Accounting for Income Tax-Free-Samples for Students-Myassignment

Questions: 1.You are required to advise Tony on how to bring the gazebos and gazebo chairs to account for income tax purposes at 30 June 2017. 2.Discuss whether the spare parts constitute trading stock. How would your answer differ if the taxpayer only leased computers to others and used the spare parts to remedy defects in the leased computers? Answers: Tonys main source of income is from repair of gazebo as well as from sales of new manufactured gazebos. He therefore expects his income from the service rendered on repair and that from sales proceeds. He is expected to declare his income only after capturing all the relevant costs involved. Its therefore very important to analyse income against costs and expenses so as to ascertain whether Tonys income meets taxation threshold as per Australian Tax Office standards set in place. By look of things arithmetic analysis need to be done so as to give detailed break - down of revenue generation and respective costs associated as shown below; The Total Manufacturing Cost Per Gazebo is = Labour Cost = 70 Material Cost = 80 Factory Cost =100 Total Cost= 250 Manufactured Gazebos Chairs Total Cost On 30th June=10*250=$2500 Sold 6 chairs out of this 10 manufactured create sales revenue of=6*500=$3000 2015/2016 purchase was made of 5 second had Gazebos thus purchase value=5*$5=$25 this same value is what stands as the potential closing stock as at June 2016. chairs were purchased at cost =3*$10=$30 as at June 2017 Assuming all the 8 chairs were sold=$20*8=$160 Replacement cost of the 8 chairs=$15*8=$120 From the above analysis we need to come up with income statement after net cost set off so as to define Tonys taxable income. All the cost of sales items as well as their value qualifies for tax deductible policies since the revenue generated result from their costs. Cost Of Sales=Opening Stock+Purchases-Closing Stock Year 2016 COS For the 5 second hand gazebos=0+$25-$25=0 Year 2017 COS=$25(Opening Stock+$30(Purchases)-$35(Closing Stock )=$20 $35(Closing Stock Valuation )=1 chair from the 5 bought 2nd hand=1*$5=$5 =3 chairs bought at year end=3*$10=$30 Tonys Statement Of Income For The Year End June 2017 Sales revenue of the six chairs cold 6*500=$3000 Sales revenue for the four repaired gazebo =$78 Less Manufacturing cost of the 6 chairs sold=$250*6=$1500 Cost of sales of the repaired chairs =$20 Replacement Cost Of 8 Chairs=$15*8 =$120 Less Total Cost (=$1640) Net Profit before Tax $1438 From the income statement above we are now certain that Tonys business of selling the either newly manufactured or repaired Gazebos forms part of his source of income. These gazebos therefore forms part of Tonys trading stock since they are seen to be manufactured or acquired for the purpose of the selling. Sec 28 of the Income Tax Assessment Act requires an entity to account for trading stocks through stock taking so as to determine closing stock balances at hand as at start and close of the year. It is deemed that a trader taxable income is ascertained through stock valuation more so while accounting for cost of sales items. Tonys gazebos closing balances in year 2015/2016 were disclosed for tax purpose and on the face of it since there existed in opening balance the net effect on cost of sales was close to zero thus increasing the taxable income in that year Cernius(2016.Pg 79). However in year 2016/2017 we come across stocks i.e. opening, purchases and closing balances that are seen to reduce the taxable income as shown in the income statement. Inventory at hand is mostly as result of purchase made thus as at the time of making the purchase GST Evans(2011.Pg 150) was charge on this purchase thus always leaving the seller and buy with the task of accounting for this charge for tax purposes. Input tax results from purchases made while output result from sales made the two as per GST regulations should contra each other and thus allowing for tax refund or tax payable Spalding (2011.Pg 7). Trading stocks upon conversion make sales revenue thus a greater aspect of taxable income. In any case sales is made via trading in goods or services therefore the tax man concern on the trade stocks disclosure is important for GST purposes. After stock takes are done and comparison of previous closing balances is made the following happens to the income; if there is no change at all in stocks the taxable income is seen to be constant, however if business starts as when the year ends the need therefore to include the closing balance in one assessable income applies. When stock increases of course there exist assessable income for tax purpose whereas when it decreases an allowable deduction for tax purposes is ascertained Michalski (2009.Pg 25). By applying this rule on closing and opening balances we can conclude that Tonys assessable income is increased by $25 in year 2015/2016 since the closing balance is more than opening balance the same applies in 2016/2017 though the figure increases to $35. Obsolescence of inventory leads to loss of value to Tonys stock valuation thus by him valuing those trade stock items at 1$ in reality he will be incurring inventory loss basis or rather undervaluing the stocks thus can only be set off against the income made in that year before tax subjection thus treated as deductible allowable for tax purpose. Alternatively the valuation downwards is treated as deductible allowable for tax purposes Mullins (2004 Pg.10). Finally Tony need to register for GST so as to be claiming taxes he paid while purchasing the gazebos this should be used to set off output tax. Although this GST on purchases is claimable upon registration and upon purchase there exist instances where you pay for inventory you already had at hand before registration. 2.Trade stocks are anything held for the purpose of facilitating all the operations in business. The main course of business for this tax payer is servicing and selling computers therefore anything that contribute to this course whether tangible or intangible should be treated as trade stocks. Servicing of this computers cant be complete in absence of the spare parts thus classifying the spare parts as trade stocks Circler (2010.Pg 345) This spare parts since they are used to facilitate operations with economic reward expectation it qualifies to be a trade stock. Likewise since they stand on its own individual traits without any alteration for identifiable purposes they qualify to be trade stock Malady (2012.Pg.156) .Finally since the spare parts are disposable in nature upon transfer to customers after servicing it qualifies it to be trade stock. Despite the fact that the computers are leased , the tax payer is still seen to use the spare parts to service the items that had already generated reward, from this therefore the conclusion is that the spare parts are classified as trade stocks .This is so because they are used to render maintenance service. However the classification is only applicable if the spare parts period is that of less than a year or a year of which in our case an assumption of it being used for one year is applied. Spare parts are therefore classified depending on the time aspect whereby if its used to operate an asset for a duration less than a year then it worth classified as trade stock and vice versa. Likewise the classification is made on the purpose or sole use of the spare part whereby if its used for rendering any service like in our case maintenance or for production purpose. References Spalding, A.D., 2011. Mark-to-market and the widening gap between financial and tax accounting. 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