APPLIED TAXATION- MACC 710
ASSIGNMENT 2.
You are the financial accountant for Olympic Designs Ltd based at Gokwe Growth Point. The company designs and supplies gifts and other promotional items to business organizations. Olympic Designs Ltd does not manufacture any of its inventory but either purchases these items from selected manufacturers or subcontracts the job to other parties.
The Income Statement for the company for the financial year ended 31 Dec 2007 is as follows;
Note $
Revenue 1 2 150 000
Less
Cost of sales-
Initial stock 345 000
Purchases 2 1 685 000
2 030 000
Final stock 405 000 1 625 000
Gross profit 525 000
Dividends 3 9 250
Insurance settlement 4 18 240 27 490
552 490
Bad debts 5 22 700
Depreciation 6 57 750
Rentals 7 45 000
Finance charges 2 200
Insurance premiums 8 54 000
Salaries and wages 9 215 750
Interest 78 000
Penalties 10 10 000
Other tax deductible expenses 24 600 510 000
Net profit before tax 42 490.
Notes
- Sales include ‘sales on appro’ to a customer for $60 000. The company applies a mark up of 20%. The customer has not confirmed their acceptance of the goods.
- On 1 December 2007, a contract was concluded to import international flags from from a supplier in Australia. 1000 flags at Aus$2 each were shipped on that date free on board but had not arrived by 31 December 2007. The settlement of the creditor is expected to take place on 31 January 2008. No accounting entries have been made in respect of this transaction.
The following exchange rates apply;
Date Spot rate
! Dec 2007 Aus$ 1 = $4,50
31 Dec 2007 Aus$ 1 = $4,55
31 Dec 2008 Aus $ 1 = $4,60
- The following dividends accrued to the company during its 2007 year of assessment;
-dividends from listed shares on Zimbabwe Stock Exchange $2 250
- dividends from foreign listed companies $7 000
- The company had sent a batch of T-shirts to a supplier for screen printing. A fire broke out in the supplier’s factory destroying the T-shirts. The company’s insurer paid $18 240 in settlement of the claim.
- The bad debt is made up as follows;
-trade debtors $12 200
-loan to CMT Ltd-which manufactures caps for the firm and ad experienced cash problems. It was later liquidated resulting in Olympic Designers failing to recover the full loan $18 000
30 200
Less Decrease in doubtful debt provision 7 500
22 700
The accounting provision for doubtful debts at 31 Dec 2007 was $32 500. The Commissioner has agreed to a doubtful debt allowance equal to 255 of the accounting provision..
6, Depreciation is charged in respect of the following assets
- delivery van purchased on 1 December 2006 for $85 000 ($75 000+VAT $10 000) is $15 000.
-the industrial building housing the equipment for quality control was brought into use on 2 March 2006 after a cost of $100 000 had been incurred.- $ 42 750
7.Rentals are in respect of an administration building and warehouse for the company for trade purposes. Over and above the payment of $45 000 made for the year 2007, the company paid rentals for January to March 2008 of $12 000 on 31 Dec 2007. This was because the landlord had cashflow problems. No portion of this advance payment was expensed to the income statement in the 2007 financial year.
8 Insurance premiums of $54 000 were incurred for 2007 tax year. The company paid its annual insurance premiums of $52 500 for its 2008 financial year on 15 Dec 2007. This was on the insurance broker’s advice that early payment would ensure ‘cheaper’ insurance. No portion of this $52 000 was expensed to the Income Statement in the 2007 financial year.
9. Salaries and wages were as follows;
-salaries and wages $175 000
-restraint of trade 36 000
-leave pay provision 4 750.
The restraint of trade was paid to a designer who left employment on 30 Sept 2007. This is effective for two years from 1 October 2007.
Leave pay provision was increased by $4 750 in its 2007 financial year. The closing balance on this provision at 31 Dec 2007 was $27 250.
10. Penalties were as follows;
-traffic ticket for over speeding in delivering an urgent order to a major customer-
$6 500.
-for late payment of trade license - $ 3 500.
Required
Calculate a) total tax liability for Olympic Designers Ltd for the 2007 tax year.
b) the excess or deficit if the company had made a provisional tax payment of $60 000.
Time Guide 45 minutes 30 Marks