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
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
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%.


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:

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
Trade payables 24,800
Provisions 24,000
Loans 17,200
Total liabilities 66,000
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.



   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. 

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