ACCY200, Autumn,

2011

Past Exam Questions

1
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 10 000

Rent revenue 2 000
Entertainment costs 4 000
Bad debts expense 6 200
Depreciation of plant 25 000
Insurance expense 8 000
Long service leave expense 18 400
Warranty expense 3 000
Amortisation of Development costs 25 000

The draft statements of financial position at 30 June 2011 and 30 June 2010 included the following
assets and liabilities:

2011 2010
$ $
Accounts Receivable 172 000 165 000
Allowance for doubtful debts (6 500) (7 000)
Prepaid insurance 4 900 6 700
Plant 250 000 250 000
Accumulated depreciation – plant (100 000) (75 000)
Development costs 100 000 -
Accumulated amortisation – development costs (25 000) -
Deferred tax asset ? 11 300
Rent received in advance 25 000 20 000
Provision for Warranty 27 000 38 000
Long service leave payable 13 000 14 500
Deferred tax liability ? 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%.

2
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)

3
Solution Question 1

a)

Accounting profit 187 000

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 96 600
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
LSL paid 5. 19 900
Warranty paid 6. 14 000
Development costs 100 000 (196 300)
Taxable income before tax loss recovered 87 300
Less: Tax loss recovered (24 000)
Add: Govt grant 10 000 (14 000)
Taxable Income 73 300
Current tax liability 21 990

Journal entry:

Dr Income tax expense 29 190

Cr DTA 7 200
Cr Current tax liability 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 Future Future Tax Base Taxable Deductible

Amount Taxable Deductible Temporary Temporary
Amount Amount Difference Difference
Relevant $ $ $ $ $ $
assets and
liabilities
Assets
Accounts 165 500 (0) 6 500 172 000 6 500
Receivable
Prepaid 4 900 (4 900) 0 0 4 900
insurance
Plant 150 000 (150 000) 100 0001. 100 000 50 000

Development 75 000 (75 000) 0 0 75 000

costs
Liabilities

Rent received 25 000 (25 000) 0 25 000

in advance
Provision for 27 000 (27 000) 0 27 000
Warranty
Long service 13 000 (13 000) 0 13 000
leave payable
Temporary 129 900 71 500
differences
Deferred tax 38 970
liability
Deferred tax 21 450
asset
Beginning (3 300) (11 300)
balances
Movement 7 200
during year
35 670 17 350
Adjustment

Dr Deferred tax asset 17 350

Dr Income tax expense 18 320
Cr Deferred tax liability 35 670

5
Solution c)

DTA beginning 21 450 x 5/30 = 3 575

DTL beginning 38 970 x 5/30 = 6 495

Dr DTL 6 495
Cr DTA 3 575
Cr Income tax expense 2 920

6
Question 2. Total: 25 marks

Mayfield Ltd

Income Statement

Year Ending 30 June 2009

Income
Sales 210 000
Government Grant 10 000
Rental Revenue 65 000 285 000
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 84 200
Profit before tax 200 800
Balance Sheet (excerpt)

As at 30 June 2009

2009 2008
Assets
Cash 12 000 18 000
Accounts Receivable 92 000 85 000
Allowance for Doubtful Debts (4 000) (5 200)
Rent Receivable 4 000 4 500
Prepaid Insurance 3 400 5 600
Plant 140 000 140 000
-Accumulated depreciation (Plant) (42 000) (28 000)
Goodwill (net) 10 200 22 200
Deferred Tax Asset (DTA) ? 5 230
Liabilities
Accounts Payable 78 000 76 000
Annual Leave Payable 10 500 3 500
Provision for Warranty 7 200 6 200
Current Tax Liability ? -
Deferred Tax Liability (DTL) ? 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%.

7
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)

8
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 (non-deductible) 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 (126 500)

Taxable income 211 600

Current tax liability @ 30% 63 480

Income Tax Expense Dr 63 480

Current Tax Liability Cr 63 480

9
 Question 2 b) Solution (10 marks)

Mayfield Ltd
Tax Effect Worksheet
as at 30 June 2009
Carrying Taxable Deductible Tax Base Taxable Deductible
Amount Amount Amount Temporary Temporary
Difference Difference

$ $ $ $ $ $

Assets
Accounts 88 000 0 4 000 92 000 4 000
Receivable
Rent 4 000 (4 000) 0 0 4 000
Receivable
Prepaid 3 400 (3 400) 0 0 3 400
insurance
Plant 98 000 (98 000) 56 000* 56 000 42 000
Goodwill 10 200 (10 200) 0 0 10 200
Liabilities

Accounts 78 000 0 0 78 000

Payable
Annual leave 10 500 0 (10 500) 0 10 500
Liability
Provision For 7 200 0 (7 200) 0 7 200
Warranty
Temporary 59 600 21 700
differences
Excluded (10 200)
differences
Net temp 49 400 21 700
differences
Deferred tax 14 820
liability
Deferred tax 6 510
asset
Beginning (2 150) (5 230)
balances
Adjustment 12 670 1 280

10
*To calculate the FDA:
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

11
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 Fair value Fair value

30 June 2009 30 June 2010
Land 1 200 000 900 000
Building 810 000 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)

12
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 Land 200 000

CR Asset Revaluation Reserve/surplus 200 000

DR Asset Revaluation Reserve/surplus 60 000

CR DTL 60 000

OR ALTERNATIVELY combine the two entries

DR Land 200 000

CR Asset Revaluation Reserve/surplus 140 000
CR DTL 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 Loss on Revaluation 100 000

DR Asset Revaluation Reserve/surplus 140 000
DR DTL 60 000
CR Land 300 000

13
Question 3 b) Solution

Working Out 30 June 2009:

Original Cost 1 000 000

1yr dep (100 000)
CA 900 000
Fair Value 810 000
Revaluation Decr. 90 000

30 June 2009

DR Loss on Revaluation 90 000

DR Accumulated Depreciation 100 000
CR Building 190 000

Working Out 30 June 2010:

CA 1 July 2009 810 000

1 yr dep (over 9yr) (90 000)
CA 30 June 2010 720 000
Fair Value 1 100 000
Revaluation incre. 380 000

30 June 2010

DR Building 290 000

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

DR Asset Revaluation Reserve/surplus 87 000

CR DTL 87 000

OR ALTERNATIVELY combine the two entries:

DR Building 290 000

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

14
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 $3 720 000
20 000 5% redeemable preference shares issued at $2, fully paid 40 000
Options (30 000 @ 40c) 12 000
General reserve 150 000
Retained earnings 240 000

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 10 25 000 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)

15
Question 4 Solution
2010
1 July Dr Cash 40 000
Cr Share Capital – Ordinary B 40 000
(20 000 shares @ $2)
15 July Dr Share Capital – Preference 40 000
Cr Shareholders’ Redemption Account 40 000
(20 000 shares @ $2)

Dr Retained Earnings 1 000

Cr Shareholders’ redemption Account 1 000
(premium of 5 cents on 20 000 shares)

20 July Dr Shareholders’ Redemption Account 41 000

Cr Cash 41 000

10 Dec Dr Cash 137 500

Cr Share Capital – Ordinary A 137 500
(25 000 shares @ $5.50)

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 Dr Call – Ordinary A 720 000
Cr Share Capital – Ordinary A 720 000
(240 000 shares @ $3 final call)

10 Feb 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)

Dr Forfeited Shares Liability 6 000

Cr Cash 6 000
(refund)
30 June Dr Retained Earnings/dividend declared 28 300
Cr Dividend Payable 28 300
(10c x [238 000 + 20 000 + 25 000])

16
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)

17
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.

19
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:

Carrying Amount Fair Value

$ $
Cash 20 000
Accounts Receivable 56 000
Inventory 29 000 50 000
Plant & Equipment (net) 127 000 140 000
232 000

Accounts Payable 31 000

Mortgage loan 51 500
Ordinary A shares $2, fully paid 40 000
Ordinary B shares $1, fully paid 60 000
Retained earnings 49 500
232 000

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.
(8 marks)

20
Question 6 a) Solution (7 marks)
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 $10 864

Question 6 b) Solution (8 marks)

Dr Accounts Receivable 56 000
Dr Inventory 50 000
Dr Plant & Equipment 140 000
Dr Patent 4 000
Dr Goodwill 10 864
Cr Accounts Payable 31 000
Cr Mortgage loan 51 500
Cr Consideration payable 76 364
Cr Proceeds on sale of Motor Vehicle 30 000
Cr Share Capital 72 000

Dr Consideration payable 40 000

Cr Cash 40 000

Dr Share capital 1 900

Cr Cash 1 900

Dr Acquisition related expenses 5 000

Cr Cash 5 000

Dr Accumulated depreciation – MV 28 000

Dr CA of MV sold 14 000
Cr Motor Vehicle 52 000

21