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The way I solved it:
CASH FLOWS from OPERATING ACTIVITIES:
Profit before tax: £3,720
Adjustments for
– Depreciation: +£400
– Interest expense: +£40
– Gain on sale: – £100Changes in working capital:
– Inventory: – £479 + £70 = – £409
– Trade debtors: -£280 + £40 = – £240
– Trade creditors: -£88 – £60= -£148Interest paid: – £40
Tax paid: – £736NET CASH FLOWS from OPERATING ACTIVITIES: £2,487
CASH FLOWS from INVESTING ACTIVITIES:
Payment for the acquisition of AG net of cash acquired: – £150
Proceeds from sale of investment: + £600
Purchase of PPE: £- 3,483NET CASH FLOWS from INVESTING ACTIVITIES: – £3,033
CASH FLOWS from FINANCING ACTIVITIES:
Proceeds from the issue of bonds: £300
Payment of principal of finance leases: -£100
Proceeds from issue of shares: £230
Repayment of loans: -£100 (it must be since the difference in non-current liabilities is £200, from which £100 is repayment of the principal of finance leases)NET CASH FLOWS from FINANCING ACTIVITIES: +£330
NET CASH CHANGE: – £216 (and it should be -£116 instead)
Cash at the beginning of the year: £337
Cash at the end of the year: £221The way I solved it:
a) DEFERRED TAX BALANCE
i) carrying value of the asset is £100,000 (cost) – £40,000 (I suppose that by saying ” AS OF 31 December 2010 this asset was charged with £40,000 of depreciation expense” it means accumulated depreciation) = £60,000 which is greater than its tax base: £100,000 – £70,000 = £30,000 => (temporary difference of £60,000 – £30,000)* 0.30 = -£ 9,000 (deferred tax liability)
ii) HERE with Inventory I am almost sure that probably I got it wrong, but this is the way I thought about it: carrying value (is the net realisable value)= £25,000 which is greater than its tax base which must be (£25,000 + £10,000) £35,000 => temporary difference of (£25,000- £35,000)* 0.30 = £3,000 (which here must be a deferred tax asset, I suppose)
iii) Trade debtors have a carrying amount of £50,000. The related revenue has already been included in taxable profit. => here I suppose there is no temporary difference as it has been included in both accounting and taxable profit
iv) ACCRUED EXPENSES (Liability): carrying amount = £18,000 which is greater than its tax base of 0 => temporary difference of £18,000* 0.30 = £5,400 (which must be a deferred tax asset, I suppose)
v) RESEARCH AND DEVELOPMENT: carrying amount = £200,000 – £40,000*4= £40,000 which is greater than its tax base = £200,000 – £100,000 – £25,000*3 = £25,000 => temporary difference of £15,000* 0.30 = £4,500 (deferred tax liability)
SO,
DEFERRED TAX BALANCE = -£9,000 + £3,000 + £5,400 – £4,500 = -£5,100 (deferred tax liability)
b) DEFERRED TAX CHARGE for 2010
tax depreciation = £25,000
accounting depreciation = £40,000
=> temporary difference of (25,000- 40,000)* 0.30 = – £4,500 must be the TAX charge that will go on the I.S. for 2010Is this correct?
The way I solved it (and is probably wrong as it’s sooooo confusing) is:
a) for the DEFERRED TAX BALANCE => here, from what I’ve read (and please confirm whether it is correct or not) I need to go through every item and, if it gives rise to a temporary difference, I compare the carrying amount and the tax base (I ignore items which give rise to a permanent difference such as the fine in ii)) and in the case of an ASSET, if the carrying amount > tax base => deferred tax liability, if carrying amount < tax base => deferred tax asset; in the CASE of a LIABILITY, if the carrying amount > tax base => deferred tax asset, if the carrying amount < tax base => deferred tax liability.
SO,
i) PPE the carrying value of that ASSET: £140,000 – £70,000 = £70,000 which is greater than its tax base: £250,000 (cost) – £210,000 (total tax allowances until that date)= £40,000. Temporary difference: £70,000 – £40,000 = £30,000, which * 0.30 (tax rate) = – £9,000 (deferred tax liability)
ii) PROVISION (this also tests my knowledge about provisions), and from what I know, only the first two items should be included in the provision, i.e. redundancies and legal/accounting costs relating to staff redundancies. I’ve read on IAS+ that you cannot make a provision for re-training the remaining staff and neither for future operating losses, which in this case would be the expected loss on inventory, right? And since it states that “The research and development costs were deducted for tax purposes in 2011, the year in which they were INCURRED and PAID” => the R&D would not give rise to a temporary difference. So, the provision which must have been included in arriving at the pre-tax financial statement income must be comprised of 440,000 (redundancies) + 90,000 (legal/accounting costs relating to staff redundancies) = 530,000
the carrying amount of this provision (which is a liability, of course) is £530,000 and the tax base is 0 => temporary difference of £530,000 * 0.30 = + 159,000 (deferred tax asset).
iv) BAD DEBT EXPENSE: carrying value of bad debt expense is £60,000 which is greater than its tax base of 0 => temporary difference of £60,000* 0.30 (tax rate) = 18,000 which is a deferred tax asset, right?
v) deferred revenue (Liability): carrying amount: £50,000 > its tax base of 0 => temporary difference of £50,000*0.30= 15,000 which is a deferred tax asset
SO now the deferred tax balance is: -9,000 (deferred tax liability PPE)+ 159,000 (deferred tax asset Provision) + 18,000 (deferred tax asset Bad Debt Expense) + 15,000 (deferred tax asset Deferred Revenue) = 183,000 DEFERRED TAX ASSET, right?
b) DEFFERED TAX CHARGE – from what I know,and please correct me if this is not true, I take the difference between the TAX DEPRECIATION and ACCOUNTING DEPRECIATION and multiply it by the tax rate
SO,
TAX DEPRECIATION for 2013 must be: £250,000 – £210,000 (total tax allowances until end of 2012)= £40,000
ACCOUNTING DEPRECIATION: £140,000 / 2 = £70,000
(£40,000 – £70,000)* 0.30 = – £ 9,000 must be the TAX CHARGE for 2013
Apologies for such a looooong post 🙁 and hopefully, you won’t hate me too much for making you go through such a horrible question 🙁
Great! Many thanks, Mike!! Just one more thing I want to clarify – about that loss on the available-for-sale equity investments – we added it back to arrive at cash flow from operating activities, but I am confused about is: doesn’t a fair value change in available-for-sale equity investment go in the Equity section (Other Comprehensive Income) and not the P&L? If so, it means that it was not included when arriving at the net profit on P&L, therefore, why do we add it back?
I thought that only fair value adjustments for investments through profit and loss are included when arriving at the net profit on I.S. …
The resulting difference can’t it be a loss on fair value for the OTHER equity investments, I mean, what I am asking is:
An equity investment asset can go up with:
– purchases of new equity investments
– gains on fair value adjustmentsand
It can go down with:
– disposals of equity investments
– losses on fair value adjustmentsright?
I added the difference (assuming all those entries were accounted for), which was 8,000 (beginning balance)-1000 (disposal) + 1,000 (purchase) + 250 (increase on FV) – 100 (decrease in FV) + x = 4500 (ending balance) => x = – 3,650 to the operating cash flow and it worked, it balanced :-S
Many thanks for the speedy answer! 🙂
When you wrote:
This is an issue of new shares at their face value (par) and the double entry here will be:
Dr Cash $1,000
Cr Share Capital $3,000.You meant:
Cr Share Capital $1,000, not $3,000, right?
Does this mean that on the Cash flow statement under Cash from Financing activities, I have:
Proceeds from the issue of shares: $1,000, right?