ACCY200,

Autumn, 2011
Past Exam
Questions

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%.

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)

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

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)

4 900

150 000

(150
000)

100 0001.

100 000

50 000

Developme
nt costs
Liabilities

75 000

(75 000)

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)

25 000

27 000

(27 000)

27 000

13 000

(13 000)

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

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

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%.

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)

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

4 000

92 000

4 000

4 000

(4 000)

4 000

3 400

(3 400)

3 400

98 000
10 200

(98 000)
(10 200)

56 000*
0

56 000
0

42 000
10 200

78 000

78 000

10 500

(10 500)

10 500

7 200

(7 200)

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

12

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)

13

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

14

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

15

Question 4

10 marks

Goldfish Ltds 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)

16

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

17

Question 5

Total: 10 marks

The management of Shoe Habit Ltd had been concerned that over the last few
years the companys market value appeared to be higher than what was
recorded in the companys 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)

18

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 Ltds 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).

19

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 Ltds
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 years 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 Ltds 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)

22

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

23