Essos Ltd Case Summary
Westros Ltd buys a throne building business from Essos Ltd on 1st July 2014. The items are shown at their carrying amount in Essos Ltd’s accounting records and at the fair values estimated by Westros Ltd.
Item
Cost
Accumulated depreciation/ amortisation
Carrying amount
Fair value
$
$
$
$
Accounts receivable
100,000
100,000
90,000
Land and buildings
800,000
400,000
600,000
Plant & Equipment
250,000
200,000
50,000
70,000
Precious metals and jewels
525,000
525,000
570,000
Accounts payable
105,000
105,000
105,000
Included in the purchases by Westros Ltd was an identifiable intangible asset for a Patent developed by Essos Ltd for securing the gilding to the thrones. The Patent has a fair value of $100,000.
The purchase consideration for the business consisted of $750,000 in cash, plus 500,000 ordinary shares in Westros Ltd, fully paid. Westros Ltd ordinary shares are presently trading on the stock exchange for $1.50. Westros Ltd also incurred legal fees of $2,500.
Required:
Prepare the journal entries to record the purchase by Westros Ltd and the payment to Essos Ltd.
Key numbers:
Goodwill $175,000 Question 2 – 10 marks
Arryn Ltd, an Australian company, acquires all the issued shares of Greyjoy Inc, a company operating in the United …show more content…
States, on 1 July 2013 at a cost of AUD $450,000.
Relevant exchange rates for the year to 30 June 2014 are as follows:
Exchange rates
1$US = $AUD
1 July 2013
1.70
Average rate for year
1.80
Ending inventory
1.95
30 June 2014
2.00
The income statement of Greyjoy Inc for the year to 30 June 2014 (i.e. one year after the date of acquisition) is shown below:
Income Statement for the year ended 30 June 2014
$US
$000
Sales revenue
1,000
Cost of sales
Opening inventory
200
Purchases
800
Ending inventory
180
820
Gross Profit
180
Expenses
Administration
10
Interest
20
Depreciation
40
Total expenses
70
Operating profit before tax
110
Income tax expense
50
Operating profit after tax
60
Retained Profits - 1 July 2013
60
Total available for appropriation
120
Interim dividend paid
20
Retained Profits - 30 June 2014
100
Required
Translate the income statement of Greyjoy Inc for the financial period 30 June 2014 in accordance with AASB 121.
Key numbers:
Translated retained profits – 30th June 2014
203
Question 3 – 22 marks
On 1st July 2014 Lannister Ltd entered into a contract with Stark Ltd to lease equipment for four years at an annual cost of $40,000 payable on the 30th June each year.
Included in this $40,000 is $10,000 for insurance and maintenance. An initial amount of $15,000 is payable at the inception of the lease. The contract provides for a guaranteed residual at the end of the lease term of $12,000. The rate of interest implicit in the lease is 12% and the reporting date is 30th June. The machinery will depreciate on a straight line basis and is expected to have an economic useful life of 5 years. At the inception of the lease the machinery had a fair value of
$113,745.
Required
According to the requirements of AASB 117:
From the point of view of Lannister Ltd, show calculations that support that the implicit interest rate in the lease is 12%.
The Present Value tables are shown below.
[6 marks]
Prepare general journal entries in the books of the lessee, Lannister Ltd, to record the lease over its life. Narrations are not required for the general journal. Round all calculations to the nearest dollar where necessary.
[16 marks]
Present Value Tables:
Present Value of $1 in n periods [Appendix A] n 4.0%
5.0%
6.0%
7.0%
8.0%
10.0%
12.0%
15.0%
1
0.9615
0.9524
0.9434
0.9346
0.9259
0.9091
0.8929
0.8696
2
0.9246
0.9070
0.8900
0.8734
0.8573
0.8264
0.7972
0.7561
3
0.8890
0.8638
0.8396
0.8163
0.7938
0.7513
0.7118
0.6575
4
0.8548
0.8227
0.7921
0.7629
0.7350
0.6830
0.6355
0.5718
5
0.8219
0.7835
0.7473
0.7130
0.6806
0.6209
0.5674
0.4972
Present Value of an annuity of $1 per period for n periods [Appendix B] n 4.0%
5.0%
6.0%
7.0%
8.0%
10.0%
12.0%
15.0%
1
0.9615
0.9524
0.9434
0.9346
0.9259
0.9091
0.8929
0.8696
2
1.8861
1.8594
1.8334
1.8080
1.7833
1.7355
1.6901
1.6257
3
2.7751
2.7232
2.6730
2.6243
2.5771
2.4869
2.4018
2.2832
4
3.6299
3.5460
3.4651
3.3872
3.3121
3.1699
3.0373
2.8550
5
4.4518
4.3295
4.2124
4.1002
3.9927
3.7908
3.6048
3.3522 Key entries:
General Journal
Date
Particulars
Debit
$
Credit
$
2015
30 June
Interest on lease
11,849
Lease liability
18,151
Insurance and maintenance
10,000
Bank
40,000
(To record lease interest and payment after one year)
Amortisation of lease
22,749
Accumulated amortisation of lease
22,749
(To record amortisation of lease)
[$113,745/5 years]
Question 4 – 21 marks
One year after the commencement of business, Tyrell Ltd determined its accounting profit before tax for the year ended 30 June 2010 to be $260,000. Included in this profit are the following items:
$
Entertainment expense
2,000
Depreciation expense – buildings
40,000
Depreciation expense – plant
50,000
Doubtful debt expense
5,100
Annual leave expense
46,000
Warranty expense
17,000
Insurance expense
4,200
The company’s Balance Sheet as at 30 June 2010 showed the following assets and liabilities:
$
$
Assets
Cash
1,500
Accounts receivable
28,000
Less allowance for doubtful debts
1,600
26,400
Inventory
21,000
Prepaid insurance
500
Land
175,000
Buildings
800,000
Less Accumulated depreciation
40,000
760,000
Plant
500,000
Less Accumulated depreciation
50,000
450,000
Liabilities
Accounts payable
35,000
Provision for annual leave
30,000
Prepaid revenue
5,000
Other information:
The plant is being depreciated equally over the useful life of 10 years for accounting purposes, but for taxation purposes it is being depreciated using the diminishing balance method at a rate of 25%.
For accounting purposes the buildings are depreciated on a straight line basis over their useful life of 20 years. For taxation purposes however, Tyrell Ltd have decided to use the diminishing balance method, at a rate of 5%.
Bad debts of $3,500 were written off during the year.
Question 4 continued over page …
Two employees have already taken their annual leave.
The $2,000 spent (and expensed) on entertainment during the year represents a permanent difference between accounting and taxable profit.
The land purchased at the beginning of the business was re-valued in accordance with AASB116 to $175,000. The land was originally purchased for $150,000.
For Tyrell Ltd, tax deductions are available only when amounts are paid and not as they are accrued.
The tax rate is 30%.
Required:
Clearly show your calculations to identify the temporary differences.
[7 marks]
Clearly show your calculations to determine income tax expense and income tax payable.
[12 marks]
Provide the journal entries to account for income tax in accordance with AASB 112. NB: Narrations are not required
[2 marks]
Key entries:
Tyrell Ltd – General Journal
Date
Particulars
Debit
$
Credit
$
31/12/10
Income Tax expense
78,600
Deferred Tax Asset
10,980
Revaluation Surplus
7,500
Deferred Tax Liability
30,150
Income Tax payable
66,930
(Record Income tax for year ended 31 Dec 2009)
Question 5 – 25 marks
On 1st July 2013 Tully Ltd acquires 100% of the equity of Targaryen Ltd at a cost of $1,100,000. At the date of acquisition, all assets of Targaryen Ltd are fairly stated except for the Property, Plant and Equipment which has a fair value of $800,000. The shareholder’s funds at the date of acquisition are:
Share capital650,000Retained earnings323,000973,000As at 30th June 2015 (two years after the date of acquisition) an extract of the financial statements of the two companies is as follows:
Account
Tully
Ltd
$‘000s
TargaryenLtd
$‘000s
Income Statement
Sales
6,500
4,000
Less Cost of goods sold
2,500
1,000
Gross profit
4,000
3,000
Plus Dividend revenue
650
Interest revenue
15
Less:
Interest expense
100
15
Other expenses
600
400
Net profit before tax
3,965
2,585
Income tax expense
1,100
785
Balance Sheet
Shareholders’ equity
Net profit after tax
2,865
1,800
Retained profits 1/7/2014
900
300
Less:
Interim dividend paid
150
200
Final dividend declared
300
450
Retained profits 30/6/2015
3,315
1,450
Share capital
5,000
650
Total shareholders’ equity
8,315
2,100
Liabilities
Accounts payable
425
155
Loan from Tully Ltd
150
Tax payable
1,100
785
Dividend payable
300
450
Long term borrowings
1,000
Total equity
11,140
3,640
Extract of financial statements continued over page …
Assets
Cash
1,200
140
Accounts receivable
500
500
Inventory
420
200
Dividends receivable
450
Investment in new Targaryen Ltd
1,100
Loan to Targaryen Ltd
150
Property, plant and equipment
4,550
790
Land
2,770
2,010
Total Assets
11,140
3,640
Additional information
Goodwill was determined to be impaired by $3,000 last year (2014) and $2,000 this year (2015).
Tully Ltd sold inventory to Targaryen Ltd for $50,000 during the period. This inventory had originally cost Tully Ltd $25,000. Targaryen sold three-quarters of this inventory during the period to parties external to the group.
The rate of company income tax is 30%.
All other consolidation journal entries (i.e. other than those required for the above intra-group transactions) have no effect on the calculation of group profit.
Required:
Prepare the consolidation elimination journal entries required for the above intra-group transactions. NB: Narrations are not required
Key entries:
Consolidation Journal
Date
Particulars
$
$
2015
30 June
Property, Plant and Equipment
10,000
Asset revaluation surplus
7,000
DTL
3,000
(Revaluation of PPE to FV as per AASB 121)
Revaluation surplus
7,000
Share capital
650,000
Retained earnings
323,000
Goodwill on consolidation
120,000
Investment in New York Ltd
1,100,000
(To record goodwill on consolidation)
Retained profits
3,000
Goodwill impairment
2,000
Accumulated impairment
5,000
(To record the impairment of goodwill on consolidation)
Question 6 – 7 marks
Question 6 has two (2) parts – you must answer all parts of the question.
Part A
Explain why depreciation expense must be recognised for non-current assets that are measured using the revaluation model.
[4 marks]
Part B
The statement of changes in equity is he link between the statement of comprehensive income and the balance sheet. Explain.
[3 marks]
Item
Cost
Accumulated depreciation/ amortisation
Carrying amount
Fair value
$
$
$
$
Accounts receivable
100,000
100,000
90,000
Land and buildings
800,000
400,000
600,000
Plant & Equipment
250,000
200,000
50,000
70,000
Precious metals and jewels
525,000
525,000
570,000
Accounts payable
105,000
105,000
105,000
Included in the purchases by Westros Ltd was an identifiable intangible asset for a Patent developed by Essos Ltd for securing the gilding to the thrones. The Patent has a fair value of $100,000.
The purchase consideration for the business consisted of $750,000 in cash, plus 500,000 ordinary shares in Westros Ltd, fully paid. Westros Ltd ordinary shares are presently trading on the stock exchange for $1.50. Westros Ltd also incurred legal fees of $2,500.
Required:
Prepare the journal entries to record the purchase by Westros Ltd and the payment to Essos Ltd.
Key numbers:
Goodwill $175,000 Question 2 – 10 marks
Arryn Ltd, an Australian company, acquires all the issued shares of Greyjoy Inc, a company operating in the United …show more content…
States, on 1 July 2013 at a cost of AUD $450,000.
Relevant exchange rates for the year to 30 June 2014 are as follows:
Exchange rates
1$US = $AUD
1 July 2013
1.70
Average rate for year
1.80
Ending inventory
1.95
30 June 2014
2.00
The income statement of Greyjoy Inc for the year to 30 June 2014 (i.e. one year after the date of acquisition) is shown below:
Income Statement for the year ended 30 June 2014
$US
$000
Sales revenue
1,000
Cost of sales
Opening inventory
200
Purchases
800
Ending inventory
180
820
Gross Profit
180
Expenses
Administration
10
Interest
20
Depreciation
40
Total expenses
70
Operating profit before tax
110
Income tax expense
50
Operating profit after tax
60
Retained Profits - 1 July 2013
60
Total available for appropriation
120
Interim dividend paid
20
Retained Profits - 30 June 2014
100
Required
Translate the income statement of Greyjoy Inc for the financial period 30 June 2014 in accordance with AASB 121.
Key numbers:
Translated retained profits – 30th June 2014
203
Question 3 – 22 marks
On 1st July 2014 Lannister Ltd entered into a contract with Stark Ltd to lease equipment for four years at an annual cost of $40,000 payable on the 30th June each year.
Included in this $40,000 is $10,000 for insurance and maintenance. An initial amount of $15,000 is payable at the inception of the lease. The contract provides for a guaranteed residual at the end of the lease term of $12,000. The rate of interest implicit in the lease is 12% and the reporting date is 30th June. The machinery will depreciate on a straight line basis and is expected to have an economic useful life of 5 years. At the inception of the lease the machinery had a fair value of
$113,745.
Required
According to the requirements of AASB 117:
From the point of view of Lannister Ltd, show calculations that support that the implicit interest rate in the lease is 12%.
The Present Value tables are shown below.
[6 marks]
Prepare general journal entries in the books of the lessee, Lannister Ltd, to record the lease over its life. Narrations are not required for the general journal. Round all calculations to the nearest dollar where necessary.
[16 marks]
Present Value Tables:
Present Value of $1 in n periods [Appendix A] n 4.0%
5.0%
6.0%
7.0%
8.0%
10.0%
12.0%
15.0%
1
0.9615
0.9524
0.9434
0.9346
0.9259
0.9091
0.8929
0.8696
2
0.9246
0.9070
0.8900
0.8734
0.8573
0.8264
0.7972
0.7561
3
0.8890
0.8638
0.8396
0.8163
0.7938
0.7513
0.7118
0.6575
4
0.8548
0.8227
0.7921
0.7629
0.7350
0.6830
0.6355
0.5718
5
0.8219
0.7835
0.7473
0.7130
0.6806
0.6209
0.5674
0.4972
Present Value of an annuity of $1 per period for n periods [Appendix B] n 4.0%
5.0%
6.0%
7.0%
8.0%
10.0%
12.0%
15.0%
1
0.9615
0.9524
0.9434
0.9346
0.9259
0.9091
0.8929
0.8696
2
1.8861
1.8594
1.8334
1.8080
1.7833
1.7355
1.6901
1.6257
3
2.7751
2.7232
2.6730
2.6243
2.5771
2.4869
2.4018
2.2832
4
3.6299
3.5460
3.4651
3.3872
3.3121
3.1699
3.0373
2.8550
5
4.4518
4.3295
4.2124
4.1002
3.9927
3.7908
3.6048
3.3522 Key entries:
General Journal
Date
Particulars
Debit
$
Credit
$
2015
30 June
Interest on lease
11,849
Lease liability
18,151
Insurance and maintenance
10,000
Bank
40,000
(To record lease interest and payment after one year)
Amortisation of lease
22,749
Accumulated amortisation of lease
22,749
(To record amortisation of lease)
[$113,745/5 years]
Question 4 – 21 marks
One year after the commencement of business, Tyrell Ltd determined its accounting profit before tax for the year ended 30 June 2010 to be $260,000. Included in this profit are the following items:
$
Entertainment expense
2,000
Depreciation expense – buildings
40,000
Depreciation expense – plant
50,000
Doubtful debt expense
5,100
Annual leave expense
46,000
Warranty expense
17,000
Insurance expense
4,200
The company’s Balance Sheet as at 30 June 2010 showed the following assets and liabilities:
$
$
Assets
Cash
1,500
Accounts receivable
28,000
Less allowance for doubtful debts
1,600
26,400
Inventory
21,000
Prepaid insurance
500
Land
175,000
Buildings
800,000
Less Accumulated depreciation
40,000
760,000
Plant
500,000
Less Accumulated depreciation
50,000
450,000
Liabilities
Accounts payable
35,000
Provision for annual leave
30,000
Prepaid revenue
5,000
Other information:
The plant is being depreciated equally over the useful life of 10 years for accounting purposes, but for taxation purposes it is being depreciated using the diminishing balance method at a rate of 25%.
For accounting purposes the buildings are depreciated on a straight line basis over their useful life of 20 years. For taxation purposes however, Tyrell Ltd have decided to use the diminishing balance method, at a rate of 5%.
Bad debts of $3,500 were written off during the year.
Question 4 continued over page …
Two employees have already taken their annual leave.
The $2,000 spent (and expensed) on entertainment during the year represents a permanent difference between accounting and taxable profit.
The land purchased at the beginning of the business was re-valued in accordance with AASB116 to $175,000. The land was originally purchased for $150,000.
For Tyrell Ltd, tax deductions are available only when amounts are paid and not as they are accrued.
The tax rate is 30%.
Required:
Clearly show your calculations to identify the temporary differences.
[7 marks]
Clearly show your calculations to determine income tax expense and income tax payable.
[12 marks]
Provide the journal entries to account for income tax in accordance with AASB 112. NB: Narrations are not required
[2 marks]
Key entries:
Tyrell Ltd – General Journal
Date
Particulars
Debit
$
Credit
$
31/12/10
Income Tax expense
78,600
Deferred Tax Asset
10,980
Revaluation Surplus
7,500
Deferred Tax Liability
30,150
Income Tax payable
66,930
(Record Income tax for year ended 31 Dec 2009)
Question 5 – 25 marks
On 1st July 2013 Tully Ltd acquires 100% of the equity of Targaryen Ltd at a cost of $1,100,000. At the date of acquisition, all assets of Targaryen Ltd are fairly stated except for the Property, Plant and Equipment which has a fair value of $800,000. The shareholder’s funds at the date of acquisition are:
Share capital650,000Retained earnings323,000973,000As at 30th June 2015 (two years after the date of acquisition) an extract of the financial statements of the two companies is as follows:
Account
Tully
Ltd
$‘000s
TargaryenLtd
$‘000s
Income Statement
Sales
6,500
4,000
Less Cost of goods sold
2,500
1,000
Gross profit
4,000
3,000
Plus Dividend revenue
650
Interest revenue
15
Less:
Interest expense
100
15
Other expenses
600
400
Net profit before tax
3,965
2,585
Income tax expense
1,100
785
Balance Sheet
Shareholders’ equity
Net profit after tax
2,865
1,800
Retained profits 1/7/2014
900
300
Less:
Interim dividend paid
150
200
Final dividend declared
300
450
Retained profits 30/6/2015
3,315
1,450
Share capital
5,000
650
Total shareholders’ equity
8,315
2,100
Liabilities
Accounts payable
425
155
Loan from Tully Ltd
150
Tax payable
1,100
785
Dividend payable
300
450
Long term borrowings
1,000
Total equity
11,140
3,640
Extract of financial statements continued over page …
Assets
Cash
1,200
140
Accounts receivable
500
500
Inventory
420
200
Dividends receivable
450
Investment in new Targaryen Ltd
1,100
Loan to Targaryen Ltd
150
Property, plant and equipment
4,550
790
Land
2,770
2,010
Total Assets
11,140
3,640
Additional information
Goodwill was determined to be impaired by $3,000 last year (2014) and $2,000 this year (2015).
Tully Ltd sold inventory to Targaryen Ltd for $50,000 during the period. This inventory had originally cost Tully Ltd $25,000. Targaryen sold three-quarters of this inventory during the period to parties external to the group.
The rate of company income tax is 30%.
All other consolidation journal entries (i.e. other than those required for the above intra-group transactions) have no effect on the calculation of group profit.
Required:
Prepare the consolidation elimination journal entries required for the above intra-group transactions. NB: Narrations are not required
Key entries:
Consolidation Journal
Date
Particulars
$
$
2015
30 June
Property, Plant and Equipment
10,000
Asset revaluation surplus
7,000
DTL
3,000
(Revaluation of PPE to FV as per AASB 121)
Revaluation surplus
7,000
Share capital
650,000
Retained earnings
323,000
Goodwill on consolidation
120,000
Investment in New York Ltd
1,100,000
(To record goodwill on consolidation)
Retained profits
3,000
Goodwill impairment
2,000
Accumulated impairment
5,000
(To record the impairment of goodwill on consolidation)
Question 6 – 7 marks
Question 6 has two (2) parts – you must answer all parts of the question.
Part A
Explain why depreciation expense must be recognised for non-current assets that are measured using the revaluation model.
[4 marks]
Part B
The statement of changes in equity is he link between the statement of comprehensive income and the balance sheet. Explain.
[3 marks]