Corporate Accounting For Financial Year Ending – Case Study

AASB requirements for corporate accounting

Discuss about the Corporate Accounting for Financial Year Ending.

Introduction

The following paper is a case study of a company named Black Hole Ltd. The study will be based on the comprehensive know- how of corporate accounting. It consists of preparation of final accounts of the company for the year ending June 30, 2018. For this, statement of profit & loss and other comprehensive income will be presented. After that, statement of financial position and statement of equity will also be adjoined. All the final accounts will be based on the standards and requirements given by AASB 101 (Australian Accounting Standards Board).

Australian Accounting Standards Board gives prescribed rules and regulations regarding presentation of final accounts of a company. It gives a standard format according to which all the statements of a company’s final position at the end of each financial year should be presented. This ensures that accounts of a company for this year are comparable with those of previous year’s accounts. Not only this, availability of common standards for all the companies also help in comparing books of accounts of two different countries (Rahman, 2013).

There is a list of mandatory requirements along with various sections that are asked by the Australian Accounting Standards Board in context of corporate accounting. Few of them that will be used in preparation of final accounts are discussed below.

First rule is about headings of the statements of final accounts. According to paragraph 51, 99 and 103 of Australian Accounting Standards Board, companies should give an appropriate heading for each statement which must comprise the name of the company, name of the type of statement and the year to which that statement belongs.

In this paper, it is required that expenses must be classified by function. For example, administration overheads, selling and distribution overheads, operating overheads, etc. According to paragraph 104 of Australian Accounting Standards Board, if a company decides to follow this, then it has to present additional details including nature of expenses, depreciation/ amortisation overheads, employees’ benefits overheads, etc.

(Bennett, Bradbury, & Prangnell, 2006)

Besides above stated rules and requirements, references related to AASB 101 are given side by side (Deegan, 2012).

BLACK HOLE LTD.

Statement of profit & loss and other comprehensive income

for the year ended June 30, 2018

Particulars	Amount (in $)	Referencing from AASB 101
Revenue	825,000	82 (a)
Cost of sales	(450,000)	85, 103
Gross profit	375,000	85, 103
Other income1	6,000	85, 103
Administrative expenses2	(236,300)	85, 103
Other expenses	(10,000)	85, 103
Finance cost	(28,700)	85 (b)
Profit before income tax	106,000	85, 103
Income tax expense	50,400	82 (d)
Profit for the year	55,600	81 A (a)
Other comprehensive income
Items that will not be re- classified to profit or loss	82 A (a)
Gain on revaluation of land	25,000	82 A (a)
Gain on revaluation of buildings	30,000	82 A (a)
Income tax related to items that will not be re- classified to profit or loss	(16,500)	91 (b)
Other comprehensive income for the year after tax	38,500	81 A (b)
Total comprehensive income for the year	94,100	81 A (c)

Working notes:

Other income-

Particulars for other income	Amount (in $)
Interest received	2,500
Dividend received	3,500
Total other income	6,000

1. Administration expenses-

Calculation for administration expenses	Amount (in $)
Total administration expenses	265,000
Less: interest paid	(28,700)
Administration expenses	236,300

BLACK HOLE LTD.

Statement of financial position

as at June30, 2018

Particulars	Amount (in $)	Referencing from AASB 101
ASSETS Current assets
Cash and bank balances	500	54 (i)
Trade and other receivables3	52,200	54 (h)
Inventories	87,700	54 (g)
Total current assets	141,400
Non- current assets
Deferred tax asset	9,800	54 (o)
Property, plant and equipment4	780,000	54 (a)
Goodwill5	95,000	55
Total non-current assets	884,800
Total assets	1,025,200
LIABILITIES
Current liabilities
Borrowings6	69,200	55
Trade and other payables7	82,300	54 (k)
Short- term borrowings8	130,000	55
Current tax payable	52,100	54 (n)
Short- term provisions	18,000	54 (l)
Total current liabilities	351,600
Non- current liabilities
Long- term borrowings9	200,000	55
Deferred tax liabilities	18,400	54 (o)
Long- term provisions	16,200	54 (l)
Total non- current liabilities	234,600
Total liabilities	586,200
Net assets	439,000
EQUITY
Share capital10	200,000	55
Reserves11	110,000	55
Retained earnings12	129,000	55
Total equity	439,000

Trade and other receivables

Particulars	Amount (in $)
Account receivables	58,000
Less: allowance for doubtful debts	12,800
Add: prepaid insurance	7,000
Total trade receivables	52,200

1. Property, plant and equipment

Particulars	Amount (in $)
Land	220,000
Building	380,000
Plant and equipment	222,500
Less: accumulated depreciation	42,500	180,000
Total	780,000

 

Particulars	Amount (in $)
Goodwill	105,000
Less: accumulated impairment	10,000
Total goodwill	95,000

1. Borrowings

Particulars	Amount (in $)
Bank overdraft	69,200

1. Trade and other payables

Particulars	Amount (in $)
Interest payable	2,800
Dividend payable	10,000
Accounts payable	69,500
Total trade payables	82,300

1. Short- term borrowings

Particulars	Amount (in $)
7% debentures	80,000
Instalment due for mortgage loan	50,000
Total short- term borrowings	130,000

1. Long- term borrowings

Particulars	Amount (in $)
Mortgage loan	250,000
Less: instalment paid in this year	50,000
Total long- term borrowings	200,000

1. Share capital

Particulars	Amount (in $)
Ordinary shares (including those issued during the year)	200,000

1. Reserves

Particulars	Amount (in $)
General reserve	5,000
Add: transfer to general reserve	25,000
Add: transfer to general reserve from retained earnings	25,000
Total reserves	110,000

Retained earnings

Particulars	Amount (in $)
Retained earnings	128,400
Add: profit for the year	55,600
Less: transferred to general reserve	25,000
Less: redemption of 7% debentures	80,000
Total retained earnings	129,000

BLACK HOLE LTD.

Statement of changes in equity

for the year ended June30, 2018

	Gains and income attributable to equity shareholders of the company                              Amount (in $)
Particulars	Share capital	Revaluation surplus	Other reserves	Retained earnings	Total equity
Balance as at July1, 2017	100,000	46,500		128,400	274,900
Fair value gains (or losses), net of tax:
Land	–	17,500	–	–	17,500
Building	–	21,000	–	–	21,000
Total recognised income for the year	–	38,500	–	55,600	94,100
Dividends paid (ordinary)	–	–	–	(10,000)	(10,000)
Dividends declared (ordinary)	–	–	–	(20,000)	(20,000)
Issue of share capital	100,000	–	–	–	100,000
Transfer to general reserve	–	–	25,000	(25,000)	–
Balance as at June30, 2018	200,000	85,000	25,000	129,000	439,000

This problem is associated with the management and accounting system of My Bag Ltd. The company has to prepare accounts regarding income tax liability. It also wants to know its obligation for tax expense for the financial year ending June 30, 2017. For this purpose, the rules and regulations of Australian Accounting Standards Board are given below, which will also be used in the paper later for reference while calculating tax liabilities. This will be followed by two worksheets i.e. for current tax liability and deferred tax liability of the organization based on the information available from the company.

Few rules and regulations of AASB that will be used in preparing tax worksheets are given below.

(Loftus, 2003)

According to AASB 116, the way to treat depreciation in books of accounts is to record the value of fixed asset that is depreciable in statement of financial position along with accumulated depreciation of arrears in a systematic manner. Tax offices provide a rate at which this expense is treated for tax calculations. The tax treatment is based on that rate and it is usually distinguished from the rate of depreciation applicable (Chang, Herbohn, & Tutticci, 2009).

Goodwill should be recognised for taxation and accounting purposes. This should be tested or checked for any impairment loss. For tax calculations, goodwill written- down is not exempted from taxation. However, there are some exceptions for temporary differences as given by AASB 112.

Another clause for long service leave is that it is considered as an expense in accounting. But it is recognised only when employee has taken a long service leave and it is actually paid to him/ her. When this is the case, only then it is allowed as a deduction in tax calculations.

Doubtful debts are a provision when there is a possibility of bad debts. As such, doubtful debts and bad debts are considered as expense in accounting. But they will not be deductible for tax purposes. However, it can be so only in case when bad debts are written off.

Entertainment expenses are not tax deductible.

Prepaid insurance works as an allowable deduction for tax calculations since they will be charged as an expense over time.

Until and unless, a warranty cost has been incurred, it will not be considered as tax deductible.

Rent received in advance is the taxable income for the year in which it is actually received.

(Hanlon & Nethercott, 2005)

MY BAG LTD.

Current tax worksheet

For the year ending June30, 2017

Particulars	Amount (in $)	Amount (in $)
Accounting profit		900,000
Add:
Parking and other fines	10,000
Depreciation expense- plant	70,000
Doubtful debts expense	25,000
Amortisation- development asset	50,000
Long service leave expense	36,000
Interest received	20,000	211,000
Less:
Tax depreciation- plant	100,000
Bad debts written off	15,000
Development costs paid	160,000
Additional deduction for development costs	40,000
Long service leave paid	50,000
Interest revenue	10,000	(375,000)
Taxable profit	736,000
Corporate tax @ 30%
Current tax liability	220,800

Working notes:

Interest receivable A/c

Date	Particulars	Amount	Date	Particulars	Amount
1/7/2016	To balance b/d	20,000	30/6/2017	By interest received A/c	20,000
30/6/2017	To interest revenue A/c	10,000	30/6/2017	By balance c/d	10,000
		30,000			30,000

OR beginning balance + interest revenue – ending balance = interest received

i.e. 20,000 + 10,000 – 10,000 = $20,000.

Development asset- at cost

Date	Particulars	Amount	Date	Particulars	Amount
1/7/2016	To balance b/d	200,000	30/6/2017	By balance c/d	360,000
1/7/2016	To development costs paid A/c	160,000
		360,000			360,000

Additional deduction for development costs= 25% * $160,000= $40,000

Allowance for doubtful debts

Date	Particulars	Amount	Date	Particulars	Amount
30/6/2017	To bad debts written off A/c	15,000	1/7/2016	By balance b/d	10,000
30/6/2017	To balance c/d	20,000	30/6/2017	By doubts debt expense A/c	25,000
		35,000			35,000

OR beginning balance + doubt debt expense – ending balance = bad debts written off

i.e. 10,000 + 25,000 – 15,000 = $20,000.

Provision for long service leave

Date	Particulars	Amount	Date	Particulars	Amount
30/6/2017	To long service leave paid A/c	50,000	1/7/2016	By balance b/d	62,000
30/6/2017	To balance c/d	48,000	30/6/2017	By long service leave expense A/c	36,000
		98,000			98,000

OR beginning balance + long service leave expense – ending balance = long service leave paid

i.e. 62,000 + 36,000 – 48,000 = $50,000.

Accumulated depreciation- for tax purposes

Date	Particulars	Amount	Date	Particulars	Amount
30/6/2017	To balance c/d	280,000	1/7/2016	By balance b/d	180,000
			30/6/2017	By accumulated tax depreciation A/c	100,000
		280,000			280,000

MY BAG LTD.

Deferred tax worksheet

as at June30, 2017

Particulars	Carrying amount	Future deductible amount	Tax base	Taxable temporary differences	Deductible temporary differences
Assets:
Account receivables (net)	225,000	0	245,000	[2]		20,000
Plant (net)	410,000	320,000	320,000	[1]	90,000
Development assets (net)	230,000	0	0	[1]	230,000
Interest receivable	10,000	0	0	[1]	10,000
Liabilities:		Liabilities:
Provision for long service leave	48,000	48,000	0	[1]		48,000
Total temporary differences	330,000	68,000
Deferred tax liability 30%	99,000
Deferred tax asset 30%		20,400
Beginning balances	60,000	21,600
Increase/ (decrease)	39,000	1,200

Working notes for tax bases:

[1] Tax base = future deductible amount (for assets that are generating economic benefits, taxable in future period).

[2] Tax base = carrying amount (for those assets that are not generating economic benefits, taxable in future).

(Herbohn, Tutticci, & Khor, 2010)

[1] Tax base = carrying amount – future deductible amount (liabilities other than unearned revenue).

[2] Tax base = carrying amount less future revenue that is not accounted for taxation (liabilities of unearned revenue).

(Richardson & Lanis, 2006)

Date	Particulars	Amount (Dr.)	Amount (Cr.)
30/6/2017	Income tax expense (current) A/c                             Dr. To current tax liability A/c (for current tax liability accounted)	220,800	220,800
30/6/2017	Income tax expense A/c                                           Dr. To deferred tax liability A/c To deferred tax asset A/c (for deferred tax asset and deferred tax liability accounted)	40,200	39,000 1,200

 

References

Bennett, B., Bradbury, M., & Prangnell, H. (2006). Rules, principles and judgments in accounting standards. Abacus, 42(2), 189-204.

Chang, C., Herbohn, K., & Tutticci, I. (2009). Market’s perception of deferred tax accruals. Accounting & Finance, 49(4), 645-673.

Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.

Hanlon, D., & Nethercott, L. (2005). Increasing Divergence between Accounting Practice and Taxation Law: The Case of in-Substance, The Debt Defeasance. Austl. Tax F., 20, 101.

Herbohn, K., Tutticci, I., & Khor, P. S. (2010). Changes in Unrecognised Deferred Tax Accruals from Carryâ€ÂForward Losses: Earnings Management or Signalling? Journal of Business Finance & Accounting, 37(7-8), 763-791.

Loftus, J. A. (2003). The CF and accounting standards: the persistence of discrepancies. Abacus, 39(3), 298-309.

Rahman, A. R. (2013). The Australian Accounting Standards Review Board (RLE Accounting): The Establishment of Its Participative Review Process. . Routledge.

Richardson, G., & Lanis, R. (2006). Determinants of the variability in corporate effective tax rates and tax reform: Evidence from Australia. Journal of Accounting and Public Policy, 26(6), 689-704.