Teaching Period 3, 2014
ACC20013 Company Accounting
Assessment 2: Case study
Assessment overview
This assessment task consists of four parts, each comprising questions relating to the case study of
Mightier Limited which was incorporated on 1 July 2011. The relevant financial statements for Mightier
Limited and related parties are provided in a separate excel file located in within the relevant
assessment folder in Blackboard.
Assessment details
Your work will generally be assessed according to the following marking guide:
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1-2 errors = full marks allocated
3-4 errors = 75% of marks allocated
5-6 errors = 50% of marks allocated
7+ errors = 25% of marks allocated
The following questions relate to the case of Mightier Limited which was incorporated on 1 July 2011.
The relevant financial statements for Mightier Limited and related parties are provided in the form of a
separate Excel file.
PART A: Accounting for share issues
4%
A major retailing company, Mightier Ltd issued a prospectus on 1 August 2011 calling for subscriptions
for 8 million shares for a new class of share – Ordinary B issued at $4.50 on the following terms:
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first payment of $1.00 is to be made on application
$1.50 is to be paid on allotment
remaining amount is to be paid in one call within 3 months of allotment.
Additionally, according to the company's constitution any surplus monies after a forfeiture of shares
are returned to the original shareholders.
Applications closed on 31st October 2011.
By the end of October, when applications closed, applications for 9.5 million shares were
received.
The shares are allotted on 15 November 2011 on a pro rata basis with the excess application money
to be applied against the amount due on allotment and any calls and any further amounts remaining to
be refunded to the applicants.
ACC20013 Company Accounting
All allotment monies as due are received on 1 December 2011.
The first and only call on the shares is made on 15 January 2012. Call monies are received on 15
February 2012 from all shareholders except from the holders of 50,000 shares who did not pay the
final call.
The Directors decide that these shares are forfeited and are to be reissued. On 1 March 2012, the
50,000 shares are forfeited. One week later the shares are reissued as fully paid to a new shareholder
for a receipt of $4 per share. Costs of reissue amount to $100 and any balance in the forfeited shares
account is refunded to the original shareholder as per the company’s constitution.
Prepare journal entries to record the above events. Narrations are required.
PART B: Tax Effect Accounting
4%
The following information is extracted from the accounts of Mightier Ltd (Also see the separate
spreadsheet)
General administration expenses for the year ended 30 June 2012 include the
following, among other items:
Donations
Entertainment expenses
Research and development costs
$125,500
$43,000
$1,270,000
Operating expenses for the year ended 30 June 2012 include the following, among
other items:
Long Service leave Expense
$391,111
Doubtful Debts Expense
$374,450
Service fees
$602,321
Additional information:
Depreciation on PPE for tax purposes for 2012
$2,212,890
Accumulated depreciation on PPE for tax at 30/06/2012
$9,433,448
Tax base of Trademarks and Patents is
$12,058,293
The amortisation expense for trademarks and patents during the year was
$1,650,421. However, the amortisation for tax purposes for the year was
$1,250,368
Only $8,200 of the donations made during the year are deductible for tax
purposes
ACC20013 Company Accounting
The company spent $1,270,000 on research and development.
Research and development costs are deductible for tax purposes at the rate of
150%.
Entertainment expenses are not deductible for tax purposes.
Rent paid during the year is $1,250,000.
For all other items of expenses the amount incurred is equal to the amount paid.
The assessable sales is equal to the income earned on sales.
Tax rate 30%
Your tasks:
a) Show the reconciliation of Accounting profit to Taxable Income
b) Show the Tax Effect Accounting work worksheet
c) Calculate the Current Income Tax expense for 2012. (Hint: you can double check your answer
by comparing it with the income tax expense disclosed in the income statement for 2012).
d) Prepare the balance day journal entries for income tax expense, deferred tax asset and
deferred tax liability.
PART C: Business combinations
4%
On 1 July 2012, Mightier Ltd completed negotiations to take over the operations of Smaller Ltd and to
acquire 90% of the shares of Minnier Ltd.
The accounts of these companies are provided in a separate excel file:
Acquisition of Smaller Ltd
Mightier Ltd is to acquire all of the assets (except cash) and the liabilities of Smaller Ltd. In exchange
for every three (3) shares in Smaller Ltd, shareholders are to receive four (4) Ordinary (A) shares in
Mightier Ltd, plus $1.00 cash for every share held by the shareholders of Smaller Ltd.
Mightier is to pay cash to Smaller Ltd to cover its liquidation costs of $10,000
Each share in Mightier Ltd has a fair value of $1.65.
The assets and liabilities of Smaller Ltd are all recorded at fair value except for the following:
Debtors (Net of Doubtful debts)
$800,000
Inventory
$90,000
Property Plant & Equipment (Net carrying amount) $956,000
Debentures (Hint: Calculate FV based on the FV of debentures held by Mightier Ltd)
The companies have had some commercial transactions in the past and there is an amount of
$58,000 showing as a “Debentures in Smaller” in the accounts of Mightier Ltd. The fair value of these
debentures is $50,000. As part of the acquisition, Mightier Ltd agrees not to request payment for these
debentures.
Acquisition of Minnier Ltd
ACC20013 Company Accounting
Mightier Ltd is to acquire 90% of the shares in Minnier Ltd. In exchange, the shareholders in Minnier
Ltd are to receive two (2) ordinary (A) shares in Mightier and $0.95 in cash for every share held in
Minnier Ltd. Each ordinary share in Mightier Ltd has a fair value of $1.65.
At the date of acquisition an extract of Minnier Ltd’s accounts shows the following:
General Reserve
Issued Share Capital ($1 ORD shares)
Retained Profits (c/b)
$680,000
$5,200,000
$1,500,000
Additional Information
Costs of issuing shares to both Smaller Ltd and Minnier Ltd amounted to $5,000. Costs associate with
the acquisition of Smaller Ltd amounted to $4,500.
Your tasks:
a)
Prepare the acquisition analysis to acquire Smaller Ltd.
b)
Record the acquisition of Smaller Ltd in the books of Mightier as at 1 July 2012. c)
Record the acquisition of Minnier Ltd in the books of Mightier as at 1 July 2012.
d)
Show the Statement of Financial Position of Mightier Ltd after the acquisition of Smaller
Ltd and Minnier Ltd.
PART D: Consolidated Financial Statements
8%
The following is a list of transactions between Mightier Ltd and Minnier Limited that would
impact on the preparation of consolidated financial statements for the Group.
a)
On 3rd September 2012, Minnier Ltd sold an item of plant to MIGHTIER Ltd for $715,500.
This plant had originally cost $916,000 and at the date of sale had a written down value of
$552,000. Depreciation on all plant is provided by each company in the group at 20% p.a.
on cost.
b)
Inter-company sales from Minnier Ltd to MIGHTIER Ltd were $152,000 and from
MIGHTIER Ltd to Minnier Ltd were $225,000. These sales were made at cost plus 20%. In
both cases, half of this stock remains on hand in the accounts at the end of the year.
c)
At 30 June 2013 inventory on hand included $56,500 held by MIGHTIER Ltd and acquired
from Minnier Ltd.
d)
At 30 June 2014, Minnier Ltd owed Mightier Ltd $32,000 as creditors.
e)
MIGHTIER Ltd had issued a parcel of 4% debentures on the 1st August 2012. Minnier Ltd
acquired $350,000 of these debentures on the open market at face value of $50 per
ACC20013 Company Accounting
debenture. Interest is accrued in full by the end of each financial year. Interest for the last
four months of the current financial year has not been paid.
f)
During the current year, goodwill was impaired by an amount of $255,000. There was no
impairment for the previous year. Both companies have a tax rate of 30%.
g)
Both companies record dividend revenue before receipt of cash. All dividends declared
since acquisition dates have been from post-acquisition profits except for one amount paid
during the year. Minnier Ltd, paid out a dividend of $52,000 out of profits earned prior to
the acquisition date. As a result of the dividend the accountant of MIGHTIER Ltd feels that
the Investment in Minnier Ltd has become impaired and to this end has recorded an
impairment amount for the appropriate amount against the investment.
Your tasks:
a) Prepare the consolidation journal entries and the consolidated worksheet (using Excel or
similar) to consolidate MIGHTIER Ltd and Minnier Ltd for the year ended 30th June 2014.
b) Produce the Consolidated Statement of Comprehensive Income for the year ended 30th
June 2014 and Consolidated Statement of Financial Position as at 30th June 2014.
You are advised to comply with AASB standards and the requirements in the Australian
Corporations Legislation when determining the structure and presentation requirements for
the financial reports in preparing the financial statements for this assignment.
Reminder: While completing Part D, please refer to the following information from Part C
On 1 July 2012 Mightier Ltd acquired 90% of the shares in Minnier Ltd. In exchange, the
shareholders in Minnier Ltd were to receive two (2) ordinary shares in Mightier and $0.95 in cash
for every share held in Minnier Ltd. At the date each ordinary share in Mightier Ltd has a fair
value of $1.65. At the date of acquisition Minnier Ltd’s equity comprised General Reserve
$680,000, Issued Share Capital ($1 ORD A shares) $5,200,000, and Retained Profits (c/b)
$1,500,000
ACC20013 Company Accounting