GAAP Graded Questions - Solution Q5.10, 5.11 PDF

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Solution 5.a) Calculation: taxable profits and current income taxProfit before tax Given 40 0 000 Less exempt income: Less dividend income Not taxable (40 000) Less capital profits W1 (50 000) Add taxable capital gain W1 25 000 Add non-deductible expenses: Add back donations Not deductible 100 000 A...

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Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.10 a) Calculation: taxable profits and current income tax Profit before tax Less exempt income: Less dividend income Less capital profits Add taxable capital gain Add non-deductible expenses: Add back donations Add back fines Taxable profit

Given

400 000

Not taxable W1 W1

(40 000) (50 000) 25 000

Not deductible Not deductible

100 000 10 000 445 000

Current income tax

C445 000 x 30%

133 500

Workings: W1: Capital profit and Taxable capital gain on sale of building Proceeds on sale: Carrying amount on date of sale (Cost 500 000 – Accumulated depreciation 300 000) Profit on sale (given) Proceeds Capital profit: Proceeds (calculated above) Less original cost/ base cost (the question stated that these were the same) Capital profit/ Capital gain

200 000 350 000 550 000 550 000 500 000 50 000

Taxable capital gain: Capital gain (calculated above) Inclusion rate Taxable portion of the capital gain

50 000 50% 25 000

b) Journals Debit 31 December 20X2 Income tax expense (E) Current tax payable: income tax (L) Income tax for the current year Dividend declared (OE) Current tax payable: dividends tax (L) Shareholders for dividends (L) Dividends declared and dividends tax withheld

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see (a)

Credit

133 500 133 500

Given 70 000 x 10% 70 000 x 10%

70 000 7 000 63 000

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Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.10 continued ... c) Disclosure YACK LIMITED EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X2 Note Profit before tax Income tax expense Profit for the year Other comprehensive income for the year Total comprehensive income for the year

4

20X2 C 400 000 (133 500) 266 500 266 500

YACK LIMITED EXTRACTS FROM NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20X2 4. Income tax expense

 

Current Deferred (no temporary differences)

Tax expense per statement of comprehensive income Tax rate reconciliation: Applicable tax rate Tax effects of: Profits before tax (400 000 x 30%) Exempt dividend income (C40 000 x 30%) Exempt capital profit [(capital profit: 50K – taxable capital gain: 25 000) x 30%] Non-deductible fines (C10 000 x 30%) Non-deductible donations (C100 000 x 30%) Tax expense per statement of comprehensive income Effective tax rate (133 500 / 400 000)

20X2 C 133 500 133 500 30%

120 000 (12 000) (7 500) 3 000 30 000 133 500 33.4%

The effective tax rate is higher than the applicable tax rate due mainly to:  Non-deductible donations.

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Chapter 5: Page 21

Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.10 continued … Note: 

Dividends tax does not form part of tax expense as it is a tax on the shareholders receiving the dividend, not a tax on the company paying the dividends. The company paying the dividend merely withholds the dividend tax (thus dividend tax is treated in much the same way as employees’ tax).



The fact that there are no temporary differences means that there is no deferred tax. Temporary differences and deferred tax are explained in chapter 6.

d) Calculations

Selling price Carrying amount/ tax base

Accounting records 550 000 200 000

Tax records 550 000 220 000

350 000 50 000

330 000 40 000

300 000

280 000

(Cost 500 000 – Accumulated Depreciation: 300 000) (Cost 500 000 – Accumulated Wear & Tear: 280 000)

Profit Capital profit / Capital gain Accounting: Proceeds: 550 000(part a) – Cost price: 500 000 Tax records: Proceeds: 550 000(part a) – Base cost: 510 000

Non-capital profit / recoupment Accounting: Proceeds ltd to cost: 500 000 – CA: (cost 500 000 – accumulated depreciation 300 000) Tax records: Proceeds ltd to cost: 500 000 – TB: (cost 500 000 – accumulated wear & tear 280 000)

Note: Under the tax records, the total profit is C330 000. However, the capital gain (C40 000) and the recoupment (C280 000) add up to only C320 000. This is because the base cost (C510 000) is C10 000 more than the cost (C500 000). Thus C10 000 of the profit is immediately exempted from tax.

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Chapter 5: Page 22

Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.11 Journals 20X1 Current tax payable: income tax (SOFP: L) Bank (SOFP: A) Provisional tax payments (this is the total of the 2 provisional payments these would normally each be journalised separately) Income tax expense (SOCI: P/L) Current tax payable: income tax (SOFP: L) Current income tax estimated for 20X1 (see working 1) 20X2 Current tax payable: income tax (SOFP: L) Bank (SOFP: current asset) Provisional tax payments (this is the total of the 2 provisional payments these would normally each be journalised separately) Income tax expense (SOCI: P/L) Current tax payable: income tax (SOFP: L) Current income tax estimated for 20X2 (see working 1) Current tax payable: income tax (SOFP: L) Income tax expense (SOCI: P/L) Current income tax over-estimated in 20X1 (see working 2) 20X3 Current tax payable: income tax (SOFP: L) Bank (SOFP: current asset)

Debit

Credit

60 000 60 000

95 250 95 250

70 000 70 000

111 000 111 000 1 250 1 250

100 000 100 000

Provisional tax payments (this is the total of the 2 provisional payments these would normally each be journalised separately) Income tax expense (SOCI: P/L) Current tax payable: income tax (SOFP: L) Current income tax estimated for 20X3 (see working 1) Income tax expense (SOCI: P/L) Current tax payable: income tax (SOFP: L) Current income tax under-estimated in 20X2 (see working 2)

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150 750 150 750 3 500 3 500

Chapter 5: Page 23

Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.11 continued . . . Workings W1: Calculation of current income tax Profit before tax Non-temporary differences:  Add donations (non-deductible) Given  Less capital profit on sale of vehicle  Add taxable capital gain on sale of vehicle15 000 x 50% SP: 70 -15 -15+ 40  Less capital profit on sale of machine  Add taxable capital gain on sale of machine

20X1 C 300 000

20X2 C 400 000

20X3 C 450 000

40 000 (20 000) 7 500

0 0 0

0 0 0 (10 000)

CP: 70 SP: 70 – 15 -15 + 40 BC: 75 x 50%

327 500

400 000

2 500 442 500

Temporary differences Total profit: 50 000 cap profit: 20 000 (1) SP, limited to CP:  Less non-capital profit on sale of machine 80 limited to70 less CA: 70 - 15 - 15 SP, limited to CP:  Add recoupment on sale of machine 80 to 70 less TB: 70 - 25 - 25

 Less non-cap profit on sale of vehicle  Add recoupment on sale of vehicle

     

Add income received in advance: c/bal Less income received in advance: o/bal Less expenses prepaid: c/bal Add expenses prepaid: o/bal Add depreciation Less wear and tear

Taxable profit Current income tax at 30%

(30 000) 30 000 (30 000) 50 000 20 000 0 (30 000) 0 0 0

10 000 (20 000) (40 000) 30 000 15 000 (25 000)

40 000 (10 000) (20 000) 40 000 15 000 (25 000)

317 500

370 000

502 500

95 250

111 000

150 750

SP: Selling price CP: Cost price CA: Carrying amount TB: Tax base BC: Base cost (1) Yr1: the calculation cannot be performed using the usual equation (SP limited to CP - TB) since there is insufficient information to do so. However it is 30 000 and this is determined on the basis that the question states that there are no other TD's, thus it must equal the non-capital profit.

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Chapter 5: Page 24

Solutions to GAAP : Graded Questions

Taxation: various types and current income tax

Solution 5.11 continued . . . W2: Calculation of over/ under provision of current income tax

20X1

20X2

20X3

Current income tax estimated (W1)

C 95 250

C 111 000

Current income tax assessed (Given) (Over-provision) / Under-provision

94 000 (1 250)

114 500 3 500

C 150 750 not yet assessed unknown

Assessment received in 20X2, thus journalised in: Assessment received in 20X3, thus journalised in:

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20X2 20X3

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