ACCY200

SPRING 2015
PAST EXAM QUESTIONS
AND SOLUTIONS

TAX EFFECT ACCOUNTING

Question 1
For the year ending 30 June 2014, Cockatoo Ltd recorded a profit before tax of $96,500.
Included in this figure were the following revenues and expenses:
$
12,000
6,500
4,200
24,000
5,250
11,300
8,500

Royalty revenue
Rent revenue
Fines and penalties
Depreciation expense equipment
Doubtful debts expense
Insurance expense
Long service leave expense

An extract from Cockatoo Ltds Balance Sheet as at 30 June 2014 (with comparative figures
for previous year) showed the following:

Assets
Accounts receivable
Allowance for doubtful debts
Prepaid insurance
Equipment
Accumulated depreciation equipment
Deferred tax asset
Liabilities
Rent received in advance
Provision for Long Service Leave
Deferred tax liability

2014
$

2013
$

83,200
(5,200)
3,200
160,000
(60,000)
?

76,000
(3,000)
2,900
160,000
(36,000)
8,700

5,000
14,300
?

4,000
9,600
10,250

Additional Information:
Cockatoo Ltd depreciates equipment at 15% straight-line, while for tax purposes
equipment is depreciated at 20%.
In a previous year Cockatoo Ltd made a tax loss of $22,000. Cockatoo Ltd recognised
a deferred tax asset in respect of this loss.
The tax rate is 30%
Required:
a) Calculate current tax and prepare the journal entry to recognise the current tax as at 30
June 2014.
b) Prepare the deferred tax worksheet attached on the last page of this exam booklet and
any necessary journal entries to adjust deferred tax accounts.

SOLUTION
a) Current tax
Accounting profit
Add:
Fines & Penalties
Depreciation equipment
Doubtful debts expense
Insurance expense
Long service leave expense
Rent received1
Less:
Royalty revenue
Rent revenue
Depreciation equipment2
Bad Debts Written Off3
Insurance paid4
LSL paid5
Taxable Income
Less: tax loss
Add: exempt income (royalty revenue)
Taxable Income
Current tax liability @ 30%

96,500
4,200
24,000
5,250
11,300
8,500
7,500
12,000
6,500
32,000
3,050
11,600
3,800

60,750

(68,950)
88,300
(22,000)
12,000
78,300
$23,490

Journal entry:
DR Income tax expense (current)
CR DTA*
CR Current tax liability

30,090
6,600
23,490

*DTA recognised for previous tax loss @30% of $22,000 is now derecognised

Working out
1.
2.
3.
4.
5.

Rent received = 5,000 + 6,500 4,000 = 7,500

Depreciation equipment for tax = 20% of 160,000 = 32,000
Bad debts written off = 3,000 + 5,250 5,200 = 3,050
Insurance paid = 3,200 + 11,300 2,900 = 11,600
LSL paid = 9,600 + 8,500 14,300 = 3,800

b) Deferred tax adjustments

Carrying
Future
Tax Base
Amount
Deductible
Amount
$
$
$
Relevant
Assets
Accounts
Receivable

78,000

Prepaid
Insurance

3,200

Equipment

5,200

Taxable
Temporary
Differences
$

Deductible
Temporary
Differences
$

83,200

5,200

3,200

20,000

100,000

80,000*

80,000

Rent received
in advance

5,000

(5,000)

5,000

Provision for
LSL
Temporary
differences

14,300

(14,300)

14,300

Relevant
Liabilities

Deferred tax
liability

23,200
6,960

Deferred tax
asset
Beginning
balances
Movement
during year

24,500

7,350
(10,250)

(8,700)

6,600

(3,290)

5,250

Adjustment
* FDA = Cost accumulated depreciation for tax purposes
= 160,000 (60,000/24,000) x (0.20 x 160,000) = 80,000
Journal entry:
DR DTA
DR DTL
CR Income tax expense (deferred)

5,250
3,290
8,540
4

Question 2.
Poppy Ltds profit before tax for the year ended 30 June 2011 is $102 000. Included in this
profit are the following items of income and expense:
Government grant
Rent Revenue
Depreciation expense Machinery
Insurance expense
Doubtful debts expense
Long service leave expense
Annual leave expense

$25 000
7 500
24 000
14 000
15 400
29 000
15 000

An extract of Poppy Ltds draft statement of financial position at 30 June 2011 and 30 June
2010 showed the following assets and liabilities:
$
$
Assets
2011
2010
Accounts Receivable
75 000
89 000
Allowance for doubtful debts
(9 400)
(5 650)
Prepaid Insurance
15 500
12 000
Machinery
120 000
120 000
Accumulated depreciation machinery
(72 000)
(48 000)
Deferred Tax Asset
35 250
Liabilities
Rent received in advance
11 000
9 000
Long service leave payable
45 000
35 000
Annual leave payable
22 000
24 500
Deferred Tax Liability
3 500
Additional information:
1. The company depreciates machinery at 20% straight-line. The tax depreciation rate for
machinery is 15% straight-line.
2. The tax rate is 30%.

Required:
a) Calculate Poppy Ltds taxable income and current tax liability for the year ended 30
June 2011, and prepare an appropriate journal entry to record the current tax liability.
b) Calculate the balance day adjustments to deferred tax asset and deferred tax liability
accounts as at 30 June 2011. Prepare the necessary journal entry to reflect adjustments
for deferred tax asset and deferred tax liability accounts. Use the worksheet at the
end of this exam paper to complete part b).

Solution:
a)
1. Rent received = 11 000 + 7 500 9 000 = 9 500
2. Depreciation on machinery for tax = 15% x 120 000 = 18 000
3. Insurance paid = 15 500 + 14 000 12 000 = 17 500
4. Bad debts written off = 5 650 + 15 400 9 400 = 11 650
5. LSL paid = 35 000 + 29 000 45 000 = 19 000
6. Annual leave paid = 24 500 + 15 000 22 000 = 17 500
Accounting Profit
ADD:
Depreciation expense Machinery
Insurance expense
Doubtful debts expense
Long service leave expense
Annual leave expense
Rent received
LESS:
Government grant
Rent revenue
Depreciation expense Machinery (tax)
Insurance paid
Bad debts written off
Long service leave paid
Annual leave paid
Taxable Income
Current tax liability @ 30%

$102 000
24 000
14 000
15 400
29 000
15 000
9 500
25 000
7 500
18 000
17 500
11 650
19 000
17 500

106 900

(116 150)
$ 92 750
$ 27 825

Journal entry:
DR Income tax expense
CR Current tax liability

27 825
27 825

b)

Carrying
Amount
Relevant
assets and
liabilities
Assets
Accounts
Receivable
Prepaid
Insurance
Machinery

Liabilities
Rent received
in advance
Long service
leave payable
Annual leave
payable
Total
Temporary
differences
Deferred tax
liability
Deferred tax
asset
Beginning
balances

Poppy Ltd
Tax Effect Worksheet
As at 30 June 2011
Future
Tax Base
Deductible
Amount
$
$

Taxable
Temporary
Difference
$

Deductible
Temporary
Difference
$

65 600

9 400

75 000

9 400

15 500

48 000

*66 000

11 000

(11 000)

11 000

45 000

(45 000)

45 000

22 000

(22 000)

22 000

15 500

66 000

18 000

15 500

105 400

4 650
31 620
(3 500)

(35 250)

1 150
Adjustment
* 120 000 [(72 000/24 000) x (15% x 120 000)] = 66 000

(3 630)

DR Income tax expense

CR Deferred tax liability (DTL)
CR Deferred tax asset (DTA)

4 780
1 150
3 630

IMPAIRMENT OF ASSETS
Question 1
Words Ltd belongs to a retail chain of bookstores, under the direction of head-company
Dictionary Ltd. Words Ltd purchases the books through Dictionary Ltd and its pricing,
marketing, and advertising are decided by Dictionary Ltd. Word Ltd hires its own cashiers
and salespeople. Dictionary Ltd also owns four other bookstores in other cities.
Words Ltd had the following assets as at 30 June 2010:
Cash
Inventory
Land
Equipment
Vehicles
Goodwill

Carrying amounts
$ 4 000
80 000
100 000
400 000
40 000
10 000

The inventorys fair value less cost to sell was equal to its carrying amount. The land had a
fair value less costs to sell of $90 000.
Required:
Assume that Words Ltd is a cash generating unit, and that on 30 June 2010 the recoverable
amount of the entity was $600 000. Calculate the impairment loss and prepare the necessary
journal entries.

SOLUTION
CA of assets:

Cash
Inventory
Land
Equipment
Vehicles
Goodwill
Recoverable amount
Impairment loss

4 000
80 000
100 000
400 000
40 000
10 000
634 000
600 000
$34 000

Write-off goodwill of $10 000, leaving a balance of $24 000 to be allocated

Land
Equipment
Vehicles

CA
100 000
400 000
40 000
540 000

Ratio
10/54
40/54
4/54

Loss
4 444
17 778
1 778
24 000

Adjusted CA
95 556
382 222
38 222

As land has a FV of $90 000, it therefore has a limit of writedown $10,000 max. The above
allocation of $4,444 to land is acceptable.
Dr

Impairment Loss
34 000
Cr Goodwill
Cr Land
Cr Acc. Dep. & Imp. Loss Equipment
Cr Acc. Dep. & Imp. Loss Vehicles

10 000
4 444
17 778
1 778

Question 2
Toffee Ltd has identified the cash-generating units in its business. Based on several
indicators, Toffee Ltd has become aware that the assets of the cash-generating unit associated
with the manufacture of caramel toffees, have become impaired. The carrying amounts of the
assets and liabilities of the unit as at 30 June 2011 were:
Cash
Inventory
Accounts receivable (net)
Plant
Accumulated depreciation plant
Buildings
Accumulated depreciation buildings
Land
Goodwill
Accounts Payable
Borrowings

$ 8 000
$40 000
$8 000
$300 000
($120 000)
$100 000
($60 000)
$50 000
$15 000
$40 000
$66 000

Toffee Ltd determined the value in use of the unit at 30 June 2011 to be $200 000. The
receivables were considered to be collectable.
Required:
Prepare the journal entries to account for the impairment loss as at 30 June 2011.
Solution
Total CA of all assets in CGU

8 000 + 40 000 + 8 000 + 180 000 + 40 000 +

50 000 + 15 000

$341 000

Value in Use

$200 000

Impairment Loss

$141 000

Write off Goodwill

141 000 15 000

$126 000 left to allocate

CA

Share of Loss

180 000

18/27

84 000

Buildings

40 000

4/27

18 667

Land

50 000

5/27

23 333

Plant

270 000

126 000
10

Journal entry:

DR Impairment Loss

141 000

CR

Goodwill

15 000

CR

Accumulated depreciation & impairment-plant

84 000

CR

Accumulated depreciation & impairment-buildings

18 667

CR

Accumulated depreciation & impairment-land

23 333

11

PROPERTY, PLANT & EQUIPMENT

Question 1
On 1 October 2009, Mikey Ltd purchased two items of equipment that were to be installed in
the company factory. The following costs were incurred:

Purchase price
Freight to transport in
Installation costs
Repair of equipment damaged during installation

Equipment A
$20,000
4,000
10,000
2,000

Equipment B
$30,000
4,000
8,000
-

Equipment A
10 years
$4,000

Equipment B
10 years
$2,000

The following details are related to the equipment:

1 October 2009 Useful life

1 October 2009 Residual Value

On 1 March 2010, Equipment A underwent an overhaul costing $29,250. After the overhaul
Equipment A was given a residual value of $2,000 and a remaining useful life of 12 years.
On 1 September 2010 Mikey Ltd sold for cash Equipment B for $40 000.
Mikey Ltd uses the cost model for Equipment and straight line depreciation. The company
has a reporting period ending 30 June and rounds calculations to the nearest dollar.
Required:
a) Calculate the initial cost to be recorded for Equipment A and Equipment B and
prepare journal entries for all costs incurred on 1 October 2009.
b) Prepare journal entries for all transactions and events related to Equipment A and B
after the initial recognition on 1 October 2009 and up to and including 30 June 2011.

12

Solution
a)
1 Oct 2009
Dr Equipment A
Cr Cash
(to record the cost of equipment A)
Dr

Equipment B
Cr Cash
(to record the cost of equipment B)
Dr

Repairs expense
Cr Cash
(to record repairs as expense)

34,000
34,000

42,000
42,000

2,000
2,000

b)
1 Mar 2010
Dr Depreciation expense-equipment A
1,250
Cr Accumulated depreciation-equipment A
1,250
(to record depreciation expense before recording overhaul costs: 34,000-4,000/10 x 5/12)
Dr

Accumulated depreciation-equipment A 1,250

Cr Equipment A
(close off total accumulated depreciation against equipment A)
Equipment A
29,250
Cr Cash
(to record the costs of the overhaul to Equipment A)

1,250

Dr

29,250

30 June 2010
Dr Depreciation expense-equipment A
1,667
Cr Accumulated depreciation-equipment A
1,667
(to record depreciation for Equipment A after an overhaul and for 4 months: [34,0001,250+29,250]-2,000/12 = 5,000p.a. 4/12 x 5,000 = 1,667)
Dr

Depreciation expense-equipment B
3,000
Cr Accumulated depreciation-equipment B
3,000
(to record depreciation for equipment B for 9 months: 42,000-2,000/10 = 4,000 x 9/12)
1 Sep 2010
Dr Depreciation expense-equipment B
667
Cr Accumulated depreciation-equipment B
(to record 2 months depreciation on equipment B before sale: 2/12 x 4,000)

667

13

1 Sep 2010 (contd)

Dr Accumulated depreciation-equipment B 3,667
Dr Carrying Amount of Equip B sold
38,333
Cr Equipment B
42,000
(to record the derecognition of equipment B due to sale; accumulated depreciation = 3,000 +
667)
Dr

Cash
40,000
Cr Proceeds on sale of Equipment B
(to record the proceeds on sale of Equipment B)

40,000

30 June 2011
Dr Depreciation expense-equipment A
5,000
Cr Accumulated depreciation-equipment A
5,000
(to record the annual depreciation expense for Equipment on hand: see 30 June 2010 working
out for the annual figure)

14

Question 2
On 1 September 2009, Carter Ltd purchased equipment that was to be used in the company.
The following costs were incurred:

Purchase price
Freight to transport in
Repair of equipment damaged during delivery

Equipment A
$
20 000
4 000
4 000

Equipment B
$
30 000
5 000
-

Equipment A
4 years
$24 500
2 years
$9 000

Equipment B
7 years
$25 000
5 years
$15 000
-

The following details are related to the equipment:

1 Sept 2009
30 June 2010
1 July 2010
30 June 2011
30 June 2011

Useful life
Fair Values
Remaining useful lives
Sold for cash equipment B
Fair Value of equipment A

Carter Ltd uses a revaluation model for subsequent measurement of Equipment and straight
line for depreciation. The tax rate is 30%.

Required:
a) Prepare journal entries for depreciation, revaluations, and sale of equipment for the year
ended 30 June 2010 and 30 June 2011.
b) Prepare journal entries for the following independent transactions (assume straightline depreciation and an end of year reporting date of 30 June in each):
1.

On 30 September 2011, Machine A was traded in for Machine B. Machine

A had been purchased on 1 January 2011 at a cost of $50 000, with a useful
life of 5 years. A trade-in allowance of $40 000 was received for Machine
A and $60 000 was paid in cash.

2.

On 31 March 2011, a motor vehicle underwent an overhaul with major parts

being replaced at a cost of $42 250. The overhaul extended the useful life of
the motor vehicle by 2 years. The motor vehicle was purchased on 1 July
2009 at a cost of $90 000 and with a useful life of 10 years.

15

Solution
a)
Purchase price
Freight in
Cost

Equipment A
20 000
4 000
24 000

Equipment B
30 000
5 000
35 000

30 June 2010
Dr

Dr

Depreciation expense Equip A

Cr
Accumulated dep equip A

5 000

Depreciation expense Equip B

Cr
Accumulated dep equip B

4 167

5 000

4 167

Depreciation calculations for 1 September 09 30 June 10

Equipment A = 24 000/4 x 10/12 = 5 000
Equipment B = 35 000/7 x 10/12 = 4 167

30 June 2010
Dr

Dr

Dr

Dr

Dr

Dr

Accumulated dep equip A

Cr
Equipment A

5 000

Equipment A
Cr Gain on revaluation (OCI)

5 500

Income tax expense (OCI)

Cr DTL

5 000

5 500
1 650
1 650

Gain on revaluation (OCI)

Cr Income tax expense (OCI)
Cr Asset revaluation surplus

5 500

Accumulated dep equip B

Cr
Equipment B

4 167

Loss on Revaluation (P/L)

Cr Equipment B

5 833

1 650
3 850

4 167

5 833

16

Revaluation calculations for 30 June 10

FV
CA
Equipment A
24 500
19 000*
Equipment B
25 000
30 833**

Revaluation
5 500
(5 833)

* 24 000 5 000 ** 35 000 4 167

30 June 2011
Dr

Dr

Depreciation expense equip A

Cr
Accumulated dep equip A

12 250

Depreciation expense Equip B

Cr
Accumulated dep equip B

5 000

12 250

5 000

Depreciation calculations for 1 July 10 30 June 11

Equipment A = 24 500/2 = 12 250
Equipment B = 25 000/5 = 5 000
30 June 2011 Sale of Equipment B
Dr
Dr

Dr

Accumulated dep equip B

CA of Equip B sold
Cr
Equipment B

5 000
20 000
25 000

Cash
15 000
Cr
Proceeds from sale of equip B

15 000

30 June 2011 Reversal of previous increment

Dr

Dr

Dr

Dr
Dr

Accumulated dep equip A

Cr
Equipment A

12 250

Loss on revaluation (OCI)

Cr
Equipment A

3 250

DTL
Cr

975

12 250

3 250

Income tax expense (OCI)

Income tax expense (OCI)

Asset revaluation surplus
Cr
Loss on revaluation (OCI)

975
975
2 275
3 250
17

Revaluation of Equipment A
FV
Equipment A
9 000

CA
*12 250

Revaluation
(3 250)

* 24 500 - 12 250
b) 1)
Depreciation for 1 July 2011 30 September 2011
Dr

Depreciation expense Machine A

Cr Accumulated depreciation Machine A
(50000/5 x 3/12)

2 500
2 500

Derecognise Machine A
Dr
Dr

Accumulated depreciation Machine A*

Carrying Amount of Machine A sold
Cr Machine A
(*9 months since purchased, 10000 x 9/12)

7 500
42 500
50 000

Trade-in and new machine

Dr

Machine B
Cr Cash
Cr Proceeds on sale Machine A

100 000
60 000
40 000

2)
Depreciation for 1 July 2010 31 March 2011
Dr

Depreciation expense motor vehicle

Cr Accumulated depreciation motor vehicle
(90000/10 x 9/12)

6 750
6 750

Write off accumulated depreciation

Dr

Accumulated depreciation motor vehicle

Cr Motor Vehicle
(90000/10 x 21/12, i.e. 1 year 9 months)
Capitalise overhaul costs
Dr
Motor Vehicle
CR
Cash

15 750
15 750

42,250
42,250

18

STATEMENT OF CASH FLOWS

Question 1
A summarised comparative statement of financial position for Jody Ltd is presented below,
together with a statement of profit or loss, for the financial year ended 30 June 2013.

Jody Ltd, Comparative Statement of Financial Position, as at 30 June 2013:

30 June 2012

30 June 2013

$ 90,000

$ 70,000

138,000

210,000

Allowance for doubtful debts

(6,000)

(12,000)

Inventory

90,000

134,000

Land

106,000

120,000

Plant

374,000

450,000

Accumulated depreciation

(70,000)

(106,000)

$ 722,000

$ 866,000

$ 130,000

$ 150,000

10,000

14,000

4,000

14,000

30,000

36,000

Borrowings

160,000

200,000

Share Capital 260,000

274,000

Retained earnings

128,000

178,000

$ 722,000

$ 866,000

Cash
Accounts Receivable

Accounts payable
Interest payable
Employee and other expenses payable
Current tax payable

Jody Ltd, Statement of Profit or Loss, for the year ending 30 June 2013:
Sales

$ 2,070,000

Cost of sales

(1,548,000)

Gross Profit

522,000

Gain on sale of plant

5,000

Employee expenses

(197,000)

Other expenses

(152,000)

Interest expense

(14,000)

Profit before tax

164,000

Income tax expense

(48,000)

Profit for the year

$ 116,000
19

Additional information:

Bad debts expense of $10,000 is included in Other expenses

Plant with a cost of $24,000 and an accumulated depreciation of $14,000 was sold
during the year, making a gain on sale of $5,000

There were no disposals of land during the year

A dividend was paid during the year, part in cash and part by issuing $14,000 as
bonus share dividend.

Required:
Using the direct method of presenting cash flows from operating activities, prepare a
statement of cash flows in accordance with AASB 107 for the year ended 30 June 2013.
Prepare your final statement of cash flows using the Statement of Cash Flows template on the
last page of the exam paper (Do not prepare notes to the statement and show all working out
in the answer booklet).
SOLUTION
Jody Ltd Statement of Cash Flows for the year ending 30 June 2013
$
Cash flows from operating activities
Cash receipts from customers 1.
Cash payments to suppliers and employees 2.
Cash generated from operations
Interest paid 3.
Income tax paid 4.
Net cash from operating activities
Cash flows from investing activities
Proceeds from sale of plant 5.
Purchase of plant 5.
Purchase of land 6.

1,994,000
(1,851,000)
143,000
(10,000)
(42,000)
91,000
15,000
(100,000)
(14,000)

Net cash used in investing activities

Cash flows from financing activities
Proceeds from borrowings 7.
Dividends paid 8.

(99,000)

Net cash from financing activities

Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

(12,000)
(20,000)
90,000
70,000

40,000
(52,000)

20

Working out
1. Cash receipts from customers = beginning accounts receivable + sales bad debts
written off* ending accounts receivable
*bad debts written off = beginning allowance for doubtful debts + bad debts expense
ending allowance for doubtful debts = 6,000 + 10,000 12,000 = 4,000
Cash receipts from customers = 138,000 + 2,070,000 4,000 210,000 = $1,994,000

2. Cash paid to suppliers and employees

There are a few different ways to getting the end figure, however they are all doing
the same thing and can be seen as adding several formula into one, or leaving some
separate and adding figures at the end. I tried to show them using the following:
Expensesa.
+ Ending inventory Beginning inventory
+ Beginning Accounts payable Ending Accounts payable
+ Beginning accrued liabilities Ending accrued liabilities
+ Ending prepayments Beginning prepayments
= Cash paid
a.COS + all expenses in the income statement (but NOT INCLUDING: depreciation expense,
income tax expense, interest expense, impairment losses, bad debts, discounts allowed, loss
on sale of non-current assets. IE do not include expenses that are non-cash, or not related to
operating activities, or appear in a separate line in the statement)
* depreciation expense = ending accumulated depreciation + sold plant beginning
accumulated depreciation = 106,000 + 14,000 70,000 = 50,000
Therefore, cash paid = 1,548,000 + 197,000 + 152,000 50,000* - 10,000 (1,837,000)
+ 134,000 90,000
+ 130,000 150,000
+ 4,000 14,000
= $1,851,000
3. Interest paid = beginning interest payable + interest expense ending interest payable
= 10,000 + 14,000 14,000 = $10,000
4. Income tax paid = beginning current tax payable + income tax expense ending
current tax payable
= 30,000 + 48,000 36,000
= $42,000
5. Proceeds from sale of plant = (24,000 14,000) + 5,000 = $15,000
21

Purchase of plant

= ending Plant + sold plant beginning plant

= 450,000 + 24,000 374,000
= $100,000

6. No disposals of land, no revaluation surplus account, and no other information,

therefore increase from $106,000 to $120,000 = $14,000 Purchase of land
7. No other information, therefore increase from $160,000 to $200,000 = $40,000
proceeds from borrowing
8. Dividend paid

= beginning retained earnings + profit bonus share dividend

ending retained earnings
= 128,000 + 116,000 14,000 178,000
= $52,000

22

Question 2
The following information is extracted from the financial statements of Amy Ltd for the year
ended 30 June 2015:

Cash
Inventory
Accounts Receivable
Allowance for Doubtful debts
Land
Buildings
Accumulated depreciation- buildings
Plant and equipment
Accumulated depreciation- P&E
Deferred tax asset

2015
$
574,000
240,000
672,000
(96,000)
600,000
960,000
(144,000)
1,008,000
(96,000)
10,000

2014
$
422,000
216,000
528,000
(72,000)
240,000
960,000
(96,000)
960,000
(96,000)
0

Accounts payable
Accrued expenses
Current tax liability
Long term loans
Deferred tax liability
Share capital
Retained earnings
Asset revaluation surplus

168,000
30,000
218,000
264,000
36,000
1,200,000
1,728,000
84,000

192,000
24,000
182,000
240,000
0
960,000
1,464,000
0

Sales
Cost of goods sold
Doubtful debts expense
Depreciation Building
Depreciation Plant and equipment
Interest expense
Rent Expense
Rates and electricity expense
Wages and salaries expense
OPERATING PROFIT
Income tax expense
OPERATING PROFIT AFTER TAX

2015
$
2,124,000
(576,000)
(96,000)
(48,000)
(168,000)
(26,000)
(168,000)
(90,000)
(480,000)
472,000
(208,000)
$ 264,000

23

Additional information:
1. During the year land was revalued upwards by $120,000
2. Land was purchased during the year, consideration being the issue of fully paid shares
to the total value of $240,000.
3. Plant with a carrying amount of $72,000 and with an accumulated depreciation of
$168,000 was sold during the year making no gain or loss.
4. Tax rate is 30%

Required:
Using the direct method of presenting cash flows from operating activities, prepare a
statement of cash flows in accordance with AASB 107 for the year ended 30 June 2015.
(20 marks)

AMY Limited
Cash Flow Statement
For the year ended 30 June 2015
$
Cash flows from operating activities
Cash receipts from customers

1,908,000

Cash paid to suppliers and employees

(1,356,000)

Net

552,000

Income tax paid

(182,000)

Interest paid

(26,000)

Net cash from operating activities

$344,000

Cash flows from investing activities

Proceeds received on sale of plant

72,000

Purchase of plant

(288,000)

Net cash from investing activities

($216,000)

Cash flows from financing activities

Acquisition of long term loan
Net cash from financing activities
Net increase (decrease) in cash and cash equivalents

24,000
$24,000
$152,000

CCE at beginning of year

$422,000

CCE at end of year

$574,000
24

a) Cash from customers = 2124000 + 528000 672000 (96000 + 72000 96000) bad
debts
= 1908000
b) Cash paid to suppliers of inventory
= (576000 + 240000 216000) purchases + 192000 168000 = 624000
c) Cash paid to suppliers and others
= 168000 + 90000 + 480000 expenses + 24000 30000
= 732000
Cash paid to suppliers and employees is therefore
b) + c) = 624000 + 732000 = 1356000
d) Interest paid

= 26000 the expense as no accruals

e) Income tax paid = 208000 + 10000 0 (the change in DTL is related to the
revaluation of land only) + 182000 - 218000 = 182000
f) Purchase of plant
= 1008000 + 240000 960000 = 288000
Cost of plant sold = 72000 + 168000 = 240000
g) Proceeds from sale of plant = CA is 72000 and no gain or loss so therefore received
72000 in cash proceeds
h) Proceeds from borrowing
= 264000 240000
= 24000

25

BUSINESS COMBINATIONS
Question 1
On 1 July 2010, Mighty Ltd enters into an agreement to take over the business of Power Ltd.
On this date the business combination took place with Power Ltds Balance Sheet as follows:

Cash
Accounts Receivable
Inventory
Plant & Equipment (net)

Accounts Payable
Mortgage loan
Ordinary A shares $2, fully paid
Ordinary B shares $1, fully paid
Retained earnings

Carrying Amount
$
20 000
56 000
29 000
127 000
232 000

Fair Value
$

50 000
140 000

31 000
51 500
40 000
60 000
49 500
232 000

Additional information:
1. Mighty Ltd is to acquire all the assets (except cash) and liabilities of Power Ltd.
2. Power Ltd has been undertaking research into a new transport vehicle and has
expensed a total of $15 000 in research and development costs. Mighty Ltd
determines that the fair value of this in-process research and development is $4 000 at
acquisition date.
3. In exchange for the acquired business, Mighty Ltd will give the Ordinary A
shareholders $4 per share in cash, $2 payable at acquisition date, and $2 payable in
one years time (Present Value of $1 discounted at 10% is 0.9091). Also, Mighty Ltd
will give the Ordinary B shareholders of Power Ltd two shares in Mighty Ltd for
every five shares held in Power Ltd. The fair value of each Mighty Ltd share is $3.
Costs to issue these shares will amount to $1 900.
4. Additionally, Mighty Ltd is to provide Power Ltd with one of its newest Motor
Vehicles which has a carrying amount of $24 000 and a fair value of $30 000 as at 1
July 2010.
5. Costs to transport and install Power Ltd assets at Mighty Ltds premises will be
$5 000.
Required:
a) Prepare an acquisition analysis in relation to this acquisition.
b) Prepare the journal entries in the books of Mighty Ltd to record the acquisition of
Power Ltd on 1 July 2010.

26

Solution
a) Fair Value of Net Identifiable
Assets acquired
:
= $56 000 + $50 000 + $140 000 + $4 000 $31 000 - $51 500
= $167 500
Cost of combination:
Cash

($40000/$2 x $2) = $40 000

Cash payable

($40000/$2 x $2 x 0.9091) = $36 364

Shares

($60000/$1 x 2/5 x $3) = $72 000

Vehicle

= $30 000

Total consideration

= $40 000 + $36 364 + $72 000 + $30 000

= $178 364
Goodwill:

= $178 364 - $167 500 = $10 864

b)
Dr

Dr
Dr
Dr
Dr
Dr

Dr

Dr

Vehicle
Cr Gain on revaluation (P/L)
Accounts receivable
Inventory
Plant & Equipment
In-process R&D
Goodwill
Cr Accounts payable
Cr Mortgage
Cr Cash
Cr Payable Power
Cr Share Capital
Cr Vehicle

6 000
6 000
56 000
50 000
140 000
4 000
10 864
31 000
51 500
40 000
36 364
72 000
30 000

Share Capital
Cr Cash

1 900

Acquisition related costs

Cr Cash

5 000

1 900

5 000

27

Question 2
On 1 July 2010 Bug Ltd and Spider Ltd sign an agreement whereby the operations of Spider
Ltd are to be taken over by Bug Ltd. Spider Ltd will liquidate after the transfer is complete.
The statement of financial position on 1 July 2010 of Spider Ltd is as follows:
Assets
Cash
Accounts Receivable
Inventory
Plant and Equipment
Accumulated depreciation plant and equipment
Land
Liabilities
Accounts payable
Mortgage loan
10% Debentures
Share Capital:
Ordinary A shares of $2, fully paid
Ordinary B shares of $1, fully paid
Retained earnings

$20 000
56 000
29 000
167 000
(40 000)
26 000
$258 000
$31 000
21 500
30 000
40 000
60 000
75 500
$258 000

Bug Ltd is to acquire all of the assets of Spider Ltd, except for cash. The assets of Spider Ltd
are recorded at their fair values except for the following:

Inventory
Plant and Equipment
Land

Carrying Amount
$ 29 000
127 000
26 000

Fair Value
$ 39 200
140 000
22 500

In exchange, the Ordinary A shareholders of Spider Ltd are to receive one Ordinary A share
in Bug Ltd for every share held in Spider Ltd. The fair value of each Bug Ltd Ordinary A
share is $3.50. The Ordinary B shareholders of Spider Ltd are to receive two Ordinary B
shares in Bug Ltd for every three shares held in Spider Ltd. The fair value of each Ordinary B
Bug Ltd share is $2.70. The total cost to issue Bug Ltd shares will amount to $1 000.
Additionally, Bug Ltd is to provide Spider Ltd with sufficient cash, additional to that already
held, to enable Spider Ltd to pay its liabilities, including liquidation costs of $21 200. The
outstanding debentures are to be redeemed at a 10% premium. Costs to transport and install
Spider Ltds assets at Bug Ltds premises will be $2 000.

28

Required:
a) Prepare an acquisition analysis to record the acquisition of Spider Ltd.
b) Prepare the necessary journal entries to record the acquisition of Spider Ltd in the
books of Bug Ltd.
Solution
a)
FV of Net Assets acquired: 56 000 + 39 200 + 140 000 + 22 500 = $257 700
Consideration:
Shares

Ordinary A shares $40 000/$2 x 1= 20 000 shares

@ $3.50
= $70 000
Ordinary B shares $60 000/$1 x 2/3 = 40 000 shares
@$2.70
= $108 000
Total shares = $178 000

Cash

Acc. payable
Mortgage
Debentures
Interest on debentures
Liquidation costs
Less cash held

Total cash
Total consideration = 178 000 + 86 700 = $264 700

31 000
21 500
30 000
3 000
21 200
106 700
(20 000)
$86 700

Goodwill = 264 700 257 700 = $7 000

b)
Dr
Dr
Dr
Dr
Dr

Dr

Dr

Accounts receivable
Inventory
Plant & Equipment
Land
Goodwill
Cr Share Capital
Cr Cash

56 000
39 200
140 000
22 500
7 000
178 000
86 700

Share Capital
Cr Cash

1 000

Acquisition costs/expense
Cr Cash

2 000

1 000

2 000
29

INTANGIBLE ASSETS
Question 1
A small privately owned Australian company Shoes n Socks designs and sells original one
off shoes and socks. The company has slowly built up brand recognition throughout Australia
and five other countries. It has developed other brands such as Rusty Hats and Twinkle
Accessories which it has recorded in its balance sheet. The company has grown and is now a
large private company and will have to prepare financial statements for the first time in
accordance with the AASB accounting standards. They are also about to acquire a small
Sydney based business so that they can own the brand Blue Jeans.
Required:
Discuss how Shoes n Socks will have to account for its internally generated brands and the
brand being acquired in a business combination under AASB138 Intangible Assets. Your
discussion should include both initial measurement and subsequent measurement issues. (10 marks)
SOLUTION
Accounting for brands under AASB 138:
(a) internally generated
- internally generated intangibles must meet the recognition criteria in para 57
- para 63 specifically excludes the recognition of internally generated brands
Therefore, Shoes n Socks can no longer record the brands Rusty Hats and Twinkle
Accessories as intangible assets in their balance sheet and must derecognise/write-off these
brands.
(b) acquired brands:
- Acquired as part of a business combination must meet the recognition criteria of
AASB 3 which states that no recognition criteria need be applied. Provided the
asset meets the definition of an intangible asset, it must be recognised as a
separate asset. As with separately acquired intangible assets, para 33 of AASB 3
provides that, where intangible assets are acquired as part of a business
combination, the effect of probability is reflected in the measurement of the asset.
Hence the probability recognition criterion is automatically met
- Initially measured at cost = fair value.
- Fair value can be obtained by measurement techniques/independent valuations
and does not require an active market.
Therefore, the brand Blue Jeans when acquired in the business combination can be
measured at fair value and recognised in the balance sheet.

Subsequently the brand Blue Jeans can be measured at cost or revalued amount, but use of
the latter requires the existence of an active market.

30

Amortisation based on useful life if the brand can be seen to have a finite life. However it is
more than likely that brands are not amortised as they are defined as having an indefinite life
no foreseeable end to the life of the brand.
Question 2
The management of Sunny Solutions Ltd had been concerned that over the last few years the
companys market value appeared to be higher than what was recorded in the companys
books. In order to address this concern, they employed you and a team of accountants to look
over their draft financial statements for the year ending 30 June 2012. Before they could
finalise these statements they wanted to determine whether there were more assets that could
be recorded for the company. In particular the following transactions had been recorded as
expenses in the draft statements:
1. $600,000 spent on developing a brand name for its new Sunny Tan product.
2. $1,000,000 spent on the purchase of computer software. A further $200,000 was
spent on training staff to use this software.
3. $1,600,000 spent on the purchase of Tropical Pty Ltd, a local rival company.
Tropical Pty Ltd had on its books $1,100,000 of net tangible assets. Tropical Pty Ltd
had also developed a patent for a new tanning product. This patent had a fair value of
$450,000 on the date that Tropical Pty Ltd was acquired.
Required:
Explain whether any of the expenditures highlighted above can be accounted for as intangible
assets. You must provide reasons for your answer according AASB138 Intangible Assets.

SOLUTION
AASB 138 definitions

Asset: A resource:
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the entity.
Intangible asset: An identifiable non-monetary asset without physical substance.
Identifiable: An asset is identifiable when it:
(a) is separable ie can be separated or divided from the entity and sold, transferred,
licensed, rented or exchanged, either individually or together with a related contract,
asset or liability; or
(b) arises from contractual or other legal rights

31

Transaction 1:
$600,000 spent on developing a brand name must remain an expense (cannot be recorded as
an IA) because:
Para 63 states:
Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall not be recognised as intangible assets

Para 64 gives the reason:

Expenditure on internally generated brands, mastheads, publishing titles, customer lists and
items similar in substance cannot be distinguished from the cost of developing the business as
a whole. Therefore, such items are not recognised as intangible assets.
That is, they are not identifiable (separable).
Transaction 2:
The $1,000,000 spent on the purchase of computer software may be capitalised and recorded
as an IA, as it is the purchase of an intangible asset. It meets the definition of IA above, as
there is an asset (control over FEB) and the company has legal right of its use through
purchase transaction.
Subsequent to the purchase, a further $200,000 was spent on training staff to use the
software. It is doubtful that this expenditure would be capitalised as it doesnt meet the
definition of a directly attributable cost: cost of preparing the asset for its intended use. Para
67(c) lists this type of cost as a cost that is NOT a component of internally generated IA.
Therefore the $200,000 must remain an expense.
Transaction 3.
This represents a business combination and as such there are several issues.
There are two intangible assets that may be recorded: patent and goodwill.
For the patent, an acquirer recognises at the acquisition date, separately from goodwill, an
intangible asset of the acquiree, irrespective of whether the asset had been recognised by the
acquiree before the business combination. Thus a patent at $450,000 can be recorded as an
IA.
As the company spent $1,600,000 on the business combination, acquiring $1,100,000 in net
tangible assets and $450,000 for the patent, it records the residual value of $50,000 as the IA
Goodwill.

32

LEASES
On 1 July 2011, Shaz Ltd leased an item of machinery from Baz Ltd. The item of machinery
had a fair value of $145,000 on 1 July 2011. The lease agreement contained the following
provisions:
Lease term (non-cancellable)
Annual rental payments (1st payment due 01/07/11)
Estimated useful life of plant
Estimated residual value of plant
at the end of lease term
Residual value guaranteed by Shaz Ltd
Annual lease payments include a payment
to cover maintenance and insurance
Interest rate implicit in the lease
- Present value of $1 in 3 years at 10%
- Present value of an annuity of $1 for 2 payments at 10%
- Present value of an annuity of $1 for 3 payments at 10%

3 years
$53,000
4 years
$15 000
$10 000
$3 000
10%
0.7513
1.7355
2.4869

Shaz Ltd depreciates plant on a straight line basis. The reporting period
ends 30 June.
Required:
a) Prepare a lease schedule for Shaz Ltd.
b) Prepare journal entries to record the lease transactions and events
for Shaz Ltd on 1 July 2012 and 30 June 2013 (note: for these dates
ONLY).
SOLUTION
a)
Date

Payment

Interest

Reduction in
Liability

1 July 2011
1 July 2011
1 July 2012
1 July 2013
1 July 2014

50,000
50,000
50,000
10,000

9,429
5,372
909**

50,000
40,571
44,628
9,09**

Balance
Liability
144,288*
94,288
53,717
9,089
2**

*PV of MLP = 50,000 + 50,000 x 1.7355 + 10,000 x 0.7513

= 50,000 + 86,775 + 7,513
= $144,288
**due to rounding interest 1 July 2012 and 1 July 2013, there is a $2 difference, immaterial.

33

b) See a) above for the shaded part of the schedule showing the years of interest for
preparing journal entries.
1 July 2012
Dr Interest payable
9,429
Dr Lease Liability
40,571
Dr Maintenance costs/prepaid
3,000
Cr Cash
(to record the second payment and associated components)

53,000

30 June 2013
Dr Interest expense
5,372
Cr Interest payable
(to record the interest owing on the lease liability balance)

5,372

Dr Depreciation expense
44,763
Cr Accumulated depreciation
44,763
(to record a years worth of depreciation on the leased machine: 144,288-10,000/3 = 44,763)

QUESTION 2
Cog Ltd was in need of a cash injection to pay back its long term loan. It entered into an
agreement on 1 July 2010 to sell its entire band equipment to Promotion Ltd for $796 000. At
that date the equipment had a carrying amount of $676 000. In the interests of the future tours
that Promotion Ltd were contracted to promote for Cog Ltd, Promotion Ltd immediately
leased the equipment back to Cog Ltd under the following arrangements:

Lease term
Economic life of equipment
Annual rental payments (first payment
made 1 July 2010, i.e. in advance)
Residual value of equipment at end of lease term
Residual value guaranteed by Cog Ltd
Interest rate implicit in the lease

6 years
7 years
$168 000
$20 000
$10 000
8%

The lease is a finance lease and Cog Ltd will return the equipment to Promotion Ltd at the
end of the lease term. The annual rental payments include $10 000 to reimburse Promotion
Ltd for the maintenance costs it will incur on behalf of Cog Ltd.
34

Additional information:
Period or
number of
payments
5
6
7

PV of $1 at 8%

0.6806
0.6302
0.5835

PV of an annuity
of $1 per period
for n periods
3.9927
4.6229
5.2064

Required:
Prepare journal entries in the books of Cog Ltd to account for transactions occurring on 1
July 2010, 30 June 2011 and 30 June 2012.

PV of MLP = 158 000 + [158 000 x 3.992] + [10 000 x 0.6302]

= $795 149
MLP
Interest
Reduce
Liability
1 July 2010
1 July 2010
158 000
158 000
1 July 2011
158 000
50 972
107 028
1 July 2012
158 000
42 410
115 590

Lease
Liability
795 149
637 149
530 121
414 531

Journal entries:
1 July 2010
DR Cash
796 000
CR Deferred Gain
120 000
CR Equipment
676 000
(to record the sale, making a gain which must be deferred over the term of the lease)
1 July 2010
DR Leased Equipment
795 149
CR Lease Liability
(to record the initial liability and asset based on PV of MLP)
DR Lease Liability
DR Prepaid executory costs
CR Cash
(to record the first lease payment)
30 June 2011
DR Executory costs
CR Prepaid exe costs
(to record the costs now incurred)

795 149

158 000
10 000
168 000

10 000
10 000
35

DR Interest expense
50 972
CR Interest payable
(to record interest owing to be paid the following day)

50 972

DR Deferred Gain
20 000
CR Gain on sale
(120 000/6 to recognise gain made earlier over 6 years)

20 000

DR Depreciation expense
130 858
CR Accumulated depreciation-leased asset
130 858
(to record depreciation on leased asset over lease term; 795 149 10 000/6)
1 July 2011
DR Interest payable
DR Lease Liability
DR Prepaid executor costs
CR Cash
(to record the 2nd lease payment)
30 June 2012
DR Executory costs
CR Prepaid exe costs
(to record the costs now incurred)

50 972
107 028
10 000
168 000

10 000
10 000

DR Interest expense
42 410
CR Interest payable
(to record interest owing to be paid the following day)

42 410

DR Deferred Gain
20 000
CR Gain on sale
(120 000/6 to recognise gain made earlier over 6 years)

20 000

DR Depreciation expense
130 858
CR Accumulated depreciation-leased asset
130 858
(to record depreciation on leased asset over lease term; 795 149 10 000/6)
1 July 2012
DR Interest payable
42 410
DR Lease Liability
115 590
DR Prepaid executory costs
10 000
CR Cash
rd
(to record 3 payment although not required in question)

168 000

36