The following represented an extract from the Statement of Financial Position of the assets and liabilities of Nelson Ltd (Nelson) for the years ending 30 June 2017 and 30 June 2018. The company reported a profit before tax for the year to 30 June 2018 of $700 000.
|Accounts receivable||$ 245 000||$ 200 000|
|Allowance for doubtful debts||(20 000)||(10 000)|
|Plant-at cost||600 000||600 000|
|Accumulated depreciation-plant||(190 000)||(120 000)|
|Interest receivable||10 000||20 000|
|Provision for long-service leave||48 000||62 000|
|Deferred tax asset||?||21 600|
|Deferred tax liability||?||24 000|
You were appointed as a junior accountant at Nelson after graduation from Western Sydney in April 2017. You have been asked to assist with the preparation of the current and deferred income tax consequences and income tax journal entries for the year end 30 June 2018. After a meeting with your supervisor, you gathered the following information which you might need to complete your work:
- Interest revenue of 10,000 is included in the profit for the year to 30 June 2018.
- Expenses included in profit for the year to 30 June 2018 are as follows:
- Parking and other fines $10 000
- Depreciation expense for plant $70 000
- Doubtful debts expense $25 000
- Long-service leave expense $36 000
- Parking and other fines are non-deductible for tax purposes.
- Accumulated depreciation on plant for tax purposes is $280 000 on 30 June 2018 and $180 000 on 30 June 2017. There have been no acquisitions or disposals of plant during 2018.
- The company tax rate was 30% and this rate has not changed for a number of years.
- Reporting date was 30 June.
- Deferred tax worksheet template:
|30June 2018||Carrying Amount||Tax Base||Deductible
|Income Tax Expense||Income Tax Payable|
Nelson acquired all issued share capital of Gibbs Ltd (Gibbs) on 1 July 2019 for a cash payment of $1,000,000. The share capital and retained earnings of Gibbs at the date of acquisition were:
Share capital $500,000
Retained earnings $350,000
At the date of acquisition all assets and liabilities of Gibbs were carried at fair values with the exception of the following assets:
|Carrying amount||Fair value|
|Machinery (cost $110 000)||$80,000||$90,000|
The machinery had a further 10-year useful life as at the date of acquisition. The land was intended to hold for further use. There were no intra-group transactions between Nelson and Gibbs between 1 July 2019 and 30 June 2022.
On 1 April 2023 Gibbs sold a machinery to Nelson for $125,000 when its carrying value in Gibbs’ books was $100,000 (original cost $200,000 and original estimated life of 10 years). There were no other intra-group transactions between Nelson and Gibbs for year ended 30 June 2023.
During year 2024, Nelson made sales of inventory to Gibbs for on-sale to external parties. The inventory had originally cost Nelson $32,000. At the year end, Gibbs still had half of the inventory on hand. On-hand inventory was expected to be sold in the subsequent period. There were no other intro-group transactions between Nelson and Gibbs for year ended 30 June 2024.
Nelson incurred the following transactions with Gibbs for year ended 30 June 2025:
- Nelson made sales of inventory to Gibbs of $25,000, while Gibbs sold $32,000 of inventory to Nelson.
- Closing inventories on 30 June 2025 included the following amounts: Nelson $16,000 (bought from Gibbs) and Gibbs $18,500 (bought from Nelson).
- Gibbs has a number of long-term loans, including a four-year loan for $45,000 from Nelson. This intra-group loan was effective from 1 July 2024. Interest rate was 5% per annum. During the year ending 30June 2025, Gibbs paid $1000 interest on this loan.
- Nelson provided management consultation to Gibbs and this was the first time that Nelson provided such service to Gibbs. At the end of 2025, Gibbs paid $7,000 for these services and has a balance of $500 payable at year end.
You were requested to prepare the followings:
- acquisition analysis and adjustment/elimination journal entries for consolidation at acquisition, 1 July 2019;
- adjustment/elimination journal entries for consolidation as at 30 June 2024, and
- adjustment/elimination journal entries for consolidation as at 30 June 2025.
After meeting with your supervisor you gathered the following information which you might need to complete your work:
- Nelson declared dividends $75,000 and paid dividends $65,000.
- Gibbs declared and paid dividends $25,000.
- Management team of Nelson believes that goodwill acquired from business combination was impaired by $300 in 2025. Previous goodwill impairment loss was 1,200.
- Nelson has the following accounting policies for the group:
- Revaluation adjustments on acquisition are to be made on consolidation only, not in the books of any subsidiary.
- All plants are depreciated using the straight-line method with no residual value. For part-years, depreciation is to be calculated on the number of months the asset is held in the relevant year.
- Intragroup sales of inventory to be at a mark-up of 15% on cost.
- All calculated amounts are to be rounded to the nearest whole dollar. Companies in the group do not show cents in any journals, worksheets, or financial statements.
- The company tax rate is 30% and this rate has not changed for a number of years.
- Reporting date is 30 June.
- Journal narrations are required.
- Number each year consolidation elimination/adjusting journal entries by 1, 2, 3, …, etc;. Where more than one journal entry is needed for an event to be completely accounted for add the letters a,b,c,…etc to them as necessary.
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