Instructions:
- All questions must be answered by using the answer boxes provided in this paper.
- Completed answers must be submitted to Blackboard by the published due date and time.
Please ensure you follow the submission instructions at the end of this paper.
Purpose:
This assessment consists of Five (5) questions and is designed to assess your level of knowledge of the key topics covered in this unit
Question 1 (10 marks)
- Identify three examples of differences with no deferred tax consequences (3 marks)
ANSWER a): ** Answer box will enlarge as you type
The “dividends and interest deduction” allows a portion of dividends and capital gains from US firms to be tax-free.
Tax deduction for natural resource depletion (% depletion) that is permanently greater than the depletion expenditure on the financial statements (cost depletion)
During that time, the company suffered a financial loss. overpaid taxes
- Suppose a tax reform bill is enacted that causes the corporate tax rate to change from 34% to 36%. How would this affect an existing deferred tax liability? How would the change be reflected in income? (4 marks)
ANSWER b):
Assets which could be used for future tax relief are known as deferred tax assets. It often indicates that your company has overcharged taxes or paid taxes in advance, so it may anticipate recovering those funds in the future.
Tax reductions increase demand by raising disposable cash and motivating companies to make additional hires and investments. Tax hikes have the opposite effect. When the economy is struggling, these demand impacts can be significant, but they are less pronounced when it is close to capacity.
- Sometimes a temporary difference will produce future deductible amounts. Explain what is meant by future deductible amounts with example (3 marks)
ANSWER:
The future deductible amount menu arises from the asset that Hess and carrying amount with the deduction of the income tax calculated on the asset or liability. Future deductable amounts may include various tax sets that are grossed up and arise from the settlement of assets or a liability. The example of a future deductible amount will be the cost base of the asset in determining the capital gain under the Australian standard.
Refrences
Aasb.gov.au (2022). Income taxes. [Online]. Available at: https://www.aasb.gov.au/admin/file/content102/c3/AAS03_12-99.pdf. [Accessed at: 23-06-2022].
Question 2 (10 marks)
- Given sales revenue of $200,000, how can it be determined whether or not $200,000 cash was received from customers? (3 marks)
ANSWER a):
In the above question the sales revenue is 200000. The sales can be determined with the amount of cash received from the customers. The sales will be credited and the amount of cash will be debited in the given journal entry of sales revenue. The amount of sales revenue can be determined with the help of the transaction that take place in the business with the exchange of goods in amount of cash.
- Investing activities include the acquisition and disposition of assets. Provide four specific examples. Why purchase of inventory is not considered as investing activities? (4 marks)
ANSWER b):
The four example of investing activity includes:
- Purchase of property plant and equipment
- Sale from plant and equipment
- Sale of various other business
- Purchase of marketable securities
Purchase of inventory is not considered as an investing activity because it is not the purchasing of long-term assets. Inventory purchases are considered in the operating activity as change in working capital as they are not the acquisition of any other business.
- What are the three broad classes of cash flows. Why this classification is needed? (3 marks)
ANSWER c):
The three broad classes of cash flow include investing activity operating activity and financing activity. This amount of classification is needed because it helps in segregating all the asset and liability and helps in improving the flow of cash in the business. It helps in analysing about the changes that can be analysed with the help of serviceable life of the Asset and the acquisition and disposition of asset and liability in the business. It helps in determining the cash flow in the three areas that are long term and short term.
Refrences
Opentext.ca (2022). Operating, Investing and Financing activity. [Online]. Available at: https://opentextbc.ca/principlesofaccountingv1openstax/chapter/differentiate-between-operating-investing-and-financing-activities/. [Accessed at: 23-06-2022].
Question 3 (10 marks)
On March 1, 2021, Beldon Corporation purchased land as a factory site for $60,000. An old building on the property was demolished, and construction began on a new building that was completed on December 15, 2021. Costs incurred during this period are listed below:
| Demolition of old building | $ 4,000 |
| Architect’s fees (for new building) | 12,000 |
| Legal fees for title investigation of land | 2,000 |
| Property taxes on land (for period beginning March 1, 2016) | 3,000 |
| Construction costs | 500,000 |
| Interest on construction loan | 5,000 |
Salvaged materials resulting from the demolition of the old building were sold for $2,000.
Required:
Determine the amounts that Beldon should capitalize as the cost of the land and the new building.
ANSWER:
Capitalize cost of land = Purchase price + Demolition of old building – Sale of material + Legal Fees
= 60000 + 4000 – 2000 + 2000
= 64000
Capitalize cost of building = Cost + Architect fees + Interest
= 500000 + 12000 + 5000
= 517000
Question 4 (10 marks)
The following book and fair values were available for Westmont Company as of March 1.
| Book value | Fair value | |
| Inventory | $ 630,000 | $ 600,000 |
| Land | 750,000 | 990,000 |
| Buildings | 1,700,000 | 2,000,000 |
| Customer relationships | –0– | 800,000 |
| Accounts payable | (80,000) | (80,000) |
| Common stock | (2,000,000) | |
| Additional paid-in capital | (500,000) | |
| Retained earnings, 1/1 | (360,000) | |
| Revenues | (420,000) | |
| Expenses | 280,000 |
Arturo Company pays $4,000,000 cash and issues 20,000 shares of its $2 par value common stock (fair value of $50 per share) for all of Westmont’s common stock in a merger, after which Westmont will cease to exist as a separate entity. Stock issue costs amount to $25,000 and Arturo pays $42,000 for legal fees to complete the transaction.
Required
Prepare Arturo’s journal entries to record its acquisition of Westmont.
ANSWER:
| S.No. | Particulars | Debit | Credit |
| a. | Legal Fees | 42000 | |
| To Cash | 4200 | ||
| b. | Inventory | 25000 | |
| To Cash | 25000 | ||
| c. | Inventory | 600000 | |
| Land | 990000 | ||
| Buildings | 2000000 | ||
| Customer relationships | 800000 | ||
| Goodwill | 690000 | ||
| To Accounts Payable | 80000 | ||
| To Stock | 40000 | ||
| To additional Capital | 960000 | ||
| To Cash | 4000000 |
Question 5 (10 marks)
Following are several figures reported for Allister and Barone as of December 31, 2021:
| Allister | Barone | |
| Inventory | $ 500,000 | $300,000 |
| Sales | 1,000,000 | 800,000 |
| Investment income | not given | |
| Cost of goods sold | 500,000 | 400,000 |
| Operating expenses | 230,000 | 300,000 |
Allister acquired 90 percent of Barone in January 2020. In allocating the newly acquired subsidiary’s fair value at the acquisition date, Allister noted that Barone had developed a customer list worth $78,000 that was unrecorded on its accounting records and had a 4-year remaining life. Any remaining excess fair value over Barone’s book value was attributed to goodwill. During 2021, Barone sells inventory costing $130,000 to Allister for $180,000. Of this amount, 10 percent remains unsold in Allister’s warehouse at year-end.
Required:
Determine balances for the following items that would appear on Allister’s consolidated financial statements for 2021:
- Inventory (3 marks)
- Sales (3 marks)
- Cost of Goods Sold (4 marks)
ANSWER:
- a) Inventory for 2021
| Particulars | Amount |
| Gross Inventory | 800000 (500000 + 300000) |
| Less: Unrealised Profit | 5000 (50000*10%) |
| Inventory | 795000 |
| Working Note:
Profit = (180000 – 130000) = 50000 |
|
- b) Sales
| Particulars | Amount |
| Gross Sales | 1800000 (1000000 + 800000) |
| Less: Sales intra transactions | 180000 |
| Sales | 1620000 |
- c) Cost of Goods Sold
| Particulars | Amount |
| Gross COGS | 900000 |
| Less: COGS intra transactions | 180000 |
| Add: Profit | 5000 |
| COGS | 725000 |
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