The accounting profit before tax of She Said Ltd for the year ended 30 June 2017 was $24000 and included the income and expense items shown below.
| Government grant (exempt from tax) Proceeds on sale of plant Carrying amount of plant sold Entertainment expense Bad debts expense Depreciation expense – plant Insurance expense Annual leave expense | $ | 5360 33000 30000 12100 5200 24000 11900 15400 |
The statements of financial position of She Said Ltd as at 30 June 2017 and 2016 included the following assets and liabilities:
| SHE SAID LTD Statement of Financial Position (Extract) as at 30 June | |||||||||
| 2017 | 2016 | ||||||||
| Accounts receivable Allowance for doubtful debts Prepaid insurance Plant – at cost Accumulated depreciation – plant Deferred tax asset Provision for annual leave Deferred tax liability | $ | 156000 (6800 3400 240000 (134400 ? 14100 ? |
) ) |
$ | 147500 (5200 5600 290000 (130400 4470 9700 9504 |
) ) |
Additional information
(a) In March 2017, the company received an amended assessment from the ATO for the year ended 30 June 2016 indicating that an amount of $4500 claimed as a deduction for legal expenses had been disallowed. The company has not yet adjusted its accounts to reflect the amendment.
(b) For tax purposes the carrying amount of plant sold was $26000. There were no other disposals or acquisitions of plant during the year.
(c) The tax deduction for plant depreciation was $28800. Accumulated depreciation at 30 June 2016 for taxation purposes was $156480.
On 30 June 2015, Rahway Prison Ltd arranged to lease equipment from Cheapa Finance Co. Limited. At the inception of the lease, the equipment had a fair value of $1 100 000, an estimated useful economic life of 10 years and an estimated scrap value of $Nil. Rahway Prison Ltd intends to purchase the equipment at the end of the lease term for its guaranteed residual value. The lease term is 7 years and payments of $237 692 are due in advance on 30 June each year. The guaranteed residual value of the equipment at the end of the lease term is $200 000. If the lease is cancelled by Rahway Prison Ltd a cancellation payment of $500 000 applies. The interest rate implicit in the lease is 24% p.a.
Required
Prepare the lease repayment schedule.
On the basis that the lease is a finance lease, prepare the journal entries of Rahway Prison in respect of all years.
Keepit Ltd is seeking additional finance from its bank and the bank manager has asked for a statement of cash flows for the six months to 30 June 2017. From the data presented below, prepare the statement of cash flows based on the direct method of presentation. Also prepare a note reconciling net cash flow from operating activities to the profit for the year.
| KEEPIT LTD Statements of Financial Position as at 30 June | |||||||||||||
| 2017 | 2016 | ||||||||||||
| Assets Cash at bank Trade debtors Inventory Equipment Acc. depn – equipment Buildings Acc. depn – buildings Total assets |
$
|
75000 (20000 430000 (110000 |
) |
$ $ |
39500 120000 150000 55000 320000 684500 |
$ |
110000 (30000 330000 (80000 |
) |
$ $ |
20000 77000 80000 80000 250000 507000 |
|||
| Liabilities Trade creditors Current tax liability Provision for dividend Loan due 2020 Equity Share capital Retained earnings Total liabilities and equity |
$ $ |
120000 17000 30000 80000 420000 17500 684500 |
$ $ |
60 000 7500 20000 — 400000 19500 507000 |
| KEEPIT LTD Statement of Profit or Loss for six months to 30 June 2017 | |||||||
| Income Sales revenue Rent revenue Discount received Less: Expenses Cost of sales Discount allowed Bad debts Salaries and wages Loss on sale of equipment Depreciation – buildings Depreciation – equipment Profit before tax Less: Income tax expense Profit after tax |
$ |
485000 14000 1000 365000 1 500 4 500 39000 5000 30000 10000 |
$ $ |
500000 455000 45000 17000 28000 |
Additional information
(a) New demountable buildings were purchased for cash.
(b) During the quarter, a dividend to shareholders was declared.
(c) A loan was raised during the year to provide cash for working capital needs.
(d) Equipment that had cost $35000 and been depreciated by $20000 was sold for cash of $10000.
KEEPIT LTD
Statement of Cash Flows
for the year ended 30 June 2017
Cash flows from operating activities
Cash receipts from customers $436 000
Cash paid to suppliers and employees (413 000)
Cash generated from operations 23 000
Rent received 14 000
Income tax paid (7 500)
Net cash from operating activities $29 500
Cash flows from investing activities
Payment for demountable buildings (100 000)
Proceeds from sale of equipment 10 000
Net cash used in investing activities (90 000)
Cash flows from financing activities
Proceeds from issue of shares 20 000
Proceeds from borrowings 80 000
Dividends paid (20 000)
Net cash provided by financing activities 80 000
Net increase in cash and cash equivalents 19 500
Cash and cash equivalents at beginning of period 20 000
Cash and cash equivalents at end of period $39 500
Reconciliation of Net Cash from Operating
Activities with Profit
Profit $28 000
Depreciation 40 000
Loss on sale of equipment 5 000
Increase in current tax liability 9 500
Increased in trade debtors (43 000)
Increase in inventories (70 000)
Increase in trade creditors 60 000
Net cash from operating activities $29 500
Current Tax Worksheet
for the year ended 30 June 2017
| Profit before income tax | $24 000 | |
| Add: | ||
| Entertainment expense (non-deductible) | $12 100 | |
| Carrying amount of plant sold (accounts) | 30 000 | |
| Depreciation expense – plant | 24 000 | |
| Bad debts expense | 5 200 | |
| Insurance expense | 11 900 | |
| Annual leave expense | 15 400 | 98 600 |
|
Deduct: |
122 600 | |
| Government grant (exempt) | 5 360 | |
| Carrying amount of plant sold (tax) | 26 000 | |
| Depreciation – taxation | 28 800 | |
| Bad debts written off | 3 600 | |
| Insurance paid | 9 700 | |
| Annual leave paid | 11 000 | (84 460) |
| Taxable income | 38 140 | |
| Current tax liability @ 30% | $11 442 |
Journal entry
Income tax expense Dr 11 442
Current tax liability Cr 11 442
PV of MLP = 237 692 + 237 692 x 3.0205 [T2 24% 6 yrs] + 200 000 x 0.2218 [T1 24% 7 yrs]
= 237 692 + 717 948 + 44 360
=1 000 000
PART B – LEASE PAYMENT SCHEDULE
Rahway Prison Ltd (Lessee)
Schedule of lease payments
MLP Interest Liability Liability
expense reduction balance
$ $ $ $
30 June 2015 1 000 000
30 June 2015 237 692 237 692 762 308
30 June 2016 237 692 182 954 54 738 707 570
30 June 2017 237 692 169 817 67 875 639 695
30 June 2018 237 692 153 527 84 165 555 530
30 June 2019 237 692 133 327 104 365 451 165
30 June 2020 237 692 108 280 129 412 321 753
30 June 2021 237 692 77 221 160 471 161 282
30 June 2022 200 000 38 718* 161 282 –
*includes adjustment for the effect of rounding
PART C – JOURNAL ENTRIES
30 June 2015
Right of Use Asset Dr 1 000 000
Lease Liability Cr 1 000 000
(Initial recognition of finance lease)
Lease Liability Dr 237 692
Cash Cr 237 692
(First lease payment in advance)
30 June 2016
Lease Liability Dr 54 738
Interest Expense Dr 182 954
Cash Cr 237 692
(Second lease payment in advance)
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