Taxation and Deferred Taxation Analysis for Harmony Innovations CC Assignment

Assignment Task

Question 1

Harmony Innovations CC conducts extensive research and development into new products. The company has been growing steadily in the last few years. The following information relates to the 2024 year-end.

Additional Information

1) The investment property had a fair value of R1 200 000 on 30 April 2023. The investment property was initially purchased for R900 000 and is measured on the fair value model in terms of IAS 40 Investment properties.

2) Administration expenses include, amongst other items, the following:
A penalty of R5 000 for late submission of VAT returns to the South African Revenue Services. These are prohibited as a deduction for income tax purposes.

Water and electricity expenses of R11 200. These are deductible at the earlier of payment or accrual.

The movement in the allowance for credit losses account is included in administration expenses. Trade receivables amounted to R540 000 at 30 April 2023, and the allowance for credit losses was R170 900 at 30 April 2023 and R228 000 at 30 April 2024. In accordance with section 11() of the Income Tax Act, SARS allows 25% of the loss allowance on trade receivables as a deduction for income tax purposes. Bad debts of R82 000 were written off during the current year.

Requried 

1. Discuss the deferred tax implications on the initial recognition of the HVAC (Heating, Ventilation, and Air Conditioning) system to be acquired in June 2024. Refer to note 6 of the additional information.Your discussion should include amounts and/or supporting calculations where appropriate.

2. Calculate the current tax expense for the year ended 30 April 2024.

3. Calculate the deferred tax balances as at 30 April 2024 using the statement of financial position approach. Indicate whether the final balance is a deferred tax asset or a deferred tax liability. Use the following table formate.

4. Disclose the income tax expense note, including the taxation reconciliation, for the (10) year ended 30 April 2024.

• No comparisons are required.
• The tax rate reconciliation should be in rands.
• Show the effective tax rate. Round to 2 decimal places.

5. Assume that Harmony Innovations CC made a tax loss of R1 500 000 for the year ended 30 April 2024 and management is uncertain about future profitability. Discuss the recognition of a deferred tax asset for this tax loss, including any disclosure implications.

Question 2

The following is an extract from the financial records of Swift Limited for the year ended 31 December 2023:

Additional information

The 2022 tax assessment was received on 15 April 2023 showing assessed current tax of R340 600. Current tax provided by the accountant amounted to R320 400 in the 2022 reporting period.

The company made a first provisional payment of R120 000, and a second provisional payment based on estimated taxable profits of R1 400 000 in respect of current tax for the current year.

Other expenses include depreciation on vehicles of R50 000 and the wear and tear allowance amounted to R60 000. Vehicles had a carrying amount of R200 000 and a tax base of R300 000 at the beginning of the year.

Rent of R110 000 was prepaid during the current year (2022: R152 600). Assume that rental expense is deductible for income tax purposes when incurred or paid, whichever occurs first.

SA's normal tax rate changed from 28% in 2022 to 27% in 2023.

Required

1. Using the information provided above, prepare all journal entries that would be processed to record the taxation expense, taxation payable and deferred tax in the financial records of Swift Limited for the year ended 31 December 2023.

• Show all relevant workings.
• Round off your answers to the nearest Rand.
• Journal narrations are required.

2. Prepare the deferred taxation note as at 31 December 2023. Comparatives are not required.

This Accounting and Finance has been solved by our PhD Experts at My Uni Paper.