ACA260-ACCOUNTING FOR TAX

EXERCISE 2 (5%) – Model Answers

Elderflower Ltd is a company which trades as a manufacturer of specialist soft
drinks. The company's statement of profit or loss for the year ended 31 March
2016 is as follows:
£ £
Gross profit 510,000
Other income
Profit on disposal of office building 54,000
Bank interest received 7,000
Expenses
Depreciation 54,690
Professional fees 22,000
Repairs and renewals 29,700
Other expenses 24,400
(130,790)
Finance costs
Interest payable (23,000)
Profit before taxation 417,210
Notes
(1) Expenditure not allowed for taxation purposes:
Depreciation (capital) 54,690
Legal fees – share capital 8,800
Legal fees – health and safety 900
Repairs and renewals: extension (capital) 9,700
Other expenses: entertaining customers 2,310
Other expenses: qualifying charitable donation 500
Non-trading Loan interest paid 23,000
(2) Other information:
Office building profit 54,000
Bank Interest received 7,000
Capital allowances 25,190
(3) The chargeable gain on sale is 45,580 and the rate of corporation tax is 25%
Required: Compute
(a) The trading profits for the year ended 31 March 2016. (Answer: 430,920) (6 Marks)
(b) The taxable profits for the year ended 31 March 2016. (Answer: 468,420) (2 Marks)
(c) The corporation tax liability for the year 31 March 2016. (Answer: 117,105) (1 Mark)
(D) Journal entries of recording tax liability and when make payment to
government. (1 Mark)

1
Answer
(a) The trading profits for the year ended 31 March 2016
£ £
Profit before taxation 417,210
Add expenditure not allowed for taxation purposes:
Depreciation (capital) 54,690
Legal fees – share capital 8,800
Legal fees – health and safety 900
Repairs and renewals: extension (capital) 9,700
Other expenses: entertaining customers 2,310
Other expenses: qualifying charitable donation 500
Non-trading Loan interest paid 23,000
99,900
Less:
Non-trading interest received (income) 7,000
Profit on disposal of office building 54,000
Capital allowances 25,190
(86,190)
Profit adjusted for tax purposes 430,920
(b) The taxable total profits for the year ended 31 March 2016
£
Trading profit (part (a)) 430,920
Profit on disposal of office building 54,000
Non-trading loan relationship (7,000 – 23,000) (16,000)
Total profits 468,920
Less qualifying charitable donation (500)
Taxable total profits 468,420
(c) The corporation tax liability for the year ended 31 March 2016.
£468,420 x 25% = £117,105
(D) Journal entries of recording tax liability and when make payment to
Date Accounts Debit credit
31 March 2016 Corporate tax expense 117,105

Corporate tax liabilities 117,105

Future Payment to Corporate tax liabilities 117,105

government Cash 117,105