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Case study on current tax liability

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)

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