Solution Code: 1EDJ

Question:Financial Accounting Assignment

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Question 1: Accounting for Lease Owing to low liquidity, Lisa Ltd decides on 1 July 2015 to sell its land and buildings to Anderson Ltd. The carrying values of the land and buildings in the books of Lisa Ltd, at 1 July 2015, are: Question 2: Accounting for Income Tax MR Limited commences operations on 1 July 2014 and presents its first statement of comprehensive income and first statement of financial position on 30 June 2015. The statements are prepared before considering taxation. The following information is available: Question 3: Consolidation Sandy Ltd acquired 100 per cent of the issued capital of Beach Ltd on 30 June 2014 for $900 000, when the statement of financial position of Beach Ltd was as follows:

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Solution:

Answer 1

a)

The journal entries are as under (Leo et al. 2015):

In the books of Lisa Ltd
Date	Particulars	Dr	Cr
01-Jul-15	Cash	$ 2,167,350
	land		$ 1,800,000
	Deferred Gain on Sale		$ 367,350
	sales of land

01-Jul-15	Cash	$ 2,167,350
	Accumulated depreciation	$ 350,000
	Buildings		$ 1,750,000
	Deferred Gain on Sale		$ 767,350
	sale of building

01-Jul-15	leased Land	$ 2,167,350
	leased Buildings	$ 2,167,350
	leased liability		$ 2,167,350
	recognistion of lease agreement

01-Jul-15	leased liability	$ 600,000
	cash		$ 600,000
	down payment

30-Jun-25	Deferred Gain on Sale	$ 56,735
	Gain on Sale of Leased Assets		$ 56,735
	amortization of gain on sale for 20 years

30-Jun-25	lease liability	$ 500,000
	cash		$ 500,000
	last lease payment

30-Jun-25	Depreciation	$ 108,368
	Accu. Dep on building		$ 108,368
	last year depreciation

b)

In the books of Anderson Ltd
Date	Particulars	Dr	Cr
01-Jul-15	land	$ 2,167,350
	cash		$ 2,167,350
	purchase of land

01-Jul-15	Buildings	$ 2,167,350
	cash		$ 2,167,350
	purchase of buildings

01-Jul-15	lease receivables	$ 4,334,700
	land		$ 2,167,350
	building		$ 2,167,350
	recognition of lease agreement

01-Jul-15	cash	$ 600,000
	lease receivable		$ 600,000
	initial payment

30-Jun-25	cash	$ 500,000
	lease receivable		$ 500,000
	last payment

c)

In the books of Lisa Ltd
Date	Particulars	Dr	Cr

30-Jun-25	Deferred Gain on Sale	$ 56,735
	Gain on Sale of Leased Assets		$ 56,735
	amortization of gain on sale for 20 years

30-Jun-25	lease liability	$ 500,000
	cash		$ 500,000
	last lease payment

30-Jun-25	Depreciation	$ 108,368
	Accu. Dep on building		$ 108,368
	last year depreciation

d)

In the books of Anderson Ltd
Date	Particulars	Dr	Cr

30-Jun-25	cash	$ 500,000
	lease receivable		$ 500,000
	last payment

Answer 2

The journal entries are as under (Collier 2012):

	Dr	Cr
Income tax expense	$ 78,000
Current tax liability		$ 78,000


Deferred tax assets	$ 6,000
Deferred tax liabilities		$ 6,000

Current Tax Worksheet as at 30 June 2015
Accounting profit		$ 300,000
Add:
Depreciation expense - Plant	$ 40,000
Long-service leave	$ 20,000
Warranties expenses	$ 30,000
Insurance expenses	$ 10,000
Income - Rent received		$ 100,000
Less:
Tax depreciation – plant	$ 100,000
Warranties paid	$ 10,000
Insurance paid	$ 30,000
Leave paid to employees		$ 140,000
Taxable profit		$ 260,000
Current tax liability @ 30%		$ 78,000

Provision for warranties
Date	Particulars	Amount	Date	Particulars	Amount
	Warranties paid	$ 10,000	01-07-14	Opening balance	$ -
30-06-15	Closing balance	$ 20,000		Warranties expense	$ 30,000
	Total	$ 30,000		Total	$ 30,000

Prepaid insurance
Date	Particulars	Amount	Date	Particulars	Amount
01-07-14	Opening balance	$ -		Insurance expense	$ 10,000
	Insurance paid	$ 30,000	30-06-15	Closing balance	$ 10,000
	Total	$ 30,000		Total	$ 20,000

Deferred tax worksheet 30 June 2015
	Carrying Amount	Future Deductible Amount	Tax Base	Taxable Temporary Differences	Deductible Temporary Differences

Assets
Plant (net)	$ 320,000	$ 300,000	$ 300,000	$ 20,000
Liabilities
Provision for warranties	$ 20,000	$ 20,000	$ -		$ 20,000
Total Temporary Diffs				$ 20,000	$ 20,000

Deferred tax liability 30%				$ 6,000
Deferred tax asset 30%					$ 6,000
Beginning balances				$ -	$ -
Increase (Decrease) for the year				$ 6,000	$ 6,000

Workings:

Payment at inception	$ 600,000
Annual payment	$ 500,000
rate	12%
PVA factor 20 years	8.3658
PV of MLP	$ 4,782,900

Answer 3

The consolidate statement of financial position is as under (Atrill & Mclaney 2006):

Consolidated Statements of financial position of Sandy Ltd as at 30 June 2015
Assets
Cash	$ 120
Accounts receivable	$ 100
Inventory	$ 263
Goodwill	$ 60
Land	$ 1,000
Property, plant and equipment	$ 1,770
Accumulated depreciation	-$ 333
Investment in Beach Ltd	$ -
Total assets	$ 3,370
Liabilities	$ -
Accounts payable	$ 110
Dividends payable	$ 150
Deferred tax liability	$ 33
Loan	$ 810
Shareholders' equity	$ -
Share capital	$ 1,000
Retained earnings	$ 800
Total Liabilities and Equity	$ 3,370



Reconciliation of opening and closing retained earnings
Profit after tax	$ 577
Retainedearnings-30June2014	-$ 270
Goodwill written off	-$ 70
Retainedearnings-30June2015	$ 237

Workings:

Acquisition analysis
At 30 June 2014:		Amount	Account
Net fair value of assets and liabilities of Beach Ltd	=	$ 500,000.00	Share capital
		$ 200,000.00	Retained earnings
		$ 70,000.00	+100,000 (1-30%)(PPE)
		$ 770,000.00

Consideration transferred by SANDY Ltd		$ 900,000.00	Investment in BEACH Ltd
Goodwill		$ 130,000.00	Consideration>NFV-->Goodwill

Account	Dr/Cr	$	$
1. Business combination valuation entries at 30 June 2014
Acc depn - Equipment	DR	270,000.00
Equipment	CR		170,000.00
DTL	CR		30,000.00
BCVR	CR		70,000.00
(Calculate the BCVR of Equipment. BCVR=100,000*0.7)
Depn Expense (100,000/10)	DR	10,000.00
Acc depn - Equipment	CR		10,000.00
(Calculate the Depn Expense for the increase in carrying amount)
DTL	DR	3,000.00
Income Tax Expense (10,000*0.3)	CR		3,000.00
(Calculate the DTL and ITE)



2. Pre-acquisition entries as at 30 June 2015
Retained Earnings *+70,000 from goodwill	DR	270,000.00
Share Capital	DR	500,000.00
BCVR	DR	70,000.00
Goodwill	DR	60,000.00
Investment in BEACH Ltd	CR		900,000.00
(Transfer the BCVR to the Pre-acquisition entries)
		900,000.00	900,000.00
3. Dividend declared
Dividend Revenue	DR	90,000.00
Interim dividend	CR		40,000.00
Final Dividend	CR		50,000.00

Dividend Payable	DR	90,000.00
Dividend Provided (Res)	CR		90,000.00
(Transfer Sub-company's dividend declare into group account)

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