Recent Question/Assignment

Question 1: Topic 1 - Accounting for Company tax (30 marks)
Jamie Ltd’s profit before tax for the year ended 30 June 2020 was $172,400. Included in this profit are the following items of income and expense:
Amortisation of development costs $12,000
’ Carrying amount of equipment sold 11,000
Depreciation - building (6%) 15,000
1 Depreciation - equipment (15%) 15,000
Depreciation - motor vehicle (20%) 5,800
Doubtful debts expense 1,700
Employee benefits expense 7,000
Entertainment expense , 3,500
Fines and penalties 4,400
Goodwill impairment 2,000
Insurance expense 1,400
Interest revenue 800
Proceeds on sale of equipment 19,000
Rent revenue 15,000
Royalty revenue (exempt income) 3,000
Warranty expense 7,000

At 30 June, the company’s draft statements of financial position showed t balances:
_ 2020 2019
- — -
Assets $10,200
Cash $14,300
Accounts receivable 18,000
¦ —I- 22,000
Allowance for doubtful debts (2,000) (3,500)
Inventories 33,000 43,500
Interest receivable 800 1,200
Prepaid Insurance 4,000 4,200
Rent receivable 3,900 3,700
Development costs 48,000 -
Accumulated amortisation (12,000) -
Motor vehicle 29,000 29,000
Accumulated depreciation (23,200) (17,400)
Equipment 100,000 120,000
Accumulated depreciation (60,000) (54,000)
Buildings 250,000 250,000
Accumulated depreciation (90,000) (75,000)
Deferred tax asset 7 24,060
Goodwill 12,000 12,000
Goodwill - accumulated impairment losses (5,000) (3,000)
Liabilities rzzzi
Accounts payable 27,000 24,500
Current tax liability 7 7,600
Provision for employee benefits ' ¦ -
12,500 8,000
Provision for warranties 8,700 4,200
Mortgage loan 160,000 150,000
. 1
Deferred tax liability 4,275

A tax deduction for develonmo * available under the Tax Act. The profit the amount spent during the Vear is amortised in the current period amount °f development costs
X deduction of $10,000 (10%) can be claimed on equipment.
The motor vehicle is depreciated at 25% for tax purposes.
the date of sale when it was purchased 3 years before
Deductions are only available for annual leave when amounts are paid and not as they are accrued.
6. Actual amounts paid for insurance are allowed as a tax deduction.
7. No deduction is allowed for taxation purposes in relation to entertainment, fines, and penalties.
8. Rent revenue and interest are taxable when amounts are received.
9. Depreciation of buildings is not allowed as a tax deduction.
10. The deferred tax asset (DTA) balance at 30 June 2019 comprised:
a) DTAs relating to temporary differences: $10,110
b) DTAs relating to carried forward tax losses: $13,950
11. No journal entries related to deferred tax have been recorded for the year ended 2020. Assume the tax balances at 30 June 2019 are correct.
12. The tax rate is 30%.
Required:
1. Prepare the current tax worksheet to calculate the current tax liability for the year ended 30 June 2020 (show all working). (15 marks)
2. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2020.
Include all accounts and net balances where appropriate. (13 marks)
3. Prepare the journal entries to recognise the current tax liability, deferred tax assets, and liabilities at 30 June 2020. (2 marks)
Question 2: Topic 2 - Business Combinations (20 marks)
Part A (12 marks)
Flashy Ltd is involved in the manufacture of Ugg boots. The to a long-standing competitor, Boots Ltd. The financial s a e contained the following information: ies to sell the business shy Ltd at 1 July 2019
j Assets _
Current assets
Cash 7,500
Accounts receivable 11,000
Inventories 16,500
Total current assets 35,000
Non-current assets
Vehicles 32,000
Accumulated depreciation (5,500)
Trucks 37,000
Accumulated depreciation (6,300)
Machinery 22,000
Accumulated depreciation (3,000)
Buildings 49,000
Accumulated depreciation (4,500)
Land 90,000
Total non-current assets 210,700
Total assets 245,700
i : ..... Lip ¦
Liabilities
Accounts payable 18,900
Other payables 41,000
Provisions 27,000
Loans 63,000
Total liabilities 149,900
_ — - . . ...
Equity
Share capital: 50,000 shares 45,000
Retained earnings 47,800
Total equity 95,800
An agreement was made whereby Boots Ltd takes over Flashy Ltd. Boots Ltd will acquire all the assets and liabilities of Flashy Ltd, except for the cash, motor vehicles and accounts payable. In exchange, Boots Ltd will give the shareholders of Flashy Ltd a block of land valued at $86,000 and a motor vehicle valued at $21,400. The land is carried at a cost of $40,000 while the motor vehicle is carried at $22,000, comprising cost of $23,000 and accumulated depreciation of $1,000. Boots Ltd will also provide sufficient additional cash to enable Flashy Ltd to pay off the accounts payable and the liquidation expenses of $4,300.
Boots Ltd recognised the brand 'Flashy’ that was not recognised in the records of Flashy Ltd as it was an internally developed brand. It was calculated that this brand had a fair value of $22,000. Boots Ltd also incurred legal and valuation costs of $2,000 in undertaking the business combination.
The assets and liabilities of Flashy Ltd are recorded at amounts equal to fair value except for the following:
Fair value
Land 100,000
Buildings 56,000
Machinery 20,000
Trucks 30,000
Inventories 20,000
Required:
1. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill. (6 marks)
2. Prepare the journal entries in the records of Boots Ltd to record its acquisition of Flashy Ltd on 1 July 2019. (6 marks)
Part B (8 marks: 350 words)
With examples and reference to relevant Australian Accounting Standards, explain the key steps in the acquisition method. Why is it important to identify an acquirer in a business combination?
business combination valuation and intra group
At acquisition date, all of School Ltd’s net assets were recorded at fair value except for.
Carrying amount Fair value
’ ¦
Inventory $32,000 $40,000
Land 62,000 75,000
Contingent liability - 8,000
Buildings (Cost $100,000) 69,000 78,000
Additional Information:
1. The dividend payable at acquisition date was subsequently paid in August 2017.
2. The revalued inventory was sold during the year ended 30 June 2018.
3. The contingent liability identified on the acquisition of School Ltd still existed at 30 June 2020.
4. The revalued land was sold during the year ended 30 June 2020 for $52,000.
5. The revalued buildings were still held at 30 June 2020 being depreciated on the straight-line basis at 15% per year.
6. In May 2018, goodwill was impaired by $1,500. An additional $2,500 impairment occurred during the year ended 30 June 2020.
7. Management fee revenues earned by Old Ltd during the year ended 30 June 2020 were collected from School Ltd.
8. School Ltd’s inventory balance at 1 July 2019 included an item previously purchased from Old Ltd. This inventory had been sold by Old Ltd to School Ltd at a profit of $6,500.
9. During the year ended 30 June 2020, School Ltd sold a quantity of inventory to Old Ltd for $12,000. This inventory had originally cost School Ltd $8,000 with 30% of this ’
inventory still being held by Old Ltd at 30 June 2020.
10 dividends paid/declared by Old Ltd during the year ended 30 June 2020 were from post-acquisition profits.
11. Financial statements for the year ended 30 June 2020 are reproduced below:
Old Ltd School Ltd
Sales $6,320,000 $3,260,000
Cost of goods sold (3,060,000) (2,710,000)
Gross profit 3,260,000 550,000
Dividend revenue 83,000
— - - - — ¦ - - - -
Interest revenue 18,000
Management fees revenue 22,000
Other income 30,000
Loss on sale of land (10,000)
Depreciation expense (180,000) (86,000)
Finance costs (91,000) (35,000)
Other expenses (284,000) (33,000)
Profit before income tax 2,840,000 404,000
Income tax expense (202,000) (88,000)
Profit after tax 2,638,000 316,000
Retained earnings at (01/07/19) 695,000 322,000
Interim dividend paid (70,000) (22,000)
Final dividend declared (140,000) (61,000)
Retained earnings at (30/06/20) 3,123,000 555,000
Share capital 800,000 1
600,000
General reserve 210,000 40,000
Total equity 4,133,000 1,195,000
Trade and other payables 413,000 137,000
Dividend payable 140,000 61,000
Loan from School Ltd (6% per year, interest payable 31 December) 300,000
Mortgage loan 1,453,000 401,000
Deferred tax liabilities 90,000
Total liabilities .. L 2,396,000 599,000

Total liabilities and equity 6,529,000 - ¦1 ¦-
1»^94,000
Cash 194,000 115,000
Trade and other receivables 72,000 35,000
Dividends receivable 61,000
Inventory 750,000 438,000
Land 770,000 250,000
Buildings 1,747,000 770,000
Accumulated depreciation buildings (320,000} (454,000)
Plant and equipment 2,790,000 450,000
Accumulated depreciation plant and equipment (435,000) (110,000)
Investment in School Ltd 900,000
Loan to Old Ltd (6% per year, interest payable 31 December) ... 300,000
Total assets 6,529,000 1,794,000
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date. (3 marks)
2. Prepare the consolidation journal entries for Old Ltd immediately after acquisition on 1 July 2017. (6 marks)
3. Prepare the consolidation journal entries for Old Ltd as at 30 June 2020. (16 marks)
4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Old Ltd as at 30 June 2020. (10 marks)
41 3 an *4 lc°ntinued) and Topic 5-Non-Controlling interest (3S marks)
On 1 July 2018, Bay Ltd nairi A AA r
the equity of Watch Ltd consisted of ‘ssuec^ shares of Watch Ltd. At this date,
-
Share capital (200,000 shares) ------ $200,000
General reserve 80,000
Retained earnings 40,000
A comparison of the carrying amounts and fair values of Watch Ltd’s assets at the acquisition date showed the following:
Carrying amount Fair value
Land $ 183,000 $200,000
Plant (cost $150,000) 100,000 120,000
Inventories 65,000 90,000
Accounts receivable 40,000 35,000
Goodwill 4,000 —
In relation to the accounts, the following information is available:
1. At acquisition date, the plant had a further 5-year life but was sold on 1 January 2020.
2. Ail the inventories were sold by 30 June 2019.
3. All the accounts receivable were collected by 30 June 2019.
Any valuation reserves arising on consolidation are transferred on realisation of the asset to retained earnings. The general reserve movement was from pre-acquisition equity. Dividends are recognised on declaration.
The following transactions occurred between 1 July 2018 and 30 June 2020:
2019 . , ' ' ¦ r ¦ . f ‘? $_• 6. 1 fl r-** J -'^1 I j j* i
Jan. 1 Watch Ltd sold an item of plant to Bay Ltd for $18,000, which included a profit of $6,000. The remaining useful life of the plant was 4 years.
Jan. 7 Watch Ltd transferred $20,000 from general reserve to retained earnings.
Feb. 12 Watch Ltd paid an $8,000 dividend.
March 23 Watch Ltd sold inventories to Bay Ltd for $50,000 recording a before-tax profit of $10 000 The tax rate is 30%.
June. 26 Watch Ltd declared a $15,000 dividend.
30 Watch Ltd recorded a profit after tax of $130,000. One-quarter of the inventories sold by Watch Ltd to Bay Ltd on 23 March 2019 are still on hand with Bay Ltd.

Aug. 15 The $15,000 dividend declared by Watch Ltd was paid.
Sept.
2020 21 The remaining inventories in Bay Ltd sold to it by Watch Ltd were sold outside the group.
Jan. 1 Watch Ltd paid a $16,000 dividend.
June 30 Watch Ltd recorded a profit after tax of $150,000.
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date using the ull goodwill method. Assume the fair value of the Non-Controlling Interest on 1 July 2018 was $150,000. (4 marks)
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (3 marks)
3. Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2019. (8 marks)
4. Prepare the consolidation journal entries for Bay Ltd using the partial goodwill method at 30 June 2020. (20 marks)
Note: Your consolidation journal entries for Required 4 should be prepared in the following format:
(a) Business combination valuation entries at 30 June 2020
(b) Pre-acquisition entries at 30 June 2020
(c) NCI share of equity at 1 July 2018
(d) NCI share of equity changes from 1 July 2018 to 30 June 2019
(e) NCI share of equity changes from 1 July 2019 to 30 June 2020
(f) Intra-group transaction adjustments required as at 30 June 2020
Questions adapted from:
Loftus, J., Leo, K., Daniliuc, S., Boys, N., Luke, B., Ang, H., & Byrnes, K. (2020). Financial Reporting. (3rd ed.). John Wiley & Sons Ltd.
Arthur, N., Luff, L., Keet, P., Egan, M„ Howieson, B., Ram,. R. (2016). Accounting for corporate combinations and associations (8th ed.). Pearson Education.