Calculation Of Taxable And Deferred Income For Jameson Ltd

Question

Solution – (i)

Computation of tax payable for the year ended 30 June, 2018

Particulars	Amount	Amount Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Profit before tax		$320,000
Add:
Depreciation expense	$40,000
Amortization of development costs	$30,000
Insurance expense	$24,000
Entertainment expense	$14,220
Fines and penalties	$7,200
Legal fees	$4,200
Restructuring expenses	$25,000
Employee benefits expense	$54,000
Doubtful debts expense	$12,000
Rent received	$27,000	$237,620
Less:
Royalty revenue	$3,500
Rent revenue	$25,000
Depreciation as per Tax	$53,333
Development expense	$150,000
Insurance expense paid	$29,000
Restructuring expenses paid
Employee expenses paid	$58,000
Doubtful debts written off	$8,000	$(326,833)
Net taxable income		$230,787
Tax payable @ 30%		$69,236
Less: taxes paid for year 2018
1st payment for 30 June 2018	$9,570
2nd payment for 30 June 2018	$10,470
3rd payment for 30 June 2018	$7,550	$27,590
Net tax payable		$41,646

Solution – (ii)

Deferred tax worksheet for the year ended 30 June, 2018

Particulars	Carrying amount	Tax base	Temporary Differences
Deductible	Taxable
Allowance for doubtful debts	$26,000		$26,000
Prepad insurance	$30,000			$30,000
Rent receivable	$3,500			$3,500
Development costs	$90,000			$90,000
Property, plant and equipment	$110,000	$80,000		$30,000
Provision for restructuring	$25,000		$25,000
Provision for employee benefits	$61,000		$61,000
Total temporary diff.			$112,000	$153,500
Deferred tax liability @ 30%				$46,050
Deferred tax asset @ 30%			$33,600
Opening balances			$26,100	$17,150
Change for the year			$7,500	$28,900

	Journal entry
(a)	To record deferred tax expense
	Income tax expense	Dr.	$ 21,400
	Deferred tax asset	Dr.	$ 7,500
	To Deferred tax liability	Cr.	$ 28,900
(b)	To record income tax expenses
	Current tax expense	Dr.	$ 69,236
	To Current tax lability	Cr.	$ 69,236

(2)

PART-A

Solution-1

Acquisition analysis as on 1 July, 2018

Particulars	Amount	Amount
Assets
Accounts receivable	$28,840
Inventory	$30,000
Buildings	$200,000
Fixtures	$75,000
Plant and equipment	$42,000	$375,840
Liabilities
Guarantees	$32,000
Accounts payable	$32,600
Loans	$74,200
Accrued interest on loans	$4,300
Liquidation expenses	$5,000	$(148,100)
Fair value of net assets acquired		$227,740
Consideration paid in shares (2 shares for every 5 shares held @ $7		$196,000
Consideration paid in patent		$18,000
Gain on bargain purchase (Fair value less consideration paid)		$13,740

Solution-2

Journal entries to record acquisition

Particulars	Dr./Cr.	Amount
Accounts receivable	Dr.	$28,840
Inventory	Dr.	$30,000
Buildings	Dr.	$200,000
Fixtures	Dr.	$75,000
Plant and equipment	Dr.	$42,000
To Guarantees	Cr.	$32,000
To Accounts payable	Cr.	$32,600
To Loans	Cr.	$74,200
To Accrued interest on loans	Cr.	$4,300
To Liquidation expenses	Cr.	$5,000
To Gain on bargain purchase	Cr.	$13,740
To Share capital	Cr.	$196,000
To Patent	Cr.	$18,000
(Being purchase of business recorded)
Share capital	Dr.	$4,000
To Cash	Cr.	$4,000
(Being cost of issuing shares recorded)

Solution-3

Acquisition analysis as on 1 July, 2018

Particulars	Amount	Amount
Assets
Accounts receivable	$28,840
Inventory	$30,000
Buildings	$200,000
Fixtures	$75,000
Plant and equipment	$42,000	$375,840
Liabilities
Guarantees	$32,000
Accounts payable	$32,600
Loans	$74,200
Accrued interest on loans	$4,300
Liquidation expenses	$5,000	$(148,100)
Fair value of net assets acquired – (a)		$227,740
Consideration paid in shares (2 shares for every 5 shares held @ $10		$280,000
Consideration paid in patent		$18,000
Goodwill (Consideration paid less fair value)		$70,260

PART-B

The today’s environment of business comes with lots of changes and challenges. To survive in today’s environment, business needs to encounter certain problems and have to do certain types of business combinations. These business combinations are in the form of merging with another company, purchasing the business of other companies, disinvesting, acquiring and so on.

With these business combinations, the acquisition related costs come. These costs are those costs which are incurred in the business combination and are mandatory to incur. These acquisition costs include the following type of expenses (Staff, 2018):

(a) advisor’s fees

(b) legal fees

(d) professional and consulting services fees

(e) general administration expenses

(f) Costs of maintaining internal acquisitions

(g) costs of registration of debt and equity instruments and so on.

These costs are incurred by the company acquiring the business of another business means they are incurred by the acquirer of the business.

The accounting treatment of these costs is defines under AASB 3, “Business combinations”. According to AASB 3 these costs should be expensed off in the period in which they are incurred. Meaning there by these costs should be charged to profit and loss account (“Business Combinations”, 2018).

However, there is one exception to above treatment, that is for debt and equity issuance costs. According to AASB 3, the debt and equity issuance costs should be capitalized in the period in which they are incurred, since the benefits from these costs are expected to last for more than a year.

(3)

Part – A

Solution-1

Acquisition analysis as on 1 January, 2018

Particulars	Amount	Amount
Share capital		$10,000
Retained earnings		$3,000
Add: Inventories fair value		$280
Fair value of net assets acquired – (a)		$13,280
Consideration paid net of dividends – (b)		$17,000
Goodwill (b-a)		$3,720

Solution-2

Consolidation Journal Entries as on 1 July, 2018

Journal No.	Particulars	Dr./Cr.	Amount
(a)	Inventory	Dr.	$400
	To Deferred tax liability	Cr.	$120
	To Business combination valuation reserve	Cr.	$280
	(Being fair valuation of inventory recorded)
	Goodwill	Dr.	$3,720
	To Business combination valuation reserve	Cr.	$3,720
	(Being goodwill on acquisition recorded)
(b)	Retained earnings (1/1/18)	Dr.	$3,000
	Share captial	Dr.	$10,000
	Business combination valuation reserve	Dr.	$4,000
	To Shares in Melon Ltd	Cr.	$17,000
	(Being acquisition of Melon Ltd recorded)
	Dividend payable	Dr.	$3,000
	To Dividend receivable	Cr.	$3,000
	(Being dividend received from pre acquisition profit recorded)

Solution-3

Consolidation Journal Entries as on 31 December, 2018

Journal No.	Particulars	Dr./Cr.	Amount
(c)	Cost of sales	Dr.	$360
	To Income tax expense	Cr.	$108
	To Transfer from business combination valuation reserve	Cr.	$252
	(Being sale of inventory recorded)
	Inventories	Dr.	$40
	To Deferred tax liability	Cr.	$12
	To Business combination valuation reserve	Cr.	$28
	(Being fair valuation of closing inventory recorded)
(d)	Sales	Dr.	$5,000
	To Cost of sales	Cr.	$4,000
	To Inventory	Cr.	$1,000
	(Being profit eliminated in ending inventory)
(e)	Deferred tax asset	Dr.	$300
	To Income tax expense	Cr.	$300
	(Being tax expense recorded on above)
(f)	Impairment loss of goodwill	Dr.	$1,860
	To Goodwill	Cr.	$1,860
	(Being goodwill written off)
(g)	Other income	Dr.	$700
	To Other expense	Cr.	$700
	(Being elimination of management fee transaction recorded)
(h)	Gain on sale of property, plant and equipment	Dr.	$3,500
	To Machinery	Cr.	$3,500
	(Being elimination of profit in sale of machinery recorded)
(i)	Deferred tax asset	Dr.	$1,050
	To Income tax expense	Cr.	$1,050
	(Being tax expense on above recorded)
(j)	Accumulated Depreciation	Dr.	$350
	To Depreciation expense	Cr.	$350
	(Being reversal of excess depreciation charged recorded)
(k)	Income tax expense	Dr.	$105
	To Deferred tax asset	Cr.	$105
	(Being tax expense on above recorded)
(l)	Dividend revenue	Dr.	$1,000
	To Interim dividend paid	Cr.	$1,000
	(Being elimination of dividend transaction recorded)

Consolidated Worksheet


Account	Water Ltd	Melon Ltd	Journal no.	Eliminations	Journal no.	Group
Dr	Cr
Sales revenue	$25,000	$23,600	d	$5,000			$43,600
Dividend revenue	$1,000		l	$1,000			$-
Gain on sale of property, plant and equipment	$1,000	$3,500	h	$3,500			$1,000
Other income	$1,000	$2,000	g	$700			$2,300
Total income	$28,000	$29,100					$46,900
Cost of sales	$21,000	$18,000	c	$360	$4,000	d	$35,360
Other expenses	$3,000	$1,000	f	$1,860	$1,050	g,j	$4,810
Total expenses	$24,000	$19,000					$40,170
Profit before income tax	$4,000	$10,100					$6,730
Income tax expense	$1,350	$1,950	k	$105	$1,458	c,e,i	$1,947
Profit for the period	$2,650	$8,150					$4,783
Retained earnings (01/01/2018)	$6,000	$3,000	b	$3,000			$6,000
	$8,650	$11,150					$10,783
Interim dividend paid	$(2,500)	$(1,000)			$1,000	l	$(2,500)
Retained earnings (31/12/2018)	$6,150	$10,150					$8,283

For the year ended on 31 December, 2018

Particulars	Amount	Amount
Income:
Sales		$43,600
Less: Cost of sales		$35,360
Gross Profit		$8,240
Add: Other income
Gain on sale of property, plant and equipment	$1,000
Other income	$2,300	$3,300
Less: Other expenses		$4,810
Profit before tax		$6,730
Less: Income tax expense		$1,947
Profit for the period		$4,783

Other comprehensive income (OCI)
Revaluation of PPE	$1,650
Income tax relating to above	$(495)	$1,155
Total comprehensive income		$5,938

Profit can be of two types, one is realized profit and other is unrealized profit. The realized profit is that profit which has been actually earned by the business. On the other hand, the unrelized profit is that profit which has not been actually earned or realized by the business. In the consolidation, there are various intra group transactions between the companies in the group. These transactions involves profit element and this profit element needs to be eliminated from the consolidation. This elimination is required to be done since the profit has not been actually earned by the business and reflects the notional income entry. Hence, the impact of such entries needs to be eliminated. This unrealized profit gets realized when it is sold to the external parties. Until it is sold to the external parties, the gain involved needs to be removed from the transactions.

These intra group transactions involve the following type of transactions (“Consolidated and Separate Financial Statements”, 2018):

(a) Gain on sale of non-current depreciable assets – The transfer or sale of non-current assets between the group companies normally involves the profit means this transfer is made at profit. Since, this profit is an unrealised profit, hence it needs to be eliminated from the books, since the one company is earning profit and other company is spending extra cost. Along with elimination of gain entry, the excess depreciation charged due to this gain also needs to be eliminated. Along with the gain and depreciation reversal entry, the impact of tax on such entries also needs to be taken care off.

(b) Profit in ending and opening entry – Another common transaction between intra group companies is the sale of inventory at profit. Again this transaction involves unrealised profit in the form of extra cost of gain earned by one company on sale of inventory to another company. This profit also needs to be eliminated from inventory and along with profit the intra company sales and cost of sales figures also needs to be corrected by eliminating the intra group sale and cost of sales involved in these figures. Further, the depreciation impact on such elimination also needs to be entered in the books.

(c) Gain on sale of non-current non-depreciable assets – Another type of transaction is the intra group sale of non-depreciable assets (like land) at a profit. And hence, the gain on sale of such non depreciable assets needs to be eliminated as this profit is an unrealized profit and is not actually earned by the business. Along with gain elimination, the tax impact also needs to be done.

(4)

Solution-1

Acquisition analysis as on 1 July, 2015

Using partial goodwill method

Particulars	Amount	Amount
Share Capital	$200,000
Retained Earnings	$55,000
Asset revaluation surplus	$50,000	$305,000
Fair value of Inventories ((67000-60000)*(1-30%))	$4,900
Fair value of Plant & Machinery ((90000-75000)*(1-30%))	$10,500	$15,400
Goodwill already recorded		$(20,000)
Fair value of identifiable assets and liabilities of Scotch Ltd		$300,400
Equivalent fair value of assets acquired – (a) (300,400*80%)		$240,320
Consideration paid (net of dividends of $20,000) – (b)		$310,000
Goodwill (b-a)		$69,680

Solution-2

Acquisition analysis as on 1 July, 2015

Using full goodwill method

Particulars	Amount	Amount
Share Capital	$200,000
Retained Earnings	$55,000
Asset revaluation surplus	$50,000	$305,000
Fair value:
– Inventories ((67000-60000)*(1-30%))	$4,900
– Plant & Machinery ((90000-75000)*(1-30%))	$10,500	$15,400
Less: Goodwill		$(20,000)
Fair value of identifiable assets and liabilities of Scotch Ltd		$300,400
Consideration paid (net of dividends of $20,000) – (a)		$310,000
Non controlling interest – (b)		$68,000
Aggregate of (a) and (b)		$378,000
Goodwill (excess of consideration paid and NCI over fair value)		$77,600

Goodwill of Scotch Ltd

Fair value (68000/20%)		$340,000
Fair value of identifiable assets and liabilities of Scotch Ltd		$300,400
Goodwill of Scotch Ltd		$39,600
Recorded goodwill		$20,000
Unrecorded goodwill		$19,600

Goodwill of Butter Ltd

Goodwill acquired		$77,600
Goodwill of Scotch Ltd		$39,600
Goodwill of Butter Ltd – Control premium		$38,000

Solution-3

Consolidation Worksheet Entries as at 1 July, 2015

Particulars	Dr./Cr.	Amount
Accumulated Depreciation	Dr.	$125,000
To Plant	Cr.	$110,000
To Deferred tax liability	Cr.	$4,500
To Business Combination Valuation Reserve	Cr.	$10,500
(Being plant recorded at fair value)
Inventories	Dr.	$7,000
To Deferred tax liability	Cr.	$2,100
To Business Combination Valuation Reserve	Cr.	$4,900
(Being inventories recorded at fair value)
Share Capital	Dr.	$160,000
Retained Earnings	Dr.	$44,000
Asset revaluation surplus	Dr.	$40,000
Goodwill	Dr.	$38,000
Business combination valuation reserve ( (4900+10500+19600)*80%)	Dr.	$28,000
To Investment in Scotch Ltd.	Cr.	$310,000
(Being acquisition of subsidiary recorded)
Share Capital	Dr.	$40,000
Retained Earnings	Dr.	$11,000
Asset revaluation surplus	Dr.	$10,000
Business combination valuation reserve ( (4900+10500+19600)*20%)	Dr.	$7,000
To NCI	Cr.	$68,000
(Being NCI share recorded)
Dividend Payable	Dr.	$20,000
To Dividend Receivable	Cr.	$16,000
To NCI	Cr.	$4,000
(Being dividend from pre acquisition profits recorded)

Solution-4

Consolidation Worksheet Entries as at 30 June, 2018

Particulars	Dr./Cr.	Amount
Accumulated Depreciation	Dr.	$125,000
To Plant	Cr.	$110,000
To Deferred tax liability	Cr.	$4,500
To Business Combination Valuation Reserve	Cr.	$10,500
(Being plant recorded at fair value)
Depreciation expense (12000/4 + 3000/4/2)	Dr.	$3,375
Retained earnings (1/7/17) (15000/4*2)	Dr.	$7,500
To Accumulated depreciation	Cr.	$10,875
(Being depreciation recorded on above fair valuation of Plant)
Deferred tax asset	Dr.	$3,263
To Income tax expense	Cr.	$1,013
To Retained earnings (1/7/17)	Cr.	$2,250
(Being tax impact on above depreciation recorded)
Share Capital	Dr.	$160,000
Retained Earnings	Dr.	$47,920
Asset revaluation surplus	Dr.	$40,000
Goodwill	Dr.	$38,000
Business combination valuation reserve ((10500+19600)*80%)	Dr.	$24,080
To Investment in Scotch Ltd.	Cr.	$310,000
(Being acquisition of subsidiary recorded)
Share Capital	Dr.	$40,000
Retained Earnings	Dr.	$11,980
Asset revaluation surplus	Dr.	$10,000
Business combination valuation reserve ((10500+19600)*20%)	Dr.	$6,020
To NCI	Cr.	$68,000
(Being NCI share recorded)
Profit on sale of machinery	Dr.	$6,000
To Machinery	Cr.	$6,000
(Being profit in sale of machinery eliminated)
Deferred tax asset	Dr.	$1,800
To Income tax expense	Cr.	$1,800
(Being tax impact on above elimination recorded)
Accumulated Depreciation (6000/4/2)	Dr.	$750
To Depreciation expense	Cr.	$750
(Being reversal of excess depreciation charged on above gain recorded)
Income tax expense	Dr.	$225
To Deferred tax asset	Cr.	$225
(Being tax impact on above reversal recorded)
Asset revaluation surplus	Dr.	$10,000
To Retained earnings	Cr.	$10,000
(Being amount transferred)
Retained earnings	Dr.	$20,000
To General reserve	Cr.	$20,000
(Being amount transferred)
Dividend revenue ((7000+4000+3000)*80%)	Dr.	$11,200
To Dividend paid and declared	Cr.	$11,200
(Being inter company dividend transaction eliminated)
Retained earnings (1/7/17)	Dr.	$1,750
Income tax expense	Dr.	$750
To Cost of sales	Cr.	$2,500
(Being profit in opening inventory eliminated)
Sales	Dr.	$7,500
To Cost of sales	Cr.	$6,250
To Inventory	Cr.	$1,250
(Being profit in closing inventory eliminated)
Deferred tax asset	Dr.	$375
To Income tax expense	Cr.	$375
(Being tax impact on above elimination recorded)
Retained earnings (1/7/17)	Dr.	$5,000
To Vehicle	Cr.	$5,000
(Being elimination of profit in sale of vehicle recorded)
Deferred tax asset	Dr.	$1,500
To Income tax expense	Cr.	$1,500
(Being tax impact on above elimination recorded)
Accumulated Depreciation (500010%2)	Dr.	$1,000
To Depreciation expense	Cr.	$500
To Retained earnings (1/7/17)	Cr.	$500
(Being reversal of excess depreciation charged recorded)
Income tax expense	Dr.	$150
Retained earnings (1/7/17)	Dr.	$150
To Deferred tax asset	Cr.	$300
(Being tax impact on above depreciation reversal recorded)
NCI ((7000+4000+3000)*20%)	Dr.	$2,800
To Dividend paid and declared	Cr.	$2,800
(Being dividend paid to NCI recorded)
NCI share of comprehensive income ((28000)*20%)	Dr.	$5,600
To NCI	Cr.	$5,600
(Being NCI share in comprehensive income recorded)

References:

Business Combinations. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB3_08-15.pdf

Staff, I. (2018). Acquisition Cost. Retrieved from https://www.investopedia.com/terms/a/acquisition-cost.asp

Consolidated and Separate Financial Statements. (2018). Retrieved from https://www.aasb.gov.au/admin/file/content102/c3/AASB127_03-08_ERDRjun10_07-09.pdf

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