ACFI2012 Patterson Ltd Statement

Patterson Ltd was registered on 18 March 2017, as a company with a constitution limiting the shares that could be offered to; 4 000 000 Ordinary A shares and 2 000 000 non-voting Ordinary B shares. The company issued a prospectus dated 12 May inviting the public to apply for 3 000 000 Ordinary A class shares at $2.50 per share. The terms of the shares on issue are $1.00 on application, $1.00 on allotment and $0.50 to be called within six months of allotment.

If the issue is oversubscribed the directors will make a pro-rata issue of shares and the excess application money will be applied to allotment and calls before any refunds will be given.On 15 May the directors also decided to issue 1 000 000 non voting Ordinary B shares as fully paid to the promoters for a payment of $2.00 per share.

On 30 June applications closed. Applications for 4 500 000 shares in total had been received with applicants for 1 500 000 shares paying $2.50 and the remainder paying only the application fee.

On 4 July the shares were allotted, with all allotment money owed, paid by the 30 July.

On 22 July share issue costs of $35,000 for the Ordinary A shares. The share issue costs related to legal expenses associated with the share issue and fees associated with the drafting and advertising of the prospectus and share issue.

The call on the Ordinary A shares was made on 25 August and due by 30 September. All call money was received except for the call on 20 000 shares. The directors met and forfeited the shares on 8 October. On 23 October the $2.50 shares were reissued at $2.20 fully paid to $2.50. Costs associated with reissuing the forfeited shares totalled $8,000. The money was refunded to the defaulting shareholders on 10 November.

The directors announced on 23 November that they were to make a further issue of 1 000 000 Ordinary A shares in 8 months time for $4.00 per share. They issued a call option on these shares, with $0.60 payable by 15 December. All options were sold.

Required:

Prepare a schedule for the Ordinary A share issue that shows the break-up of:
number of shares applied for;
number of shares allotted;
total cash received;
cash received that relates to application;
cash received that relates to allotment;
cash received that relates to calls (in advance); and
cash refunded.

Prepare journal entries for the above transactions. Note: the entries should be in strict date order of the underlying event. (Narrations required)

Question 2

Banjo Ltd began operations on 1 July 2016. Items in the statement of financial position as at 30 June 2018 are:

Year end balances	$
Inventory on hand	236,000
Accounts receivable	94,000
Allowance for Impairment	9,000
Goodwill (net)	71,000
Provision for Employee Entitlements	6,000
Accounts payable	73,000
Cash at Bank	35,000
Vehicles at cost	90,000
Vehicles: Accumulated Depreciation	37,500
Equipment at cost	400,000
Equipment: Accumulated Depreciation	200,000
Computers at cost	200,000
Computers: Accumulated Depreciation	100,000
Rent Payable	4,000
Prepaid Insurance	40,500
Deferred Tax Liability (before adjustment)	26,175

The depreciation regimes for the financial reports and the company income tax return respectively, are listed below. The company income tax rate is 30%.

Depreciation Regimes	Vehicles	Equipment	Computers
Depreciation rate:
Accounting	25%	25%	25%
Tax	40%	30%	50%
Method:
Accounting	Straight-line	Straight-line	Straight-line
Tax	Reducing Balance	Reducing Balance	Reducing Balance
Residual:	$15,000	Zero	Zero

During the year the company recognised the following transactions which are treated differently for tax and accounting purposes:

Insurance of $78,000 was paid during the year. Of this amount, $40,500 is prepaid for next year.
Rent of $4,000 is owing at the end of the year, $48,000 has paid in cash during the year.
Employee Entitlements (Annual, Sick and Long Service Leave) totalling $10,000 were expensed during the year. Payments of $4,000 were made.
Bad Debts expense was $9,000 for the year.
Goodwill was impaired by $12,000 during the year.

Items in the income statement which were treated the same for accounting and tax purposes were:

Sales $1,180,000
Cost of Goods Sold $615,500
Salaries and Wages $89,000
Other expenses $21,400

Answer:

a) Schedule - Ordinary A shares:

Particulars	Share on which full amount is received	Share on which application amount is received	Total
Number of share applied for	1,500,000	3,000,000	4,500,000
Number of share allotted	1,000,000	2,000,000	3,000,000
Total cash received	3,750,000	3,000,000	6,750,000
Cash received that relates to application	1,000,000	2,000,000	3,000,000
Cash received that relates to allotment	1,000,000	1,000,000	2,000,000
Cash received that relates to calls	500,000	-	500,000
Cash refunded	1,250,000	-	1,250,000

(b) Journal Entries

Date	Particulars	Debit ($)	Credit ($)
15-May-17	Bank	2,000,000
	To Share Capital - Ordinary B shares	2,000,000
	(Ordinary B shares issued to promoters as fully paid @$2)

30-Jun-17	Bank	6,750,000
	To Share Application Money	6,750,000
	(Share application money received on 6,000,000 shares)

04-Jul-17	Share Application Money	4,250,000
	To Share Capital - Ordinary A shares	3,000,000
	To Bank	1,250,000
	(Allotment of shares made)

04-Jul-17	Share Allotment Money	3,000,000
	To Share Capital - Ordinary A shares	3,000,000
	(Allotment money due)

22-Jul-17	Share issue expenses	35,000
	To Bank	35,000
	(Share issue expenses relating to Ordinary A shares paid)

30-Jul-17	Bank	1,000,000
	To Share Application Money	2,000,000
	To Share Allotment Money	3,000,000
	(Share allotment money received)

25-Aug-17	Share Call Money	1,500,000
	To Share Capital - Ordinary A shares	1,500,000
	(Call money due)

30-Sep-17	Bank	990,000
	Share Application Money	500,000
	To Share Call Money	1,490,000
	(Share allotment money received on 2,980,000 shares)

08-Oct-17	Share Capital	50,000
	To Share Forfeiture	40,000
	To Share Call Money	10,000
	(20,000 share forfeited for non-payment of call money)

23-Oct-17	Bank	44,000
	Share Forfeiture	6,000
	To Share Capital - Ordinary A shares	50,000
	(Forfeited shares reissued)

23-Oct-17	Share Forfeiture	8,000
	To Bank	8,000
	(Share reissue charges paid)

10-Nov-17	Share Forfeiture (40,000-6,000-8,000)	26,000
	To Bank	26,000
	(Excess amount refunded to shareholders)

15-Dec-17	Bank (1,000,000*0.6)	600,000
	To Equity Share Options	600,000
	(Options sold @ $4)

Solution 2

Given Information

Year end balances	Amount (in $)
Inventory on hand	236,000
Accounts receivable	94,000
Allowance for Impairment	9,000
Goodwill (net)	71,000
Provision for Employee Entitlements	6,000
Accounts payable	73,000
Cash at Bank	35,000
Vehicles at cost	90,000
Vehicles: Accumulated Depreciation	37,500
Equipment at cost	400,000
Equipment: Accumulated Depreciation	200,000
Computers at cost	200,000
Computers: Accumulated Depreciation	100,000
Rent Payable	4,000
Prepaid Insurance	40,500
Deferred Tax Liability (before adjustment)	26,175

Calculation of Depreciation

Particulars	Accounting Books (Straight Line)			Income Tax Books (Reducing Balance)
Particulars	Vehicles	Equipment	Computers	Vehicles	Equipment	Computers
Asset Cost	90,000	400,000	200,000	90,000	400,000	200,000
Residual Value	15,000	-	-	15,000	-	-
Rate of Depreciation	25%	25%	25%	40%	30%	50%
Depreciation for the year ended 30th Jun-17	18,750	100,000	50,000	36,000	120,000	100,000
Written Down Value as on 30th Jun-17	71,250	300,000	150,000	54,000	280,000	100,000
Depreciation for the year ended 30th Jun-18	18,750	100,000	50,000	21,600	84,000	50,000
Written Down Value as on 30th Jun-18	52,500	200,000	100,000	32,400	196,000	50,000

(a)

Computation of taxable income and tax payable for the year ended 30th Jun-18

Particulars	$	Amount (in $)
Accounting profit before tax	164,850

Less: Allowed expenses
Depreciation - Vehicles	21,600
Depreciation - Equipment	84,000
Depreciation - Computers	50,000
Insurance expense paid	78,000
Rent expense paid	48,000
Employee Entitlements paid	4,000	285,600


Add: Disallowed expenses
Depreciation - Vehicles	18,750
Depreciation - Equipment	100,000
Depreciation - Computers	50,000
Insuance expense	37,500
Rent expense	52,000
Bad debt expense	9,000
Employee Entitlements expensed	10,000
Impairment of goodwill	12,000	289,250

Taxable income	168,500
Tax payable	50,550

(b)

Deferred tax worksheet for the year ended 30th Jun-18

Particulars	Carrying amount as per accounts ($)	Carrying amount as per tax ($)	Deductible Temporary Differences ($) (DTA)	Taxable Temporary Differences ($) (DTL)
Assets
Inventory on hand	236,000	236,000	-	-
Accounts receivable	85,000	94,000	9,000	-
Goodwill (net)	71,000	83,000	12,000	-
Cash at Bank	35,000	35,000	-	-
Vehicles	52,500	32,400	-	20,100
Equipment	200,000	196,000	-	4,000
Computer	100,000	50,000	-	50,000
Prepaid Insurance	40,500	-	-	40,500

Liabilities
Provision for Employee Entitlements	6,000	-	6,000	-
Accounts payable	73,000	73,000	-	-
Rent Payable	4,000	-	4,000	-
Total temporary diff.	31,000	114,600
Deferred tax @ 30%	9,300	34,380
Opening balances	26,175
Deferred tax movement for the year	9,300	8,205

(c) Journal entries

Particulars	Dr./ Cr.	Amount ($)	Amount ($)
Deferred tax asset	Dr.	9,300
To Deferred tax liability	Cr.	8,205
To Income tax expense	Cr.	1,095
(Being deferred tax expense booked)

Current tax expense	Dr.	50,550
To Current tax lability	Cr.	50,550
(Being current tax expense booked)

As per AASB 112 "Income taxes", an entity can offset its deferred tax assets and deferred tax liabilities, if it fulfills the following criterias:

(a) the entity has a legally enforceable right to set-off current tax assets against current tax liabilities; and he deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority.

Offset Journal Entry

Particulars	Dr./ Cr.	Amount ($)	Amount ($)
Deferred tax liability	Dr.	9,300
To Deferred tax assets	Cr.	9,300
(Being deferred tax assets adjusted with deferred tax liabilities)

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