Financial Statement Analysis and Taxation: A Comprehensive Assessment

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Assessment Item 2

Contents
Introduction...........................................................................................................................................3
Q1..........................................................................................................................................................4
1.........................................................................................................................................................4
2.........................................................................................................................................................4
3.........................................................................................................................................................6
4.........................................................................................................................................................6
Q2..........................................................................................................................................................7
Part A................................................................................................................................................7
1.....................................................................................................................................................7
2.....................................................................................................................................................8
Part B.................................................................................................................................................9
Q3..........................................................................................................................................................9
1.........................................................................................................................................................9
2.......................................................................................................................................................10
3.......................................................................................................................................................10
4.......................................................................................................................................................11
Q4........................................................................................................................................................12
1.......................................................................................................................................................12
2.......................................................................................................................................................13
3.......................................................................................................................................................13
5.......................................................................................................................................................13
Conclusion...........................................................................................................................................16
References...........................................................................................................................................17

Introduction
The assignment was a comprehensive assignment based on the taxation and accounting aspect of
financial statements, such that expert knowledge is required analyse and solve the questions. It helps
in gaining knowledge of various accounting tools and taxation provisions and legislations and
understands their applicability in different situations. For an individual to be able to understand the
applicability of such tools, he/she must have a comprehensive knowledge of the subject matter and
hence requires technical expertise on his/her part.

Q1
1.
Journal Entry for the amendment in the previous year's tax return:
Date particulars L.F. Amount(Dr.)
Amount
(Cr.)
30-Jun-19 Profit and Loss a/c Dr. 6,000
To Provision for Income tax a/c 6,000
(Being provision made for demand
notice)
2.
Calculation of Capital Gains:
Particulars Amount ($) Amount ($)
Sale Consideration 33,000
Less:
Cost of the Asset (WN8) 26,000
Short term Capital gain 7,000

Calculation of Current tax liability:
Particulars Amount ($) Amount ($)
Profit as per the books of accounts 92,550
Add:
Depreciation as per books of accounts: (WN1)
Plant 24,000
Equipment 5,500
Accounting fees 4,500
Entertainment Expenses 13,200
Goodwill Impairment 2,000
Amortisation of Development Costs (WN6) 15,000
Doubtful Debt Expense (WN2) 8,100
Employee expense (WN3) 15,400
Warranty expense (WN4) 1,500
Insurance Expense (WN5) 12,900
Carrying amount of plant sold (WN7) 30,000
1,32,100
2,24,650
Less:
Depreciation as per Income Tax: (WN2)
Plant 28,800
Equipment 7,000
Insurance Claim 41,200
Development Costs (WN6) 56,250

Bad Debts written off (WN2) 7,900
Employee Expenses Paid (WN3) 19,800
Actual warranty paid (WN4) 2,400
Actual Insurance Expenses paid (WN5) 10,700
Government Grant 2,200
Proceeds from sale of plant (WN7) 33,000
2,09,250
Taxable Income from Business 15,400
Short term Capital gain 7,000
Total Taxable Income 22,400
Tax @ 30% 6,720
WN 2 Allowance for doubtful debts
Particulars Amount
Opening Balance 4,000
Doubtful Debt Expense 8,100
Bad Debts written off (Balancing Figure) 7,900
Closing Balance 4,200
WN 3 Provision for Employee Benefits
Particulars Amount
Opening Balance 9,700

Employee expense 15,400
Employee Expenses Paid ( Balancing Figure) 19,800
Closing Balance 14,100
WN 4 Provision for Warranties
Particulars Amount
Opening Balance 2,200
Warranty expense 1,500
Actual Warranty paid (Balancing Figure) 2,400
Closing Balance 3,100
WN 5 Prepaid Insurance
Particulars Amount
Opening Balance 5,600
Insurance Expense 12,900
Actual Insurance paid (Balancing Figure) 10,700
Closing Balance 3,400
WN6: Development costs are to be allowed as a deduction at 125% and hence amortised
value is added back and the 125% of the whole expense is allowed as a deduction.
WN7: Carrying amount and sales proceeds will not become part of the profit and loss
account for the tax purposes and instead will be taken separately for calculating Capital gains
tax.

3.
Treatment for Current Tax Liability and Deferred tax
Assets and Liabilities:
Particulars Amount
Book Profit 92,550
Tax on Book Profit 27,765
Tax as per IT Act 6,720
Difference to be adjusted in Deferred Tax
Liability (21,045)
4.
Journal Entry for for Tax Adjustments:
Date particulars L.F.
Amount(Dr
.)
Amount
(Cr.)
30-Jun-18 Deferred tax Assets a/c Dr. 17,000
To Profit and Loss a/c 17,000
( Being tax loss accounted)
30-Jun-19 Tax Expenses a/c Dr. 27,765
To Deferred tax Liability a/c 21,045
To Current tax Liability a/c 6,720
(Being adjustment made for tax
liability)
30-Jun-19 Profit and Loss a/c Dr. 27,765
To Tax Expenses a/c 27,765
( being p/l charged with tax)
30-Jun-19 Deferred tax Liability a/c Dr. 27,140
To Deferred Tax Assets a/c 27,140
( Being deferred tax asset and liability
net-off)

Q2
Part A
1
Calculation of Purchase Consideration:
Particulars Amount ($)
Equity Shares in Scruffy Ltd 1,44,000
Cash 70,000
Total 2,14,000
Calculation of Gain on Bargain
Purchase/Goodwill:
Particulars Amount ($)
Cash 13,800
Trade Receivables 46,800
Inventory 28,000
Plant 1,12,000
Land 35,800
Total Assets 2,36,400
Trade Payables 24,800
Provisions 24,000
Loans 17,200
Total Liabilities 66,000
Net Assets 1,70,400
Purchase Consideration 2,14,000
Goodwill 43,600

2.
Journal Entries in the book of Scruffy Ltd on 1st December 2019:
Sr.
No. particulars L.F.
Amount(
Dr.)
Amount
(Cr.)
1 Business Purchase a/c Dr. 2,14,000
To Liquidator of Smuckos Ltd a/c 2,14,000
(Being purchase Consideration payable)
2 Cash a/c Dr. 13,800
Trade receivables a/c Dr. 46,800
Inventory a/c Dr. 28,000
Plant a/c Dr. 1,12,000
Land a/c Dr. 35,800
Goodwill a/c Dr. 43,600
To Trade Payables a/c 24,800
To Provisions a/c 24,000
To Loans a/c 17,200
To Business Purchase a/c 2,14,000
( Being assets and liabilities overtaken and
goodwill calculated)
3 Liquidator of Smuckos Ltd a/c Dr. 2,14,000
To Equity Share Capital a/c 1,44,000
To Cash a/c 70,000
(Being discharge of consideration)
4 Profit and Loss a/c Dr. 58,000
To Artworks a/c 40,000
To Capital reserve a/c 18,000
(Being artworks given)

5 Legal Expenses a/c Dr. 800
Cost of Issue of Shares a/c Dr.
400
To Capital reserve a/c
1,200
(Being expenses incurred on acquisition)
Part B
A business combination as per AASB 3, takes place when an entity is taken over by another
entity by following rules and provisions mentioned therein. As per AASB 3, this process will
only constitute as a business combination when the entity has taken over as active business
and all its assets and liabilities had been taken over. The amount paid by the acquirer is called
purchase consideration and may be in the form of shares in the acquiring company or cash.
For obtaining control over the other business the acquirer must by 50% or above shares. This
process can take place via many methods most common of them being the merger of two
businesses. There are four steps are involved in this process
Acquirer identification: It is not necessary to that the larger company will be the acquirer and
the vice versa. In substance, the smaller may become the acquirer depending on the nature of
the merger. The shareholders from the company are acquired, may end up with the majority
of share in the acquiring company and thus gain control of it (AASB, 2014).
Acquisition date: Date of acquisition decides the date on which the acquirer to control of the
other entity and such information is required at a later date during consolidation at the year-
end. An accurate distinction has to be made between the post-acquisition and pre-acquisition
period.
Measurement of Assets, and non-controlling interest: Assets and liabilities are to be taken
over at their respective fair values such that it enables the calculations of goodwill or gain on
bargain taking place in the process. In simpler words, it ascertains how much extra or less a
company is paying for the other entities net assets.
Goodwill and bargain of purchase: Acquisition process helps in determining the fair value of
the business of the company being acquired and also signifies its market performance and
position for the acquiring company to consider (Bugeja and Loyeung, 2015).
A business combination may take place in many ways as per the requirement and objectives
set by the company. Ascertain method may be more appropriate for a company than other
methods and thus it varies according to the nature and size of the business.