Basic Accounting Practice - 02b answer
Quick question in the "Basic Accounting Practice" pdf, page 02b answer shows NI as 0, is this intentional?
My understanding is that the pre-tax NI is -7700, and for the sake of simplicity, we can directly multiply this by (1- the tax rate) to get the post tax NI, -7700 * (1-0.29) to get -5467. Even though this is hardly the case in real life due to complication of taxes, we can assume this is safe to do in exams?
Comments
The key point here is that if pre-tax income is less than 0, there is no tax. You only pay tax when you have a profit. In this problem, I set the result to 0 just to indicate there was no profit.
You could argue it makes more sense to say the final net income is -7700. (It wouldn't be -5467, because the tax rate wouldn't apply to a loss. Having a loss could reduce your taxable income in future years, but that's beyond the scope of the syllabus.)
Thanks Graham, so in the exam, say if my pre-tax NI is calculated to be -7700, I should state the pre-tax NI is -7700, and the post-tax NI is also -7700 as we can assume there's no tax under this circumstance.
I was interpreting it differently: if we are making a loss of 7700, the company might be able to enjoy a tax credit in the year that it experiences U/W loss (given the company has paid enough tax in the historical years to get this tax credit). But I agree with your approach more, do you think we need to quickly state our assumption that there's no tax in a loss scenario.
Yes, if you briefly state your assumption you should be safe. They just want to know that you understand what you're doing.
As far taking into account prior or future years, that's something you wouldn't have to do because it isn't covered in the syllabus.
The only other tax calculation is in: https://www.battleactsmain.ca/wiki6c/CIA.Taxes. That particular question has appeared on several exams, most recently 2017.Spring. I think there's a chance it could up in 2018.Fall. It's definitely worth reviewing.