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BARCOO LTD
Options Dr 1 000
Options lapsed reserve Cr 1 000
(Transfer of lapsed options)
Note: the $1 000 amount for lapsed options could have been included in
share capital.
Exercise 3.5 Issue of ordinary and preference shares
FINICE LTD
2011
01/4 NO ENTRY
Cash Trust
10/4/11 Application 380 000 15/4/11 Application 60 000
______ Cash 320 000
380 000 380 000
Receivable - Underwriter
15/04/11 Share capital - pref 30 000 20/04/05 Cash/Share issue costs30 000
Cash
15/04/11 Cash trust 320 000
20/04/11 Receivable – U’writer 25 500
Exercise 3.6 Rights issue, placement of shares
HUNTER LTD
B. The accountant should consider whether there are tax or dividend distribution issues
associated with particular equity accounts before determining which accounts are to be
affected by the buy-back. If there are no such issues the buy-back can be written off against
any equity account or across all equity accounts.
Problem 3.5 Rights issue, call on shares, issue of options
FITZROY LTD
General Journal
2010
Nov 30 Cash Dr 18 000
Share capital - B Ordinary Cr 18 000
(Allotment of 8 000 B ordinary
shares at a price of $2.25 under a 1
for 5 rights issue)
2011
Jan 16 Call -A Ordinary Dr 90 000
Share capital - A Ordinary Cr 90 000
(Call of 75c per share on 100 000
A Ordinary shares)
Flaxton Ltd
Current Tax Worksheet
(for year ended 30 June 2011)
$ $
Accounting profit 40 000
Add:
Donations to political parties (non deductible) 5 000
Depreciation expense – Machinery 15 000
Rent received 10 000
Annual leave expense 5 600 35 600
75 600
Deduct:
Rent revenue 12 000
Annual leave paid 6 500
Depreciation of machinery for tax 18 750 (37 250)
Taxable profit 38 350
Current liability @ 30% $11 505
30 June 2011
Income Tax Expense (current) Dr 11 505
Current Tax Liability Cr 11 505
(Being recognition of current tax liability)
Part 2
Rent is recognised as income by Flaxton Ltd as it is earned, but will not be taxable
income until the cash is received. In the current year only $10,000 of the $12,000
rental income earned has been received and thus, an adjustment is required to remove
$2 000 from the accounting profit when calculating the company’s tax liability for the
current year. In the worksheet this is accomplished by adding all rent received in cash
to accounting profit and deducting all rent income recognised. This difference will
create a deferred tax liability of $600 ($2 000 x 30%) which will be recognised via the
deferred tax worksheet. When the cash is received next year the company will add
$2,000 rent to the accounting profit, pay the $600 tax and reverse the tax liability.
Exercise 8.3 Calculation of deferred tax
Liabilities
Interest Payable 1 000 0 (1 000) 0 1 000
Total 25 000 3 000
temporary
differences
Excluded - -
differences
Temporary 25 000 3 000
differences
Deferred tax 7 500
liability
Deferred tax 900
asset
Beginning (0) (0)
balances
Movement - -
during year
Adjustment 7 500 Cr 900 Dr
Exercise 8.6 Creation and reversal of temporary difference
Imbil Ltd
Workings
Accounting Taxation
Cost 25 000 25 000
Depreciation (04) (5 000) (3 750)
Carrying amount (04) 20 000 21 250
Depreciation (05) (5 000) (3 750)
Carrying amount (05) 15 000 17 500
Depreciation (06) (7 500) (3 750)
Carrying amount (06) 7 500 13 750
Proceeds on sale (15 000) (15 000)
Gain on sale 7 500 1 250
Imbil Ltd
Calculation of deferred tax (extract)
as at 30 June 2008
Carrying Future Future Taxable Deductible
Amount Taxable Deductible Tax Base Temporary Temporary
Amount Amount Differences Differences
$ $ $ $ $ $
The deductible temporary difference has increased to $2500 (representing two year’s
depreciation differentials). A deferred tax asset for $375 already exists so this year’s
adjustment will add a further $375 as follows:
Imbil Ltd
Calculation of deferred tax (extract)
as at 30 June 2010
Carrying Future Future Taxable Deductible
Amount Taxable Deductible Tax Base Temporary Temporary
Amount Amount Differences Differences
$ $ $ $ $ $
Equipment 0 (0) 0 0 0
As the asset has been sold the temporary difference will reverse. In the current tax
worksheet there will be two differences impacting on taxable income:
difference between the accounting gain on sale $7500 and the taxable gain $1250
will reduce taxable income by $6250
difference between accounting depreciation expense $7500 and tax deductible
depreciation $3750 will increase taxable income by $3750.
The net decrease of $2500 will result in $750 less tax being paid in the current year.
This benefit represents the reversal of the deferred tax asset. The adjusting journal
entry will be:
Kilcoy Ltd
Current Tax Worksheet
(for year ended 30 June 2010)
$ $
Accounting profit 256 700
Add:
Entertainment expense (non deductible) 1 700
Depreciation – buildings (non deductible) 7 600
Depreciation – plant 22 500
Insurance expense 4 200
Development expenditure 15 000
Doubtful debts expense 4 100
Annual leave expense 46 000 101 100
Workings:
Depreciation of plant for tax purposes: $150 000 x 20% = $30 000.
Accumulated depreciation for tax purposes is $30 000 x 3 = $90 000.
Kilcoy Ltd
Deferred tax worksheet
Relevant
Liabilities
Annual leave 10 000 0 (10 000) 0 10 000
Total
Temporary 137 500 29 100
Differences
Exempt
differences 110 500
Temporary 27 000 29 100
Differences
Deferred tax 8 100
liability
Deferred tax 8 730
asset
Beginning (27 270) *(5 850)
balances
Movements - -
during the
year
Adjustment (19 170) (2 880)
Dr Dr
* ($9 600 – 3 750 (tax loss recouped) = $5 850)
Paddington Ltd
AASB 112, paragraph 24 states that deferred tax assets shall be recognised for all
deductible temporary differences (DTD) ‘to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences can be
utilised’. The same recognition criteria apply to deferred tax assets arising from carry
forward tax losses (paragraph 34).
In determining whether it can recognise deferred tax assets with respect to:
Tax losses of $12 500, and
Deductible temporary differences of $17 000
a) Taxable profit against which tax losses and DTDs can be utilised will be
available if taxable temporary differences (TTD) reverse in the same period
as the deductions are available. Thus, the extent and period of reversal of
TTDs will need to be considered.
b) If insufficient TTDs exist to recoup the DTDs and tax losses Paddington Ltd
will need to consider if the company will earn sufficient taxable profit in the
period of reversal against with the deductions can be made.
c) AASB 112, paragraph 35 states that the existence of unused tax losses is
strong evidence that future taxable profit may not be available. Paddington
Ltd will need to examine the cause of the loss to determine whether it is due
to factors which are unlikely to recur.
As Paddington Ltd has incurred a tax loss in the current year deferred tax assets can
only be recognised to the extent that TTDs exist and will reverse in the same period as
the DTDs and tax losses, and to the extent that convincing evidence exists that future
taxable profits will be made.
As there is no indication that the losses incurred in 2005 are a ‘one-off’ Paddington
Ltd can only recognise a DTA of $3450 ($11 500 x 30%) representing the deductions
which can be made against taxable profit arising in 2006 from the reversal of taxable
temporary differences. The DTA of $5250 raised in the prior year will need to be
written down to $3450.
CHAPTER 10
BRUCE LTD
General Journal
A.
Accumulated depreciation – Building Dr 100 000
Asset revaluation reserve Dr 14 000
Deferred tax liability Dr 6 000
Expense – revaluation decrement Dr 20 000
Building Cr 140 000
B.
Depreciation expense – Building Dr 6 400
Accumulated depreciation – Building Cr 6 400
($160 000/25)
FADDEN LTD
When the asset is revalued upwards the entity will pass the entry:
In the tax effect worksheet, the temporary difference which is a deductible difference will
give rise to a deferred tax asset of 30% of $2 500 = $750.
However the movement during the year of a credit to the deferred tax liability will mean
that the adjustment required at the end of 2003 will be a debit to the deferred tax asset of
$2 250 ie. $750 – ($1 500):
The net effect is a debit balance in the deferred tax account of $750.
When the asset is revalued downwards the entity will pass the entry:
In the tax effect worksheet, the temporary difference which is a deductible difference will
give rise to a deferred tax asset of 30% of $15 000 = $4 500.
However, with the opening balance of $750, and the movement during the year of a debit to
the deferred tax account, the adjustment required at the end of 2004 will be a debit to the
deferred tax asset of $2 625 ie. $4 500 – ($750 + $1 125):
The net effect is a debit balance in the deferred tax account of $4 500.
When the asset is revalued upwards the entity will pass the entry:
In the tax effect worksheet, the temporary difference which is a deductible difference will
give rise to a deferred tax asset of 30% of $17 500 = $5 250.
However, with the opening balance of $4 500, and the movement during the year of a
credit to the deferred tax liability will mean that the adjustment required at the end of 2005
will be a debit to the deferred tax asset of $2 250 ie. $5 250 – ($4 500 - $1 500):
The net effect is a debit balance in the deferred tax account of $5 250.
On sale of the asset for $45 000, the entity will recognise a zero gain/loss on sale. For tax
purposes, there is a tax loss of $17 500 i.e. $45 000 - $62 500. The difference is $17 500.
The journal entry for tax to reverse the balance in the deferred tax account is:
CHIFLEY LTD
1 July 2009
30 June 2010
1 January 2011
Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of machine C)
Cash Dr 29 000
Proceeds on sale of Machine B Cr 29 000
(Sale of Machine B)
30 June 2011
McMAHON LTD
2010
1/9 Depreciation expense Dr 225
Accumulated depreciation Cr 225
(Depreciation on machine to be sold:
1/6 x 10%[15 000 – 1 500])
Machine Dr 15 000
Cash Cr 8 800
Proceeds on sale Cr 6 200
(Acquisition of machine)
Cash Dr 7 300
Proceeds on sale of machine Cr 7 300
(Sale of machine)
2011
1/1
Depreciation expense Dr 180
Accumulated depreciation Cr 180
(Depreciation on machine sold:
½ x 10%[4 000 – 400])
Cash Dr 500
Proceeds Cr 500
(Proceeds on machine sold)
Problem 10.1 (Cont’d)
1/1 Working:
Cost 7 000
Depreciation (3 x 10% x 6 300) 1 890
5 110
New motor 4 800
Carrying amount 9 910
Machine Dr 2 910
Accumulated depreciation Dr 1 890
Cash Cr 4 800
(Adjustment due to overhaul of machine)
PART B
Working:
Depreciation on arm:
1/15 x 3/12 x 1 200 = 20
The dividend payable is not a provision as the timing and amount are reasonably
certain. It may be shown separately if relevant to an understanding of the financial
position.
Lachlan Limited
Statement of Comprehensive Income for the year ended 30 June 2010
$'000
Revenue 1 200
Cost of sales (840)
Gross profit 360
Other income 54
Selling and distribution expenses (76)
Administrative expenses (35)
Finance costs (18)
Profit before tax 285
Income tax expense (85)
Profit for the year 200
Other comprehensive income:
Revaluation loss on available-for-sale financial assets, net of tax (1)
Total comprehensive income for the year 199
Calculations:
Other income comprises:
$’000
Gain on sale of plant 5
Interest income 24
20
Valuation gain on trading investments
Dividend revenue 5
54
Lucas Ltd
Statement of Financial Position as at 30 June 2010
$
Assets
Current assets
Cash and cash equivalents 119 869
Trade and other receivables 21 071
Financial assets held for trading 68 455
209 395
Non-current assets
Available-for-sale financial assets 1 880 472
Deferred tax asset 655
1 881 127
Non-current liabilities
Deferred tax liability 56 414
Long-term provisions 227
56 641
Equity
Share capital 1 368 024
Reserves 376 090
Retained earnings 278 384
2 022 498
Total equity
Total equity and liabilities 2 090 522
Explanations
Cash and cash equivalents: cash $7 000 + deposits at call $112 869 = $119 869.
Trade and other receivables comprise dividends receivable $15 693 + interest
receivable $478 + outstanding settlements receivable $4 900 = $21 071.
Trade and other payables comprises outstanding settlements payable $10 253 +
interest payable $280 + other payables $83 = $10 616.
Long-term provisions: provision for employee benefits $752 – $525 = $227.
2009 Dr Cr 2010
$ $ $ $
Land 100 000 (1) 20 000 120 000
Plant, at cost 70 000 (2) 15 000 85 000
Accumulated depreciation (20 000) 8 000 (28 000)
Available for sale investments 30 000 (3) 8 000 40 000
(4) 2 000
Goodwill 25 000 (5) 5 000 20 000
Investing activities
Purchase of plant (2) 15 000 (15 000)
Purchase of investments (4) 2 000 (2 000)
Explanations:
(1) There are no acquisitions or disposals of land. Hence, the increase results from
the revaluation of land at independent valuation amounting to $20 000. The
offsetting credits are to deferred tax $6000 and to land revaluation reserve $14
000.
(2) There are no disposals of plant; hence, the increase in plant represents additions
amounting to $15 000.
(3) There were no disposals of investments. The investments revaluation reserve has
increased by $6000 and there is related deferred tax of $2000. Hence the
revaluation of investments must have amounted to $8000.
(4) Since investments increased by $10 000 the difference is accounted for by the
purchase of additional investments $2000 (10 000 – 8000).
(5) The change in goodwill is wholly accounted for by the impairment write-off
$5000.
$
Purchase of plant (15 000)
Purchase of investments (2 000)
Net investing cash flows (17 000)
Exercise 20.8 Cash receipts from customers and cash paid to
suppliers and employees
$
Cash received from customers = Sales 600 000
Less increase in receivables (10 000)
$590 000
Interest paid
Interest expense 6 000
Increase in accrued interest (2 000)
Interest paid 4 000
Income tax paid
Income tax expense 23 000
Increase in tax payable (2 000)
Income tax paid 21 000
Investments
Revaluation gain net of tax 3 500
Increase in deferred tax liability 1 500
Purchase of investments -
Increase in investments $5 000
Explanations
The increase in deferred tax liability is the tax effect of the revaluation increment,
as per the additional information.
As the increase in investments can be explained by the revaluation, and there were
no disposals of investments, we can conclude that there were no purchases of
investments during the year.
The purchases of plant are determined as the increase in plant in the absence of
any disposals of plant during the year.
Denim Ltd
Statement of Cash Flows for the year ended 30 June 2010
$
Cash flows from operating activities
Receipts from customers 676 000
Payments to suppliers and employees (605 000)
Cash generated from operations 71 000
Interest paid (4 000)
Income tax paid (21 000)
Net cash from operating activities 46 000
Operating activities
Profit before tax (1) 138 000 138 000
Decrease in accounts receivable (2) 6 000 6 000
Decrease in prepayments (3) 5 000 5 000
Increase in inventory (4) 44 000 (44 000)
Increase in accounts payable (5) 46 000 46 000
Increase in accrued liabilities (6) 5 000 5 000
Depreciation (8) 30 000 30 000
Gain on sale of plant (7) 7 000 (7 000)
Interest expense (9) 6 000 6 000
236 000 51 000 185 000
Interest paid (10) 1 000 (9) 6 000 (5 000)
Income tax paid (12) 7 000 (11) 46 000
(13) 4 000 (43 000)
244 000 107 000 137 000
Investing activities
Purchase of plant (14) 72 000
(15) 34 000 (106 000)
Proceeds from sale of plant (16) 20 000 (17) 5 000
(7) 7 000 (18) 22 000 -
27 000 133 000 (106 000)
Financing activities
Borrowings (19) 2 000 2 000
Dividends (20) 10 000 (21) 84 000
(22) 6 000 (80 000)
12 000 90 000 (78 000)
Net decrease in cash and cash equivalents (23) (47 000)
Cash and cash equivalents at beginning of year 96 000
Cash and cash equivalents at end of year
$ 49 000
Explanations
(1) Profit before tax $138 000.
(2) Decrease in net accounts receivable (excluding receivables for plant) $6000.
(3) Decrease in prepayments $5000.
(4) Increase in inventory $44 000.
(5) Increase in accounts payable (excluding accounts payable arising from the
purchase of plant) $46 000.
(6) Increase in accrued liabilities (excluding interest accrued liabilities) $5000.
(7) Gain on sale of plant $7000.
(8) Depreciation expense for the year $30 000. This is calculated as the increase in
accumulated depreciation, after taking into account the reduction in
accumulated depreciation for the plant sold during the year. Refer item (17).
(9) Adjustment for interest expense $6000 included in profit before tax.
(10) Increase in accrued interest; note that the interest paid $5000 = interest
expense $6 000 – increase in accrued interest $1000.
(11) Income tax expense for year 46 000.
(12) Increase in current tax payable $7000.
(13) Increase in deferred tax asset $4000. As there were no items of other
comprehensive income, the increase in deferred tax asset is recognised as the
deferred component of income tax expense.
(14) Plant additions for year $72 000.
(15) Decrease in plant accounts payable $34 000.
(16) Cost of plant sold $20 000. Refer additional information.
(17) Accumulated depreciation on plant sold $5000. Note book value of plant sold
was $15 000; proceeds from sale = $15 000 + gain on sale $7000 = $22 000.
(18) Increase in accounts receivable arising from sale of plant $22 000; hence, there
is no cash received in the current year arising from the sale of plant.
(19) Increase in borrowings $2000. This represents the increase in borrowings and
in the absence of other information it is assumed there are no loan repayments.
(20) Dividends reinvested as share capital $10 000 (refer additional information).
(21) Dividends declared out of profits for the year $84 000.
(22) Decrease in dividend payable $6000. Note dividends paid amount to $80 000,
which comprises dividend payable at beginning of year $56 000 + Interim
dividend $34 000 – Reinvestment of dividends $10 000.
(23) Decrease in cash $47 000.
The doubtful debts expense is not used in calculating net cash from operating
activities under the indirect method. It is a component of the movement in net
receivables.
Crimson Ltd
Statement of Cash Flows for the year ended 30 June 2010
$
Cash flows from operating activities
Profit before tax 138 000
Interest expense 6 000
Depreciation of plant 30 000
Gain on sale of plant (7 000)
Decrease in accounts receivable 6 000
Increase in inventory (44 000)
Decrease in prepayments 5 000
Increase in accounts payable 46 000
Increase in accrued liabilities 5 000
Cash generated from operations 185 000
Interest paid (5 000)
Income tax paid (43 000)
Net cash from operating activities 137 000