SURNAME NAME D.N.I. Company ITT, Ltd. provides the following information for the calculation of the income tax expense of 2009:

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1 FINANCIAL ACCOUNTING. YEAR GROUP 5 Second Semester Exam ONLY LESSONS 5&6 9 th June 2009 SURNAME NAME D.N.I. EXERCISE 1 (3 points) Company ITT, Ltd. provides the following information for the calculation of the income tax expense of 2009: Losses before taxes: (The company believes that the losses are an unusual event in the evolution of the business, since they are due to the current worldwide financial crisis) A computer server was bought at the beginning of 2008 for 2,000 and has a useful life of 2 years. However, according to the tax laws the maximum percentage that is allowed for the deduction of the depreciation expense is a 25%. The balance sheet at the end of 2008 included the liability account Tax liability for taxable temporary differences with a credit balance of 6,000. It is know that the temporary difference it derives from reverses (the total amount) this year. The company registered an expense of 3,500 in 2009 that is not deductible. Deductions and discounts: 7,500 Withholdings and payments on account: 6,200 Tax rate: 30% REQUIRED: Register the income tax expense of year How much is the total tax expense as shown in the Income Statement of 2009? Which is the value of the tax assets and liabilities at the end of 2009? 1

2 SOLUTION Depreciation of computer server Year Tax Exp/Rev Accounting Exp/Rev Difference (TE AE) Effect this year Deferred effect 2008 (500) (1,000) +500 Deductible TD 2009 (500) (1,000) +500 Deductible TD 2010 (500) (500) Reversion 2011 (500) (500) Reversion Pays more: 0.30*500 = 150 Expense for Current tax Pays more: 0.30*500 = 150 Expense for Current tax Pays less: 0.30*(500) Expense for Current tax Pays less: 0.30*(500) Expense for Current tax Right to pay less in the future Deferred tax asset =150 Revenue for deferred tax Right to pay less in the future Deferred tax asset =150 Revenue for deferred tax Applies the right to pay less in the future Deferred tax asset = 150 Expense for deferred tax Applies the right to pay less in the future Deferred tax asset = 150 Expense for deferred tax tax liability for taxable temporary difference Year Tax Accounting Difference Effect this year Expense Expense (TE AE) Deferred effect 2008 (20,000) Taxable TD ,000 Reversion Pays less: Obligation to pay more in the 0.30*(20,000)=6,000 future Expense for Deferred tax liability Current tax Expense for Deferred Tax Pays more: 0.30*20,000=6000 Expense for Current tax Complies with the obligation to pay more Deferred tax liability Revenue for DT Non-deductible expense: Tax Expense Accounting Expense Difference (TE AE) Effect this year Penalty 0-3, ,500 Higher payment: None (Positive 0.30*3,500= 1,050 adjustment) Deferred effect 2

3 INCOME TAX RETURN 2009 Income before taxes /- Adjustments Preliminary taxable income Negative taxable income from previous years Taxable income * Income tax rate 30% Total tax Deductions & discounts not possible Tax due - Withholdings & payments on account INCOME TAX PAYABLE / OVERPAYMENT (+/-) Current tax ,200 (4709) Tax asset for tax overpayment Deferred tax 2009 to (473) Tax asset for withholdings and payments on account 6, (4740) Tax asset for deductible temporary differences 6,000 (479) Tax liability for taxable temporary differences 18,300 (4745) Tax asset for the compensation of losses to (6301) Deferred Tax 150 to (6301) Deferred Tax 6,000 (6301) Deferred Tax 18,300 Total income tax expense 2008 = , ,300 = + 24,450 Value of tax assets and liabilities 2008: (473) Tax asset for withholdings and payments on account = 6,200 6,200 = 0 (4709) Tax asset for tax overpayment = 6,200 (debit) (4740) Tax asset for deductible temporary differences = = 300 (debit) (479) Tax liability for taxable temporary differences = 6,000 6,000 = 0 (4745) Tax asset for the compensation of losses = 18,300 (debit) 3

4 EXERCISE 2 (4 points) Company SPJ, Ltd., discloses the following information: BALANCE SHEET ASSETS LIABILITIES A) NON-CURRENT ASSETS 282, ,000 A) EQUITY 267, ,000 I. Intangible assets. 17,000 15,000 A-1) Shareholders' equity. 249, , Computer software. 17,000 15,000 I. Capital. 187, ,000 II. Tangible fixed assets. 249, , Registered capital. 200, , Land and structures. 130, , (Uncalled subscribed capital). (12,500) 0 2. Plant and machinery, tools, furniture and other tangible assets. 118,800 48,000 II. Additional paid-in capital (share premium). 10,000 0 V. Long-term financial investments. 16,500 33,000 III. Reserves. 36,660 30, Holdings in equity. 16,500 33, Legal and statutory. 22,500 22,500 B) CURRENT ASSETS 149,172 64, Other reserves. 14,160 7,500 II. Inventories. 17,000 25,500 VII. Income for the year. 19, , Commercial (goods for sale). 17,000 21,000 VIII. (Dividends paid in advance). (4,000) 0 6. Advances to suppliers. 0 4,500 A-2) Adjustments for changes in value ,400 III. Trade accounts receivables and other. 35,250 2,250 I. Financial instruments available for sale , Trade accounts receivables for sale & s. 8,500 1,500 A-3) Grants, donations and legacies received. 17,430 10, Sundry accounts receivables. 1, B) NON-CURRENT LIABILITIES 100,020 77, Called subscribed capital receivable. 25,000 0 II. Long-term debt. 92,250 72,750 V. Short-term financial investments. 19,800 18, Long-term debt payable to credit institutions. 92,250 72, Holdings in equity. 19,800 18,000 IV. Deferred tax liability. 7,770 5,100 VI. Accrual accounts (expenses paid in advance) C) CURRENT LIABILITIES 64,030 59,475 VII. Cash and cash equivalents. 76,867 18,200 III. Short-term debt. 25,500 22, Cash. 76, , Short-term debt payable to credit institutions. 15,500 22,500 TOTAL ASSETS 431, , Other financial liabilities (short-term debt with suppliers of fixed assets). 10,000 0 V. Trade accounts payables and other payables. 38,530 36, Trade accounts payables for purchases & s. 25,430 29, Sundry accounts payable. 7,200 4, Liability for current tax. 5,900 2, Customer advances TOTAL LIABILITIES 431, ,325 4

5 INCOME STATEMENT A) CONTINUING OPERATIONS Net turnover. 177,000 a) Sales. 177, Procurements. (110,250) a) Consumption of goods for sale. (110,250) 5. Other operating revenues. 28,200 a) Accesory and other ordinary income. 28, Personnel expenses. (49,550) a) Wages, salaries and similar expenses. (36,250) b) Employee welfare expenses. (13,300) 7. Other operating expenses. (3,150) a) Outside services. (2,750) c) Losses, impairment and change in provisions for trade operations. (400) 8. Fixed assets depreciation expense (Intangible assets: 5.000; Constructions: 6.600; Plant and machinery and other: 4.200) (15,800) 9. Transfer of grants of non-financial non-current assets and others. 2, Impairment and income from disposal of non-current assets. (3,000) b) Income from disposals and others. (3,000) A.1) OPERATING INCOME ( ) 25, Financial revenues. 1,650 a) From holdings in equity instruments. 1,650 a2) Of third parties. 1, Financial expenses. (3,120) b) Of third parties. (3,120) 14. Change in fair value of financial instruments. 2,800 a) Held for trading and others. 1,800 b) Transfer to income for the year for available for sale financial instruments. 1,000 A.2) FINANCIAL INCOME ( ) 1,330 A.3) INCOME BEFORE TAXES (A.1+A.2) 26, Income tax (current tax). (7,348.5) A.4) INCOME FROM CONTINUING OPERATIONS (A.3+17) 19,531.5 A.5) INCOME FOR THE YEAR (A.4+18) 19,531.5 Additional information: During 2009 several transactions changed the composition of equity: a.- There has been an increase in capital stock. The shareholders have paid the minimum required by law: the additional paid-in capital and 25% of the capital stock. b.- Income of 2008 has been distributed to reserves and dividends. c.- Dividends on advance have been paid. d.- A new capital grant has been obtained at the end of Moreover, a portion of the capital grant that was in the balance sheet at the end of 2008 has been transferred to income. e.- The heading Adjustments for changes in value has changed as a result of sale of half of the portfolio of of long-term investment in equity instruments (classified as available for sale financial assets ). The selling price was equal to the fair value at the end of The fair value of the other half of the portfolio (that remains as property of the company) has not changed during REQUIRED: A) Register the transactions described in points d.- and e.- of the additional information. B) Prepare the Statement of Changes in Equity of

6 A) Register the transactions described in points d.- and e.- of the additional information. CAPITAL GRANT: (130) Grants, donations and legacies 1,470 transfer 10,500 Previous grant 8,400 New grant 17,430 Final Balance (479) Tax liability 630 4,500 3,600 7,470 Final balance 572 Cash 12, Revenues of official capital grants (8,400 / 0.7) 12, Deferred tax (12,000 * 0.3) 3, Tax liability for taxable temporary differences 3, Revenues of official capital grants 12, Deferred tax 3, Official capital grants 8, Transfers of official capital grants 2, Capital grants, donations and legacies transferred to income for the year 2, Tax liability for taxable temporary differences Deferred tax Deferred tax Official capital grants 1, Transfers of official capital grants 2,100 ADJUSTMENTS FOR CHANGES IN VALUE: (250) Long term holdings in equity 33,000 16,500 Sale 16,500 Final balance 6

7 (133) Adjustments for changes in value 1, Sale 300 Sale (479) Tax liability Final balance 300 Final balance 572 Cash 16, Long term holdings in equity instruments 16, Transfer of profits from available for sale financial assets 1, Profits from available for sale portfolio 1, Tax liability for taxable temporary differences Deferred tax Deferred tax Adjustments for changes in value of financial instruments 700 available for sale 802 Transfer of profits from available for sale financial assets 1,000 B) Prepare the Statement of Changes in Equity of STATEMENT OF RECOGNIZED REVENUES AND EXPENSES 2009 A) Income for the year ,5 Revenues and expenses recognized directly in equity III. Grants, donations and legacies V. Tax effect B) Total revenues and expenses recognized directly in equity (I+II+III+IV+V) Transfers to the income statement VI. From valuation of financial instruments 1. Revenues/expenses from available for sale financial assets VIII. Grants, donations and legacies IX. Tax effect 930 C) Total transfers to the income statement (VI+VII+VIII+IX) TOTAL RECOGNIZED REVENUES AND EXPENSES (+A+B+C) ,5 7

8 STATEMENT OF ALL CHANGES IN EQUITY Registered Capital Uncalled Additional paidin capital Reserves Prior years' income Income for the year (Dividend paid in advance) Adjustments for changes in value Grants, donations and legacies received TOTAL A. BALANCE, END OF YEAR 2008 I. Adjustments for changes in accounting policies, 200X-2 and preceding. II. Adjustments for errors, 200X-2 and preceding. B. ADJUSTED BALANCE, BEGINING OF YEAR 2009 I. Total recognized revenues and expenses. II. Transactions with equity holders. 1. Capital increases. 2. ( - ) Capital reductions , , Conversion of financial liabilities in equity. (conversion of debentures, debts writting off). 4. ( - ) Dividends distributions Transactions with the entity's shares (net). 6. Increase (reduction) of equity from a business combination. 7. Other transactions with equity holders III. Other changes in equity C. BALANCE, END OF YEAR , ,5 8