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.
Question 3
On 1 July 2017, Cat Ltd acquired all the shares of Fish Ltd on a cum-div. basis. Acquisition-related expenses were $5,000. On this date, the equity and liabilities of Fish Ltd included the following balances:
| Share capital | 200,000 |
| General reserve | 25,000 |
| Retained earnings | 45,000 |
| Dividend payable | 10,000 |
| Provisions | 206,500 |
At acquisition date, all the identifiable assets and liabilities of Fish Ltd were recorded at amounts equal to fair value except for:
| Carrying amount | Fair value | |
| Plant (cost $300,000) | $186,000 | $190,000 |
| Trademark | 100,000 | 110,000 |
| Inventory | 70,000 | 80,000 |
| Equipment (cost $80,000) | 50,000 | 53,000 |
| Land | 50,000 | 70,000 |
| Machinery (cost $18,000) | 15,000 | 16,000 |
| Fittings (cost $15,000) | 10,000 | 10,000 |
| Goodwill | 25,000 |
Additional information in relation to the acquisition:
a) Both the plant and equipment had a further 5-year life at acquisition date and was expected to be used on a straight-line basis over that time.
b) The trademark was considered to have an indefinite life.
c) The machinery, which was estimated to have a further 4-year life at acquisition date, was sold on 1 January 2019.
d) At 1 July 2017, Fish Ltd had not recorded a liability relating to a guarantee that was considered to have a fair value of $10,000. An amount of $6,000 was paid by Fish Ltd in June 2019 in part payment of this liability. The balance of this liability was still considered to be $4,000 at 30 June 2019.
e) Fish Ltd registered a patent on 28 June 2017 but has not yet recognised it as an asset. Cat Ltd believes the fair value of the patent was $30,000. The patent is legally enforceable for a period of 10 years. On 30 June 2018, Fish Ltd determined that the patent was impaired by $9,000. On 1 January 2019, Fish Ltd sold the patent for $17,000.
f) During the year ended 30 June 2018, all inventory on hand at acquisition date was sold, and the land was sold on 1 June 2019.
g) Goodwill was written down by $5,000 at 30 June 2018 by Cat Ltd as a result of an annual impairment test.
h) Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. Any valuation reserves created are transferred on consolidation to retained earnings when assets are sold or fully consumed. The movement in Asset revaluation surplus was from post-acquisition equity.
Additional information in relation to intragroup translations:
a) The interim dividend of $5,000 was paid by Fish Ltd in the current year. Shareholder approval is not required in relation to the payment of dividends.
b) On 1 July 2018, Fish Ltd has on hand inventory worth $12,000, being transferred from Cat Ltd in June 2018. The inventory had previously cost Cat Ltd $8,000. All the inventory is sold to external parties in the year ending 30 June 2019.
c) On 31 March 2019, Fish Ltd transferred an item of plant with a carrying amount of $10,000 to Cat Ltd for $15,000. Cat Ltd treated this item as inventory. The item was still on hand at the end of the year. Fish Ltd applied a 20% depreciation rate per year on a straight-line basis to this plant.
d) During the 2019 year, Cat Ltd sold inventory to Fish Ltd for $9,000, this being at cost plus 20% mark-up. Of this inventory, $1,800 remained on hand at 30 June 2019.
e) During the 2019 year, Fish Ltd sold inventory costing $12,000 to Cat Ltd for $18,000. One-third of this was sold to external parties for $9,000.
f) On 1 January 2018, Cat Ltd sold furniture to Fish Ltd for $8,000. This had originally cost Cat Ltd $12,000 and had a carrying amount at the time of sale of $7,000. Both entities charge depreciation at a rate of 10% per year on a straight-line basis.
g) Cat Ltd purchased a new block of land for $25,000 in August 2018. This block of land was sold to Fish Ltd in December 2018 for $50,000. To help Fish Ltd pay for the land, Cat Ltd gave Fish Ltd an interest-free loan of $12,000. Fish Ltd has not as yet made any repayments on the loan.
h) On 1 January 2019, Fish Ltd sold an item of inventory to Cat Ltd who regarded the item as plant. The inventory cost Fish Ltd $9,000 to manufacture and was sold for $12,000. Cat Ltd assesses the plant’s useful life to be 5 years.
i) On 1 January 2018, Cash Ltd sold a motor vehicle to Fish Ltd. On this date, the motor vehicle had a carrying amount of $10,000 and was sold to Cat Ltd for $20,000. The motor vehicle is depreciated at 20% per year on a straight-line basis by Cat Ltd.
On 30 June 2019, the trial balances of Cat Ltd and Fish Ltd were as follows:
| Debit balances | Cat Ltd | Fish Ltd |
| Cash | $9,800 | $43,000 |
| Shares in Fish Ltd | 320,000 | — |
| Trade receivables | 6,000 | 5,000 |
| Inventory | 23,000 | 20,000 |
| Deferred tax assets | 10,200 | 20,000 |
| Motor vehicle | 10,000 | 20,000 |
| Fittings | — | 15,000 |
| Machinery | 15,000 | 15,000 |
| Plant | 203,000 | 324,000 |
| Equipment | 53,000 | 80,000 |
| Land | 25,000 | 50,000 |
| Furniture | 7,000 | 8,000 |
| Trademark | — | 100,000 |
| Goodwill | — | 25,000 |
| Cost of sales | 162,000 | 128,000 |
| Other expenses | 53,000 | 31,000 |
| Income tax expense | 20,000 | 18,000 |
| Interim dividend paid | 12,000 | 5,000 |
| Final dividend declared | 6,000 | 4,000 |
| Loan to Fish Ltd | 12,000 | — |
| $947,000 | $911,000 | |
| Credit balances | ||
| Share capital | $312,000 | $200,000 |
| General reserve | 20,000 | 25,000 |
| Asset revaluation surplus | — | 5,000 |
| Retained earnings (1/7/18) | 30,000 | 45,000 |
| Final dividend payable | 6,000 | 4,000 |
| Current tax liabilities | 8,000 | 2,500 |
| Provisions | 50,000 | 108,500 |
| Deferred tax liabilities | 20,000 | 11,000 |
| Loan from Cat Ltd | — | 12,000 |
| Sales | 220,000 | 182,000 |
| Other income | 84,000 | 30,000 |
| Gains/(losses) on sale of non-current assets | 50,000 | 80,000 |
| Accumulated depreciation – plant | 114,000 | 138,000 |
| Accumulated depreciation – Machinery | 1,000 | 3,000 |
| Accumulated depreciation – furniture | 1,000 | 2,000 |
| Accumulated depreciation – fittings | — | 7,000 |
| Accumulated depreciation – equipment | 30,000 | 50,000 |
| Accumulated depreciation – vehicles | 1,000 | 6,000 |
| $947,000 | $911,000 |
The tax rate is 30%.
Required:
1. Determine the gain on bargain purchase or goodwill as at acquisition date.
2. Prepare the consolidation journal entries for Cat Ltd immediately after acquisition on 1 July 2017.
3. Prepare the consolidation journal entries for Cat Ltd as at 30 June 2019.
4. Prepare the consolidation worksheet for the preparation of the consolidated financial statements as at 30 June 2019.
5. Prepare the following financial statements as at 30 June 2019:
a) Consolidated statement of profit or loss and other comprehensive income;
b) Consolidated statement of financial position;
c) Consolidated statement of changes in equity.
Question 4
High Ltd purchased 75% of the issued shares of Low Ltd for $260,000 on 1 July 2013 when the equity of Low Ltd was as follows:
| Share capital | $100,000 |
| General reserve | 60,000 |
| Retained earnings | 40,000 |
At this date, Low Ltd had not recorded any goodwill, and all identifiable assets and liabilities were recorded at fair value except for the following assets:
| Carrying amount | Fair value | |
| Inventory | $75,000 | $100,000 |
| Plant (cost $170,000) | 150,000 | 190,000 |
| Land | 60,000 | 100,000 |
At 30 June 2019, the trial balances of High Ltd and Low Ltd are as follows:
| High Ltd | Low Ltd | |
| Debit balances: | ||
| Current assets | $162,000 | $74,000 |
| Shares in Low Ltd | 260,000 | – |
| Plant | 425,500 | 190,000 |
| Land | 110,000 | 60,000 |
| Cost of sales | 225,000 | 32,000 |
| Other expenses | 65,000 | 8,000 |
| Income tax expense | 50,000 | 16,000 |
| 1,297,500 | 380,000 | |
| Credit balances: | ||
| Share capital | 400,000 | 100,000 |
| General reserve | 60,000 | 80,000 |
| Retained earnings (1/7/18) | 120,000 | 75,000 |
| Sales revenue | 510,600 | 89,000 |
| Trade payables | 82,900 | 12,000 |
| Accumulated depreciation – plant | 124,000 | 24,000 |
| 1,297,500 | 380,000 | |
All the inventory on hand at 1 July 2013 was sold by 30 June 2014. The plant has a remaining useful life of 10 years, with benefits to be received evenly over this period. Any adjustments for differences between carrying amounts at acquisition date and fair values are made on consolidation. The tax rate is 30%.
Assume a profit for Low Ltd for the year ended 30 June 2014 of $35,000 and no other changes in Low Ltd’s equity since the acquisition date.
During the 2018-2019 period, Low Ltd sold inventory to High Ltd for $14,000. This inventory had cost Low Ltd $9,000. At 30 June 2019, one-fifth of this inventory still remained in High Ltd.
Required:
1. 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 2013 was $77,100.
2. Determine the gain on bargain purchase or goodwill as at acquisition date using the partial goodwill method.
3. Prepare the consolidation journal entries for High Ltd using the partial goodwill method at 1 July 2013, immediately after acquisition.
4. Prepare the consolidation journal entries for High Ltd using the partial goodwill method at 30 June 2014.
5. Prepare the consolidation journal entries for High Ltd using the partial goodwill method at 30 June 2019.
Note: Your consolidation journal entries for Required 5 should be prepared in the following format:
(a) Business combination valuation entries at 30 June 2019
(b) Pre-acquisition entries at 30 June 2019
(c) NCI share of equity at 1 July 2013
(d) NCI share of equity changes from 1 July 2013 to 30 June 2018
(e) NCI share of equity changes from 1 July 2018 to 30 June 2019
(f) Intragroup transaction adjustments required as at 30 June 2019
6. Prepare the consolidation worksheet for the preparation of the consolidated financial statements as at 30 June 2019.
7. Prepare the following financial statements as at 30 June 2019:
a) Consolidated statement of profit or loss and other comprehensive income;
b) Consolidated Statement of financial position;
c) Consolidated Statement of changes in equity.
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