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

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 the following balances:

2020

2019

Assets

Cash

$14,300

$10,200

Accounts receivable

18,000

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

?

24,060

Goodwill

12,000

12,000

Goodwill - accumulated impairment losses

(5,000)

(3,000)

Liabilities

Accounts payable

27,000

24,500

Current tax liability

?

7,600

Provision for employee benefits

12,500

8,000

Provision for warranties

8,700

4,200

Mortgage loan

160,000

150,000

Deferred tax liability

?

4,275

Additional information:

1. A tax deduction for development costs on 125% of the amount spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.
3. A tax deduction of $10,000 (10%) can be claimed on equipment.
5. The motor vehicle is depreciated at 25% for tax purposes.
7. The equipment sold on 1 July 2019 cost $20,000 when it was purchased 3 years before the date of sale.
9. Deductions are only available for annual leave when amounts are paid and not as they are accrued.
11. Actual amounts paid for insurance are allowed as a tax deduction.
13. No deduction is allowed for taxation purposes in relation to entertainment, fines, and penalties.
15. Rent revenue and interest are taxable when amounts are received.
17. Depreciation of buildings is not allowed as a tax deduction.
19. The deferred tax asset (DTA) balance at 30 June 2019 comprised:
20. a) DTAs relating to temporary differences: $10,110
21. b) DTAs relating to carried forward tax losses: $13,950
23. 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.
25. 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)
3. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2020.
4. Include all accounts and net balances where appropriate.(13 marks)
6. 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 director wishes to sell the business to a long-standing competitor, Boots Ltd. The financial statements of Flashy Ltd at 1 July 2019 contained the following information:

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

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

48,000

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)