ACCT19061 Advanced Financial Accounting Term 2 2016
Academic Institution: Central Queensland University Academic Group: Higher Education Division Academic Career: Undergraduate Unit: Advanced Financial Accounting Subject Area: ACCT Catalog Number: 19061 Term 2 2016
TOTAL (50 MARKS)
Question 1 (10 Marks)
Red Ltd was registered as a public company in July 2015. On 1 August 2015, Red Ltd issued a prospectus inviting applications from the public for 100,000 ordinary shares at an issue price of $2.50 per share, payable as follows:
$1.00 on application (due 1 November 2015)
$1.00 on allotment (due 1 December 2015)
$0.50 on future calls
By 1 November 2015, applications had been received for 190,000 ordinary shares.
At a directors’ meeting on 1 November 2015, it was decided to reject applications for
20,000 shares and allot 170,000 shares to the other applicants in proportion to the number of shares for which application had been made. According to the company’s constitution, all surplus money from application can be transferred to Allotment and/or Call accounts.
On 1 November 2015, the application money was refunded to unsuccessful applicants. On 5 November 2015, share issue costs of $3,000 were paid.
All outstanding allotment money was received by the due date.
The final call of $0.50 per share was made on 1 January 2016 with payment due to Red Ltd by 1 February 2016. All money was received on the due date except for the holder of 10,000 shares who failed to meet the call.
On 7 February 2016, as provided for in the constitution, the directors decided to forfeit the 10,000 shares on which the final call was unpaid. On 15 February 2016, the forfeited shares were reissued as fully paid for a consideration of $1.50 per share. The balance of the Forfeited Shares account was refunded to the former shareholder on 20 February 2016.
Required
Prepare the journal entries to record these transactions of Red Ltd.
Question 2 (10 Marks)
White Ltd recorded an accounting profit before income tax of $152,000 for the year ended 30 June 2016 that included the following:
Doubtful debts expense |
$22,000 |
Prepaid rent expense |
16,000 |
Depreciation of machinery |
12,000 |
Annual leave expense |
12,000 |
Development costs expense |
8,000 |
Interest revenue |
5,600 |
Impairment of goodwill |
5,200 |
Entertainment costs |
4,800 |
Depreciation of buildings |
2,000 |
Additional information:
- The impairment of goodwill, entertainment costs and depreciation of buildings are not allowed as deductions for income tax.
- Interest received in cash during the year was $2,400.
- Tax depreciation for the machinery for the year is $24,000.
- Total bad debts written off during the year amounted to $14,000.
- The amount paid in cash for prepaid rent during the year was $8,000.
- The amount paid in cash for annual leave during the year was $7,200.
- The amount paid in cash for development costs during the year was $25,600. White Ltd recognises development costs as an asset that is expensed over time. However, cash payments are immediately deductible for tax purposes based on 125% of the expenditure incurred.
- The corporate tax rate is 30%.
Required
Calculate the current tax of White Ltd for the year ended 30 June 2016 and prepare the required tax journal entry.
Question 3 (10 Marks)
On 1 July 2016, Brown Ltd acquired all of the assets and liabilities of Purple Ltd. In exchange for these assets and liabilities, Brown Ltd paid $80,000 in cash and issued 50,000 shares that at the date of issue had a fair value of $8 per share. Costs of issuing these shares amounted to $5,000. Legal costs associated with the acquisition of Purple Ltd amounted to $12,000.
The asset and liabilities of Purple Ltd at 1 July 2016 were as follows:
Carrying Amount |
Fair Value Assets | |
Cash |
2,000 |
2,000 |
Accounts receivable |
10,000 |
10,000 |
Inventory |
70,000 |
60,000 |
Equipment |
325,000 |
240,000 |
Accumulated depreciation – equipment |
(100,000) |
- |
Buildings |
240,000 |
280,000 |
Accumulated depreciation – buildings Liabilities |
(90,000) |
- |
Accounts payable |
(15,000) |
(15,000) |
Debentures |
(60,000) |
(60,000) |
At 30 June 2016, Purple Ltd had reported a contingent liability relating to a guarantee given by Purple Ltd to another company. Purple Ltd did not record the guarantee as a liability because of the difficulty of measuring the liability. The fair value of this contingent liability was assessed as $20,000.
Purple Ltd had been undertaking research into new manufacturing machinery and had expensed a total of $25,000 research costs. Brown Ltd determined that the fair value of this in-process research was $8,000 as at 1 July 2016.
Required
- Explain the term ‘business combination’. (1 mark)
- Briefly explain four key steps in the acquisition method of accounting for business combinations. (2 marks)
- What does ‘goodwill’ represent and how is it accounted for? (2 marks)
- Prepare the acquisition analysis at 1 July 2016 for the acquisition of Purple Ltd by Brown Ltd. (5 marks)
Question 4 (20 Marks)
Yellow Ltd acquired 100% of the issued shares of Beige Ltd on 1 July 2015 for $640,000, when the equity of Beige Ltd consisted of:
Share Capital $400,000
Retained Earnings 150,000
General Reserve 13,000
Asset Revaluation Surplus 15,000
All identifiable assets and liabilities of Beige Ltd were recorded at fair value at this date except for the following:
Carrying Amount | Fair Value | |
Equipment (cost: $480,000) | $340,000 | $370,000 |
Inventory | 80,000 | 90,000 |
Patent | 120,000 | 140,000 |
The equipment had a further 5-year life with depreciation based on the straight-line method. The inventory was all sold by 30 June 2016. The patent is considered to have an indefinite life.
During the year ending 30 June 2017, Beige Ltd transferred $10,000 from Retained Earnings to the General Reserve. This amount was from profits earned before acquisition date.
The following transactions took place between Yellow Ltd and Beige Ltd.
- During the 2016-17 period, Beige Ltd sold inventory to Yellow Ltd for $40,000, recording a profit before tax of $8,000. Yellow Ltd has since resold half of these items.
- During the 2016-17 period, Yellow Ltd sold inventory to Beige Ltd for $36,000, recording a profit before tax of $6,000. Beige Ltd has not resold any of these items.
- During the 2015-16 period, Beige Ltd sold inventory to Yellow Ltd for $60,000. At 30 June 2016, Yellow Ltd still had inventory on hand on which Beige Ltd had recorded a before-tax profit of $12,000.
- Beige Ltd paid an interim dividend of $8,000 on 10 January 2017.
- Beige Ltd declared a final dividend of $12,000 on 25 June 2017.
- During the 2016-17 period, Yellow Ltd provided the services of a specialist employee to Beige Ltd for two months in return for which Beige Ltd paid $30,000 to Yellow Ltd. The employee’s annual salary is $120,000 and is paid by Yellow Ltd.
- On 1 July 2015, Beige Ltd sold machinery to Yellow Ltd for $38,000 cash. The machinery had cost Beige Ltd $40,000 and its carrying amount on the date of the sale to Yellow Ltd was $36,000. Depreciation charged on machinery by Beige Ltd is 10% per annum on cost whilst Yellow Ltd applies a rate of 12.5% per annum on cost.
The company income tax rate is 30%.
Required
- Prepare the acquisition analysis as at 1 July 2015. (4 marks)
- Prepare the consolidation worksheet journal entries for the preparation of consolidated financial statements by Yellow Ltd at 30 June 2017. (14 marks)
- Briefly explain the term ‘non-controlling interest’ and how non-controlling interest is presented in the consolidated financial statements. (2 marks)