Provide the journal entries to account for tax

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Reference no: EM13844814

PART A

Q1. Jolly Boat Limited commences operations on 1 July 2014 and presents its first statement of comprehensive income and first statement of financial position on 30 June 2015. The statements are prepared before considering taxation. The following information is available:

Statement of comprehensive income for the year ended 30 June 2015 
Gross Profit
$730 000
Expenses 

Administration expenses   $80 000
Salaries   200 000
Long-service leave   20 000
Warranty expenses   30 000
Depreciation expense-plant   80 000
Insurance    20 000 430 000
Accounting profit before tax 
 $300 000



Assets and-liabilities as disclosed in the statement of financial position as at 30 June 2015 
Assets 
$20 000
Cash 
 100 000
Inventory 
 100 000
Accounts receivable 
 10 000
Prepaid insurance     20 000
Plant-cost   400 000
less Accumulated depreciation   80 000 320 000
Total assets     $550 000
Liabilities 

Accounts payable 
 $80 000
Provision for warranty expenses 
 20 000
Loan payable 
 200 000
Provision for long-service leave 
20 000
expenses 

Total liabilities 
 $320 000
Net assets 
 $230 000

Other information

- AlI administration and salaries expenses incurred have been paid as at year end.

- None of the long-service leave expense has actually been paid. It is not deductible until it is actually paid.

- Warranty expenses were accrued and, at year end, actual payments of $10 000 had been made (leaving an accrued balance of $2 000).

- Deductions are available only when the amounts are paid and not as they are accrued.

- Insurance was initially prepaid to the amount of $30 000. At year end, the unused component of the prepaid insurance amounted to $10 000. Actual amounts paid are allowed as a tax deduction.

- Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.

- The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.

- The tax rate is 30 per cent.

REQUIRED

Provide the journal entries to account for tax in accordance with AASB 112.

Q2. Dumpster Limited acquired an item of plant on 1 July 2012 for $3 660 000. When the plant was acquired, it was initially assessed as having a life of 10 000 hours. During the reporting period ending 30 June 2013 the plant was operated for 3 000 hours.

At 1 July 2013 the plant had a remaining useful life of 7 000 hours. On 1 July 2013 the plant underwent a major upgrade costing $234 600. Management believes that this upgrade will add a further 2 000 hours of operating time to the plant's life. During the reporting period ended 30 June 2014 the plant was operated for 4 000 hours.

On 1 July 2014 the plant underwent a further major upgrade, the cost of which amounted to $344900, and this added a further 3100 hours' operating time to its life. During the reporting period ending 30 June 2015 the plant was operated for 3800 hours.

REQUIRED

Prepare all the journal entries that Dumpster Limited would prepare for the years ending 30 June 2013, 30 June 2014 and 30 June 2015 to account for the acquisition, subsequent expenditure and depreciation on the asset.

Q3. Top End Delivery Solutions leased a truck from a truck dealer, Truck n' Go Ltd. Truck n' Go Ltd acquired the truck at a cost of $180 000. The truck will be painted with Top End Delivery Solutions' logo and advertising and the cost of repainting the truck to make it suitable for another owner four years later is estimated to be $400 000. Top End Delivery Solutions plans to keep the truck after the lease but has not made any commitment to the lessor to purchase it. The terms of the lease are as follows:

- Date of entering lease: 1 July 2015.
- Duration of lease: four years.
- Life of leased asset: five years, after which it will have no residual value.
- Lease payments: $100 000 at the end of each year.
- Interest rate implicit in the lease: 10 per cent.
- Unguaranteed residual: $50 000.
- Fair value of truck at inception of the lease: $351 140.

REQUIRED

(a) Demonstrate that the interest rate implicit in the lease is 10 per cent.

(b) Prepare the journal entries to account for the lease transaction in the books of the lessor, Truck n' Go Ltd, at 1 July 2015 and 30 June 2016.

(c) Prepare the journal entries to account for the lease transaction in the books of the lessee, Top End Delivery Solutions, at 1 July 2015 and 30 June 2016.

(d) On 30 June 2019 Top End Delivery Solutions pays the residual of $50 000 and purchases the truck. Prepare alI journal entries in the books of Top End Delivery Solutions for 30 June 2019 in relation to the termination of the lease and the purchase of the truck.

Q4. Crock Limited acquired Buffalo Limited on 1 July 2014 for cash of $7 000 000. At that date, Buffalo Limited's net identifiable assets had a fair value of $5 800 000. The fair value of the net identifiable assets of Buffalo Limited are determined as follows:


(000)'s
Customer List   $50
Machinery    1 450
Buildings    1 500
Land    3 000
   6 000

At the end of the reporting period of 30 June 2015, the management of Crock Limited determines that the recoverable amount of the cash generating unit, which is considered to be Buffalo Limited, totals $6 200 000. The carrying amount of the net identifiable assets of Buffalo Limited, which excludes goodwill, has not changed since acquisition and is $580 000.

REQUIRED

(a) Prepare the journal entry to account for any impairment of goodwill.

(b) Assume instead that at the end of the reporting period the management of Crock Limited determines that the recoverable amount of the cash generating unit, which is considered to be Crock Limited, totals $4 800 000. Prepare the journal entry to account for the impairment.

Q5. Diving Ltd acquires a four-wheel-drive bus on 1 July 2011 for $300 000. The bus is expected, to have a useful life to Diving Ltd of seven years, after which time it will be towed out to sea and sunk to make an artificial reef for marine life (after an oils and solvents have been removed). The straight-line method of depreciation is used.

On 1 July 2013 the bus revalued to $250 000 and its useful life is reassessed: it is expected, at that date, to have a remaining useful life of six years.

On 1 July 2014 it is unexpectedly sold for $220 000.

REQUIRED

Provide the journal entries to record the revaluation on 1 July 2013 and the subsequent sale on 1 July 2014.

Q6. The management of one of your clients has told you that they intend not to consolidate the financial statements of one of their subsidiaries because it is involved in mining, whereas all the other organisations in the group are involved in service industries. How would you respond to this position?

Q7. New Start Ltd acquired 90 per cent of the share capital of Old Timer Ltd on 1 July2014 for a cost of $500000. As at the date of acquisition assets of Old Timer Ltd were fairly valued, other than land that had a carrying amount $50 000 less than its fair value. The recorded balances of equity in Old Timer Ltd as at 1 July 2014 were:


 $
Share capital   350 000
Retained earnings   100 000

 450 000

- During the financial year to 30 June 2015 Old Timer Ltd sold inventory to New Start Ltd for a price of $50 000. The inventory cost Old Timer Ltd $30 000 to produce, and 25 per cent of this inventory was still on hand with New Start Ltd as at 30 June 2015.

- During the year Old Timer Ltd paid $10 000 in management fees to New Start Ltd.

- On 1 July 2014 Old Timer Ltd sold an item of plant to New Start Ltd for $40 000 when it had a carrying amount of $30 000 (cost of $50 000, accumulated depreciation of $20 000). At the date of sale it was expected that the plant had a remaining useful life of four years, and no residual value.

- The tax rate is 30 per cent.

REQUIRED

Prepare the consolidation adjustments for the year ended 30 June 2015 and, based on the information provided above, calculate the non-controlling interest in the 2015 profits.

Q8. Wayne's Pools Ltd is involved in manufacturing swimming pools. Wayne's Pools Ltd's statement of financial positions for the years ended 30 June 2015 and 30 June 2016 are presented below.

 

2016 ($000)'s

2015 ($000)'s

Assets

 

 

Cash

96

---

Accounts receivable

36

60

Allowance for doubtful debts

(12)

(8)

Property, plant and equipment

156

120

Accumulated depreciation-property, plant and equipment

(36)

(20)

Inventory

92

52

Total assets

332

204

Liabilities

 

 

Bank overdraft

---

40

Accounts payable

60

60

Accrued wages

20

16

Provision for annual leave

8

12

Loans

60

_

Total liabilities

148

128

Net assets

184

ZS

Represented by:

 

 

Shareholders' funds

 

 

Share capital (ordinary shares)

140

20

Revaluation surplus

28

8

Retained earnings

16

48

Total shareholders' funds

184

Za

 

 

 

The statement of comprehensive income (extract) of Wayne's Pools Ltd for
the year ended 30 June 2016 is:

 

 

2016 ($000)'s

Revenues

 

 

Sales

 

60

Interest (no interest receivable at year end)

 

4

Profit on sale of property (which had a carrying amount of $20 000)

 

8

Expenses

 

 

Cost of goods sold

 

(40)

Doubtful debts

 

(8)

Depreciation

 

(20)

Wages

 

(20)

Employee entitlements

 

(161

Loss for the year

 

t32,1

REQUIRED

Prepare a statement of cash flows for Wayne's Pools Ltd for the year ended 30 June 2016. Comparatives are not required. Ignore tax effects.

Q9. The Big Company Ltd acquires 100 per cent of the shares of The Little Company Ltd on 1 July 2014 for a consideration of $1.25 million. The share capital and reserves of The Little Company Ltd at the date of acquisition are:

Share capital   $750 000
Retained earnings   $375 000
Revaluation surplus   $375 000

 $1 500 000

Additional information

There are no transactions between the entities and all assets are fairly valued at the date of acquisition.

No land or plant is acquired or sold by The Little Company Ltd in the year to 30 June 2015. The financial statements of The Big Company Ltd and The Little Company Ltd at 30 June 2015 (one year after acquisition) are:

 

The Big
Company Ltd
($000)

The Little
Company Ltd
(S000)

Reconciliation of opening and closing retained earnings

 

 

Profit before tax

750

375

Tax

(250)

(125)

Profit after tax

500

250

Retained earnings at 30 June 2014

1 000

375

Retained earnings at 30 June 2015

1 5110

621

 

The Big
Company Ltd
($000

The Little
Company Ltd
($000)

Statements of financial position

 

 

 

 

Shareholders' equity

 

 

 

 

Retained eamings

1

500

 

625

Share capital

3

000

 

750

Revaluation surplus

 

750

 

500

Current liabilities

 

 

 

 

Accounts payable

 

250

 

250

Non-current liabilities

 

 

 

 

Loans

1

500

 

625

 

7

000

2

750

Current assets

 

 

 

 

Cash

 

250

 

200

Accounts receivable

 

875

 

300

Non-current assets

 

 

 

 

Land

1

750

 

750

Plant

2

875

1

500

Investment in The Little Company Ltd

1

250

 

---

 

7

000

2

750

REQUIRED

Prepare the consolidated accounts for The Big Company Ltd and The Little Company Ltd as at 30 June 2015.

Q10. The following financial statements of Billy Ltd and its subsidiary Michael Ltd have been extracted from their financial records at 30 June 2015.

 

Billy Ltd

($000)

Michael Ltd

($000)

Reconciliation of opening and closing retained earnings

 

 

Sales revenue

671.4

640

Cost of goods sold

(4641

(238)

Gross profit

207.4

302

Dividends received from Michael Ltd

93

---

Management fee revenue

26.5

---

Gain on sale of plant

40

35

Expenses

 

 

Administrative expenses

(30.8)

(28.7)

Depreciation

(29.5)

(56.8)

Management fee expense

---

(26.5)

Other expenses

(101.11

(721

Profit before tax

205.5

143

Tax expense

61.5

42.2

Profit for the year

144

100.8

Retained earnings-30 June 2014

319.4

239.2

 

463.4

340

Dividends paid

(137.41

(931

Retained earnings-30 June 2015

326

247

 

 

 

Statements of financial position

 

 

Shareholders' equity

 

 

Retained earnings

326

247

Share capital

350

200

Current liabilities

 

 

Accounts payable

54.7

46.3

Tax payable

41.3

25

Non-current liabilities

 

 

Loans

173.5

116

 

945 5

63433

Current assets

 

 

Accounts receivable

59.4

62.3

Inventory

92

29

Non-current assets

 

 

Land and buildings

224

326

Plant -at cost

299.85

355.8

Accumulated depreciation

(85.75)

(138.8)

Investment in Michael Ltd

356

---

 

945.5

 634.3

Other information

- Billy Ltd acquired its 100 per cent interest in Michael Ltd on 1 July 2010, that is five years earlier. At that date the capital and reserves of Michael Ltd were:

Share capital   $200 000 
Retained earnings   $180 000

 $380 000

At the date of acquisition all assets were considered to be fairly valued.

- During the year Billy Ltd made total sales to Michael Ltd of $80 000, while Michael Ltd sold $50 000 in inventory to Billy Ltd.

- The opening inventory in Billy Ltd as at 1 July 2014 included inventory acquired from Michael Ltd for $40 000 that cost Michael Ltd $30 000 to produce.

- The closing inventory in Billy Ltd includes inventory acquired from Michael Ltd at a cost of $33000. This cost Michael Ltd $28 000 to produce

- The closing inventory of Michael Ltd includes inventory acquired from Billy Ltd at a cost of $12000. This cost Billy Ltd $10 000 to produce.

- On 1 July 2014 Michael Ltd sold an item of plant to Billy Ltd for $116 000 when its carrying value in Michael Ltd's accounts was $81 000 (cost $135 000, accumulated depreciation $54 000).

This plant is assessed as having a remaining useful life of six years.

- Michael Ltd paid $26 500 in management fees to Billy Ltd.

- The tax rate is 30 per cent.

REQUIRED

Prepare a consolidated statement of financial position, and a consolidated statement of comprehensive income for Billy Ltd and Michael Ltd as at 30 June 2015.

PART B

Q11. Read the attached article, published by AccountingWeb, in Appendix A about Tesco plc, a UK supermarket chain with interests throughout Asia, and read Note 12 to the financial statements on Property, Plant and Equipment.

You have been approached by a client who has invested in Tesco plc and is concerned by the disclosures. Write a report to your client, using the relevant accounting standards, identifying and explaining the sections that apply to the disclosed accounting treatment and explain in detail how and why they apply.

Your client is confused by the term "kitchen sinking" which applies in the UK. You have been advised that in Australia it is known as "taking a big bath." Conduct research to explain what these terms mean and place this explanation in the context of impairment testing and how this may have been employed in the case of Tesco plc.

In your answer pay strict attention to referencing with respect the accounting standards and the paragraphs contained therein that you have quoted and the websites visited quoting the website and the times of access.

Your report should be written as a business report with an executive summary, an introduction, the main findings, a conclusion and references. Marks will be awarded to reflect presentation, business English, content and referencing. (see CDU Report Format in Assessment Area)

Q12. Read the attached article, from the Sydney Morning Herald, in Appendix B on the theft of rare coins from the NSW State Library.

Would you consider these coins to be heritage assets? Give explanations for your conclusion.

How do these coins differ from the definition of an asset in the Conceptual Framework?

What problems can you identify when trying to recognise these coins as assets?

How do the coins fall within the definition of Property, Plant and Equipment as defined by AASB 116?

What use would be gained by placing a financial value on them?

Who would benefit by having a financial value placed upon them and why?

How would valuers identify a fair value if cost was not available?

What problems do you envisage that valuers would have when trying to ascertain fair value?

Who would be better at establishing a fair value, the Museum Director or an independent valuer? Give reasons for your answer and identify the disclosure requirements of such a valuation.

Suggest alternative methods of assessing the Museum Director's performance. How could this be contained within the annual report and financial statements?

Reference no: EM13844814

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