The accounting profit before tax for Silly Ltd for the year ended 30 June 2016 w

Question

The accounting profit before tax for Silly Ltd for the year ended 30 June 2016 was $820,000 and included the following revenue and expense items: Depreciation of plant $7,500 Long service leave expense $60,000 Doubtful debts expense $35,000 Rent revenue $20,000 Entertainment expenses $45,000 Depreciation of building $50,000 Additional information: • The Plant was purchased on 1 July 2011 for $65,000. The plant has an expected useful life of 8 years and a residual value of $5,000 and is depreciated using straight-line method for accounting purposes. Tax depreciates at 25% per annum straight line on cost. • Long service leave paid to employees in the year to 30 June 2016 totalled $90,000. • Total bad debts written off during the year were $25,000. • Rent revenue relates to the building and is paid to Silly Ltd in advance. The balance of Rent Revenue Received in Advance was $8,000 as the beginning of the period (i.e. as at 1 July 2015) and $12,000 at the end of the period (ie as at 30 June 2016). 2 • Long service leave and rent revenue are recognised for tax purposes on a cash basis. • Entertainment expenses and depreciation for buildings are not allowable as deductions for tax purposes. • Bad/doubtful debts are only allowable as deductions when written off. • The tax rate is 30%. The extract from the statement of financial position for Silly Ltd as at 30 June 2016 is as follows: Assets Cash 80,000 Inventory 720,000 Accounts Receivable 400,000 Allowance for Doubtful Debts (50,000) Deferred Tax Asset 38,000 Plant 65,000 Accumulated Depreciation –Plant (37,500) Building 400,000 Accumulated Depreciation –Building (80,000) Liabilities Accounts Payable 60,000 Provision for Long Service Leave 100,000 Rent Revenue Received in Advance 12,000 Deferred Tax Liability 6,500 Loan 220,000 1. Prepare a statement reconciling accounting profit to taxable profit. 2. Complete the tax effect worksheet which is attached 3. Prepare the journal entries required to account for income tax as at 30 June 2016. 4. If the beginning balance of deferred tax liabilities was $11,000 how would this impact on your journal entries in 3 above

Explanation / Answer

Profit as per Books 820000 Add : Dep as per books on Plant 7500 Add : Doubtful Expense 35000 Add : Building Dep. 50000 Less : Dep as per income tax Plant 16250 Add : long term leave expense 60000 Less : Actual paid Long term Leave Expense 90000 Less actual bad debt 25000 less : Rent Revenue 21000 Add : Rent Revenue 25000 Add : Entertainment exp 45000 Profit as per iNcome tax 890250

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