Question 1 (30 Marks)
The accounting profit before tax of Jameson Ltd for the year ended 30 June 2018 was $320,000. It included the following revenue and expense items:
| Amortisation of development costs | $30,000 |
| Employee benefits expense | 54,000 |
| Carrying amount of plant sold | 36,667 |
| Depreciation expense – plant (15%) | 40,000 |
| Doubtful debts expense | 12,000 |
| Entertainment expense | 14,220 |
| Fines and penalties | 7,200 |
| Goodwill impairment | 1,000 |
| Insurance expense | 24,000 |
| Legal fees | 4,200 |
| Proceeds on sale of plant | 30,000 |
| Rent revenue | 25,000 |
| Royalty revenue (non-assessable) | 3,500 |
| Restructuring expenses | 25,000 |
The draft statement of financial position as at 30 June 2018 included the following assets and liabilities:
| 2018 | 2017 | |
| Assets | ||
| Cash | 42,000 | 57,000 |
| Accounts receivable | 190,000 | 160,000 |
| Allowance for doubtful debts | (26,000) | (22,000) |
| Inventory | 142,000 | 152,000 |
| Prepaid insurance | 30,000 | 25,000 |
| Rent receivable | 3,500 | 5,500 |
| Development costs | 120,000 | – |
| Accumulated amortisation – development costs | (30,000) | – |
| Plant – at cost | 200,000 | 266,667 |
| Accumulated depreciation – plant | (90,000) | (80,000) |
| Goodwill | 10,000 | 10,000 |
| Goodwill – accumulated impairment losses | (2,000) | (1,000) |
| Deferred tax asset | ? | 26,100 |
| Liabilities | ||
| Accounts payable | 111,500 | 94,000 |
| Current tax liability | ? | 12,500 |
| Provision for employee benefits | 61,000 | 65,000 |
| Provision for restructuring | 25,000 | – |
| Borrowings | 210,000 | 190,000 |
| Deferred tax liability | ? | 17,150 |
Additional information:
a) All plant was purchased on 1 July 2015. The tax depreciation rate for plant is 20%. The plant sold on 30 June 2018 cost $66,667.
b) A tax deduction for development expenditure of 125% of the $120,000 spent during the year is available under income tax legislation. The profit before tax reflects the amount of development costs amortised in the current period.
c) Assume all depreciation rates are on a straight line basis.
d) Rent is assessed for tax when received in cash.
e) Actual amounts paid for insurance are allowed as a tax deduction.
f) No deduction is allowed for taxation purposes in relation to entertainment, fines and penalties.
g) Legal fees of $4,200 are capital in nature and non-deductible for tax purposes.
h) For tax purposes, restructuring costs are deductible only when paid.
i) The company pays tax in quarterly instalments. The following payments were made during the year ended 30 June 2018:
| 28 July 2017 (Final payment for 30 June 2017) | $10,700 |
| 28 October 2017 (1st payment for 30 June 2018) | 9,570 |
| 28 February 2018 (2nd payment for 30 June 2018) | 10,470 |
| 28 April 2018 (3rd payment for 30 June 2018) | 7,550 |
j) Except for the quarterly instalments above, no journal entries related to tax have been recorded for the year ended 2018. Assume the tax balances at 30 June 2017 are correct.
k) The tax rate is 30%.
Required:
- Calculate the taxable income and current tax liability using an appropriate worksheet for the year ended 30 June 2018 (show all workings). (15 marks)
- Prepare the deferred tax worksheet to calculate the deferred tax asset and liability balances and adjustments for the year ended 30 June 2018. Include all accounts and net balances where appropriate. (13 marks)
- Prepare the journal entries to recognise the current tax liability, deferred tax assets and liabilities at 30 June 2018 calculated in 1. and 2. (2 marks)
(Source: adapted from Loftus, J., Leo, K., Picker, R., Wise, V., & Clark, K. (2013). Understanding Australian Accounting Standards. (1st edition). Brisbane: John Wiley & Sons, Australia.)
| Marking Guide – Question 1 | Max. marks awarded |
| 1) | |
| Determination of taxable income | 12 |
| Workings | 3 |
| 2) | |
| Determination of deferred tax balances and adjustments | 13 |
| 3) | |
| Journal entries | 2 |
| Total | 30 |
Question 2 (20 Marks)
Part A (14 marks)
Justice Ltd acquired all the assets except cash of League Ltd on 1 July 2018. On this date, the statement of financial position contained the following accounts:
| Assets | |
| Current assets | |
| Cash | 12,000 |
| Accounts receivable | 28,840 |
| Inventory | 24,880 |
| Non-current assets | |
| Buildings | 200,000 |
| Accumulated depreciation – building | (40,000) |
| Fixtures | 60,000 |
| Accumulated depreciation – fixtures | (20,000) |
| Plant and equipment | 60,000 |
| Accumulated depreciation – plant and equipment | (14,200) |
| Goodwill | 1,800 |
| Total assets | 313,320 |
| Liabilities | |
| Current liabilities | |
| Accounts payable | 32,600 |
| Non-current liabilities | |
| Guarantees | 31,000 |
| Loans | 74,200 |
| Total Liabilities | 137,800 |
| Equity | |
| Share capital (70,000 shares) | 70,000 |
| Retained earnings | 105,520 |
| Total equity | 175,520 |
| Total equity and liabilities | 313,320 |
Justice Ltd determined that the only identifiable items not recorded at amounts equal to fair values at acquisition date were:
| Fair value | |
| Inventory | $30,000 |
| Buildings | 200,000 |
| Fixtures | 75,000 |
| Plant and equipment | 42,000 |
| Guarantees | (32,000) |
Justice Ltd also determined that League Ltd had not recorded the accrued interest on the loans, amounting to $4,300.
In exchange for the assets of League Ltd, Justice Ltd agreed to provide sufficient additional cash to enable League Ltd to pay off its debts as well as liquidation costs of $5,000.
In addition, Justice Ltd would:
a) Pay two fully paid shares in Justice Ltd for every five shares held in League Ltd. The fair value of each Justice Ltd share was agreed to be $7. Costs of issuing the shares amounted to $4,000.
b) Provide League Ltd a patent with a fair value of $18,000. This was not recognised within Justice Ltd’s accounts at the time of acquisition.
Required:
1. Prepare the acquisition analysis in relation to the acquisition to determine the gain on bargain purchase or goodwill. (5 marks)
2. Prepare the journal entries in the records of Justice Ltd to record its acquisition of the assets of League Ltd at 1 July 2018. (10 marks)
3. Prepare the acquisition analysis on the basis each of Justice Ltd shares was instead agreed to be $10. (4 marks)
(Source: adapted from Loftus, J., Leo, K., Picker, R., Wise, V., & Clark, K. (2013). Understanding Australian Accounting Standards. (1st edition). Brisbane: John Wiley & Sons, Australia.)
Part B (6 marks)
What are acquisition-related costs? With reference to relevant accounting standard(s), discuss whether these costs should be capitalised or expensed.
(Source: adapted from Leo, K. J., Sweeting, J., Knapp, J. & McGowan, S. (2014). Company Accounting, (10th ed.). John Wiley & Sons.)
| Marking Guide – Question 2 | Max. marks awarded |
| Part A | |
| 1) | |
| Acquisition analysis | 4 |
| 2) | |
| Journal entries | 6 |
| 3) | |
| Acquisition analysis | 4 |
| Part B | |
| Explanation of ‘acquisition-related costs’ | 3 |
| Reference to relevant accounting standard(s) | 1 |
| Example used | 2 |
| Total | 20 |
Question 3 (35 Marks)
Water Ltd acquired its shares in Melon Ltd at 1 January 2018, buying the 10,000 shares in Melon Ltd for $20,000 on a cum div. basis. At that date, Melon Ltd recorded share capital of $10,000. Melon Ltd had declared prior to the acquisition a dividend of $3,000 that was paid in March 2018.
Financial information for Water Ltd and its 100% owned subsidiary, Melon Ltd, for the period ended 31 December 2018 is provided below:
| Water Ltd | Melon Ltd | |
| Sales revenue | $25,000 | $23,600 |
| Dividend revenue | 1,000 | 0 |
| Gain on sale of property, plant and equipment | 1,000 | 3,500 |
| Other income | 1,000 | 2,000 |
| Total income | 28,000 | 29,100 |
| Cost of sales | 21,000 | 18,000 |
| Other expenses | 3,000 | 1,000 |
| Total expenses | 24,000 | 19,000 |
| Profit before income tax | 4,000 | 10,100 |
| Income tax expense | 1,350 | 1,950 |
| Profit for the period | 2,650 | 8,150 |
| Retained earnings (01/01/2018) | 6,000 | 3,000 |
| 8,650 | 11,150 | |
| Interim dividend paid | (2,500) | (1,000) |
| Retained earnings (31/12/2018) | 6,150 | 10,150 |
Additional information:
a) At 1 January 2018, all identifiable assets and liabilities of Melon Ltd were recorded at fair value except for inventory, for which the carrying amount was $400 less than fair value. 10% of this inventory was still on hand at 31 December 2018. Inventory on hand in Melon Ltd at 31 December 2018 also includes some items acquired from Water Ltd during the current period. These were sold by Water Ltd for $5,000, at a profit before tax of $1,000.
b) Half of the goodwill on acquisition of Melon Ltd by Water Ltd was written off as the result of an impairment test on 31 December 2018.
c) During March 2018, Water Ltd provided some management services to Melon Ltd at a fee of $700 paid by 31 December 2018.
d) On 1 July 2018, Melon Ltd sold machinery to Water Ltd at a gain of $3,500. This machinery had a carrying amount to Melon Ltd of $20,000, and was considered by Water Ltd to have a 5 year useful life.
e) By 31 December 2018, the financial assets acquired by Water Ltd and Melon Ltd from external entities increased in value by $1,000 and $650 respectively with gains and losses being recognised in other comprehensive income.
f) The income tax rate is 30%.
Required:
- Determine the gain on bargain purchase or goodwill as at acquisition date. (2 marks)
- Prepare the consolidation journal entries for Water Ltd immediately after acquisition on 1 July 2018. (4 marks)
- Prepare the consolidation journal entries for Water Ltd as at 31 December 2018. (11 marks)
- Prepare the consolidation worksheet for the preparation of the consolidated financial statements by Water Ltd as at 31 December 2018. (6 marks)
- Prepare the consolidated statement of profit or loss and other comprehensive income for Water Ltd and its subsidiary, Melon Ltd, at 31 December 2018. (6 marks)
- Discuss the concept of ‘realisation’ using the intragroup transactions in this question to illustrate the concept. (6 marks)
(Source: adapted from Loftus, J., Leo, K., Daniliuc, S., Boys, N., Luke, B., Ang H., Byrnes, K. (2017). Financial Reporting. (2nd Edition). Brisbane: John Wiley & Sons, Australia).
| Marking Guide – Question 3 | Max. marks awarded |
| 1) | |
| Acquisition analysis with workings | 2 |
| 2) | |
| Consolidation journal entries provided immediately after acquisition date | 4 |
| 3) | |
| Consolidation journal entries provided as at 31 December 2018 | 11 |
| 4) | |
| Consolidation worksheet as at 31 December 2018 | 6 |
| 5) | |
| Consolidated statement of profit or loss and other comprehensive income | 5 |
| Consolidated statement of profit or loss and other comprehensive income – presentation | 1 |
| 6) | |
| Explains concept of realisation | 2.5 |
| Provides examples to explain the concept | 1.5 |
| Examples relate to intragroup transactions within the question | 1 |
| APA6 referencing | 1 |
| Total | 35 |
Question 4 (35 marks)
Butter Ltd acquired 80% of the share capital of Scotch Ltd for $330,000 (cum div.) on 1 July 2015. The statement of financial position at acquisition date of Scotch Ltd, including comparative information on fair values for assets is shown below:
| Carrying amount | Fair value | ||
| Current assets | |||
| Cash | 5,000 | ||
| Inventory | 60,000 | 67,000 | |
| Accounts receivable | 40,000 | ||
| Allowance for doubtful debts | 5,000 | 35,000 | 35,000 |
| Total current assets | 100,000 | ||
| Non-current assets | |||
| Plant and machinery (at cost) | 200,000 | ||
| Accumulated depreciation – plant and machinery | (125,000) | 75,000 | 90,000 |
| Vehicles (at cost) | 80,000 | ||
| Accumulated depreciation – vehicles | (10,000) | 70,000 | |
| Buildings (at cost) | 120,000 | ||
| Accumulated depreciation – buildings | (5,000) | 115,000 | 115,000 |
| Trademark (at valuation) | 100,000 | 100,000 | |
| Other assets | 40,000 | ||
| Goodwill | 20,000 | ||
| Total non-current assets | 420,000 | ||
| Total assets | 520,000 | ||
| Current liabilities | |||
| Accounts payable | 40,000 | ||
| Dividend payable | 20,000 | ||
| Total current liabilities | 60,000 | ||
| Non-current liabilities | |||
| Debentures | 155,000 | ||
| Total non-current liabilities | 155,000 | ||
| Total liabilities | 215,000 | ||
| Equity | |||
| Retained earnings | 55,000 | ||
| Share capital | 200,000 | ||
| Asset revaluation surplus | 50,000 | ||
| Total equity | 305,000 | ||
| Total equity and liabilities | 520,000 | ||
The depreciable assets had the following remaining useful lives at 1 July 2015:
| Plant and machinery | 4 years |
| Vehicles | 10 years |
| Buildings | 10 years |
All the inventory on hand at 1 July 2015 was sold by Scotch Ltd by 30 June 2016. Adjustments for differences between fair values and carrying amounts at acquisition date are made on consolidation.
Additional information:
a) The dividend payable in the records of Scotch Ltd at 1 July 2015 was paid in August 2015.
b) On 1 January 2018, one of the machines that was on hand in Scotch Ltd at 1 July 2015 was sold at a gain of $6,000. At 1 July 2015, the machine was recorded at cost of $50,000 with accumulated depreciation of $30,000, and had a fair value of $23,000. Any related revaluation surplus was transferred on consolidation to retained earnings.
c) During the 2018 financial year, Scotch Ltd transferred $10,000 from the asset revaluation surplus (on hand at 1 July 2015) to retained earnings, and transferred $20,000 to general reserve from retained earnings.
d) Information on dividends paid and declared during the 2018 financial year is as follows:
– paid a $7,000 dividend declared in the previous period;
– paid a $4,000 interim dividend;
– declared, in June 2018, an $3,000 dividend.
Butter Ltd recognises dividends prior to receipt.
e) Information on inventory sold by Scotch Ltd to Butter Ltd at a mark-up of 20%:
– At 1 July 2017 Butter Ltd had $15,000 of inventory on hand which was sold by 30 June 2018.
– During the 2017–2018 period, $30,000 worth of inventory was sold, with 25% still on hand at Butter Ltd on 30 June 2018.
f) On 1 July 2016, Scotch Ltd sold a vehicle to Butter Ltd at a profit before tax of $5,000. Butter Ltd depreciates vehicles at a rate of 10% per year on cost while Scotch Ltd applies a rate of 20% per year on cost.
g) The retained earnings balance at 30 June 2017 in Scotch Ltd was $60,000. The total comprehensive income for the year ended 30 June 2018 was $28,000, including $3,000 due to revaluation of land measured using the revaluation model. The asset revaluation surplus balance at 30 June 2017 for Scotch Ltd was $54,000.
h) The tax rate is 30%.
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method. (3 marks)
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the full goodwill method. Assume the fair value of the Non-controlling interest at 1 July 2015 was $68,000. (4 marks)
3. Prepare the consolidation journal entries for Butter Ltd using the full goodwill method at 1 July 2015, immediately after acquisition. (8 marks)
4. Prepare the consolidation journal entries for Butter Ltd using the full goodwill method at 30 June 2018. (20 marks)
(Source: Adapted from Deegan, C. (2010). Australian financial accounting. (6th edition) Sydney: McGraw Hill.)
| Marking Guide – Question 4 | Max. marks awarded |
| 1) | |
| Partial goodwill acquisition analysis with workings | 3 |
| 2) | |
| Full goodwill acquisition analysis with workings | 4 |
| 3) | |
| Consolidation journal entries provided immediately after acquisition date | 8 |
| 4) | |
| Consolidation journal entries provided as at 30 June 2018 | 20 |
| Total | 35 |
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