HI5020 Corporate Accounting Online Tutoring
Question 1 (10 marks)
Prepare general journal entries to record the following unrelated transactions of a limited company:
- Payment of an interim dividend of $400,000 (in cash).
- Declaration of a final dividend of $840,000.
- Transfer of $240,000 to the general reserve from retained earnings.
- Payment of 600,000 bonus shares, fully paid at $1 per share from a general reserve.
- Issued 500,000 shares for $30,000,000 by a private placement.
ANSWER: ** Answer box will enlarge as you type
- Interim Dividend 400,000
Bank 400,000
(To record interim dividend paid)
At the end of the financial year:
Retained earnings 400,000
Interim Dividend 400,000
(To record recognition of interim dividend paid from retained earnings)
- Final Dividend declared 840,000
Dividend Payable 840,000
(To record final dividend declared for year)
Retained earnings 840,000
Final Dividend declared 840,000
(To record payment of dividend from retained earnings)
- Retained earnings 240,000
General reserve 240,000
(To record transfer to general reserve from retained earnings)
- General reserve 600,000
Share Capital 600,000
(To record issue of bonus shares from a general reserve)
- Cash 30,000,000
Share Capital 30,000,000
(To record issue of 500,000 shares at $60 by private placement)
Question 2 (10 marks)
On 1 January 2019 Liam Ltd acquired 90% of the issued shares of Ian Ltd. During the year ended 31 December 2019 the following intra group transactions occurred:
- Sales of inventory:
Ian Ltd sold inventory to Liam Ltd $360,000. This inventory costed Ian Ltd $300,000. At 31 December 2019 Liam Ltd held 50% of the inventory acquired from Ian Ltd.
- Intragroup sale of equipment:
An item of equipment originally acquired by Liam Ltd on 1 January 2017 at a cost of $400,000 was sold to Ian Ltd on 1 January 2019 for $340,000. Liam Ltd had depreciated this asset at 10% per annum on a straight-line basis with no scrap value. There is no change in the asset expected life subsequent to the sale.
- During the year ended 31 December 2019 the following dividends were paid:
- Liam Ltd $100,000
- Ian Ltd $40,000
- On 30 June 2019 Liam Ltd lent Ian Ltd $100,000. Interest on this loan at 8% was paid up to 31 December 2019.
Required:
Prepare the consolidation journal entries required to eliminate the above intragroup transactions for the year ended 31 December 2019. Assume a tax rate of 30%.
ANSWER:
Cash 360,000
Sales Revenue 360,000
(To record the sales revenue)
Cost of sales 300,000
Inventory 300000
(To record a cost of sale of inventory)
Cash 340000
Accumulated Depreciation 40000
Equipment 400000
Gain on sale of Equipment 20000
(To record gain on sale of equipment)
Dividends Payable 100000
Dividend receivable 100000
(To record dividend paid)
Loan Account 100,000
Cash 100,000
(To record a loan amount)
Interest expense 8000
Interest payable 8000
(To record an interest due on Ian Ltd)
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Question 3 (10 marks)
KGB Security Ltd provides the following information at 30 June 2019 (the first year of operation of the company)
Statement of Financial Position (Balance Sheet)
As at 30 June 2019
| Assets | $000 | Liabilities and owner’s equity | $000 |
| Prepayments | 20 | Provision for Annual Leave | 90 |
| Accounts Receivable | 360 | Loan | 320 |
| Allowance for Bad Debts | (40) | Share Capital | 1,600 |
| Inventory | 600 | Retained Earnings | 330 |
| Plant and Equipment | 1,800 | ||
| Accum Depreciation | (400) | ||
| 2,340 | 2,340 |
Other Information:
- For the year ended 30 June 2019 the company made a net profit before tax of $500,000. Dividends of $170,000 were paid.
- Temporary differences include:
- Annual Leave – no payments made during the year
- Depreciation of Plant and Equipment for tax purposes $360,000
- Bad Debts written off $10,000 (against Allowance for Bad Debts)
- Prepayments (Previously paid in cash)
- Included in expenses for the year is entertainment expenses of $6,000.
- Assuming a tax rate of 30%.
Required:
- Calculate the current tax liability at 30 June 2019. (4 marks)
- Calculate the amount of deferred tax assets/liabilities at 30 June 2019. (3 marks)
- Journal entry to record income tax for the year. (3 marks)
ANSWER:
a)
| KGB Security Ltd | ||
| Current Tax Worksheet | ||
| (For the year ended 30 June 2019) | ||
| Profit before tax | $500,000 | |
| Add: | ||
| Annual Leave Expense | 0 | |
| Depreciation Expense | 400 | |
| Entertainment Expense | 6000 | (6400) |
| $506,400 | ||
| Deduct: | ||
| Depreciation of Plant and Equip: for tax | 360,000 | |
| Bad Debts write off | 10,000 | (370,000) |
| Taxable Income | $136,400 | |
| Current Tax Liability @ 30% | $40,920 | |
- b)
| Carrying amount | Tax base | temporary difference | |
| Plant and Equipment | 1800000 | 1800000 | – |
| Accumulated depreciation | 400000 | 1800000 | – |
| 1400000 | 0 | 1400000 |
The carrying amount of the asset exceeds the tax base, a deferred tax liability exists. The balance of the deferred tax liability is $1400000 * 30 = $420000
- c) Income Tax Expense 40,920
Current Tax Liability 40920
Question 4 (10 marks)
Humorous Ltd had cash and cash equivalents at 1 July 2018 of $ 1,400,000. The transactions of Humorous Ltd for the year to 30 June 2019 are as follows:
- Borrowed $180,000 with a 6-month loan payable.
- Received $2,280,000 cash from accounts receivable.
- Sold for $240,000 cash a plant asset with a carrying amount of $160,000.
- Issued ordinary shares for $720,000 cash.
- Purchased a plant asset for $530,000; $162,000 in cash and $368,000 on loan.
- Exchanged 90,000 shares for land with a fair value of $900,000.
- Received a $200,000 dividend in cash.
- Received $40,000 interest from term deposit.
- Invested $600,000 cash on the short-term money market.
- Paid fixed-term loan principal of $480,000 and interest of $48,000.
- Cash payments for suppliers’ accounts $1,500,000.
- Dividend paid during the period $120,000.
- Insurance expense shown in the income statement is $84,000. At the end of the year the balance sheet shows prepaid insurance expense of $42,000. There was a prepaid insurance expense of $36,000 at the beginning of the year.
Required:
Prepare the statement of cash flows of Humorous Ltd for the year to 30 June 2019.
ANSWER:
| HUMOROUS LTD | |
| STATEMENT OF CASH FLOWS | |
| FOR THE YEAR ENDED 30 JUNE 2019 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |
| Cash recipts from customers | 2,280,000 |
| Cash paid to suppliers | (1,500,000) |
| Cash flow from operations | 780,000 |
| Insurance expense | (90,000) |
| Interest paid | (48,000) |
| Interest received | (40,000) |
| NET CASH FLOWS FROM OPERATING ACTIVITIES | 602,000 |
| CASH FLOW FROM INVESTING ACTIVITIES | |
| Proceeds from sale of plant | 240,000 |
| Purchase of plant | (162,000) |
| Dividends received | 200,000 |
| NET CASH FLOWS FROM INVESTING ACTIVITIES | 278,000 |
| CASH FLOW FROM FINANCING ACTIVITIES | |
| Proceeds from issue of shares | 720,000 |
| Proceeds from short term borrowings | 180,000 |
| Repayment of borrowings | (480,000) |
| Dividend paid | (120,000) |
| NET CASH FLOW FROM FINANCING ACTIVITIES | 300,000 |
| NET INCREASE/ DECREASE IN CASH AND CASH EQUIVALENTS | 1,180,000 |
| ADD: OPENING CASH AND CASH EQUIVALENTS | 1,400,000 |
| CLOSING CASH AND CASH EQUIVALENTS | 2,580,000 |
Question 5 (10 marks)
On January 1, 2019, Horizon Corporation, an UK based company acquired Spectacular Company as a subsidiary in Australia with an initial investment cost of 360,000 Australian dollars (AUD). Spectacular’s December 31, 2019, trial balance in AUD is as follows:
| Debit (AUD) | Credit(AUD) | |
| Cash at bank | 42,000 | |
| Accounts Receivable | 120,000 | |
| Receivable from Horizon | 30,000 | |
| Inventory | 150,000 | |
| Machinery | 600,000 | |
| Accumulated Depreciation | 60,000 | |
| Accounts Payable | 72,000 | |
| Debenture liability | 300,000 | |
| Share Capital | 360,000 | |
| Sales | 900,000 | |
| Cost of goods sold | 420,000 | |
| Depreciation Expense | 60,000 | |
| Operating Expense | 180,000 | |
| Dividend paid | 90,000 | |
| Total | 1,692,000 | 1,692,000 |
Other Information:
- The receivable from Horizon is denominated in AUD. Horizon’s books show a AUD 24,000 payable to Spectacular.
- Purchases of inventory goods are made evenly during the year. Items in the ending inventory were purchased November 1.
- The Machinery is depreciated by the straight-line method with a 10-year life and no residual value. A full year’s depreciation is taken in the year of acquisition. The equipment was acquired on March 1.
- The dividends were declared and paid on November 1.
- Exchange rates between AUD and Euro (€) were as follows:
| January 1 | AUD 1 = € 0.73 |
| March 1 | AUD 1 = € 0.74 |
| November 1 | AUD 1 = € 0.77 |
| December 31 | AUD 1 = € 0.80 |
| 2019 Average | AUD 1 = € 0.75 |
- AUD is the functional currency.
Required:
- Prepare a schedule translating the December 31, 2019, trial balance from AUD to €. (8 marks)
- Why is the translation adjustment reported on Horizon’s other comprehensive income statement rather than on the Profit and Loss statement? (2 marks)
ANSWER:
a)Schedule Translating the December 31, 2019
| Debit (AUD) | Credit(AUD) | Exchange rate | Euro (€) | |
| Cash at bank | 42,000 | 0.8 | 33600 | |
| Accounts Receivable | 120,000 | 0.8 | 96000 | |
| Receivable from Horizon | 30,000 | 0.8 | 24000 | |
| Inventory | 150,000 | 0.77 | 115500 | |
| Machinery | 600,000 | 0.74 | 444000 | |
| Accumulated Depreciation | 60,000 | 0.74 | 44400 | |
| Accounts Payable | 72,000 | 0.8 | 57600 | |
| Debenture liability | 300,000 | 0.8 | 240000 | |
| Share Capital | 360,000 | 0.73 | 262800 | |
| Sales | 900,000 | 0.75 | 675000 | |
| Cost of goods sold | 420,000 | 0.8 | 336000 | |
| Depreciation Expense | 60,000 | 0.74 | 44400 | |
| Operating Expense | 180,000 | 0.8 | 144000 | |
| Dividend paid | 90,000 | 0.77 | 69300 | |
| Other Comprehensive Income | – | – | – | |
| Total Comprehensive Income | 1,692,000 | 1,692,000 | 2586600 |
- b) Paragraphs 21 and 23 of AASB 121 provide the rules for translating one currency into another currency. In relation to items included within the statement of profit or loss and other comprehensive income. However, the Financial Accounting Standards Board (FASB) has continued to emphasize a financial measure called other comprehensive income (OCI) as a valuable financial analysis tool. The FASB’s stated goal, in general, is to issue guidance “to improve the comparability, consistency, and transparency of financial reporting.” To accomplish this, it has sought to “increase the prominence of items reported in other comprehensive income.” That’s why, the translation adjustment is reported on Horizon’s other comprehensive income statement rather than on the Profit and Loss statement.
