Question 1:
MyOwnWork Ltd commences operations on 1 July 2018 and presents its first statement of profit and loss and other comprehensive income and first statement of financial position on 30 June 2019. The statements are prepared before considering taxation. The following information is available:
Statement of profit or loss and other comprehensive income for the year ended 30 June 2019
| Gross Profit |
730,000 |
|
Expenses
Administration expenses
|
80,000
|
|
Salaries
|
200,000
|
|
Long-service Leave
|
20,000
|
|
Warranty expenses
|
30,000
|
|
Depreciation expense - plant
|
80,000
|
|
Insurance
|
20,000 430,000
|
|
Accounting profit before tax
|
300,000
|
|
Other comprehensive income
|
Nil
|
|
Assets and liabilities as disclosed in the statemet of financial positions as at 30 June 2019
|
|
Assets
|
|
|
|
Cash
|
|
20,000
|
|
Inventory
|
|
100,000
|
|
Accounts receivable
|
|
100,000
|
|
Prepaid Insurance
|
|
10,000
|
|
Plant - cost
|
400,000
|
|
|
Less: Accumulated depreciation
|
80,000
|
320,000
|
|
Total assets
|
|
550,000
|
|
Liabilities
|
|
|
|
Accounts payable
|
|
80,000
|
|
Provision for warranty expenses
|
|
20,000
|
|
Loan payable
|
|
200,000
|
|
Provision for long service leave expenses
|
|
20,000
|
|
Total liabilities
|
|
320,000
|
|
Net assets
|
|
230,000
|
Other information
- All administration and salaries expenses incurred have been paid as at year end.
- None of the long service leave expense has actually been paid.
- Warranty expenses were accrued, and at year end, actual payments of $10 000 have been made (leaving an accrued balance of $20 000).
- Insurance was initially prepaid to the amount of $30 000. At year end, the unused component of the prepaid insurance amounted to $10 000.
- Amounts received from sales, including those on credit terms, are taxed at the time of sale is made.
- The plant is depreciated over five years for accounting purposes, but over four years for taxation purposes.
- The tax rate is 30 per cent
Required:
Prepare Deferred Tax worksheet for MyOwnWork Ltd as at 30 June 2019 and provide the Journal entries to account for tax in accordance with AASB 112
Question 2:
MyNextProblem Ltd has acquired a new building called Next In Line Building for $2 000 000. It has incurred incidental costs of $30 000 in the acquisition process for legal fees, real estate agent's fees and stamp duties. At the quarterly Board meeting, the management believes that these costs should be expensed because they have not increased the value of the building and, if the building was immediately resold, these amounts would not be recouped. In other words, the fair value of the building is considered to still be $2 000 000.
Required: Discuss how these costs should be accounted for in the books of MyNextProblem Ltd. Maximum 200 words.
Question 3:
A recent annual report of the City of Darwin Council did not include library books on the statement of financial position, notwithstanding the existence of a substantial library collection. The City of Darwin Council's accounting policy for library books is to expense them at the time of acquisition. A note in the annual report reveals that in applying this policy the council considered the following factors:
- As soon as the book is purchased its fair value is minimal compared with its cost.
- The acquisition costs of individual books are below the council's capitalisation policy.
- The useful life of a book is variable and indeterminable, making depreciation difficult.
Required
Critically evaluate the council's accounting policy for its library collection. Suggest an alternative accounting policy or supplemental information that could be reported, if appropriate. Maximum 400 words
Question 4:
ChallengeMe Pty Ltd is a manufacturer of tennis equipment and fashion wear. The statement of financial position as at 30 June 2020 and details of expenses and revenues for the year ending 30 June 2020 are as follows:
|
Statement of financial position as at 30 June 2020
|
|
|
|
2020
|
2019
|
|
|
($000)
|
($000)
|
|
Current assets
|
|
|
|
Cash
|
135
|
274
|
|
Inventory
|
2,774
|
2,486
|
|
Prepayments
|
115
|
-
|
|
Accounts receivable
|
2,897
|
2,654
|
|
Allowance of doublful debts
|
(150)
|
(120)
|
|
Total current assets
|
5,771
|
5,294
|
|
Non-current assets
|
|
|
|
Investment - associated company
|
1,050
|
-
|
|
Investments
|
1,216
|
948
|
|
Land
|
1,500
|
1,750
|
|
Buildings
|
800
|
800
|
|
Accumulated depreciation - buildings
|
(200)
|
(160)
|
|
Plant and equipment
|
1,025
|
768
|
|
Accumulated depreciation - plant and equipment
|
(100)
|
(548)
|
|
Deferred tax asset
|
312
|
302
|
|
Total non-current assets
|
5,603
|
3,860
|
|
Total assets
|
11,374
|
9,154
|
|
Current liabilities
|
|
|
|
Accounts payable
|
1,637
|
1,483
|
|
Accruals
|
1,575
|
1,110
|
|
Lease liability
|
5
|
-
|
|
Income tax payable
|
243
|
83
|
|
Provision for employee entitlements
|
205
|
298
|
|
Provision for deferred payments (relating to
|
|
|
|
investment in Squash Pty Ltd)
|
50
|
-
|
|
Provision for warranty
|
314
|
-
|
|
Total current liabilities
|
4,029
|
2,974
|
|
Non-current liabilities
|
|
|
|
Lease liability
|
15
|
-
|
|
Deferred tax liability
|
240
|
75
|
|
Borrowings
|
3,500
|
3,800
|
|
Total non-current liabilities
|
3,755
|
3,875
|
|
Total liabilities
|
7,784
|
6,849
|
|
Net assets
|
3,590
|
2,305
|
|
Statement of financial position as at 30 June 2020 (cont.)
|
|
|
|
|
2020
|
2019
|
|
|
($000)
|
($000)
|
|
Shareholders' equity
|
|
|
|
Share capital
|
2,750
|
2,000
|
|
Retained earnings
|
280
|
130
|
|
Revaluation surplus
|
560
|
175
|
|
Total shareholders' equity
|
3,590
|
2,305
|
Statement of profit or loss and other comprehensive income for the year ending 30 June 2020
|
|
2020
|
2019
|
|
($000)
|
($000)
|
|
Income
|
|
|
|
Sales
|
31,394
|
27,346
|
|
Dividends income
|
51
|
47
|
|
Expenses
|
|
|
|
Bad debts
|
(90)
|
(85)
|
|
Cost of sales
|
(28,205)
|
(24,611)
|
|
Doubtful debts
|
(35)
|
(40)
|
|
Inventory write-off
|
(50)
|
0
|
|
Warranty expenses (taken to provision for warranty)
|
(314)
|
0
|
|
Depreciation
|
|
|
|
- Building
|
(40)
|
(40)
|
|
- Plant and equipment
|
(100)
|
(60)
|
|
Interest
|
(315)
|
(418)
|
|
Rent
|
(600)
|
(600)
|
|
Salaries and wages
|
(1,324)
|
(1,231)
|
|
Finance charges
|
(7)
|
(90)
|
|
Profit before tax
|
365
|
218
|
|
Income tax
|
(215)
|
-
|
|
Profit after tax
|
150
|
218
|
|
Other comprehensive income
|
|
|
|
Reduction in revaluation surplus as a result of reduction
|
|
|
|
in value of land
|
(175)
|
-
|
|
Increase in revaluation surplus as a result of increase
|
|
|
|
in value of plant and equipment
|
560
|
-
|
|
Total comprehensive income
|
535
|
218
|
Statement of changes in equity for the year ending 30 June 2020
|
|
Share capital
|
Retained earnings
|
Revaluation
surplus
|
Total
|
|
($000)
|
($000)
|
($000)
|
($000)
|
|
Opening balance 1 July 2019
|
2,000
|
130
|
175
|
2,305
|
|
Statement of profit and loss and other
|
|
|
|
|
|
comprehensive income
|
-
|
150
|
385
|
535
|
|
Issue of shares as part consideration for
|
|
|
|
|
|
acquisition of associated company
|
750
|
-
|
-
|
750
|
|
Balance 30 June 2020
|
2,750
|
280
|
560
|
3,590
|
Additional information
- An additional investment of $80 000 is acquired for consideration of tennis equipment costing $80 000.
- Land is devalued against a previous increment in the revaluation reserve. The previous increment is fully reversed.
- Plant and equipment with a cost of $700 000 and accumulated depreciation of $500 000 are revalued to $1 000 000 during the year
- Plant and equipment with a fair value of $25 000 are acquired under a finance lease. The residual is guaranteed by the lessee.
- Plant and equipment are sold for $20 000 cash. Cost is $68 000 and no profit or loss is made on the sale.
- During the year, one line of wooden tennis racquets is scrapped at a loss of $50 000, as there is a little demand for the range.
- During the year, an investment is made in an associated company, Squash Pty Ltd. Consideration is $1 000 000, funded by cash of $250 000 and the balance by the issue of 500 000 shares at $1.50 per share. The purchase agreement includes a clause stating that if profits exceed $110 000 in the first financial year after purchase, additional amounts are payable. Using the formula, an extra $50 000 is provided.
- Provision for warranty is based on 1 per cent of sales
- Rent expense of $600 000 is accrued within ‘Accruals'.
- Interest expense is paid during the year and dividends are received.
- Salaries and wages expense includes the expense for employee entitlements.
- Tax rate is 30 per cent.
Required
Prepare the statement of cash flows in accordance with AASB 107 for ChallengeMe Pty Ltd for the year ending 30 June 2020. Comparatives are not required. Show necessary workings.
Question 5
FinalHeadache Ltd acquires all of the shares in Solutions Ltd on 30 June 2018. The financial statements for FinalHeadache Ltd and Solutions Ltd at 30 June 2019 (one year after acquisition) are provided below.
Reconciliation of opening and closing retained earnings
|
|
FinalHeadache Ltd
|
Solutions Ltd
|
|
($000)
|
($000)
|
|
Sales revenue
|
2,000
|
610
|
|
Costs of goods sold
|
(800)
|
(240)
|
|
Other expenses
|
(300)
|
(70)
|
|
Profit
|
900
|
300
|
|
Retained earnings opening balance
|
1,100
|
500
|
|
Retained earnings at 30 June 2019
|
2,000
|
800
|
|
Statements of financial position
|
|
|
|
|
FinalHeadache Ltd
|
Solutions Ltd
|
|
|
($000)
|
($000)
|
|
Shareholders' equity
|
|
|
|
Retained earnings
|
2,000
|
800
|
|
Share capital
|
1,100
|
350
|
|
Current liabilities
|
|
|
|
Accounts payable
|
700
|
150
|
|
Non-current liabilities
|
|
|
|
Loans
|
1,100
|
700
|
|
|
4,900
|
2,000
|
|
Current assets
|
|
|
|
Cash
|
150
|
200
|
|
Accounts receivable
|
450
|
250
|
|
Non-current assets
|
|
|
|
Land
|
1,200
|
750
|
|
Plant
|
2,600
|
1,000
|
|
Accumulated depreciation - plant
|
(600)
|
(200)
|
|
Investment in Solutions Ltd
|
1,100
|
-
|
|
|
4,900
|
2,000
|
|
Additional information
|
|
|
Additional information
- FinalHeadache Ltd acquires Solutions Ltd on 30 June 2018 for $1.1 million cash.
- The directors of FinalHeadache Ltd consider that in the year to 30 June 2019 the value of goodwill has been impaired by an amount of $20 000.
- There are no intragroup transactions.
- Solutions Ltd did not issue any shares during 2019.
- The tax rate is 30 per cent.
- On the date at which FinalHeadache Ltd acquires Solutions Ltd, the carrying amount and fair value of the assets of Solutions Ltd are:
|
|
Carrying amount
|
Fair value
|
|
|
($000)
|
($000)
|
|
Cash
|
150
|
150
|
|
Accounts receivable
|
200
|
200
|
|
Land
|
750
|
800
|
|
Plant (cost of $1 000 000,
accumulated depreciation of $200 000)
|
800
|
900
|
|
|
1,900
|
2,050
|
No revaluations are undertaken in Solutions Ltd's accounts before consolidation.
- At the date of acquisition of Solutions Ltd, Solutions Ltd's liabilities amount to $1.050 million and there are no contingent liabilities.
- The plant in Solutions Ltd is expected to have a remaining useful life of 10 years from 30 June 2018, and no residual value.
Required
Provide the consolidated accounts of FinalHeadache Ltd and Solutions Ltd as at 30 June 2019 with the following:
- Goodwill computation
- Consolidation journal entries to:
o Revalue the assets of Solutions Ltd so that goodwill can subsequently be accounted for
o Eliminate the investment in Solutions Ltd and the pre-acquisition capital and reserves of Solutions Ltd
o Recognise impairment of goodwill
o Additional depreciation and decrease in Deferred tax liability
- Consolidation worksheet for FinalHeadache Ltd and its controlled entity for the period ending 30 June 2019 showing columns of Eliminations and adjustments and Consolidated amounts
- Consolidated statement of financial position of the FinalHeadache group