What recognition criteria for deferred tax liabilities

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Reference no: EM13150650

PART A

The following information is provided in respect of Fedyou Ltd for calculation of income tax as required by Accounting Standard AASB112 Income Taxes

Fedyou Ltd commenced operations on 1 July 2007 with an issued share capital of $700,000. On that date the company purchased a number of property plant and equipment (PPE) assets, details of which are provided below:

                                Land          Plant        Computers    Vehicles

Cost                      $100,000   $200,000    $100,000      $50,000

Depreciation

Rate:

Accounting                 -              15%             25%             30%

Tax                             -               10%             50%             40%

Method                                   Straight        Straight          Straight

                                                Line             Line               Line

Carrying Amount

30 June 2008       150,000       170,000        75,000          35,000

The Statement of Profit and Loss for the year ended 30 June 2008 was as follows:

Sales                                                                                  $520,000

Interest Revenue                                                                   40,000

Government Grant (exempt from tax)                                  40,000

Total Revenue                                                                     600,000

Cost of Goods Sold                                      200,000

Salaries and Wages                                        60,000

Depreciation Plant                                         30,000

Depreciation Computers                                25,000

Depreciation Vehicles                                   15,000

Rent                                                               18,000

Doubtful Debts                                              30,000

Insurance                                                         5,000

Long Service Leave                                        3,000

Other Expenses                                               9,000

Total Expenses                                                                  395,000

Profit before Tax                                                               205,000

Additional Information:

- The current tax rate is 30%

- Insurance of $23,000 was paid during the year. Of this amount $18,000 was considered to be prepaid for the coming financial year

-  Rent is paid in arrears. $10,000 is due at end of current year and $8000 has been paid in cash.

-  Interest Revenue will be received in the coming financial year.

-  No bad debts were written off during the current year

-  No payments for long service leave were made during the current year.

At 30 June 2008 the Statement of Financial Position of Fedyou Ltd was as follows:

Assets                                                                              $'000

Cash                                                                                   805

Prepayments                                                                        18

Receivables                                                                          300

Less

Allowance for Doubtful Debts               30                       270

Inventory                                                                           170

Property Plant and Equipment              500

Less:

Accumulated Depreciation                    70                        430

Interest Receivable                                                              40

Total Assets                                                                     1733

Liabilities

Accounts Payable                                                              280

Accrued Expenses                                                               10

Loan                                                                                  485

Long Service Leave Provision                                              3

Deferred Tax Liability                                                        15

Total Liabilities                                                                 793

Equity

Share Capital                                                                     700

Retained Profits                                                                 205

Asset Revaluation Surplus                                                  35

Total Equity                                                                       940

Total Liabilities and Equity                                             1733 

Additional information:

- Land was revalued upward by $50,000 at 30 June 2008

- The written down values for tax purposes at 30 June 2008 for other PPE assets were Plant $180,000, Computers $50,000 and Vehicles $30,000. 

Required:

- Calculate taxable income and current tax liability for Fedyou Ltd for year ended 30 June 2008 including journal entry to record these amounts (show all workings)

- Prepare a deferred tax worksheet to calculate the balances of any deferred tax assets and liabilities at 30 June 2008 and prepare required journal entry.

PART B

Refer to the attached extracts from the Wannon Water 2012/2013 Annual Report:

- Comprehensive Operating Statement

- Balance Sheet

- Note 5: Income Tax

Required:

What recognition criteria for deferred tax liabilities and assets must Wannon Water meet in order to recognise the net deferred tax liability of $36.879 million in its accounts?

PART C

At 30 June 2009 Fedyou Ltd undertook a comprehensive valuation of all of its PPE assets. The results of the revaluation exercise were as follows:

Asset                                                   Fair Value 30 June 2009

Land                                                         $140,000

Plant                                                           120,000

Computers                                                   45,000

Vehicles                                                      25,000

Required:

Having regard to the requirements of Accounting Standard AASB116 Property Plant and Equipment and AASB136 Impairment of Assets prepare the journal entries required (including tax effects) if the assets were revalued to fair value at 30 June 2009

PART D

Under current accounting standards revaluation increments on PPE assets are credited to a revaluation surplus account in equity, whereas a revaluation decrement may be recognised as an expense under certain circumstances.

Required:

Explain and critically evaluate these requirements                                

Reference no: EM13150650

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