Accounting Questions for Income Tax, Financial Instruments, Control and Equity and Not-for-Profits

Income Tax Accounting

QUESTION 1: 
ACCOUNTING FOR INCOME TAX                

Doc McStuffins, CEO of McStuffinsville Hospital has asked you for help with her deferred tax. For the year ending 31 March 2019, McStuffinsville Hospital made an accounting profit that is the 998317. The tax rate is 28%. The following information was also provided to you:

•    As at the end of the 2019 financial year McStuffinsville Hospital has a 4 year-old portable x-ray machine. The machine cost $62,000 and is depreciated over a total useful life of 25 years with an expected residual or salvage value of $2,000. For tax purposes the machinery is fully depreciated using a 5% depreciation rate. 

 

•    At the start of the 2016 financial year $119,000 of R&D expenditure was capitalized and turned into an intangible asset to be amortized over seven years. For tax purposes such expenditure is deductible in the year incurred (note there was no R&D tax credit in 2016-2019).

 

•    McStuffinsville Hospital rents iPads and iPhones for staff. At 31 March 2019, $4,000 was paid in advance for the next year . Tax deductions for this item are available for amounts paid.

 

•    At the start of the year there was a provision for annual long service leave of $56,000. $8,000 long service leave was taken during the year and the long service leave expense for the year was $18,000. Tax deductions for this item are available for amounts paid.

 

•    There were entertainment expenses incurred and paid of $11,000. For tax purposes only 50% of the amount paid for entertainment expenses are tax deductible.

 

•    The allowance for doubtful debts at the start of the year was $27,000, and at the end of the year it was $26,000. $5,000 of bad debts were written off during the year. Tax deductions for this item are available when debts are written off.

 

•    The opening balances as at 1 April 2018 for Deductible Temporary Differences and Taxable Temporary Differences were 77,800 and 81,900, respectively. 

 

•    The tax rate is 28%.
Fill in the current tax worksheet and deferred tax worksheet below. Record any journal entries relating to tax for the year. 
Current tax worksheet for the year ending 31 March 2019
Deferred tax worksheet as at 31 March 2019
Following from above, record any journal entries relating to the bonds for the year ending 31 March 2018 in the space below (record one account in each line).

Accounting for Financial Instruments

 

QUESTION 2: 

ACCOUNTING FOR FINANCIAL INSTRUMENTS                

1.    On 1 April 2017, DuckTales Ltd bought bonds originally issued for $100,000 (i.e., this was their face value). The bonds will be repaid in five years. The bonds have an interest rate of 8% payable at the end of the year, but due to changes to the OCR, the current interest rate for similar debt 7%. The price DuckTales Ltd bought the bonds for $104100 

Fill in the table below. DuckTales Ltd accounts for debt instruments using the amortised cost method. Please round to no decimal places.

 

2 Following from above, record any journal entries relating to the bonds for the year ending 31 March 2018 in the space below (record one account in each line).

 

3    As at 31 March 2018, DuckTales Ltd has another financial instrument which is shares in another company. These shares were purchased for the purposes of making a gain on the investment. Explain to Scrooge McDuck, the CEO of Ducktakes Ltd, how the financial instrument should be accounted for at the end of each financial year. In your answer you should outline how new values for the financial instrument could and should be determined and how any change would affect the financial statements.   

 

QUESTION 3: 
CONTROL AND EQUITY ACCOUNTING           

1.    On 1 January 2018, SuperCha Ltd, a bubble milk tea chain, acquired a 30 per cent interest in HighlandTea Ltd for $120,000 in cash. As at the acquisition date, the assets of HighlandTea Ltd were reported at fair value. In addition:

•    For the year ended 31 December 2018, HighlandTea Ltd recorded an after-tax loss of $20,000.
•    For the year ended 31 December 2019, HighlandTea Ltd recorded an after-tax profit of $40,000 and paid a dividend of $5,000.

Record the relevant equity accounting adjustments in the books of SuperCha Ltd for the year ending 31 December 2019 only. SuperCha Ltd accounts for its investment in HighlandTea Ltd using equity accounting (record one account in each line).

 

2.    Following from above, what is the value of the Investment in Associate recorded in SuperCha Ltd’s books as at 31 December 2019.

 

3.    SuperCha Ltd also owns 46% of another company, DentTea Ltd. DentTea Ltd was started by Arthur Dent, and the remaining 54% of shares are still owned by Dent Family members. The Dent Family is very large (over 100 people) and family members do not get along with each other. Currently, SuperCha Ltd controls 3 out of the 5 Board of Director seats for DentTea Ltd. How should SuperCha Ltd account for its investment in DentTea Ltd? Explain why and motivate your answer with reference to the definition of control.

 

QUESTION 4: 
ACCOUNTING FOR NOT-FOR-PROFITS                       

1.    Pakuranga Museum is a registered tier 3 charity. Its purpose is to promote and educate the history of its local area. Suggest three output measures of performance.
2.    As part of its collection Pakuranga Museum has two material heritage assets. Explain how each should be accounted for, justify why, and explain some pros and cons of each accounting option.

•    The first is a painting by C.F. Silver. The painting was purchased by the museum for $10,000 but is viewed as irreplaceable as the painter is deceased. There is a liquid market for similar paintings, which have sold recently for $400,000 and this was estimated to be the fair value by a registered valuer. 
•    The second is a hei-tiki which was donated to the museum and reputedly worn by a chief of great mana (prestige or status). To replace it with a greenstone carving of similar quality would cost $10,000.