Accounting profit is based on a full accrual model whereas taxable profit

Q 1. Income Tax (10 marks)

Accounting profit is based on a full accrual model whereas taxable profit is based on a partial accrual model. Explain this comment by reference to the following items:

long service leave

doubtful debts

prepaid insurance

rent received in advance.

(No references are required)

Consolidation (40 marks)

Financial information at 30 June 2016 of Starr Ltd and its subsidiary company, Lennon Ltd include that shown below.

At 1 July 2013, the date Starr Ltd acquired its 80% shareholding in Lennon Ltd, all the identifiable assets and liabilities of Lennon Ltd were at fair value except for the following assets:

Carrying Amount Plant (cost $75 000) $ 50 000 Land 30 000

Fair Value $ 55 000 38 000

The plant has an expected life of 10 years, with benefits being received evenly over that period. Differences between carrying amounts and fair values are adjusted on consolidation. The land on hand at 1 July 2013 was sold on 1 February 2014 for $40,000. Any valuation reserve in relation to the land is transferred on consolidation to retained earnings.

Starr Ltd uses the full goodwill method. The fair value of the non-controlling interest at 1 July 2013 was $31,500.

Financial Information at 30 June 2016

Sales revenue Other revenue:

Debenture interest

Management and consulting fees Dividend from Lennon Ltd

Total revenues

Cost of sales Manufacturing expenses Depreciation on plant Administrative

Financial

Other expenses

Total expenses

Profit before tax

Starr Ltd

$316,000

5,000

5,000 12,000 338,000

130,000 90,000 15,000 15,000 11,000 14,000

275,000 36,000

Lennon Ltd

$220,000

- – -

220,000

85,000 60,000 15,000

8,000

5,000 12,000 185,000 35,000

Assignment: 2103AFE Company Accounting, Trimester 2 2017

2

Starr Ltd

Income tax expense (25,000) Profit 38,000 Retained earnings (1/07/15) 50,000

88,000

Transfer to general reserve 3,000 Interim dividend paid 10,000 Final dividend declared 10,000

23,000

Retained earnings (30/06/16) 65,000 General reserve 50,000 Other components of equity 13,000 Share capital 300,000 Debentures 200,000 Current tax liability 25,000 Dividend payable 10,000 Deferred tax liability – Other liabilities 90,000

$ 753,000

Financial assets 50,000 Debentures in Lennon Ltd 100,000 Shares in Lennon Ltd 131,600 Plant (cost) 120,000 Accumulated depreciation – plant (65,000) Other depreciable assets 76,000 Accumulated depreciation (40,000) Inventory 90,000 Deferred tax asset 85,400 Land 201,000 Dividend receivable 4,000

$ 753,000

Additional information

i. At the date of acquisition of 80% of its issued shares by Starr Ltd, the equity of Lennon Ltd was:

Lennon Ltd

(17,000) 18,000 45,000 63,000

- 10,000 5,000 15,000

48,000 10,000 10,000

100,000 100,000 17,000 5,000 7,000 12,000 309,000

60,000 – - 102,000 (55,000) 55,000 (25,000) 85,000 30,000 57,000 – 309,000

$

Share Capital (100,000 shares) General reserve

Retained earnings

$100,000 3,000 37,000

Inventory on hand of Lennon Ltd at 1 July 2015 included a quantity priced at $10,000 that had been sold to Lennon Ltd by its parent. This inventory had cost Starr Ltd $7,500. It was all sold by Lennon Ltd during the year.
During the year, intragroup sales by Lennon Ltd to Starr Ltd were $60,000.
An item of inventory of Lennon Ltd has been sold to Starr Ltd for $20,000 on 1 January 2015. Starr Ltd has treated this item as an addition to plant and machinery. The item was put into service as soon as it was received by Starr Ltd and depreciation charged at 20% p.a. The item had been fully imported by Lennon Ltd at a total cost of $15,000.

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