MA511-Financial Accounting and Reporting
Case Study 1 Accounting for company income tax
Grace Timber Ltd (GTL) is engaged primarily in agricultural pursuits as well as in forestry products, including the management of its own forest reserves. Unfortunately, in the current year a bushfire in the mountain range bordering the company’s operations resulted in the destruction of 5 000 hectares of standing timber, harvested logs, forestry buildings and equipment. As a result the company recognised a $10 million loss in the current period. The board of directors of GTL are debating whether it can raise a deferred tax asset in relation to this loss in the financial statements for the current period.
The accounting profit and other relevant information of GTL for the year to 30 June 2019 are as follows:
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Accounting profit (loss)
After debiting as expense:
Goodwill impairment loss*
Entertainment costs*
Donation to political party*
Depreciation expense – plant
Long-service leave expense
For tax purposes:
Tax depreciation for plant
Long-service leave paid
*These items are non-deductible for tax purposes.
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$(10 000 000)
8 000 000
1 000 000
500 000
2 000 000
1 200 000
4 000 000
2 400 000
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The company tax rate is 30%.
The Chief Executive Officer (CEO) of GTL instructed the Chief Financial Officer (CFO) to submit a report to the board providing advice on the raising of a deferred tax asset and specifying the conditions, if any, under which the asset could be recognised.
Required
1.Explain how accounting profit and taxable profit differ and how each is treated when accounting for income taxes.
2.Discuss when a deferred tax asset must be recognised.
3.Calculate the taxable income.
4.Prepare the journal entry for the deferred tax asset.
Case Study 2 Accounting treatment for PPE
Twister Ltd recently acquired a second-hand machine for installation in its factory. The machine was acquired from Robert Ltd, with Twister Ltd giving a block of land plus $5 000 cash in exchange for the machine. The land had been acquired by Twister Ltd for $200 000 three years ago, but was considered to have a fair value of $300 000 at the date of exchange. The machine had a carrying amount in the records of Robert Ltd of $310 000 at this date.
Twister Ltd planned to use the machine in its main factory. The installation of the machine would require that it be cemented into the factory floor in order to achieve sufficient stability for the machine to operate. The cost is expected to be $550. However, when the machine is replaced in three years’ time, the costs of removal of the machine are expected to be $250. As the operation of the machine requires some technical knowledge, current staff will need to be trained for its use. As it has supplied the machine, Robert Ltd has agreed to supply training at a cost of $250.
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.
The report should include the following:
1.What are the recognition criteria for property, plant and equipment?
2.How should items of property, plant and equipment be measured at point of initial recognition.
3.How is cost determined in accordance with AASB116?
4.Estimate the cost of the Machine as per para 16 of AASB116.
Case Study 3 Accounting for Consolidation
Carina Ltd has acquired all the shares of Finn Ltd on 1 July 2019 for $ 225 000. The accountant for Carina Ltd, having studied the requirements of AASB 3 Business Combinations, realises that all the identifiable assets and liabilities of Finn Ltd must be recognised in the consolidated financial statements at fair value. Although he is happy about the valuation of these items, he is unsure of a number of other matters including pre-acquisition entries and business combination valuation reserves associated with accounting for these assets and liabilities. He has approached you and asked for your advice.
The financial statements of Finn Ltd showed the equity of Finn Ltd at acquisition date to be:
Share capital — 20 000 $5.10 shares$102 000
General reserve 40 000
Retained earnings 60 000
All the assets and liabilities of Finn Ltd were recorded at amounts equal to their fair values at that date.
During the year ending 30 June 2020, Finn Ltd undertook the following actions:
• On 10 September 2019, paid a dividend of $20 000 from the profits earned prior to 1 July 2019.
• On 28 June 2020, declared a dividend of $20 000 to be paid on 15 August 2020.
On 1 January 2020, transferred $15 000 from the general reserve existing at 1 July 2019 to retained earnings.
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?
2. What is the purpose of the pre-acquisition entries in the preparation of consolidated financial statements? Explain.
3. How to prepare the pre-acquisition entries at 1 July 2019.
4. How to prepare the pre-acquisition entries at 30 June 2020.
