Accounting Standards and Transactions: Provision of Journal Entries and Deferred Tax Assets and Liabilities

This article discusses the application of accounting standards in various transactions such as bad debt recovery, job seeker payment, and designing new golf clubs. It also provides journal entries and schedules of temporary differences for the calculation of deferred tax assets and liabilities.

Assessment

Table of Contents
PART A...........................................................................................................................................3
1...................................................................................................................................................3
2...................................................................................................................................................3
3...................................................................................................................................................4
4...................................................................................................................................................5
5...................................................................................................................................................5
Part B...............................................................................................................................................6
6. Provision of Journal entries, preparation of Schedule of temporary differences and
calculation of Deferred tax assets and Deferred tax liabilities....................................................6
7. Lease accounting.....................................................................................................................9
REFERENCES..............................................................................................................................11
Books and Journals....................................................................................................................11

PART A
1.
As per Australian Standard AASB 110, the events whether favourable or unfavourable that
occur between the end of the reporting period and the date when financial statement are
authorized. The transaction of fire on 7th July is occurred between the annual report date and
issue date. Hence, on this basis this are events occurring after the balance sheet date. The nature
of this event is non-adjusting event after the reporting period because there is no indicative of
conditions that arose after the balance sheet date. The applicable accounting standard this event
relates is AASB 102 Inventories. This standard prescribes the accounting treatment of
inventories such as closing stock is recorded at cost or NPV whichever is lower (Czerney, and
et.al., 2020). Yes, there is a requirement to disclose the stock loss or financial loss of $2 million
on the notes to accounts. It is because first this is a non-adjusting event and the loss of stock is
40% of total value of stock.

2.
As per AASB 110, the particular transaction of bad debt recovering is considered as
adjusting transaction or events after the reporting period. It is because this transaction provides
the evidence of condition that existed at the reporting period in the form of provision made
against bad debts. The applicable accounting standard relates to the present transaction is AASB
137 provision, contingent liabilities and contingent assets. This standard indicates that the
possible assets that arises from the past events and whose existence is in the balance sheet are
recorded or recognised in the financial statement at the time when the income occurrence. This
transaction will not disclose in the books of account because it is an adjusting transaction.
However, the particular transaction need to be adjusted in the financial statement of the end
reporting period (Dobson, 2020). The adjustment of this transaction is as follows:
Debtor a/c $550000
To Bad debt recovered a/c $550000
Bad debt recovered a/c $550000
To P&L a/c $550000
On this basis, the adjustment in the financial statement of MQE ltd is that their debtors i.e.,
accounts receivable value will be increased by $550000 that result into the total value of trade
receivable after adjustment is 4.037 million. Further, the income of the company will increase by
0.55 million due to this transaction adjustment. This should be done by the company as it affects
the decision-making of the financial statement of business.
3.
As per AASB 110, the nature of transaction of job seeker payment received from
government is adjusting event occurring after the balance sheet date. It is because the condition
regarding the profit of business should not fall by greater than 20%. Thus, this is an adjusting
event after reporting period. The applicable accounting standards relates to this particular
transaction is AASB 118 Revenue recognition. This standard state that the company should
recognise its business revenue on the accrual basis. Further, the principle of conservatism
indicate that the company should recognise its uncertain income at the time when it earned but
for uncertain loss the company should create provision at the time when it actually arises. This
particular transaction is a non-adjusting event thus it is not required to be disclose in the notes to

account (Lessambo, 2018). However, this particular transaction of job seeker payment is
adjusted in the financial statement account. Here, in order to adjust this account, the following
entry need to be passed by MQE Ltd
Accrued liability a/c debit $500000
To Jobseeker account $500000
This indicate that the payment of job seeker the company have received from government are
now need to be paid by company again. This leads to increase in the liability of MQE Ltd by
$500000.
4.
As per AASB 110, the events occurring after the reporting period is of two types adjusting
and non-adjusting event. The nature of particular event of renegotiating some of the supplier in
the upcoming year of 2022 has been arises after the losses suffered by company from fire is non-
adjusting event. It is because there was no indicative of conditions that arose after the reporting
period which further means the company need not to adjust this event in the financial statement.
The applicable accounting standards relates to this particular event is AASB 124 Related party
transaction (Szulc and Zieniuk, 2020). This standard indicate that entity financial statement
should contain the necessary or materialistic disclosure about the related party’s transaction and
outstanding balance. It is because the this affect the financial position and decision-making of the
users of financial statement. As the event in this question is non-adjusting event, it is important
for the MQE ltd that they should disclose this event as it influence the financial statement user’s
decision. It is because the company have accepted the quota of that supplier in which one of the
director of MQE Ltd is holding share of 50%.
5.
As per AASB 110, the nature of this event is also adjusting event because the condition of
designing the new type of golf club is present in the balance sheet date as they have received
order for new club in May and June is $250000. The applicable accounting standard relate to this
transaction is AASB 110, events occurring after the balance sheet date. This standard indicate
that company should discourse all the material events that occur after the balance sheet and
adjust the event if condition is present in at the balance sheet date (Heazlewood and Andrew,

2021). As per this standard, the MQE ltd need to adjust the expenses associated with the
designing of new type of golf club in their financial statement as this affect the decision-making
of the users of the financial statement of MQE Ltd. The company should record the expenses in
their financial statement which involve the total cost they will incur in the designing of new golf
type is $135000. This will reduce the net income of company by amount $135000.
Part B
6. Provision of Journal entries, preparation of Schedule of temporary differences and calculation
of Deferred tax assets and Deferred tax liabilities
Transaction 1
Treatment of Depreciation
Useful life as per the books of accounts = 6 years
Useful life as per the tax purpose = 5 years
Particulars As per accounting
standard
As per tax purpose Temporary difference
Depreciation to be
charged
240000 / 6 = 40000 240000 / 5 = 48000 8000
Income tax
applicable
40000 * 30% = 12000 48000 * 30% = 14400 2400
Deferred tax liabilities = 8000 * 30% = 2400
Journal entries:
Income tax expense 2400
To deferred tax liability 2400
(Being deferred tax liability created as the depreciation charged as per the tax laws is higher.)
Transaction 2
Treatment of development costs
Balance sheet shows development cost = 50000
Cost claimed as deduction in prior financial year = 50000

Difference in income derived on the basis of accounting standards and tax purpose would be =
50000
Temporary difference in Net income and taxable income = 50000
Deferred tax liability on 50000 = 50000 * 30% = 15000
Journal entry
Income tax expense 15000
To deferred tax liability 15000
(Being deferred tax liability created for the higher advanced tax paid as per the accounting profit
by disregarding the claimed development costs.)
Transaction 3
Treatment of provision of annual leave entitlement (Görlitz and Dobler, 2021)
Schedule of Temporary differences
Particulars As per accounting
standard
As per tax purpose Temporary difference
Provision recorded in
accounts
35000 Annual leave
entitlement accrued +
Annual leave paid =
7000 + 8000 = 15000
20000
As the higher provision made for annual leave entitlement in books, there would arise deferred
tax liability which can be computed as follows:
Deferred tax asset = temporary different in annual leave entitlement * applicable tax rate
Deferred tax asset = 20000 * 30% = 6000
Journal entry
Deferred tax asset 6000
To income tax payable 6000
(Being deferred tax asset created as the income in tax statement is higher due to overstating the
annual leave entitlement in accounting records.)
Transaction 4
Impairment of goodwill

Impairment of goodwill is not tax deductible because they are considered as an unrealized loss
and thus do not manifest from a real transaction (Mear, Bradbury and Hooks, 2020). However,
impairment of goodwill in the given transaction @ 10% of 500000 would be recorded as the
accounting standards for the year ended 2022 and the same would be amounted to 50000.
Accordingly, schedule of temporary difference would be as follows:
Particulars As per accounting
standard
As per tax purpose Temporary difference
Impairment of goodwill Recorded in financial
statement as 50000.
Not recorded in tax
statement due to being
unrealized loss.
50000
This temporary difference would lead to lower profit in income statement while higher profit in
tax statement. Accordingly, deferred tax asset would arise as follows:
Deferred tax asset = 50000 * 30% = 15000
Journal entry
Deferred tax asset 15000
To income tax payable 15000
(Being deferred tax asset arises on account of higher profit in tax statement as against the profit
in income statement due to non – recognition of impairment of goodwill in the former.)
Transaction 5
Treatment of advance rent received
As per the Australian Taxation office, the rental income received in cash must be declared as
rental income in the year it has been received disregarding the year from which the rent is related
(Mear, Bradbury and Hooks, 2021). Accordingly, the profit in tax statement would be higher
than the profit indicated by income statement. This could be shown through schedule of
temporary difference as follows:
Particulars As per accounting
standard
As per tax purpose Temporary difference
Rent received in
advance
Realized in the year
from which it is
relevant.
Realized in the year
when it is received in
cash.
30000

Rental income = 0 Rental income = 30000
As a result of this temporary difference, the profit in tax statement would be higher than the
profit in income statement, therefore, deferred tax asset would arise as follows:
Deferred tax asset = 30000 * 30% = 9000
Journal entry
Deferred tax asset 9000
To income tax payable 9000
(Being deferred tax asset created as profit in tax statement was higher than profit in income
statement due to recognition of rent received in advance in the former.)
7. Lease accounting
The current lease would be treated as capital lease it is satisfying the following conditions:
 Lease term is greater than 75% of economic life of the asset, that is 5 years > 4.5 years
(75% of 6 years) (Sorrentino, Smarra and Briamonte, 2020).
 Present value of lease payments is greater than 90% of the fair value of asset in the
beginning.
Initial value of asset = 65000 + 2500 (additional costs) = 67500
92550 > 60750 (90% of 67500).
Journal entries for recording capital lease
Yearly lease payments = 22500
Lease term = 5 years
Present value of lease payments = (1 / r) – 1 / r (1 + r)t
r = 7%
t = 5 years
= (1 / 7%) – 1 / 7% (1 + 7%)5
= (14.29) – 1 / 7% (1.40)
= (14.29) – 1 / 0.098
= (14.29) – (10.19) = 4.1
Present value annuity factor = 4.1
Present value of lease payments = 4.1 * 22500 = 92250
Interest payment at the end of first year (included in lease rent) = 92250 * 7% = 6458
Depreciation of leased van = 92250 / 5 = 18450

Date Particulars Debit Amount Credit Amount
1st July 2021 Gross Asset 92250
To Lease Liability 92250
30th June 2022 Lease rent 16042
Interest Expense 6458
To Cash 22500
30th June 2022 Depreciation 18450
To Depreciation
expense
18450
Closing lease liability = Initial lease liability – Lease rent paid during the year
= 92250 – 16042 = $76208

REFERENCES
Books and Journals
Sorrentino, M., Smarra, M. and Briamonte, M. F., 2020. Lease accounting: Back into the past—a
general review of different theoretical approaches. International journal of business and
management, 15(2).
Mear, K., Bradbury, M. and Hooks, J., 2021. The ability of deferred tax to predict future
tax. Accounting & Finance, 61(1), pp.241-264.
Mear, K., Bradbury, M. and Hooks, J., 2020. Is the balance sheet method of deferred tax
informative?. Pacific Accounting Review.
Görlitz, A. and Dobler, M., 2021. Financial accounting for deferred taxes: a systematic review of
empirical evidence. Management Review Quarterly, pp.1-53.
Heazlewood, C. and Andrew, B., 2021. Company law administrators in Victoria and the
Australian Capital Territory object to tax-effect accountinq whilst the NSW Corporate
Affairs Commission endorses the method required in Standard DS4. Aus tralian Journal
of M anagement'f'.
Szulc, M. and Zieniuk, P., 2020. The disclosure of events after the reporting period. The example
of listed companies from selected European countries. Zeszyty Teoretyczne
Rachunkowości, (109 (165)), pp.139-155.
Lessambo, F. I., 2018. Subsequent Events; and Going Concern. In Auditing, Assurance Services,
and Forensics (pp. 247-259). Palgrave Macmillan, Cham.
Dobson, C., 2020. Assessing the effects of housing policy measures on new lending in
Australia. BIS Paper, (110c).
Czerney, K. and et.al., 2020. Do type II subsequent events impair financial reporting
quality?. The Accounting Review, 95(6), pp.97-123.