Manitoba (Pty) Ltd manufactures and sells Manita Herbal Teabags as a healthy product. The company is based in South Coast, KwaZulu-Natal, has a 31 December financial year end and applies International Financial Reporting Standards.
The draft results of operations for the year ended 31 December 2022 is shown below:
| R | |
| Sales | 2 400 000 |
| Rent income | 150 000 |
| Dividend income | 600 000 |
| Profit on sale of vehicle | 300 000 |
| Cost of sales | (900 000) |
| Depreciation | (450 000) |
| Interest on expense | (360 000) |
| Other expenses | (240 000) |
| Dividends declared (30 June 2021) | (660 000) |
| Profit for the period | 840 000 |
| Retained earnings: (1 January 2021) | 180 000 |
| Retained earnings: 31 December 2021 | 1 020 000 |
Additional information:
• The deferred tax balance at the beginning of the year was R126 000 (debit), whereas the deferred tax balance at the end of the year is R68 400 (debit).
• Other expenses are allocated to the entity’s core functions as follows:
Administration: 20%
Distribution: 30%
Other: 50%
• All amounts are considered material
• The normal tax rate is 30% and
• The inclusion rate for purposes of capital gains is 50%.
The following balances have been extracted from the 2021 closing balances appeared in the trial balance at 31 December 2022:
• Expenses prepaid (31/12/ 2021) R45 000
• Rent income received in advance (31/12/2021) R30 000
• Rent income received in advance at 31 December 2022 R24 000
• Income received in advance is taxed in the year of receipt.
• Expenses prepaid at 31 December 2022 totalled R21 000. Expenses prepaid are deductible for tax purposes in the year in which they are paid.
Other than the processing of provisional tax payments made during 2022 which totalled R540 000, no other journal entries have yet been processed regarding tax expense.
• The tax assessment for the year 2021 was received during August 2022. It reflected an amount of R144 000 for the assessed normal tax on taxable profit for 2021.
• The total tax expense in the statement of comprehensive income in 2021 was disclosed as R294 000, which was made up of current normal tax of R156 000 and deferred normal tax of R138 000. No journal entries have yet been processed to take into account any adjustments that may be necessary.
• A vehicle with a carrying amount of R2 100 000 and tax base of R1 950 000 was sold during 2022. Its original cost was R2 250 000. The base cost of this asset is R2 280 000.
• Wear and tear of R810 000 was granted as a deduction in 2022 by the tax authorities.
• There are no other differences between accounting profit and taxable profit other than those evident from the information given.
• There are no components of other comprehensive income.
REQUIRED:
QUESTION 1 [30 MARKS]
In accordance with IAS 12 Income tax:
a. Prepare all the journal entries relating to the manufacturing of Manitoba (Pty) Ltd for the year ended 31 December 2022. (14)
NB: (Show calculations).
b. Prepare the Statement of Profit or Loss and Other Comprehensive Income of Manitoba (Pty) Ltd for the year ended 31 December 2022 (8)
c. Prepare the tax expense note to be included in the annual financial statement of Manotoba (Pty) Ltd for the year ended 31 December 2022, in accordance with, International Financial Reporting Standards and Companies Act of 2008. (8)
Answers to Above Questions on Financial Accounting
Answer 1: The journal entries relating to the manufacturing of Manitoba (Pty) Ltd for the year ended 31 December 2022 are given below:
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