Question 1
The accounting profit before tax of Baby Shark Ltd for the year ended 30 June 2019 was $92,550. It included the following revenue and expense items:
| Accounting fees | $5,500 |
| Amortisation of development costs | 15,000 |
| Carrying amount of plant sold | 30,000 |
| Depreciation expense – equipment | 5,500 |
| Depreciation expense – plant | 24,000 |
| Doubtful debts expense | 8,100 |
| Employee expense | 15,400 |
| Entertainment expense | 13,200 |
| Goodwill impairment | 2,000 |
| Government grant (exempt income) | 2,200 |
| Insurance expense | 12,900 |
| Proceeds from insurance claim for loss of profits | 41,200 |
| Proceeds from sale of plant | 33,000 |
| Warranty expense | 1,500 |
The draft statement of financial position as at 30 June 2019 included the following assets and liabilities:
| 2019 | 2018 | |
| Assets | ||
| Cash | $15,500 | $17,500 |
| Trade receivable | 35,000 | 40,500 |
| Allowance for doubtful debts | (4,200) | (4,000) |
| Inventory | 21,000 | 19,600 |
| Prepaid insurance | 3,400 | 5,600 |
| Development costs | 45,000 | – |
| Accumulated amortisation | (15,000) | – |
| Plant – at cost | 240,000 | 290,000 |
| Accumulated depreciation – plant | (134,400) | (130,400) |
| Equipment – at cost | 58,000 | 58,000 |
| Accumulated depreciation – equipment | (24,500) | (19,000) |
| Land – at fair value | 450,000 | 300,000 |
| Deferred tax asset | ? | 10,140 |
| Goodwill | 6,000 | 6,000 |
| Goodwill – accumulated impairment losses | (4,000) | (2,000) |
| Other debtors | 142,400 | 0 |
| Liabilities | ||
| Provision for employee benefits | 14,100 | 9,700 |
| Provision for warranties | 3,100 | 2,200 |
| Deferred tax liability | ? | 42,804 |
| Borrowings | 150,000 | 130,000 |
| Other creditors | 12,000 | – |
Additional information:
a) In November 2018, the company received an amended assessment for the year ended 30 June 2018 from the Australian Taxation Office (ATO). The amended notice indicated that an amount of $6,000 claimed as a deduction had been disallowed. Baby Shark Ltd has not yet adjusted its accounts to reflect the amendment.
b) In the previous year, Baby Shark Ltd has made a tax loss of $17,000. Baby Shark Ltd recognised a deferred tax asset in respect of this loss.
c) For tax purposes, the carrying amount of plant sold was $26,000. This sale was the only movement in plant for the year.
d) The tax deduction for plant depreciation was $28,800. Accumulated depreciation at 30 June 2018 for taxation purposes was $156,480.
e) The tax deduction for equipment was $7,000. Accumulated depreciation at 30 June 2018 for tax purposes was $28,000.
f) The original cost of the land was $200,000.
g) Other creditors at 30 June 2019 include an accrual for accounting fees of $4,500 for work not yet performed. For tax purposes, the accounting fees are deductible only if work has been performed.
h) Other debtors at 30 June 2019 include $41,200 relating to an insurance claim that is in process. Income is assessable for tax purposes only after the insurance proceeds have been received.
i) No deduction is allowed for taxation purposes in relation to entertainment.
j) A tax deduction for development expenditure of 125% of the $45,000 spent during the year is available under the Tax Act. The profit reflects the amount of development costs amortised in the current period.
k) No journal entries related to tax have been recorded for the year ended 2019. Assume the tax balances at 30 June 2018 are correct.
l) The tax rate is 30%.
Required:
1. Prepare the journal entry necessary to record the amendment to the prior year’s taxation return.
2. Prepare the current tax worksheet to calculate the current tax liability for the year ended 30 June 2019 (show all working).
3. Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2019. Include all accounts and net balances where appropriate.
4. Prepare the journal entries to recognise the current tax liability, deferred tax assets and liabilities at 30 June 2019.
Question 2
Scruffy Ltd is a manufacturer of pet food and looking to take over the company Smuckos Ltd. Financial information of Smuckos Ltd at 1 December 2019 included the following:
| Assets | |
| Cash | $13,800 |
| Trade receivables | 46,800 |
| Inventory | 23,200 |
| Plant | 133,800 |
| Accumulated depreciation – plant | (32,000) |
| Land | 20,800 |
| Total assets | 206,400 |
| Liabilities | |
| Trade payables | 24,800 |
| Provisions | 24,000 |
| Loans | 17,200 |
| Total liabilities | 66,000 |
| Equity | |
| Share capital – 60,000 ordinary shares | 48,000 |
| – 40,000 ordinary shares | 32,000 |
| Retained earnings | 60,400 |
| Total equity | 140,400 |
All the assets and liabilities of Smuckos Ltd were recorded at amounts equal to fair value except as follows:
| Plant | $112,000 |
| Land | 35,800 |
| Inventory | 28,000 |
Smuckos Ltd also had a brand ‘Scuby Snacks’ that was not recorded by the company because it had been internally generated. It was valued at $10,000.
Smuckos Ltd has also not recorded the interest accrued on the loans amounting to $22,800 and annual leave entitlements of $13,000.
Scruffy Ltd decided to acquire all the assets of Smuckos Ltd except for the cash. In exchange for these assets, Scruffy Ltd agreed to provide:
a) Two shares in Scruffy Ltd for every three A ordinary shares held in Smuckos Ltd. The fair value of each Scruffy Ltd share was agreed to be $2.16.
b) Artworks to the owners of the B ordinary shares held in Smuckos Ltd. (These artworks were held in the records of Scruffy Ltd at $40,000 and valued at $58,000.
c) Sufficient additional cash to enable Smuckos Ltd to pay off its liabilities including the expected liquidation costs of $4,000.
The business combination occurred on 1 December 2019. Legal and accounting costs incurred by Scruffy Ltd in undertaking this business combination amounted to $800. Costs to issue the shares to the A ordinary shareholders of Smuckos Ltd were $400.
Required:
1. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill.
2. Prepare the journal entries in the records of Scruffy Ltd to record its acquisition of Smuckos Ltd on 1 December 2019.
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