Deferred Tax Worksheet And Goodwill Implications: Accounting Analysis

1st investment relationship

LBX Pty limited has two shareholders and 25% of shares are held by Millionaires Club and Pty limited and the remaining shares are held by founder of LBX. It is required to take into consideration all the facts and circumstances while assessing investor’s control. MC has been provided three seats in the board of directors and they have say in all relevant activities of organization. According to paragraph, B-19 of AASB 10, an investor can has the power if it is involved in directing activities of organization and they can consequently exercise control over them (El Dahrawet al. 2015).

It is essential for MC to make the assessment of rights for determining consolidation requirement and where the control rests. Activities of investee changes fundamentally if the investors are having protective rights and they are applied in some special events or circumstances. In this scenario, financial operations of BBT are controlled by Mc executive over the period of five years. Therefore, control rests in MC hand only for the financial aspects of business. Consolidation is not required and cannot be done as the members of MC does not have any seats in board of directors (Maxfield 2013).

In this relationship, CTL has two investors that are MC who is responsible for supplying loan and BJL that is responsible for handling the management. In event of two investors of any organization, if the relevant activities of CTL are directed by both the investors together, then only control can be exercised by such investors. Activities of such entity cannot be directed without each other’s cooperation. Therefore, CTL cannot be controlled by individual investors and the interest in CTL would be accounted from joint arrangement in accordance with AASB 11 (Özkol et al. 2014).

In this particular investor relationship, there are three investors of PGH Pty limited and all having equal shares that is 33.3% of each shareholders. Daily activities of PGH Pty limited are handled by MC and they have one seat in board of directors. While the remaining two shareholders that is CCL and GJL have one seat out of three in board of directors and they are passive investors. If an investor has more than passive interest then they might have some special relation with investee according to paragraph B-19 of AASB 10 (Aasb.gov.au 2017). It can be examined from the given scenario that MC has sufficient power to exercise control on PGH Pty limited as they are entitled to some other rights and have more than passive interest. Large exposure of variability in return and MC’s involvement in day-to-day activities of its investee’s business has led to exercise some control.

In this scenario, MC is owner of 75% of shares of JB-Hi Fi, however they do not have any seats in the board of directors and are not responsible for managing and handling any financial and operating decisions JB-Hi Fi. There has been consolidation of assets due to deficiency and continuous poor and unhealthy performance. Nonetheless, MC is holding major shares of JB-Hi Fi, they do not provided with any voting rights. An investor is capable of exercising control over investee even if they do not posses any voting rights according to paragraph, B-38 of AASB 10 (Aasb.gov.au 2017). Sufficient control can be exercised by investors if they are involved in managing relevant activities and have any contractual agreement with them. It can be assessed for the situation that MC is only a passive invest of JB-Hi Fi that does not have any involvement in directing some relevant activities of business. Therefore, it can be said that control cannot be exercised (Kaya 2017).

Acquisition Analysis:
Particulars		Carrying Amount	Fair Value	Net Fair Value
Share Capital		$0	$500,000	$500,000
Retained Earnings		$0	$200,000	$200,000
Property, Plant & Equipment		$430,000	$530,000	$100,000
Net Fair Value of Identifiable Assets & Liabilities	A			$800,000
Purchase Consideration	B			$900,000
Goodwill	C=B-A			$100,000

2nd investment relationship

In the books of ChallengeMe Pty. Ltd.

Journal Entries

Dr.

Cr.

Date

Particulars

Amount

Business Combination Valuation Entries:

1.a

Accumulated Depreciation A/c.

$270,000

Property, Plant & Equipment A/c.

$100,000

Deferred Tax Liability A/c.

$51,000

Business Combination Valuation Reserve A/c.

$119,000

1.b

Profit after Tax A/c.

$17,000

Accumulated Depreciation A/c.

$17,000

1.c

Deferred Tax Liability A/c.

$5,100

Profit after Tax A/c.

$5,100

1.d

Goodwill A/c.

$100,000

Business Combination Valuation Reserve A/c.

$100,000

Pre-Acquisition Entries:

30/7/2018

Share Capital A/c.

$500,000

Retained Earnings (30/7/2018) A/c.

$200,000

Business Combination Valuation Reserve A/c.

$200,000

Investment in Beach Ltd. A/c.

$900,000

Goodwill Impairment:

Profit after Tax A/c.

$40,000

Accumulated Impairment Loss-Goodwill A/c.

$40,000

Interim Dividend:

Profit after Tax A/c.

$28,000

Deferred Tax Assets A/c.

$12,000

Interim Dividend A/c.

$40,000

Final Dividend:

5.a

Profit after Tax A/c.

$35,000

Deferred Tax Assets A/c.

$15,000

Final Dividend A/c.

$50,000

5.b

Dividend Payable A/c.

$50,000

Accounts Receivable A/c.

$50,000

Consolidation Worksheet:
			Adjustment
Particulars	ChallengeMe Pty. Ltd.	TakeItEasy Ltd.		Debit	Credit		Group
Profit after Tax	$400,000	$190,000	1.b,3.4,5.a	$120,000	$5,100	1.c	$475,100
Retained Earnings – 30 June,2018	$300,000	$200,000	2	$200,000			$300,000
Interim Dividend	($90,000)	($40,000)			($40,000)	4	($90,000)
Final Dividend	($110,000)	($50,000)			($50,000)	5.a	($110,000)
Retained Earnings – 30 June,2019	$500,000	$300,000					$575,100
Share Capital	$1,000,000	$500,000	2	$500,000			$1,000,000
Business Combination Valuation Reserve			2	$200,000	$219,000	1.a,1.d	$19,000
Total Shareholders’ equity	$1,500,000	$800,000					$1,594,100
Accounts Payable	$100,000	$10,000					$110,000
Dividends Payable	$100,000	$50,000	5.b	$50,000			$100,000
Deferred Tax Liability			1.c	$5,100	$51,000	1.a	$45,900
Loan	$670,000	$140,000					$810,000
Total Liabilities & equity	$2,370,000	$1,000,000					$2,660,000
Cash	$80,000	$40,000					$120,000
Accounts Receivable	$50,000	$50,000			$50,000	5.b	$50,000
Inventory	$140,000	$123,000					$263,000
Deferred Tax Assets			4,5.a	$27,000			$27,000
Goodwill			1.d	$100,000			$100,000
Accumulated Impairment Loss					($40,000)	3	($40,000)
Land	$600,000	$400,000					$1,000,000
Property,Plant & Equipment	$900,000	$700,000			$100,000	1.a	$1,500,000
Accumulated Depreciation	($300,000)	($313,000)	1.a	($270,000)	($17,000)	1.b	($360,000)
Investment in Beach Ltd.	$900,000				$900,000	2	$0
Total Assets	$2,370,000	$1,000,000					$2,660,000

In the books of ChallengeMe Pty. Ltd.

Balance Sheet

as on 31st June, 2018

Particulars

Amount

Current Assets:

Cash

$120,000

Accounts Receivable

$50,000

Inventory

$263,000

Deferred Tax Assets

$27,000

Total Current Assets

$460,000

Non-Current Assets:

Goodwill

$100,000

Accumulated Impairment Loss

($40,000)

Land

$1,000,000

Property, Plant& Equipment

$1,500,000

Accumulated Depreciation

($360,000)

Investment in Beach Ltd.

Total Non-Current Assets

$2,200,000

TOTAL ASSETS

$2,660,000

Current Liabilities:

Accounts Payable

$110,000

Dividends Payable

$100,000

Deferred Tax Liability

$45,900

Total Current Liabilities

$255,900

Non-Current Liabilities:

Loan

$810,000

Total Non-Current Liabilities

$810,000

TOTAL LIABILITIES

$1,065,900

Shareholder’s Equity:

Share Capital

$1,000,000

Retained Earnings

$575,100

Business Combination Valuation Reserve

$19,000

Total Shareholder’s Equity

$1,594,100

TOTAL LIABILITIES & EQUITY

$2,660,000

Deferred Tax Worksheet:
Particulars	Carrying Amount	Tax Base	Taxable Temp’y Diffs	Deductible Temp’y Diffs
	$	$	$	$
Assets
Cash	$20,000	$20,000
Inventories	$100,000	$100,000
Accounts Receivable	$100,000	$100,000		$0
Prepaid Insurance	$10,000		$10,000
Plant-at Cost	$400,000	$400,000
Accumulated Depreciation	($80,000)	($100,000)		($20,000)
Liabilities
Accounts Payable	$80,000	$80,000
Provision for Warranties	$20,000			$20,000
Provision for Long Service Leave expenses	$20,000			$20,000
Loan Payable	$200,000	$200,000
Total Temporary differences			$10,000	$20,000
Deferred tax liability (30%)			$3,000
Deferred tax asset (30%)				$6,000

	In the books of I Love Corporate Accounting Ltd.
	Journal Entries
			Dr.	Cr.
Date	Particulars	Amount	Amount
30/06/2017	Income Tax Expense A/c.	Dr.	$93,000
	Income Tax Refundable A/c.	Dr.	$126,000
	To,	Advance Tax Paid A/c.		$219,000
	(Being Income tax expenses adjusted with advance tax paid and income tax refundable recorded)
	Deferred Tax Assets A/c.	Dr.	$6,000
	To,	Deferred Tax Liability A/c.		$3,000
	To,	Income Tax Expense A/c.		$3,000
	(Being deferred tax assets and deferred tax liabilities recorded)
	Profit & loss A/c.		$90,000
	To,	Income Tax Expense A/c.		$90,000
	(Being income tax expense transferred to P/L A/c.)

Workings-

Worksheet for Current Tax Liability/(Refundable):
Particulars	Amount	Amount
Accounting profit before tax		$300,000
Add:
Long Service Leave	$20,000
Warranty Expenses	$30,000
Insurance	$20,000
Depreciation Expense for accounting purpose	$80,000
		$150,000
		$450,000
Less:
Actual Warranty Expense paid	$10,000
Prepaid Insurance	$30,000
Depreciation Expense for Tax Purpose	$100,000	$140,000
Taxable income		$310,000
Tax on taxable income @30%		$93,000
Less: 30% Tax paid on Gross Profit		$219,000
Income Tax Refundable		($126,000)

	Base
Particulars	Accounting	Tax
Plant-at Cost	$400,000	$400,000
Useful Life (in years)	5	4
Depreciation Expenses p.a.	$80,000	$100,000
Period of Utilization (in years)	1	1
Accumulated Depreciation	$80,000	$100,000
Equipment (net Value)	$320,000	$300,000

Requirement a:

In this particular scenario, equity interest are shared by Wiley Plus Ltd and Wiley and Sons Australia Ltd. 70% of shares of Wiley Plus Ltd are acquired by Wiley and Sons Australia Ltd. Goodwill can be determined at the date of acquisition by suing the acquiree’s interest of equity in spite of using the transferred equity interest. Valuation technique can be used for determining the acquirer’s equity interest value (Binkow 2015). The value of the goodwill would be as follows:

Total Equity Capital : $10 million

Less: Non-Controlling Interest: $3 million

Acquired Capital: $7 million

Purchase Consideration: $10 million

Goodwill: $ 3 million

Determination of goodwill amount, amount resulting from loss of impairment is deducted from goodwill amount that is recognized at date of acquisition (Guthrie and Pang 2013). The amount of goodwill would be same as the above as the net fair value of the identifiable assets and liabilities has not been mentioned in the case study.

In event of any acquisition, goodwill can de determined by two possible ways. In first option, goodwill value is obtained as the difference between total fair value of organization and net identifiable assets fair value. In second option, goodwill calculation is done as the difference between acquirer’s share of net identifiable assets fair value and purchase consideration (Walker 2015).

Acquisition Analysis:
Particulars		Carrying Amount	Fair Value	Net Fair Value
Share Capital		$0	$200,000	$200,000
Retained Earnings		$0	$180,000	$180,000
Net Fair Value of Identifiable Assets & Liabilities	A			$380,000
Purchase Consideration	B			$356,000
Gain on Bargain Purchase	C=B-A			($24,000)

In the books of FinalHeadache Ltd.
Consolidated Income Statement
for the period ended 30/6/18
Particulars	Amount
Sales Revenue	$1,056,400
Cost of Goods Sold	($544,000)
Gross Profit	$512,400
Gain on Sale of Plant	$40,000
Expenses:
Administrative expenses	($69,500)
Depreciation	($80,467)
Other Expenses	($173,100)
Profit before Tax	$229,333
Tax Expense	($105,720)
Profit for the year	$123,613
In the books of FinalHeadache Ltd.
Consolidated Balance Sheet
as on 30/6/18
Particulars	Amount
Current Assets:
Accounts Receivable	$121,700
Inventory	$114,000
Deferred Tax Assets	$980
Total Current Assets	$236,680
Non-Current Assets:
Land & Buildings	$550,000
Plant-At Cost	$620,650
Accumulated Depreciation – Plant	($218,717)
Total Non-Current Assets	$951,933
TOTAL ASSETS	$1,188,613
Current Liabilities:
Accounts Payable	$101,000
Tax Payable	$66,300
Deferred Tax Liability	$7,200
Total Current Liabilities	$174,500
Non-Current Liabilities:
Loan	$289,500
Total Non-Current Liabilities	$289,500
TOTAL LIABILITIES	$464,000
Shareholders’ Equity:
Share Capital	$350,000
Retained earnings	$374,613
Total Shareholders’ Equity	$724,613
TOTAL LIABILITIES & EQUITY	$1,188,613

References & Bibliography:

Aasb.gov.au. (2017). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_03-08_COMPoct10_01-11.pdf [Accessed 29 Sep. 2017].

AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.

Aasb.gov.au. (2017). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB3_03-08_COMPoct10_01-11.pdf [Accessed 26 Sep. 2017].

Atanasov, B. and Black, B., 2015. Shock-based inference in corporate finance and accounting research. Critical Finance Review.

Binkow, P., 2015. The Impact of Self?Service Applications on Corporate Accounting and Its Customers. Journal of Corporate Accounting & Finance, 26(6), pp.81-85.

El Dahrawy, K.E.D.M., El Ghany, M.M.A. and Mohamed, O.M.F., 2015, January. THE EFFECT OF ACCOUNTING INFORMATION AND CORPORATE GOVERNANCE MECHANISMS ON DEBT COVENANTS-AN APPLIED STUDY ON FIRMS LISTED IN THE EGYPTIAN STOCK MARKET. In Global Conference on Business & Finance Proceedings (Vol. 10, No. 1, p. 59). Institute for Business & Finance Research.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Holzmann, O.J. and Munter, P., 2014. Accounting and Reporting by Development Stage Enterprises. Journal of Corporate Accounting & Finance, 26(1), pp.69-72.

Kaya, ?., 2017. Accounting Choices in Corporate Financial Reporting: A Literature Review of Positive Accounting Theory. In Accounting and Corporate Reporting-Today and Tomorrow. InTech.

Le Guyader, L.P., 2015. Inversion. Journal of Corporate Accounting & Finance, 26(5), pp.79-84.

Maxfield, S., 2013. Accounting paradigm changes and their impact on corporate social and environmental responsibility. Providence College School of Business, Paper, 4.

Özkol, E., Çelik, M. and Gönen, S., 2014. The Concept of Corporate Social Responsibility and Social Responsibility of Accounting, MUFAD Accounting and Finance Magazine, July 2005., Issue: 27., pg: 134-145.

Toraman, C. and Ö?reten, A., 2013. From the First Corporate Accounting Practices in the Ottoman Empire: Eregli Coal Company and Accounting Book Records.

Walker, D.A., 2015. SEC. Journal of Corporate Accounting & Finance, 27(1), pp.109-110.

Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Study Guide, Volume 1 for Warren/Reeve/Duchac’s Financial & Managerial Accounting, 12th and Corporate Financial Accounting, 12th (Vol. 1). Cengage Learning.

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