Question 1: Accounting for Income Tax (suggested words count: approximately 300)
Use the information relating to income tax in the financial statements of the allocated ASX Company and answer the following:
(i) The income tax expense included in the profit or loss for the year? 2 marks
(ii) Any income tax included in other comprehensive income; 2 marks
(iii) The current and deferred tax components of income tax expense; 4 marks
(iv) Whether a deferred tax asset or deferred tax liability or both is disclosed in the statement of financial position and the size of these balances; 5 marks
(v) Why income tax expense is usually not equal to accounting profit multiplied by the company tax rate.
Question 2: Business combinations and consolidation (suggested words count: 800)
50 Marks
(i) Earth Ltd has 44% of the voting rights in Mars Ltd. The other 56% of voting rights in Mars Ltd are held by several hundred shareholders who are geographically dispersed. No other shareholder owns more than 1% of the voting rights in Mars Ltd. In general, few of the other shareholders attend Annual General Meetings. There are no arrangements between shareholders for making collective decisions.
Required:
Refer to relevant paragraphs of AASB 10/IFRS 10 Consolidation Financial Statements
(a) Explain whether Earth Ltd is likely to control Mars Ltd; 6 marks
(b) Would it make any difference to your answer to (a) above, if apart from Earth Ltd, there were only two other shareholders in Mars Ltd, each with a 28% shareholding interest? 6 marks
(ii) Please refer to the allocated ASX company's annual report and answer the following:
(a) What is the amount of total comprehensive income for the year ended 30 June 2015? Describe the components of this company's comprehensive income, and show the amount of this comprehensive income that is attributable to (i) shareholders of the parent entity; and (ii) non-controlling interest 6 marks
(b) Explain how your Company complies with paragraph 81B of AASB 101 Presentation of Financial Statements? 3 marks
(c) Explain whether your Company has complied with the requirements of paragraphs 54 (q) and 54 (r) of AASB 101, and paragraph 22 of AASB 10 Consolidated Financial Statements? 4 marks
(d) Read this company's ‘Principles of consolidation' accounting policy carefully and determine whether it complies with the requirements of AASB 10. 5 marks
(iii) Consolidation journal entries 20 marks
Parent Ltd (Parent) owns 80% of the issued shares of Subsidiary Ltd (Subsidiary). During the period ended 30 June 2016, the following transactions took place.
(a) In August 2015, Parent sold to external entities $2,000 worth of inventories that had been sold to it by Subsidiary in April 2015 at a profit before tax to Subsidiary of $200.
(b) In March 2016, Parent sold $10,000 worth of inventories to Subsidiary, recording a profit before tax of $1,000. At 30 June 2016, 10% of these inventories remained unsold by Subsidiary.
(c) In April 2016, Subsidiary sold $12,000 worth of inventories to Parent Ltd at a mark-up of 20%. At 30 June 2016, $1,200 of these inventories remained unsold by Parent Ltd.
(d) At 1 July 2014, Parent purchased plant from Subsidiary for $100,000. At that date, this plant had a carrying amount of $90,000 in the accounts of Subsidiary.
(e) At 30 June 2016, Parent recorded depreciation of $10,000 in relation to plant sold to it by Subsidiary on 1 July 2014. Parent uses a 10% p.a. straight-line depreciation method for plant.
Required:
Assuming a company tax rate of 30%, prepare consolidation journal entries to eliminate the effect of intra-group transactions as at 30 June 2016, considering the effect on non-controlling interest (NCI) where applicable.