Income Taxation Assessment
Posted: February 18th, 2024
Income Taxation Assessment
Chloe Model Trains
Case study: Chloe’s Model Trains
Income Statement & Additional Information
PLEASE READ THE WORD DOCUMENT FOR INSTRUCTIONS
Chloe’s Model Trains Ltd
Income Statement
(Profit & Loss)
$ $ $
Income
Sales Revenue 110,000
Less Cost of Goods Sold
Opening Inventory 6,000
Purchases 25,400
Closing Inventory (7,500)
Cost of Goods Sold 23,900
Gross Profit 86,100
Other Income
Dividend Income 4,000.00
Grant 10,000.00
14,000.00
Total Income 100,100
Less Expenses
Advertising Fees 560
Accountancy Fees 1800
Bad Debts 1200
Consultancy Fees 900
Depreciation 8000
Donations 500
Interest Expense 80
Repairs & Maintenance 1100
Shareholder’s Salary 56500
Subscriptions 300
Travel Expense 900
Vehicle Expense 4800
Total Expenses 76,640
Net Profit 23,460
Additional Information
1. $4,000 Dividend Received from Carnel Ltd on 31/3/20X3 was assessable and included tax credits of 25% imputation Credits, and the rest for RWT.
2. There was a $10,000 grant which is not assessable for income tax.
3. The Bad Debts of $1,200 included $900 of which you confirmed that Chloe did not exercise all efforts to chase customers for the debt.
4. The Depreciation of $8,000 was using Industry Depreciation Rates. The Depreciation for taxation purposes totalled $9,300 using depreciation rates given by the Inland Revenue. Since there was more depreciation to claim, expect a negative adjustment.
5. For the powertools, only 70% is allowed for business use. The private use is non-allowable deduction. Please use this for the next two adjustments below.
5a. $1,300 of depreciation allowed was for powertools. A private use adjustment is required for this amount.
5b. Repairs & Maintenance included a $700 repair to the motor for a powertool. A private use adjustment is required for this amount. The other $400 of R&M is allowable.
6. $150 of the accounting fees included the filing of Chloe’s sisters return. You have indicated that this is an expense for Chloe’s sister, not Chloe’s Model Trains Ltd. The remaining $1,650 was accounting fees to Chloe’s Model Trains Ltd.
7. Chloe’s Model Trains Ltd had Losses of $520 brought forward from the previous year.
8. Provisional Tax paid for 20X3 was $4,500, there is still $1,500 due for unpaid provisional tax.
9. All Donations were made by Chloe’s Model Trains Ltd to donee organisations. The company has kept donation receipts, which is an allowable expense.
10. IRD Numbers – Chloe’s Model Trains Ltd: 131 120 555, Chloe: 095 456 986
11. The Current Account for Chloe had a $12,000 Credit Balance and an additional Shareholder Loan of $40,000. No other shareholder information was given for other information like aim credits.
12. No PAYE was deducted for Chloe’s Shareholder’s Salary.
13. For 20X4, Chloe’s Model Trains Ltd has estimated the provisional tax to be $6,000.
Chloe’s Model Trains Ltd income tax return for the 20X3 year:
Income:
Sales revenue of $110,000 is fully assessable income.
Dividend income of $4,000 received from Carnel Ltd includes 25% imputation credits. The dividend is assessable income but the imputation credits provide a tax credit.
Grant of $10,000 is non-assessable income and does not need to be included in the tax return based on information provided.
Expenses:
Opening and closing inventory have been correctly accounted for in calculating the cost of goods sold amount.
Advertising, accountancy, consultancy, depreciation, donations, interest, repairs and maintenance, and other expenses listed appear to be legitimate business expenses.
Adjustments:
$900 of the bad debts is non-allowable as full efforts to recover the debt have not been made. This amount needs to be added back as an adjustment.
Depreciation calculated for tax ($9,300) exceeds the amount in the accounts ($8,000) so there will be a negative adjustment of $1,300.
30% of the depreciation ($1,300) and repairs ($700) related to power tools must be disallowed and added back as a private use adjustment.
$150 of accountancy fees was not a business expense and needs to be removed.
$520 tax losses brought forward can be offset against taxable income.
$1,500 of provisional tax remains unpaid.
Donations appear valid based on receipt retention.
Other considerations:
Shareholder salary, loan and current account balances need further review
No PAYE deducted for salary will result in tax liability
Provisional tax estimate for 20X4 of $6,000
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