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Income Tax - Lecture 4 & 5
What is the entry for recording Current Tax Liability? How is the amount of this entry calculated?
- Dr. Income Tax Expense $x,xxx
- Cr. Current Tax Liability $x,xxx
ITE based on accounting profit, but with changes. The Balance Sheet approach, which compares the carrying value of assets with their tax base, has been used since 2005.
Which items qualify as accounting income but carry different values as tax assessable income? (Us v. Them)
- 1. (Unearned) Revenue received in advance, such as rental revenue. A/C liability until earned, Taxed upon receipt.
- 2. (Accrued) Revenue received in arrears, such as interest revenue. A/C revenue when earned, Taxed upon receipt.
- 3. Instalment Sales.
Which items qualify as accounting expenses but carry different values as tax deductions?
- 1. Depreciation rates
- 2. Accrued expenses, such as annual leave. A/C expense when accrued, Tax deductible when paid.
- 3. Doubtful Debts. A/C expense when recognised, Tax deductible when written off.
- 4. Prepaid Expenses, such as insurance. A/C expense when used, Tax deductible when paid.
- 5. Research & Development. Amortised as benefits consumed, Tax deductible when paid.
Which items are A/C expenses but never a tax expense? Which item is the opposite?
6. Non-Deductible items, such as entertainment, amortisation of goodwill and fines, are A/C expenses, but never tax deductible.
7. Tax losses are never A/C expenses, but are tax deductible against future years' taxable income.
What is the (long-handed) formula for calculating taxable profit for company tax (30%)?
- Accounting profit / (loss)
- +/(-) Accounting expenses not deductible for tax
- +/(-) Accounting expenses where the amount differs from deductible amounts
- +/(-) Taxable income where the amount differs from accounting revenue
- -/(+) Accounting revenues not subject to taxation
- -/(+) Accounting revenue where the amount differs from taxable income
- -/(+) Deductible amounts where the amount differs from accounting expense
- = Taxable Profit
If Carrying Amount is compared to Tax Base, when will a DTA and DTL be found, for both assets and liabilities?
- Asset: CA > TB = DTL (Taxable Temporary Difference)
- CA < TB = DTA (Deductible Temporary Difference)
- Liability: CA > TB = DTA (Deductible Temporary Difference)
- CA < TB = DTL (Taxable temporary Difference)
What are the Tax Base formulae for Assets and Liabilities?
Asset: Tax Base = Carrying Amount - Future Taxable amount + Future Deductible amount
Liability: Tax Base = Carrying Amount - Future Deductible amount + Future Taxable amount
What are the Carrying Amount, Future Taxable Amount and Future Deductible Amount?
- Carrying Amount is the asset's/liability's recorded value in the accounts.
- Future Taxable Amount is the amount expected to be assessable under current income tax laws in the future.
- Future Deductible Amount is the amount that will be deductible under current income tax laws in the future.
How do tax losses arise? What good are they to a company?
- Tax losses arise when allowable deductions > taxable income (ie. a negative profit)
- Tax losses may be offset against future taxable income to reduce the future income tax expense. This benefit lasts indefinitely.
Exempt income is subtracted from tax loss and also loses its exempt status.
What entry is processed when a company pays its current tax liability to the ATO?
- Dr. Current Tax Liability $x,xxx
- Cr. Cash at Bank $x,xxx
Property, Plant & Equipment - Lecture 6
How does an asset qualify as a piece of PP&E?
- It must:
- - Be Tangible
- - Have a specific use within the entity
- - Be used for more than one period (ie. be non-current)
Assets held for re-sale are excluded.
PP&E is normally divided into classes, such as Land, Buildings, Machinery or Motor Vehicles.
How is a PP&E initially recognised? What is included in this value?
- At cost, but the asset must meet the recognition criteria.
- Component parts are accounted for separately.
- 'Cost' includes:
- - Purchase price (at fair value)
- - Costs directly attributable to bringing the asset to the location and condition necessary for operation
- - Initial estimates of dismantling or removing the asset and restoring the site.
In what order are creditors paid when a company is liquidated? (1 of 2)
- 1. Secured Creditors
- 2. Expenses incurred by the liquidator in carrying on the business
- 3. Costs relating to court-ordered applications
- 4. Debts relating to indemnification of the administrator
- 5. Debts incurred by an official manager
- 6. Costs associated with preparation of a report as to the affairs of the company
- 7. Costs of the audit of the liquidator's accounts
- 8. Auditors' fees related to period of official management from #5
- 9. Other expenses incurred by liquidator
In what order are creditors paid when a company is liquidated? (2 of 2)
- 10. Liquidator's remuneration
- 11. Expenses incurred by committee of inspection
- 12. Employees' wages & super contributions payable
- 13. Workers' compensation payable
- 14. Employees' leave entitlements
- 15. Retrenchment payments to employees
- 16. Unsecured creditors - utility bills, GST, etc.
- 17. Deferred creditors