ACCT-224 Lecture 8: Module 8 - Taxable Income and Tax Payable(2)

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whitecat797

4 Mar 2018

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Module 8 taxable income and tax payable. The first step was by far the most complex of the entire process. The second step of the process, which is much simpler, requires that we calculate the person"s. Once we have determined taxable income , we proceed to the final step of the process, which is to apply the appropriate tax rates to the. Taxable income calculated for the year, and finally determine a person"s tax. To summarize, taxable income is the basis on which income tax is determined in. To determine taxable income, we must first determine net income for tax purposes according to the rules in ita 3, which we have covered in modules. In this final module relating to income tax rules, we will see how to calculate taxable income and the resulting tax payable by an individual. The calculation of tax payable is the final step in determining a person"s tax liability for a year.

Related Questions

Rent and insurance payments are examples of

	A.	variable expenses.
	B.	fixed expenses.
	C.	long-term liabilities.
	D.	short-term liabilities.

Matthew is concerned about his ability to save money regularlyand has prepared a budget. Which of the following budgetclassifications would be most appropriate for Matthew'sbudget?

	A.	Savings as a fixed expenditure
	B.	Saving whatever may be left over
	C.	Savings as a variable expenditure

Question 3

A successful financial plan includes

	A.	explicitly stated financial goals.
	B.	specified values that underlie the plan.
	C.	all of these.
	D.	logical and consistent financial strategies.

Question 4

A cash-flow statement is also known as a(n) ____ statement.

	A.	taxable income
	B.	net worth
	C.	income and expense
	D.	asset-and-liability

Question 5

A long-term goal is one that is projected to be acheived beyondhow much time?

	A.	five year
	B.	ten years
	C.	six months
	D.	one year

Question 6

A balance sheet includes ____, ____, and ____.

	A.	income; expenses; net worth
	B.	assets; expenses; liabilities
	C.	income; liabilities; net worth
	D.	assets; liabilities; net worth

Question 7

Disposable income is income

	A.	after all employer withholding including taxes.
	B.	minus fixed expenditures.
	C.	before taxes.
	D.	after all employer withholding except taxes.

Question 8

Which of the following would be classified as a long-termliability?

	A.	Education loan balance
	B.	Credit card debt
	C.	Bank card debt
	D.	All of these

Question 9

Stephen Scott's monthly pay stub indicates that his monthlygross income is $3,800. However, $800 is withheld for income andSocial Security taxes, $200 is withheld for his health anddisability insurance, and another $200 is contributed to hispension plan. How much is Stephen's disposable income?

	A.	$2,800
	B.	$3,000
	C.	$2,600
	D.	$3,800

Question 10

Which of the following provides information about a person'sfinancial condition at a specific point in time?

	A.	Federal tax return
	B.	Balance sheet
	C.	All of these
	D.	Income and expense statement

Question 11

The two most useful financial statements are ____ and____.

	A.	federal tax returns; income and expense statements
	B.	balance sheets; wills
	C.	cash-flow statements; balance sheets
	D.	wills; federal tax returns

Question 12

Which of the following is the best example of awell-stated financial goal?

	A.	Pay off your credit cards as soon as possible
	B.	Purchase a three-bedroom home in five years
	C.	Buy a $3,000 computer in 18 months
	D.	Buy a $2,000 stereo

Question 13

The first step in the budgeting process is

	A.	setting financial goals.
	B.	evaluating.
	C.	organizing.
	D.	decision making.

Question 13

The first step in the budgeting process is

	A.	setting financial goals.
	B.	evaluating.
	C.	organizing.
	D.	decision making.

Which of the following is a characteristic of a cash-flowstatement?

	A.	It shows if you were able to live within your income for theperiod covered.
	B.	All of these.
	C.	It covers a period of time, usually one month or one year.
	D.	The statement includes three sections: income, expenses, andsurplus (or deficit).

Question 15

The formula for calculating net worth is

	A.	income minus liabilities.
	B.	assets minus expenses.
	C.	income minus expenses.
	D.	assets minus liabilities.

Question 16

Food, clothing, and entertainment are examples of

	A.	long-term liabilities.
	B.	short-term liabilities.
	C.	fixed expenses.
	D.	variable expenses.

Question 17

To construct a balance sheet, you need to compile dollar valuesfor your assets and liabilities. Good sources from which to beginare

	A.	checkbook or savings account records.
	B.	all of these.
	C.	investments.
	D.	receipts of various payments.

Question 18

Discretionary income is used to pay for things like

	A.	housing.
	B.	vacations.
	C.	utilities.
	D.	food.

Question 19

A short-term goal is one that is projected to be acheived withinhow much time?

	A.	one month
	B.	three months
	C.	one year
	D.	five years

Question 20

The advantages of having organized financial records include

	A.	helping you take advantage of all available tax deductions.
	B.	all of these.
	C.	enabling you to review the results of financialtransactions.
	D.	helping you save money as well as make money.

magentarhinoceros749

Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.

Hamish Ltd
Income statement for theyear ended 30 June 2018	$
*Income*	904,000
Revenue from Sales	850,000
Interest Revenue	18,000
Rent Revenue	36,000
*Expenses*	647,000
Administration and sellingexpenses	133,000
Wages and salary expenses	250,000
Doubtful debts expense	20,000
Goodwill impairment	20,000
Insurance expense	54,000
Depreciation expense - plant	90,000
Long-service leave expenses	35,000
Warrantee expenses	45,000

*Net Profit beforetax*	257,000

Hamish Ltd
Extract from the Balancesheet as at 30 June 2018	$
*Assets*
Cash	40,000
Inventory	90,000
Accounts receivable (net)	80,000
Prepaid insurance	?
Interest receivable	6,000
Goodwill	?
Plant	?
*Liabilities*
Accounts payable	50,000
Wages and salaries owing	30,000
Provision for long-service leaveexpenses	25,000
Rent revenue received inadvance	?
Provision for warranteeexpenses	30,000
Loan payable	200,000

The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:

At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.

The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.

Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.

The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).

Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.

During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.

Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.

During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.

At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.

The tax rate was always 33% but changedto 28% during the current year.

Required:

Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.

Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.

Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9

Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.

salmonporcupine872

It is now late May 2018 and you, CPA, have just finished meetingwith your partner, Ms. Wong. Ms. Wong wants your help with someclients of hers.

One client, Garden Supplies Co. (GSC) has had a new shareholderbuy shares. Ms. Wong wants you to tell her if GSC is a resident ofCanada for tax purposes in 2018 and describe the personal taxconsequences that Mrs. Gardiner will have from her 2018 share sale.You can ignore the acquisition of control rules. Also, given thelist of GSCâs 2018 expenditures in Exhibit I, calculate the total2018 expenses that are deductible in 2018 when computing net incomefor tax purposes. GSC is very profitable and wants to claim themaximum amount of deductions possible. You do not need to commenton non-deductible items.

Note: Additional information about GSC is provided in ExhibitI.

Another client, Mr. Rich, who is a non-resident of Canada, hasjust purchased a newly built townhouse in Canada for $1,500,000that he plans to rent out. The home was purchased on May 1, 2018and will be rented out starting on July 1, 2018. What Canadianincome tax obligations will Mr. Rich face in 2018? If you have anyrecommendations that will reduce Mr. Richâs Canadian income taxobligations (in 2018 or in future years) with respect to his rentalproperty, then you should provide them. Additional informationabout Mr. Rich is provided in Exhibit II.

Ms. Wong wants you to draft a memo to her answering herquestions. She says you can ignore provincial income taxes, ignoreforeign taxes and ignore any income tax treaties. Explain youranswers, show all your detailed calculations and give IncomeTax Act (ITA) section, subsection and paragraph (whereapplicable) references and Income Tax Regulations sectionand subsection references in order to support your answers. Whengiving references you must be specific. Do not just list multiplereferences!

Exhibit I

Garden Supplies Co.

Garden Supplies Co (GSC) is a private company that wasincorporated in Canada in 1963 by Mr. Taft. Mr. Taft subscribed for1,000 common shares in return for $100 (in aggregate). GSC does nothave any other shares outstanding

GSC has a December 31^st year-end and its board ofdirectors meetings are typically held in the United States(U.S.)

GSC operates gardening supply stores in Canada and it startedwith one store in Toronto in 1963. Now it has 10 stores throughoutCanada

In 2005, Mr. Taft sold his shares to Mrs. Gardiner for $1M inaggregate (which was their FMV at the time)

In late January 2018, Mrs. Gardiner sold 600 of her GSC commonshares for $3,000 per share to Marcus Jones, an armâs length person(she still owns 400 common shares of GSC)

In January 2018, Mrs. Gardiner paid $3,500 to a charteredbusiness valuator to value her GSC shares and paid $2,500 in legalfees related to her sale of GSC shares

The FMV of GSC was determined to be $3M

Mrs. Gardiner incurred $300 of safety deposit box rental fees in2018 and she keeps her GSC share certificates in her safety depositbox

Assume GSC is not a qualified small business corporation

Marcus Jones is a non-resident of Canada

In 2018 GSC incurred the following expenditures:

Income taxes paid of $124,500

Salary and wages expense paid of $390,000

In addition, GSC accrued a bonus payable to Mrs. Gardiner of$70,000 for work performed in 2018. This bonus will not be paiduntil May 31, 2019

Interest expense paid of $5,000 on a bank loan used to financebusiness operations

Dividends paid to shareholders of $55,000

Warranty expense accrued of $25,000 (based on estimated warrantycosts). The actual cost in 2018 of servicing warranties was$20,000

Purchased new shelving units to display merchandise on April 1,2018 for $200,000

Purchased new computer software for $3,000 on January 1,2018

Purchased goodwill for $40,000 as part of a business acquisitionon January 1, 2018

Purchased a patent, with an 18-year legal life remaining onDecember 31, 2018 for $10,000

Accrued office supply expenses of $12,000, for suppliespurchased (and used) in late 2018. Payment of this account payablewas made in early 2019

Paid $7,000 for Toronto Blue Jays (baseball) tickets used totake large customers out to games

Incurred $4,000 of legal fees related to obtaining bankfinancing, and

Incurred lobbying expenses of $1,300 for matters related to thebusiness

Assume all expenditures are reasonable unless otherwiseindicated

Assume the prescribed interest rate is 1% at all times

Exhibit II

Mr. Rich

Mr. Richâs rental income is property income; i.e., he is notrunning a business

Mr. Rich wants to minimize his Canadian rental income and hedoes not have any other Canadian income

Mr. Rich has prepared the following (assume that all theexpenses below are paid in 2018 and are reasonable):

Mr. Richâs Canadian Rental Income

For the year-ended December 31, 2018

Gross rental revenue ($4,000 permonth) $24,000

Mortgage interest ($2,200 permonth) $13,200

Property taxes ($610 permonth) $3,660

Maintenance and repairs ($500 permonth) $3,000

Insurance ($200 permonth) $1,200

Total expenses $21,060

Netincome $2,940

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ACCT-224 Lecture 8: Module 8 - Taxable Income and Tax Payable(2)

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