Sample Past Exam Questions Revised [PDF]

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ACCY200, Autumn, 2011 Past Exam Questions

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TAX EFFECT QUESTIONS Question 1 Total: 35 marks The accounting profit before tax of Leela Ltd for the year ended 30 June 2011 was $187 000 and included the following items of income and expense: $ Government grant Rent revenue Entertainment costs Bad debts expense Depreciation of plant Insurance expense Long service leave expense Warranty expense Amortisation of Development costs

10 000 2 000 4 000 6 200 25 000 8 000 18 400 3 000 25 000

The draft statements of financial position at 30 June 2011 and 30 June 2010 included the following assets and liabilities: 2011 $ Accounts Receivable 172 000 Allowance for doubtful debts (6 500) Prepaid insurance 4 900 Plant 250 000 Accumulated depreciation – plant (100 000) Development costs 100 000 Accumulated amortisation – development costs (25 000) Deferred tax asset ? Rent received in advance 25 000 Provision for Warranty 27 000 Long service leave payable 13 000 Deferred tax liability ?

2010 $ 165 000 (7 000) 6 700 250 000 (75 000) 11 300 20 000 38 000 14 500 3 300

Additional information: 1. In the previous year Leela Ltd made a tax loss of $24 000 in respect of which the company had recognised a deferred tax asset. 2. For accounting purposes the plant is depreciated at 10% straight line. For tax purposes the plant is depreciated at 15% straight line. 3. All plant was purchased on 1 July 2007, and none has been sold. 4. Development costs of $100 000 were incurred on 1 July 2010, all of which is deductible for tax purposes in the current year. 5. The tax rate is 30%.

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Required: a) Calculate and record in a journal entry the balance of any current tax liability for Leela Ltd as at 30 June 2011. (15 marks) b) Complete the worksheet on page 7 of this paper to calculate the balance day adjustments to deferred tax asset and deferred tax liability accounts as at 30 June 2011. Prepare the necessary general journal entry to reflect adjustments calculated for deferred tax asset and deferred tax liability accounts (do not net off deferred tax assets and deferred tax liabilities). (15 marks) c) Assume that on 1 July 2011 the company tax rate changed from 30% to 25%. Prepare the general journal entry needed to reflect the change in tax rate. (5 marks)

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Solution Question 1 a) Accounting profit Add: Entertainment costs 4 000 Bad debts exp 6 200 Depreciation –P&E 25 000 Insurance exp 8 000 LSL exp 18 400 Warranty exp 3 000 Amortisation development costs 25 000 Rent revenue 1. 7 000 Less: Rent revenue 2 000 Government grant 10 000 Debts written off 2. 6 700 Depreciation (tax) 3. 37 500 Insurance paid 4. 6 200 5. LSL paid 19 900 Warranty paid 6. 14 000 Development costs 100 000 Taxable income before tax loss recovered Less: Tax loss recovered (24 000) Add: Govt grant 10 000 Taxable Income Current tax liability

187 000

96 600

(196 300) 87 300 (14 000) 73 300 21 990

Journal entry: Dr

Income tax expense Cr DTA Cr Current tax liability

29 190 7 200 21 990

Working out: 1. rent in advance = 25 000 + 2 000 – 20 000 = 7 000 2. Debts written off = 7 000 + 6 200 – 6 500 = 6 700 3. depreciation = 15% of 250 000 = 37 500 4. insurance paid = 8 000 + 4 900 – 6 700 = 6 200 5. LSL paid = 14 500 + 18 400 – 13 000 = 19 900 6. warranty paid = 38 000 + 3 000 – 27 000 = 14 000

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Solution b) Carrying Amount

Future Taxable Amount

Future Deductibl e Amount

Tax Base

Taxable Temporar y Differenc e

$

$

$

$

$

165 500

(0)

6 500

172 000

4 900

(4 900)

0

0

4 900

150 000

(150 000)

100 0001.

100 000

50 000

Developme nt costs Liabilities

75 000

(75 000)

0

0

75 000

Rent received in advance Provision for Warranty Long service leave payable Temporary differences Deferred tax liability Deferred tax asset Beginning balances Movement during year

25 000

(25 000)

0

25 000

27 000

(27 000)

0

27 000

13 000

(13 000)

0

13 000

Relevant assets and liabilities Assets Accounts Receivable Prepaid insurance Plant

Deductibl e Temporar y Differenc e $

6 500

129 900

71 500

38 970 21 450 (3 300)

(11 300) 7 200

35 670

17 350

Adjustmen t Dr Dr

Deferred tax asset Income tax expense

17 350 18 320 5

Cr

Deferred tax liability

35 670

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Solution c) DTA beginning DTL beginning Dr

21 450 x 5/30 = 3 575 38 970 x 5/30 = 6 495

DTL Cr DTA Cr Income tax expense

6 495 3 575 2 920

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Question 2.

Total: 25 marks Mayfield Ltd Income Statement Year Ending 30 June 2009

Income Sales 210 000 Government Grant 10 000 Rental Revenue 65 000 Expenses Goodwill Impairment 12 000 Doubtful Debts Expense 6 200 Depreciation Expense- Plant 14 000 Entertainment Expense 13 300 Insurance Expense 6 300 Annual Leave Expense 12 000 Warranty Expense 8 000 Other Expenses 12 400 Profit before tax Balance Sheet (excerpt)

285 000

84 200 200 800

As at 30 June 2009 2009 Assets Cash Accounts Receivable Allowance for Doubtful Debts Rent Receivable Prepaid Insurance Plant -Accumulated depreciation (Plant) Goodwill (net) Deferred Tax Asset (DTA) Liabilities Accounts Payable Annual Leave Payable Provision for Warranty Current Tax Liability Deferred Tax Liability (DTL)

2008

12 000 92 000 (4 000) 4 000 3 400 140 000 (42 000) 10 200 ?

18 000 85 000 (5 200) 4 500 5 600 140 000 (28 000) 22 200 5 230

78 000 10 500 7 200 ? ?

76 000 3 500 6 200 2 150

Additional Information: a) Plant is depreciated straight line over its useful life of 10 years. The rate for tax is 20% straight line. b) The tax rate is 30%.

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Required: a) Calculate and record the balance of any current tax liability for Mayfield Ltd as at 30 June 2009. (15 marks) b) Determine the end of year adjustments in deferred tax assets and deferred tax liabilities using the worksheet on the last page of the examination. Prepare the journal entries for the adjustments in the answer booklet (do not net off balances in deferred tax asset and deferred tax liability accounts). (10 marks)

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Question 2 a) Solution MAYFIELD LTD Determination of Taxable Income (for year ended 30 June 2009) Accounting profit before income tax

200 800

Add: Depreciation – plant

14 000

Entertainment Expense

13 300

Doubtful debts expense

6 200

Annual leave expense

12 000

Warranty Expense

8 000

Insurance expense

6 300

Impairment of goodwill (nondeductible)

12 000

Rental Revenue

65 500

137 300

Deduct: Rent Revenue

65 000

Grant Income (exempt)

10 000

Depreciation of plant for tax

28 000

Bad debts written off

7 400

Annual leave paid

5 000

Warranty Expense

7 000

Insurance paid

4 100

Taxable income

211 600

Current tax liability @ 30%

Income Tax Expense Current Tax Liability

Question 2 b) Solution

(126 500)

63 480

Dr Cr

63 480 63 480

(10 marks)

10

Carrying Amount

$ Assets Accounts Receivable Rent Receivable Prepaid insurance Plant Goodwill Liabilities Accounts Payable Annual leave Liability Provision For Warranty Temporary differences Excluded differences Net temp difference s Deferred tax liability Deferred tax asset Beginning balances Adjustmen t

Mayfield Ltd Tax Effect Worksheet as at 30 June 2009 Taxable Deductibl Tax Amount e Amount Base

$

$

Taxable Temporar y Differenc e

$

$

Deductibl e Temporar y Differenc e $

88 000

0

4 000

92 000

4 000

4 000

(4 000)

0

0

4 000

3 400

(3 400)

0

0

3 400

98 000 10 200

(98 000) (10 200)

56 000* 0

56 000 0

42 000 10 200

78 000

0

0

78 000

10 500

0

(10 500)

0

10 500

7 200

0

(7 200)

0

7 200

59 600

21 700

(10 200) 49 400

21 700

14 820 6 510 (2 150)

(5 230)

12 670

1 280

*To calculate the FDA: 11

Cost of Plant

140 000

Accumulated depreciation for tax purposes

(84 000)

Future deductible amount

56 000

Accumulated depreciation for tax = 20% of 140 000 x number of years depreciated Number of years depreciated = accounting accumulated depreciation/accounting depreciation per year = 42 000/14 000 = 3 Thus, acc. dep for tax = (0.2 x 140 000) x 3 = 84 000

The journal entry required to record movements in the deferred tax accounts for the year ended 30 June 2009 would be: Deferred Tax Asset

Dr

1 280

Income Tax Expense

Dr

11 390

Deferred Tax Liability

Cr

12 670

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Question 3

Total: 10 marks

On 1 July 2008, Harvey Ltd purchased a block of land and building for $2 000 000 cash. The fair value was assessed as $1 000 000 for the land and as $1 000 000 for the building. Harvey Ltd decided to use the revaluation model to account for land and buildings in accordance with AASB116 Property Plant and Equipment. For accounting and taxation purposes, the depreciation rate for the building, is straight line over the expected life of 10 years. The tax rate is 30%. Fair values for the following two (2) years were as shown below:

Asset Land Building

Fair value 30 June 2009 1 200 000 810 000

Fair value 30 June 2010 900 000 1 100 000

Required: a) Prepare journal entries to record the revaluations on 30 June 2009 and 30 June 2010 for the Land. (5 marks) b) Prepare journal entries to record the revaluations on 30 June 2009 and 30 June 2010 for the Building. (5 marks)

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Question 3 a) Solution 

30 June 2009 (to record the fair value for land, increasing from 1 000 000 up to 1 200 000) DR

DR

Land 200 000 CR Asset Revaluation Reserve/surplus Asset Revaluation Reserve/surplus CR DTL

200 000

60 000 60 000

OR ALTERNATIVELY combine the two entries DR



Land 200 000 CR Asset Revaluation Reserve/surplus CR DTL

140 000 60 000

30 June 2010 (to record the drop in fair value from CA of 1 200 000 down to 900 000: land must drop by 300 000, and the loss must first use up revaluation reserve and DTL [200 000] and then remainder must go to P & L as loss). DR DR DR

Loss on Revaluation Asset Revaluation Reserve/surplus DTL CR Land

100 000 140 000 60 000 300 000

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Question 3 b) Solution Working Out 30 June 2009: Original Cost 1yr dep CA Fair Value Revaluation Decr.

1 000 000 (100 000) 900 000 810 000 90 000

30 June 2009 DR DR

Loss on Revaluation Accumulated Depreciation CR Building

90 000 100 000 190 000

Working Out 30 June 2010: CA 1 July 2009 1 yr dep (over 9yr) CA 30 June 2010 Fair Value Revaluation incre.

810 000 (90 000) 720 000 1 100 000 380 000

30 June 2010 DR DR

DR

Building 290 000 Accumulated Depreciation 90 000 CR Gain on Revaluation CR Asset Revaluation Reserve/surplus Asset Revaluation Reserve/surplus CR DTL

90 000 290 000

87 000 87 000

OR ALTERNATIVELY combine the two entries: DR DR

Building 290 000 Accumulated Depreciation 90 000 CR Gain on Revaluation 90 000 CR Asset Revaluation Reserve/surplus 203 000 CR DTL 87 000

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Question 4

10 marks

Goldfish Ltd’s equity at 30 June 2010 was as follows: 240 000 ordinary A shares issued at $6, paid to $3 720 20 000 5% redeemable preference shares issued at $2, fully paid 40 Options (30 000 @ 40c) 12 General reserve 150 Retained earnings 240

$ 000 000 000 000 000

Each option entitles the holder to one ordinary A share at a price of $5.50 per share, exercisable by 10 December 2010. Any options not exercised by this date will lapse. The following events occurred during the year ended 30 June 2011: 2010 July 1

20 000 ordinary B shares were privately placed at $2 per share, fully paid. The purpose of this issue was to fund the redemption of preference shares.

July 15

The preference shares were redeemed at a price of $2.05 per share.

July 20

Redemption cheques were issued to the preference shareholders.

December 1025 000 ordinary A shares were allotted as a result of 25 000 options having been exercised, with shares being paid for in full upon allotment.

2011 January 10

A final call was made on ordinary A shares, with money due by February 10 2011.

February 10 $714 000 of call money was received by this date. March 2

The shares on which the call was unpaid were forfeited. The company refunded the balance arising from the forfeiture of shares.

June 30

Dividends of 10c per share were declared by the directors. No approval by shareholders was necessary.

Required: Prepare general journal entries to record the above transactions (Narrations are not required). (10 marks)

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Question 4 Solution 2010 1 July Dr Cash 40 000 Cr Share Capital – Ordinary B (20 000 shares @ $2) 15 July Dr Share Capital – Preference 40 000 Cr Shareholders’ Redemption Account (20 000 shares @ $2) Dr Retained Earnings 1 000 Cr Shareholders’ redemption Account (premium of 5 cents on 20 000 shares) 20 July

10 Dec

Dr Shareholders’ Redemption Account 41 000 Cr Cash Dr Cash Cr Share Capital – Ordinary A (25 000 shares @ $5.50)

40 000

40 000

1 000

41 000

137 500 137 500

Dr Share Options 12 000 Cr Share Capital 10 000 Cr Lapsed Option Reserve 2 000 (25 000 options @ 40c exercised; 5 000 options @ 40c lapsed) 2011 10 Jan

10 Feb

Dr Call – Ordinary A Cr Share Capital – Ordinary A (240 000 shares @ $3 final call)

720 000 720 000

Dr Cash 714 000 Cr Call – Ordinary A 714 000 (total $714 000 received at $3 each = 238 000 shares paid; thus 2 000

have not paid) 2 March Dr Share Capital – Ordinary A 12 000 Cr Call 6 000 Cr Forfeited Shares Liability 6 000 (2 000 $6 shares forfeited; $3 received previously, $3 call not received)

30 June

Dr Forfeited Shares Liability 6 000 Cr Cash (refund) Dr Retained Earnings/dividend declared28 300 Cr Dividend Payable (10c x [238 000 + 20 000 + 25 000])

6 000

28 300

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Question 5

Total: 10 marks

The management of Shoe Habit Ltd had been concerned that over the last few years the company’s market value appeared to be higher than what was recorded in the company’s books. In order to address this concern, they employed you and a team of accountants to look over their draft financial statements for the year ending 30 June 2010. Before they could finalise these statements they wanted to determine whether there were more assets that could be recorded for the company. In particular the following transactions had been recorded as expenses in the draft statements: 1. $600 000 spent on developing a brand name for its new line of winter boots “Hot Boots”. 2. $1 500 000 spent on the purchase of computer software. Subsequent to the purchase, a further $200 000 was spent on updating the software. 3. $1 200 000 spent on the purchase of Higher Heel Pty Ltd, a local rival company. Higher Heel Pty Ltd had on its books $800 000 of net tangible assets. It had also developed a patent for a new shoe that would eliminate the need for heels in high heel shoes. This patent had been valued at $300 000, but had yet to be registered. Required: Prepare a report to the management of Shoe Habit Ltd explaining whether in each of the above transactions an intangible asset can be recorded, and identify the impact that any intangible asset will have on the financial statements (both the current year and future years). Your answer should refer to AASB 138 Intangible Assets, including specifically the definition, recognition, and measurement criteria. (10 marks)

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Question 5 Solution AASB 138 definitions Asset: A resource: controlled by an entity as a result of past events; and from which future economic benefits are expected to flow to the entity. Intangible asset: An identifiable non-monetary asset without physical substance. Identifiable: An asset is identifiable when it: (a) is separable – ie can be separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or (b) arises from contractual or other legal rights. AASB 138 recognition & measurement of internally generated intangible asset  

Under AASB 138 internally generated brands, mastheads, publishing titles, customer lists and items similar in substance shall not be recognised as intangible assets. Accordingly, Shoe Habit Ltd cannot record an intangible asset for transaction 1) internally generated brand name and should continue to expense any further costs incurred in relation to developing the brand name “Hot Boots”.

AASB 138 recognition & measurement of purchased intangible assets 

 



The purchased computer software meets the asset definition. Shoe Habit Ltd has control as it has the power to obtain the future economic benefits flowing from it and can restrict the access of others to it. Future economic benefits exist in the form of potential sales. It also meets the intangible asset definition, as it is non-monetary, has no physical substance, and is identifiable as it can be sold, transferred, etc. Assuming that it is probable that future economic benefits will be obtained from use of the software, Shoe Habit Ltd’s can recognise in transaction 2) an intangible asset at cost $1 500 000, and then amortise the asset over its useful life. The impact will be an increase in assets and a smaller expense recorded each year as the capitalised costs are amortised.

AASB 138 recognition & measurement of subsequent expenditure  

Under AASB 138 subsequent expenditure on brands, mastheads, publishing titles, customer lists and items similar in substance (whether externally acquired or internally generated) is always expensed as incurred. Hence, Shoe Habit Ltd should expense the $200 000 that was spent on updating the software in transaction 2).

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AASB 3 recognition & measurement of intangible assets acquired in a business combination 





The Patent acquired is an intangible asset, meeting the definition in relation to identifiability as the company has legal rights to its use. As the asset is acquired as part of a business combination, irrespective of it being an internally generated intangible asset, it can be recognised as long as fair value can be measured reliably. As the Patent was acquired in a business combination, fair value can be measured using valuers and their measurement techniques. Thus in transaction 3) Shoe Habit Ltd can record a $300 000 Patent, increasing assets. The useful life of the Patent needs to be determined to see if it needs to be amortised. As Shoe Habit Ltd acquired the business worth $1 100 000 (800 000 + 300 000), and gave $1 200 000 in consideration, it will be able to record Goodwill of $100 000. This is subject to an impairment test annually, but is not required to be amortised. Thus an increase in assets and possible future impairment losses will arise.

20

Question 6

Total: 15 marks

On 1 July 2009, Monster Ltd enters into an agreement to take over the business of Alien Ltd. On this date the business combination took place with Alien Ltd’s Balance Sheet as follows:

Cash Accounts Receivable Inventory Plant & Equipment (net)

Carrying Amount $ 20 000 56 000 29 000 127 000 232 000

Accounts Payable Mortgage loan Ordinary A shares $2, fully paid Ordinary B shares $1, fully paid Retained earnings

31 51 40 60 49 232

Fair Value $

50 000 140 000

000 500 000 000 500 000

Additional information: 1. Monster Ltd is to acquire all the assets (except cash) and liabilities of Alien Ltd. 2. Alien Ltd has been undertaking research into a new transport vehicle and has expensed a total of $15 000 in research and development costs. Monster Ltd determines that the fair value of this in-process research and development is $4 000 at acquisition date. 3. In exchange for the acquired business, Monster Ltd will give the Ordinary A shareholders $4 per share in cash, $2 payable at acquisition date, and $2 payable in one year’s time (Present Value of $1 discounted at 10% is 0.9091). Also, Monster Ltd will give the Ordinary B shareholders of Alien Ltd two shares in Monster Ltd for every five shares held in Alien Ltd. The fair value of each Monster Ltd share is $3. Costs to issue these shares will amount to $1 900. 4. Additionally, Monster Ltd is to provide Alien Ltd with one of its newest Motor Vehicles which had an original cost of $52 000, and an accumulated depreciation of $28 000. At 1 July 2009 the fair value of the motor vehicle is $30 000. 5. Costs to transport and install Alien Ltd assets at Monster Ltd’s premises will be $5 000. Required: a) Prepare an acquisition analysis in relation to this acquisition. (7 marks) b) Prepare the journal entries in the books of Monster Ltd to record the acquisition of Alien Ltd on 1 July 2009. 21

(8 marks)

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Question 6 a) Solution Fair value of identifiable net assets: Accounts receivable 56 000 Inventory 50 000 P&E 140 000 In-process R&D 4 000 Accounts payable (31 000) Mortgage loan (51 500) $167 500 Consideration transferred: Shares 60 000/5 x 2 = 24 000 shares @ $3 72 000 Cash $2 x 20 000 ($40 000/$2) 40 000 $2 x 20 000 x 0.9091 36 364 Vehicle 30 000 $178 364 Goodwill = 178 364 – 167 500

(7 marks)

$10 864

Question 6 b) Solution Dr Accounts Receivable 56 Dr Inventory 50 Dr Plant & Equipment 140 Dr Patent 4 Dr Goodwill 10 Cr Accounts Payable Cr Mortgage loan Cr Consideration payable Cr Proceeds on sale of Motor Vehicle Cr Share Capital Dr Consideration payable Cr Cash

(8 marks) 000 000 000 000 864 000 500 364 000 000

40 000 40 000

Dr Share capital Cr Cash

1 900

Dr Acquisition related expenses Cr Cash

5 000

Dr Accumulated depreciation – MV Dr CA of MV sold Cr Motor Vehicle

31 51 76 30 72

1 900

5 000 28 000 14 000 52 000

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