Question 1(20 marks) January Ltd's equity at 30 June 2016 was as follows: 400000 ordinary shares, issued
Question:
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Question 1(20 marks)
January Ltd's equity at 30 June 2016 was as follows:
400000 ordinary shares, issued at $1.60, fully paid
500000 ordinary shares, issued at $2, called to $1.20
180000 redeemable preference shares, issued at $1, fully paid
Calls in advance (10000 ordinary shares)
Share issue costs
General reserve
Retained earnings
$640000
600000
180000
8000
(7000)
60000
310000
The following events occurred during the year ended 30 June 2017:
2016
July
15
The final call, due 31 August, was made on the partly paid shares.
Aug.
31
All call money was received, except for that due on 24000 shares.
Sept.
10
In accordance with the constitution, the shares on which the call was unpaid were forfeited. The company is entitled to keep any balance from forfeiture of shares.
Oct.
1
The company offered ordinary shareholders 1 option (at a price of 80 cents per option) for every 5 shares held. Each option entitled the holder to buy 1 ordinary share at a price of $1.50 per share, exercisable on or before 15 April 2017.
31
70000 options were taken up by shareholders, for which all money due was received.
2017
Jan.
3
A prospectus was issued, inviting applications for 100000 ordinary shares at an issue price of $2, payable in full on application. The purpose of the issue was to fund the redemption of the preference shares. The issue was underwritten at a commission of $6700.
31
The issue closed fully subscribed, with all money due having been received.
Feb.
5
The 100000 shares were allotted, and the underwriting commission was paid.
18
The directors resolved to redeem the preference shares out of the proceeds of the January share issue for $1.06 per share.
26
Cheques were issued to the preference shareholders.
April
15
52000 shares were issued as a result of 52000 options having been exercised, for which money had been received. The unexercised options lapsed.
Required:
Prepare general journal entries to record the above transactions.
Question 2(30 marks)
At 30 June 2018, Spencer Ltd had the following temporary differences:
Asset or liability
Carrying amount ($000)
Tax base ($000)
Temporary difference ($000)
Computers at cost
300
300
Accumulated depreciation
(60)
(100)
Computers (net)
240
200
40
Accounts receivable
100
100
Allowance for doubtful debts
(10)
0
Accounts receivable (net)
90
100
10
Provision for warranty costs
30
0
30
Provision for employee benefits (LSL)
20
0
20
The following information is available for the year ending 30 June 2019.
Statement of comprehensive income for Specialist Engineering Ltd for the year ended 30 June 2019
$000
Revenue
4 000
Cost of goods sold expense
(1 800)
Depreciation expense
(60)
Warranty expense?
(90)
Bad and doubtful debts expense
(25)
Other expenses
(1 375)
Profit before tax
650
Additional information:
Spencer Ltd depreciates computers over 5 years under accrual accounting but the ATO does it over 3 years. Both the company and the ATO uses the straight-line method.
During the year Spencer Ltd wrote off bad debts amounting to $15 000.
Warranty costs of $70 000 were paid during the year.
No amounts were paid for long-service leave during the year.
There was no acquisition of plant and equipment during the year.
The tax rate as at 30 June 2018 and 30 June 2019 was 30 per cent.
The following information is extracted from the statement of financial position at 30 June 2019:
$000
Assets
Accounts receivable
120
Allowance for doubtful debts
(20)
Liabilities
Provision for warranty costs
50
Provision for employee benefits (LSL)
30
Required:
a) Calculate the amount of each of Spencer Ltd's temporary differences at 30 June 2018, and state whether it is deductible or taxable.(10 marks)
b) Determine the balance of the deferred tax liability and deferred tax asset as at 30June2018 and provide the journal entry.(2 marks)
c)Calculate Spencer Ltd's taxable income for the year ended 30June2019 and provide the journal entry.(5 marks)
d) Calculate the deferred tax for the year ended 30June2019 and provide the journal entry.(13 marks)
Question 3(30 marks)
On 1 August 2014, Erik Ltd acquired 10% of the shares in Finn Ltd for $8 000. Erik Ltd used the fair value method to measure this investment with movements in fair value being recognised in profit or loss. At 1 July 2016, the fair value of this investment was $15 400. The original investment in Finn Ltd was due to the fact that Finn Ltd was undertaking research into particular microbiological elements that could influence the profitability of Erik Ltd. With the continuing success of this research, Erik Ltd decided to acquire the remaining shares (cum div.) in Finn Ltd.
On 1 July 2016, Erik Ltd made an offer to buy the remaining shares in Finn Ltd for $151 000 cash. This offer was accepted by the shareholders of Finn Ltd. On 1 July 2016, immediately after the business combination, the statement of financial position of Finn Ltd was as follows:
Eric Ltd
Finn Ltd
Share capital
$130,000
$90,000
General reserve
56,500
12,000
Retained earnings
93,500
36,000
Total equity
280,000
138,000
Dividend payable
25,000
12,600
Other liabilities
75,000
25,000
Total liabilities
100,000
37,600
Total equity and liabilities
380,000
175,600
Cash
11,000
20,600
Receivables
25,200
20,000
Other assets
10,000
8,000
Shares in Finn Ltd
153,800
0
Inventory
55,000
42,000
Plant and equipment
210,000
107,000
Accumulated depreciation
(85,000)
(22,000)
Total assets
380,000
175,600
On analysing the financial statements of Finn Ltd, Erik Ltd determined that all the assets and liabilities recorded by Finn Ltd were shown at amounts equal to their fair values except for:
Carrying amount
Fair value
Plant and equipment (cost $46 000)
$35 000
$43 000
Inventory
42 000
46 000
The plant and equipment is expected to have a further 4-year life and is depreciated on a straight-line basis. The inventory was all sold by 30 June 2017.
Finn Ltd had expensed all the outlays on research and development. Erik Ltd placed a fair value of $12 000 on this asset. Finn Ltd also had reported a contingent liability at 30June2016 in relation to claims by customers for damaged goods. Erik Ltd placed a fair value of $3 000 on these claims. The research and development is amortised evenly over a 10-year period. The claims by customers were settled in May 2017 for $2 800.
The company tax rate is 30%.
Required
A. Prepare the consolidation worksheet entries of Erik Ltd at 1 July 2016, immediately after the business combination and complete the worksheet below.
B. Prepare the consolidation worksheet entries at 30 June 2017.
Erik
Ltd
Finn
Ltd
Adjustments
Group
Dr
Cr
Cash
11 000
20 600
Receivables
25 200
20 000
Other assets
10 000
8 000
Inventory
55 000
42 000
Shares in Finn Ltd
153 800
0
Plant
210 000
107 000
Accum depreciation
(85 000)
(22 000)
380 000
175 600
Dividend payable
25 000
12 600
Other liabilities
75 000
25 000
Share capital
130 000
90 000
Retained earnings
93 500
36 000
General reserve
56 500
12 000
Business combination valuation reserve
-
-
380 000
175 600
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