Overpayment Of Tax

Economics Cafe was involved in a lawsuit from 2019 to 2022 and the estimated legal cost was over $200 000. As the lawsuit was initiated in 2019, Economics Cafe declared the estimated legal cost as an expense in the same year. However, the correct accounting practice, which we were not aware of at the same, is to declare the legal cost as an expense in the year in which the payment for the lawsuit is made rather than the year in which the lawsuit was initiated. Therefore, as the payment for the lawsuit was made over a period of four years from 2019 to 2022, we over-declared our expenses in 2019 but under-declared our expenses in 2020, 2021 and 2022. As a result, Mr. Edmund Quek underpaid tax in 2019 ($24256.93) but overpaid tax in 2020 ($19757.59), 2021 ($6648.37) and 2022 ($1947.0135). In addition to 2019, there was a marginal amount of tax underpaid in 2018 ($3912.24) related to the lawsuit initiated in 2019. The combined effect of the underpayment of tax in 2018 and 2019 and the overpayment of tax in 2020, 2021 and 2022 is an OVERPAYMENT of tax of $183.8035 over the period of five years.

Workings:

Tax Overpaid = $19757.59 (2020) + $6648.37 (2021) + $1947.0135 (2022) – $3912.24 (2018) – $24256.93 (2019) = $183.8035

Therefore, we wish to point out the fact that despite the accounting mistake which Economics Cafe made in 2018 and 2019, Mr. Edmund Quek did not underpay tax. Indeed, the accounting mistake resulted in an overpayment of tax. Although Economics Cafe also wrongly declared the estimated legal cost as an expense in 2019 by decreasing the revenue instead of increasing the expenses, the mistake had no impact on income at all.

As a sidenote, Economics Cafe lost the lawsuit in the trial but won two out of the three cases in the appeal.

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Principal Economics Tutor: Mr. Edmund Quek