QUESTION (30 marks)

You are the financial accountant at Nkosi Limited. The company started operations on 1 January 2021. The following information is available:

• Plant costing R1 200 000 was purchased on 1 March 2022. It was installed and available for use on 1 June 2022. The costs of installation amounted to R320 000. Depreciation is provided over a period of ten years to an estimated residual value of R100 000, using the straight-line method.
• Land was purchased for R2 500 000 on 1 January 2021. The land is not depreciated.
• The building was constructed at a total cost of R980 000, was available for use on

1 April 2023, and was brought into use on 1 June 2023. The building is depreciated to an estimated nil residual value over eight years on the straight-line method.
• Research costs of R620 000 were incurred during 2023 and research costs of R410 000 were incurred during 2022. No research costs were incurred during 2021.

• An assessed tax loss of R1 300 000 was incurred during the tax year ended 31 December 2021.

• Profit before tax was R1 400 000 in the financial year ended 31 December 2023 (31 December 2022: R1 300 000). The profit figures are correctly calculated.
• Dividend income, included in the profit before tax figure, of R150 000 was earned during 2023 (31 December 2022: R250 000).
• It was considered probable, at the end of every year since incorporation, that sufficient future profits would be available to fully utilise the deferred tax assets.
• There are no other differences between accounting profit and taxable profit other than in the given information.
• There are no components of other comprehensive income.

Additional information:

• A deduction for tax purposes equal to 20% of the cost (purchase price plus installation costs) of the plant per annum is allowed, not apportioned for a part year.
• No deductions are allowed relating to the cost of the land or building.

• A tax deduction is allowed for research costs incurred over 4 years on the straight line method, not apportioned for a part year.
• Income is taxed at the earlier of receipt or accrual.

• South African Revenue Services (SARS) allows tax losses to be carried forward and set off against taxable profits in future years.
• An income tax rate of 28% is applied during the 2023 financial year end (2022: 29%).

REQUIRED:

a) Calculate the current income tax expense for the years ended 31 December 2022 and 31 December 2023.

Marks will be awarded as follows:

• Current income tax – 2022 (6 marks)

• Current income tax – 2023 (7 marks)

• Presentation and communication (1 mark)

b) Calculate, using the balance sheet approach, the deferred tax balance for each category of temporary difference at 31 December 2022 and 31 December 2023 in the accounting records of Nkosi Limited. Indicate clearly whether the balance represents an asset or liability.

Marks will be awarded as follows:

• Deferred tax – 2022 (8 marks)

• Deferred tax – 2023 (7 marks)

• Presentation and communication (1 mark)

(Total : Calculations: 28 marks) (Total: Presentation, communication, and use of excel: 2 marks)

Evidence required:

Your final response should be saved and uploaded in Excel and PDF format. Regarding the PDF, please ensure that each page is saved on a SINGLE PAGE and does not cut off to save over multiple pages. Collate all individual PDF sheets saved into one file and upload a single PDF file onto ColCampus.

Answers on Above Questions on Financial Reporting

Answer 1: In order to calculate the current income tax expense, it is important to determine the taxable income which is calculated as follows:

Calculation of Taxable Income

Profit for the year: R1300000

Add: Depreciation on plan: R304000

Get completed answers on questions above on financial reporting from the accounting assignment help South Africa experts of Student Life Saviour.