AFM202 Lecture Notes - Lecture 7: Child Care, Tax Rate, Gie
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A cash-flow budget uses the same format as a cash-flowstatement. It is prepared on a monthly basis and it reflectsbudgeted income and expenses.
In addition to the cash-flow statement, Deon and May made a listof budget assumptions, listed for you here:
| ⢠| Deonâs income will increase by 5%, effective January 1. Hisbonus is generally 10% of his income in the previous year, and hereceives it in January. |
| ⢠| Mayâs raise will be 3%, effective January 1. |
| ⢠| Interest and dividend income will conservatively be the same in2017 as it was in 2016 and will be received on a monthlybasis. |
| ⢠| Mortgage payments will be the same in 2017 as they were in2016. |
| ⢠| Federal income taxes are estimated at 20%, state income taxesat 6%, and social security taxes at 7.65% of wages, includingDeonâs bonus. |
| ⢠| Property insurance and property taxes are paid every sixmonths, in June and December. The amount is expected to be the samein 2017 as it was in 2016. |
| ⢠| May will contribute $60 per week for the employee portion oftheir medical insurance. According to her pay schedule, April andJune are five-week months. |
| ⢠| Auto insurance is paid at the end of each calendar quarter andshould not be more than it was in 2016. |
| ⢠| Deon and May would like to purchase a new car in the next fewyears and will put $500 a month away specifically for thatpurpose. |
| ⢠| Deon and May donât expect the amount of variable expenses tochange in 2017 except that they would like to double theircharitable contributions and go on a vacation to Ireland in June.The vacation will cost $6,000. |
| ⢠| Gift purchases are made mostly around the holidays, so Deon andMay are planning to pay half of the gift expense in December andhalf in January when the credit card bill comes in. |
| ⢠| Water and sewer is billed quarterly, in January, April, July,and October. The cost of heat should be spread over six months fromNovember to April. |
| ⢠| All other variable expenses can be spread evenly every month at2016 amounts. |
Use the information from their cash-flow statement (listed inthe first column of the following annual budget) and their budgetassumptions to fill in the missing amounts for the first six monthsof Deon and Mayâs monthly budget for 2017. Note: Be sure to fill inevery blank space with a value.
Annual Budget | Cash-Flow Statement | 2017 | |||||
|---|---|---|---|---|---|---|---|
Name: Deon and May Daley | |||||||
| 2016 | Jan. | Feb. | Mar. | Apr. | May | Jun. | |
| INCOME | |||||||
| Deonâs salary | 59,000 | ||||||
| Mayâs salary | 53,100 | ||||||
| Deonâs Bonus | 5,000 | ||||||
| Interest and dividends | 150 | ||||||
| Total Income | $117,250 | ||||||
| EXPENDITURES | |||||||
| Fixed Expenses | |||||||
| Mortgage | 14,976 | ||||||
| Deonâs federal income taxes | 12,800 | ||||||
| Deonâs state income taxes | 3,840 | ||||||
| Deonâs social security taxes | 4,896 | ||||||
| Mayâs federal income taxes | 10,620 | ||||||
| Mayâs state income taxes | 3,186 | ||||||
| Mayâs social security taxes | 4,062 | ||||||
| Property taxes | 4,100 | ||||||
| Property insurance | 1,200 | ||||||
| Medical insurance | 2,400 | ||||||
| Automobile insurance and registration | 700 | ||||||
| Savings for auto purchase | |||||||
| Total Fixed Expenses | $62,780 | ||||||
| Variable Expenses | |||||||
| Food | 1,620 | ||||||
| Entertainment | 3,000 | ||||||
| Dining out | 4,700 | ||||||
| Electric | 350 | ||||||
| Water and sewer | 800 | ||||||
| Heat | 1,250 | ||||||
| Cable TV | 3,000 | ||||||
| Telephone | 600 | ||||||
| Cell phone | 900 | ||||||
| Gifts | 2,000 | ||||||
| Personal care | 600 | ||||||
| Medical expenses | 3,700 | ||||||
| Vehicle gas and maintenance | 2,530 | ||||||
| Charitable contributions | 1,500 | ||||||
| Vacation | |||||||
| Total Variable Expenses | $26,550 | ||||||
| Total Expenses | $89,330 | ||||||
| SURPLUS (DEFICIT) | $27,920 | ||||||
Deon and May have an emergency fund of $40,000. They would liketo start saving for retirement, but they have not signed up fortheir companiesâ 401(k) plans. Neither company matches 401(k)contributions.
What do you suggest for Deon and May based on their goals andthe budget that they have put together?
The $40,000 that the Daleys have saved for an emergency is___three months of expenses. They have not, however, takenadvantage of the employer 401(k) plans that are available to them.If an employer does not match contributions, it is ____advantageousto contribute to a company-sponsored retirement savings planbecause the contributions to the plan are invested with___earnings. If the Daleys invest part of their surplus in their401(k) plans, they will save the designated amount plus another___of that amount because of the tax savings.
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.
