Week 6 - Shareholder's Equity, Intangibles and Taxes

Question 1

When are brands recorded as an intangible asset

Answer 1

Only if purchased

Question 2

what are three types of intangible assets (not examples but classifications)

Answer 2

separate acqusition
acquisition as part of business combination
Internally generated intangibles

Question 3

what is a separate acqusition

Answer 3

intangible which can be measured as the company bought it, recoognised at cost

Question 4

what is acqusition as part of business combination

Answer 4

acquirer must recognise separately indentifiable assets irrespective of if the company they bought recognised them, which is goodwill.

if a company bought coca cola, the brand name is recognised as goodwill but on coca cola statements it isnt shown

Question 5

internally generated intangibles what are they

Answer 5

can be difficult to measure these so should be recognised only if their cost can be reliably measured
they are to be capitalised

Question 6

measurement types for intangible assets

Answer 6

at cost just like PPE

revaluation only if there is an active market for that type of intangible asset

Question 7

what happens with amortization if the asset has a finite useful life

Answer 7

residual value presumed zero unless there is an acive market for second hand or someone agreed to buy
amortized over useful life

Question 8

what happens with amortization if the asset has an infinite useful life

Answer 8

do not amortize, instead perform annual impairment review

Question 9

If a company has created a huge brand recognition through ads which cost 100k and the expected benefits are 5m, what is the value of the intangible asset ‘brand value’

Answer 9

0 because this cannot be accurately measured

Question 10

A company bought a 5 year license for 400k which enables it to make a certain specialised amount of paint. can this be recognised as an intangible asset

Answer 10

yes

Question 11

If a firm acqured a permanent trademark from another firm. should they amortize this asset?

Answer 11

no because indefinite useful life so just do impairment losses

Question 12

a company issues 250k ordinary shares at par value of 1 each and makes 75k profit that year. what is the end equity balance and components

Answer 12

share captial 250k
retained earnings 75k
shareholders equity = 325k

Question 13

after 5 years a company issues 150k more shares of par value 1 for 3. what does the equity account look like (they issued 250k five years ago par value 1) and what happens to cash

Answer 13

150k = share capital
300k = share premium (3-1)xshares
cash up 450k (150+300)

Question 14

what are the two types of shares

Answer 14

preffered and common/ordinary

Question 15

what is a preferred share

Answer 15

dividends are paid before ordinary dividends at a fixed rate of dividend each year

Question 16

what is an ordinary share

Answer 16

divident not guaranteed, and if it is received then it is paid from net profits after preferred dividends

Question 17

features of ordinary shares

Answer 17

if business closes, they get proceeds last
have voting rights
benefit from dividends and share price appreciation
high risk, high return

Question 18

features of preferred shares

Answer 18

fixed rate of dividend each year
dividends paid before ordinary
priority over ordinary when business closes
no voting rights
low risk, low return

Question 19

what are the two types of rreserve accounts

Answer 19

capital reserves and revenue reserves

Question 20

what are capital reserves

Answer 20

share premium goes here (when shares are issued above par value)
revaluation reserve is here too (upward revaluation of noncurrent assets)

Question 21

what are revenue reserves

Answer 21

retained earnings

Question 22

difference between pre-tax income and taxable income

Answer 22

pretax income + non-deductible expenses - non-taxable income - capital allowances = taxable profit

Question 23

what are non deductible (ie tax deductible so dont get taxed) expenses

Answer 23

depreciation an amortization
general provisions (eg doubtful debt)
entertainment expenses
capex
losses on sales of non current assets

Question 24

what is non taxable income

Answer 24

dividends received or interest received on bonds

Question 25

what is the double entry for corporate tax

Answer 25

Dr Tax espense (IS expense)

Cr tax liability (BS current liability)

Question 26

what is under/over provision of tax

Answer 26

income tax (what IS said and that u put in taxes payable) - income tax paid (what you actually need to pay)

if greater than 0 then overprovided
if negative then underprovided

Question 27

what is the tax liability entry this year if you underprovided tax by 300k last year

Answer 27

you have 300k more to pay which needs to be added onto this years income tax expense account so credit this years income tax liabiliity account by 300k (because u have a debit balance of 300k from before)

Question 28

what is tax liability entry if you overprovided tax

Answer 28

you have a credit balance so you debit this years account since you need to reduce it back to what you really needed to pay

Question 29

what is the journal entry if: 2019 company expects to pay 100k, then in 2020 once finalised turned out to be 150k. 2020 they expect to pay 120k.

Answer 29

2019: Dr Tax expense (IS) 100k, Cr Tax Payable 100k (BS)
2020: turned out to be 150 so - Dr Tax Payable 150k, Cr cash 150k
2020: Dr tax expense 120k, Cr Tax payable 120k, but also Dr tax expense 50k and Cr tax payable 50k to make up for underprovision