Reference no: EM132973400

Question 1 - At 1 January 2020, SHAPE Ltd grants share options to each of its 100 employees working in the sales department. The share options will vest at the end of 2022, provided that the employees remain in SHAPE Ltd's employment, and provided that the volume of sales of a particular product increases by at least an average of 5% per year. If the volume of sales of the product increases by an average of between 5% and 10% per year, each employee will receive 100 share options. If the volume of sales increases by an average of between 10% and 15% each year, each employee will receive 200 share options. If the volume of sales increases by an average of 15% or more, each employee will receive 300 share options.

On grant date, SHAPE Ltd estimates that the share options have a fair value of $20 per option. The company also estimates that the volume of sales of the product will increase by an average of between 10% and 15% per year. SHAPE Ltd also estimates, on the basis of a weighted average probability, that 20% of employees will leave before 31 December 20X2.

By 31 December 2020, seven employees have left and SHAPE Ltd still expects that a total of 20 employees will leave by the end of 20X2. Product sales have increased by 12% and the entity expects this rate of increase to continue over the next two years. Fair value of the share option has increased to $25 per option.

By 31 December 2021, a further five employees have left. SHAPE Ltd now expects only three more employees will leave during 2022. Product sales have increased by 18%, resulting in an average of 15% over the two years to date. The company now expects that sales will average 15% or more over the three-year period. Fair value of the share option has further increased to $28 per option.

By 31 December 2022, a further two employees have left. SHAPE Ltd's sales have increased by an average of 16% over the three years. The share options now have a fair value of $30 per option.

Required - Prepare the journal entries relating to the share options for SHAPE Ltd for the years ended 31 December 2020, 2021 and 2022.

Question 2 - On 30 June 2020, VTC Ltd entered into an agreement to lease a piece of equipment to THEi Ltd. On the same day, VTC Ltd paid $6,500 for preparing the lease agreement. Details of the lease are as follows:

Inception of lease and beginning of lease term, 30 June 2020.

Lease term, 5 years.

Economic and useful life of the equipment, 6 years.

Fair value of equipment, $839,377.

VTC's cost of the equipment as at 30 June 2020, $800,000.

Estimated scrap value at the end of the useful life of the equipment, $9,765.

Total residual value of $60,000 of which $40,000 is guaranteed by THEi.

Five annual lease payments of $220,000 payable each 30 June. The first lease payment is made in arrears on 30 June 2021.

Included in the annual lease payments is an amount of $20,000 representing payment to VTC for executory costs of insurance and maintenance of the equipment.

At the end of the lease term, THEi has the option to purchase the equipment and THEi intends to exercise this option.

The interest rate implicit in the lease is 8% p.a.

The lease is non-cancellable.

Required - (a) Prove that the interest rate implicit in the above lease is 8%.

(b) Prepare journal entries in the books of THEi Ltd for the years ended 30 June 2020 and 2021.

(c) Prepare journal entries in the books of VTC Ltd for the years ended 30 June 2020 and 2021.

Question 3 - Consider each of the following assets and liabilities which appear in the statement of financial position of HKIVE Ltd at 30 April 2021:

(a) A motor lorry which cost $100,000 is shown at its written down value of $20,000. For tax purposes, its written down value is $30,000.

(b) A loan payable is shown at $60,000. The repayment of the loan will have no tax consequences.

(c) An amount receivable is shown at $45,000. Of this amount, $25,000 has already been taxed but the remaining $20,000 will be taxed in the accounting period in which it is received. The whole $45,000 has already been included in accounting profit.

(d) An amount payable is shown at $3,000. This relates to an expense which has already been deducted when computing accounting profit but which will not be deducted for tax purposes until it is paid.

Required - Compute the tax base of each of the above assets and liabilities and identify any deferred tax asset or liability for each item.