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Delta prepares financial statements to 31 March each year. Delta applies IAS 12 Income Taxes and IAS 41 - Agriculture in the preparation of its financial statements. IAS 12 requires that entities recognise deferred tax liabilities on taxable temporary differences and, in certain circumstances, deferred tax assets on deductible temporary differences. Temporary differences are determined by comparing the carrying amount of an asset or liability with its tax base. IAS 41 sets out the principles of recognition and measurement for biological assets and harvested produce. Note 1 - Temporary differences On 1 October 20X4, Delta purchased an item of plant for $4 million. The estimated useful life of the plant was five years, with no residual value. Under tax legislation in the country in which Delta is located, purchases of plant attract a tax deduction of 50% of the cost in the accounting period in which the plant is purchased and 25% of the cost in each of the following two accounting periods. On 1 July 20X4, Delta borrowed $20 million from a bank. The loan attracts interest at a rate of 8% per annum on the $20 million borrowed. The interest is payable annually in arrears. The loan is repayable on 30 June 20X9. Under tax legislation in the country in which Delta is located, a tax deduction for the interest on loans is available in the accounting periods in which the interest is actually paid. On 1 April 20X4, Delta purchased some land for $15 million. Delta uses the revaluation model to measure land in its financial statements. On 31 March 20X5, Delta estimated that the value of the land was $18 million and this amount was recognised in Delta's financial statements. Under tax legislation in the country in which Delta is located, gains on the value of land are not taxable unless or until the land is sold. Delta has no intention of disposing of this land in the foreseeable future. The rate of corporate income tax in the country in which Delta is located is 20% per annum. The directors of Delta anticipate that Delta will make taxable profits for the foreseeable future. Delta had no temporary differences at 31 March 20X4. (12 marks) Note 2 - Agricultural activity Delta is a farming entity specialising in milk production. Cows are milked on a daily basis. Milk is kept in cold storage immediately after milking and sold to retail distributors on a weekly basis. On 1 April 20X4, Delta had a herd of 500 cows which were all three years old. During the year, some of the cows became sick and on 30 Sentember 20X420 which the interest is actually paid. On 1 April 20X4, Delta purchased some land for $15 million. Delta uses the revaluation model to measure land in its financial statements. On 31 March 20X5, Delta estimated that the value of the land was $18 million and this amount was recognised in Delta's financial statements. Under tax legislation in the country in which Delta is located, gains on the value of land are not taxable unless or until the land is sold. Delta has no intention of disposing of this land in the foreseeable future. The rate of corporate income tax in the country in which Delta is located is 20% per annum. The directors of Delta anticipate that Delta will make taxable profits for the foreseeable future. Delta had no temporary differences at 31 March 20X4. (12 marks) Note 2 - Agricultural activity Delta is a farming entity specialising in milk production. Cows are milked on a daily basis. Milk is kept in cold storage immediately after milking and sold to retail distributors on a weekly basis. On 1 April 20X4, Delta had a herd of 500 cows which were all three years old. During the year, some of the cows became sick and on 30 September 20X4 20 cows died. On 1 October 20X4, Delta purchased 20 replacement cows at the market for $210 each. These 20 Cows were all one year old when they were purchased. On 31 March 20X5, Delta had 1,000 litres of milk in cold storage which had not been sold to retail distributors. The market price of milk at 31 March 20X5 was $2 per litre. When selling the milk to distributors, Delta incurs selling costs of 10 cents per litre. These amounts did not change during March 20X5 and are not expected to change during April 20X5. Information relating to fair value and costs to sell is given below: Date Fair value of a dairy cow which is: Costs to sell a cow at market 1 year old 112 years old 3 years old 4 years old $ $ $ $ $ 1 April 20X4 200 220 270 250 10 1 October 20X4 210 230 280 260 10 31 March 20x5 215 235 290 265 11 (13 marks) 7 (P.T.O. Required: Using the information in notes 1 and 2, explain, with appropriate computations, how Delta should report these transactions in the financial statements for the year ended 31 March 20X5. consolidated financial statements of Gamma (excluding goodwill on acquisition) was $115 million. Subsidiary X is a single cash-generating unit for impairment purposes. On 31 March 20X5, the value in use of subsidiary X was $135 million and its fair value less costs of disposal was $130 million. (8 marks) Note 2 - Purchase of machine On 1 January 20X4, Gamma entered into a firm commitment to purchase a machine from a supplier whose functional currency is the kroner. This firm commitment was not an onerous contract. The cost of the machine was 14:4 million kroner and the agreed delivery date was 30 June 20X4. Gamma was due to pay 14:4 million kroner to the supplier on 31 July 20X4. On 1 January 20X4, Gamma entered into a forward exchange contract with a bank to purchase 14-4 million kroner for $1.44 million on 31 July 20X4. The forward exchange contract was entered into so as to provide a hedge against the currency risk associated with the firm commitment to purchase the machine. On 30 June 20X4, Gamma took delivery of the machine and immediately brought the machine into use. Gamma estimated that the machine would have a useful life of five years from 30 June 20X4, with no residual value. On 31 July 20X4, Gamma paid 14-4 million kroner to the supplier of the machine and received payment of $360,000 from the bank in settlement of the forward exchange contract (see below). Gamma designated the forward exchange contract as a hedge of the cash flows expected to arise on the purchase of the machine. This contract was a perfectly effective hedge of those cash flows. Gamma wishes to use hedge accounting to reflect the above transactions in its financial statements. Relevant exchange rates and fair values of the forward exchange contract are as follows: Date Exchange rate Fair value of forward contract (kroners to $1) (favourable to Gamma) $'000 1 January 20X4 10 Nil 31 March 20X4 9.6 60 30 June 20X4 9 160 31 July 20X4 8 360 (17 marks) Required: Using the information in notes 1 and 2, explain and show how the two events would be reported in the consolidated financial statements of Gamma for the year ended 31 March 20X5. Gamma prepares consolidated financial statements to 31 March each year. Notes 1 and 2 contain information relevant to these financial statements: Note 1 Impairment of goodwill On 1 April 20X3, Gamma purchased 75% of the equity shares of subsidiary X for a cash payment of $99 million. The fair value of the net assets of subsidiary X on that date was $108 million. Gamma measured the non-controlling interest in subsidiary X using the proportionate method. On 31 March 20X4, Gamma reviewed the goodwill on acquisition of subsidiary X for impairment but no impairment was evident. On 31 March 20X5, the carrying amount of the net assets of subsidiary X in the consolidated financial statements of Gamma (excluding goodwill on acquisition) was $115 million. Subsidiary X is a single cash-generating unit for impairment purposes. On 31 March 20X5, the value in use of subsidiary X was $135 million and its fair value less costs of disposal was $130 million. (8 marks) Note 2 Purchase of machine On 1 January 20X4, Gamma entered into a firm commitment to purchase a machine from a supplier whose functional currency is the kroner. This firm commitment was not an onerous contract. The cost of the machine was 14:4 million kroner and the agreed delivery date was 30 June 20X4. Gamma was due to pay 14.4 million kroner to the supplier on 31 July 20X4. On 1 January 20X4, Gamma entered into a forward exchange contract with a bank to purchase 14.4 million kroner for $1.44 million on 31 July 20X4. The forward exchange contract was entered into so as to provide a hedge against the currency risk associated with the firm commitment to purchase the machine. On 30 June 20X4, Gamma took delivery of the machine and immediately brought the machine into use. Gamma estimated that the machine would have a useful life of five years from 30 June 20X4, with no residual value. On 31 July 20X4, Gamma paid 14.4 million kroner to the supplier of the machine and received payment of $360,000 from the bank in settlement of the forward exchange contract (see below). Gamma designated the forward exchange contract as a hedge of the cash flows expected to arise on the purchase of the machine. This contract was a perfectly effective hedge of those cash flows. Gamma wishes to use hedge accounting to reflect the above transactions in its financial statements. Relevant exchange rates and fair values of the forward exchange contract are as follows: Date Exchange rate Fair