Financial Accounting
QUESTION 1
On 30 June 2014 Bronson Ltd reported the following information for Equipment in its statement of financial position:
Equipment (at cost) 1,500 000
Accumulated depreciation 450 000 1,050,000
Investigation of the Property, Plant and Equipment records showed that the Equipment consisted of two items: Machine A that originally cost the company $900,000 and had a carrying amount of $540,000 at 30 June 2014, and another Machine B that originally cost $600,000 and had a carrying amount at 30 June 2014 of $510,000. Both items of Equipment are depreciated on a straight-line basis for 10 years.
On 1st of January 2015, the directors of Bronson Ltd decided to switch the valuation method from the cost model to the revaluation model in accordance with AASB116. Machine A was revalued to its fair value of $630,000 with an expected remaining useful life of 6 years and Machine B was revalued to $525,000, with an expected remaining useful life of 7 years.
On 30 June 2015, the fair value of Machine A was assessed at $600,000, and the future useful life was estimated as 5 years. For Machine B, fair value was assessed to be only $420,000, and its future useful life to be 4 years because of a certain degree of commercial obsolescence.
Required:
I. Prepare general journal entries for Bronson Ltd for Machines A and B during the period from 1 January 2015 to 30 June 2015 (ignore the tax effect).
II. Wesfarmers Ltd recently announced a major write down of Goodwill in its subsidiary Target. Explain in your own words, using relevant references:
a) Why Wesfarmers have deemed this necessary (due to what factors); and
b) What will be the implication(s) on the financial statement(s).
QUESTION 2
The records of Cats Ltd as 30 at 30 June 2014 to 30 June 2016 revealed the following:
• A deferred tax liability of $45 000 relating to taxable temporary difference of $150 000. The temporary difference is related to account receivable that was recognised in the measurement of accounting profit in the year ended 30 June 2014. It was expected that the cash will be collected from account receivable in future reporting periods, as follows:
2015 $60 000
2016 $90 000
• A deductible temporary difference of $30 000 relating to provision for long service leave, which was expected to be paid in the future periods as follows:
2015 $10 000
2016 $ 20 000
• During the financial year ending 30 June 2014, Cats Ltd received a fine of $25 000 from a regulatory body for violation of a particular law. The fine was paid in 30 June 2014 and it was a non-deductible expense.
• On 1 July 2013, Cats Ltd purchased a stadium at a cost of $80 000. The stadium was depreciated at 20% on straight line basis for accounting purposes and 25% per year for tax purposes. The building was expected to be recovered through use. At 1 July 2015 the stadium was revalued to $90 000 and Cats Ltd estimated that the remaining useful life of the stadium was 5 years from the date of revaluation. The revaluations did not affect the tax base of the stadium.
• Cats Ltd had recognised goodwill of $15 000 in the statement of financial position. Goodwill was not amortised and would only be expensed if there is any impairment.
• Accounting profit was as follows:
2014 $112 500
2015 $142 500
2016 $165 000
• There were no other transactions in 2014, 2015, 2016.
• The tax rate was 30%.
• Cats Ltd had the following assets and liabilities:
|
|
2014
|
2015
|
2016
|
|
Stock control
|
28 000
|
28 000
|
28 000
|
|
Investments
|
49 000
|
49 000
|
49 000
|
|
Land
|
150 000
|
150 000
|
150 000
|
|
Accounts payable
|
750
|
750
|
750
|
|
Long-term debt
|
26 000
|
26 000
|
26 000
|
|
Bank overdraft
|
7 500
|
4 500
|
9 000
|
Required:
I. Prepare a deferred tax table for years ending 30 June 2014, 2015 and 2016 by creating column for carrying amount, tax base, taxable temporary difference and deductible temporary difference.
II. How would the answer for the year ended 30 June 2016 differ if the tax rate changed from 30% to 28% in 2016? Justify you answer with reference to AASB 112 "Income taxes".