Acu 603 Solutions

CHAPTER 3
Exercise 3.4 Share issue, options
BARCOO LTD
25/3 Cash trust – shares Dr 750 000

Application – shares Cr 750 000
(Applications for shares)
Cash trust – options Dr 10 000

Application – options Cr 10 000
(Applications for options)
2/4 Cash Dr 610 000

Cash trust – shares Cr 600 000
Cash trust – options Cr 10 000
(Transfer on issue of shares and options)
Application – shares Dr 600 000

Share capital Cr 600 000
(Issue of shares)
Application – shares Dr 150 000

Cash trust Cr 150 000
(Refund to unsuccessful applicants)
Application – options Dr 10 000

Options Cr 10 000
(Issue of options)
31/12 Options Dr 9 000

Cash Dr 63 000
(Issue of shares on issue of options)
Options Dr 1 000
Options 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 LTD
2011
01/4 NO ENTRY
10/4 Cash trust Dr 210 000

Application – ordinary shares Cr 210 000
(Applications for ordinary shares:
140 000 x $1.50)
Cash trust Dr 170 000

Application – preference shares Cr 170 000
(Applications for preference shares:
85 000 x $2)
15/4 Application – ordinary shares Dr 150 000

Share capital – ordinary Cr 150 000
(Issue of 100 000 shares at $1.50 each)
Application – preference shares Dr 170 000

Receivable from underwriter Dr 30 000
Share capital – preference Cr 200 000
(Issue of 100 000 shares at $2 each)
Cash Dr 320 000

(Transfer on issue of shares)
Application – ordinary shares Dr 60 000

Cash trust – ordinary shares Cr 60 000
(Refund to unsuccessful applicants)
20/4 Share capital – preference Dr 4 000

Share capital – ordinary Dr 500
Cash 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 Trust
10/4/11 Application 380 000 15/4/11 Application 60 000
______ Cash 320 000
380 000 380 000
Application – Ordinary Shares

15/04/11 Share capital 150 000 10/04/11 Cash trust 210 000
Cash trust 60 000 ______
210 000 210 000
Application – Preference Shares

15/04/11 Share Capital 170 000 10/04/11 Cash trust 170 000
Share Capital - Ordinary Shares

20/04/11 Share issue costs 500 15/04/05 Application – Ord 150 000
Share Capital - Preference Shares

20/04/11 Share issue costs 4 000 15/04/05 Application – Pref 200 000
Receivable - Underwriter
15/04/11 Share capital - pref 30 000 20/04/05 Cash/Share issue costs30 000
Cash
15/04/11 Cash trust 320 000
20/04/11 Receivable – U’writer 25 500
Exercise 3.6 Rights issue, placement of shares
HUNTER LTD
31/3 Cash Dr 200 000

Application Cr 200 000
(Applications for shares on rights issue)
Application Dr 200 000

(Issue of shares)
Share capital Dr 5 000

Cash Cr 5 000
(Share issue costs)
30/6 Cash Dr 20 000

(Placement of 10 000 shares at $2)
Problem 3.2 Share issue, options

MITCHELL LTD
A. GENERAL JOURNAL ENTRIES
DATE
DETAILS
25/07/09 Call – preference Dr 50 000

Share capital - preference Cr 50 000
(50 000 shares x $1.00)
31/08/09 Cash Dr 42 500

Call – preference Cr 42 500
(50 000 – 7 500 =42 500 shares x $1.00)
07/09/09 Share capital – preference (7 500 x $3.00) Dr 22 500

Call – preference (7 500 x $1.00) Cr 7 500
Forfeited shares reserve (7 500 x $2.00) Cr 15 000
30/11/09 Cash trust Dr 120 000

Application Cr 120 000
(40 000 x $3.00)
01/12/09 Application Dr 90 000

Share capital – B ordinary Cr 90 000
(30 000 shares x $3.00)
Application Dr 30 000
Calls in advance Cr 30 000
(5 000 applications x $3.00)
Cash Dr 120 000

5/12/09 Share capital – B Ordinary Dr 5 200

Cash Cr 5 200
(Share issue costs)
30/04/10 Cash Dr 67 500
Share capital – A ordinary Cr 67 500
(15 000 shares x $4.50)
30/04/10 Options Dr 11 200

Share capital – A ordinary (15 000 x $0.56) Cr 8 400
Options reserve (5 000 x $0.56) Cr 2 800
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 options
FITZROY LTD
General Journal
2010
Nov 30 Cash Dr 18 000
Share capital - B Ordinary Cr 18 000
(Allotment of 8 000 B ordinary
shares at a price of $2.25 under a 1
for 5 rights issue)
2011
Jan 16 Call -A Ordinary Dr 90 000
Share capital - A Ordinary Cr 90 000
(Call of 75c per share on 100 000
A Ordinary shares)
Jan 31 Cash Dr 82 500

Call - A Ordinary Cr 82 500
(Cash received on call)
Feb 5 Share Capital - A Ordinary Dr 15 000

Call - A Ordinary Cr 7 500
Forfeited shares reserve Cr 7 500
(Forfeiture and cancellation
of 10 000 A ordinary shares)
Mar 17-31 Cash trust Dr 21 000

Application – options Cr 21 000
(Receipt of applications for options)
Mar 31 Cash Dr 21 000

(Being transfer on allotment of options)
Application – options Dr 21 000

Share options Cr 21 000
(Issue of 35 000 options
exercisable on 31 December 2003)
Dec 31 Cash Dr 44 500

Share 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 2 000

Cash Cr 2 000
(Payment of share issue costs)
CHAPTER 8
Exercise 8.2 Calculation of current tax
Flaxton Ltd
Current Tax Worksheet
(for year ended 30 June 2011)
$ $
Accounting profit 40 000
Add:
Donations to political parties (non deductible) 5 000
Depreciation expense – Machinery 15 000
Rent received 10 000
Annual leave expense 5 600 35 600
75 600
Deduct:
Rent revenue 12 000
Annual leave paid 6 500
Depreciation of machinery for tax 18 750 (37 250)
Taxable profit 38 350
Current liability @ 30% $11 505
Adjusting journal entry
30 June 2011
Income 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 Future Future Tax Taxable Deductible

Amount Taxable Deductible Base Temporary Temporary
Amount Amount Differences Differences
$ $ $ $ $ $
Assets
Receivables 23 000 (0) 2 000 25 000 2 000
Machines 75 000 (75 000) 50 000 50 000 25 000
Liabilities
Interest Payable 1 000 0 (1 000) 0 1 000
Total 25 000 3 000
temporary
differences
Excluded - -
differences
Temporary 25 000 3 000
differences
Deferred tax 7 500
liability
Deferred tax 900
asset
Beginning (0) (0)
balances
Movement - -
during year
Adjustment 7 500 Cr 900 Dr
Exercise 8.6 Creation and reversal of temporary difference
Imbil Ltd
Workings
Accounting Taxation
Cost 25 000 25 000
Depreciation (04) (5 000) (3 750)
Carrying amount (04) 20 000 21 250
Depreciation (05) (5 000) (3 750)
Depreciation (06) (7 500) (3 750)
Proceeds on sale (15 000) (15 000)
Gain on sale 7 500 1 250
Imbil Ltd
Calculation of deferred tax (extract)
as at 30 June 2008
Carrying Future Future Taxable Deductible
Amount Taxable Deductible Tax Base Temporary Temporary
$ $ $ $ $ $
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 375

Income tax income Cr 375
Exercise 8.6 (Cont’d)
Imbil Ltd
as at 30 June 2009
$ $ $ $ $ $
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 375

Income tax income Cr 375
Imbil Ltd
as at 30 June 2010
$ $ $ $ $ $
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 750

Deferred tax asset Cr 750
PROBLEMS
Problem 8.1 Current and deferred tax
Kilcoy Ltd
Current Tax Worksheet
(for year ended 30 June 2010)
$ $
Accounting profit 256 700
Add:
Entertainment expense (non deductible) 1 700
Depreciation – buildings (non deductible) 7 600
Depreciation – plant 22 500
Insurance expense 4 200
Development expenditure 15 000
Doubtful debts expense 4 100
Annual leave expense 46 000 101 100
Deduct: 357 800

Royalty revenue (tax exempt) 8 000
Bad debts written off 3 500
Annual leave paid 52 000
Insurance paid 3 700
Depreciation – plant (tax) 30 000
Gain – Sale of buildings (non assessable) 5 000 (102 200)
Taxable income 255 600
Add back exempt income 8 000
263 600
Tax loss recouped (12 500)
Taxable income 251 100
Tax payable @ 30% 75 330
Less 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 25 580

Current Tax Liability Cr 21 830
Deferred Tax Asset Cr 3 750
Problem 8.1 (Cont’d)
Kilcoy Ltd
Deferred tax worksheet
Carrying Future Future Tax Base Taxable Deductible

Amount Taxable Deductible Temporary Temporary
$ $ $ $ $ $
Relevant
Assets
Receivables 17 400 0 4 100 21 500 4 100
Prepaid 4 500 (4 500) 0 0 4 500 -
insurance
Buildings 110 500 (110 500) 0 0 110 500
Plant 82 500 (82 500) 60 000 60 000 22 500
Development 0 (0) 15 000 15 000 15 000
expenditure
Relevant
Liabilities
Annual leave 10 000 0 (10 000) 0 10 000
Total
Temporary 137 500 29 100
Differences
Exempt
differences 110 500
Temporary 27 000 29 100
Differences
Deferred tax 8 100
liability
Deferred tax 8 730
asset
Beginning (27 270) *(5 850)
balances
Movements - -
during the
year
Adjustment (19 170) (2 880)
Dr Dr
* ($9 600 – 3 750 (tax loss recouped) = $5 850)
The entry to adjust deferred tax accounts is:
Deferred Tax Liability Dr 19 170

Deferred Tax Asset Dr 2 880
Income 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 Reversal
2005 2006 2007
DTD 17 000 14 500 2 500
TTD 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 LTD
General Journal
A.
Accumulated depreciation – Building Dr 100 000
Asset revaluation reserve Dr 14 000
Deferred tax liability Dr 6 000
Expense – revaluation decrement Dr 20 000
Building Cr 140 000
Accumulated depreciation – Vehicle Dr 40 000

Vehicle Cr 30 000
Asset revaluation reserve Cr 7 000
Deferred 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 22 500

Accumulated depreciation – Vehicle Cr 22 500
($90 000/ 4)
Exercise 10.6 Revaluation of assets and tax-effect accounting
FADDEN LTD
Year ended 2008

Carrying Tax Base Temporary
Amount Difference
Asset cost $100 000 $100 000

Depreciation 20 000 12 500
80 000 87 500
Revaluation 5 000 _____
$85 000 $87 500 $2 500
When the asset is revalued upwards the entity will pass the entry:
Accumulated depreciation Dr 20 000

Asset Cr 15 000
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 2 250

Income tax revenue Cr 2 250
The net effect is a debit balance in the deferred tax account of $750.
Year ended 2009

Amount Difference
Asset 1/7/08 $85 000 $87 500
63 750 75 000
Revaluation 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 2 625

Deferred tax liability Dr 1 125
Asset Cr 25 000
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.
Year ended 2010

Amount Difference
Asset 1/7/09 $60 000 $75 000
40 000 62 500
Revaluation 5 000 _____
$45 000 $62 500 $17 500
When the asset is revalued upwards the entity will pass the entry:

Asset Cr 15 000
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 5 250

Deferred tax asset Cr 5 250
Exercise 10.9 Revaluation of assets
CHIFLEY LTD
1 July 2009
Machine A Dr 100 000

Machine B Dr 60 000
Cash Cr 160 000
30 June 2010
Depreciation expense – Machine A Dr 20 000

Accumulated depreciation Cr 20 000
(1/5 x $100 000)
Depreciation expense – Machine B Dr 20 000

(1/3 x $60 000)
Accumulated depreciation- Machine A Dr 20 000

Machine A Cr 16 000
(Revaluation to fair value at 30/6/10)
Accumulated depreciation – Machine B Dr 20 000

Machine B Cr 22 000
1 January 2011
Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of machine C)
Depreciation expense – Machine B Dr 9 500

(1/2 x /1/2 x $38 000)
Cash Dr 29 000
Proceeds on sale of Machine B Cr 29 000
(Sale of Machine B)
Carrying amount of Machine B Sold Dr 28 500

Machine B Cr 38 000
(Carrying amount of machine sold)
General reserve Dr 8 000

Asset revaluation reserve – Machine A Dr 2 000
Share Capital Cr 10 000
30 June 2011
Depreciation expense – Machine A Dr 21 000

(1/4 x $84 000)
Depreciation expense – Machine C Dr 10 000

(1/4 x ½ x $80 000)
Accumulated depreciation – Machine A Dr 21 000

Asset revaluation reserve Dr 800
Deferred tax liability Dr 600
Expense – Revaluation decrement Dr 600
Machine A Cr 23 000
Accumulated depreciation – Machine C Dr 10 000

Machine C Cr 11 500
PROBLEMS
Problem 10.1 Depreciation calculation
McMAHON LTD
2010
1/9 Depreciation expense Dr 225
Accumulated depreciation Cr 225
(Depreciation on machine to be sold:
1/6 x 10%[15 000 – 1 500])
Machine Dr 15 000
Cash Cr 8 800
Proceeds on sale Cr 6 200
(Acquisition of machine)
Carrying amount of machine sold Dr 3 925

Machine Cr 8 200
(Carrying amount of machine sold:
8 200 less 3 1/6 [15 000 – 1 500] = 3 925)
Depreciation expense Dr 135

(Depreciation on machine sold:
1/6 x 10%[9 000 – 900])
Cash Dr 7 300
Proceeds on sale of machine Cr 7 300
(Sale of machine)
Carrying amount of machine sold Dr 7 042

Machine Cr 9 000
(Carrying amount of machine sold:
29/12 x 10% [9 000 – 900] = 1 958)
2011
1/1
(Depreciation on machine sold:
½ x 10%[4 000 – 400])
Cash Dr 500
Proceeds Cr 500
(Proceeds on machine sold)
Problem 10.1 (Cont’d)
Carrying amount of machine sold Dr 580

Machine Cr 4 000
(Machine sold:
9.5 x 10%[4 000 – 400] = 3 420])
1/1 Working:
Cost 7 000
Depreciation (3 x 10% x 6 300) 1 890
5 110
New motor 4 800
Carrying 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 2 910
Cash Cr 4 800
(Adjustment due to overhaul of machine)
1/4 Arm Dr 1 200

Cash 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
= 391 800
Depreciation = 10%[391 800 – 39 180] = 35 262
Depreciation on new or replaced machines:

10% x 10/12 [15 000 – 1 500] = 1 125
½ 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 $’000

Cash 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 $’000
Trade 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
$'000
Revenue 1 200
Cost of sales (840)
Gross profit 360
Other income 54
Selling and distribution expenses (76)
Administrative expenses (35)
Finance costs (18)
Profit before tax 285
Income tax expense (85)
Profit for the year 200
Other 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:
$’000
Gain on sale of plant 5
Interest income 24
20
Valuation gain on trading investments
Dividend revenue 5
54
Exercise 19.9 Financial statements
(a) contingent liabilities 5. notes

(b) the effect on retained earnings of the 4. statement of changes in equity
correction of a prior period error
(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 3. other comprehensive income in
any previous revaluation) statement of comprehensive
income
(f) judgements that management has made 5. notes
in classifying financial assets
(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
$
Assets
Current assets
Cash and cash equivalents 119 869
Trade and other receivables 21 071
Financial assets held for trading 68 455
209 395
Non-current assets
Available-for-sale financial assets 1 880 472
Deferred tax asset 655
1 881 127
Total assets 2 090 522

Equity and Liabilities
Current liabilities
Trade and other payables 10 616
Current tax payable 242
Short-term provisions 525
11 383
Non-current liabilities
Deferred tax liability 56 414
Long-term provisions 227
56 641
Total liabilities 68 024
Equity
Share capital 1 368 024
Reserves 376 090
Retained earnings 278 384
2 022 498
Total equity
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) 20 000 120 000
Plant, at cost 70 000 (2) 15 000 85 000
Accumulated depreciation (20 000) 8 000 (28 000)
Available for sale investments 30 000 (3) 8 000 40 000
(4) 2 000
Goodwill 25 000 (5) 5 000 20 000
Deferred tax liability (1) 6 000

(3) 2 000
Land revaluation reserve 20 000 (1) 14 000 34 000

Investments revaluation reserve 5 000 (3) 6 000 11 000
Impairment of goodwill (5) 5 000
Investing activities
Purchase 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 10 000
Inventories 32 000 34 000 2 000
Prepaid expenses 1 000 3 000 2 000
Accounts payable for inventory 15 000 16 000 1 000
Employee liabilities 5 000 5 500 500
Accruals – Interest 700 850 150
Accruals – 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 480 000
Expenses 75 000
Depreciation (5 000)
Interest (2 000) 68 000
Increase in inventories 2 000
Increase in prepayments 2 000
Increase 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 38 000
Receivables 46 000 70 000 24 000
Inventory 30 000 32 000 2 000
Investments 35 000 40 000 5 000
Plant 125 000 150 000 25 000
Accumulated depreciation (23 000) (35 000) 12 000
243 000 325 000
Accounts payable 39 000 43 000 4 000
Accrued interest 3 000 5 000 2 000
Current tax payable 10 000 12 000 2 000
Deferred tax liability - 1 500 1 500
Borrowings 60 000 100 000 40 000
Share capital 100 000 100 000 -
Retained earnings 31 000 60 000 29 000
Investment revaluation reserve - 3 500 3 500
243000 325000
Receipts from customers:
Sales 700 000
Increase in receivables (24 000)
Cash received 676 000
Payments to suppliers and employees

Cost of sales 483 000
Other expenses:
Distribution costs 62 000
Administration costs 74 000
Depreciation (12 000) 124 000
Increase in inventory 2 000
Increase in accounts payable (4 000)
Total payments 605 000
Interest paid
Interest expense 6 000
Increase in accrued interest (2 000)
Interest paid 4 000
Income tax paid
Income tax expense 23 000
Increase in tax payable (2 000)
Income tax paid 21 000
Investments
Revaluation gain net of tax 3 500
Increase in deferred tax liability 1 500
Purchase 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 676 000
Payments to suppliers and employees (605 000)
Cash generated from operations 71 000
Interest paid (4 000)
Income tax paid (21 000)
Net cash from operating activities 46 000
Cash flows from investing activities

Net cash used in investing activities (25 000)
Cash flows from financing activities

Proceeds from borrowings 40 000
Dividend paid (23 000)
Net cash from financing activities 17 000
38 000
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year 30 000
Cash 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 49 000
Accounts receivable - sale of plant - (18) 22 000 22 000
Accounts receivable - other 147 000 (2) 6 000 141 000
Prepayments 20 000 (3) 5 000 15 000
Inventory 60 000 (4) 44 000 104 000
Land 40 000 40 000
Plant 368 000 (14) 72 000 (16) 20 000 420 000
Accumulated depreciation (45 000) (17) 5 000 (8) 30 000 (70 000)
Deferred tax asset 20 000 (13) 4 000 24 000
706 000 745 000
Accounts payable - purchase of plant 34 000 (15) 34 000 -
Accounts payable - other 106 000 (5) 46 000 152 000
Accrued liabilities - interest 3 000 (10) 1 000 4 000
Accrued liabilities - other 33 000 (6) 5 000 38 000
Current tax payable 24 000 (12) 7 000 31 000
Dividend payable 56 000 (22) 6 000 50 000
Borrowings 73 000 (19) 2 000 75 000
Share capital 335 000 (20) 10 000 345 000
Retained earnings 42 000 (11) 46 000 (1) 138 000 50 000
(21) 84 000
706 000 745 000
Operating activities
Profit before tax (1) 138 000 138 000
Decrease in accounts receivable (2) 6 000 6 000
Decrease in prepayments (3) 5 000 5 000
Increase in inventory (4) 44 000 (44 000)
Increase in accounts payable (5) 46 000 46 000
Increase in accrued liabilities (6) 5 000 5 000
Depreciation (8) 30 000 30 000
Gain on sale of plant (7) 7 000 (7 000)
Interest expense (9) 6 000 6 000
236 000 51 000 185 000
Interest 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 activities
Purchase 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 activities
Borrowings (19) 2 000 2 000
Dividends (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 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 activities
Profit before tax 138 000
Interest expense 6 000
Depreciation of plant 30 000
Gain on sale of plant (7 000)
Decrease in accounts receivable 6 000
Increase in inventory (44 000)
Decrease in prepayments 5 000
Increase in accounts payable 46 000
Increase in accrued liabilities 5 000
Cash generated from operations 185 000
Interest paid (5 000)
Income tax paid (43 000)
Net cash from operating activities 137 000
Cash flows from investing activities

Net cash used in investing activities (106 000)
Cash flows from financing activities

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

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CHAPTER 3

Exercise 3.4 Share issue, options

25/3 Cash trust – shares Dr 750 000

Cash trust – options Dr 10 000

2/4 Cash Dr 610 000

Application – shares Dr 600 000

Application – shares Dr 150 000

Application – options Dr 10 000

31/12 Options Dr 9 000

10/4 Cash trust Dr 210 000

Cash trust Dr 170 000

15/4 Application – ordinary shares Dr 150 000

Application – preference shares Dr 170 000

Cash Dr 320 000

Application – ordinary shares Dr 60 000

20/4 Share capital – preference Dr 4 000

Application – Ordinary Shares

Application – Preference Shares

Share Capital - Ordinary Shares

Share Capital - Preference Shares

31/3 Cash Dr 200 000

Application Dr 200 000

Share capital Dr 5 000

30/6 Cash Dr 20 000

Problem 3.2 Share issue, options

25/07/09 Call – preference Dr 50 000

31/08/09 Cash Dr 42 500

07/09/09 Share capital – preference (7 500 x $3.00) Dr 22 500

30/11/09 Cash trust Dr 120 000

01/12/09 Application Dr 90 000

Cash Dr 120 000

5/12/09 Share capital – B Ordinary Dr 5 200

30/04/10 Options Dr 11 200

Jan 31 Cash Dr 82 500

Feb 5 Share Capital - A Ordinary Dr 15 000

Mar 17-31 Cash trust Dr 21 000

Mar 31 Cash Dr 21 000

Application – options Dr 21 000

Dec 31 Cash Dr 44 500

Share Capital – A Ordinary Dr 2 000

Exercise 8.2 Calculation of current tax

Adjusting journal entry

Gin Gin Ltd

Deferred Tax Worksheet

Carrying Future Future Tax Taxable Deductible

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

The differential in depreciation rates has created a deductible temporary difference of

A deferred tax asset must be created as follows:

Deferred tax asset Dr 375

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

Deferred tax asset Dr 375

Income tax expense Dr 750

Problem 8.1 Current and deferred tax

Deduct: 357 800

The entry to recognise current tax is:

Income Tax Expense (current) Dr 25 580

Carrying Future Future Tax Base Taxable Deductible

The entry to adjust deferred tax accounts is:

Deferred Tax Liability Dr 19 170

Paddington Ltd will need to consider the following factors.

An analysis of the temporary differences at 30 June 2010 reveals:

Exercise 10.2 Revaluation of assets

Accumulated depreciation – Vehicle Dr 40 000