Week 3 tutorial questions

Tutorial 1 (SEEN) Capital gains tax Basic level

Capital profit vs. capital gains on sale (proceeds> original cost)

A company sells a vehicle on 1 January 20X2 for C200 000.
Details of this vehicle are:
•Cost of vehicle purchased on 1 January 20X1 is C150 000
•Depreciation on vehicles to Rnil residual value over 2 years (straight-line)
•Wear and tear on vehicle (allowed by the tax authorities) is over 3 years (straight-
line)
Additional information:
•Profit before tax (after deducting any depreciation on the vehicle but before
considering the profit or loss on sale) in each of the years ended 31 December
20X1 and 20X2 is C100 000.
•Income tax is levied at 30%, the capital gains tax inclusion rate is 80% and the
base cost is C150 000.
•There are no temporary differences, no exempt income and no non-deductible
expenses other than those evident from the information provided.
Required:
A. Calculate the profit/ loss on sale in 20X2 per IFRSs: show the capital and non-
capital portions.
B. Calculate the recoupment or scrapping allowance on sale in 20X2 per the tax
legislation.
C. Calculate the taxable capital gain per the tax legislation.

Suggested solution
Solution A: Calculation of profit or loss on sale, where it includes a capital
profit
20X2
Proceeds on sale C200 000 
Less carrying amount Cost: 150 000 - Acc depreciation: (150 000 / 2 x 1year) 
(75 000) 
Profit on sale 125 000

Solution B: Calculation of recoupment or scrapping allowance on sale (tax

law)
20X2
Proceeds on sale, limited to cost Proceeds: C200 000, but limited to cost: C150 000 
C150 000
Less tax base Cost: 150 000-Acc wear & tear: (150 000 + 3 x 1year) 
(100 000) 
Recoupment on sale (scrapping allowance) 50 000


Solution C: Calculation of taxable capital gain (tax law)

20X2
Proceeds on sale Given C200 000
Less base cost Given (150 000) 
Capital gain 50 000
Inclusion rate Given 80%
Taxable capital gain Capital gain: 50 000 x Inclusion rate: 80%
40 000

Insight on the effect of deferred tax (Not required)

Comment: Over the 2-year period, the accounting records and tax records will not
agree  (Bonus) because:
• The accounting records show that the asset resulted in a profit over the 2
years of C50 000:
Profit on sale In 20X2 (see Solution A) , C125 000 
Less: depreciation In 20X1: 150 000/2 x 1yr (75 000) 
Effect on accounting profit 50 000 
• However, the tax records show that the asset resulted in a taxable profit over
the 2 years of C40 000(Bonus):

Taxable capital gain In 20X2 (see Solution C) C40 000

Recoupment In 20X2 (see Solution B) 50 000
Less: wear and tear In 20x1: 150 000/3 x 1yr (50 000) 
Effect on taxable profit 40 000
Thus, of the accounting profit of C50 000, only C40 000 is taxable. Thus; C10
000 will never be taxed (Accounting profit: C50 000- Taxable profit: C40 000)
and is thus a permanent difference.  (Students might not be aware of this
concept in detail, but they should know of a permanent difference).
 Tutorial 2 (SEEN) Current taxation disclosure Basic level

Maxwell Ltd (‘Maxwell’) is an entity listed on the JSE Ltd. Its primary business is importing books and
other media from the United States and distributing them in South Africa. You were appointed as the
financial director during the year ending 30 June 20x5 and are currently finalising the 20x5 financial
statements.

The following balances were reported in the statement of financial position at 30 June 20x4 (the prior
financial year):
20x4 20x3
CU CU
Dividend withholding tax 5 500 4 800
Tax overpaid/payable (Dr) 34 000 (Cr) 287 000

Additional information:

Profit before tax for the year ended 30 June 20x4 was reported at CU1 329 000, while taxable
income for that period was estimated at CU1 275 000. The assessment for the 20x4 year was
received on 15 December 20x4 and reflected a taxable income of CU1 345 000. A payment for CU21
400 was made to the tax authority on 31 January 20x6 in full settlement of the amounts owing for the
20x4 tax year. These amounts were recorded before taking into account any information below.

Profit before tax for the year ending 30 June 20x5 was calculated at CU525 000, and taxable income
for the same period was estimated at CU487 000. Provisional tax payments were made when due,
and no top-up payment was necessary.

Maxwell declared a dividend of 120 cents per share on 20 June 20x5. Assume

a normal tax rate of 28% and a dividend tax rate of 10%.

Ignore VAT.

You are required to do the following:

Prepare the note disclosure (including comparatives) for the taxation expense to be included in the
financial statements of Maxwell Ltd for the year ended 30 June 20x5, in compliance with IFRS. (15)
 Tutorial 2 Suggested solution Basic level

Maxwell Ltd 
Notes to the financial statements for the year ended 30 June 20x5 
2. Taxation expense 20x5 20x4 
CU CU
Normal tax 155 960 357 000

– Current year w2 136 360 357 000 w1

– Prior year under-provision w3 19 600 –

 CU155 960 CU357 000

Workings:

w1: Prior year tax

Previously estimated: CU1 275 000 x 28% = CU357 000 

w2: Current year normal tax

Estimated: CU487 000 x 28% = CU136 360 

w3: Prior year under-provision:

Previously estimated: CU357 000
Assessed: CU1 345 000 x 28% = 376 600 
Under-provision: 19 600
Paid to tax authority 21 400 
Interest charged CU1 800 
 Tutorial 3 (UNSEEN) Recording current taxation Intermediate level

Tedco Ltd has a financial year end of 31 December. The balance due to the tax authority,
as reflected in the trial balance on 31 December 20x4, amounted to CU25 000.

The following selected transactions and events took place during the financial year
ended 31 December 20x5:

1. On 8 August 20x5, the entity paid CU25 000 to the tax authority.
This payment settled the balance due to the tax authority on 31
December 20x4.

2. During the 20x5 financial year, the entity made two provisional tax
payments as follows:
● CU45 000 on 30 June 20x5: 1st 20x5 provisional payment.
● CU40 000 on 31 December 20x5: 2nd 20x5 provisional payment.

3. On 25 October 20x5, the entity received the tax assessment for the year
ended
31 December 20x4. The assessment showed tax payable of CU96 500
(compared to the entity’s estimated tax payable of CU90 000). A payment for
CU6 800 was made to the tax authority on 30 November 20x5.

4. The annual financial statements for the year ended 31 December 20x5
showed a net profit before tax of CU480 000 (20x4: CU425 000). The
estimated tax payable for the 20x5 tax year was CU126 000 based on a
taxable income of CU420 000.

You are required to do the following:

1. Show how the transactions and events above would be recorded on the
tax payable account for the year ended 31 December 20x5. (Dates may
be ignored.)

2. Show how taxation is disclosed in the statement of profit or loss and

notes to the financial statements of Tedco Ltd for the year ended 31
December 20x5, in accordance with IFRS (and as far as the information
provided allows).

Assume a tax rate of 30% for both years.

 Tutorial 4 (UNSEEN) Normal taxation Advanced level

On 1 July 20x5, you were appointed as the financial accountant of Footloose Enterprises
(Pty) Ltd, a manufacturer of men’s shoes. The managing director, Mr Simpson, has
received a recommendation from the auditors, J. Cochran & Co, advising that the
accounting records relating to taxation should be corrected and updated.

The entity’s financial year end is 31 August. On further investigation, you discover the
following facts:
1. The balance on the general ledger account ‘taxation payable’ as of 1
September 20x3 is CU3 240 (credit), and none of the entries relating to
taxation set out in items 2 to 8 below have been recorded.
2. The 1st and 2nd provisional tax payments for the 20x4 income tax
year were CU13 500 and CU9 000, respectively. Profit before tax for
the 20x4 financial year was CU85 000, and the tax calculation
estimated taxable income to be CU82 300.
3. On 28 February 20x5 the entity made a first provisional tax payment of
CU13 500 for the 20x5 year, while the second provisional tax payment
of CU8 000 was made on 31 August 20x5.
4. The 20x4 income tax assessment was issued on 15 July 20x5, reflecting
taxable income at CU77 500. The assessment reflected that the total
amount that would be refunded on 29 July 20x5 amounted to CU1 670.
The refund was received on 29 July 20x5.
5. The audit of the 20x5 financial year is completed on 3 November 20x5.
The audited financial statements reflect a profit before tax of CU650 for
the year. After completing the income tax calculation and considering
additional tax allowances, you determine a computed tax loss of CU2
540 for the year.
6. Where appropriate, 3rd provisional tax payments have been made.

The entity tax rate is 30%.

You are required to do the following:

1. Record the above entries as they should have appeared in the taxation
payable account in the general ledger of Footloose Enterprises (Pty)
Ltd. The general ledger should be balanced annually.

2. Show the appropriate disclosure of taxation in the statement of

profit or loss of Footloose Enterprises (Pty) Ltd for the year ended 31
August 20x5. Comparative figures and notes, where appropriate, are
required.