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Re: Numerous Accounting Issues From: Aaron Anderso

Re: Numerous Accounting Issues From: Aaron Anderson [aanderson@andersonandjohnson.com.au] Sent: Monday, 14 December 2015 at 8.30am To: Janice.Williams@Edwardsjackson.com.au Cc: Margaret Mitchell [mmitchell@ andersonandjohnson.com.au] Attachment: Issues Raised by the Board Dear Janice, Thanks for your call suggesting we meet to plan the year end accounting work for the financial year ending 31 March 2016. It was a pleasant surprise to find out that you had remembered that our company year-end was March and not June! There are quite a few issues that the board of directors has raised with me in relation to the financial statements and I have noted them below for your response. Some of the directors are concerned about these issues as the company has just moved from being a small proprietary company to a large one (with effect from 1 December 2015), and they think this changes matters. As suggested I have also attached the information relating to the calculation of income tax and deferred tax as discussed. To assist us in our decision making process could you please make sure that any relevant sources such as the AASBs, Corporations Act, reference books, journal articles, and/or websites are referenced so that the accounting team here could check them out when evaluating your answer. If you could kindly copy the newly appointed Financial Controller, Margaret Mitchell in on your response she could start the review process. I must confess I am not too worried about it as I am sure that all we need to do is to prepare the financial statements as we did last year. That’s correct isn’t it? I will be overseas on vacation until early February but look forward to hearing from you before I get back. Best wishes and regards Aaron Anderson Managing Director, Anderson & Johnson Pty Ltd Suite 2516, Level 30, Plaza Building 185 Charles Street Adelaide SA 5000 ATTACHMENT 1 Anderson & Johnson Pty Ltd Issues raised by the Board of Directors Issue 1: The price on the company’s shares has increased significantly over the year, as we enjoyed a good financial year with a very positive expectation in terms of future profits. The share price has almost tripled (overall) in the last two years inspite of the volatile share market. Five possible new mine sites were discovered and at least three of them are commercially viable. This was due to the present Board of Directors’ decision to invest about $ 8.25 million exploring further possible mines in the demarcated areas. I also believe that the present Board of Directors is seen as having integrity and vision and is well respected and that the shareholders acknowledge this goodwill by continuing to invest in the company’s shares and in most cases they have even increased their present investment. Margaret does not think that this is a good idea but I have requested her to discuss the possibility of recognising this goodwill in the financial statements as at 31 March 2016 and to agree on a basis of valuation with you. Issue 2: A number of employees who work on our strategic management team have been with us for a number of years at least 12 of them have been with us since the company commenced operations in 2006. In accordance with the Employee Bargaining Agreement (EBA) all employees are entitled to long service leave of 13 weeks if they remain in service for 10 years. They are also entitled to pro rata long service leave after 6 years of service. Our usual practice is to show the long service leave expense in the income statement when the employee actually takes leave and is paid. Of course we maintain a memorandum record of the number of days each employee is entitled to. Margaret has indicated to us that she thinks we should consider treating this expense in a different manner, which seems complicated. The directors are wondering why we should complicate a very simple way of calculating long service leave why not stick with recognising the expense when we pay for it? What do you think we should do and why? Issue 3: Thank you for agreeing to calculate the company tax and deferred tax liabilities for the year ending 30 June 2015 for Johnson Pty Ltd, our subsidiary company. See attachment 2 for details. Could you please give us the journal entries required, to give effect to both the current tax liability and deferred tax calculation done by you? The board would also like a brief summary of the logic behind calculating deferred tax; why we have to provide for deferred tax at all. There is also a possibility that the company tax rate may drop to 25%; would this impact on the deferred tax calculation; and if so how? I suggest you attach the tax calculation worksheets to your letter in support of the journal entry as our auditors will require it. Hint: Remember that your firm plans to charge the client for your advice; as a check ask yourself if you would pay for the advice you have drafted! ATTACHMENT 2 Johnson Pty Ltd has calculated their accounting profit before tax for the year ended 30 June 2015 to be $375,680. The company tax rate at present is 30%. The company’s draft trial balance (an extract) for the year ended 30 June 2015 (with comparative figures) showed the following assets and liabilities (prior to the tax provisions): 2015 2014 Cash 12 000 9 500 Accounts receivable 12 500 14 000 Allowance for doubtful debts (4 000) (2 500) Inventories 21 000 21 500 Rent receivable 3 000 2 400 Motor vehicle 18 000 18 000 Accumulated depreciation motor vehicle (16 000) (11 250) Equipment 90 000 130 000 Accumulated depreciation equipment (50 000) (52 000) Deferred tax assets ? 6 450 Accounts payable 17 600 21 500 Provision for annual leave 3 500 6 000 Current tax liability ? 7 600 Deferred tax liability (opening balance) ? 2 745 Included in the profit above are items of revenue and expenses relevant to the calculation of company income tax and are shown below: Depreciation expense motor vehicles (25%) 4 500 Depreciation expense equipment (20%) 18 000 Rent revenue 16 500 Doubtful debt expense 2 500 Carrying amount of equipment sold 17 500 Entertainment expense 1 750 Annual leave expense 6 000 Proceeds on sale of equipment $ 19 500 Royalty revenue (non-taxable exempt income) $ 11 000 Additional Information: 1. The motor vehicle is fully depreciated for tax purposes; the company can claim 15% depreciation on equipment. 2. The equipment sold during the year was purchased 2 years before the date of sale for $35 000 Prepare two worksheets showing: (1) The current tax calculation (2) The deferred tax calculation Prepare the journal entries that Johnson Pty Ltd would need to recognise the current tax for the year ended 30 June 2015 and the deferred tax as at 30 June 2015. ~~~~~~~~~~~~~~~~~~ End of Assignment ~~~~~~~~~~~~~~~~~~~

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