Question 2 [16 marks]
Accounting for share issues
On 1 February 2017, Beach Supplies Ltd was registered and issued a prospectus inviting applications for 2,000,000 shares, at an issue price of $3.50, payable as follows:
$1.00 on application
$1.50 on allotment (payment due within 1 month of allotment)
$0.60 on first call
$0.40 on final call
The issue is underwritten at a commission of $30,000.
By 28 February 2017, applications had been received for 1,900,000 shares. On 3 March, shares are allotted, and the underwriter forwarded the application and allotment money due on the 100,000 shares less their commission. All remaining allotment money is received by 3 April. Legal costs re company formation are $5,000 and are paid on 5 April. Share issue costs of $3,000 are also paid on the same date.
The first call is made on 10 April 2017, with money due by 10 May 2017. The final call is made on 15 May 2017, with money due by 15 June 2017. All money owing in relation to the two calls is received by the due dates except for the holders of 40,000 shares who did not pay either call, and the holder of another 10,000 shares who did not pay the second call. On 20 June 2017, as provided in the company’s constitution, the directors forfeited these 50,000 shares.
On 25 June 2017, the forfeited shares are reissued as fully paid for a consideration of $3.10 per share. Costs of forfeiture and reissue amounted to $10,000, and are paid. The constitution allows for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 30 June 2017.
Required:
Prepare the journal entries to record the transactions of Beach Supplies Ltd up to and including that which took place on 30 June 2017. Show all relevant dates, narrations and workings.
| Marking Guide – Question 2 | Max. marks awarded |
| Journal entries | 12 |
| Dates | 2 |
| Narrations and workings | 2 |
Question 3 [18 marks]
Accounting for income tax
The accounting profit before tax for the year ended 30 June 2017 for Aldee Ltd amounted to $235,000. It included the following income and expense items:
| $ | |
| Royalties (exempt income) | 15,000 CR |
| Interest revenue | 16,000 CR |
| Annual leave expense | 9,000 DR |
| Doubtful debts expense | 3,800 DR |
| Depreciation – plant (15% per year, straight-line) | 47,250 DR |
| Depreciation – motor vehicles (20% per year, straight-line) | 20,000 DR |
| Insurance expense | 14,000 DR |
| Rent expense | 42,000 DR |
| Warranty expense | 5,600 DR |
| Entertainment expense (not tax deductible) | 4,000 DR |
The draft statement of financial position at 30 June 2017 contained the following assets and liabilities:
| $ |
$ |
|
| Assets: | ||
| Cash | 46,000 | 22,500 |
| Trade receivables | 88,000 | 45,800 |
| Less Allowance for doubtful debts | (4,000) | (2,200) |
| Inventory | 57,100 | 54,300 |
| Interest receivable | 2,000 | 1,000 |
| Prepaid insurance | 4,000 | 1,000 |
| Plant – cost | 315,000 | 315,000 |
| Less Accumulated depreciation | (113,250) | (66,000) |
| Motor vehicles – cost | 100,000 | 100,000 |
| Less Accumulated depreciation | (70,000) | (50,000) |
| Deferred tax asset | ? | 17,190 |
| Liabilities: | ||
| Trade payables | 66,200 | 43,600 |
| Provision for annual leave | 15,600 | 11,000 |
| Provision for warranties | 14,200 | 11,600 |
| Bank loan | 130,000 | 150,000 |
| Deferred tax liability | ? | 7,200 |
Additional information:
- The tax depreciation rate for plant is 20% per year, and motor vehicles is 15% per year, using the straight-line method.
- Tax deductions for annual leave, warranties, insurance are available when the amounts are paid, and not as amounts are accrued.
- Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
- Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
- Interest revenue is only taxable when amounts are actually received, and not as amounts are accrued.
- The deferred tax asset (DTA) balance at 30 June 2016 comprised:
– DTA’s relating to temporary differences: $11,190
– DTA’s relating to carried forward tax losses: $6,000
- Taxation legislation allows tax losses to be offset against future taxable profit.
- The tax rate is 30%.
Required:
- i) Determine the balance of any current tax liability and deferred tax assets and liabilities as at 30 June 2017, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.
- ii) Prepare the journal entries to record the current tax liability and movements in deferred tax assets and deferred tax liabilities.
| Marking Guide – Question 3 | Max. marks awarded |
| i) Determination of taxable income and current tax liability | 8 |
| i) Determination of deferred tax assets and liabilities in deferred tax worksheet | 8 |
| ii) Journal entries | 2 |
Question 4 [16 marks]
Revaluation of property, plant and equipment
Sunshine Ltd reported the following information for plant and equipment in its statement of financial position at 1 July 2016:
| $ | |
| Plant and equipment – at cost | 1,000,000 |
| Less: accumulated depreciation | (305,000) |
| 695,000 |
The records of Sunshine Ltd as at 1 July 2016 showed that the plant and equipment consisted of two items:
| Plant X | Plant Y | |
| $ | $ | |
| Cost | 800,000 | 200,000 |
| Carrying amount | 575,000 | 120,000 |
Both items of plant are depreciated on a straight-line basis over 10 years. Plant X has an estimated residual value of $50,000, and Plant Y has an estimated residual value of nil.
On 1 July 2017, the directors of Sunshine Ltd decide to change from the cost model to the revaluation model. The following information applies:
| 1 July 2017 | 1 July 2018 | |||
| Plant X | Plant Y | Plant X | Plant Y | |
| Fair value | $460,000 | $110,000 | $410,000 | $90,000 |
| Remaining useful life | 6 years | 5 years | 5 years | 4 years |
| Estimated residual value | $40,000 | nil | $40,000 | nil |
Assume a tax rate of 30%.
Required:
Prepare all relevant journal entries for Sunshine Ltd’s plant and equipment for the period 1 July 2016 to 30 June 2019 (including entries for depreciation and all necessary revaluation entries). Show narrations and all relevant workings.
| Marking Guide – Question 4 | Max. marks awarded |
| Journal entries | 13 |
| Workings | 3 |
Question 5 [15 marks]
Impairment of assets
Gadgets Ltd has a division that represents a separate cash generating unit. At 30 June 2016, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:
| Assets: | $ |
| Cash | 242,000 |
| Plant and equipment | 600,000 |
| Less: accumulated depreciation | (200,000) |
| Land | 800,000 |
| Inventory | 190,000 |
| Accounts receivable | 67,000 |
| Patent | 200,000 |
| Goodwill | 10,000 |
| Carrying amount of cash generating unit | 1,909,000 |
The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $180,000, and the land has a fair value less costs to sell of $780,000.
The directors of Gadgets estimate that, at 30 June 2016, the fair value less costs to sell of the division amounts to $1,750,000, while the value in use of the division is $1,840,000.
As a result, management increased the depreciation of the plant and equipment from $40,000 p.a. to $45,000 for the year ended 30 June 2017.
By 30 June 2017, the recoverable amount of the cash generating unit was calculated to be $20,000 greater than the carrying amount of the assets of the unit.
Required:
Determine how Gadgets Ltd should account for the results of the impairment test at 30 June 2016 and 30 June 2017, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.
| Marking Guide – Question 5 | Max. marks awarded |
| Journal entries, calculations and workings for 2016 | 7.5 |
| Journal entries, calculations and workings for 2017 | 7.5 |
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