Page 21 - CIMA MCS Workbook August 2018 - Day 2 Tasks

FINANCIAL REPORTING AND TAXATION (F1) - PRACTICE TASKS

EXERCISE THREE (TAXATION)

TRIGGER.
You have received the following email from Bertram Durrand:

From: Bertram Durrand (CEO)
To: Finance Officer
Subject: Strictly confidential

I’m struggling to understand the detail of some financial accounting and tax issues. Normally, I
would ask Nicola Collette (CFO) or Steven Potter (FM) but it appears that Nicola is on annual leave
and Steven is away ill.
I have never been involved in the detail of tax issues, leaving it to Nicola and Steven, but I’ve been
doing a bit of research and am a little confused. I appreciate that capital expenditure is subject to
something called a tax depreciation allowance but I do not understand how this works. Also I don’t
understand why, when we made a profit before tax of C$5,923,000 in 2016 but in 2017 we did not
pay 20% of this as tax which I calculate to be C$1,184,600, instead, the amount of tax GymFIT
actually paid in 2017 was C$1,065,000 according to the statement of cash flows.
I’m sure that the auditor knew what he was doing but it looks to me that GymFIT has not paid the
correct tax and actually made an underpayment? Given that GymFIT has ongoing plans for
expansion, the last thing we need would be an additional tax demand plus penalties for late
payment.

I appreciate that this is short notice but could you please provide me with information that might
help my understanding of this issue prior to my meeting with the auditor at the end of this week?

Thanks
Bertram Durrand
CEO

TASK
Using the information provided in the pre-seen material, reply to Bertram’s email explaining what
tax depreciation allowance is and how this, in combination with other tax adjustments, has
resulted in a different taxable profit than was reported in the financial statements. Within your
reply you should suggest reasons as to why certain expenses are disallowable under Celtland’s tax
rules

(Time Allowed: 30 minutes)

KAPLAN PUBLISHING 41