1. QUESTION

    

    

    

   Q1. The accountant for Katherine Enterprises Ltd has the task of preparing the deferred tax entries in the year-end financial statements at 30th June 2021. a. The accounts receivable account had a balance at 30th June 2020 of $84,630 with a balance at 30th June 2021 of $81,900. Despite active monitoring by the credit department of the accounts receivables it proved impossible to collect $13,650 and this was written off during the year. The allowance for doubtful debts account had a balance at 30th June 2020 of $6,830 and $10,920 at 30th June 2021. b. On 1st July 2020 Katherine Enterprises Ltd bought an articulated dump truck for $485,000. The company has adopted an accounting straight-line depreciation rate of 10% each year for ten years. The Tax depreciation rate applicable on a straight line basis for this class of asset is 25%. c. On the 1st April 2021 the company invested $850,000 in a term deposit which accrued interest at 5.6% per annum. Interest is paid half-yearly on 30th September and 31st March. At the start of the financial year the company held no other interest bearing investments. d. Katherine Enterprises Ltd employs 20 staff, some of whom have worked for the company for 8 years. They are entitled, as part of their salary package, to long service leave when they have worked for the company for 10 years of continual employment. One of their managers, who has worked for 11 years, took long service leave during the year and was paid $27,500. The company provides for long service leave each year and the balance at 1st July 2020 was $201,000 with a closing balance at 30th June 2021 of $192,000. e. Part of the assistance that you have provided to the company was an impairment test undertaken at the start of the year as the value of the assets had not been reviewed for some time. Equipment which originally had a carrying amount of $635,000 was revalued upwards to $785,000. The equipment had an annual accounting depreciation rate of 15% and a tax depreciation rate of 8%. f. The company has been expensing research in a new product for a number of years. The directors are now of the opinion that the product will have a viable market and that further expenditure can be capitalised as a development asset. With this in view $160,000 was expended on 1st July 2020. It is believed that this expenditure will be recovered over a five year period and is to be amortised on a Asia Pacific College of Business and Law ACT305 Corporate Accounting Assignment Semester 1, 2021 Page 3 of 5 straight line basis at 20% per annum. The project does not qualify for any accelerated tax deductions over and above the full cost incurred. Required As the accountant has only recently been recruited you have been asked to complete the preparation of the journal entry adjustments for any temporary tax differences and to explain in each of the situations given above the reasons for the adjustments, why the accounts have been chosen and the timing of the differences and any future reversals. (total 15 marks) Q2. You have been auditing the consolidated financial statements of Reynolds Ltd and its wholly owned subsidiary Fisher Ltd. You discover that Reynolds Ltd had bought inventory during the year for $33,750 which it subsequently sold to Fisher Ltd for $40,500. Later in the year one third of the inventory was sold by Fisher Ltd to a non-group company for $16,500. The accountant’s consolidation worksheet had recorded the following adjusting journal entries: Sales Dr 40,500 Cost of Sales Cr 38,000 Inventories Cr 2,500 Deferred Tax Asset Dr 750 Income Tax Expense Cr 750 Required a. Discuss whether the entries suggested by the chief accountant are correct, explaining on a lineby-line basis the adjustment entries. b. Determine the consolidation worksheet entries in the following year, assuming the inventories are on-sold, and explain the adjustments on a line-by-line basis. (total 18 marks) Q3 Billy Ltd has a 100% interest in Goat Ltd. During the financial year to 30th June 2022 the following exchanges of plant and machinery occurred between the group members: (a) Billy Ltd sold a machine to Goat Ltd for $29,000 on 1st February 2022. It had originally cost $116,000 with an accumulated depreciation of $92,800. Goat Ltd traded in secondhand machinery and held the machine as unsold inventory when it reported its results at 30th June 2022. (b) On 1 July 2021, Goat Ltd bought a motor car for $18,300 from Billy Ltd. When the car was sold it stood at a carrying amount of $53,500 in Billy Ltd’s Statement of Financial Position with a cost of $65,000 and accumulated depreciation of $11,500. The common straight-line depreciation policy adopted by the companies was 10% p.a. on cost. (c) On 1 April 2019 Billy Ltd purchased a concrete pumping truck from Goat Ltd for $72,000. At that time it appeared in Goat Ltd’s asset register at a cost of $59,000 with accumulated depreciation of $9,800. Billy Ltd depreciated heavy machinery on a straight-line basis at 10% p.a. on cost. Goat Ltd had employed a diminishing balance depreciation method at a rate of 12.5% per year. Required Prepare the consolidation worksheet journal entries for 30th June 2022 assuming an income tax rate of 30%. (total 26 marks) Asia Pacific College of Business and Law ACT305 Corporate Accounting Assignment Semester 1, 2021 Page 4 of 5 Q4 On 1 July 2021, Oldfield Ltd acquired 23% of the shares of Shadow Ltd for $340,000. There is a presumption that, as the shareholding is greater than 20%, Oldfield Ltd exerts a significant influence over the management of Shadow Ltd. At the date of the acquisition of the 23% shareholding the equity of Shadow Ltd was made up of: Share capital Retained earnings $ 561,000 374,000 General reserve 85,000 Total equity $ 1,020,000 At 1 July 2021, with the exception of land and plant and machinery, all the identifiable assets and liabilities of Shadow Ltd were recorded at their fair values. Carrying amount Fair value Land $ 935,000 $ 1,275,000 Plant and machinery (cost $780,000) 650,000 715,000 It was assessed that the plant and machinery would remain in operation for a further 5 years. With the revaluation of the land Shadow Ltd created an Asset Revaluation Surplus Account and measured the value of the land annually. The tax rate is 30%. The following is an extract from the financial statements of Shadow Ltd for 30 June 2023: Profit before tax $ 612,000 Income tax expense (255,000) Profit after tax 357,000 Retained earnings at 1 July 2022 697,000 1,054,000 Dividends paid (34,000) Dividends declared (42,500) Transfer to general reserve (27,500) Retained earnings at 30 June 2023 950,000 General reserve at 1 July 2022 102,000 Transfer from retained earnings 27,500 General reserve at 30 June 2023 129,500 Asset revaluation surplus at 1 July 2022 284,000 Other comprehensive income — gains on revaluation 11,500 Asset revaluation surplus at 30 June 2023 295,500 Share capital at 30 June 2023 Total equity at 30 June 2023 561,000 $1,936,000 Required Prepare the Oldfield Ltd journal entries to include its equity investment in Shadow Ltd in the consolidated financial statements at 30 June 2023. (total 23 marks) Asia Pacific College of Business and Law ACT305 Corporate Accounting Assignment Semester 1, 2021 Page 5 of 5 Q5 As a result of a creditors petition a court order was issued for the liquidation of Investor Danger Ltd. At a meeting of the creditors, debts were submitted and subsequently taken as proved by the liquidator. They consisted of $240,000 unsecured notes, and debentures issued with a circulating security interest which totalled $525,000. The land and buildings had been used as security to raise two mortgage loans. The first mortgage was for $198,000, which included the outstanding mortgage loan and accrued interest to the date of liquidation. The second subsequent mortgage was for $124,000. The short-term creditors consisted of trade accounts payable, $192,000, and outstanding employee entitlements. These entitlements were made up of employees’ wages for the eight employees who were each owed two weeks wages at $1,000 per week, a secretary’s salary, also owed two weeks at $750 per week, their accrued holiday pay of $15,000, and outstanding sales commissions earned by the sales team totalling $8,000. PAYG instalment tax of $1,900, GST of $4,780 and Fringe Benefits Tax of $4,800 were also outstanding. The directors were owed fees of $12,000 and the managing director had a month’s salary unpaid of $17,000. The liquidator incurred expenses of $12,000 and had a remuneration of $35,000. The liquidator took control of the assets and realised $1,332,808 from their sale, which included $298,000 from the sale of the land and buildings. The share capital of the company comprised 120,000 fully paid $1 Ordinary shares. Required: Show the order of priority of payment of debts for Investor Danger Ltd and calculate the amount payable to each of the creditors.

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