Expense		1 800
Provision for Long Service Leave		1 200
Loan Payable		18 480
Total Liabilities		27 480
Net Assets		57 200

Additional Information

• All administration and salaries expenses have been paid as at year end.
• None of the long service leave has actually been paid. It is not deductible until actually paid.
• Warranty expenses were accrued and at year end, actual payments for the year amounted to $600 leaving an account balance for provision for warranty amounting to $1 800. Deductions are available only when the amounts are paid and not as they are accrued.
• Insurance initially prepaid during the year amounted to $1 680. At year end, the unused component of the prepaid insurance amounted to $480. Actual amounts paid are allowed as a tax deduction.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• Plant and equipment is depreciated over four years for accounting purposes and over three years for taxation purposes.
• The company tax rate is 30%.

Required -

(i) Calculate the taxable income for the year ending 30 June 2019 showing all calculations and prepare the accounting for tax journal entry to account for any current tax consequences.

(ii) Applying the appropriate formula for both assets and liabilities, calculate the relevant tax base for each of the following and prepare the relevant individual journal entry to account for any future tax consequences:

(a) prepaid insurance

(b) plant and equipment

(c) provision for warranty

QUESTION SEVEN - Accounting for Income Taxes

Mesa Ltd had interest received in advance with a carrying value amounting to a total of $10 000 as at 30 June 2019 (taxed on a cash basis):

(i) Calculate tax base using the appropriate formula. 

(ii) Determine the amount of the deferred tax asset or differed tax liability (providing a temporary difference exists) as at 30 June 2019.

(iii) Prepare the journal entry to account for any future tax consequences (providing that a temporary difference exists)

QUESTION EIGHT - Segment Reporting

Clive Ltd has four operating segments that the chief operating decision maker reviews when making assessments regarding performance and evaluating and making resource allocation decisions.  Details concerning these segments are as follows:

	Total Sales $	Profit before Tax $	Assets $
Construction	700 000	66 000	8 000
Building Supplies	300 000	36 000	3 500
Information Technology	110 000	-10 000	2 000
Agriculture	10 000	4 000	200

Additional Information - Sales of the building supplies segment are primarily external and within Australia, however, included in total sales of $300 000 are $50 000 inter-segment sales to the construction segment and these sales generated a profit of $5 000.  No other segments are involved in inter-segment sales.

Required - Determine which segments are reportable segments in accordance with the provisions of AASB 8, showing all workings to support your conclusions.

QUESTION NINE -

Theo Ltd has four operating segments that the chief operating decision maker reviews when making assessments regarding performance and evaluating and making resource allocation decisions.  Details concerning these operating segments for the year ending 30 June 2019 are as follows:

	Total Sales $	Profit before Tax $	Assets $
Mining	127 500	-27 000	500 000
Chemicals	5 000	1 000	50 000
Clothing	175 000	16 500	2 000 000
Food	75 000	9 000	875 000

Additional Information - While sales of food are primarily external and within Australia, there was a total of $12 500 inter-segment sales to the clothing segment and these sales generated a profit of $4 000.  No other segments are involved in inter-segment sales.

Required - Determine which segments are reportable segments in accordance with the provisions of AASB 8, showing all workings to support your conclusions.