ACCA FR Syllabus B. Accounting For Transactions In Financial Statements - Income Tax - Past Papers ^{2 / 2}

Mighty IT Co provides hardware, software and IT services to small business customers.

Mighty IT Co has developed an accounting software package.

The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500.

Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200.

Payment for the combined contract is due one month after the date of installation.

In December 20X5, Mighty IT Co revalued its corporate headquarters.

Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2·5m.

Mighty IT Co also revalued a sales office on the same date.

The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000.

No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.

Mighty It Co’s income tax rate is 30%.

In accordance with IAS 12 Income Taxes, what is the impact of the property revaluations on the income tax
expense of Mighty IT Co for the year ended 31 December 20X5?

A     Income tax expense increases by $180,000
B     Income tax expense increases by $120,000
C     Income tax expense decreases by $30,000
D     No impact on income tax expense

Mighty IT Co provides hardware, software and IT services to small business customers.

Mighty IT Co has developed an accounting software package.

The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500.

Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200.

Payment for the combined contract is due one month after the date of installation.

In December 20X5, Mighty IT Co revalued its corporate headquarters.

Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2·5m.

Mighty IT Co also revalued a sales office on the same date.

The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000.

No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.

Mighty It Co’s income tax rate is 30%.

In January 20X6, the accountant at Mighty IT Co produced the company’s draft financial statements for the year
ended 31 December 20X5.

He then realised that he had omitted to consider deferred tax on development costs.

In 20X5, development costs of $200,000 had been incurred and capitalised. Development costs are deductible in full
for tax purposes in the year they are incurred.

The development is still in process at 31 December 20X5.

What adjustment is required to the income tax expense in Mighty IT Co’s statement of profit or loss for the year
ended 31 December 20X5 to account for deferred tax on the development costs?

A     Increase of $200,000
B     Increase of $60,000
C     Decrease of $60,000
D    Decrease of $200,000

The following scenario relates to questions 26–30.

Speculate Co is preparing its financial statements for the year ended 30 September 20X3.

The following issues are relevant:

1.     Financial assets

Shareholding A – a long-term investment in 10,000 of the equity shares of another company. These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $4·50 each.

Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $3·00 each.

Where possible, Speculate Co makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.

2.     Taxation

The existing debit balance on the current tax account of $2·4m represents the over/under provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is required for income tax for the year ended 30 September 20X3. The existing credit balance on the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.

3.     Revenue

On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.

What is the total amount which will be charged to the statement of profit or loss for the year ended 30 September
20X3 in respect of taxation?

A     $28,000,000
B     $30,400,000
C     $32,300,000
D     $29,900,000