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kaplan text pg 188 – i have reproduced below:
1. trade debts written off – 520
2. loan to former employee – 280
3. allowance for impaired recvables – (200)
——1 jul 13 … 900
——30 jun 14 7004. trade debt recovered – (400)
5. loan to supplier written off 250
6. loan to customer recovered – (150)my questions:
3. there is a REDUCTION of this allownace and it shd be taxable. but the example does not treat it as taxable.
4. trade debts recovered are taxable. but the the example does not treat them as taxable.
6. this amount shd be taxable but is DECREASED from the calculation. why??
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kaplan’s worked out answer is below:
————————————$——-$
1.Trade debt written off ——0——-
2. loan to former emp ———280—-
3. loan to supplier —————250—-
4. movement in recvb all —————0
5. trade debts recovered —————0
6. loan to cust. recovered ————–150
—————————————530
—————————————-(150)
Add back ————————–380thanks!
To begin with the example should have given the accounting write off rather than leaving you to work it out for yourself, but from the numbers you give that should be a net write off (debit) in the period of 300.
What the answer has then done is to look at what is NOT allowable for tax to establish what is the adjustment for tax to use in the adjustment of profit statement – an add back of 380.
What you have stated but not correctly executed (and this is my preferred way of dealing with a detailed problem of this nature), is firstly compute what is either an allowable deduction for tax or what is the amount taxable, hence:Trade debt w/off 520
Less:
Trade debt recovered (400)
Decrease in impairment allowance (200)Net TAXABLE amount 80
and then compare with the figure in the accounts which is a net REDUCTION in profit of 300. The difference of 380 is then an add back in the adjustment of profits as the accounting profit has been reduced by 300 but for tax there should be an increase in profit of 80 therefore to compute the taxable profit we need to increase the accounting profit by 380.
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