ACCO 310 Study Guide - Midterm Guide: Deferral, Accounting, Historical Cost
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Emerald Ltd, a manufacturing company, commenced operations on 1 July 2016 by issuing 350 000 $5.00 shares, payable in full on application on a first-come, first-served basis. By 31 July 2016 the shares were fully subscribed and duly allotted. There were share issue costs of $10 000. No additional shares were issued during the year ending 30 June 2017.
For the year ending 30 June 2018, the company recorded the following aggregate transactions:
| $ | |
| Sales | 5 120 000 |
| Interest income | 34 000 |
| Sundry income | 25 000 |
| Cost of Sales | 2 465 000 |
| Employee benefit expenses | 856 000 |
| Depreciation expense | 244 000 |
| Amortisation - franchise | 25 000 |
| Rental expense | 120 000 |
| Advertising expense | 147 000 |
| Insurance expense | 48 000 |
| Freight out expense | 110 000 |
| Doubtful debts expense | 16 000 |
| Interest expense | 36 000 |
| Borrowing Costs | 9 000 |
| Other expenses | 8 000 |
| Income tax expense | 320 000 |
The following additional information was noted during the preparation of financial statements for the year ended 30 June 2018:
75 000 fully paid ordinary shares have been issued on 1 October 2017 at the price of $4.00.
$135 000 dividends (31.76 cents per share) were declared and paid during the 2018 financial year. A final dividend for 2018 of $51 850 was proposed but not recognised in the financial statements.
There was a gain of $20 000 from the cash flow hedge arrangement during the 2018 financial year. Any gain or loss associated with the cash flow hedge is directly recognised in equity. There was no previously recognised cash flow hedge reserve before the 2018 financial year.
$25 000 of bank loans is repayable within 1 year.
$90 000 of other loans is repayable within 1 year.
The employee benefits of $32 000 are expected to be settled wholly within 12 months.
Emerald Ltd measures inventory at the lower of cost and net realizable value and property, plant and equipment using a cost model.
The summarised balances are provided below:
| Year-end balances, 30 June 2018 | $ |
| Cash on hand | 960 000 |
| Cash on deposit, at call | 82 000 |
| Accounts Receivables | 665 000 |
| Allowance for doubtful debts/ Impairments | 24 000 |
| Other debtors | 27 000 |
| Finished goods inventories, 30 June 2018 | 600 000 |
| Work in Progress inventories 30 June 2018 | 105 000 |
| Land | 94 000 |
| Buildings | 230 000 |
| Accumulated depreciation â buildings | 60 000 |
| Plant and equipment | 1 385 000 |
| Accumulated depreciation â plant and equipment | 330 000 |
| Franchises | 140 000 |
| Accumulated amortisation of franchise | 50 000 |
| Goodwill | 620 000 |
| Bank loans | 92 000 |
| Other loans | 440 000 |
| Accounts payable | 696 000 |
| Provision for employee benefits | 116 000 |
| Income tax payable | 35 000 |
| Deferred tax liability | 140 000 |
| Retained earnings, 30 June 2017 | 225 000 |
| Dividends paid | 135 000 |
| Cash flow hedge reserve (equity) | 20 000 |
Required:
For the year ending 30 June, 2018,
a) Using the pro forma table supplied in appendix B, prepare a preliminary trial balance for Emerald Ltd; (5 Marks)
b) Prepare a statement of profit or loss and comprehensive income for Emerald Ltd in accordance with the requirements of AASB 101. Emerald Ltd uses the single statement format for the statement of comprehensive income and classifies expenses by function within the statement; (18 marks)
c) Prepare a statement of changes in equity for Emerald Ltd in accordance with the requirements of AASB 101; (15 marks)
d) Prepare a statement of financial position for Emerald Ltd in accordance with AASB 101. Use the current/non-current presentation format; (17 marks)
e) Prepare appropriate notes to the accounts. (You do not need to prepare notes related to income taxes. Include the following note as note 1. You may optionally add accounting policies to this note): (25 marks).
â1. Summary of significant accounting policies
Basis of accounting
The financial report is a general purpose financial report which has been prepared on the historical cost basis, except where stated otherwise.
Statement of Compliance
The financial statements have been prepared in accordance with the requirements of the Corporations Act, Australian Accounting Standards which include Australian equivalents to International Financial Reporting Standards (AIFRSs) and AASB Interpretations. Compliance with AIFRSs ensures the financial statements and notes comply with International Financial Reporting Standardsâ
APPENDIX A: PRESENTATION REQUIREMENTS (Departures attract a penalty)
The hard copy of the assignment must be handed in to the lecturer in class. It is also required to be submitted through Turnitin by the due date;
It is worth 20% of the final grade but will be marked out of 100;
The assignment will be marked on the basis of a requirement of "suitable for publication", that is, the relevant statements/notes comprise an external report and each statement is to be presented on one page;
The assignment must be performed individually.
You are to employ an aggregated format whenever appropriate and consistent with provision of minimum line items prescribed in AASB101;
The financial statements and the notes are to be typed in 12 point font;
You are not to use specialized accounting software packages, such as are employed by professional accounting firms, to produce your financial reports;
You are to apply the âcost of salesâ method to the classification of expenses in the income statement (see AASB101 paras 97-105);
You are directed to use the current/non-current format for the statement of financial position (balance sheet) and supply a ânet assetsâ line item;
The notes are to be simplified equivalences to published reports; that means a list of constituent components of a given line item with their respective dollar amounts, not footnotes
Your hard copy assignment is to be collated in the following order:
Coversheet (optional for electronic version but mandatory, signed with ticked module and Turnitin ID, for hard copy), Part A followed by Part B (trial balance, statement of profit or loss comprehensive income, statement of changes in equity, statement of financial position, and notes to the accounts.
APPENDIX B
| Emerald Ltd - Trial Balance as at 30 June 2018 | DR | CR |
| Sales | $â000 | $â000 |
| Interest income | ||
| Sundry income | ||
| Cost of sales | ||
| Employee benefit expenses | ||
| Depreciation expense | ||
| Amortisation - franchise | ||
| Rental expense | ||
| Advertising expense (selling) | ||
| Insurance expense | ||
| Freight out expense | ||
| Doubtful debts expense | ||
| Interest expense | ||
| Borrowing costs | ||
| Other expenses | ||
| Income tax expense | ||
| Cash on hand | ||
| Cash on deposit, at call | ||
| Accounts Receivables | ||
| Allowance for doubtful debts/ Impairments | ||
| Other debtors | ||
| Finished goods inventories, 30 June 2018 | ||
| Work in Progress inventories 30 June 2018 | ||
| Land | ||
| Buildings | ||
| Accumulated depreciation â buildings | ||
| Plant and equipment | ||
| Accumulated depreciation â plant and equipment | ||
| Franchise | ||
| Accumulated amortisation of franchise | ||
| Goodwill | ||
| Bank loans | ||
| Other loans | ||
| Accounts payable | ||
| Provision for employee benefits | ||
| Income tax payable | ||
| Deferred tax liability | ||
| Retained earnings, 30 June 2017 | ||
| Dividends paid | ||
| Cash flow hedge reserve | ||
| Share capital | ||
| Totals |
Hamish Ltd needs your assistance incalculating and disclosing the taxation expense for the financialyear ended 30 June 2018. Hamish Ltd has supplied you with anextract from their income statement and from their balance sheet aswell as a list of other information that need to be considered.
Hamish Ltd | |
Income statement for theyear ended 30 June 2018 | $ |
Income | 904,000 |
Revenue from Sales | 850,000 |
Interest Revenue | 18,000 |
Rent Revenue | 36,000 |
Expenses | 647,000 |
Administration and sellingexpenses | 133,000 |
Wages and salary expenses | 250,000 |
Doubtful debts expense | 20,000 |
Goodwill impairment | 20,000 |
Insurance expense | 54,000 |
Depreciation expense - plant | 90,000 |
Long-service leave expenses | 35,000 |
Warrantee expenses | 45,000 |
Net Profit beforetax | 257,000 |
Hamish Ltd | |
Extract from the Balancesheet as at 30 June 2018 | $ |
Assets | |
Cash | 40,000 |
Inventory | 90,000 |
Accounts receivable (net) | 80,000 |
Prepaid insurance | ? |
Interest receivable | 6,000 |
Goodwill | ? |
Plant | ? |
Liabilities | |
Accounts payable | 50,000 |
Wages and salaries owing | 30,000 |
Provision for long-service leaveexpenses | 25,000 |
Rent revenue received inadvance | ? |
Provision for warranteeexpenses | 30,000 |
Loan payable | 200,000 |
The following information relates tothe year ended 30 June 2018. Revenue from sales, including those oncredit terms, is taxable when the sales are made. Administrationand salary expenses are tax deductible when they are incurred. Thisalso applies to wages and salary expenses. The following items thatare included in the financial statements of Hamish Ltd are treateddifferently for accounting and tax purposes:
At year end, accounts receivable owed to Hamish Ltd was $80,000net after the allowance for doubtful debts. Since Hamish Ltdexpects that some of its debtors may be doubtful, it creates anallowance for doubtful debts. The opening balance (on 1 July 2017)of the allowance for doubtful debts was $5,000. The doubtful debtsexpense is not tax deductible until the debtor is actually writtenoff as bad.
The insurance expense amounts to $4,500 per month. During theyear $60,000 was actually paid for insurance and on 30 June 2017$13,500 was prepaid for the 2017 financial year. Insurance expenseis tax deductible when it is paid.
Interest amounting to $12,000 was received during the year andan additional $6,000 was accrued to account for the total interestearned of $18,000 for the year. Interest is taxable when it isreceived.
The plant was acquired on 1 July 2016 at a cost of $500,000. Theplant has an economic life of 5 years with a residual value of$50,000. The straight line method of depreciation is used todepreciate the plant for accounting purposes. For taxationpurposes, the straight line method over 4 years is used tocalculate the depreciation, but only the cost of the plant isdepreciable (ignore the residual for tax purposes).
Hamish Ltd paid an amount of $10,000 during the year in respectof long service leave. In addition an amount of $25,000 had beenaccrued for accounting purposes during the year in respect of longservice leave. Tax deductions for this item are available only whenthe amount is paid. At 30 June 2017 there was no accrual for longservice leave.
During the year $45,000 was received with respect to rentrevenue, of which $36,000 relates to the current year. This is thefirst year that Hamish Ltd received any rent. Rent received istaxable when it is received.
Warrantee expenses incurred amount to $45,000, of which $15,000has been paid by year end. Warrantee expenses are only taxdeductible if they have been paid. At 30 June 2017 there was noaccrual for warrantee expenses.
During the year the goodwill with an opening balance of $100,000was impaired by $20,000. Goodwill impairment is not a deductibleexpense for tax purposes.
At the beginning of the year (i.e., at the 1st of July 2017),total taxable temporary differences amounted to $48,500 and totaldeductible temporary differences amounted to $5,000.
The tax rate was always 33% but changedto 28% during the current year.
Required:
Calculate the deferred taxation that Hamish Ltd should providefor the year ended 30 June 2018. Complete the worksheet for thispurpose. Prepare the journal entries (with narrations) to accountfor Hamish Ltdâs tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12.
Calculate the taxable income and current tax for Hamish Ltd forthe year ended 30 June 2018. Provide the journal entries that willbe needed to account for current tax for the 2018 financialyear.
Show an extract from the income statement and the notes to theincome statement of Hamish Ltd that clearly shows the requireddisclosure of the tax expense for the year ended 30 June 2018 inaccordance with NZ IAS 12. (9
Hamish Ltd has a deferred tax asset as well as a deferred taxliability at 30 June 2018 in accordance to your calculation thatwould be disclosed in accordance with NZ IAS 12. The financialdirector is concerned with this situation as he argues that the IRDdoes not owe them anything and neither does Hamish owe anything tothe IRD, other than the current tax payable. So why should amountsthat are not currently an asset or liability be disclosed as such?Give a well-reasoned answer to the financial director.
I need these ratios:
Return on Assets
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