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Financial Accounting Part 2

Preliminary Examination

Instruction: Answer all the problems given below following the requirements set forth in each of them. Be sure to
properly show the solutions ensuring that only your final answer are double ruled whenever relevant. Also, be sure
that the checker will understand your answers, otherwise, it will be marked as incorrect. Do not use cursive writing. Do
not write at the back of your worksheet(s). FAILURE TO FOLLOW THE INSTRUCTIONS WILL INVALIDATE YOUR


1. The accounting profit before tax of Jasmine Ltd for the year ended 30 June 2014 was $22,240. It included the
following revenue and expense items:

Government grant (non-taxable) $3,600
Proceeds from sale of plant 33,000
Carrying amount of plant sold 30,000
Entertainment expense (non-deductible) 11,100
Doubtful debts expense 8,100
Depreciation expense plant 24,000
Insurance expense 12,900
Annual leave expense 15,400

The draft statement of financial position as at 30 June 2014 included the following assets and liabilities:

2014 2013
Accounts receivable $156,000 $147,500
Allowance for doubtful debts (6,800) (5,200)
Prepaid insurance 3,400 5,600
Plant 240,000 290,000
Accumulated depreciation plant (134,400) (130,400)
Deferred tax asset ? 9,990
Provision for annual leave 14,100 9,700
Deferred tax liability ? 9,504

Additional information:
(a) In November 2013, the company received an amended assessment for the year ended 30 June 201
from the taxing authority. The amendment notice indicated that an amount of $4,500 claimed as a
deduction had been disallowed. Jasmine Ltd has not yet adjusted its accounts to reflect the
(b) For tax purposes, the carrying amount of plant sold was $26,000. This sale was the only movement in
plant for the year.
(c) The tax deduction for plant depreciation was $28,800.Accumulated depreciation at 30 June 2013 for
taxation purpsoes was $156,480.
(d) In the previous year, Jasmine Ltd had made a tax loss of $18,400. Jasmine Ltd recognized a deferred
tax asset in respect of this loss.
(e) Tax regulations allows deduction of doubtful accounts only when written-off.
(f) Provision for annual leave is tax deductible only when actually claimed.
(g) Insurance expense is considered tax deductible only when paid.
(h) The tax rate is 30%.

Required (Show ALL Solutions. Be sure that the answers are properly marked):
a. Prepare the journal entry necessary to record the amendment to the prior years taxation return. (5
b. Prepare the worksheets and journal entries to calculate and record the current tax liability, and any
movements in deferred tax assets and liabilities in accordance with PAS 12, for the year ended 30
June 2014. Be sure this is properly presented for easy checking. (10 Points)
c. Justify your treatment of annual leave expense in the current tax worksheet. (5 points)
d. Calculate the temporary difference as at 30 June 2014 for each of the following assets. Explain how
these differences arise and why you have classified them as either deductible temporary differences
or taxable temporary differences:
a. Plant (5 points)
b. Accounts receivable (5 points)

2. Dover Ltd calculated its current tax liabilty at 30 June 2013 to be $57,500. This tax was paid in installments as
shown in the following table.

28 October 2012 $13,200
28 January 2013 11,600
28 April 2013 15,200
28 July 2013 17,500

On 1 November 2013, an amended assessment notice was received from the taxing authority. It disallowed a
donation for $1,500 claimed as a deduction, and amended the taxation depreciation rate used for vehicles
from 50% to 30%. The accounting depreciation rate is 25%. As a result, further tax of $1,950 was paid on 31
December 2013. The company tax rate is 30%.

Prepare all journal entries necessary to record the taxation transactions for the period 31 December 2013 (15

3. Lily Ltd provides a defined benefit superannuation plan for its managers. The following information is available
in relation to the plan.

Present value of the defined benefit obligation 1 Juy 2012 10,000,000
Fair value of plan assets 1 July 2012 9,500,000
Current service cost 1,150,000
Contributions paid by Lily Ltd to the fund during the year 1,000,000
Benefits paid by the fund during the year 1,200,000
Present value of the defined benefit obligation 30 June 2013 10,750,000
Fair value of plan assets at 30 June 2013 10,047,500

Additional information:
a. No past service costs were incurred during the year ended 30 June 2013.
b. The interest rate used to measure the present value of defined benefits at 30 June 2012 was 9%.
c. The interest rate used to measure the present value of defined benefits at 30 June 2013 was 10%.
d. There was an actuarial gain pertaining to the present value of the defined benefit obligation as a
result of an increase in the interest rate.
e. The only remeasurement affecting the fair value of plan assets is the return on plan assets.
f. The asset ceiling was nil at 30 June 2012 and 30 June 2013.
g. All contributions received by the funds were paid by Lily Ltd. Employees make no contributions.
1. Determine the surplus or deficit of Lilys defined benefit plan at 30 June 2013 (5 Points)
2. Determine the net defined benefit asset or liability that should be recognized by Lily Ltd. At 30 June
2013. (5 Points)
3. Calculate the net interest for the year ended 30 June 2013 (5 Points)
4. Calculate the actuarial gain or loss for the defined benefit obligation for the year ended 30 June 2013
(5 Points)
5. Calculate the return on plan assets, excluding any amount recognized in net interest, for the year
ended 30 June 2013. (5 Points)
6. Present a reconciliation of the opening balance to the closing balance of the net defined benefit
liability (asset) showing separate reconciliations for plan assets and the present value of the defined
benefit obligation (10 Points)
7. Prepare a summary journal entry to account for the defined benefit superannuation plan in the books
of Lily Ltd for the year ended 30 June 2013 (5 Points)

4. Orchid Ltd contributes to a defined contribution superannuation plan for its employees. Contributions have been
established as 10% of wages and salaries, including bonuses, actually paid during the year. Contributions
based on budgeted payroll costs were set at $100,000 per month. There is annual net settlement of
superannuation contributions payable or refundable based on actual audited payroll information. The net
settlement occurs on 30 September for the preceding year ended 30 June.

Managers are entitled to a bonus calculated at 5% of their base salary if Orchid Ltds profit before tax
(excluding the bonus) is more than 20% of market capitalization of the company at the beginning of the year.
The profit target was achieved in 2012 and 2013. The bonus is payable 6 months after the end of the reporting
period, provided the manager has remained in the companys employment.

2013 2012
$ $
Managerial salaries expense 4,500,000 4,000,000
Other salaries and wages 8,000,000 7,800,000
12,500,000 11,800,000
Accrued wages and salaries 300,000 250,000
Accrued managerial bonuses ? 400,000

At 30 June 2012, Orchid Ltd correctly anticipated that all managers would be eligible for the bonus because
staff turnover among managers had been very low. However, by 30 June 2013, the company had moved to
new premises and one manager, with a salary of $800,000, indicated that the additioanl travel was causing
him to reconsider his position. The directors estimated that there was a 50% probability that the manager
would resign by 31 December 2013, and an 80% probability that he would resign by 30 June 2014.

a. Prepare the journal entry to record the contribution to the superannuation plan for June 2013 (5
b. Prepare a journal entry to record the liability, if any, arising from the bonus plan at 30 June 2013. (10
c. Prepare a journal entry to account for the superannuation asset or liability, if any, at 30 June 2013. (10