Question 1 

Morning Star Ltd was registered on 1 July 2020, as a company with a constitution limiting the shares that could be offered to 5 000 000 Ordinary shares (including all classes) and 2 000 000 preference shares. The company issued a prospectus dated 1 July 2020 inviting the public to apply for 3 600 000 Ordinary A class shares at $7.00 per share. The terms of the shares on issue are $3.00 on application, $2.00 on allotment and a future call of $2.00.

If the issue is oversubscribed the directors will make a pro-rata issue of shares and the excess application money will be applied to allotment and calls before any refunds will be given.

On 30 July, applications for the Ordinary A class shares closed. Applications for 4 000 000 shares in total had been received with applicants for 1 000 000 shares paying the full price and 3 000 000 shares paying only the application fee.

On 1 August, the Ordinary A class shares were allotted on a pro-rate basis with all allotment money owed paid by the 30 August.

The company paid share issue costs of $10,000 for the issuing of Ordinary A shares on 1 September. The share issue costs related to legal expenses associated with the share issue and fees associated with the drafting and advertising of the prospectus and share issue.

The call on the Ordinary A shares was made on 15 Septmber and due by 30 September. All call money was received except for the call on 100 000 shares. The directors met and forfeited the shares on 15 October. On 30 October, the forfeited shares were reissued at $6.50 fully paid to $7.00. Costs associated with reissuing the forfeited shares totalled $3,000. The remaining money was refunded to the defaulting shareholders on 15 November.

On 1 January 2021, Morning Star Ltd issued via a private placement semi-annual coupon debentures (which pay interest every 6 months) with a nominal value of $500,000. The debenture term is four years and the coupon rate is 6% per year. The market requires a rate of return of 4% per year. The money came in and the debentures were allotted on the same date. The first interest payment will occur on 30 June 2021.

On the same day (1 January), Monring Star issued 300,000 options for class A shares with an exercise price of $6.00 each. It costs $1.00 per option. These options expires on 30 June 2021.

The directors decided on 31 March 2021 to make a bonus issue of the Ordinay A shares at initial issue price to the existing Ordinary A shareholders for every 20 shares of holding.

The company issued via a private placement 400,000 redeemable preference shares of $5.00 each on 30 June 2021. The shares offer a fixed dividend of 6 per cent per annum. The shares are later redeemed to non-voting Ordinary Class B shares at the choice of the shareholders on 30 June 2022.

By 30 June 2021, 220,000 options were exercised. The remaining options are lapsed.



  1. Prepare journal entries for the above transactions for the year ended 30 June 2021. Note: the entries should be in strict date order of the underlying event.
  2. Prepare an extract of the statement of change in equity to show the composition and movement of the ordinary shares account of Morning Star Ltd as at 30 June 2021 and 30 June 2022. Please provide the opening balance, change in share capital and closing balance of each classes of shares.


Question 2


The profit before tax, as reported in the statement of profit and loss for Aileen Ltd for the year ended 30 June 2020, amounted to $185,000, including the following revenue and expense items:


Sales revenue                                                $400,000

Interest revenue                                                30,000

Government grant                                             50,000



Cost of goods sold                                          130,000

Bad debts expense                                            10,000

Depreciation expense – equipment                    7,000

Amortisation expense – development costs   20,000

Wages expense                                               120,000

Insurance expense                                               5,000

Impairment of goodwill                                      3,000


The draft statement of financial position of Aileen Ltd at 30 June 2020 and the statement from last year showed the following assets and liabilities:

               Assets 2019  2020
               Cash $200,000 $140,000
               Inventory 110,000 150,000
               Accounts receivable   50,000   70,000
               Allowance for doubtful debts   (7,000)   (5,000)
               Interest receivable     5,000     8,000
               Prepaid Insurance     4,000     6,000
               Equipment – cost   70,000   70,000
               Accumulated depreciation – equipment (14,000) (21,000)
               Development costs               –   60,000
               Accumulated amortisation – development costs               – (20,000)
               Goodwill   20,000   17,000
               Deferred tax asset   30,000           ?
               Accounts payable  60,000   40,000
               Wages payable  30,000   50,000
                Rent received in advance  –  10,000
                Loan payable                 200,000  100,000
                Deferred tax liability  18,113   ?


Additional information: 

  • In the year ended 30 June 2019, Aileen Ltd had a tax loss of $70,000 that it carried over in the deferred tax asset. In June 2020, the company received an amended assessment for the year ended 30 June 2020 from the ATO, indicating that an amount of $10,000 claimed as a deduction has been disallowed. Aileen Ltd has not yet adjusted its accounts to reflect the amendment. The remaining losses can be used to offset taxable incomes in future periods.
  • Amounts received from sales, including those on credit terms, are taxed at the time the sale is made. All other general taxation rules apply.
  • The depreciation regimes for the financial reports and the company income tax return respectively, are listed below.


Depreciation Regimes Equipment
Depreciation rate:
Accounting 10%
Tax 20%
Accounting Straight-line
Tax Reducing Balance
Residual: Zero


  • A tax deduction for development costs of 115% of the $60,000 spent during the year is available.
  • All revenues recorded in the rent received in advance account belong to the next financial period.
  • All movements of deferred tax accounts during the year are not yet recongised.
  • The company tax rate applicable is 30%.



  1. Determine the taxable profit for the year ended 30 June 2020. Start from the accounting profit before tax and show the adjustments for differences between taxation and accounting rules.
  2. Complete the worksheet on the additional page provided to determine the movements in the deferred tax accounts for the year ended 30 June 2020.
  3. Prepare the journal entries to recognise the current tax liability and the final deferred tax adjustments for the year ended 30 June 2020 including the movement during the year due to carry-forward tax loss. Note Aileen Ltd does not set off the deferred tax accounts against each other.

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