Professional Documents
Culture Documents
B.
D.
Students could select either policy the key issue is whether or not such
expenditure results in the creation of an asset as per the Conceptual
Frameworks definition. If so, the expenditure should be capitalised. If not, the
expenditure should be expensed. Students should provide valid arguments to
support their choice of accounting policy. In this case, we would argue against
capitalisation as the main purpose of the board is to show a higher profit in the
current year, i.e. this is not a faithful representation of the entitys financial
position or performance.
PRACTICE QUESTIONS
RACTICE QUEST
IONS
QUESTION 3.11
PANSY LTD
A.
Statement of Profit or Loss and Other Comprehensive Income
For year ended 30 June 2014
Income:
Sales
Less sales returns
Interest revenue
Total revenues
Expenses:
Selling expenses
Cost of sales
Other selling expenses
Salaries and wages
Total selling expenses
Administrative expenses
Financial expenses
Interest expense
Total expenses
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for the year
$1 600 000
65 000
$1 535 000
20 000
1 555 000
850 000
125 000
150 000
1 125 000
262 000
56 500
1443 500
111 500
65 000
$46 500
0
$46 500
-/-/14
30/6/14
30/6/14
30/6/14
Retained Earnings
100 000 1/7/13
Balance
150 000 30/6/14
P or L Summary
25 000 30/6/14
Transfer from
revaluation surplus
85 000
360 000
1/7/14
Balance b/d
263 500
46 500
50 000
360 000
85 000
Opening balance of retained earnings = $38 500 add back dividends paid and declared
during the year i.e. $100 000 + 150 000 (which have been deducted from the retained
earnings) less $50 000 transfer from revaluation surplus (which is included in the $38
500) and plus $25 000 transfer to general reserve (which is included in the $38 500) =
$263 500
PANSY LTD
Statement of Changes in Equity
for the year ended 30 June 2014
Total comprehensive income for the year
$46 500
Retained earnings:
Balance at 1 July 2013
Profit for the period
Transfer from revaluation surplus
Interim dividend paid
Final dividend declared
Transfer to general reserve
Balance at 30 June 2014
$263 500
46 500
50 000
(100 000)
(150 000)
(25 000)
$85 000
Share capital:
Balance at 1 July 2013
Balance at 30 June 2014
$200 000
$200 000
Other reserves:
Revaluation surplus
Balance at 1 July 2013
Transfer to retained earnings
Balance at 30 June 2014
General reserve
Balance at 1 July 2013
Transfer from retained earnings
Balance at 30 June 2014
70 000
(50 000)
20 000
$0
25 000
$25 000
$117 000
85 000
180 000
382 000
200 000
250 000
(37 000)
213 000
413 000
795 000
50 000
150 000
50 000
65 000
315 000
150 000
150 000
465 000
$330 000
Equity
Share capital
Revaluation surplus
General reserve
Retained earnings
Total equity
$200 000
20 000
25 000
85 000
$330 000
adjusting events after the end of the reporting period which provide evidence
of conditions that existed at end of the reporting period (e.g. the settlement of a
court case after the end of the reporting period that confirms the company had
a present obligation at the end of the reporting period)
non-adjusting events after the end of the reporting period are events that are
indicative of conditions that arose after the end of the reporting period (e.g. a
flood or fire after the end of the reporting period that destroys a companys
building and plant).
$ 825 000
(450 000)
375 000
6 000
(236 300)
(10 000)
(28 700)
106 000
(50 400)
55 600
25 000
30 000
(16 500)
38 500
$ 94 100
Workings:
*Other income:
Interest
Dividends
** Administrative expenses:
Administrative expenses
Less Interest expense
$ 2 500
3 500
6 000
$ 265 000
(28 700)
236 300
2
$ 500
52 200
87 700
140 400
9 800
780 000
95 000
884 800
$ 1 025 200
$ 82 300
149 200
50 000
52 100
18 000
351 600
Non-current liabilities
Long-term borrowings******
Deferred tax liability
Long-term provisions
Total non-current liabilities
Total liabilities
200 000
18 400
16 200
234 600
$ 586 200
Net assets
$ 439 000
EQUITY
Share capital
Reserves
Retained earnings
Total equity
$ 200 000
110 000
129 000
$ 439 000
Workings:
*Trade and other receivables:
Accounts receivable
Allowance for doubtful debts
Prepaid insurance
**Property, plant and equipment:
Land
Buildings
Plant and equipment
Accumulated depreciation
***Goodwill:
Goodwill
Accumulated impairment
******Long-term borrowings:
Mortgage loan
Less instalment payable 1 March 2016
$ 58 000
(12 800)
7 000
52 200
$ 220 000
380 000
$ 222 500
(42 500)
180 000
780 000
$ 105 000
(10 000)
95 000
$ 2 800
69 500
10 000
82 300
$ 69 200
80 000
149 200
$ 250 000
(50 000)
200 000
C.
BLACK HOLE LTD
Statement of Changes in Equity
for the year ended 30 June 2015
Share
capital
$ 100 000
General
Reval. Retained
Total
reserve surplus earnings
- $ 46 500 $ 128 400 $ 274 900
100 000
$ 200 000
- 38 500
55 600
94 100
- 100 000
- (20 000) (20 000)
- (10 000) (10 000)
25 000
- (25 000)
$ 25 000 $ 85 000 $ 129 000 $ 439 000
Dividends: 30 cents per share (assuming shares issued during the year entitled to
dividends paid and declared).
Outline the different treatments for accounting and tax purposes of the
following items:
(a) depreciation of non-current assets
(b) goodwill
(c) long-service leave payable
(d) allowance for doubtful debts
(e) entertainment costs
(f) prepaid insurance
(g) warranties liability
(h) rent received in advance.
(a) The accounting treatment for depreciation as per AASB 116 is to allocate the
depreciable amount of the asset on a systematic basis over the assets useful life.
The tax treatment is based on a set of rates provided by the tax office which is
usually different to the accounting depreciation rates.
(b) Purchased goodwill is for accounting purposes recognised and then tested for
impairment. For tax purposes, write-downs of goodwill are not allowed as a
deduction. Note AASB 112 provides an exclusion in this regard to temporary
differences. (See 6.4.3 of text).
(c) Long service leave is an accounting expense that is recognised as it is incurred,
however, for tax purposes it is only recognised as an allowable deduction when
the leave is actually taken by an employee and paid in cash.
(d) Doubtful/bad debts are recognised as an accounting expense when the likelihood
of recovering a debt is doubtful, whereas for tax purposes the deduction will only
be allowed when the debt is written out of the accounting records as bad.
(e) Entertainment expenses are an accounting expense, but for tax purposes are not an
allowable deduction.
(f) Prepaid insurance is recognised as an asset for accounting purposes and then
charged to expense over time. The tax treatment is to record the amount prepaid
as an allowable deduction immediately.
(g) Warranty expenses are recognised on the sale of the inventory for accounting
purposes, whereas for tax purposes the deduction is not allowed until the
inventory has been returned to be fixed and a warranty cost has been incurred.
(h) Rent received in advance is regarded as a liability for accounting purposes and
then recorded as income (revenue) over time. The common tax treatment is to
record the amount received in advance as taxable income immediately.
1
PRACTICE QUESTIONS
QUESTION 6.14
BARTLE FRERE LTD
A.
Taxable Income
for year ended 30 June 2014
Accounting profit before tax
Add
Bad debts expense
Depreciation expense plant
Long service leave
Annual leave
Office supplies used
Entertainment
Depreciation buildings
Rent received in advance
$600 000
60 000
50 000
45 000
30 000
15 000
18 000
8 000
35 000
861 000
Deduct
Rent revenue
Government grant received
Depreciation expense of plant for tax
Bad debts written off
Long service leave paid
Annual leave paid
Office supplies paid for
30 000
10 000
75 000
45 000
30 000
20 000
18 000
228 000
633 000
$189 900
Taxable income
Current tax liability = 30% x $633 000
Dr
Cr
189 900
189 900
40 000
60 000
100 000
Revenue
Ending balance
20 000
35 000
55 000
Cash
Ending balance
45 000
45 000
90 000
Cash
Ending balance
30 000
30 000
60 000
Accs Receivable
Ending balance
$185 000
(75 000)
110 000
Carrying
Amount
$
Assets
Cash
Inventory
Receivables
Supplies
Plant
Buildings
Goodwill
Liabilities
A/cs payable
LSL payable
Annual leave
payable
Rent in adv
Total
temporary
differences
Excluded
differences
Net
temporary
differences
Deferred tax
liability
Deferred tax
asset
Beginning
balances
Movement
during year
Adjustment
Taxable
Temp Diffs
Deductible
Temp
Diffs
$
80 000
170 000
445 000
25 000
240 000
152 000
70 000
(170 000)
(0)
(25 000)
(240 000)
(152 000)
(70 000)
170 000
55 000
0
110 000
0
0
80 000
170 000
500 000
0
110 000
0
0
55 000
290 000
60 000
40 000
0
0
(60 000)
(40 000)
290 000
0
0
60 000
40 000
25 000
(25 000)
25 000
25 000
130 000
152 000
70 000
377 000
180 000
222 000
155 000
180 000
46 500
54 000
(38 100)
(40 500)
-
8 400Cr
13 500 Dr
The journal entry required for the year ended 30 June 2014 would be:
Deferred Tax Asset
Deferred Tax Liability
Income Tax Exp/Income
Dr
Cr
Cr
13 500
8 400
5 100
Dr
Cr
Cr
*6 750
**6 350
400
The current tax liability would now be recorded by the following entry (assuming that
the entry had not been made previously)
Income Tax Expense
Current Tax Liability
$633 000 x 35%
Dr
Cr
221 550
221 550
The entry from the second worksheet would now appear as follows, as the change in
tax rate appears as a movement at the bottom of the worksheet:
155 000
Net
temporary
differences
Deferred tax
liability
(35%)
Deferred tax
asset (35%)
Beginning
balances
Movement
during year
Adjustment
180 000
54 250
63 000
Dr
Cr
Cr
(38 100)
(40 500)
(6 350)
(6 750)
9 800Cr
15 750 Dr
15 750
9 800
5 950
Dr
Cr
15 000
Dr
Cr
10 000
Machine A
Machine B
Cost
Accum depn
Fair value
Increment
300 000
135 000
165 000
180 000
15 000
15 000
10 000
Cost
Accum depn
200 000
40 000
160 000
155 000
5 000
Fair value
Decrement
Dr
Cr
135 000
Machine A
Dr
Gain on revaluation of machinery (OCI) Cr
(Revaluation of asset)
15 000
135 000
15 000
Dr
Cr
4 500
Dr
Cr
15 000
4 500
4 500
10 500
Dr
Cr
40 000
Dr
Cr
5 000
Dr
Cr
15 000
Dr
Cr
15 500
Machine A
Carrying amount
Fair value
Decrement
Machine B
Carrying amount
Fair value
Decrement
40 000
5 000
30 June 2013
$
165 000
163 000
2 000
15 000
15 500
$
139 500
136 500
3 000
Dr
Cr
15 000
Dr
Cr
2 000
600
1 400
600
15 000
2 000
600
2 000
Dr
Cr
15 500
Dr
Cr
3 000
15 500
3 000
$125 000
840 000
550 000
364 000
225 000
124 000
2 228 000
80 000
$2 148 000
Accounts payable
Consideration transferred:
Shares:
Cash:
Land:
Goodwill
$1 400 000
615 500
220 000
$2 235 500
$87 500
Land
Gain
(Re-measurement as part of consideration
transferred in a business combination)
Accounts receivable
Land
Buildings
Farm equipment
Irrigation equipment
Vehicles
Goodwill
Accounts payable
Share capital
Payable to Warehou Ltd
Land
(Acquisition of net assets of Warehou Ltd)
Dr
Cr
140 000
140 000
Dr
Dr
Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
125 000
840 000
550 000
364 000
225 000
124 000
87 500
80 000
1 400 000
615 500
220 000
Dr
Cr
615 500
Acquisition-related expenses
Cash
(Payment of acquisition-related costs)
Dr
Cr
25 000
Share capital
Cash
(Share issue costs)
Dr
Cr
18 000
615 500
25 000
18 000
Factory
Brand
Carrying
Amount
Proportion
Allocation
of Loss
Net Carrying
Amount
250 000
50 000
300 000
5/6
1/6
22 500
4 500
27 000
227 500
45 500
Dr
Cr
77 000
50 000
Cr
22 500
Cr
4 500
10. Why are some adjustment entries in the previous periods consolidation worksheet
also made in the current periods worksheet?
The consolidation worksheet is just a worksheet. The consolidation worksheet entries do not
affect the underlying financial statements or the accounts of the parent or the subsidiary.
Hence, if last years profits were required to be adjusted on consolidation, then potentially
retained earnings needs to be adjusted in the current period.
Similarly, a BCVR entry to recognise the land on hand at acquisition at fair value is made in
the consolidation worksheet for each year that the land remains in the subsidiary. The entry
does not change from year to year. Again the reason is that the adjustment to the carrying
amount of the land is only made in a worksheet and not in the actual records of the subsidiary
itself.
PRACTICE QUESTIONS
QUESTION 16.3
PYXIS LTD GEMINI LTD
At 1 July 2013:
Net fair value of identifiable assets
and liabilities of Gemini Ltd
Consideration transferred
Goodwill
=
=
=
Dr
Cr
Cr
8 000
Land
Deferred tax liability
Business combination valuation reserve
Dr
Cr
Cr
15 000
Dr
Cr
Cr
Cr
50 000
Goodwill
Business combination valuation reserve
Dr
Cr
9 400
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
2 400
5 600
4 500
10 500
40 000
3 000
7 000
19 400
Pre-acquisition entries
Retained earnings (1/7/13)
Share capital
General reserve
Business combination valuation reserve
Shares in Gemini Ltd
218 500
Dr
Cr
8 000
Cr
Land
Deferred tax liability
Business combination valuation reserve
Dr
Cr
Cr
15 000
Dr
Cr
Cr
Cr
50 000
Depreciation expense
Accumulated depreciation
(10% x $10 000)
Dr
Cr
1 000
Dr
Cr
300
Goodwill
Business combination valuation reserve
Dr
Cr
9 400
2 400
5 600
4 500
10 500
40 000
3 000
7 000
1 000
300
9 400
Pre-acquisition entries
The pre-acquisition entries are affected by:
- transfer from general reserve $25 000
- transfer from business combination valuation reserve
Retained earnings (1/7/13)
Share capital
General reserve
Business combination valuation reserve
Shares in Gemini Ltd
Dr
Dr
Dr
Dr
Cr
36 000
100 000
50 000
32 500
Dr
Cr
25 000
Dr
Cr
5 600
218 500
25 000
5 600
PRACTICE QUESTIONS
QUESTION 17.2
ADDISON LTD ERIN LTD
(a)
(b)
(c)
(d)
Sales revenue
Cost of sales
Inventory
Dr
Cr
Cr
15 000
Dr
Cr
1 500
Sales revenue
Cost of sales
Dr
Cr
15 000
Sales revenue
Cost of sales
Inventory
Dr
Cr
Cr
15 000
Dr
Cr
750
Dr
Dr
Cr
4 200
1 800
10 000
5 000
1 500
15 000
12 500
2 500
750
6 000
(e)
Dr
Dr
Cr
20 000
5 000
Land
Dr
Cr
5 000
Dr
Cr
1 500
Dr
Cr
12 000
Dr
Cr
Cr
12 000
Dr
Cr
2 000
Dr
Cr
600
Accumulated depreciation
Depreciation expense
Dr
Cr
200
Dr
Cr
60
Sales revenue
Cost of sales
Machinery
Dr
Cr
Cr
6 000
Dr
Cr
600
Accumulated depreciation
Depreciation expense
Dr
Cr
200
Dr
Cr
60
25 000
OR
Loss on sale of land
(f)
5000
1 500
12 000
10 000
2 000
OR
(g)
2000
600
200
60
4 000
2 000
600
200
60
60%
B Ltd
C Ltd
A Ltd 80%
DNCI 20%
A Ltd 48%
DNCI 40%
INCI 12%
The DNCI in B Ltd receives a share of the whole of the equity of B Ltd which
includes equity relating to the asset Shares in C Ltd. This asset reflects the assets of
C Ltd that were on hand in C Ltd at the date B Ltd acquired its shares in C Ltd. The
pre-acquisition equity of C Ltd also relates to these assets. As the DNCI receives a
share of the equity of B Ltd relating to these assets, and as the DNCI in B Ltd is the
same party as the INCI in C Ltd, to give the DNCI a share of all the equity of B Ltd as
well as the INCI in C Ltd getting a share of the pre-acquisition equity of C Ltd would
double-count the share of equity to the NCI. As the investment account Shares in C
Ltd only relates to the pre-acquisition equity of C Ltd, the INCI is then entitled to a
share of the post-acquisition equity of C Ltd.
PRACTICE QUESTION
Exercise 19.3 Consolidation worksheet entries, multiple subsidiaries
LAOS LTD MALDIVES LTD MALAYSIA LTD
70%
Laos Ltd
60%
Maldives Ltd
DNCI
30%
Malaysia Ltd
DNCI 40%
INCI
18%
Dr
Dr
Dr
Cr
28 000
70 000
2 000
100 000
70 000
3
STAGE 2 THE INTRAGROUP TRANSACTIONS AND BALANCES
3. Dividends paid
Maldives Ltd: 70% x $10 000 = $7 000
Dividend revenue
Dividend paid
Dr
Cr
7 000
Dr
Cr
3 000
7 000
3 000
Dr
Cr
Cr
20 000
Cost of sales
Inventory
Deferred tax asset
Income tax expense
Dr
Cr
750
17 500
2 500
750
Dr
Cr
Cr
25 000
Dr
Cr
600
Accumulated depreciation
Depreciation expense
(30% x $2 000)
Dr
Cr
600
Dr
Cr
180
23 000
2 000
600
6. Depreciation
600
180
4
STAGE 3 THE NCI
Dr
Dr
Cr
12 000
30 000
42 000
Dr
Dr
Cr
12 000
32 000
44 000
Dr
Cr
1 800
1 800
Dr
Cr
2 000
Dr
Cr
900
2 000
900
Note retained earnings decreases over the period in this example instead of increasing.
Note there are no eliminations of adjustment entries in the acquisition stage or intra-group
stage in this example where we have adjusted or eliminated post-acquisition profits of the
subsidiaries up until 30/06/11.
5
Step 3 the current year 1/07/11 to 30/06/12
Dr
Cr
NCI
Dividend paid
(30% x $10 000)
Dr
Cr
3 675
3 675
17 000
(3 000)
(1 750)
12,250
See journal 3
See journal 4
3 000
3 000
Dr
Cr
6 408
Dr
Cr
2 884
NCI
Dividend paid
(40% x $5 000)
Dr
Cr
6 408
2 884
17 000
(1,400)
420
16 020
See journal 5
See journal 6
2 000
2 000
REVIEW QUESTIONS
10. Explain why equity accounting is sometimes referred to as one-line consolidation.
Equity accounting is similar to consolidation in that:
- both recognise the investors share of post-acquisition equity in the income statement.
The consolidation method recognises the MI share as well, but divides equity into
parent and MI share.
- both adjust for the effects of inter-entity transactions
- in the income statement, the share of profits/losses of an associate is similar to the
parents share of the post-acquisition equity of a subsidiary however, under the equity
method this is not taken against individual accounts but there is a one-line total.
- in the balance sheet, the investment in the associate is adjusted for the increase in the
investors share of the net assets of the associate similar to the parents share of the
net assets of a subsidiary. However, under equity accounting, there is no recognition of
the individual assets and liabilities of the associate, rather, there is a one-line
recognition.
PRACTICE QUESTIONS
Question 20.1
ACOUSTIC LTD BASS LTD
30%
Acoustic Ltd
At 1 July 2011:
Net fair value of identifiable assets
and liabilities of Bass Ltd
Net fair value acquired
Cost of investment
Goodwill
Bass Ltd
=
=
=
=
=
$150 000
30% x $150 000
$45 000
$50 000
$5 000
2011 2012
Dr
Cr
50 000
Cash
Dr
Cr
24 000
Dr
Cr
15 000
Cash
Dr
Cr
4 500
2012 2013
2013 2014
50 000
24 000
15 000
4 500
Dr
Cr
13 500
Cash
Dr
Cr
3 000
Dr
Cr
12 000
13 500
3 000
12 000
Dr
Cr
15 000
Dividend revenue
Investment in Bass Ltd
(30% x $80 000
Dr
Cr
24 000
Dr
Cr
9 000
Dr
Cr
13 500
Dividend revenue
Investment in Bass Ltd
(30% x $15 000)
Dr
Cr
4 500
Dr
Cr
Dr
Cr
12 000
Dividend revenue
Investment in Bass Ltd
(30% x $10 000)
Dr
Cr
3 000
15 000
24 000
30 June 2013:
9 000
13 500
4 500
30 June 2014:
12 000
3 000
REVIEW QUESTIONS
6.
Accountants must produce timely, accurate and reliable reports of the true position of
the company.
The accounting function will need to provide directors (as well as senior managers)
with insights into the strategic factors at play in their organisations.
Auditors play a key role in the external flow of information that they provide and the
expectation that they will be independent and report breaches.
12.
PRACTICE QUESTIONS
Question 20.1
ACOUSTIC LTD BASS LTD
30%
Acoustic Ltd
At 1 July 2011:
Net fair value of identifiable assets
and liabilities of Bass Ltd
Net fair value acquired
Cost of investment
Goodwill
Bass Ltd
=
=
=
=
=
$150 000
30% x $150 000
$45 000
$50 000
$5 000
2011 2012
Dr
Cr
50 000
Cash
Dr
Cr
24 000
Dr
Cr
15 000
Cash
Dr
Cr
4 500
2012 2013
2013 2014
50 000
24 000
15 000
4 500
Dr
Cr
13 500
Cash
Dr
Cr
3 000
Dr
Cr
12 000
13 500
3 000
12 000
Dr
Cr
15 000
Dividend revenue
Investment in Bass Ltd
(30% x $80 000
Dr
Cr
24 000
Dr
Cr
9 000
Dr
Cr
13 500
Dividend revenue
Investment in Bass Ltd
(30% x $15 000)
Dr
Cr
4 500
Dr
Cr
Dr
Cr
12 000
Dividend revenue
Investment in Bass Ltd
(30% x $10 000)
Dr
Cr
3 000
15 000
24 000
30 June 2013:
9 000
13 500
4 500
30 June 2014:
12 000
3 000