Financial Statements And Tax Calculation For Jacky Ltd – Year Ended 30 June 2016

Financial Statements

1.

Computation of tax payable for the year ended 30 June, 2016
Particulars	Amount
Accounting Profit before tax Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	$          190,750
Add: Expenses not allowed for deduction
Depreciation – equipment	$            40,000
Depreciation – motor vehicles	$            15,000
Entertainment expense	$              4,500
Annual leave	$            13,000
Doubtful debts expense	$              6,000
Insurance expense	$            10,000
Rent expense	$            26,000
Warranty expense	$              8,500
Less: Expenses/Incomes allowed/taxable for deduction
Income
Government grant	$            30,000
Depreciation as per tax
– Equipment	$            60,000
– Motor vehicles	$            12,000
Doubtful debts written off	$              2,000
Expenses paid
Annual leave	$              2,000
Warranty expense	$              1,600
Rent	$            20,000
Insurance expense	$            13,000
Net taxable income	$          173,150
Net tax payable	$            51,945

Note: It is assumed that the doubtful debts are taxable, when they are written off.

Deferred tax worksheet for the year ended 30 June, 2018
	Accounting Carrying amount	Tax Carrying amount	Temporary Differences
Assets
Allowance for doubtful debts	$              4,000	$                   –	$          4,000
Prepaid insurance	$              3,000	$                   –	$        (3,000)
Property, plant and equipment (refer WN-1)	$          405,000	$         388,000	$      (17,000)
Liabilities
Provision for annual leaves	$            11,000	$                   –	$        11,000
Rent payable	$              6,000		$          6,000
Provision for warranties	$              6,900	$                   –	$          6,900
Total temporary diff.			$          7,900
Deferred tax asset /(liability) @ 30%			$          2,370

WN-1: Calculation of carrying amount of PPE as per tax :
	Equipment	Motor Vehicles
Cost	$ 400,000	$ 60,000
Less: Depreciation for the year	$  60,000	$ 12,000
Tax carrying amount	$ 340,000	$ 48,000

(b)	Journal entry

(a)	Deferred tax asset	Dr.	$             2,370
	To Income tax expense	Cr.	$             2,370
(b)	Current tax expense	Dr.	$           51,945
	To Current tax lability	Cr.	$           51,945

2.

Journal Entries
Date	Particulars	Debit	Credit
01-Jul-13	Equipment	$       800,000
	To cash		$       800,000
	(Being purchase of equipment recorded)
30-Jun-14	Depreciation	$       152,000
	To Accumulated depreciation		$       152,000
	(Being depreciation for the year recorded)
01-Jul-14	Accumulated depreciation	$       152,000
	To Equipment (refer Wn-1)		$         70,000
	To Revaluation Surplus		$         82,000
	(Being equipment recorded at fair value)
30-Jun-15	Depreciation  (refer Wn-1)	$       115,000
	To Accumulated depreciation		$       115,000
	(Being depreciation for the year recorded)
30-Jun-16	Depreciation	$       115,000
	To Accumulated depreciation		$       115,000
	(Being depreciation for the year recorded)
30-Jun-16	Accumulated depreciation	$       230,000
	Revaluation Surplus	$         82,000
	Impairment loss	$         18,000
	To Equipment (refer Wn-1)		$       330,000
	(Being equipment recorded at fair value)
30-Jun-16	Depreciation	$         28,750
	To Accumulated depreciation		$         28,750
	(Being depreciation recorded up to the date of sale)
30-Sep-16	Bank	$       390,000
	Accumulated depreciation	$         28,750
	To Equipment		$       400,000
	To Gain on sale of equipment (refer Wn-1)		$         18,750
	(Being equipment sold)

 

WN-1 – Asset chart
Year ended	Estimated useful life	Residual value	Cost	Depreciation	Acc. Dep	Closing carrying value	Fair value	Revaluation Surplus/(loss)	Sale proceeds	Gain on sale
1 July, 2013	5 years	40,000	800,000
30 June, 2014			800,000	152,000	152,000	648,000	730,000	82,000
1 July, 2014 (change in useful life)	6 years	40,000	730,000
30 June, 2015			730,000	115,000	267,000	615,000	615,000	–
30 June, 2016			730,000	115,000	382,000	500,000	400,000	(100,000)
30 Sep, 2016			400,000	28,750	410,750	371,250			390,000	18,750

3.

(a)

Whether any adjustment in financial statement is required? – Yes

Explanations – No adjustments are required in the previous years 2014 and 2015, as the change in estimated useful life is a change in accounting estimates. This change is required as business is full of uncertainties and to account for these uncertainties certain estimates are made, these estimates are known as accounting estimates. But due to change in situations, these estimates also gets changed, hence the management is required to take the impact of these change in estimates in the books.

As per para 36 of AASB 108, any change in accounting estimate should be recognized prospectively in the profit and loss of current periods and future periods only. As the change in useful life of the equipment, is a change of accounting estimates, hence its impact should be considered prospectively only. Thus, the depreciation for FY 2015-16 and onwards, will be calculated on the revised useful life of the equipment.

Accounting treatment – The journal entry for the year 2016 as per revised estimate is as below:

Depreciation     $ 66,667

To Accumulated depreciation    $ 66,667

Calculation of depreciation amount

Cost	500,000
Dep for FY 2013-14	50,000
Dep for FY 2014-15	50,000
Carrying value of Equipment as on 30 June, 2015	400,000
Revised useful life (years)	6
Dep for FY 2015-16	66,667

(b)

Whether any adjustment in financial statement is required? – Yes

Explanations – The adjustment relates to the prior period error of not recording the expense and its corresponding provision. As per para 42 of AASB 108 “Accounting Policies, Change in Accounting Estimates and Errors”, an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by: (a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or (b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented (“Accounting Policies, Changes in Accounting Estimates and Errors”, 2018).

Hence, as per the above treatment, the correction should be made in the comparative figures of 2015 shown in the 2016 financials, by revising the expense and payable amounts and the relative correction should also be made in the year 2016 to reflect the correct amounts.

Accounting treatment – The journal entry for the year 2016 is as below:

Retained earnings                     $ 25,000

To Cash                                   $ 25,000

Assets and Liabilities

Income tax receivable              $7,500

To Retained earnings               $ 7,500

(c)

Whether any adjustment in financial statement is required? – No

Explanations – As per AASB 110, “Events after Reporting Date”, two types of events are there, one is adjusting event and another is non-adjusting events. Adjusting events are those whose evidences are available as on the reporting date. On the other hand, non-adjusting events are those whose indication of occurrence are not present on the reporting date and they have arisen subsequent to reporting date (“Events after the Reporting Period”, 2018).

Since, in the given case, there is no indication of fall in the fair value of investments as on the date of reporting and only comes in the picture subsequent to reporting date. Hence, it is a non-adjusting event. As per para 10 of AASB 110, an entity shall not adjust the amounts recognized in its financial statements to reflect non-adjusting events after the reporting period and hence no adjustment is required in the financial statements of 2016.

 However, as per para 21 of AASB 110, the company is required to given some additional disclosures in its notes to accounts which relates to providing details of the nature of event and the estimate of its financial impact.

Accounting treatment – No accounting treatment, only disclosure is required in the notes to the financial statements stating

Nature of Event – Reduction in value of investment made by company in Bobsmith Ltd, due to sudden fall in stock market.

Estimated financial impact   – $350,000

(d)

Whether any adjustment in financial statement is required? – Yes

Explanations – As per AASB 110, it is an adjusting event, since the fact that the amount is unrecoverable from debtor is present on the reporting date,( as the management has made a provision for doubtful debts of 50% as on the reporting date). Para 9 of AASB 110, states that an entity shall adjust the amounts recognized in its financial statements to reflect adjusting events after the reporting period.

Hence, the company needs to record the remaining provision in the financial statements.

Accounting Treatment – The accounting treatment of this is to make provision for the full amount of debts gone into bankruptcy, the allowance for doubtful debts to the extent of 50% is already made in the financials, so the journal entry for remaining 50% is also required to be made, which is as follows:

Doubtful debt expense   $ 450,000

To Provision for doubtful debts  $ 450,000

References

Events after the Reporting Period. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB110_08-15.pd

Accounting Policies, Changes in Accounting Estimates and Errors. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07-04_COMPjan15_07-15.pdf