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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!    
 
ACCM 4200 Financial Accounting & Reporting 1 Trimester 3, 2015: Assessment 2 – Letter Writing Assignment  
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



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