Referencing Styles : Harvard Martin Kellick, the marketing director on our board of directors, is also on a number of other company boards. He heard the other companies refer to a new standard on fair values and was very anxious to work out whether Jenson and Jarman Pty Ltd had accounted for all their assets based on “fair value”. This had all the other directors quite confused. Is there such a standard? Does it apply to our company or only to the public listed ones? Should we be making a change to fair values for all our assets? I thought we had to show them at cost? In fact I think we had to lower the value of inventory last year as the net realisable value of a number of items were less than the original cost. We would love to get your opinion on this so that everyone on the board is clear as to what needs to be done. Issue 2: There are a number of events happening towards the end of September which we are not too sure about; that is should we treat them in the current period or the next. Margaret seems to think we may have to accrue the expenses for the following events as they will happen before the year-end: (a) We will be calling for tenders from construction companies to construct the new office building and retail outlets on 10 September 2015. This will close on 25 September and will be evaluated by us. We hope to be able to finalise the contractor by Monday 5 October and work will commence soon after. (b) Another block of land purchased over 30 years ago for $30 000 is still shown at that value in our books. We think that the directors will decide to sell it when they meet on 7 October. The net realisable value of the land is $ 3.45 million (and there is a development company interested in buying it from us) and the money will be used to construct the new office building and retail outlets. (c) There is some argument over the invoices received in October; I think we should let invoices received in October be accounted for in October as payment will be made in that month. I am sure that the previous financial controller did just that. We did make payment for last September (2014) invoices in October 2014 so I think it will adjust itself, don’t you? Issue 3: Thank you for agreeing to calculate the company tax and deferred tax liabilities for the year ending 30 June 2015 for Jarman Pty Ltd, our subsidiary company. See attachment 2 for details. Could you please give us the journal entries required, to give effect to both the current tax liability and deferred tax calculation done by you? The board would also like a brief summary of the logic behind calculating deferred tax; why we have to provide for deferred tax at all. There is also a possibility that the company tax rate may drop to 25%; would this impact on the deferred tax calculation; and if so how? I suggest you attach the tax calculation worksheets to your letter in support of the journal entry as our auditors will require it. Hint: Remember that your firm plans to charge the client for your advice; as a check ask yourself if you would pay for the advice you have drafted! ACCM 4200 Financial Accounting & Reporting 1 Trimester 2, 2015: Assessment 2 – Letter Writing Assignment ATTACHMENT 2 Jarman Pty Ltd has calculated their accounting profit before tax for the year ended 30 June 2015 to be $225,450. The company tax rate at present is 30%. Included in this profit are items of revenue and expenses relevant to the calculation of company income tax and are shown below: Depreciation expense – motor vehicles (25%) 4 500 Depreciation expense – equipment (20%) 20 000 Rent revenue 16 000 Doubtful debt expense 2 300 Carrying amount of equipment sold 18 000 Entertainment expense 1 500 Annual leave expense 5 000 Proceeds on sale of equipment $ 19 000 Royalty revenue (non-taxable exempt income) $ 10 000 The company’s draft trial balance (an extract) for the year ended 30 June 2015 (with comparative figures) showed the following assets and liabilities (prior to the tax provisions): 2015 2014 Cash 11 500 9 500 Accounts receivable 12 000 14 000 Allowance for doubtful debts (3 000) (2 500) Inventories 19 000 21 500 Rent receivable 2 800 2 400 Motor vehicle 18 000 18 000 Accumulated depreciation – motor vehicle (15 750) (11 250) Equipment 100 000 130 000 Accumulated depreciation - equipment (60 000) (52 000) Deferred tax assets ? 6 450 Accounts payable 15 655 21 500 Provision for annual leave 4 500 6 000 Current tax liability ? 7 600 Deferred tax liability (opening balance) ? 2 745 Additional Information: 1. The motor vehicle is fully depreciated for tax purposes; the company can claim 15% depreciation on equipment. 2. The equipment sold during the year was purchased 2 years before the date of sale for $30 000 Prepare two worksheets showing: (1) The current tax calculation (2) The deferred tax calculation Prepare the journal entries that Jarman Pty Ltd would need to recognise the current tax for the year ended 30 June 2015 and the deferred tax as at 30 June 2015.