financial statements pratice paper 1

salih

Hey guys im having problem on understanding this question.

1.4)f) the coporation tax charge of Fangled Ltd based upon its profits for the current year is £55,000. The company has over-estimated its corporation tax liability for the previous year by £6,000. What will be the corporation tax charge and corporation liability recognised in the financial statements of fangled Ltd at the end of the current accounting period?

The answer shows corporation tax charge is £49,000 and the tax liability is £55,000. I'm confused on how to get the answer i've looked at the book can't seem to find any information about corporation tax it says it on the index page corporation tax once i go to the page it just talks about income tax and depreciation not once about coporation tax charge or liability.

Nps

The liability stays at £55,000 as that is what is expected to be paid based on this years profits so needs to be 'put aside' for this purpose. However last year, £6000 too much was put aside for the tax bill so although that £6000 was accounted for for tax, it was never actually used. Therefore we only need to account for an extra £49,000 to make up the £55,000 bill for this year.

crispy

Hi,

Remember that Tax will appear both on the income statement and balance sheet. At Year End the company directors will estimate the Corp. Tax charge for the Year, in the example it had been overestimated for the Prev Yr. therefore there reamins a Credit balance (Income statement) to bring forward. The journal for Corp Tax would be: -

Dr Taxation (Income Statement) £ 55,000
Cr Taxation Liability (Balance Sheet) £ 55,000

The charge for the Year to appear in income statment would be:

Over Provision B/f (6,000)
Tax charge for Yr 55,000
Taxation 49,000

salih

thank you so much. You explain it so much better then anyone :001_smile:

salih

Sorry this is going to be quick want to make sure if i am doing this right same practice paper but in 1.5) During the year deer ltd sold goods which had cost £100 to claw plc for 480. Half of these goods still remain in inventory at the end of the year.
For the cost of sales claw ltd cos were 24,200 while deer ltd was 7,300 for total intercompany adjustments would it be half of 100 and 480 so total it would be 290 for the adjustment not the total for cost of sales. It was mentioned half of these goods still remain in the inventory for the year.

Nps

I've answered this question a few times before. Just search for deer claw etc and you should find one of the threads.

Nps

You need to look at the unrealised profit. Bought for £100 and sold for £480 so £380 profit in total. If half remains in inventory then half of the £380 profit is unrealised until sold on, in other words, £190 needs to be adjusted for.

salih

i've gone through the thread you told me and it talks about the 261 figure which i know how to do. That's the first thing i done i half the profit 380 and 190 need to be adjusted for. I can't see any other figure and the answer is saying 290 when it mentioned half of these two figures remained in the inventory i thought at least it would be half of those figures, to get 290.

salih

unless you get £190 and takeaway from the figure £480 if thats what you been by adjusted for ?

Nps

I can't log on at the moment, but if I get 5 minutes (and if someone doesn't help in the meantime), I'll read through the whole question and try to explain it.

Nps

Ok, I've looked at the question now. You have an inter company transaction so the full amount is deducted from the revenue and the cost of sales, but the unrealised profit is added back to cost of sales, hence you get 480-190 giving you the 290 you asked about.

salih

Thanks, more clear now. How long have you been a member if you dont mind me asking?

Nps

I'm not actually a member, but did the AAT levels last year.

salih

oh i see. Passed all the level's? what would be your best advice on tackling statement exam and performance? Also looking at this question :
the following information relates to a company for the year ended 30 June 20X1 Profit from operation (after deducting depreciation £3,000) £6,200
Year 30.06.20X0 The inventories - 2,700, receivable 1,900 and payable 1,100.
Year 30.06.20X1 The inventories - 2,900, receivable 1,400 and payable 1,200
The net cash generated from operating activities (prior to any tax and interest paid) Is..

I know that the forumla inventories + recievables - payable, looking at this question would you get the invetories and recievable from last year and takeaway the next year payable?

Nps

The formula you mention is to do with working capital. The question is about cash flows. You need to look at the changes between each from one year to the next to establish the cash flow.

Nps

Yep, that's right.