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BAC205 Corporate Reporting Assessment Answer

BAC205 Corporate Reporting

Question 18 Marks

Ninja Ltd’s profit before tax for the year ended 30 June 2020 was $18,500. Included in this profit are the following items of income and expense:


Amortisation of development costs
$10,000
Depreciation – equipment (20%)
20,000
Depreciation – motor vehicle (25%)
20,000
Depreciation – building (5%)
15,000
Entertainment expense
1,500
Fines and penalties
1,000
Insurance expense
2,400
Doubtful debts expense
2,300
Proceeds on sale of equipment
19,000
Carrying amount of equipment sold
18,000
Rent revenue
16,000
Employee benefits expense
5,000
Royalty revenue (exempt income)
5,000
Goodwill impairment
2,000
Warranty expense
1,000
Interest revenue
600


At 30 June, the company’s draft statements of financial position showed the following balances:


2020
2019
Assets


Cash
$11,500
$9,500
Accounts receivable
12,000
14,000
Allowance for doubtful debts
(3,000)
(2,500)
Inventories
19,000
21,500
Interest receivable
900
500
Prepaid Insurance
2,900
2,500
Rent receivable
2,800
2,400
Development costs
30,000
-
Accumulated amortisation
(10,000)
-
Motor vehicle
18,000
18,000
Accumulated depreciation
(15,750)
(11,250)
Equipment
100,000
130,000
Accumulated depreciation
(60,000)
(52,000)
Buildings
300,000
300,000
Accumulated depreciation
(150,000)
(135,000)
Deferred tax asset
?
6,450
Goodwill
5,000
5,000
Goodwill - accumulated impairment losses
(3,000)
(1,000)
Liabilities


Accounts payable
15,655
21,500
Current tax liability
?
7,600
Provision for employee benefits
4,500
6,000
Provision for warranties
2,900
2,000
Mortgage loan
100,000
140,000
Deferred tax liability
?
2,745


Additional information:

  • A tax deduction for development expenditure of 125% of the $30,000 spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.
  • A tax deduction of $22,000 (22%) can be claimed on equipment, but the motor vehicle is fully depreciated for tax purposes.
  • The equipment sold on 30 June 2020 cost $30,000 when it was purchased 2 years before the date of sale
  • Deductions are only available for annual leave when amounts are paid and not as they are accrued.
  • Actual amounts paid for insurance are allowed as a tax deduction.
  • No deduction is allowed for taxation purposes in relation to entertainment, fines and penalties.
  • Rent revenue and interest is taxable when amounts are received.
  • Depreciation of buildings are not allowed as tax deduction.
  • The deferred tax asset (DTA) balance at 30 June 2019 comprised: DTAs relating to temporary differences: $4,000
  • DTAs relating to carried forward tax losses: $2,450
  • No journal entries related to tax have been recorded for the year ended 2020. Assume the tax balances at 30 June 2019 are correct.
  • The tax rate is 30%.

Required:

  1. Calculate the taxable income and current tax liability using an appropriate worksheet for the year ended 30 June 2020 (show all workings).(6 Marks)
  2. Prepare a journal entry to record the current tax liability.(2 Marks)

Question 28 Marks

Salad Ltd acquired all the net assets of an existing business, Lettuce Ltd on 1 July 2020. The statements of financial position of the two companies immediately prior to the acquisition were as follows:


Salad Ltd
Lettuce Ltd
Cash

$4,200
$2,000
Accounts receivable

30,000
16,500
Freehold land

265,000
100,000
Building (net)

35,000
28,000
Cultivation equipment (net)
69,000
46,000
Irrigation equipment

18,000
21,000
Delivery trucks

46,000
36,000
Motor vehicles

30,000
32,000


497,200
281,500
Accounts payable

29,000
24,500
Loan - Bank of NSW

155,000
79,000
Loan - Bernard Bros

35,000
34,000
Loan - Golds Corp.

72,000
52,500
Share capital
110,000 shares
110,000
-

60,000 shares
-
60,000
Reserves

28,500
-
Retained earnings

67,700
31,500


497,200
281,500


All of the assets of Lettuce Ltd are recorded at fair value, with the exception of:


Fair value
Freehold land*
120,000
Buildings
40,000
Cultivation equipment
40,000
Motor vehicle
34,000

*Fair value excluding Lettuce’s vacant land.

The terms of the acquisition are as follows:

  • Salad Ltd is to acquire all of the assets, except cash, delivery trucks and motor vehicles of Lettuce Ltd and will assume all of the liabilities except accounts payable.
  • Salad Ltd is to give the share-holders of Lettuce Ltd a block of vacant freehold land, two delivery vehicles and sufficient additional cash to enable the company to pay of the accounts payable and then liquidation costs of $1,600.
  • On the liquidation of Lettuce Ltd, the former directors are to receive the land, motor vehicles and the delivery trucks. The land and vehicles had the following values at 1 July 2020:

Carrying amount
Fair Value
Freehold Land
$50,000
$120,000
Delivery Trucks
30,000
27,000

Required:

  1. Prepare the acquisition analysis in relation to the acquisition.(2 Marks)
  2. Prepare the journal entries in Salad Ltd to record the business combination.(4 Marks)
  3. Prepare the statement of financial position of Salad Ltd immediately subsequent to the acquisition.(2 Marks)Question 38 Marks

You are finishing your Accounting internship at Rainbow Ltd., where John is working as an accountant and Sky as a CFO. Rainbow Ltd. is a parent company that on 1 July 2020 acquired the controlling interest in Blue Ltd. (subsidiary).

On 15 July 2020, you along with John and Sky attended a meeting in which they discussed accounting of acquisition of Blue Ltd. During the meeting you heard John disclosing to Sky that Blue Ltd. has not measured their assets at fair value to which Sky questioned if under AASB standards at the acquisition date an adjustment entry is needed to record the assets and liabilities of Blue Ltd. at fair value. After the meeting, John as a part of your internship project entrust you to prepare a one-page memo answering Sky’s concern.

Write a memo to Sky and John answering following questions:

  1. Under AASB at the acquisition date is there any requirement for Rainbow Ltd. to make any adjusting entries to record the assets and liabilities of Blue Ltd (subsidiary) at fair value? Give reason to support your answer.(2 Marks)
  2. What would be the implications if Rainbow Ltd. do not process these adjusting entries?

(2 Marks)

  1. Is there any exception to the recognition principle at the acquisition date regarding any liabilities? Explain your answer.(2 Marks)
  2. Should any adjusting entries be also processed to recognise assets that acquiree (Blue Ltd.) had not previously recognised in its own financial statements? Give one example and explain.(2 Marks)

Use relevant standards from AASB to support your answer to each of above 4 questions.

Rationale:

This assignment is designed to assess your ability to:

SLO 4 Evaluate financial statements and disclosures as required by Australian  Accounting Standards including the preparation of consolidated financial statements and accounting for equity investments and joint ventures (arrangements).

SLO 3 Analyse financial accounting records for specified transactions and events in accord with relevant Australian Accounting Standards and generally accepted accounting principles.

Answer

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