Case study on current tax liability
Red Dog Ltd began operations on 1st July 2016 by purchasing an existing business for $700,000. The fair values of the assets of the purchased business were as follows:
| Asset | Fair value $ |
| Vehicles | 88,000 |
| Equipment | 380,000 |
| Computers | 192,000 |
The excess of the purchase consideration over the fair value of the assets acquired was recorded as goodwill.
The depreciation regimes for the financial reports and the company income tax return respectively are listed below. The company income tax rate is 30%.
| Depreciation Regimes | Vehicles | Equipment | Computers |
| Depreciation rate: | |||
| Accounting | 25% | 25% | 25% |
| Tax | 40% | 30% | 50% |
| Method: | |||
| Accounting | Straight-line | Straight-line | Straight-line |
| Tax | Reducing Balance | Reducing Balance | Reducing Balance |
| Residual: | $8,000 | $20,000 | $12,000 |
During the first year of operations, the company recognised the following transactions which are treated differently for tax and accounting purposes:
· Insurance of $38,000 was paid for during the year. Of this amount, $26,400 is prepaid for next year.
· Rent is paid for in arrears. $26,000 is owing at the end of the current year and $9,200 has been paid in cash.
· Employee Entitlements (Annual, Sick and Long Service Leave) totalling $16,000 were provided for during the year. No payments were made.
· Allowance for Impairment for Accounts Receivable was $4,000.
Items in the income statement which were treated the same for accounting and tax purposes were:
· Sales $900,000
· Cost of Goods Sold $456,000
· Salaries and Wages $84,000
· Other expenses $19,200
Other items in the statement of financial position as at 30th June 2017 are:
| Year end balances | $ |
| Inventory on hand | 312,000 |
| Accounts receivable | 86,000 |
| Goodwill (net) | 35,000 |
| Accounts payable | 42,000 |
| Cash at Bank | 38,000 |
Additional information:
· No debts were written off as bad during the year.
· For year ended 30th June 2017 the profit before income tax of Red Dog Ltd was $114,000.
Required:
a) Prepare a schedule that shows the calculation of taxable income and current tax liability for Red Dog Ltd for the year ending 30th June 2017. (2.5 marks)
b) Prepare a worksheet that shows the calculation of deferred tax liabilities and deferred tax assets for Red Dog Ltd as at 30th June 2017. (5 marks)
c) Provide journal entries to record the current tax liability, deferred tax assets (if any) and deferred tax liabilities (if any). Offset is optional. Exclude journal narrations. (2.5 marks)