Regarding question 5, consolidaion, how do i calculate the impairment entry for goodwill and which elimnations entry should i look at in the income statement

Additional Practice Questions & Solutions for exam Leasing QUESTION TWO (Sem 3, 2015) On 1 July 2015 Oasis Ltd entered into a non-cancellable lease contract to lease a truck from Blur Ltd for six years. Blur is directly leasing the truck to Oasis immediately after its acquisition. The lease contract is for a truck with a fair value of $4,636,201 at the inception of the lease. According to the terms of the agreement, Oasis Ltd is required to make an initial payment of $30,000 at the inception of the lease and then yearly lease payments of $920,000 for six years on 30 June each year, commencing on 30 June 2016. Included within the $920,000 yearly lease payments is an amount of $80,000 representing payment to Blur Ltd for the maintenance of the truck every six months. The contract also includes a bargain purchase option, enabling Oasis Ltd to purchase the equipment for $1,147,200 at the end of the lease term. The interest rate implicit in the lease contract is 8%. The truck is expected to have a useful life of 8 years, after which time it is expected to have a salvage value of $80,000. The equipment is depreciated on a straight-line basis. The table below sets out data on present values: Number of periods to Maturity Interest Rate Present Value of $1 due at Maturity 6 8 12 8% 8% 8% 0.6302 0.5403 0.3971 Present Value of an annuity of $1 until Maturity 4.6229 5.7466 7.3561 REQUIRED: (a) Describe how Oasis Ltd should classify the lease, providing two supporting reasons as to your classification consistent with the application of AASB117: Leases. (b) Prepare the journal entries relating to the lease contract for Blur Ltd on 1 July 2015 and on 30 June 2016, in accordance with AASB117: Leases. Show all workings necessary to derive your answer (2 + 10 = 12 marks) Page 1 of 16 Additional Practice Questions & Solutions for exam QUESTION TWO (Sem 3, 2015) Solution a) Oasis Ltd. should classify the lease contract as finance lease because substantially all the risks and rewards of ownership of the equipment have been transferred to the lessee,1/ Blur Ltd., as: The lease contract is non-cancellable; and The Lease contract includes a bargain purchase option. Alternative 75% of useful life covered by the lease term (ANY OTHER 2 REASONS -1 MARKS EACH) Additional Explanation Whenever a lease contract includes a bargain purchase option, or a fully guaranteed residual, Present Value of the Minimum Lease Payments must be equal to 100% of the Fair Value of the Leased Asset, at the inception of the lease. PV = 30,000 + (4.6229* 840,000) + (1,147,200*0.6302) = 4,636,201 Present Value of the Minimum Lease Payments* = 100% of the Fair Value 4,636,201 Additional Evidence about the transfer of risks and rewards Oasis Ltd. is responsible for paying for the maintenance and insurance of the truck. Oasis Ltd bears the risks of unsatisfactory performance of the truck, unused idle capacity of the truck, obsolescence of the truck. Oasis Ltd obtains the benefit of increases in the residual value, and bears the risk of decreases in residual value. b) Prepare the journal entries relating to the lease contract for Blur Ltd for the year ended 30 June 2016, in accordance with AASB117. Inception of the lease 1 July 2015 DR Asset 4,636,201 CR Cash 4,636,201 Not necessary (do not penalise if presented, do not count as additional mark if presented) (To record acquisition of asset) DR Lease Receivable 4,636,201 Page 2 of 16 Additional Practice Questions & Solutions for exam CR Asset 0.5 mark each entry + 1 mark for correct amount 4,636,201 (Upon leasing, asset account is replaced by lease receivable) DR Cash 30,000 CR Lease Receivable 0.5 mark each entry + 2 mark for correct amount 30,000 (Initial payment from lessee) 30 June 2016 Date of Payment Minimum Lease Payment 1/7/2015 30,000 30/6/2016 840,000 Interest Revenue DR Cash 920,000 CR Lease Receivable CR Interest Revenue CR Recoupment on Execut. costs 0.5 mark each entry + 1.5 mark for correct amount Principal Reduction Outstanding Principal 4,606,201 368,496 471,504 4,134,697 471,504 368,496 80,000 (Yearly lease payment from lessee) DR Depreciation 579,525 CR Accumulated depreciation 0.5 mark each entry + 1 mark for correct amount 579,525 (Depreciation of asset) QUESTION ONE (3 Oct, 2015) Page 3 of 16 Additional Practice Questions & Solutions for exam Q1) Black Ltd enters into a non-cancellable five-year lease agreement with Burn Ltd on 1 July 2015. The lease is for an item of machinery that, at the inception of the lease, has a fair value of $1,294,384. The machinery is expected to have an economic life of six years, after which time it will have an expected residual value of $210,000. There is a bargain purchase option that Black Ltd will be able to exercise at the end of the fifth year for $280,000. There are to be five annual payments of $350,000, the first being made on 30 June 2016. Included within the $350,000 lease payments is an amount of $35,000 representing payment to the lessor for the insurance and maintenance of the equipment. The equipment is to be depreciated on a straight-line basis. Required: (I) Determine the rate of interest implicit in the lease and calculate the present value of the minimum lease payments. (II) Prepare the journal entries in the books of Black Ltd for the years ending 30 June 2016 and 30 June 2017. (III) Prepare the portion of the statement of financial position for the year ending 30 June 2017 relating to the lease asset and lease liability. (IV) Prepare the journal entries of Black Ltd for the years ending 30 June 2016 and 30 June 2017 assuming that Black Ltd classifies the lease as an operating lease. QUESTION ONE (3 Oct, 2015) Solution Page 4 of 16 Additional Practice Questions & Solutions for exam Q1) Solution (I) (II) Page 5 of 16 Additional Practice Questions & Solutions for exam (III) (IV) Page 6 of 16 Additional Practice Questions & Solutions for exam Income Tax 30 Oct, 2014 QUESTION FOUR (Solution) Page 7 of 16 Additional Practice Questions & Solutions for exam a) Taxable income for the year ending 30 June 2014: Accounting profit (before tax) Add: Accounting Depreciation of Plant mark) Entertainment expenses mark) Deduct: Tax Depreciation of Plant 1,000,000 Taxable income mark) 1,105,000 200,000 65,000 (160,000) (0.5mark) b) Temporary Differences and associated Deferred Tax Assets and Liabilities at 30 June 2013 and 30 June 2014 Carrying Temporary DTA / DTL value Tax base difference Plant Plant at cost 1,600,000 1,600,000 Acc Depreciation (400,000) (320,000) Plant 30/06/13 1,200,000 1,280,000 80,000 DTA $24,000 (1 mark) (1 mark) (0.5mark) (0.5 mark) Dep 2013/14 (200,000) (160,000) Plant 30/06/14 1,000,000 1,120,000 120,000 DTA $36,000 (0.5mark) (0.5mark) (0.5mark) (0.5 mark) Land Land 30/6/13 600,000 600,000 0 (0.5mark) Land 30/6/14 850,000 600,000 250,000 (0.5 mark) DTL $75,000 (0.5 mark) c) Journal entry to record income tax for year ending 30 June 2014: Dr Dr Income tax expense (0.5mark) Deferred tax asset (0.5mark) Revaluation Surplus Dr mark) Cr Deferred tax liability mark) 319,500 12,000 75,000 75,000 Page 8 of 16 Additional Practice Questions & Solutions for exam Cr Income tax payable mark) 331,500 (2 + 6.5 + 2.5 = 11 marks) Consolidation 19 June, 2014 Page 9 of 16 Additional Practice Questions & Solutions for exam Page 10 of 16 Additional Practice Questions & Solutions for exam Page 11 of 16 Additional Practice Questions & Solutions for exam 19 June, 2014 Question Five Solution Consolidation Worksheet Journal Entries 1 Revalue S's Land to Fair Value at Acquisition Date (1 mark) DR Land [950,000 - 800,000] CR Revaluation Surplus 150,000 2 3 Tax Effect: Revalue S's Land to Fair Value (1 mark) DR Revaluation Surplus CR Deferred Tax Liability [150,000 x .3] 45,000 (3 + 11 = 14 marks) 150,000 45,000 Eliminate Investment in S against P's share of S's Equity at Acquisition Date (3 marks) DR Share Capital [400,000 x .8]0.5 320,000 DR Revaluation Surplus [(140,000 + 150,000 - 45,000) x .8] 1.0 196,000 DR Retained Profits 1/7/09 [100,000 x .8] 0.5 80,000 Page 12 of 16 Additional Practice Questions & Solutions for exam DR Goodwill0.5 CR Investment in S0.5 640,000 4 Impairment of Goodwill (relates to P) (1.5 marks) DR Retained Profits 1/7/09 [44,000 - 34,000 (previous year expense)] DR Impairment Loss -Goodwill [34,000 - 22,000 (current year expense)] CR Accumulated Impairment Losses - Goodwill 22,000 44,000 10,000 12,000 5 Elimination of intra-group Rental Revenue and Rental Expense (relating to Land) (1 mark) DR Rental Revenue [12,000 per month x 8 months)] 96,000 CR Other Expenses (Rental Expense) 96,000 6 Elimination of intra-group debt: Prepaid Rental Revenue (1 mark) DR Unearned Rental Revenue (Liability) [12,000 per month x 4 months] CR Prepaid Rental Expense (Asset) 48,000 7 Elimination of intra-group Sales (1 mark) DR Sales Revenue CR Purchases 480,000 48,000 480,000 8 Elimination of Unrealised Profit in Closing Inventory (earned by S) (1.5 marks) DR Closing Inventory (P+L) [(480,000 - 355,000) x .40] 1.0 50,000 CR Inventory (B/S) 0.5 50,000 9 Tax Effect: Elimination of Unrealised Profit in Closing Inventory (1 mark) DR Deferred Tax Asset [50,000 x .3] CR Income Tax Expense 15,000 10 Elimination of Final Dividend paid by S to P (1 mark) DR Dividend Revenue [40,000 x .8] CR Final Dividend (P + L Appropriation) 32,000 15,000 32,000 Sem 2, 2015 (Sample from blackboard) QUESTION FOUR On 30 June 2011, Parent Ltd purchased 80% of the shares of Subs Ltd for $640,000 cash. At acquisition date, Subs Ltd's Statement of Financial Position was as follows: Page 13 of 16 Additional Practice Questions & Solutions for exam $ Share Capital 400,000 Retained Earnings 240,000 640,000 Additional Information i On 30 June 2011, all the identifiable net assets of Subs Ltd were considered to be recorded at fair value in Subs Ltd's Statement of Financial Position, except land, which had a fair value of $950,000 in respect to a book value of $900,000. The land has not been revalued in Subs Ltd's accounts. ii Parent Ltd has a policy of valuing Non-Controlling Interest at the Non-Controlling Interest's proportionate share of the identifiable net assets of the subsidiary at acquisition date. iii On 30 June 2015, the recoverable amount of the goodwill relating to the purchase of Subs Ltd by Parent Ltd was assessed to be $22,000. iv During 2014-2015 financial year, Subs Ltd sold goods to Parent Ltd for $480,000. These goods had originally cost Subs Ltd $355,000. On 30 June 2015, 40% of these goods remained in Parent Ltd's closing inventory. v Subs Ltd had a profit after taxes of $ 80,000 for the ear ending on 30 June 2015 vi The income tax rate is 30%. REQUIRED: Prepare the consolidation adjustments for the year ended 30 June 2015. Non-controlling interests on profit are NOT required. (17 marks) Sem 2, 2015 (Sample from blackboard) QUESTION FOUR - Solution Initial calculations: Price of Acquisition = $640,000 Fair value of net assets: [640,000 + (50,000 - 15,000)*] = $675,000 80% of FV of Net Asset acquired by Parent: $540,000 Goodwill for Parent = $100,000 20% Non-controlling interests= $675,000 - $540,000 = $135,000 Page 14 of 16 Additional Practice Questions & Solutions for exam Fair value adjustment (of Subs Ltd's Land)* Dr Land 50 000 Cr Revaluation surplus 50 000 Dr Cr Revaluation surplus Deferred tax liability 15 000 15 000 Elimination of investment Dr Share capital 320 000 Dr Retained earnings 192 000 Dr Revaluation reserve 28 000 Dr Goodwill 100 000 Cr Investment in S Ltd 640 000 Elimination of balance of pre-acquisition capital and reserves and identification of noncontrolling interest at acquisition date Dr Share capital 80 000 Dr Retained earnings 48 000 Dr Revaluation reserve 7 000 Cr Non-controlling interest in S Ltd 135 000 Because the management of Parent Ltd measures any non-controlling interests at the proportionate share of Subs Ltd's identifiable net assets, then no goodwill is attributed to the non-controlling interest in Subs Ltd. Impairment of goodwill Dr Impairment loss on goodwill Cr Accumulated impairment loss 78 000 78 000 This has no effect on non-controlling interests Elimination of intra group sales Dr Sales Cr Cost of goods sold 480 000 480 000 Elimination of unrealised profit in closing inventory Dr Cost of goods sold 50 000 Cr Inventory 50 000 Consideration of the tax paid or payable on the sale of inventory that is still held within the group Page 15 of 16 Additional Practice Questions & Solutions for exam Dr Deferred tax asset Cr Income tax expense ($50 000 x 30 per cent) 15 000 15 000 Page 16 of 16