Deck 9: Tax Accounting and Trading Stock

Question 1

You are provided with the following information on the accounts receivable of Chester Ltd for the year ended 30 June 2020.
What will be the assessable income from trading for Chester Ltd?
Opening trade debtors$40,000
Cash received$200,000
Closing trade debtors

A) $250,000
B) $200,000
C) $230,000
D) $170,000

Answer 1

$170,000

Question 2

Trading stock in Division 70 ITAA 97 may be considered as being 'on hand' when

A) The taxpayer has physical possession of the stock
B) The taxpayer has ownership of the stock
C) The taxpayer has dispositive power over the stock
D) The taxpayer has access to the stock

Answer 2

The taxpayer has dispositive power over the stock

Question 3

Which of the following methods would not be considered a valid basis for valuing trading stock

A) Cost or 'lower of cost'
B) Market selling value
C) Replacement value
D) Historical record obtained over 20 years ago

Answer 3

Historical record obtained over 20 years ago

Question 4

Which of the following statements is true?

A) With the receipt of franked dividends, taxable income will be higher than accounting profit
B) With the receipt of franked dividends, taxable income will be lower than accounting profit
C) Amortisation or impairment of intangibles will result in accounting profit being higher than taxable income
D) The receipt of exempt income will result in accounting profit being lower than taxable income

Question 5

How should ABC Manufacturing Pty Ltd treat its provision for annual and long service leave entitlements in its tax records?

A) Provisions for annual and long service leave are incurred for taxation purposes and so do result in a tax deduction
B) Provisions for annual and long service leave are not incurred for taxation purposes and so do not result in a tax deduction
C) Provisions for annual and long service leave do result in the employer being committed to making the expenditure at that time and so do result in a tax deduction
D) As accounting standards, such as AASB 119 Employee Benefits,the entity to recognise an expense and a corresponding provision (being a liability) for leave entitlement, the same treatment applies for taxation purposes

Question 6

Which of the following is not an example of trading stock?

A) Shares to a share trader
B) Work in progress to a manufacturer
C) Tropical and freshwater fish held by an aquarium store for sale to customers
D) Standing or growing crops to a farmer

Question 7

Which of the following statements is true about the periodic inventory system?

A) Detailed records of inventory are maintained
B) There is a continuous record of how much inventory is on hand at any particular point in time.
C) The only way that the amount of inventory on hand can be ascertained is by performing a physical stock take (i.e. counting the inventory on hand).
D) The cost of goods sold figure can be determined from the detailed and accurate inventory records

Question 8

Which one of the following statements is true?

A) Where trading stock is donated to a deductible gift recipient a deduction equivalent to the market value of the trading stock at the date if disposal is allowed
B) Where trading stock is disposed outside the ordinary course of business the taxpayer must include in his/her assessable income theof that stock at cost
C) Where a taxpayer takes stock for his/her own personal use, the taxpayer is required to include themarket value of that stock as at the date of transfer as part of the assessable income of the business
D) Any compensation received for the loss of stock is non assessable non-exempt income

Question 9

You are provided with the following information on the accounts receivable of Don Lawlor, a self employed solicitor, who has only one employee who is, employed as a receptionist, for the year ended 30 June 2020.
What will be the assessable income for Don Lawlor?
Accounts receivable balance as at 1 July 2019 $25,000
Cash received from clients $180,000
Accounts receivable balance as at 30 June 2020 20,000
Which of the following statements is true?

A) Don's assessable income will be $185.000
B) Don's assessable income will be $180.000
C) Don's assessable income will be $175.000
D) Don's assessable income will be $200.000

Question 10

ABC Tuition Services Pty Ltd provides private paid tuition services to secondary school students. The company offers a discount to encourage prepayment and students always pay for their tuition in advance. The tuition contracts expressly provide that no refunds are available in respect of the prepaid tuition services. When monies are received from students, ABC's bookkeeper debits the 'cash at bank' account and credits the 'unearned income' current liability account as per generally accepted accounting principles. How should ABC Tuition Services Pty Ltd treat these monies received in advance for tax purposes?

A) The monies received in advance would be treated as assessable income when earned (and so only when the tuition services are provided)
B) The monies received in advance would be treated the same for tax purposes as they would be for accounting purposes and so would only give rise to assessable income when the services are actually preformed
C) The monies received in advance would be treated as assessable income when received
D) The monies received in advance are treated as exempt income and so not assessable at anytime

Question 11

Western Hardware Store uses a periodic inventory system and provides the following information about their trading stock.
Opening stock $12,000
Purchases $57,000
Closing stock (cost) $9,000
Of the $9,000 of closing stock, $2,000 is past its "use-by" date and must be destroyed.
What is the allowable deduction for the purchases and adjustments of trading stock that Western Hardware Store is entitled to for the year ended 30 June 2020?
Learning objective: 9.6 apply the rules for determining the assessability/deductibility of trading stock under both the periodic and perpetual inventory systems

A) $57,000
B) $62,000
C) $54,000
D) $60,000

Question 12

Top Class Products Ltd manufactures conveyor belts for use in factories. The company knows there are some impending liability claims due to a batch of defective conveyor belts that were made a couple of years ago. These claims have not yet been brought to court. The company's accountant, nevertheless, has shown in the company's 2020 financial statements, a contingent liability of $10 million (shown as product liability claims) based on what the accountant estimates is likely to be a settlement sum to settle these outstanding claims. For tax purposes is the $10 million contingent liability for product liability claims an allowable tax deduction?

A) No as the $10 million is only an estimate and therefore cannot be said to be 'incurred' at this time
B) No as it has not as yet been paid
C) Yes as it is based on a reasonable estimate by a very conservative accountant
D) Yes as it is better showing some amount in the accounts than nothing at all when it is known that there will be some claims that will be made

Question 13

Bob's Signwriting Pty Ltd is a small business entity and has just paid $240,000, which represents the next 24 months of liability insurance to cover the business until 30 April 2022. How much of this prepaid expense can Bob's Signwriting Pty Ltd claim in the year ended 30 June 2020?

A) $240,000
B) $120,000
C) $40,000
D) $20,000

Question 14

Which of the following statements is true about the perpetual inventory system?

A) The only way that the amount of inventory on hand can be ascertained is by performing a physical stock take
B) The cost of goods sold figure can be determined from the detailed and accurate inventory records
C) There is a no continuous record of how much inventory is on hand at any particular point in time.
D) The cost of goods sold figure cannot be determined from the detailed and accurate inventory records

Question 15

Which of the following items would not be trading stock under s70-10?
(i) Land held by a property developer
(ii) Confidential documents held by a research company
(iii) Computer software that is produced or developed for sale by a software manufacturer or developer

A) (i) and (ii)
B) (i) and (iii)
C) (ii) and (iii)
D) (ii) only

Question 16

Local Motors Pty Ltd is a small business entity and a manufacturer of engine motors for use in mining machinery. To help secure a lease of some valuable business premises, on 1 June 2020, Local Motors Pty Ltd decided to prepay 12-months rent in advance at a cost of $36,000. The lease commenced on the 1 June 2020. What is Local Motors Pty Ltd's deduction in respect of prepaid rent for the year ended 30 June 2020?

A) $36,000
B) $3,000
C) $18,000
D) $0

Question 17

Roger is a sole trader who sells various electrical items such as flat screen UHD television sets. Roger decides to take one flat screen UHD television set from his store for his own personal use. The television set cost $1,500 and retails for$3,000. The current replacement cost of this same make and model set is $1,800. What amount does Roger need to show into his business income for the stock taken for his own use?

A) $3,000
B) $1,500
C) $1,800
D) $0

Question 18

THC Paint Pty Ltd is a company that sells paint and other painting supplies to the public. A stock take at 30 June 2020 revealed there were 200 cans of a particular paint still unsold. Some of these cans of paint cost $10 when they were originally ordered (at the start of the tax year) and a few most likely were in the most recent shipment that had been received and which had a cost price of $14 each (due to some extra customs costs that had to be paid). The current replacement cost is $12 a can and the cans have a current market value of $22. Of these values per can of paint, which is not able to be used for tax purposes?

A) $14
B) $10
C) $12
D) $22

Question 19

Owen has recently purchased shares in a big Bank but has not yet advised his bank details and so on the 29th June 2020 he received a cheque representing a dividend. Owen did not bank this cheque until 3 July 2020. He does not know when he received the cheque as he collected his mail on the 28^th June 2020 but did not open it until the 29^th June. Owen kept a copy of the dividend statement which indicated that the dividend was paid by the company on the 18^th of June 2020. What is the correct date that Owen 'derived' this dividend?

A) 3 July 2020
B) 29 June 2020
C) 18 June 2020
D) 28 June 2020

Question 20

Luciano is concerned about his taxable income for the year and so he directs that his employer not pay him his next salary payment, due on 29 June 2020, and instead have that payment go direct to the local council and be shown as being paid on Luciano's behalf. The employer reluctantly agrees to do so. What is the tax effect of this arrangement for the year ended 30 June 2020?

A) Luciano will not be assessed on this salary payment for the year ended 30 June 2020
B) Luciano will still be assessed on this salary payment in the year ended 30 June 2020
C) Luciano will never be assessed on this salary payment as it was never actually paid to him
D) Luciano can include this salary payment in his assessable income for the year ended 30 June 2020

Question 21

Respirico Pty Ltd produces a pharmaceutical product which is used to treat asthma and other breathing difficulties. The product has a life-span of 18 months and is not saleable in any form after it passes its use by date. At the end of the income year, Respirico Pty Ltd has the following amounts of the product on hand:
· 2,000 items, valued at costs @ $40 each, which are within 3 months of their use by date; and
· 1,000 items, valued at cost @ $40 each, which are past their use by date.
Based on past data about the quantities of this stock sold in the preceding years and also combined with industry experience, it is reasonably estimated that only 20% of the 2.000 items, that are within 3 months of their use by date, will be sold before they reach their use by date (after which they cannot be legally sold). What amount should Respirico Pty Ltd show for the closing stock on hand?

Question 22

A large firm of accountants carries on business in partnership. The records of the business show:
Accounts Receivable 1 July $ 200,000
Cash received from clients during the year $1,500,000
Estimated value of work in progress as at 30 June $ 80,000
Accounts Receivable 30 June $ 300,000
What is the gross income derived by the partnership for the year ended 30 June?

Question 23

Ian wants to know what his assessable income will be for the year ended 30 June 2020. He advises you of the following:
· Rent received of $22,000
· Accrued Rent Receivable of $420
· Interest received of $2,300
· Accrued interest of $860
· Unfranked dividend of $2,000. This unfranked dividend was not actually paid to Ian but was instead reinvested into a dividend reinvestment plan and resulted in Ian receiving 10 additional shares in the company.

Question 24

A and B Car Detailers is a small business entity and has advised you that it has paid the following in the year ended 30 June 2020:
· $40,000 in workers compensation insurance premiums for the next 12 months until 30 June 2021
· $80,000 prepaid 2021 wages
· $900 in advertising expenses for a campaign to in July 2020
How much, if any, of these prepaid expenses can the business claim in the year ended 30 June 2020?

Question 25

BVD Construction Pty Ltd is in the process of working out its closing stock as at 30 June 2020. The company has advised that the value of stock physically on hand (at cost) id $840,000 but that the company has some outstanding orders on their way from overseas by ship. $55,000 worth of stock (at cost) is currently onboard ships and is all under the trade term FOB (Free on Board). There is also $20,000 worth of stock that has not yet left the port of departure due to issues with customs and government clearance. Advise BVD Construction Pty Ltd what the value of the company's closing stock on hand is as at 30 June 2020.