Workshop # 1 Questions – Income Taxes
The Following Questions are to be completed prior to attending your Workshop and may form part of your ‘randomly assessed homework’
Kustom Kennels Ltd manufactures prefabricated sheds, ranging from industrial sheds and garden sheds down to small items such as dog kennels. In recent years, Kustom Kennels Ltd has recorded accounting losses. The company has retrenched several of its staff after struggling to find new markets for its products.
In the prior year, the company recognised expenses and liabilities for long-service leave and potential redundancy payouts. Redundancy costs and long-service leave are not deductible for income tax until paid. The company recognised deferred tax assets as a result of these liabilities.
With the long-service leave and redundancy entitlements being paid out to the retrenched employees in the current year, the company has now been able to claim large tax deductions for the cash payments made. The effect of these deductions is that the company has recorded a significant tax loss in the current year.
- Outline the requirements of AASB 112 in relation to the recognition of deferred tax assets from long-service leave and retrenchment liabilities. How do these requirements differ (if at all) from the recognition requirements for deferred tax assets from tax losses?
- Discuss whether the deferred tax asset from the employee benefits liabilities in the prior year should have been recognised. Should the tax loss in the current year be recognised as a deferred tax asset?
At 30 June 2017, Kelly Ltd had the following deferred tax balances:
Deferred tax liability
Deferred tax asset
Kelly Ltd recorded a profit before tax of $80 000 for the year to 30 June 2018, which included the following items:
Depreciation expense – plant
Doubtful debts expense
Long-service leave expense
For taxation purposes the following amounts are allowable deductions for the year to 30 June 2018:
Tax depreciation – plant
Bad debts written off
Depreciation rates for taxation purposes are higher than for accounting purposes. A corporate tax rate of 30% applies.
- Prepare a current tax worksheetto determine the taxable income for the year to 30 June 2018.
- Determine by what amount thebalances of the deferred tax liability and deferred tax assetwill increase or decrease for the year to 30 June 2018 because of depreciation, doubtful debts and long-service leave.
- Prepare all journal entriesto account for income tax assuming recognition criteria are satisfied.
- What are the balancesof the deferred tax liability and deferred tax asset at 30 June 2018?
“Accounting profit is based on a full accrual model whereas taxable profit is based on a partial accrual model”.
Explain this comment by reference to the following items: long service leave, and doubtful debts.