Accounting-Accounting Assignment -26th September 2012

Accounting Assignment -26th September 2012Questions:Q.1 From the information provided in the document “John and Mary Brown – Current FinancialSituation” calculate the likely 2011 tax payable/refundable for each if John accepts the employer offeredETP and John and Mary sell their investment property before June 30th 2011. Show your workings:Answer: Q1 solution provided by me$Workings(a) John BrownAssessable IncomeGross salaryTravelled allowanceFully Franked dividendFranking CreditInterest receivedRental IncomeCapital GainETPTotal Assessable IncomeAllowable DeductionsCar ExpensesDonations:-Salvation Army-World visionDeduction on propertyTotal AllowableDeductionsTaxable Income65,0001,2001,8507931,125725050,000Franking Credit 30/70 X 1,850Bank Interest (half of 2250 ÷ 2 = 1,125)Rental Income (50%) = 14500 ÷ 2 = 7,250Capital Gain =(380,000–180,000)x50%X50%=50,0008106 Early Retirement Payment (ETP) = 65,000135,323.85 ( 8126 + (4064 X 12)= 81062035 Car Expenses :Cent per kilometre 2750 x 74c=203525240 Donation4800 Donation7100 Deduction on property 9600÷2= 4800128,214Tax on Taxable IncomeTax Offsets;Franking CreditPrimary Tax Payable35,389. 17550+ 37% (128214 -80,000) = 35389.1879334,596Medicare Levy1,923 Taxable Income 128214 x 1.5% =1923PAYG Paid14,250 Tax withheldTax payable22,269 36519-14250= 22269(b) Mary Brown$Assessable IncomeGross salaryInterest receivedInvestment propertyCapital gain3300011257250 Half of $1450050000Total Assessable income91,375WorkingsAllowable DeductionsDeductions on theproperty4800 Property expenses 9600/2 = 4800Taxable Income86575Tax on Taxable Income19,982 17550 + 37% ( 86,575 – 80,000) = 19982.75(Refer ATO Tax table rates based 2010 -2011 FY)Tax OffsetsMature Age workerMedical expensesPrimary Tax PayableMedicare LevyMature Age over 55, less than 53,000 section (61500 550 to 61- 550)250 Medical expenses ( 3250 – 2000) = 1250( 1250 x .2%)=250192321299 Taxable Income 86575 X 1.5% = 1298.62PAYG Paid4600Tax Refundable15931 19232 + 1299 – 4600 = 15931 RefundableQ. 2 Review the financial information for Charley’s Hardware then answer thefollowing:a) What financial statements and source documents could John Brown use toverify (reasonably quickly) the accuracy of the following financial informationprovided in Charley’s Hardware management accounts?Answer: please review and see attached in excel1.Profit and loss reports:-Tax return form GST Quarterly Report and BAS Statement-Please add if any do you think I missed2.Sales and Purchases-BAS Statement, Sales journal and Purchase journal-Please add if any do you think I missed3.Cash Received during the period by Cash sales and otherdeposits- Cash journal; BAS Statement- please add if any do you think I missed4.Staff Salaries and wages- PAYG withholdingplease add if any do you think I missed5.Inventory on hand-Stock taken report;- please add if any do you think I missed6.Loans / overdraft-Balance Sheet statement and Bank Statement- please add if any do you think I missed7.Value of the premises- Written down value of premises and depreciation of premises.-Balance Sheet Statementplease add if any do you think I missedb) What important financial information is missing, with regard to tax liabilitiesand other compulsory statutory payments by the business, from themanagement accounts? Why is this financial information important to apotential purchaser of the business?Answer:c) From your review of the management accounts, what do you consider to bethe five most important financial questions (which should cover the assets,liabilities, Expenses, Income and Equity) John Brown should ask the owner ofCharley’s Hardware before any decision about purchase is taken?Answer:d) Advise your client of 5 important non-financial questions they should ask theowner of Charley’s Hardware before purchase is considered?Answer:Q. 3 Based on the tax information in Q1, the financial information in Q2 and theprovided client information answer the following:a) Provide advice to your client on whether you think he should proceed withproposed purchase of Charley’s Hardware. Ensure that your advice covers thefollowing areas:I.your client’s financial and lifestyle needsII.assessment of the potential risks for your clientIII.If required, sources of short and long-term financeAnswer:l. Client’s Financial and LifestyleSavingsThe early retirement payoutProperty (estimate)John’s taxable incomeMary’s taxable incomeMary’s tax RefundableTotal Money45,00065,000200,000128,21486,57515,930539,930Total Cost:Business market priceMortgageJohn’s tax payableTotal cost295,00097,00022,269414,269The balance ( after buy the business )125,661What will be your advice/comment above based on client’s financial & lifestyle (buy thebusiness or not)?Answer:ll. assessment of the potential risks for your clientAnswer:Ill. If required, sources of short and long-term financeAnswer:b) Depending on the advice you provided in 3 (a) above:I.If you recommended the purchase of Charley’s Hardware, whichbusiness structure would you recommend to your client and why?Answer:II.If you did not recommend the purchase of Charley’s Hardware, whatadvice would you give to your client with regard to accepting thecurrent employer offered ETP?Answer:Case Study – John BrownABC Financial Services has been approached by a client, John Brown, who isinterested in purchasing an existing business, Charley’s Hardware.Your ABC manager has assigned you to provide suitable advice to this client.Your client requires advice from you about:1) His current tax position and that of his wife, Mary2) The financial position/performance of a business they are consideringpurchasing3) Whether your client should proceed with the business purchaseBefore you can provide advice to your client it is essential that you have a goodunderstanding of his business and personal objectives.You will also have to analyse the financial statements of Charley’s Hardware toestablish the viability of the purchase.As part of the process you will have to determine the level of your client’s knowledgeof business operations and his commitment to the future success of the business.You will need to establish a level of mutual trust and confidence with your client toobtain the information you need to assess his requirements.Before you can consider advising the client you need to:“John and Mary Brown – Current Financial Situation”“Charley’s Hardware 2010 & 2011 Financial Reports”“Choosing the Right Business Structure”John and Mary Brown – Current Financial SituationYour discussions with John and Mary Brown have provided you with the followinginformation:1. John Brown reports the following estimate information for the year ending June 30,2011:(a) Gross salary of $65,000, travel allowance of $1,200, PAYG tax paid $14,250and reportable fringe benefits of $2,750(b) Fully franked dividends of $1,850 were received(c) Interest of $2,250 was earned from a joint bank account, John is entitled tohalf of it(d) The use of John’s car included 4,850 km for trips between home and work,and another 2,750 km travelling between places of work. His car cost $29,500 andthe engine size is 1,800 cc. John did not keep a log book, but has records to showthat his total car costs for the year were $8,650. His total car use was 18, 400 km(e) Hospital insurance was paid for the entire year(f) John’s employer expects him to wear a suit when representing the company.John paid $499 for a new suit during the year.(g) Donations during the year were $25 to the Salvation Army Red Cross Appeal,$240 to World Vision, and $10 to the Smith family door-knock appeal. John hasreceipts for all of these except the Smith family donation.(h) John is 50% owner of an investment property. Total rental income on theinvestment property for the year was $14,500. Total allowable deductions on theproperty were $9,600.2. Mary Brown reports the following estimate information for the year ending June 30,2011:(a) Gross salary of $33,000, PAYG tax paid $4,600(b) Interest of $2,250 was earned from a joint bank account, Mary is entitled tohalf of it(c) Hospital insurance was paid for the entire year(d) Mary has eligible medical expenses totalling $3,250(e) Mary supports her dependant mother who receives an old age pension of $275per fortnight(f) Mary is 50% owner of an investment property. Total rental income on theinvestment property for the year was $14,500. Total allowable deductions on theproperty were $9,6003.Your further discussions with John and Mary Brown reviled the following informationabout their sale of property and their future investment decisions:•John is a 62 year old sales/support representative for a major hardware retailchain. He has worked for this employer for the last 12 and a half years•Mary has been employed as a part-time accounts clerk for the last 2 years. Sheis 59 years old•John has always wanted to work for himself as he believes that he can use theskills that he has acquired to enhance his own future prospects.•He is prepared to commit long hours to a business in the immediate future inthe belief that this will ease off after two to three years. He will run thebusiness and Mary will do the accounts/admin.•John’s employer has announced plans to offer early retirement schemepayments to employees who are aged over 60. John has been offered a lumpsum of $65,000 if he retires before June 30th•John has been looking for a business to purchase and is looking closely atCharley’s Hardware, which is on the market for $295,000•He and Mary have cash savings of $45,000, which together with the earlyretirement payout (ETP) of $65,000 leaves a balance to be found of $185,000,which will be funded by the sale of their investment property in Queenslandwhich they purchased 10 years ago for $180,000. They estimate its currentvalue to be $380,000. They still have a $97,000 mortgage on the property.Income Tax Rates – 2010/11Resident Individuals:

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