Case Study 1

The trial balance of the partnership of Woods Brothers trading as Woods Hardware as at 21 June 2018 disclosed:

Inventory

$145,000

Accounts receivable

225,000

Land at cost

50,000

Buildings at cost

80,000

Accumulated depreciation -buildings

$ 20,000

Fittings and equipment

60,000

Accumulated depreciation -fittings and equipment

25,000

Motor vehicles

40,000

Accumulated depreciation - motor vehicles

24,000

Accounts payable

181,000

Bank overdraft

100,000

Capital - John Woods

125,000

Capital - Thomas Woods

125,000

600,000

600,000

At that date Woods Industries Ltd was incorporated to acquire Woods Hardware as a going concern for a purchase consideration of $500,000. The purchase consideration was settled by the issue of fully paid ordinary shares.

The fair value of the assets acquired is:

Land

$ 300,000

Buildings

170,000

Fittings and equipment

NIL

Motor vehicles

5,000

Inventory

100,000

Accounts receivable

200,000

Task 1

General journal entries, including cash, in the books of Woods Industries Ltd to record:

a)The purchases of the business (entries to comply with AASB3 Business Combinations); and

b)The settlement of the purchase consideration.

Case Study 2

The following relates to Artline Ltd.

Net profit before tax is $80,000. A number of items included in the determination of profit have to be treated differently for taxation purposes

Accounting Treatment

Taxation Treatment

$

$

Capital profit on asset sale

15,000

Nil

Transfer to Warranty expense provision

17,000

Nil

Depreciation expense - Plant and Equipment

14,000

16,500

Transfer to Doubtful Debts allowance

13,000

Nil

An extract from the balance sheet at balance day reveals:

Carrying

Tax

Amount

Base

Assets

$

$

Plant and Equipment - at cost

100,000

100,000

Accumulated Depreciation

- 60,000

-62,500

40,000

37,500

Accounts Receivable (net)

73,000

81,000

Liabilities

Provision for Warranty expense

10,000

Nil

Rent received in Advance

7,000

Nil

Additional Information

1. An amount of $7,000 for warranty expenses was paid and charged against the provision. This amount can now be claimed as a taxation deduction.

2. A bad debt for $5,000 has been written off against the allowance for doubtful debts. This amount can now be claimed as a taxation deduction.

3. The rent received in advance has been included in taxable income for the current year.

4. Income tax rate is 30%.

Task 2

Provide:

a.A statement to determine taxable income; and

b.All necessary general journal entries to record income tax expense and the tax effect of temporary differences. Present your workings for temporary differences in a table.