MPA903 Advanced Corporate Reporting Individual Assignment (30%) Semester 2, 2017
QUESTION 1
At 1st July 2016, Green Bay Ltd’s opening balances of asset and liability accounts for both accounting and tax purposes were shown as follows:
| Accounting | Tax | |
| Goodwill | $800,000 (Dr.) | Nil |
| Plant and equipment (net) | $640,000 (Dr.) | 600,000 (Dr.) |
| Provision for long service leave | $100,000 (Cr.) | Nil |
| Accounts Receivable (net) | $320,000 (Dr.) | $350,000 (Dr.) |
| Provision for Warranty expenses | $75,000 (Cr.) | Nil |
| Research and development expenses | Nil | Nil |
| Deferred tax assets (DTA) | 49,500 (Dr.) | |
Green Bay Ltd’s operating profit before income tax was $3,500,000 for the year ended 30th June, 2017. In preparing the financial statements for the year ended 30th June, 2017, the company accountant used the following information.
- Goodwill of $200,000 was being impaired over the year.
- Depreciation of plant and equipment was 25% per annum for tax purposes, for accounting purposes was 20%. Plant and equipment was purchased on 1 July 2015 for $800,000.
- Long service leave expense was recorded as $105,000 for the year ending at 30th June 2017 but $90,000 had been paid.
- Doubtful debts expense was $45,000, actual bad debts written off amounted to 65,000.
- Warranty expenses were estimated as $50,000. However, actual warranty paid totalled $45,000 for the year.
- Entertainment expenses amounted to $75,000.
- Research and development costs incurred during the year totalled $120,000. For accounting purposes these were capitalized and are being amortized over 5 years, only ½ year was applicable in the current period. However, current legislation allows a 125% deduction in the year R&D costs are paid.
- Income tax rate for the financial year ended on 30 June 2017 is 30%
Required:
- Calculate taxable income for the year ended 30 June 2017 and then complete a worksheet provided on the next page.
- Prepare the journal entry required by AASB 112 Income Taxes for the year ended 30 June 2017.
- From 1 July 2017 the tax rate changed from 30% to 25%. Prepare journal entries to reflect this change of tax rate on 1 July 2017.
Taxation worksheet for Green Bay Ltd for the year ended 30 June 2017
| Item | Statement of Financial Position ($) | Tax bases ($) | Deductible temporary differences ($) | Taxable temporary differences ($) | Tax expense ($) | Current tax payable ($) |
| ASSETS | ||||||
| Cash | 250,000 | |||||
| Inventory | 350,000 | |||||
| Accounts Receivable (net) | 740,000 | |||||
| Plant and equipment (net) | 480,000 | |||||
| Research and Development cost | 108,000 | |||||
| Goodwill | 600,000 | |||||
| 2,528,000 | ||||||
| LIABILITIES | ||||||
| Payables | 780,000 | |||||
| Provision for long service leave | 115,000 | |||||
| Provision for warranty expense | 80,000 | |||||
| Loan | 1,100,000 | |||||
| 2,075,000 | ||||||
| NET ASSETS | 453,000 | |||||
| Temporary differences at end of period | ||||||
| Less prior period balance | ||||||
| Movement for the period | ||||||
| Tax effect at 30 % | ||||||
| Tax taxable income *30% | ||||||
| Income tax adjustments | ||||||
QUESTION 2
On 1 July 2012, Green Bay Ltd acquired 80% of the issued shares in Blue Sky Ltd for a cash payment of $12,000,000. At the date of acquisition, the shareholders’ equity of Blue Sky Ltd comprised the following:
| Share Capital | $6,000,000 |
| General Reserve | $3,000,000 |
| Retained profit | $3,000,000 |
| $12,000,000 |
At the date of acquisition a depreciable non-current asset of Blue Sky Ltd were valued at $800,000 below their fair values. The directors of Green Bay Ltd decided not to advise the directors of Blue Sky Ltd to revalue the relevant assets. Furthermore, no adjustments have been made with respect to these non-current assets in the accounts of Blue Sky Ltd since the date of acquisition. This depreciable asset had a useful life of ten (10) years at the date of acquisition. Goodwill on acquisition was impaired by $550,000 in the financial year ended 30 June 2013 and $600,000 in the financial year ended 30 June 2017. The information extracted from statement of comprehensive income, statement of financial position and statement of changes in equity of Green Bay Ltd and Blue Sky Ltd for the year ended 30 June 2017 is shown as below:
| Green Bay | Blue Sky | |||||
| Ltd ($,000) | Ltd ($,000) | |||||
| Sales | 125,000 | 75,000 | ||||
| Cost of goods sold | (80,000) | (69,000) | ||||
| Gross profits | 45,000 | 6,000 | ||||
| Other income | 5,000 | 3,000 | |||||||||
| Operating expenses | (4,000) | (2,600) | |||||||||
| Operating profit before income tax expense | 46,000 | 6,400 | |||||||||
| Income tax expense | (13,800) | (1,920) | |||||||||
| Operating profit after income tax expense | 32,200 | 4,480 | |||||||||
| Retained profit (1/7/16) | 12,000 | 6,200 | |||||||||
| Interim dividend paid (1/1/17) | (8,200) | (800) | |||||||||
| Proposed Final dividend | (4,800) | (1,200) | |||||||||
| Retained profit (30/6/17) | 31,200 | 8,680 | |||||||||
| Green Bay Ltd | Blue Sky Ltd | |||||||
| $,000 | $,000 | |||||||
| Current assets | 18,274 | 4,678 | ||||||
| Non-current assets | 55,443 | 16,449 | ||||||
| Investments | 16,353 | 5,113 | ||||||
| 90,070 | 26,240 | |||||||
| Share capital | 35,000 | 6,000 | ||||||
| General reserve | 7,500 | 3,200 | ||||||
| Revaluation Surplus | 870 | 560 | ||||||
| Retained profit | 31,200 | 8,680 | ||||||
| Liabilities | 15,500 | 7,800 | ||||||
| 90,070 | 26,240 | |||||||
Additional Information:
- All dividends have been paid from post-acquisition profits. Both Green Bay Ltd and Blue Sky Ltd record dividends as income when the dividends are proposed.
- The opening stock of Green Bay Ltd for the year ended 30 June 2017 includes goods bought from Blue Sky Ltd at a profit of $734,000.
- Transactions between the two companies during the year ended 30 June 2017 amounted to $25,000,000 worth of sales. At 30 June 2017, Blue Sky Ltd still held some of inventory purchased from Green Bay Ltd during the year. The inventory had been transferred at a profit of $680,500.
- On 1 July 2014, Blue Sky Ltd sold a piece of machinery to Green Bay Ltd for $1,950,000. The machinery had original cost $1,500,000 on 1 July 2012, and was depreciated in Blue Sky Ltd’s books of account at 10% per annum, straight line. The directors of Green Bay Ltd considered the remaining estimated useful life of the machinery was eight (8) years.
- During the year, Blue Sky Ltd paid an interest on the loan from Green Bay Ltd $187,500. At 30 June 2017, the outstanding balance of the loan that Blue Sky Ltd borrowed from Green Bay Ltd amounted 2,500,000.
- Management of Green Bay Ltd measures any non-controlling interest at fair value.
- Income tax rate is 30%.
Required
- Prepare all necessary consolidated journal entries to eliminate the investment and intra-company transactions for the year ended 30 June 2017 (including all tax effects on the internal transactions).
- Design a consolidation worksheet and then post all consolidation journal entries into the worksheet.
- Prepare consolidated Financial Statements according to AASB 10 Consolidated Financial Statements based on the consolidated worksheet.
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