AF314 Corporate Accounting
The following represented an extract from the Statement of Financial Position of Nadi Ltd for the years ending 30 June 2010 and 30 June 2011. Reporting date was 30 June.
|Cash||110 000||87 000||Accounts payable||28 500||31 700|
|Accounts receivables (net)||45 000||52 000||Accrued expenses||7 200||11 600|
|Inventory||58 000||43 000||Deferred tax liability||?||15 150|
|Interest receivable||8 400||5 000||Rent received in advance||12 000||–|
|Prepaid insurance||7 000||5 000||Bank loan||50 000||50 000|
|Deferred tax asset||?||10 470||Provision for employee benefits||21 000||17 300|
|Development cost||32 000||32 000|
|Less Accumulated amortisation||(8 000)||–|
|Property plant and equipment||75 000||75 000|
|Less Accumulated amortisation||(22 000)||(13 500)|
You were appointed as a graduate accountant at Nadi Ltd after graduation from USP in January 2011. You were requested to prepare the deferred tax worksheet for the business for year ended 2011. After a meeting with your supervisor, you gathered the following information you thought you might need for your work:
- The balance of allowance for doubtful debts for 2011 and 2010 was $5,000 and $6,000 respectively.
- Interest revenue was assessable when the cash was received.
- Insurance was deductible when paid.
- Development costs were deductible when paid together with an additional deduction of 50%.
- Accrued expenses were deductible when paid.
- Rent revenue was assessable when the cash was received.
- Employee benefits were deductible when the payment was made to the employee.
- The tax depreciation rate for plant and equipment was double the rate of accounting.
- The tax rate was 30%.
Prepare a deferred tax worksheet to calculate the amount of adjustment required for deferred tax assets and deferred tax liabilities. Use the following format for the worksheet:
|Carrying amount||Tax base||Deductible temporary difference||Taxable temporary difference|
Sigatoka Ltd acquired all issued share capital of Nadi Ltd on 1 July 2011 for a cash payment of $885,000. Nadi Ltd is the only subsidiary of Sigatoka Ltd. The share capital and reserves of Nadi Ltd at the date of acquisition were:
Share capital $598,000
Retained earnings $102,000
Revaluation surplus $50,000
As at the date of acquisition, all assets of Nadi Ltd were at fair value, other than the property, plant and equipment, which had a fair value of $250,000. The cost of the property, plant and equipment was $328,000 and it had accumulated depreciation of $178,000. The property, plant and equipment were expected to have a remaining useful life of eight years. At the date of acquisition, the notes to Nadi Ltd’s financial statements identify a contingent liability related to an unsettled legal claim with a fair value of $10,000 which would be tax deductible when paid. On 1 May 2012, the liability relating to the legal claim was settled and paid in full. There were no intra-group transactions between Sigatoka Ltd and Nadi Ltd between 1 July 2011 and 30 June 2014.
On 1 March 2015 Nadi Ltd sold an item of equipment to Sigatoka Ltd for $43,200 when its carrying value in Nadi’s books was $36,000 (original cost $60,000 and original estimated life of ten years). There were no other intra-group transactions between Sigatoka Ltd and Nadi Ltd for year ended 30 June 2015.
On 1 June 2016 Sigatoka Ltd sold an item of plant to Nadi Ltd for $74,240 when its carrying value, and original cost, in Sigatoka’s books was $80,000 and estimated remaining useful life was four years. There were no other intra-group transactions between Sigatoka Ltd and Nadi Ltd for year ended 30 June 2016.
During year 2017, Sigatoka Ltd made sales of inventory to Nadi Ltd for on-sale to external parties. The inventory had originally cost Sigatoka Ltd $26,000. At the year end, Nadi Ltd still had a quarter of the inventory on hand. On-hand inventory was expected to be sold in the following financial period. There were no other intra-group transactions between Sigatoka Ltd and Nadi Ltd for year ended 30 June 2017.
During year 2018, Nadi Ltd made sales of inventory to Sigatoka Ltd for on-sale to external parties. The inventory had originally cost Nadi Ltd $28,000. All intra-group inventories were sold in 2018. Sigatoka Ltd provided management services to Nadi Ltd in 2018. Nadi Ltd paid $5,000 for those services and has a balance of 1,000 for management fees payable at the year end. Nadi Ltd declared and paid dividend of $10,000 at year end 2018. There were no other intra-group transactions between Sigatoka Ltd and Nadi Ltd for year ended 30 June 2018.
- Prepare acquisition analysis and all adjustment/elimination journal entries for consolidation at acquisition, 1 July 2011.
- Prepare adjustment/elimination journal entries for consolidation as at 30 June 2012.
- Prepare all adjustment/elimination journal entries for consolidation as at 30 June 2017.
- Prepare all adjustment/elimination journal entries for consolidation as at 30 June 2018.
After meeting with your supervisor you gathered the following information which you might need to complete your work:
- Sigatoka Ltd has the following accounting policies for the group:
- Revaluation adjustments on acquisition are to be made on consolidation only, not in the books of the subsidiary;
- All plants are depreciated using the straight-line method with no residual value. For partyears, 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 10% 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 currently 30% and this rate has not changed for a number of years.
- 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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