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

TACC505NA T5 2017 Assignment Question 1 (20 marks) January Ltd's equity at 30 June 2016 was as follows: 400 000 ordinary shares, issued at $1.60, fully paid 500 000 ordinary shares, issued at $2, called to $1.20 180 000 redeemable preference shares, issued at $1, fully paid Calls in advance (10 000 ordinary shares) Share issue costs General reserve Retained earnings $640 000 600 000 180 000 8 000 (7 000) 60 000 310 000 The following events occurred during the year ended 30 June 2017: 2016 July Aug. Sept. Oct. 2017 Jan. Feb. April 15 The final call, due 31 August, was made on the partly paid shares. 31 All call money was received, except for that due on 24 000 shares. 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. 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 70 000 options were taken up by shareholders, for which all money due was received. 3 31 5 18 26 15 A prospectus was issued, inviting applications for 100 000 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. The issue closed fully subscribed, with all money due having been received. The 100 000 shares were allotted, and the underwriting commission was paid. The directors resolved to redeem the preference shares out of the proceeds of the January share issue for $1.06 per share. Cheques were issued to the preference shareholders. 52 000 shares were issued as a result of 52 000 options having been exercised, for which money had been received. The unexercised options lapsed. Required: Prepare general journal entries to record the above transactions. 1 Question 2 At 30 June 2018, Spencer Ltd had the following temporary differences: Carrying Tax base Asset or liability amount ($000) ($000) Computers at cost 300 300 Accumulated depreciation (60) (100) Computers (net) 240 200 Accounts receivable 100 100 Allowance for doubtful debts (10) 0 Accounts receivable (net) 90 100 Provision for warranty costs 30 0 Provision for employee benefits (LSL) 20 0 (30 marks) Temporary difference ($000) 40 10 30 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 2 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 30 June 2018 and provide the journal entry. (2 marks) c)Calculate Spencer Ltd's taxable income for the year ended 30 June 2019 and provide the journal entry. (5 marks) d) Calculate the deferred tax for the year ended 30 June 2019 and provide the journal entry. (13 marks) 3 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 $130,000 56,500 93,500 280,000 Finn Ltd $90,000 12,000 36,000 138,000 Dividend payable Other liabilities Total liabilities Total equity and liabilities 25,000 75,000 100,000 380,000 12,600 25,000 37,600 175,600 Cash Receivables Other assets Shares in Finn Ltd Inventory Plant and equipment Accumulated depreciation Total assets 11,000 25,200 10,000 153,800 55,000 210,000 (85,000) 380,000 20,600 20,000 8,000 0 42,000 107,000 (22,000) 175,600 Share capital General reserve Retained earnings Total equity 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: Plant and equipment (cost $46 000) Inventory Carrying amount Fair value $35 000 $43 000 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 30 June 2016 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. 4 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 11 000 25 200 10 000 Finn Ltd 20 600 20 000 8 000 55 000 153 800 210 000 (85 000) 380 000 42 000 0 107 000 (22 000) 175 600 Dividend payable Other liabilities 25 000 75 000 12 600 25 000 Share capital Retained earnings General reserve Business combination valuation reserve 130 000 93 500 56 500 - 90 000 36 000 12 000 - 380 000 175 600 Cash Receivables Other assets Inventory Shares in Finn Ltd Plant Accum depreciation Adjustments Dr Cr Group 5