HA3011 Advanced Financial Accounting Tutorial Questions Assignment 2 Answer
Answer
Week 6: Depreciation and fair valuation
Depreciation = Cost of Assets/Useful life of asset
$280 000/10 = $28000
The depreciation for 4 years from 2016 to 2020 is $ 28,000 * 4= $ 112,000
The Book Value of the assets on July 1 on $ 280000-$ 112000 = $ 168000
The Revaluation Shortage $ 168000-$ 150000 = $ 18000
Depreciation A/c Dr. $ 28000
To Machinery a/c $ 28000
(Being accumulated depreciation charged to machinery)
Revaluation Reserve A/c Dr $18000
To Machinery a/c $18000
(Being asset revalued at their fair market value)
Profit and loss A/c Dr.$ 28000
To depreciation A/c$28000
(Being depreciation transferred to profit and loss a/c)
Week 7: Accounting of debentures
(A) Issue price of debentures
Debenture valuation is calculated on the basis of the present value of all cash outflows. Cash outflows related to debentures are interest payments and redemption payments. so the sum of the present value of these outflows is the issue price of the debentures (Schroeder, et al. 2020).
Effective interest rates for half year compounding = 12 / 2 = 6%
Effective coupon rate per annum = 10%
Total Effective number of periods =10*2 =20 periods
Interest payment= $2000, 000*10%/2 = $ 100,000 per half year
PV of $1 in 20 periods= 1/ (1+0.06) ^20= 0.31180
PV of $1 in 20 periods= 200000*0.31180 = $623,609
Present value of annuity of $1 per period for 20 periods = 1-1(1+0.06) ^ 20/6% =$ 11.46992
Present value of annuity for interest rate 6 % and period @20 = $ 100, 000 * 11.46992= $ 1146992
Issue price of debenture= $ 623,609+$ 1146992= $ 1,770,601
Discount on debenture= $2,000,000-$1,770,602= $2,29,399
(B) Journal Entries
1 July 2018
Bank a/c Dr. $1,770,601
Discount on debenture dr $2, 29,399
To Debenture holders A/c $2,000,000
(Being payment received from debentures holders and discount recognized on the issue of debentures)
1 July 2018
Debentures holder’s A/c Dr.$ 2000000
To Debentures liability A/c$ 2000000
(Being debentures issued)
30 December 2018
Interest expense A/c Dr.$ 100000
To Debentures holders A/c$100000
(Being interest expense recognized)
30 December 2018
Interest a/c Dr $100000
To Bank a/c $ 100000
(Being Interest paid)
30 December 2018
Profit and loss A/c Dr.$ 100000
To interest expense A/c$ 100000
(Being interest transferred to profit and loss A/c)
Week 8: Lease payments and their accounting
(A) Calculation of present value of lease outflow
Year Annual Lease Payment PV factor Present value Value
1 $ 5500001.0 $ 550000
2 $ 550000 0.9346 $ 514030
3 $ 550000 0.8734 $ 480370
4 $ 550000 0.8163 $ 418800
5 $ 1900000.7628 $ 144932
Total present Minimum lease rental payment = $ 2,108,132
b) Lease table and recording of journal entries
Lease table
| Year | Balance in the beginning | Interest Due | Lease Payments | Principal paid in the lease payment | Balance at the End |
| 1 | 2138315.09 | 0 | 550000.00 | 550000 | 1588315.00 |
| 2 | 1588315.00 | 111182 | 550000.00 | 438818 | 1149497.00 |
| 3 | 1149497.00 | 80465 | 550000.00 | 469535 | 679962.00 |
| 4 | 679962.00 | 47597 | 550000.00 | 502403 | 177559.00 |
| 5 | 177559.00 | 12441 | 190000.00 | 12441 | Nil |
Journal entries
1-January-2015
Lease Payable a/c Dr. $ 550000
To Bank a/c $ 550000
(Being advance lease amount paid to the lessor)
1-January-2015
Assets a/c Dr. $ 2108132
To Lease Liability A/c 2138315
(Being asset received from the lessor)
1-January-2016
Lease Liability a/c Dr $ 550000
To bank a/c $ 550000
(Being lease liability paid)
1-January-2016
Interest on lease A/c Dr $ 111182
To Lease liability A/c$ 111182
(Being interest expense due to lease liability)
1-January-2017
Lease Liability a/c Dr $ 550000
To bank a/c $ 550000
(Being lease liability paid)
1-January-2017
Interest on lease A/c Dr $ 80465
To Lease liability A/c$ 80465
(Being interest expense due to lease liability)
1-January-2018
Lease Liability a/c Dr $ 550000
To bank a/c $ 550000
(Being lease liability paid)
1-January-2018
Interest on lease A/c Dr $ 47597
To Lease liability A/c$ 47597
(Being interest expense due to lease liability)
1-January-2019
Lease Liability a/c Dr $ 190000
To bank a/c $ 190000
(Being residual value of asset paid)
1-January-2019
Interest on lease A/c Dr $ 12441
To Lease liability A/c$ 12441
(Being interest expense due to lease liability)
Week 9: Taxation calculation and accounting
(A) Calculation of taxable profit and accounting profit for BBS Limited
Accounting profit and taxable profit are two different terms. Accounting profit is used to report the correct situation of the business entity in financial statements to various stakeholders of the organization and taxable profit is calculated for the purpose of tax calculations and tax payments on the taxable income (Demerjian, 2017). There is a difference in accounting laws and taxation laws, accounting profits calculated in accordance with accounting laws, and taxable profit is calculated in accordance with taxation laws. These differences are being the reason for the creation of deferred tax assets and deferred tax liabilities (Siddik, et al. 2018).
| Particulars | Accounting profit | Taxable profit |
| Cash Sales | 9,50,000.00 | 9,50,000.00 |
| Add: Advance received from customers | 0.00 | 9,500.00 |
| Less: Cost of goods sold | 35,000.00 | 35,000.00 |
| Less: Rent expense | 9,000.00 | 9,000.00 |
| Less: Doubtful debts expense | 1,200.00 | 0.00 |
| Less: Provision for employee long leave service benefits | 5,000.00 | 0.00 |
| Less: Goodwill impairment expense | 7,000.00 | 0.00 |
| Less: Prepaid rent expense | 0.00 | 1,200.00 |
| Profit | 8,92,800.00 | 9,14,300.00 |
Working notes
- Prepaid rent expense is not debited in profit and loss account according to accounting laws but it is a deductible expense as per the tax laws.
- Goodwill impairment expense is not an allowable expense as per income tax laws but it should be debited to calculate accounting profit.
- Provisions are not allowable according to income tax law but according to prudence, it is debited in profit and loss account.
(B) Calculation of fair market value of deferred tax assets and deferred tax liabilities and accounting thereof
Deferred tax assets and deferred tax liabilities are calculated by multiplying effective tax rates with temporary timing difference. So, when a deferred tax asset or deferred tax liability is generated it is generated with tax rates prevails that time (Loughran, et al. 2016). At the time when tax rate of future periods are changed there should be an adjustment of this change is required to be adjusted in deferred tax assets and deferred tax liabilities (Schroeder, et al. 2019).
Calculation of fair value of deferred tax assets
Current deferred tax assets = $ 900000
Previous tax rates = 20%
Future tax rates = 25%
Fair value of deferred tax assets = 900000*25/20 = $ 1125000
Increase in fair value of deferred tax assets = $ 225000
Calculation of fair value of deferred tax liabilities
Current deferred tax liabilities = $ 700000
Previous tax rates = 20%
Future tax rates = 25%
Fair value of deferred tax liabilities = $ 700000*25/20 = $ 875000
Increase in value of deferred tax liability = $ 175000
Journal Entries
Deferred tax assets A/c Dr.$ 225000
To revaluation reserve A/c$ 225000
(Being deferred tax assets revalued at fair market value)
Revaluation reserve A/c Dr.$ 175000
To deferred tax liabilities A/c$ 175000
(Being deferred tax liabilities revalued)Week 10: Accounting of expenditure on highly risky business
An expense made by an organization is either write off to Profit and loss account or it should be capitalized in assets. For classify as an asset, and expense should satisfy conditions to be recognized as an asset. According to the definition of an asset as per generally accepted accounting principles, an expense should capitalize if it (Schroeder, et al. 2011).
Drive future economic benefits for the organizations, and
There is the use of such an asset for a long time.
After satisfying both the conditions an expense should be capitalized as an asset. In the case of mining, exploration, and other similar extractive businesses, these businesses are naturally and fundamentally possessing risk, any expense made on such businesses satisfied condition of long-time use. But there is very less probability of probable future economic benefits. Thus, the amount expended in the business of mining, exploration, and other similar extractive businesses is not capitalized and they should charge to the profit and loss account (Watts, & Zimmerman, 2010).
Apart from this extraction from these businesses is not certain. That means if you explore something from an area than it is not certain that there are minerals in that area. Thus, if the area of such an asset is not able to produce any mineral than expenses made on such an area is debited to profit and loss account, and there is no capitalization of such expense.
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