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Tax Accounting I • Chapter 6/2 The Tax Treatment of Incidental Revenues and Capital Gains Dr. Mohamed A. Hamada Lecturer of Accounting Information Systems
Second: • The tax treatment of incidental revenues: • These revenues are considered to be outside the scope of the basic activities of the firm. Incidental revenues include: • Subsidy:they are sums received by the taxpayer from government or any party to achieve economic or social objectives. • Cash subsidies are taxable on a cash basis. • If the subsidy is in a form other than cash (property or services), the market value of subsidy is subject to tax.
First: The taxable revenues: • 2- Bad debts recovered: • sometimes accounts that have been written off as non- collectable (bad debts) are collected (bad debts recovered) at a later date. The following rules may be noted for the purpose of tax treatment: • - If the bad debts were allowable as deduction in determining the tax net profit for the previous year, they would be included in the taxable revenues for the year in which they are received. • If the bad debts were not allowable as deduction in determining the tax net profit for the previous year, they would not be included in the taxable revenues for the year in which they are received.
First: The taxable revenues: • 3- Compensations: • they are sum received for damages suffered by the taxpayer. compensations include: • A- Insurance compensations related to current assets (insurance policies that cover the loss may occur because of unexpected events such as fire). The amount of insurance compensation should included in the tax profit regardless whether the firm replaces this asset by purchasing other assets or not. • B- Insurance compensations related to fixed assets.The excess of insurance compensation over the book value of these assets (capital gain) should included in the tax profit.
First: The taxable revenues: 4- Interest revenuesderived from some transaction with customers such as interest of credit sales are includable in the tax profit.
Example (2): • The net profit of “Ahmed" sole-company for the year ended December 31, 2012 was L.E. 70,000. The tax examination revealed the following information: • 1- The income statement includes the following items: • a- L.E. 10,000 subsidy received from ministry of health to support the firm's hospital. This amount includes L.E.3,000 received in cash and the remainder is a medical devices, its fair market is L.E. 8,000 • b- L.E.5,500 bad debts recovered including L.E. 3,500 was earlier allowed as deduction and the rest was not allowed. • 2- The following item was not recorded in the accounting books during the year: • - L.E. 15,000 compensation received from an insurance company for goods which were damaged by fire, the total amount of compensation was used to purchase other goods. • Required: • Make the necessary adjustments to measure the taxable net profit of the firm for the taxable period 2012.
3-The tax treatment of capital gains. • When company stops getting benefits from the fixed asset (land, building, cars, equipment, furniture), it is sold. • Gains are realized when company receives selling price for an asset more than its book value. • Losses are realized when company receives selling price for an asset less than its book value.
Note: Book value= Cost of asset – Accumulated depreciation Depreciationis decreasing in the value of the fixed assets due to use them. Depreciation = (cost – salvage value) ÷ useful life Accumulated depreciation is the sum of the annual depreciation.
Example • Alex Co., purchased a new machine on January 1, 2010, at a cost $17,000. The company estimated that the machine will have a salvage value of $2,000 at the of its 5- years life. • Required: • Compute the depreciation expense per year. • Compute the accumulated depreciation at the end of 2012. • Compute the book value at the end of 2012. • If Alex Co., sold the machine at the end of 2012 for $10,000, compute the capital gain or loss.
Depreciation expense per year =(17,000 – 2,000) ÷ 5-year =$3,000 • Accumulated depreciation at the end of 2012= • The book value at the end of 2012 = cost – Accumulated depreciation • = $17,000 – $9,000 = $8,000 • Capital gain = selling price – book value • = $10,000 – $8,000 = + $2,000 gain.