1. Buildit Ltd, a fabricating company, bought an industrial drill on 1st July 2020 for a price of $150,000. The CFO estimated that the drill had a useful life of 6 years and a straight line basis of depreciation was applied. One year later, on 1st July 2021 due to technological improvements the CFO determined that the drill would have to be replaced earlier in order to remain competitive. The remaining useful life was estimated to be 4 years. The accounting depreciation rate was changed to reflect this alteration.
The drill was sold for $69,000 on 30 June 2023. This equipment attracted a tax depreciation rate of 35% p.a. The company tax rate is 30%.
For each of the 3 years ended 30 June 2021, 2022 and 2023, calculate the carrying amount and tax base of the drill, and show the deferred tax journal entry at the end of each year. Provide explanations for your answer.
2. At the 1st July 2022 Towelling Ltd had the following financial position:
Cotton Ltd had purchased all the assets and taken over all the liabilities of Towelling Ltd on 1st July 2022.
The purchase consideration included Cotton Ltd issuing to the Towelling Ltd shareholders 6 Cotton Ltd shares and giving them a cash payment of $2.70 for each one Towelling Ltd share held. The Cotton Ltd shares were deemed to have a fair value of $9.45 each. The costs of issuing the Cotton Ltd shares amounted to $810. The Towelling Ltd shareholders would also have a patent transferred to them. This patent was internally generated by Cotton Ltd with a carrying value of $540,000 and was deemed to have a fair value of $1,350,000.
At 30th June 2022 Towelling Ltd had noted in its financial statements a contingent liability due to a guarantee that the company had given for another company’s loan. No value had been placed on the guarantee but the fair value at the date of acquisition was assessed at $54,000.
Prior to the acquisition of Towelling Ltd Cotton Ltd sought advice from lawyers and accountants and at the completion of the acquisition their fees amounted to $13,500.
Complete the journal entries in the books of Cotton Ltd recording the acquisition of Towelling Ltd.
3. Benjamin Ltd owns all of the issued share capital of Franklin Ltd.
The following transactions occurred during the financial year ending 30th June 2022.
(a) On 15th January 2022 Benjamin Ltd purchased inventory from Franklin Ltd for $52,800 which gave Franklin Ltd a pre-tax profit of $15,840. Benjamin Ltd sold one quarter of the inventory to external parties for $16,500 and the remainder were sold back to Franklin Ltd for $71,500 on account.
(b) On 1st February 2021 Benjamin Ltd sold equipment, which had cost Benjamin Ltd $374,000 with an accumulated depreciation balance at the time of sale of $44,000, to Franklin Ltd for $352,000. Franklin Ltd applies a 10% straight line depreciation rate to equipment. On 30th June 2022 Franklin Ltd sold the equipment to Jefferson Ltd for $220,000.
(c) Benjamin Ltd, owns a car dealership and sold a car on 1st July 2021 to Franklin Ltd which Franklin Ltd classified as a motor vehicle. The sale price was $44,000 with a cost of sales of $22,000. Franklin depreciates motor vehicles at 20% on a straight-line basis.
(d) Franklin Ltd purchased a new production facility on 1st September 2021 for $1,600,000. The factory equipment required calibrating and staff training to enable them to operate it. To facilitate this Benjamin Ltd provided management staff to oversee the calibration and training at a cost to Benjamin Ltd of $22,000 for which they billed Franklin Ltd $110,000. This latter cost Franklin Ltd treated as part of the cost of installation and added it to the cost of the facility. Franklin Ltd depreciates the facility on a reducing balance basis at a yearly rate of 30%.
Prepare the adjusting consolidation worksheet journal entries for the year ended 30th June 2022 to eliminate the intragroup transactions.
4. On 1st July 2021 Jensen Ltd acquired 80% of the issued shares of Interceptor Ltd for $315,200. The equity of Interceptor Ltd at that date comprised:
The machinery, which a remaining life of 5 years, was sold on 1st July 2022 for $175,000. All the inventory held at 1st July 2021 was sold in the year after acquisition.
All valuation adjustments were made by consolidation worksheet journal entries.
Interceptor Ltd had the following transactions during the years to 30th June 2022 and 30th June 2023.
Paid an interim dividend $10,000. $5,000 being funded out of pre-acquisition profits.
Sold inventory to Jensen Ltd with a sale price of $62,500 at a pre-tax profit of $12,500.
June Declared a final dividend of $18,750.
Half of the inventory sold to Jensen Ltd on April 1st was still on hand.
Profit for the year amounted to $162,500.
Paid the final dividend declared in June. 2023
Sold equipment costing $25,000 to Jensen Ltd for $37,500. This attracts a straight-line depreciation rate of 20%.
Paid an interim dividend $20,000
Transferred $25,000 from the general reserve balance at 1st July 2021 to retained earnings
Profit for the year amounted to $187,500.
It is group policy to account for dividends upon declaration. Assume a tax rate of 30%.
Prepare the adjusting consolidation worksheet journal entries for the years ended 30th June 2022 and 30th June 2023.
5. Your client Iced Ltd, which controls a number of companies, has recently purchased a 24% shareholding in Tea Ltd. The new accountant, Mr Bushell, has asked your advice about the preparation of the Iced Ltd’s consolidated accounts with respect to the shareholding in Tea Ltd. They are confused about the term “significant influence” and how they should include Tea Ltd’s results in the consolidated accounts.
Write a business letter to the accountant explaining the term “significant influence” and how to recognise it, and the appropriate method for including Tea Ltd’s results in Iced Ltd’s consolidated accounts. Marks will be awarded for the content of the letter, the structure of the business letter and the manner in which it is presented.