ACT503 Corporate Accounting

Published : 27-Sep,2021 | Views : 10

Question:

ShouldBeMyOwnWork Ltd had the following balances in their books showing Carrying Amount and Tax Base amounts at 30 June 2018 which creates temporary differences: ShouldBeMyOwnWork Ltd depreciates computers over five years in its accounting records, but over three years for tax purposes. The straight-line method is used. During the year,
ShouldBeMyOwnWork Ltd wrote off bad debts amounting to $15,000. Warranty costs of $70,000 were paid during the year. No amounts were paid for long-service leave during the year.The following information is extracted from the statement of financial position at 30 June 2019:
Carrying Amount Tax Base
Asset or Liability ($'000) ($'000)
Computers at cost 300 300
Accumulated depreciation (60) (100)
Computers, net 240 200
Accounts receivable 100 100
Allowance for doubful debts (10) 0
Accounts receivable, net 90 100
Provision for warranty costs 30 0
Provision for employee benefits (LSL) 20 0

The following information is available for the following year, the year ending 30 June 2019.Statement of profit or loss and other comprehensive income for ShouldBeMyOwnWork Ltd for the year ending 30 June 2019 ($'000)
Revenue 4,000
Cost of goods sold expense (1,800)
Depreciation expense (60)
Warranty expense (90)
Bad and doubtful debts expense (25)
Other expenses (1,375)
Profit before tax 650 Other comprehensive income Nil
($'000)
Assets
Accounts Receivable 120
Allowance for doubful debts (20)
Liabilities
Provision for warranty costs 50
Provision for employee benefits (LSL) 30

There was no acquisition of plant and equipment during the year.The tax rate as at 30 June 2018 and 30 June 2019 was 30 per cent
Required:
a) Calculate the amount of each of ShouldBeMyOwnWork Ltd’s temporary differences, if any, at 30 June 2018, and state whether it is deductible or taxable
b) What is the balance of the deferred tax liability and deferred tax asset, if any, as at 30 June 2018
c) Calculate ShouldBeMyOwnWork Ltd’s taxable income for the year ending 30 June 2019.
d) Prepare journal entries to record current tax and deferred tax for the year ending 30 June 2019.

In accounting for employee benefits wherein under their contract with employers, employees can receive various forms of benefits in return for their services. Such benefits will usually result to recognition of expenses by the employer, and if not paid as at the end of the reporting period, becomes liabilities from the perspective of the employer.If the services of the employees are used to generate items that are expected to provide future economic benefits -- for example, employees generate Inventories in the form of WIP (work in progress) -- then amounts paid or payable to employees may be considered to be part of the cost of the respective assets.

Required: Aside from the above-mentioned Inventories, illustrate or describe other scenarios you can think of when would payments made to employees can be considered to be an Asset Provide possible journal entries, if needed. Maximum 200 words.

Required
State whether the following assets may be revalued, support your answer with a brief explanation to your reason. (maximum 100 words in each scenario). Prepare journal entries for any revaluations permitted by accounting standards. Assume that each item listed below represents a separate class of assets
a) NT News OnTheGo Ltd has developed a masthead for its newspaper to the point where it is a very valuable asset. Although the masthead is not currently recognised, management believes it could be sold for at least $3 million.
b) John Wiley & Sons Australasia Ltd purchased a publishing title two years ago for $1.2 million when another publisher went into liquidation. The book lhas been very successful and management believes that it could probably sell $1.5 million if ever they put it on the market.
c) Booze Your Juice Ltd acquired a franchise for an ice-cream stand at a beach at a cost of $100 000. There is great demand for this type of franchise as evidenced by recent sales of equivalent franchises at other beaches. The current market price of such a franchise is $200 000.
d) DJB Ltd has deferred development costs of $520 000 and the estimated recoverable amount of development project is $860 000.

You own a financial accounting services called MyNextProblem Consultancy Ltd. You have been invited to lecture at Darwin Charles Uni and provide advice to students of the requirements of AASB 10 in respect of the control criterion.
Required: For each of the below independent situation, determine whether or not control exists and, if so, by which party. Discuss the reasons for your answers. Where possible, support your answer with excerpts from AASB 10.You will be marked based on the explanation of your answer and not the Standard’s wordings itself. Maximum 150 words per situation, excluding any words quoted from the standard.The following are independent situations:

a) ACT503 Ltd, a supplier of sailing equipment, was incorporated 10 years ago and is 60 per cent owned by ACT305 Group. ACT503 Ltd has been a very successful business, averaging annual profits of $500 000. However, during the past two years the company has run into financial difficulties and has defaulted on its loan with its bank.Consequently, the bank has used the powers in the load agreement to monitor the company’s activities closely in order to obtain repayment of its debt. The company must now obtain the bank’s authorisation for any expenditure over $5 000 and no
changes in operations of the company are permitted without the bank’s approval.

b) GyK Pty Ltd is a family-run book publisher that has purposely refrained from using high-technology equipment over the past five years as the directors (the G family) considered it to be a ‘fad’ and a waste of the company’s resources. As a result, the company’s antiquated equipment has failed to produce quality material and has been very inefficient compared with GyK’s competitors. During the current year, the company’s bankers took possession of the company’s assets, converted all the debt into equity and two directors of the bank were appointed to GyK’s board, which now
totals four people. The bank is undecided whether it should sell the company’s assets,which have little recoverable value, or reject further equity into the company, purchase more advanced equipment and attempt to trade on and sell the business as agoing concern.
c) ACT502 Ltd is a 30 per cent shareholder of Investment Co. Pty Ltd. The other shareholders have smaller shareholdings (approximately 8 to 12 per cent) and are always too busy to attend annual general meetings. ACT502 has two non-executive seats on the board and the remaining three are held by other shareholders – one chief executive officer who is a shareholder and two non-executives –who do make an attempt to attend board meetings.

ChallengeMe Pty Ltd acquired 100 per cent of the issued capital of TakeItEasy Ltd on 30 June 2018 for $900 000, when the statement of financial position of TakeItEasy Ltd was as follows:
Additional Information:
Tax rate is 30 per cent
As at the date of acquisition, all assets of TakeItEasy Ltd were at fair value, other than the property, plant and equipment, which had a fair value of $530 000. TakeItEasy Ltd adopts the cost model for measuring its property, plant and equipment. The property, plant and equipment is expected to have a remaining useful life of 10 years, and no
residual value.
One year following acquisition it was considered that TakeItEasy Ltd’s goodwill had a recoverable amount of $60 000.
TakeItEasy Ltd declared a dividend of $40 000 on 10 July 2018, with the dividends being paid from pre-acquisition retained earnings.

Answer:

The given statement depict that an organization could make a payment to its employees on the basis of the assets of the organization. According to this case, the employee has transformed the simple and raw material into the WIP (work in progress) form. And for converting the inventory into WIP, the employee has been paid by the company. Numerous other transactions also take place in an organization where the firm pays the amount as a salary to the employees by considering the assets of the business (Mutchler Chang & Prawitt, 2001).

Such as if an organization deal with one of his employee to sell his vehicle or truck to the organization and then organization uses this vehicle to supply the finished goods to the distributors than the amount paid by the company to the employee by the name of the cars price also affect the asset account. The entry of this statement is as follows:

Cash a/c Dr. 5,00,000

To Motor vehicle a/c 5,00,000

(Being vehicle purchased.)

Further, various other transactions are also exist in which the employee as well as the asset account of the company get affected such as if the company offers its top level management, some shares on the basis of bonus. The entry of this statement is as follows:

Shares a/c Dr 25,000

To employees a/c 25,000

So it has been found that there are various other transactions are also existed in which the employee as well as the asset account of the company gets affected.

This situation represent that the organization has launched a innovative section in the operations and due to which the worth of the company’s assets has been improved and the administration has checked the condition of marketing and through that it has been assumed by the management of the company that the asset’s worth has been enhanced and thus the sales value of assets is $ 3 million but this case scenario express that it is not the perfect time and scenario for the organization to revalue the asset (McGrath et al, 2001).
This situation express that the organization has been liquidated before 2 years and due to the liquidation situation, the plants and machineries are free and no one is taking the perfect use of that machineries. So the management has taken a decision to enter into the market to sell out the machineries (Abdul Nasser et al, 2006). According to the given case, it is necessary for the organization to conduct the revaluation technique to recognize the value of asset currently. This would help the organization to identify the fair value of the machineries and thus the machineries amount could be recognized accordingly.

Machineries a/c Dr 30,000

To revaluation account 30,000

Revaluation a/c Dr. 50,000

To share capital a/c 50,000

This given case expresses that an organization has acquired a business of franchise the total worth of that franchise is $ 1,00,000 and more, the current price in the market of the acquired franchise is worth $ 2,00,000. According to this, it has been identified that the fair value of the franchise is lower than the market value of the franchise. But in the given case, the company must not revalue the asset and must record the value according to the buy price.

According to the given case, organization has paid the deferred development cost which is $5,20,000 and the organization is identifying that the total amount would be get back by the company, would be worth of $ 8,60,000 in consideration of total extra expenses. According to the given case, it is necessary for the business to conduct revaluation technique to known the fair value of the assets according to the development cost (Dopuch, King & Schwartz, 2004). The development cost has been occurred in the organization of the franchise is for long term and thus this amount would be included in the total assets value. Thus the journal entry of revaluation would be as follows:

Machineries a/c Dr 5,20,000

To revaluation account 5,20,000

(The excess amount of revaluation has been credited.)

Revaluation a/c Dr. 5,20,000

To share capital a/c 5,20,000

(Excess amount has been transferred into the share capital.)

According to the given case study, the organization was operating its business efficiently but because of few external issues, organization has faced various problems of lower stability and profitability and due to that, the bank has expressed that the company has became defaulted. Due to that, the bank has begun to make a direct control over the activities and the operations of the company which are more than $ 5000. This express that the bank’s control over business’s activities, operations and the transaction is genuine. Due to the face that the bank is expecting from the company to pay back the entire loan that has been taken by the company from the bank. According to the current situation of the company, the condition of company is becoming worst and thus the bank is required to take some strict option to manage the funds of the company so that the debts could be repaid (Dopuch, King & Schwartz, 2001).
According to the given case study, it has been analyzed that the company’s directors have determined to discontinue it to accept the new high technology. This express that numerous people are performing their duties in the company and the director f G family has declined them to work according to the new technology and because of that face, the employees are working according to the old technology (Dopuch et al, 2001). Thus the machineries of the company are not offering the quality product and the entire marketplace has been grabbed by other players. Due to that, the condition of the company became lower. According to the given case study, company is required to buy higher machineries and technology and should start the procedure again on the basis of going concern concept. So that the extra invested amount of bank could be of some use and the condition of the company could be back on the right track again.
According to the given case study, there are 2 seats vacant in the ACT502 company of non executive members and in current scenario, the balanced 3 seats has been equipped by the chief executive officer which is one of the share holders of the company and 2 non executive officer (Abu Bakar et al, 2005). It has been recognized that the directors (non executive members) are showing their interest towards the business meeting sand annual meetings of the company whereas the 30% share holder of the company is attending every meeting of the company, so there are more chances of fraud in the company and that is why the company is suggested to ask the non executive members of the board to attend every meeting and look over the entire activities of the business which could affect the business. And at the same time, company is also required to fulfil the vacant seats as soon as possible (Diamont, 2004).
According to the given case study, 2 directors are only there in the company which are B1 limited with 50% shares and B2 limited with 50% shares. Company is not enjoying the investment from any other party. There are only 2 people to hold the entire shares of the company. But, a management team has been appointed by the company to look over the entire activities of the business in a proper manner. Company has agreed to pay 50% of total net profit after tax to the management team. At the same time, according to the contract the B1 limited is only responsible for 10 options in the company which is quite valid as the organization is a public limited company and in such kind of organization, shareholders are only responsible for their holdings. The liabilities are limited in that case and thus the contract is valid.
According to the given case study, there are 2 major shareholders in the organization which own the 51% shares and 49% of shares of the company. The company which is holding 51% shares in the company has only 2 seats in the company’s board and the company which is holding 49% shares has 3 seats in the company’s board. The first company has given a statement and according to that company is bit happy with the stability and performance and the position of the company and thus the company has allowed the 49% holding company to manage the entire business activities and operations of the company, due to their management style and managing every issue in the company (Myring And Bloom, 2003). 51% share holding company is the passive company which only invest the amount in the business and don’t directly participate in the performance of the business. Being a passive director is valid in a company.
According to the given case study, there are 3 major shareholders in the organization which own the 33.33% of the company respectively. The name of the shareholder is P limited, G limited and H limited. The P limited and H limited is only investing their amount in their business and they are not directly participating into the activities and operations of the company. The passive companies have given a statement and according to those companies are bit happy with the stability and performance and the position of the company and thus the companies have allowed G limited company to manage the entire business activities and operations of the company, due to their management style and managing every issue in the company (Shockley, 1981). P limited and H limited company is the passive company which only invest the amount in the business and don’t directly participate in the performance of the business. Being a passive director is valid in a company.

References:

Abdul Nasser, A.T., Syed Mustapha Nazri, S.N.F., &Hudaib, M. (2006). Auditor-client

Abu Bakar, N.B., Abdul Rahman, A.R., & Abdul Rashid, H.M. (2005). Factors influencing

and Taxation,5(2), 231-248.

Diamant, A. (2004). Revisors oberoende (Doctoral dissertation, Iustus Förlag AB).

Dopuch, N., King, R. R., & Schwartz, R. (2001). Auditors’ independence: appearance vs. fact. Working paper, Washington University.

Dopuch, N., King, R. R., & Schwartz, R. (2004). Contingent rents and auditors' independence: Appearance vs fact. Asia-Pacific Journal of Accounting & Economics, 11(1), 47-70.

McGrath, S., Siegel, A., Dunfee, T. W., Glazer, A. S., & Jaenicke, H. R. (2001). A framework for auditor independence. Journal of Accountancy, 191(1), 39.

Mutchler, J., Chang, S., & Prawitt, D. (2001). Independence and objectivity: A framework for internal auditors. Altamonte Springs, FL: Institute of Internal Auditors.

Myring, M. And Bloom, R. (2003). ISB?s conceptual framework for auditor?s independence. The CPA Journal; (1)3.

Shockley, R. A. (1981). Perceptions of auditors' independence: An empirical analysis. Accounting Review, 785-800.

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