acu 603 solutions

CHAPTER 3

Exercise 3.4 Share issue, options

BARCOO LTD

25/3 Cash trust – shares Dr 750 000Application – shares Cr 750 000

(Applications for shares)

Cash trust – options Dr 10 000Application – options Cr 10 000

(Applications for options)

2/4 Cash Dr 610 000Cash trust – shares Cr 600 000Cash trust – options Cr 10 000

(Transfer on issue of shares and options)

Application – shares Dr 600 000Share capital Cr 600 000

(Issue of shares)

Application – shares Dr 150 000Cash trust Cr 150 000

(Refund to unsuccessful applicants)

Application – options Dr 10 000Options Cr 10 000

(Issue of options)

31/12 Options Dr 9 000Cash Dr 63 000

Share capital Cr 72 000(Issue of shares on issue of options)

Options Dr 1 000Options lapsed reserve Cr 1 000

(Transfer of lapsed options)

Note: the $1 000 amount for lapsed options could have been included in share capital.

Exercise 3.5 Issue of ordinary and preference shares

FINICE LTD201101/4 NO ENTRY

10/4 Cash trust Dr 210 000Application – ordinary shares Cr 210 000

(Applications for ordinary shares:140 000 x $1.50)

Cash trust Dr 170 000Application – preference shares Cr 170 000

(Applications for preference shares:85 000 x $2)

15/4 Application – ordinary shares Dr 150 000Share capital – ordinary Cr 150 000

(Issue of 100 000 shares at $1.50 each)

Application – preference shares Dr 170 000Receivable from underwriter Dr 30 000

Share capital – preference Cr 200 000(Issue of 100 000 shares at $2 each)

Cash Dr 320 000Cash trust Cr 320 000

(Transfer on issue of shares)

Application – ordinary shares Dr 60 000Cash trust – ordinary shares Cr 60 000

(Refund to unsuccessful applicants)

20/4 Share capital – preference Dr 4 000Share capital – ordinary Dr 500Cash Dr 25 500

Receivable from Underwriter Cr 30 000(Costs of underwriting and receipt of application monies due from underwriter)

Exercise 3.5 (cont’d)

Cash Trust10/4/11 Application 380 000 15/4/11 Application 60 000

______ Cash 320 000380 000 380 000

Application – Ordinary Shares15/04/11 Share capital 150 000 10/04/11 Cash trust 210 000

Cash trust 60 000 ______210 000 210 000

Application – Preference Shares15/04/11 Share Capital 170 000 10/04/11 Cash trust 170 000

Share Capital - Ordinary Shares20/04/11 Share issue costs 500 15/04/05 Application – Ord 150 000

Share Capital - Preference Shares20/04/11 Share issue costs 4 000 15/04/05 Application – Pref 200 000

Receivable - Underwriter15/04/11 Share capital - pref 30 000 20/04/05 Cash/Share issue costs30 000

Cash15/04/11 Cash trust 320 00020/04/11 Receivable – U’writer 25 500

Exercise 3.6 Rights issue, placement of shares

HUNTER LTD

31/3 Cash Dr 200 000Application Cr 200 000

(Applications for shares on rights issue)

Application Dr 200 000Share capital Cr 200 000

(Issue of shares)

Share capital Dr 5 000Cash Cr 5 000

(Share issue costs)

30/6 Cash Dr 20 000Share capital Cr 20 000

(Placement of 10 000 shares at $2)

Problem 3.2 Share issue, options

MITCHELL LTDA. GENERAL JOURNAL ENTRIESDATE

DETAILS

25/07/09 Call – preferenceShare capital - preference

(50 000 shares x $1.00)

DrCr

50 00050 000

31/08/09 CashCall – preference

(50 000 – 7 500 =42 500 shares x $1.00)

DrCr

42 50042 500

07/09/09 Share capital – preference (7 500 x $3.00)Call – preference (7 500 x $1.00)Forfeited shares reserve (7 500 x $2.00)

DrCrCr

22 5007 500

15 000

30/11/09 Cash trust Application

(40 000 x $3.00)

DrCr

120 000120 000

01/12/09 Application Share capital – B ordinary

(30 000 shares x $3.00)

DrCr

90 00090 000

Application Calls in advance

(5 000 applications x $3.00)

DrCr

30 00030 000

CashCash trust

DrCr

120 000120 000

5/12/09 Share capital – B OrdinaryCash

(Share issue costs)

DrCr

5 2005 200

30/04/10 Cash Share capital – A ordinary

(15 000 shares x $4.50)

DrCr

67 50067 500

30/04/10 OptionsShare capital – A ordinary (15 000 x $0.56)Options reserve (5 000 x $0.56)

DrCrCr

11 2008 4002 800

B. The accountant should consider whether there are tax or dividend distribution issues associated with particular equity accounts before determining which accounts are to be affected by the buy-back. If there are no such issues the buy-back can be written off against any equity account or across all equity accounts.

Problem 3.5 Rights issue, call on shares, issue of optionsFITZROY LTD

General Journal2010Nov 30 Cash Dr 18 000

Share capital - B Ordinary Cr 18 000(Allotment of 8 000 B ordinaryshares at a price of $2.25 under a 1for 5 rights issue)

2011Jan 16 Call -A Ordinary Dr 90 000

Share capital - A Ordinary Cr 90 000(Call of 75c per share on 100 000A Ordinary shares)

Jan 31 Cash Dr 82 500Call - A Ordinary Cr 82 500

(Cash received on call)

Feb 5 Share Capital - A Ordinary Dr 15 000Call - A Ordinary Cr 7 500Forfeited shares reserve Cr 7 500

(Forfeiture and cancellation of 10 000 A ordinary shares)

Mar 17-31 Cash trust Dr 21 000Application – options Cr 21 000

(Receipt of applications for options)

Mar 31 Cash Dr 21 000Cash trust Cr 21 000

(Being transfer on allotment of options)

Application – options Dr 21 000Share options Cr 21 000

(Issue of 35 000 options exercisable on 31 December 2003)

Dec 31 Cash Dr 44 500Share options * Dr 21 000

Share capital - A Ordinary Cr 65 500(Allotment of 25 000 A ordinary shares at $1.78 on exercise of 25 000 options)

* note: the issue price of lapsed options may be taken to any equity account, or left in an options “reserve” account. Legal and taxation implications must be considered.

Share Capital – A Ordinary Dr 2 000Cash Cr 2 000

(Payment of share issue costs)

CHAPTER 8

Exercise 8.2 Calculation of current tax

Flaxton LtdCurrent Tax Worksheet

(for year ended 30 June 2011)

$ $Accounting profit 40 000Add:Donations to political parties (non deductible) 5 000Depreciation expense – Machinery 15 000Rent received 10 000Annual leave expense 5 600 35 600

75 600Deduct:Rent revenue 12 000Annual leave paid 6 500Depreciation of machinery for tax 18 750 (37 250)Taxable profit 38 350Current liability @ 30% $11 505

Adjusting journal entry

30 June 2011Income Tax Expense (current) Dr 11 505

Current Tax Liability Cr 11 505(Being recognition of current tax liability)

Part 2

Rent is recognised as income by Flaxton Ltd as it is earned, but will not be taxable income until the cash is received. In the current year only $10,000 of the $12,000 rental income earned has been received and thus, an adjustment is required to remove $2 000 from the accounting profit when calculating the company’s tax liability for the current year. In the worksheet this is accomplished by adding all rent received in cash to accounting profit and deducting all rent income recognised. This difference will create a deferred tax liability of $600 ($2 000 x 30%) which will be recognised via the deferred tax worksheet. When the cash is received next year the company will add $2,000 rent to the accounting profit, pay the $600 tax and reverse the tax liability.

Exercise 8.3 Calculation of deferred tax

Gin Gin Ltd

Deferred Tax Worksheet

as at 30 June 2011

Carrying Amount

Future Taxable Amount

Future Deductible

Amount

Tax Base

Taxable Temporary Differences

Deductible Temporary Differences

$ $ $ $ $ $Assets Receivables 23 000 (0) 2 000 25 000 2 000Machines 75 000 (75 000) 50 000 50 000 25 000

Liabilities Interest Payable 1 000 0 (1 000) 0 1 000Total temporary differences

25 000 3 000

Excluded differences

- -

Temporary differences

25 000 3 000

Deferred tax liability

7 500

Deferred tax asset

900

Beginning balances

(0) (0)

Movement during year

- -

Adjustment 7 500 Cr 900 Dr

Exercise 8.6 Creation and reversal of temporary difference

Imbil LtdWorkings

Accounting TaxationCost 25 000 25 000Depreciation (04) (5 000) (3 750)Carrying amount (04) 20 000 21 250Depreciation (05) (5 000) (3 750)Carrying amount (05) 15 000 17 500Depreciation (06) (7 500) (3 750)Carrying amount (06) 7 500 13 750Proceeds on sale (15 000) (15 000)Gain on sale 7 500 1 250

Imbil LtdCalculation of deferred tax (extract)

as at 30 June 2008Carrying Amount


Future Deductible

AmountTax Base



$ $ $ $ $ $

Equipment 20 000 (20 000) 21 250 21 250 1 250

The differential in depreciation rates has created a deductible temporary difference of $1250. Imbil Ltd will receive these deductions at the end of the asset’s useful life when taxation deductions exist but the equipment is fully depreciated for accounting purposes.

A deferred tax asset must be created as follows:

Deferred tax asset Dr 375Income tax income Cr 375

Exercise 8.6 (Cont’d)Imbil Ltd

Calculation of deferred tax (extract)as at 30 June 2009

Carrying Amount


Future Deductible

AmountTax Base



$ $ $ $ $ $

Equipment 15 000 (15 000) 17 500 17 500 2 500

The deductible temporary difference has increased to $2500 (representing two year’s depreciation differentials). A deferred tax asset for $375 already exists so this year’s adjustment will add a further $375 as follows:

Deferred tax asset Dr 375Income tax income Cr 375

Imbil LtdCalculation of deferred tax (extract)

as at 30 June 2010Carrying Amount


Future Deductible

AmountTax Base



$ $ $ $ $ $

Equipment 0 (0) 0 0 0

As the asset has been sold the temporary difference will reverse. In the current tax worksheet there will be two differences impacting on taxable income: difference between the accounting gain on sale $7500 and the taxable gain $1250

will reduce taxable income by $6250 difference between accounting depreciation expense $7500 and tax deductible

depreciation $3750 will increase taxable income by $3750.

The net decrease of $2500 will result in $750 less tax being paid in the current year. This benefit represents the reversal of the deferred tax asset. The adjusting journal entry will be:

Income tax expense Dr 750Deferred tax asset Cr 750

PROBLEMS

Problem 8.1 Current and deferred tax

Kilcoy LtdCurrent Tax Worksheet

(for year ended 30 June 2010)$ $

Accounting profit 256 700Add:Entertainment expense (non deductible) 1 700Depreciation – buildings (non deductible) 7 600Depreciation – plant 22 500Insurance expense 4 200Development expenditure 15 000Doubtful debts expense 4 100Annual leave expense 46 000 101 100

Deduct: 357 800Royalty revenue (tax exempt) 8 000Bad debts written off 3 500Annual leave paid 52 000Insurance paid 3 700Depreciation – plant (tax) 30 000Gain – Sale of buildings (non assessable) 5 000 (102 200)Taxable income 255 600Add back exempt income 8 000

263 600Tax loss recouped (12 500)Taxable income 251 100Tax payable @ 30% 75 330Less quarterly tax paid (53 500)Current tax liability 21 830

Workings:

Depreciation of plant for tax purposes: $150 000 x 20% = $30 000.Accumulated depreciation for tax purposes is $30 000 x 3 = $90 000.

The entry to recognise current tax is:

Income Tax Expense (current) Dr 25 580Current Tax Liability Cr 21 830Deferred Tax Asset Cr 3 750

Problem 8.1 (Cont’d)

Kilcoy LtdDeferred tax worksheet

Carrying Amount


Future Deductible

Amount

Tax Base Taxable Temporary Differences


$ $ $ $ $ $Relevant Assets Receivables 17 400 0 4 100 21 500 4 100Prepaid insurance

4 500 (4 500) 0 0 4 500 -

Buildings 110 500 (110 500) 0 0 110 500Plant 82 500 (82 500) 60 000 60 000 22 500Development expenditure

0 (0) 15 000 15 000 15 000

Relevant Liabilities Annual leave 10 000 0 (10 000) 0 10 000Total Temporary Differences

137 500 29 100

Exempt differences 110 500Temporary Differences

27 000 29 100

Deferred tax liability

8 100

Deferred tax asset

8 730

Beginning balances

(27 270) *(5 850)

Movements during the year

- -

Adjustment (19 170)Dr

(2 880)Dr

* ($9 600 – 3 750 (tax loss recouped) = $5 850)

The entry to adjust deferred tax accounts is:

Deferred Tax Liability Dr 19 170Deferred Tax Asset Dr 2 880Income Tax Income Cr 22 050

Problem 8.6 Recognition of deferred tax assets

Paddington Ltd

AASB 112, paragraph 24 states that deferred tax assets shall be recognised for all deductible temporary differences (DTD) ‘to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised’. The same recognition criteria apply to deferred tax assets arising from carry forward tax losses (paragraph 34).

In determining whether it can recognise deferred tax assets with respect to: Tax losses of $12 500, and Deductible temporary differences of $17 000

Paddington Ltd will need to consider the following factors.

a) Taxable profit against which tax losses and DTDs can be utilised will be available if taxable temporary differences (TTD) reverse in the same period as the deductions are available. Thus, the extent and period of reversal of TTDs will need to be considered.

b) If insufficient TTDs exist to recoup the DTDs and tax losses Paddington Ltd will need to consider if the company will earn sufficient taxable profit in the period of reversal against with the deductions can be made.

c) AASB 112, paragraph 35 states that the existence of unused tax losses is strong evidence that future taxable profit may not be available. Paddington Ltd will need to examine the cause of the loss to determine whether it is due to factors which are unlikely to recur.

As Paddington Ltd has incurred a tax loss in the current year deferred tax assets can only be recognised to the extent that TTDs exist and will reverse in the same period as the DTDs and tax losses, and to the extent that convincing evidence exists that future taxable profits will be made.

An analysis of the temporary differences at 30 June 2010 reveals:Existing Reversal Reversal2005 2006 2007

DTD 17 000 14 500 2 500TTD 11 500 11 500 -

As there is no indication that the losses incurred in 2005 are a ‘one-off’ Paddington Ltd can only recognise a DTA of $3450 ($11 500 x 30%) representing the deductions which can be made against taxable profit arising in 2006 from the reversal of taxable temporary differences. The DTA of $5250 raised in the prior year will need to be written down to $3450.

CHAPTER 10

Exercise 10.2 Revaluation of assets

BRUCE LTDGeneral Journal

A.Accumulated depreciation – Building Dr 100 000Asset revaluation reserve Dr 14 000Deferred tax liability Dr 6 000Expense – revaluation decrement Dr 20 000

Building Cr 140 000

Accumulated depreciation – Vehicle Dr 40 000Vehicle Cr 30 000Asset revaluation reserve Cr 7 000Deferred tax liability Cr 3 000

B.Depreciation expense – Building Dr 6 400

Accumulated depreciation – Building Cr 6 400($160 000/25)

Depreciation expense – Vehicle Dr 22 500Accumulated depreciation – Vehicle Cr 22 500

($90 000/ 4)

Exercise 10.6 Revaluation of assets and tax-effect accounting

FADDEN LTD

Year ended 2008Carrying Tax Base TemporaryAmount Difference

Asset cost $100 000 $100 000Depreciation 20 000 12 500

80 000 87 500Revaluation 5 000 _____

$85 000 $87 500 $2 500

When the asset is revalued upwards the entity will pass the entry:

Accumulated depreciation Dr 20 000Asset Cr 15 000Deferred tax liability Cr 1 500Asset revaluation reserve Cr 3 500

In the tax effect worksheet, the temporary difference which is a deductible difference will give rise to a deferred tax asset of 30% of $2 500 = $750.

However the movement during the year of a credit to the deferred tax liability will mean that the adjustment required at the end of 2003 will be a debit to the deferred tax asset of $2 250 ie. $750 – ($1 500):

Deferred tax asset Dr 2 250Income tax revenue Cr 2 250

The net effect is a debit balance in the deferred tax account of $750.


Asset 1/7/08 $85 000 $87 500Depreciation 21 250 12 500

63 750 75 000Revaluation down 3 750 _____

$60 000 $75 000 $15 000

When the asset is revalued downwards the entity will pass the entry:

Asset revaluation reserve Dr 2 625Deferred tax liability Dr 1 125Accumulated depreciation Dr 21 250

Asset Cr 25 000

Exercise 10.6 (Cont’d)

In the tax effect worksheet, the temporary difference which is a deductible difference will give rise to a deferred tax asset of 30% of $15 000 = $4 500.However, with the opening balance of $750, and the movement during the year of a debit to the deferred tax account, the adjustment required at the end of 2004 will be a debit to the deferred tax asset of $2 625 ie. $4 500 – ($750 + $1 125):


The net effect is a debit balance in the deferred tax account of $4 500.


Asset 1/7/09 $60 000 $75 000Depreciation 20 000 12 500

40 000 62 500Revaluation 5 000 _____

$45 000 $62 500 $17 500

When the asset is revalued upwards the entity will pass the entry:

Accumulated depreciation Dr 20 000Asset Cr 15 000Deferred tax liability Cr 1 500Asset revaluation reserve Cr 3 500

In the tax effect worksheet, the temporary difference which is a deductible difference will give rise to a deferred tax asset of 30% of $17 500 = $5 250.

However, with the opening balance of $4 500, and the movement during the year of a credit to the deferred tax liability will mean that the adjustment required at the end of 2005 will be a debit to the deferred tax asset of $2 250 ie. $5 250 – ($4 500 - $1 500):


The net effect is a debit balance in the deferred tax account of $5 250.

On sale of the asset for $45 000, the entity will recognise a zero gain/loss on sale. For tax purposes, there is a tax loss of $17 500 i.e. $45 000 - $62 500. The difference is $17 500. The journal entry for tax to reverse the balance in the deferred tax account is:

Income tax revenue Dr 5 250Deferred tax asset Cr 5 250

Exercise 10.9 Revaluation of assets

CHIFLEY LTD

1 July 2009

Machine A Dr 100 000Machine B Dr 60 000

Cash Cr 160 000

30 June 2010

Depreciation expense – Machine A Dr 20 000Accumulated depreciation Cr 20 000

(1/5 x $100 000)

Depreciation expense – Machine B Dr 20 000Accumulated depreciation Cr 20 000

(1/3 x $60 000)

Accumulated depreciation- Machine A Dr 20 000Machine A Cr 16 000Deferred tax liability Cr 1 200Asset revaluation reserve Cr 2 800

(Revaluation to fair value at 30/6/10)

Accumulated depreciation – Machine B Dr 20 000Expense – revaluation decrement Dr 2 000

Machine B Cr 22 000(Revaluation to fair value at 30/6/10)

1 January 2011

Machine C Dr 80 000Cash Cr 80 000

(Acquisition of machine C)

Depreciation expense – Machine B Dr 9 500Accumulated depreciation Cr 9 500

(1/2 x /1/2 x $38 000)

Cash Dr 29 000Proceeds on sale of Machine B Cr 29 000

(Sale of Machine B)

Carrying amount of Machine B Sold Dr 28 500Accumulated depreciation Dr 9 500

Machine B Cr 38 000(Carrying amount of machine sold)

General reserve Dr 8 000Asset revaluation reserve – Machine A Dr 2 000

Share Capital Cr 10 000

Exercise 10.9 (Cont’d)

30 June 2011

Depreciation expense – Machine A Dr 21 000Accumulated depreciation Cr 21 000

(1/4 x $84 000)

Depreciation expense – Machine C Dr 10 000Accumulated depreciation Cr 10 000

(1/4 x ½ x $80 000)

Accumulated depreciation – Machine A Dr 21 000Asset revaluation reserve Dr 800Deferred tax liability Dr 600Expense – Revaluation decrement Dr 600

Machine A Cr 23 000(Revaluation to fair value at 30/6/11)

Accumulated depreciation – Machine C Dr 10 000Expense – revaluation decrement Dr 1 500

Machine C Cr 11 500(Revaluation to fair value at 30/6/11)

PROBLEMS

Problem 10.1 Depreciation calculation

McMAHON LTD

20101/9 Depreciation expense Dr 225

Accumulated depreciation Cr 225(Depreciation on machine to be sold:1/6 x 10%[15 000 – 1 500])

Machine Dr 15 000Cash Cr 8 800Proceeds on sale Cr 6 200

(Acquisition of machine)

Carrying amount of machine sold Dr 3 925Accumulated depreciation Dr 4 275

Machine Cr 8 200(Carrying amount of machine sold:8 200 less 3 1/6 [15 000 – 1 500] = 3 925)

Depreciation expense Dr 135Accumulated depreciation Cr 135

(Depreciation on machine sold:1/6 x 10%[9 000 – 900])

Cash Dr 7 300Proceeds on sale of machine Cr 7 300

(Sale of machine)

Carrying amount of machine sold Dr 7 042Accumulated depreciation Cr 1 958Machine Cr 9 000

(Carrying amount of machine sold:29/12 x 10% [9 000 – 900] = 1 958)

20111/1


(Depreciation on machine sold:½ x 10%[4 000 – 400])

Cash Dr 500Proceeds Cr 500

(Proceeds on machine sold)

Problem 10.1 (Cont’d)

Carrying amount of machine sold Dr 580Accumulated depreciation Cr 3 420Machine Cr 4 000

(Machine sold:9.5 x 10%[4 000 – 400] = 3 420])

1/1 Working:

Cost 7 000Depreciation (3 x 10% x 6 300) 1 890

5 110New motor 4 800Carrying amount 9 910

New depreciation per annum = 1/9 [9 910 – 991] = 991


(Depreciation on machine overhauled:½ x 10% [7 000 – 700])

Machine Dr 2 910Accumulated depreciation Dr 1 890

Cash Cr 4 800(Adjustment due to overhaul of machine)

1/4 Arm Dr 1 200Cash Cr 1 200

(Acquisition of equipment)

PART B

Working:

Machinery on hand at 1 July 2005 and still on hand at 30 June 2009:= 420 000 – 8 200 – 9 000 – 4 000 – 7 000= 391 800Depreciation = 10%[391 800 – 39 180] = 35 262

Depreciation on new or replaced machines:10% x 10/12 [15 000 – 1 500] = 1 125½ x 1/9 [9 910 – 991] = 496

Depreciation on arm:1/15 x 3/12 x 1 200 = 20

Total depreciation for 2005-06 = 35 262 + 1 125 + 496 + 20 = $36 903

CHAPTER 19 & 20

Exercise 19.2 Current asset and liability classifications

Current Assets $’000Cash and cash equivalents 10 (g)Trade and other receivables 95 [(b) 100 000 – (f) 5 000]Inventories 180 [(e) 120 000 + (i) 60 000]Other current assets 12 (d)

297

Current Liabilities $’000Trade and other payables 130 [(a) 25 000 + (c) 85 000 + (h) 20 000]Financial liabilities 125 [(j) 50 000 + (k) 75 000]Current tax liability 30 (l)

285

The dividend payable is not a provision as the timing and amount are reasonably certain. It may be shown separately if relevant to an understanding of the financial position.

Exercise 19.3 Statement of comprehensive income

Lachlan Limited

Statement of Comprehensive Income for the year ended 30 June 2010

$'000Revenue 1 200Cost of sales (840)Gross profit 360Other income 54Selling and distribution expenses (76)Administrative expenses (35)Finance costs (18)Profit before tax 285Income tax expense (85)Profit for the year 200Other comprehensive income:Revaluation loss on available-for-sale financial assets, net of tax (1)Total comprehensive income for the year 199

Calculations:

Other income comprises:

$’000Gain on sale of plant 5Interest income 24

Valuation gain on trading investments20

Dividend revenue 554

Exercise 19.9 Financial statements

(a) contingent liabilities 5. notes

(b) the effect on retained earnings of the correction of a prior period error

4. statement of changes in equity

(c) cash and cash equivalents 1. statement of financial position

(d) capital contributed during the year 4. statement of changes in equity

(e) revaluation gain on land (not reversing any previous revaluation)

3. other comprehensive income in statement of comprehensive income

(f) judgements that management has made in classifying financial assets

5. notes

(g) income tax expense 2. in profit or loss in the statement of comprehensive income

(h) provisions 1. statement of financial position

Problem 19.3 Preparation of a statement of financial position

Lucas Ltd

Statement of Financial Position as at 30 June 2010

$

AssetsCurrent assetsCash and cash equivalents 119 869Trade and other receivables 21 071Financial assets held for trading 68 455

209 395

Non-current assetsAvailable-for-sale financial assets 1 880 472Deferred tax asset 655

1 881 127

Total assets 2 090 522

Equity and LiabilitiesCurrent liabilitiesTrade and other payables 10 616Current tax payable 242Short-term provisions 525

11 383

Non-current liabilitiesDeferred tax liability 56 414Long-term provisions 227

56 641

Total liabilities 68 024

EquityShare capital 1 368 024Reserves 376 090Retained earnings 278 384

Total equity2 022 498

Total equity and liabilities 2 090 522

Explanations

Cash and cash equivalents: cash $7 000 + deposits at call $112 869 = $119 869. Trade and other receivables comprise dividends receivable $15 693 + interest

receivable $478 + outstanding settlements receivable $4 900 = $21 071. Trade and other payables comprises outstanding settlements payable $10 253 +

interest payable $280 + other payables $83 = $10 616. Long-term provisions: provision for employee benefits $752 – $525 = $227.

20.6 Net investing cash flows

2009 Dr Cr 2010$ $ $ $

Land 100 000 (1) 20 000 120 000Plant, at cost 70 000 (2) 15 000 85 000Accumulated depreciation (20 000) 8 000 (28 000)Available for sale investments 30 000 (3) 8 000 40 000

(4) 2 000Goodwill 25 000 (5) 5 000 20 000

Deferred tax liability (1) 6 000(3) 2 000

Land revaluation reserve 20 000 (1) 14 000 34 000Investments revaluation reserve 5 000 (3) 6 000 11 000

Impairment of goodwill (5) 5 000

Investing activitiesPurchase of plant (2) 15 000 (15 000)Purchase of investments (4) 2 000 (2 000)

Explanations:(1) There are no acquisitions or disposals of land. Hence, the increase results from

the revaluation of land at independent valuation amounting to $20 000. The offsetting credits are to deferred tax $6000 and to land revaluation reserve $14 000.

(2) There are no disposals of plant; hence, the increase in plant represents additions amounting to $15 000.

(3) There were no disposals of investments. The investments revaluation reserve has increased by $6000 and there is related deferred tax of $2000. Hence the revaluation of investments must have amounted to $8000.

(4) Since investments increased by $10 000 the difference is accounted for by the purchase of additional investments $2000 (10 000 – 8000).

(5) The change in goodwill is wholly accounted for by the impairment write-off $5000.

Hence, investing activities comprise:

$Purchase of plant (15 000)Purchase of investments (2 000)Net investing cash flows (17 000)

Exercise 20.8 Cash receipts from customers and cash paid to suppliers and employees

2009 2010 Increase(Decrease)

$ $ $Accounts receivable 40 000 50 000 10 000Inventories 32 000 34 000 2 000Prepaid expenses 1 000 3 000 2 000Accounts payable for inventory 15 000 16 000 1 000Employee liabilities 5 000 5 500 500Accruals – Interest 700 850 150Accruals – Other 3 300 2 950 (350)

$Cash received from customers = Sales 600 000

Less increase in receivables (10 000)$590 000

Cash paid to suppliers and $employees =Cost of goods sold 480 000Expenses 75 000

Depreciation (5 000)Interest (2 000) 68 000

Increase in inventories 2 000Increase in prepayments 2 000Increase in accounts payable (1 000)Increase in employee liabilities (500)Decrease in other accruals excl. interest 350

$550 850

Problem 20.3 Preparation of a statement of cash flows

2009 2010 Increase(decrease)

$ $ $Cash 30 000 68 000 38 000Receivables 46 000 70 000 24 000Inventory 30 000 32 000 2 000Investments 35 000 40 000 5 000Plant 125 000 150 000 25 000Accumulated depreciation (23 000) (35 000) 12 000

243 000 325 000Accounts payable 39 000 43 000 4 000Accrued interest 3 000 5 000 2 000Current tax payable 10 000 12 000 2 000Deferred tax liability - 1 500 1 500Borrowings 60 000 100 000 40 000Share capital 100 000 100 000 -Retained earnings 31 000 60 000 29 000Investment revaluation reserve - 3 500 3 500

243000 325000Receipts from customers:Sales 700 000Increase in receivables (24 000)Cash received 676 000

Payments to suppliers and employeesCost of sales 483 000Other expenses: Distribution costs 62 000 Administration costs 74 000Depreciation (12 000) 124 000Increase in inventory 2 000Increase in accounts payable (4 000)Total payments 605 000

Interest paidInterest expense 6 000Increase in accrued interest (2 000)Interest paid 4 000

Income tax paidIncome tax expense 23 000Increase in tax payable (2 000)Income tax paid 21 000

InvestmentsRevaluation gain net of tax 3 500Increase in deferred tax liability 1 500Purchase of investments - Increase in investments $5 000

Explanations

The increase in deferred tax liability is the tax effect of the revaluation increment, as per the additional information.

As the increase in investments can be explained by the revaluation, and there were no disposals of investments, we can conclude that there were no purchases of investments during the year.

The purchases of plant are determined as the increase in plant in the absence of any disposals of plant during the year.

Denim Ltd

Statement of Cash Flows for the year ended 30 June 2010

Cash flows from operating activities$

Receipts from customers 676 000Payments to suppliers and employees (605 000)Cash generated from operations 71 000Interest paid (4 000)Income tax paid (21 000)Net cash from operating activities 46 000

Cash flows from investing activitiesPurchase of plant (25 000)Net cash used in investing activities (25 000)

Cash flows from financing activitiesProceeds from borrowings 40 000Dividend paid (23 000)Net cash from financing activities 17 000

Net increase in cash and cash equivalents38 000

Cash and cash equivalents at beginning of year 30 000Cash and cash equivalents at end of year $68 000

Problem 20.4 Preparation of a statement of cash flows

Worksheet

2009 Dr Cr 2010$ $ $ $

Cash 96 000 (23) 47 000 49 000Accounts receivable - sale of plant - (18) 22 000 22 000Accounts receivable - other 147 000 (2) 6 000 141 000Prepayments 20 000 (3) 5 000 15 000Inventory 60 000 (4) 44 000 104 000Land 40 000 40 000Plant 368 000 (14) 72 000 (16) 20 000 420 000Accumulated depreciation (45 000) (17) 5 000 (8) 30 000 (70 000)Deferred tax asset 20 000 (13) 4 000 24 000

706 000 745 000Accounts payable - purchase of plant 34 000 (15) 34 000 -Accounts payable - other 106 000 (5) 46 000 152 000Accrued liabilities - interest 3 000 (10) 1 000 4 000Accrued liabilities - other 33 000 (6) 5 000 38 000Current tax payable 24 000 (12) 7 000 31 000Dividend payable 56 000 (22) 6 000 50 000Borrowings 73 000 (19) 2 000 75 000Share capital 335 000 (20) 10 000 345 000Retained earnings 42 000 (11) 46 000 (1) 138 000 50 000

(21) 84 000706 000 745 000

Operating activitiesProfit before tax (1) 138 000 138 000Decrease in accounts receivable (2) 6 000 6 000Decrease in prepayments (3) 5 000 5 000Increase in inventory (4) 44 000 (44 000)Increase in accounts payable (5) 46 000 46 000Increase in accrued liabilities (6) 5 000 5 000Depreciation (8) 30 000 30 000Gain on sale of plant (7) 7 000 (7 000)Interest expense (9) 6 000 6 000

236 000 51 000 185 000Interest paid (10) 1 000 (9) 6 000 (5 000)Income tax paid (12) 7 000 (11) 46 000

(13) 4 000 (43 000)244 000 107 000 137 000

Investing activitiesPurchase of plant (14) 72 000

(15) 34 000 (106 000)Proceeds from sale of plant (16) 20 000 (17) 5 000

(7) 7 000 (18) 22 000 -27 000 133 000 (106 000)

Financing activitiesBorrowings (19) 2 000 2 000Dividends (20) 10 000 (21) 84 000

(22) 6 000 (80 000)12 000 90 000 (78 000)

Net decrease in cash and cash equivalents (23) (47 000)Cash and cash equivalents at beginning of year 96 000Cash and cash equivalents at end of year

$ 49 000

Explanations

(1) Profit before tax $138 000.(2) Decrease in net accounts receivable (excluding receivables for plant) $6000.(3) Decrease in prepayments $5000.(4) Increase in inventory $44 000.(5) Increase in accounts payable (excluding accounts payable arising from the

purchase of plant) $46 000. (6) Increase in accrued liabilities (excluding interest accrued liabilities) $5000.(7) Gain on sale of plant $7000.(8) Depreciation expense for the year $30 000. This is calculated as the increase in

accumulated depreciation, after taking into account the reduction in accumulated depreciation for the plant sold during the year. Refer item (17).

(9) Adjustment for interest expense $6000 included in profit before tax.(10) Increase in accrued interest; note that the interest paid $5000 = interest

expense $6 000 – increase in accrued interest $1000.(11) Income tax expense for year 46 000.(12) Increase in current tax payable $7000.(13) Increase in deferred tax asset $4000. As there were no items of other

comprehensive income, the increase in deferred tax asset is recognised as the deferred component of income tax expense.

(14) Plant additions for year $72 000.(15) Decrease in plant accounts payable $34 000.(16) Cost of plant sold $20 000. Refer additional information.(17) Accumulated depreciation on plant sold $5000. Note book value of plant sold

was $15 000; proceeds from sale = $15 000 + gain on sale $7000 = $22 000.(18) Increase in accounts receivable arising from sale of plant $22 000; hence, there

is no cash received in the current year arising from the sale of plant.(19) Increase in borrowings $2000. This represents the increase in borrowings and

in the absence of other information it is assumed there are no loan repayments.(20) Dividends reinvested as share capital $10 000 (refer additional information).(21) Dividends declared out of profits for the year $84 000.(22) Decrease in dividend payable $6000. Note dividends paid amount to $80 000,

which comprises dividend payable at beginning of year $56 000 + Interim dividend $34 000 – Reinvestment of dividends $10 000.

(23) Decrease in cash $47 000.The doubtful debts expense is not used in calculating net cash from operating activities under the indirect method. It is a component of the movement in net receivables.

Crimson Ltd

Statement of Cash Flows for the year ended 30 June 2010

$Cash flows from operating activitiesProfit before tax 138 000Interest expense 6 000Depreciation of plant 30 000Gain on sale of plant (7 000)Decrease in accounts receivable 6 000Increase in inventory (44 000)Decrease in prepayments 5 000Increase in accounts payable 46 000Increase in accrued liabilities 5 000Cash generated from operations 185 000Interest paid (5 000)Income tax paid (43 000)Net cash from operating activities 137 000

Cash flows from investing activitiesPurchase of plant (106 000)Net cash used in investing activities (106 000)

Cash flows from financing activitiesProceeds from borrowings 2 000Dividends paid (80 000)Net cash from financing activities (78 000)Net decrease in cash and cash equivalents (47 000)Cash and cash equivalents at beginning of year 96 000Cash and cash equivalents at end of year $49 000

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