Company reporting

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Part A: Accounting for income tax

For journal entries, narration is NOT required.

The accounting profit before tax of Happy Star Ltd for the year ended 31 December 2012 amounted to $10,000 after including the following information.

The financial year of the company was from 1 January 2012 to 31 December 2012.

Equipment: The Company purchased the equipment for the amount of $100,000 on 1 January 2011. Ending balance of equipment based on accounting as at 31 December 2011 was $100,000. Ending balance as at 31 December 2012 was $100,000.

A deferred tax liability in relation to the equipment as at 31 December 2011 was $1,500.

Accumulated depreciation of equipment: Ending balance based on tax as at 31 December 2011 was $25,000.

The depreciation method based on tax and accounting is straight line.

Bank loans: Ending balance as at 31 December 2011 was $50,000. Ending balance as at 31 December 2012 was $70,000.

Prepaid rent: Ending balance as at 31 December 2011 was $?; Rent paid during the financial year ended 31 December 2012 was $1,000. Ending balance as at 31 December 2012 was $4,000. A deferred tax liability in relation to prepaid rent as at 31 December 2011 was $3,000.

Income tax rate was 30 per cent.

There is no other difference between accounting profit and taxable income except the above information.

Other tax information: income tax rate was 30 per cent.

Required:
(i)Complete the tax worksheet to determine the balance of deferred tax asset (DTA) or deferred tax liability (DTL) as at 31 December 2011. (ii)Determine taxable income and current tax liability for the financial year ended 31 December 2012. Prepare the journal entry to record the current tax liability. (iii)Complete the tax worksheet to determine the balances of DTA or DTL as at 31 December 2012 and the change (movement/adjustment) in DTA or DTL for the financial year ended 31 December 2012. (iv)Prepare the journal entry to record the change (the movement/adjustment) in DTA or DTL for the financial year ended 31 December 2012.

(1 + 1 + 1 + 1 = 4 marks)

Simplified Tax Worksheet
Solution 1 (i)

Happy Star Ltd
Tax worksheet for the financial year ended 31 December 2011

ParticularsCarrying Amount
(CA)Tax Base
(TB)Taxable Temporary Differences (TTD)Deductible Temporary Differences (DTD)

Solution 1 (ii)

Happy Star Ltd
Determination of Taxable Income for the financial year ended 31 December 2012

Journal entry:

Solution 1 (iii)

Happy Star Ltd
Tax worksheet for the financial year ended 31 December 2012

ParticularsCarrying Amount
(CA)Tax Base
(TB)Taxable Temporary Differences (TTD)Deductible Temporary Differences (DTD)

Solution (iv)

Journal entry:

Part B: Consolidation

For journal entries, narrations are NOT required.

On 1 January 2011, Panda Ltd acquired 60% of the share capital of Snake Ltd for $ 1,000,000. At that time, the equity of Snake Ltd consisted of: Share capital$ 1,000,000
General reserve100,000
Retained earnings400,000
$ 1,500,000
All the identifiable assets and liabilities of Snake Ltd were recorded at fair value except for:
Carrying AmountFair Value
Land$ 600,000$ 620,000
Plant and equipment $ 500,000$ 510,000

The financial year of the company was from 1 January 2012 to 31 December 2012.

On 1 January 2011, the plant and equipment had a further ten-year life and was expected to be used evenly over that time. The land was sold during the financial year ended 31 December 2012. The goodwill was impaired by $10,000 and $20,000 on 31 December 2011 and 31 December 2012 respectively.

The following intra-group transactions have taken place:
(i)On 10...
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