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\fQ 1. Income Tax (10 marks) Accounting profit is based on a full accrual model whereas taxable profit is based on a partial accrual model. Explain this comment by reference to the following items: long service leave (2.5 marks) doubtful debts (2.5 marks) prepaid insurance (2.5 marks) rent received in advance. (2.5 marks) (Maximum 250 words. No references are required) Q 2. Consolidation (40 marks) Financial information at 30 June 2016 of Starr Ltd and its subsidiary company, Lennon Ltd include that shown below. At 1 July 2013, the date Starr Ltd acquired its 80% shareholding in Lennon Ltd, all the identifiable assets and liabilities of Lennon Ltd were at fair value except for the following assets: Carrying Amount $ 50 000 30 000 Plant (cost $75 000) Land Fair Value $ 55 000 38 000 The plant has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2013 was sold on 1 February 2014 for $40,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings. Starr Ltd uses the full goodwill method. July 2013 was $31,500. The fair value of the non-controlling interest at 1 Financial Information at 30 June 2016 Sales revenue Other revenue: Debenture interest Management and consulting fees Dividend from Lennon Ltd Total revenues Cost of sales Manufacturing expenses Depreciation on plant Administrative Financial Other expenses Total expenses Profit before tax Starr Ltd $316,000 Lennon Ltd $220,000 5,000 5,000 12,000 338,000 220,000 130,000 90,000 15,000 15,000 11,000 14,000 275,000 36,000 85,000 60,000 15,000 8,000 5,000 12,000 185,000 35,000 2 Starr Ltd (25,000) 38,000 50,000 88,000 Lennon Ltd (17,000) 18,000 45,000 63,000 3,000 10,000 10,000 23,000 10,000 5,000 15,000 $ 65,000 50,000 13,000 300,000 200,000 25,000 10,000 90,000 753,000 $ 48,000 10,000 10,000 100,000 100,000 17,000 5,000 7,000 12,000 309,000 $ 50,000 100,000 131,600 120,000 (65,000) 76,000 (40,000) 90,000 85,400 201,000 4,000 753,000 $ 60,000 102,000 (55,000) 55,000 (25,000) 85,000 30,000 57,000 309,000 Income tax expense Profit Retained earnings (1/07/15) Transfer to general reserve Interim dividend paid Final dividend declared Retained earnings (30/06/16) General reserve Other components of equity Share capital Debentures Current tax liability Dividend payable Deferred tax liability Other liabilities Financial assets Debentures in Lennon Ltd Shares in Lennon Ltd Plant (cost) Accumulated depreciation - plant Other depreciable assets Accumulated depreciation Inventory Deferred tax asset Land Dividend receivable Additional information i. At the date of acquisition of 80% of its issued shares by Starr Ltd, the equity of Lennon Ltd was: Share Capital (100,000 shares) $100,000 General reserve 3,000 Retained earnings 37,000 ii. Inventory on hand of Lennon Ltd at 1 July 2015 included a quantity priced at $10,000 that had been sold to Lennon Ltd by its parent. This inventory had cost Starr Ltd $7,500. It was all sold by Lennon Ltd during the year. iii. During the year, intragroup sales by Lennon Ltd to Starr Ltd were $60,000. iv. An item of inventory of Lennon Ltd has been sold to Starr Ltd for $20,000 on 1 January 2015. Starr Ltd has treated this item as an addition to plant and machinery. The item was put into service as soon as it was received by Starr Ltd and depreciation charged at 20% p.a. The item had been fully imported by Lennon Ltd at a total cost of $15,000. 3 v. Management and consulting fees derived by Starr Ltd were all from Lennon Ltd and represented charges made for administration $2,300 and technical services $2,700, with the latter charged by Lennon Ltd to manufacturing expenses. vi. All debentures issued by Lennon Ltd are held by Starr Ltd. vii. Other components of equity relate to movements in the fair values of the financial assets. The balance of this account at 1 July 2015 was $10,000 (Starr Ltd) and $8,000 (Lennon Ltd). viii. The tax rate is 30%. Required 1. Prepare: i. ii. iii. The acquisition analysis (using the full goodwill method); The business combination valuation entries; The pre-acquisition entries. (6.5 marks) (4.75 marks) (2.5 marks) 2. Calculate NCI share of equity at: i. ii. iii. 1 July 2013; 1 July 2013 - 30 June 2015; 1 July 2015 - 30 June 2016. (1.5 marks) (2.25 marks) (2.5 marks) 3. For the year ended 30 June 2016, prepare: i. The consolidation journal entries (10 marks) ii. The consolidation worksheet (10 marks) 4 5