Accounting Profit and Tax Calculation for Madison Ltd

Accounting Profit Analysis for Madison Ltd

Overview of Madison Ltd Financial Data

• Accounting profit before tax (Year ended 30 June 2014):
  • Total: $18,500
  • Components of Profit:
    • Depreciation - motor vehicles (25%): $4,500
    • Depreciation - equipment (20%): $20,000
    • Rent revenue: $16,000
    • Royalty revenue (non-taxable): $5,000
    • Doubtful debts expense: \$2,300
    • Entertainment expense (non-deductible): \$1,500
    • Proceeds from sale of equipment: \$19,000
    • Carrying amount of equipment sold: \$5,000
    • Annual leave expense: \$18,000

Statement of Financial Position (as at 30 June 2014)

• Assets:

  • Cash: $11,500
  • Receivables: $12,000
  • Allowance for doubtful debts: $(3,000)
  • Inventory: $2,800
  • Motor Vehicle (net):
  • Value: $18,000
  • Accumulated Depreciation: $(15,750)
  • Equipment (net):
  • Value: $100,000
  • Accumulated Depreciation: $(60,000)
  • Deferred Tax Asset: ?

• Liabilities:

  • Accounts payable: $15,655
  • Provision for annual leave: $4,500
  • Current Tax liability: $21,500
  • Deferred Tax liability: $6,000

Additional Information

1. Deduction for depreciation on equipment: $15,000 (15%),
   • Note: Motor vehicle is fully depreciated for tax purposes.
2. Equipment sold purchased for $30,000 (2 years ago).
3. Company's tax rate: 30%.

Requirement A: Current Tax Worksheet

• Objective: Calculate the current tax liability for the year ending June 30, 2014.

Steps for Current Tax Calculation:

1. Calculate Taxable Income:

   • Start with accounting profit before tax: $18,500
   • Add back non-deductible expenses:
     • Entertainment expense: $1,500
   • Subtract non-taxable income:
     • Royalty revenue: $5,000
   • Adjust for differences in depreciation:
     • Depreciation claimed for tax on equipment: $15,000
   • Sum up adjustments:
     • Account profit before tax + Non-deductible expenses - Non-taxable income - Tax depreciation adjustment.

2. Detailed Calculation:

   • Taxable Income =
     $ext{Taxable Income} = 18,500 + 1,500 - 5,000 - (20,000 - 15,000)$
     $ext{Taxable Income} = 18,500 + 1,500 - 5,000 - 5,000 = 10,000$

3. Compute Current Tax Liability:

   • Current Tax = \$10,000 × 30% = \$3,000.

Requirement B: Deferred Tax Worksheet

• Objective: Calculate the end of year adjustment to deferred tax asset and liability.

Steps for Deferred Tax Calculation:

1. Identify Temporary Differences:
   • Depreciation differences between tax and accounting for both equipment and motor vehicles.
2. Calculate Deferred Tax Asset/Liabilities:
   • For each temporary difference, apply the tax rate to determine deferred tax implications.
3. Deferred Tax Asset Calculation:
   • If taxable income causes future tax deduction due to differences, recognize as an asset.
4. Deferred Tax Liability Calculation:
   • Recognize tax payable in the future because of greater income income recognition.

Requirement C: Journal Entries

• Objective: Prepare journal entries to record requirements 1 & 2.

Journal Entry for Current Tax Expense:

1. Current Tax Expense:
   • Debit Current Tax Expense: $3,000
   • Credit Current Tax Liability: $3,000

Journal Entry for Deferred Tax Adjustments:

1. Deferred Tax Asset Liabilities Adjustments:
   • Adjust as per calculated differences, credit or debit as necessary according to increases or decreases in asset or liability.

Implications and Conclusions

• Understanding these adjustments and requirements demonstrates the intricacies of tax accounting and the importance of aligning financial reporting with tax obligations.
• The analysis also showcases the relationship between accounting practices and taxation, requiring a sound understanding of regulations and potential impacts on financial statements.
• Significant emphasis must be placed on accurately recording and justifying both current and deferred tax liabilities and assets to present a true and fair view of the company’s financial position.