FIA 324

Homework :Accounting for Income Taxes

(50 marks : 75 minutes)

AJ Ltd are a company, based in Port Elizabeth, which packs fish. They operate from a warehouse near
the Port Elizabeth harbour. During February 2008 when the Port Elizabeth area had heavy rainfall their
warehouse, which is in a low lying area, was completely flooded and all their documentation and
computer equipment destroyed. The company kept back-ups of their data in a fire-proof safe but after
the flood they discovered that the safe was not water-proof and that all the back-ups were damaged
too.

AJ Ltd are in the process of reconstructing their data in order to prepare their annual financial
statements for the year ended 31 December 2008 and have asked for your assistance with respect to
all the taxation matters.

The assistant accountant of AJ Ltd has only managed to reconstruct the following with respect to the
opening deferred tax balances for 2008:

DEFERRED TAX CALCULATION - as at 31 December 2007

Deferred
Carrying Tax Temporary Tax tax asset /
amount base differences rate (liability)
Land 500,000 ? ? ?
Warehouse building ? ? ? ?
Computer equipment ? ? ? ?
Pre-paid rent 20,000 ? ? ?
Provision for doubtful debts ? ? 4,500 ?
? ?
Assessed loss 650,000* 29% 188,500
?

* The assessed loss was fully utilised to reduce the deferred tax liability at 31 December 2007.
The following information is available and may assist you with completing the various tax calculations:

1. During 2006 the directors decided to implement the policy of revaluing the land and the
warehouse building every three years. The first revaluation was carried out on 1 January 2007.
Land is not depreciated but buildings are being written off over 20 years to a nil residual value.
SARS does not grant a wear and tear allowance on land, whilst buildings are subject to a wear
and tear allowance of 2% per annum in terms of s13(1) of the Income Tax Act.

Cost Value
at 31 December 1991 at 1 January 2007
R’s R’s
Land 100 000 500 000
Warehouse building 200 000 800 000
2. All of the company’s computer equipment which cost R300 000 on 1 July 2005 was destroyed
during the floods on 31 January 2008. The company depreciates the computer equipment at
20% per annum to a nil residual value. SARS grants a wear and tear allowance on computer
equipment, in terms of s11(e), over 3 years.

During March 2008, the company received R75 000 from their insurance company in full
settlement of their claim for the destroyed computer equipment.

3. On 1 April 2008 the company purchased and installed new computer equipment, to replace the
destroyed computer equipment, at a cost of R150 000.

4. The company rents a few small offices in the building next door to their warehouse. Rent is
always paid in advance on the 28th of the previous month. Monthly rental for the 2008 year was
R20 000 per month and is R25 000 per month for the 2009 year. SARS allows rent to be
deducted in the period in which the payment is actually made.

5. At the end of 2008 the company created a provision for doubtful debts of 5% of the accounts
receivable balance. Accounts receivable were R80 000 at this stage. In terms of s11(j) of the
Income Tax Act, SARS grants the company an allowance equal to 25% of their provision for
doubtful debts.

6. During the 2008 year the company received dividend income of R20 000.

7. On 30 August 2008 the company incurred a fine of R125 000 due to a leak in a waste pipe
which polluted a nearby stream.

8. The company made a profit before tax during the 2008 financial year of R245 000. This was
calculated after correctly accounting for all matters referred to in this question.

9. On 31 December 2008 the directors of the company declared a dividend of R50 000.

10. It is the company policy not to recognise deferred tax assets as the probability of future taxable
income is uncertain.

11. The tax rate was 29% for the 2007 year but during February 2008 it was announced that the tax
rate for companies was to be reduced to 28% for all year ends ending after 1 April 2008. The
inclusion rate for capital gains is 50% for all companies.

12. There are no other temporary or permanent differences other than those that can be perceived
from the information given above.

Required:

(a) Prepare the tax expense note for the financial statements of AJ Ltd for the year ended
31 December 2008 in compliance with IFRS.

(b) Prepare the deferred tax note for the financial statements of AJ Ltd at 31 December 2008 in
compliance with IFRS.
(c) Note: Comparatives are not required.
(d) Accounting policy note is not required.