Income Tax Calculation 50 marks.
It is early January 2020. Billy Bunter is a new client of yours. He set up a sole trade bakery business in Cardiff, Wales on 1 June 2018 drawing up his first set of accounts for the seven months to 31 December 2018 and using a 31 December accounting date from that point. Billy is trying to complete his 2018/19 tax return (as it is due to be submitted online to HMRC by 31 January 2020). He has brought you a box full of relevant information to allow you to calculate his income tax liability and to tell him how much tax remains due.
You sift through the box and find the following information:
• Information on the bakery
• Profit and loss accounts for the first two trading periods
• A list of acquisitions and disposals of assets; and
• Details on other income Each of these is reproduced below.
Information on the bakery
• Sells to local shops
• Sole trade business established on 1 June 2018
• Billy has six employees, including his wife Bessie; and
• The business begins trading from rented premises. Profit and loss accounts for the first two trading periods Seven-month period
to Year to Notes 31 Dec 2018 31 Dec 2019
£ £ Sales 299,935 337,669
Cost of sales 1, 2 (138,321) (119,978)
Gross profit 161,614 217,691
Wages 3 (61,500) (92,400)
Depreciation (16,340) (31,890)
Light and heat (4,163) (7,216)
Bad debts 4 (1,960) (30)
Motor costs 5 (4,320) (5,462)
Entertaining 6 (2,640) (2,770)
Repairs 7 (962) (1,385)
Bank overdraft interest (2,750) (2,015)
Sundry expenses (2,160) (2,845)
Net profit 64,819 71,678
1. Included within cost of sales for the first period is £800 for a new dough mixer that Billy bought in August 2018. Given the relatively
small cost, Billy decided just to expense this.
2. Cost of sales in the second period also includes £450 costs that relate to bakery products taken home by Billy to cater for a family Christmas party. You establish that Billy normally manages to mark up costs by 20% when selling to customers.
3. Included within wages are amounts of £200 per month which Billy takes as a salary and £100 per month paid to Billy’s wife Bessie who tries to keep clerical records of the bakery’s business.
4. Bad debts in the two periods are made up as follows: Period to Year to 31 Dec 2018 31 Dec 2019
£ £ Set up of specific provision 750
Set up of general provision 1,000
Movement in specific provision 180
Movement in general provision (220)
Write off of bad debts 21095
Recovery of bad debts previously written off (25) 1,960 30
5 Within motor costs Billy has included the running costs of the Ford Focus used in the business. You find mileage records for the vehicle which show that in the first period it was used 20% privately and in the second period it was used 40% privately. The running costs amounted to £2,600 and £4,000 for the two periods. The car has CO2 emissions of 103g/km. In addition, Billy leased an estate car (list price £20,000) to deliver products to customers. The lease commenced on 1 October 2019 and cost £370 per calendar month. There was 100% business use of the vehicle. The estate car has CO2 emissions of 174g/km.
6 Entertaining costs are made up as follows: Period to Year to 31 Dec 2018 31 Dec 2019 £ £ Client entertaining 1,800 2,100 Staff parties 360 420 Gifts to clients 480 250 2,640 2,770 The gifts to clients were made up as follows:
• In the first period, Billy gave his 20 best clients gifts of silver ornaments shaped like loaves, with the bakery name engraved on them; and
• In the second period, the gifts were for his ten best clients. Each one received a plain crystal vase.
7 Included in repairs you find the following items: Period to Year to 31.12.2018 31.12.2019 £ £ Repair oven (purchased in first period and not in working order) 50 Replace broken bakery shutters with more secure electric ones 320 Acquisitions and disposals of assets Purchases £ 10.5.18 Kitchen equipment 8,000
15.5.18 Billy’s Ford Focus (see note 5 above) 15,500
16.7.18 Purchase of oven (see note 7 above) 18,000
20.7.18 Energy-saving equipment 3,000
21.4.19 Boiler 12,000
30.6.19 Employee Prius (CO2 = 105g/km) 25,000
11.11.19 Replacement oven 19,680 The boiler is designated as energy-saving equipment. Disposals
18.11.19 Sale of original oven 15,000
1.12.19 Disposal of kitchen equipment (original cost £3,500) 1,200.
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