Question

Prepare necessary adjusting entries to correct the errors on all issues (ii) to (v) in the financial statements of GHL for the year ended 31 March 2020 in accordance with relevant HKFRSs.  

(ii) At 1 April 2019 there was a deferred tax liability of $6.6 million in the statement of financial position and no adjustments have been made to this figure at 31 March 2020. This deferred tax liability was solely in relation to the differences between the carrying amount ($90 million) and the tax based ($57 million) of plant and equipment. At 31 March 2020 these figures were $96 million and $54 million respectively for the carrying amount and tax base of plant and equipment. The applicable income tax is 20%. GHL accounts for plant and equipment using cost model under HKAS 16 ‘Property, Plant and Equipment’.

The first tax loss carried forward in respect of the year ended 31 March 2020 is $24 million. GHL has reliable budgets for a total taxable profit of $12 million for the next two financial years. Tax losses can be carried forward indefinitely under the tax law. Fanny used the full amount of tax loss to determine the deferred tax amount and has been reflected in the draft financial statements.

(iii) On 31 March 2020 GHL issued $15 million 5% convertible bonds at par. Interests on the bonds are payable annually in arrears with first payment on 31 March 2021. Issue costs payable to professional advisers were $600,000. The bond can, at the choice of the holders, be redeemed at par on 31 March 2023; or converted on 31 March 2023 into ordinary shares in GHL at the rate of three ordinary shares for every $10 bond held.

In the draft financial statements, the proceeds from the bond issue have been recognized as bonds payable. The issue costs have been classified as an administrative expense. Cash received and paid has been recognized. No other entries have been made. The prevailing market interest rate for similar bonds for equivalent risk, but without conversion rights, is 8% per annum.

(iv) On 1 April 2019, GHL entered into a sale and leaseback agreement for its manufacturing plant. The plant was originally acquired by GHL on 31 March 2009 for $8,910,000, at which point the plant had a useful life of 30 years with no residual value. The sale proceeds of plant from the sale and leaseback agreement were $11.25 million, which is higher than the fair value of the plant of $9.0 million. The plant was leased back on a 20-year lease from 1 April 2019 at an annual rental of $1,105,350 to be paid annually in arrears at 31 March 2020. The sale satisfies HKFRS 15 "Revenue from Contracts with Customers", however, she insisted to account for it as a financing arrangement. The first lease rental is paid and charged to the statement of profit or loss. The sales proceed was treated as a financial liability. The incremental borrowing rate is 15% per annum.  

(v) GHL purchased a factory site in Malaysia on 1 April 2019 with intention for industrial use. Land prices in the area had increased significantly in the years immediately prior to 31 March 2020. Nearby sites had been acquired and converted into residential use. It is felt that, should the GHL's site also be converted into residential use, the factory site would have a market value of $27 million. $1.5 million of costs are estimated to be required to demolish the factory and to obtain planning permission for the conversion. GHL was not intending to convert the site at 1 April 2019 and had not sought planning permission at that date. The current replacement cost and carrying amount of the factory site are correctly calculated as $25.1 million and $28 million respectively as at 31 March 2020 before revaluation. Fanny did not reflect the change in fair value of the factory site even the factory site is measured using the revaluation model under HKAS 16.

Answer 1

ii	$ Million
Book Value of Property Plan & Equipment	96
Tax value of Plant & Equipment	54
Difference	42
Deferred tax liability to be created @ 20%	8.4
Opening Deferred Tax Liability	6.6
To be provided	1.8
Journal Entry
Dr Deferred Tax P&L	1.8
Cr Deferered Tax Liability	1.8
There is no entry required for deferred tax created on carried forward loss, since the losses can be carried forward indefinitely and there is virtual reasonability that the GHL will earn profits in future to cover the losses
iii
Rectification entry for issue costs	$
Dr Professional Fees	600,000
Cr Admininstrative Costs	600,000
Entry for recognising interest cost on bonds
Dr Interest on Bonds	750,000
Cr Interest Payable on Bonds	750,000
iv
Original Cost of Plant on 31 Mar 2009	8,910,000
Annual Depreciation from 01 Apr 2009 to 31 Mar 2019 (10 years)	2,970,000
Written Down Value of Plan	5,940,000
Sale Value of Plant	11,250,000
Profit on Sale of Plan	5,310,000
Rectification of incorrect treatment of sales proceeds
Dr Financial Liability	11,250,000
Cr Plant	5,940,000
Cr Profit on sale of Plant	5,310,000
v
Entry for recognising the fair value of the factory site	$ million
Estimated fair value of the Factory Site if it converted for residential use	27
Cost of demolition of the factory site	1.5
Net Fair Value of the factory site	25.5
Carrying value of factory in the books	28
Difference between fair value and carrying amount	-2.5
Dr Revaluation Reserve	2.5
Cr Factory Site	2.5