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AFA I Assignment

The document outlines an advanced financial accounting assignment involving various calculations related to revenues, expenses, taxable income, and share-based compensation for ABC, Inc. It includes specific tasks such as identifying temporary and permanent differences, computing income taxes payable, and preparing journal entries for different scenarios. Additionally, it addresses the implications of net operating losses and the treatment of share-based payments under IFRS guidelines.

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6 views

AFA I Assignment

The document outlines an advanced financial accounting assignment involving various calculations related to revenues, expenses, taxable income, and share-based compensation for ABC, Inc. It includes specific tasks such as identifying temporary and permanent differences, computing income taxes payable, and preparing journal entries for different scenarios. Additionally, it addresses the implications of net operating losses and the treatment of share-based payments under IFRS guidelines.

Uploaded by

ibsaasheka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Advanced Financial Accounting I Individual Assignment (10%)

1. ABC, Inc. reported revenues of Br130,000 and expenses of Br60,000 in each of its first three
years of operations. For tax purposes, ABC reported the same expenses to the IRS in each of
the years. ABC reported taxable revenues of Br100,000 in 2010, Br150,000 in 2011, and
Br140,000 in 2012. What is the effect on the accounts of reporting different amounts of revenue
for IFRS versus tax?

During 2016, the product warranty liability accrued for book purposes was Br200,000, and the
actual paid for warranty liability was Br44,000. Allman expects to settle the remaining Br156,000
by expenditures of Br56,000 in 2017 and Br100,000 in 2018.
In 2016, nontaxable municipal bond interest revenue was Br28,000.
In 2016, nondeductible fines and penalties of Br26,000 were paid.
Pretax financial income for 2016 amounts to Br412,000.
Tax rates enacted up to 2016 were 50% and for 2017 and later years 40%.
I. Identify temporary and permanent differences?
II. Determine taxable income of 2016?
III. Computes income taxes payable for 2016?
IV. Compute future taxable amount (DTL) at the end of 2016?
V. Compute future deductible amount (DTA) at the end of 2016?
VI. Compute net deferred tax expense (DTL - DTA) for 2016?
VII. Compute total income tax expense (deferred + current) of 2016?
VIII. Records income taxes payable, deferred income taxes, and income tax expense of 2016?
IX. Show the financial presentation.
Instruction: Pass the necessary entry for each year for the following share-based compensation
2. On 1 January 2001, Entity A grants 100 shares to each of its 200 employees under the following
2 vesting conditions: three-year service condition and share price of the entity after these 3
years must be higher by at least 20% compared to grant date. At the grant date, fair value of
granted shares is estimated at Br30 each. This fair value does not take into account 3-
year service condition, but takes into account the market vesting condition from point 2. above.
At the grant date, it is estimated that 90% out of 200 employees will meet the service condition.
Year 2002
At 31 December 2001, the price of Entity’s shares falls on the stock exchange and the fair value
of share options is now Br20. Additionally, only 2% of employees left during 2001, therefore Entity
A revised its original estimate and now 190 employees (i.e. 95% out of the starting 200) are
expected to meet the service condition.
Year 2003
This is the final year of service condition. 186 employees (93% out of the original 200) remained
in the company after these 3 years. It turned out that the share price at 31 December 2003 was only
15% higher compared to grant date and employees did not receive any shares.
3. On 1 January 2001, Entity A promises to grant 100 shares to each of its 200 employees if and
when the share price of Entity A reaches Br50. If this target is not met by 31 December 2004,
no shares will be granted. In order to receive shares, employees must still be employed by
Entity A when this target is met. According to the fair value valuation prepared by Entity A,
the most likely date when the price target will be achieved is 31 December 2003. Fair value of
one share that was granted is estimated at Br30 and this takes into account the market vesting
condition, i.e. the vesting share price target. Entity A estimates that 180 employees (i.e. 90%)
will still be employed at 31 December 2003.
Year 2003
The share price target is not achieved during 2003, but this fact does not impact the recognition,
as the estimate of the length of the expected vesting period, which was based on market
performance conditions, cannot be subsequently revised (IFRS 2.15b). Additionally, the actual
number of employees that fulfilled the service condition during the estimated vesting period was
184 (92%).
Entity A recognizes the final year of the expected vesting period (even though the share price target
was not achieved), adjusting only for the number of employees that fulfilled the service condition
during the estimated vesting period.
Year 2004
The share price target is not achieved during 2004 as well, so there will be no shares delivered to
employees. 176 employees (88%) still work for the company on 31 December 2004. However,
these facts do not impact the recognition, as the estimate of the length of the expected vesting
period, which was based on market performance condition, cannot be subsequently revised (IFRS
2.15b). Therefore, whatever happens in 2004, no entries will be booked by Entity A during this
year.
4. On 1 January 2001, Entity A promises to grant 100 shares to each of its 200 employees if the
share price will exceed Br10 at 31 December 2002 or 150 shares if the share price will exceed
Br15 at that date. In order to receive shares, employees must still be employed by Entity A at 31
December 2002. Fair value of one share with a market vesting condition of a target price at
Br10 is Br7 and it drops to Br4 with a target price at Br15.
Year 2002
The share price at 31 December 2002 is Br9, therefore no shares are given to employees. 92% of
employees still work at the company at 31 December 2002. The fact that the market vesting
condition (i.e. target share price) is not met does not impact the recognition of share-based payment
arrangement. It was taken into account when estimating the fair value of share options at grant
date. Their fair value is not subsequently remeasured after grant date. The entity adjusts the
recognition for the % of employees that met the service condition only.

5. ABC Corporation has one temporary difference at the end of 2007 that will reverse and cause
deductible amounts of Br50,000 in 2008, Br65,000 in 2009, and Br40,000 in 2010. ABCD’s
pretax financial income for 2007 is Br200,000 and the tax rate is 34% for all years. There are
no deferred taxes at the beginning of 2007. ABCD expects to be profitable in the future.

Instructions
A. Compute taxable income and income taxes payable for 2007.
B. Prepare the journal entry to record income tax expense, deferred income taxes, and
income taxes payable for 2007.
6. XYZ Inc. incurred a net operating loss of Br500,000 in 2007. Taxable income was Br200,000
for 2005 and Br200,000 for 2006. The tax rate for all years is 40%. XYZ elects the carryback
option. Prepare the journal entries to record the benefits of the loss carryback and the loss
carryforward.
7. Based on the above question now assume that it is more likely than not that the entire net
operating loss carryforward will not be realized by XYZ Inc. in future years. Prepare all the
journal entries necessary at the end of 2007.

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