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Solution Code: 1EDJ
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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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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 | |||
| 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 | |||
| 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 | |||
| In the books of Anderson Ltd | |||
| Date | Particulars | Dr | Cr |
| 30-Jun-25 | cash | $ 500,000 | |
| lease receivable | $ 500,000 | ||
| last payment | |||
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 |
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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