Accounting for share capital
On 1 January 2019, Funland Ltd was registered and issued a prospectus, offering 1,000,000 preference shares at $2.00 payable in full on application by 31 March 2019, and 2,000,000 ordinary shares at $6.00 with $4.00 due on application by 31 March 2019, $1.50 due within one month of allotment, and $0.50 due on a call to be made by the directors at a later date.
By 31 March 2019, the company had received applications for 800,000 preference shares and applications for 2,200,000 ordinary shares. On 15 April 2019, the ordinary and preference shares were allotted. The ordinary shares were allotted to applicants on a pro-rata basis, and the excess application money was retained and credited against amounts due on allotment. All allotment money was received by 15 May 2019.
The directors made the call on the ordinary shares on 1 August 2019, with amounts due by 1 September. By this date, amounts due on 1,960,000 ordinary shares had been received. On 15 September 2019, the shares on which call money had not been received were forfeited and sold as fully paid. An amount of $5.60 was received for each share sold. Costs of the forfeiture and reissue amounted to $7,000, and were paid. The constitution allows for the refund of any balance in the forfeited shares account after reissue to former shareholders, so refunds were made on 30 September 2019.
Prepare the journal entries to record the transactions of Funland Ltd up to and including that which took place on 30 September 2019. Show all relevant dates, narrations and workings.
Accounting for income tax
The accounting profit before tax for Splash Ltd, for the year ended 30 June 2018, amounted to $714,000. It included the following revenue and expense items:
Royalties (exempt income) 15,000 CR
Interest revenue 11,000 CR
Annual leave expense 13,200 DR
Doubtful debts expense 22,800 DR
Depreciation – plant 48,750 DR
Depreciation – motor vehicles 30,000 DR
Insurance expense 23,000 DR
Impairment loss – goodwill (not tax deductible) 14,000 DR
Warranty expense 37,400 DR
Entertainment expense (not tax deductible) 3,500 DR
The draft statement of financial position at 30 June 2018 contained the following assets and liabilities:
Cash 216,000 212,500
Accounts receivable 195,000 143,800
Allowance for doubtful debts (29,000) (12,200)
Inventory 367,100 354,300
Interest receivable 1,900 1,000
Prepaid insurance 6,000 4,000
Plant – cost 390,000 390,000
Less: accumulated depreciation (146,250) (97,500)
Motor vehicles – cost 150,000 150,000
Less: accumulated depreciation (75,000) (45,000)
Goodwill 60,000 60,000
Less: accumulated impairment losses (16,000) (2,000)
Deferred tax asset ? 17,302
Accounts payable 146,900 127,600
Provision for annual leave 21,400 14,000
Provision for warranties 33,100 14,600
Bank loan 100,000 150,000
Deferred tax liability ? 11,250
• The plant is depreciated over eight years for accounting purposes, but over six years for taxation purposes (straight-line method, and with an estimated residual value of nil). The accumulated depreciation for tax purposes as at 30 June 2018 is $195,000.
• The motor vehicles are depreciated over five years for accounting purposes, but over eight years for taxation purposes (straight-line method, and with an estimated residual value of nil). The accumulated depreciation for tax purposes as at 30 June 2018 is $46,875.
• Tax deductions for annual leave, warranties and insurance are available when the amounts are paid, and not as amounts are accrued.
• Amounts received from sales, including those on credit terms, are taxed at the time the sale is made.
• Interest revenue is only taxable when amounts are actually received, and not as amounts are accrued.
• Tax deductions are not available for doubtful debts. Tax deductions are only available when bad debts are written off.
• The tax rate is 30%.
i) Determine the balance of any current tax liability, deferred tax assets and deferred tax liabilities for Splash Ltd as at 30 June 2018, in accordance with AASB 112. Use appropriate worksheets and show all necessary workings.
ii) Prepare the journal entries to record the current tax liability, deferred tax assets and deferred tax liabilities.
Marking Guide – Question 3 Max. marks awarded
Determination of taxable income and current tax liability 6
Determination of deferred tax assets and liabilities in deferred tax worksheet 8
Journal entries 2
Question 3 [12 marks]
Revaluation of property, plant and equipment
Firefly Ltd acquired an item of equipment on 1 July 2016 at a cost of $800,000. On 30 June 2017, Firefly’s directors decide to continue using the cost model for equipment. They elect to depreciate the equipment acquired on 1 July 2016 using the straight-line method, over its useful life of five years. The estimated residual value is $40,000.
The directors then decide to adopt the revaluation model for equipment from 1 July 2017. They determine that the fair value of this item of equipment on this date is $610,000. The remaining useful life is revised on this date – estimated to be six years from 1 July 2017. The estimated residual value is also revised on this date – to $50,000.
On 30 June 2018, Firefly’s directors estimate that the fair value of the item of equipment does not differ materially from its carrying amount.
On 30 June 2019, Firefly’s directors estimate that the fair value of the item of equipment is $550,000.
The item of equipment is sold on 31 December 2019 for $490,000.
Prepare journal entries to account for all transactions that took place during the period 1 July 2016 to 31 December 2019, including entries for the acquisition of the equipment, depreciation, revaluations and its disposal. Show all relevant dates, narrations and workings. Note: you are not required to account for income tax associated with revaluations.
Marking Guide - Question 4 Max. marks awarded
Journal entries 9
Impairment of assets
Flash Ltd has a division that represents a separate cash generating unit. At 30 June 2018, the carrying amounts of the assets of the division, valued pursuant to the cost model, are as follows:
Plant and equipment 750,000
Less: accumulated depreciation (250,000)
Accounts receivable 163,000
Carrying amount of cash generating unit 1,446,000
The receivables were regarded as collectable, and the inventory’s fair value less costs to sell was equal to its carrying amount. The patent has a fair value less costs to sell of $85,000, and the land has a fair value less costs to sell of $270,000.
The directors of Flash estimate that, at 30 June 2018, the fair value less costs to sell of the division amounts to $1,360,000, while the value in use of the division is $1,270,000.
As a result, management increased the depreciation of the plant and equipment from $50,000 p.a. to $56,000 for the year ended 30 June 2019.
By 30 June 2019, the recoverable amount of the cash generating unit was calculated to be $30,000 greater than the carrying amount of the assets of the unit.
Determine how Flash Ltd should account for the results of the impairment test at 30 June 2018 and 30 June 2019, and prepare any necessary journal entries. Show all workings and provide references to the relevant accounting standard to support your answer.
Marking Guide - Question 5 Max. marks awarded
Journal entries, calculations and workings for 2018 8.5
Journal entries, calculations and workings for 2019 8.5