Question 1.

Journal entry for 2020

$ $

Tax Expenses     11,20,000

Deferred tax assets     26,250

    Current tax payable 11,46,250

(To record tax expense for the year)

Working Note 1:

Computation of taxable income and current tax for 2020:

Particulars Amount ($)

Accounting Income Before Tax 2,500,000
Add: Depreciation as per accounting 475,000
Less: CCA Deduction 50,000
Add: Warranty expenses accounted ($50 x 750,000
15,000)
Less: Warranty expenses paid as tax 400,000
deductible
Add: Gained from investment 50,000
Add: Disallowed entertainment expenses 50,000
($100,000 x 50%)
Taxable Income 3,275,000
Tax Rate 35%
Current Tax (Taxable value x Tax rate) 11,46,250

Working Notes 2:
Deferred Tax for 2020 $

Item creating DTL

Depreciation (475,000- 50,000)     425,000

Difference     425,000

Tax rate 35%

Deferred Tax Liability (Difference x tax rate)         148,750

Item creating DTA

Warranty expenses (750,000 – 400,000)     3,50,000

Difference     3,50,000

Tax rate 35%

Deferred Tax Assets (Difference x tax rate)     122,500

Net- deferred tax (DTA) (148,750 – 122,500)     26,250

Question 3.

(a) Basic EPS (Earning Per Share ) = ( Net Income - Preferred Dividend ) / Weighted
average shares outstanding

Particular Amount($)

Net Income 3,500,000

Less: Cumulative preference dividend

(1,600,000 * 10%) -160,000

Earning available to Common shareholders 3,340,000

Weighted average number of common stocks 1,000,000

Basic EPS (3,340,000 / 1,000,000) 3.34

b) Diluted EPS = Earning available to common shareholders / Weighted average number of

common shares

Computation of earnings available to common stockholder

Particular Amount ($)

Net Income (before preference dividend) 3,500,000

Add: Interest on convertible bonds

(7,500,000 * 8% * (1 - 20%) 480,000

Earnings available to common stockholder 3,020,000

Computation of weighted average number of common shares

 Opening common stock 1000000

Add: converted preferred stock 120000

Add: converted bonds 105000

Add: stock option 360000

Less: stock bought back (stock option proceeds)

(360000 * 25 / 30) -300000

Weighted average number of common shares 1,285,000

Diluted EPS = 3,020,000/1,285,000 = $2.35

Question 4.

(a) Value of executive remuneration

i. Initial measurement at 1st July 2016:

8,000 shares x $2.4 x (10 – 4) = 115,200/ 4 years = $28,800 p.a.

ii. Subsequent measurement at 30th June 2020:

8,000 shares x $2.4 x (10 – 5) = $96,000

(b) Journal Entries

30th June 2017

Employee benefit expenses A/c Dr. $28,800

To Share based payment reserve A/c $28,800

30th June 2020

Share based payment reserve A/c Dr. $3200

To Employee benefit expenses A/c $3200

(c) Journal Entry

30th September 2020

Cash A/c Dr. $40,000

Share based payment reserve A/c Dr. 19,200

To Equity share capital A/c $59,200

SBP = $96,000/5 executives = $19,200 per executive

Equity Capital = 8000 shares x $7.4 = $59,200

Question 5.