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Questions and Answers
What is the total amount recognized as an income tax expense related to the revaluation surplus?
What is the total amount recognized as an income tax expense related to the revaluation surplus?
In the journal entry for the deferred tax asset and liability, how much is the deferred tax liability being offset?
In the journal entry for the deferred tax asset and liability, how much is the deferred tax liability being offset?
What percentage interest does Ma Ltd acquire in Pa Ltd?
What percentage interest does Ma Ltd acquire in Pa Ltd?
What is the total shareholders' equity of Pa Ltd at the date of acquisition?
What is the total shareholders' equity of Pa Ltd at the date of acquisition?
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How much did Pa Ltd record as an after-tax profit for the year ending June 30, 2023?
How much did Pa Ltd record as an after-tax profit for the year ending June 30, 2023?
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What amount was paid as dividends by Pa Ltd for the year ending June 30, 2023?
What amount was paid as dividends by Pa Ltd for the year ending June 30, 2023?
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What is the tax rate applicable to Pa Ltd's profits?
What is the tax rate applicable to Pa Ltd's profits?
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What amount was recorded as the revaluation of land by Pa Ltd on June 30, 2024?
What amount was recorded as the revaluation of land by Pa Ltd on June 30, 2024?
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What constitutes a contract in a business context?
What constitutes a contract in a business context?
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Which role does a customer play in a contractual agreement?
Which role does a customer play in a contractual agreement?
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Which of the following is a limitation of conventional financial accounting?
Which of the following is a limitation of conventional financial accounting?
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What should be disclosed regarding dividends declared after the end of a reporting period?
What should be disclosed regarding dividends declared after the end of a reporting period?
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Which type of event after the reporting date requires adjusting the financial statements?
Which type of event after the reporting date requires adjusting the financial statements?
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What is a contingent liability?
What is a contingent liability?
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Which of the following best describes a non-adjusting event after the reporting period?
Which of the following best describes a non-adjusting event after the reporting period?
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How might social-responsibility reporting impact financial reporting?
How might social-responsibility reporting impact financial reporting?
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What is the total amount of the impairment loss recorded?
What is the total amount of the impairment loss recorded?
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Which asset has the largest allocation of impairment loss?
Which asset has the largest allocation of impairment loss?
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What type of tax expense is recognized with a deferred tax liability?
What type of tax expense is recognized with a deferred tax liability?
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What is the total carrying amount of all assets mentioned?
What is the total carrying amount of all assets mentioned?
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Which scenario correctly describes a deferred tax asset?
Which scenario correctly describes a deferred tax asset?
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What formula is used to determine the percentage for declining-balance depreciation?
What formula is used to determine the percentage for declining-balance depreciation?
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In which year does the highest depreciation occur under the declining-balance method?
In which year does the highest depreciation occur under the declining-balance method?
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How is the units-of-production method of depreciation calculated?
How is the units-of-production method of depreciation calculated?
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What is the depreciation amount for Year 5 using the declining-balance method?
What is the depreciation amount for Year 5 using the declining-balance method?
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Which approach is most suitable for assets that provide greater economic benefits in the early years?
Which approach is most suitable for assets that provide greater economic benefits in the early years?
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For the units-of-production method, what is the depreciation calculation for the year 2023?
For the units-of-production method, what is the depreciation calculation for the year 2023?
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What total depreciation amount is achieved at the end of Year 6 under the declining-balance method?
What total depreciation amount is achieved at the end of Year 6 under the declining-balance method?
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Which of the following years has the lowest depreciation charge under the units-of-production method?
Which of the following years has the lowest depreciation charge under the units-of-production method?
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What is the primary objective of AASB 15?
What is the primary objective of AASB 15?
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Which of the following is NOT a report that an entity is required to produce according to financial reporting standards?
Which of the following is NOT a report that an entity is required to produce according to financial reporting standards?
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Which body is responsible for developing accounting standards in Australia?
Which body is responsible for developing accounting standards in Australia?
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Which of the following best describes the role of the Australian Securities and Investments Commission?
Which of the following best describes the role of the Australian Securities and Investments Commission?
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What significant changes in Australian Accounting Standards occurred around 2003 and 2004?
What significant changes in Australian Accounting Standards occurred around 2003 and 2004?
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What aspect does AASB 15 specifically focus on concerning revenue?
What aspect does AASB 15 specifically focus on concerning revenue?
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In financial reporting, which is a legislative requirement for the preparation of comprehensive income?
In financial reporting, which is a legislative requirement for the preparation of comprehensive income?
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What is one of the criticisms against the regulation of financial accounting?
What is one of the criticisms against the regulation of financial accounting?
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What is the purpose of the statement of cash flows in financial reporting?
What is the purpose of the statement of cash flows in financial reporting?
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Which of the following entities plays a role in the international accounting standard setting process?
Which of the following entities plays a role in the international accounting standard setting process?
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Study Notes
Understanding Deferred Tax
- Deferred tax arises when the carrying amount of an asset or liability in the financial statements differs from its tax base.
- Deferred tax asset arises when the carrying amount is less than the tax base. This implies a future tax benefit.
- Deferred tax liability arises when the carrying amount is greater than the tax base. This implies a future tax expense.
Deferred Tax Example
- Deferred tax is recognized for the revaluation of land.
- The revaluation of land creates a temporary difference, leading to a deferred tax liability.
- The difference between the carrying amount and the tax base related to the revaluation is 60,000
- The journal entry to record the deferred tax liability is a debit to income tax expense (OCI, or Other Comprehensive Income) and a credit to deferred tax liability.
- Deferred tax liability is offset against a deferred tax asset
- Deferred tax asset is recognized for temporary differences arising from other items, resulting in a deferred tax of $3,000.
- The journal entry to record the deferred tax asset is a debit to deferred tax asset and a credit to income tax expense (deferred).
- Deferred tax assets and liabilities are netted off in the statement of financial position.
Accounting for Equity Investments
- Ma Ltd acquires a 25% stake in Pa Ltd for $375,000
- Pa Ltd's share capital and reserves at acquisition are:
- Share capital: $1,000,000
- Retained earnings: $500,000
- Total shareholder's equity: $1,500,000
Pa Ltd's Performance
- Pa Ltd records an after-tax profit of 80,000intheyearendingJune30,2023,andpaysadividendof80,000 in the year ending June 30, 2023, and pays a dividend of 80,000intheyearendingJune30,2023,andpaysadividendof30,000.
- Pa Ltd records an after-tax profit of 100,000intheyearendingJune30,2024,andpaysadividendof100,000 in the year ending June 30, 2024, and pays a dividend of 100,000intheyearendingJune30,2024,andpaysadividendof50,000.
- Pa Ltd revalues its land upwards by $70,000 on June 30, 2024.
- The tax rate is 30%.
Accounting for Investments
- There are two methods to account for equity investments:
- Cost method
- Equity method
Cost Method
- The cost method records the investment at its acquisition cost.
- Dividends received are credited to income.
Equity Method
- The equity method reflects the investor's share of the investee's profit or loss in the investor's own income.
- The investment is adjusted each period to reflect the investor's share of the investee's profit or loss.
- Dividends received are treated as a reduction of the investment.
Australian External Reporting Environment and Conceptual Framework
- The practice of financial accounting in Australia is heavily regulated.
- The Australian Accounting Standards Board (AASB) sets accounting standards in Australia, based on International Financial Reporting Standards (IFRS).
- The Australian Securities and Investments Commission (ASIC) enforces the requirements of the Corporations Act 2001, which governs financial reporting in Australia, including the application of accounting standards.
- The Financial Reporting Council (FRC) provides guidance on financial reporting matters and oversees the AASB.
- The Australian Securities Exchange (ASX) sets listing rules for companies listed on the ASX.
Company Reports and Disclosure
- Companies must produce financial statements that comply with accounting standards.
- These statements include a statement of comprehensive income, a statement of changes in equity, a statement of financial position, and a statement of cash flows.
- Companies are also required to disclose information about their corporate social responsibility, including environmental and social performance.
AASB 15: Revenue from Contracts with Customers
- AASB 15 establishes principles for recognizing revenue from contracts with customers.
- The key objective is to ensure that revenue is recognized when it is earned and the related goods or services are transferred to the customer.
- The Standard applies to the income-generating activities of an entity involving contracts with customers.
- It defines a customer as a party that has contracted with an entity to obtain goods or services for consideration.
Corporate Social Reporting
- There is an increasing emphasis on companies disclosing information about their social and environmental performance, referred to as corporate social responsibility reporting.
- This reporting is separate from traditional financial reporting.
- Companies may report on various aspects of their social and environmental performance, such as their impact on the community, their environmental practices, and their governance practices.
Accounting Policies
- Companies must disclose their accounting policies in the notes to the financial statements.
- These policies provide information about how companies measure and report their financial performance.
- Accounting policies may differ depending on the company's industry and specific circumstances.
Events After the Reporting Period
- Events that occur after the reporting period can impact the financial statements.
- They are classified as either adjusting events or non-adjusting events.
- Adjusting events require adjustments to the financial statements.
- Non-adjusting events are disclosed in the notes to the financial statements.
Provisions, Contingent Liabilities, and Contingent Assets
- Provisions are liabilities of uncertain timing or amount.
- Contingent liabilities are potential obligations that are not recognized in the financial statements.
- Contingent assets are potential assets that are not yet recognized in the financial statements.
Depreciation Methods
- Different depreciation methods are used depending on the expected pattern of use or consumption of an asset.
- Methods include:
- Straight-line depreciation
- Declining balance depreciation
- Units-of-production
Impairment of Non-Current Assets
- Assets are tested for impairment when there is an indication that the carrying amount may exceed its recoverable amount, which is the higher of fair value less costs to sell and value in use.
- If an impairment loss is recognized, it is recorded as an expense in the statement of comprehensive income and the carrying amount of the asset is reduced.
Group Structure and Intragroup Transactions
- Group structures result in transactions between entities within the group.
- These transactions are eliminated in the consolidated financial statements to avoid double-counting.
Non-Controlling Interests
- Non-controlling interests represent the portion of a subsidiary's net assets that is not owned by the parent company.
- Non-controlling interests are recognized in the consolidated financial statements.
Joint Arrangements
- Joint arrangements are arrangements where two or more parties have joint control over an economic activity.
- Joint ventures are one type of joint arrangement where parties have joint control and they share in the risks and rewards.
- Joint operations are another type of joint arrangement where the parties have joint control but do not have joint ownership of the asset.
Consolidated Financial Statements
- Consolidated financial statements combine the financial information of a parent company and its subsidiaries.
- The purpose of consolidation is to present a true and fair view of the group as a single economic entity.
- Consolidated financial statements are prepared using accounting principles that are consistent with those used for individual company financial statements.
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Description
This quiz explores the concepts of deferred tax, including deferred tax assets and liabilities. It explains how these arise from differences between the carrying amount and tax base of assets or liabilities, along with examples and journal entries. Test your knowledge on the recognition and implications of deferred tax.
