MA511 End Of Trimester Major Case Study Assessment In Replacement Of Final Examination Answer
Answer
Case Study 1
Required
1. Explain how accounting profit and taxable profit differ and how each is treated when accounting for income taxes. (5 marks)
Answer:
The accounting profit and taxable profit differ from each other because of the different treatment of some expenses while calculating the accounting profit and taxable profit. Some of the main reasons are as follows:
- Accounting profits are calculated using the accrual basis of accounting while the taxable profits calculation uses cash basis mostly. Therefore prepaid expenses, employee benefits are deducted in calculating accounting profits when they are incurred but in calculating taxable profits they are deducted when they are paid.
- The accounting profits are calculated using the accounting principles, while the taxable profits are calculated while the taxable profits are calculated using the tax rulings.
- The taxable profits allows carry forward and adjustment of IT losses while the accounting profit does not account for the losses.
- There are some deduction and concession allowed from taxable income like R&D costs, development costs, etc. these cost are treated as define in counting standards.
- Also the assets and liabilities have different carrying value for the Accounting purposes an Income Tax uses which results in different amount of depreciation.
2. Discuss when a deferred tax asset must be recognised. (7 marks)
Answer:
The deferred tax must be recognised by the organisation in the year in which the accounting profit is different from the taxable profit due to temporary differences. This happens when the revenues and expenses recognised under the accounting system and taxation system are different due to timing of deduction.
According to AASB 112 the temporary differences are “the differences between the carrying amount of asset and liability in the statement of financial position and the tax base”
The temporary differences can be of two types:
- Taxable temporary differences - the amount is taxed in future periods when the asset or liability is recovered or settled
- Deductible temporary differences - the amount is deductible in future period when the asset or liability is recovered or settled
The difference in the two profits can lead to deferred tax liabilities or deferred tax assets.
In case of Asset:
when CA > TBleads to deferred tax liability
when CA < TBleads to deferred tax asset
In case of Liability:
when CA > TBleads to deferred tax asset
when CA < TBleads to deferred tax liability
Where CA is the carrying as per the accounting profit and TB is the tax base.
3. Calculate the taxable income. (8 marks)
Answer:
| | | | |
| Accounting profit (loss) | -$10,000,000 | ||
| ADD : Expenses as per accounting standards | |||
| Depreciation expense – plant | $2,000,000 | ||
| Long-service leave expense | $1,200,000 | ||
| Profit before the differences | -$6,800,000 | ||
| Less: Expenses for tax purposes | |||
| Tax depreciation for plant | -$4,000,000 | ||
| Long-service leave paid | -$2,400,000 | ||
| Taxable profit (loss) | -$13,200,000 |
The expenses that were not allowed as deduction for tax purposes were permanent differences and hence exclude.
4. Prepare the journal entry for the deferred tax asset. (5 marks)
Answer:
Since the net taxable profit is less than the accounting profit (being loss), the deferred tax asset is created as the net amount entry:
Deferred tax asset DR960,000
Income Tax Expense CR960,000
(3200,000 * 30%)
Case Study 2 (Total = 25 Marks)
Required:
The accountant of Twister Ltd is unsure of how to account for the acquisition of the machine and has asked for your advice. Prepare a report providing detailed advice to the accountant.
1. What are the recognition criteria for property, plant and equipment? (5 marks)
Answer:
The recognition criteria of PPE is defined in AASB 116 Para 7 as follows:
The cost of any item should be recognised in the books of accounts as property, plant and equipment only when the two conditions are fulfilled:
- The item should result in economic benefits to the entity in future.
- The cost if the item can be measured in a reliable manner
In case any of the two conditions is not fulfilled the item should be written off as an expense
2. How items of property, plant and equipment should be measured at point of initial recognition.
(5 marks)
Answer:
At the point of initial recognition, the items of PPE should be measured at cost. This is as per Para of AASB 116.
The standard states that, “An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost”
The above rule applies irrespective of the method by which the item is acquired by the entity. Thus in case the asset is acquired at zero cost like gift, its initial recognition will be done at zero cost.
3. How is cost determined in accordance with AASB116? (5 marks)
Answer:
Para 16 of AASB 116 states how to determine he cost of the item. The cost as three components according to the standard:
a) The purchase price of the item: this includes the import duties, non-refundable purchase taxes paid and is the value after deducting the trade discounts and rebates and refundable taxes like GST.
b) Directly attributable costs: this includes the costs that are incurred to bring the asset to the location and make it ready to operate. This includes costs delivery of the item to the location, site preparation costs, testing of the item and all costs incurred to bring the item in operating condition.
c) Initial estimated cost of dismantling or removing the item or restoring the site. However this cost is capitalised only if the obligation is there at the time of acquisition of the asset for such dismantling.
4. Estimate the cost of the Machine as per para 16 of AASB116. (10 marks)
Answer:
A. As per para 16 of AASB116, the initial cost estimate comprises of three components - purchase price, directly attributable costs and dismantling costs.
a. The purchase price: the purchase price of this machinery is the fair value of the land block given in exchange and the cash paid. Thus the initial price is $300,000 +$5,000 = $305,000
b. Cost directly attributable is the cost incurred to bring the machine into operating conditions. The machinery is required to be cemented into the factory floor in order to achieve sufficient stability for the machine to operate. This the cost necessary to make the machinery operable and hence the cost $550 is included
c. The cost of dismantling or removal cost is capitalised and added into initial cost only when it is an obligation at the time of acquisition of the asset. But it is not the condition in this case. Thus the dismantling cost cannot be capitalised.
The initial cost of the Machinery = $305,000 +$550 = $305,550
Case Study 3 (Total = 25 Marks)
Required
1. Explain how to account for goodwill. (3 marks)
Answer:
Good will is the difference between the fair value of the identifiable assets and liabilities and the price paid for purchase.
Goodwill = Consideration transferred Less Acquirer’s interest in the FVINA
Goodwill on acquisition is recorded as an asset in the balance sheet of the acquiring company.
2. Discuss the importance of identifying the acquisition date (3 marks)
Answer:
The Acquisition date is defined in AASB 3 as the date on which the acquirer obtains control of the acquire. It is important to correctly identify this date because the date will affect the following things in the acquisition process:
- The fair values of net assets acquired is taken on the date of acquisition
- The value of non –cash consideration given also varies with the date
- In case of non-controlling interest, the measurement value will change with change in date.
- The acquiring date is important in measurement of the equity holding that has been acquired prior to gain of control.
3. What recognition criteria is applied to assets and liabilities acquired in the business combination. Explain. (4 marks)
Answer:
The business combination applies the fair value criteria for recognition of assets and liabilities. Fair value is allocated to the following items at acquisition date and requires the recognition of:
- Identifiable assets acquired
- Liabilities assumed
- Contingent liabilities
- Any non-controlling interest in the acquiree
- Goodwill
The fair value criteria recognises all identifiable assets acquired and liabilities assumed regardless of the probability of inflows and outflows. It also includes some contingent liabilities.
4. Prepare the acquisition analysis at 1 July 2020 for the acquisition of Blacks Ltd by Tall Ltd. (5 marks)
Answer:
Acquisition Analysis at 1 July 2020:
Net fair value of identifiable assets
and liabilities of Black Ltd=($1000+10 000 + $68000 + $232 000 + 280 000) (equity) – (16000+64000)=$511000
Consideration transferred=100,000 *6.30 = $630,000
Goodwill acquired=$630,000 – 511,000
=$119,000
5. Prepare the journal entries in the records of Tall Ltd at 1 July 2020. (10 marks)
Answer:
Business combination entries
CashDR $ 1000
Accounts receivableDr $10 000InventoryDr 68 000
Equipment Dr. 232 000
Patents Dr 280 000
GoodwillDr 119000
Accounts payable Cr. 16 000
Debentures Cr 64000
Shares capital Cr 630000
Case Study 4
Required
Write a report for the accountant at Carina Ltd advising on the following issues:
1. Should the adjustments to fair value be made in the consolidation worksheet or in the accounts of Finn Ltd? (5 marks)
Answer:
The adjustments for fair value are done in the consolidation worksheet while making the entries for the acquisition.
2. What is the purpose of the pre-acquisition entries in the preparation of consolidated financial statements? Explain. (5 marks)
Answer:
The purpose of the pre-acquisition entry is to:
- prevent double counting of the assets of the economic entity
- prevent double counting of the equity of the economic entity
- recognise any gain on bargain purchase
3. How to prepare the pre-acquisition entries at 1 July 2019. (10 marks)
Answer:
Acquisition analysis:
At 1 July 2019:
Net fair value of identifiable assets
and liabilities acquired=$102 000 + $40 000 + $60 000 (equity)
=$202 000
Consideration transferred=$225 000
Goodwill=$23000
Business combination valuation entries
GoodwillDr23 000
Business combination valuation reserveCr23 000
Pre-acquisition entries at 1 July 2019:
Retained earnings (1/7/19)Dr60 000
Share capital Dr102 000
General reserve Dr40 000
Business combination valuation reserve Dr23000
Shares in Finn LtdCr225 000
4. How to prepare the pre-acquisition entries at 30 June 2020. (5 marks)
Answer:
Pre-acquisition entries at 30 June 2020
Retained earnings (1/7/19) Dr60 000
Share capital Dr102 000
General reserve Dr40 000
Business combination valuation reserve Dr23000
Shares in Finn LtdCr225 000
Retained earnings (1/7/19)Dr15 000
General reserveCr15 000
Neither of the dividend transactions have any effect on the pre-acquisition entries regardless of whether the dividends are paid/declared from pre- or post-acquisition equity.
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