Calculation of Net Income and Fringe Benefits

This assignment content is related to the financial statements of a partnership firm. It includes calculations for Cost of Goods Sold, Trade Payables, Motor Vehicle Running Expenses, Repairs and Maintenance Expenses, Interest on Loan, and Depreciation. The firm's net income for the year is calculated as $43,445.90. Additionally, the assignment also discusses Fringe Benefit Taxation (FBT) and its application in this case, specifically with regards to Mr. John, a senior executive of the printing company.

QUESTION 1)
PARTNERSHIP FIRM TAXATION
A partnership is a form of business where partners come together to carry out a business, In this case
Daniel and Olivia Smith are partners of a firm who have come jointly for the common purpose.
To set up a firm is relatively cost effective and in this form partners share among them losses and profits.
Key features of firm where partners have joint control:
 Profits and losses are shared proportionately on the basis of their share.
 The firm has a common identification number and has to file annually a return showing all
income and expenses.
 On firm profits the firm will not pay tax but the partner will pay tax on amount individually on
the basis of its share.
 Partners pay tax on their respective firm profit share amount on the basis of individual tax rate
and also get other deductions.
 The firm must apply for common identification number and have to use for all of its business
dealings.
 The firm has to get itself registered if its annual turnover is $75000or more
The amount drawn from the business cannot be claim as deduction from business and the amount
withdrawn are not wage for tax purpose.
The Net profit of a partnership is to be calculated by preparing income Statement and then calculating tax
on it. All the Revenues are added and expenses / deductions are deducted from the revenues to arrive at
the net income.
In computing net income for tax purposes, accrual system of accounting is used and only the revenues
and expenses which are related with business purposes are considered. Personal expenses are not allowed
as deduction.
Let us calculate the Net Income of Daniel and Olivia Smith through Income Statement Method.

Daniel and Olivia Smith
Statement of Partnership Net Income for the year ended
30th June 2017
$ $
Income
Sales-Cash (W . N. 1) 18692
5
Sales-Credit (W . N . 2) 31885
Goods taken from stock 3200 222010
Less: Deductions
Cost of Goods Sold (W . N . 3) 15971
3
Motor Vehicle Running Expenses (W . N . 4) 2364
Power (80% of 1470) 1176
Rates (60% of 517) 310
Insurance 1250
Telephone (90% of 704) 634
Union Fees 284
Account Charges 595
Repairs and Maintainance (W . N . 5) 290
Interest on Loan (W . N . 6) 5500
Depreciation(W . N .7) 6448.1
TOTAL EXPENSES 178564.
1
NET INCOME OF PARTNERSHIP FIRM 43445.9

WORKING NOTES:
W . N . 1) COMPUTATION OF CASH SALES:
$
Cash deposited into bank 150170
Add: Payment made directly from cash receipts 31155
Add: Withdrawals done for personal purposes 5600
TOTAL CASH SALES 186925
The Cash sales are those sales which the company has done in cash. In computing that cash receipts from
customers and cash deposited into bank are added and Any cash withdrawals which are for personal
purposes are deducted from it.
W . N . 2) SALES DONE ON CREDIT:
$
Balance of Trade Receivables at the year end 3010
Add: Payment received from the Trade Receivables 32800
Less: Opening Trade Receivables 3925
TOTAL CREDIT SALES 39735
Any sales done on credit basis are computed by adding balance of trade receivables at the year end and
deducting opening balances of trade receivables to arrive at the credit sales figure.
W . N . 3) COST OF GOODS SOLD
$
Inventory at the beginning of the year 9120

Add: Purchases
Cash Purchases 31155
Credit purchases (NOTE) 129188
169463
Less: Inventory at the end of the year 9750
TOTAL COST OF GOODS SOLD 159713
Cost of Goods sold is computed for computing Gross profit in Income Statement, this is to be deducted
from the Revenues. Inventory at the beginning and total purchases (both cash and credit) are added and
inventory at the yeat end is deducted from it to arrive at the cost of goods sold figure.
(NOTE) Credit Purchases
Trade Payables at the end of the year 7010
Payment to Trade Payables 128678
135688
Less: Trade Payables at the beginning of the year 6500
CREDIT PURCHASES 129188
Credit purchases are calculated by adding closing trade payables balances and payment made to trade
payables during the year and deducting beginning trade payables balance.
W . N . 4) MOTOR VEHICLE RUNNING
EXPENSES
$
Van (1260 * 90%) 1134
SUV (2050 * 60%) 1230
TOTAL MOTOR VEHICLE RUNNING
EXPENSES 2364

Only vehicle used for business purposes will be considered
in calculation of running expenses.
Power, insurance, Rates, telephone expenses which are used for personal purposes are not allowed as
deduction. That is why only business related percentages are considered.
W . N . 5) REPAIRS AND MAINTENANCE
EXPENSES
$
Painting of shop 150
Replacement of Motor of Refrigerator 140
TOTAL REPAIRS AND MAINTENANCE
EXPENSES 290
All the repairs and Maintenance expenses done during the year are allowed as deduction for computation
of Net Income.
W . N . 6) INTEREST ON LOAN
$
Repayment of loan during the year 8500
Less: Reduction in Principal Amount 3000
INTEREST PAID 5500
All the interest expenses and borrowings made by the firm are allowed as deduction.
W . N . 7) COMPUTATION OF
DEPRECIATION
$ $ $
ORIGINA
L COST
OPENING
ADJUSTE
D VALUE
Writte
n
Down

Value
Restaurant Refrigeration 14600 3580 11020
Shop Fitting Structure 7800 2965 4835
Kitchen Electrical Appliances 3900 754 3146
Car -Van 16500 1550 14950
Car –SUV 42200 10350 31850
Additions:
Restaurant Freezer (01.08.2016) 4000 4000
Air Conditioner (01.10.2016) 1200 1200
Disposal:
Restaurant Freezer 8000 1480 6520
YEAR END BALANCES 82200 17719 64481
As nothing is mentioned in the question depreciation rate is considered to be 10%
for all the fixed assets. Depreciation will be calculated on Written down value at the
year end.
DEPRECIATION = (64481 * 10%) 6448.1
Depreciation is an allowable expense for the income computation purposes and it is calculated on written
down value method. The effective life of the asset is considered as 10 years for all the assets.
Depreciating assets are those assets which have limited useful life and its value diminishes with normal
wear and tear.
DEPRECIATION RULES:
The cost of a depreciating asset includes all expenses that are incurred for purchasing the asset that one
incurs in transportation, installation of the asset and also expense which are incurred immediately after its
installation.

Depreciation deductions are limited to the purpose that it is used for the purpose of business for eg.
Suppose an asset is used partially for business as well as private purpose than only business purpose
depreciation can be claimed.
Depreciation expense is allowable only to the people who have legal title.
Small businesses have the option to opt for simplified depreciation rules which includes instant writing
off the whole amount. It is assumed that the above partnership firm is not using the above method.
To calculate depreciation most firms opt for general depreciation rules unless they are eligible for
simplified depreciation rules. This rule helps in calculating the amount of allowance which can be
claimed as depreciation.
General depreciation rules mention the condition for immediate write off which are-
 Items which cost up to $100 for earning business income.
 items which cost up to $300 for earning income other than business purpose such as employee
provide equipments.
The amount which can be calculated on depreciating asset is calculated by depreciation and capital
allowance tool or it can be says as the amount for allowance and capital work purpose.
CONCLUSION:
After computing all the expenses and revenues from the above working papers, the net income of the
partnership firm comes out to be $43445.9
QUESTION 2)

Fringe Benefit taxation is that which states the amounts which have to be paid by employer on the amount
or benefits it provides to its employees including its family. This benefit is provided to them in addition to
their normal salary and wages.
In the present case, Mr. John is a senior executive with the printing company, means he is an employee of
the company that is why he is getting Fringe Benefits from the company.
SCHOOL FEES FRINGE BENEFITS:
Housing
A housing fringe benefit arises where the employer provide its employees rent free accommodation,
reduced rent accommodation and the accommodation is the place which is usual place of residence.
This includes the following.
 A house or any other unit for the purpose of residential
 Accommodation in any temporary unit like hostels or hotels.
 Any other home like mobile home
 Stay in any floating structure like boat or ship.
Accommodation provided for the purpose of stay in backward area may be exempt.
HOW CAN ONE CLAIM TAX BENEFITS?
To get successful claims of their expenditure one needs to provide a copy of valid tax invoice, proof of
payment (like credit card / debit card receipts)
Let us calculate the Fringe Benefits available to Mr. John during the year which he can claim
reimbursement from his employer.
Total Amount Liable to FBT:
School Fees 15000
Rent(800-100)*52 36400
51400