Question

ART A

Beta Drug and Chemical Ltd is undertaking a number of research and development projects, including the following project. Beta has been in the industry for a long time and has a network of suppliers / retailers it can rely on for any new product introduced.

Project Interion:

2018: A new organic compound, DTT-phenol, has been discovered and there is a lot of interest in what this new compound can do. Beta spends $200,000 on various costs to synthesise and test what this new compound can offer.

2019: One particular property of this compound that has piqued the interest of Beta is the compound’s property to stimulate orchids to grow more robustly, by improving the photosynthesis process in orchids. Hence, Beta has used the compound to develop a new fertiliser for orchids. Tests have shown that the new fertiliser greatly improves the appearance and colouring of orchid flowers. The fertiliser will enable production of premium orchids, which fetches high prices in the flower market. There is significant demand for orchids worldwide and the market is worth at least 1 billion dollars per year. Beta is confident of the techniques it uses to produce the fertiliser and commercial production can start at the beginning of next year. After determining that the fertiliser is ready for production, they have spent $1,000,000 in the process to do some additional testing.

2020: Beta successfully manufactures the new fertiliser and offers the new fertiliser on the market. The response has been very positive from the market. They also incur $500,000 in this year to further improve the fertiliser.

REQUIRED:

Determine the total amount of research and development costs that should be recognised as an internally generated intangible asset, in accordance with AASB 138, at the end of each year (2018, 2019, and 2020). Discuss and justify your answer in details.

PART B

Bowe Ltd is a reporting entity and complies with AASB 112 ‘Income Taxes'. Bowe maintains separate accounts for any deferred tax assets or deferred tax liabilities (i.e. does not offset deferred tax assets and deferred tax liabilities). Bowe’s accounting records for the year ended 30 June 2020 disclose the following:

Revenue	$1,200,000
Cost of goods sold	300,000
SG&A expenses	100,000
Capital expenditure (not allowed for tax deduction)	200,000
Deductible temporary difference, 30 June 2020	50,000
Taxable temporary difference, 30 June 2020	80,000
Deductible temporary difference, 30 June 2019	50,000
Taxable temporary difference, 30 June 2019	30,000
Tax rate	20%
Total tax base of assets	1,000,000
Total tax base of liabilities	800,000

REQUIRED:

Calculate deferred tax expense for the year ended 30 June 2020. Your answers must comply with AASB 112 ‘Income Taxes’. Show all necessary working, explanations and assumptions to support your answer.

Answer 1

PART A

What is AASB 138 -

It is an Accounting Standard that set out the required accounting treatment for particular transaction and events that affect the financial statements of a business.

Solution -

The total amount of research and development costs that should be recognised as an internally generated intangible asset, in accordance with AASB 138, at the end of each year (2018, 2019, and 2020) is following-

Particulars	Year	Cost incurred
synthesise and testing	2018	$200,000
Futher testing	2019	$1,000,000
Research cost for product efficiency enhancement	2020	$500,000

Above cost incurred came under AASB 138 because it meet the following criteria

1) It will help in future economic benefits of Beta Drug and Chemical Ltd .

2) The cost of the asset can be measured reliably.

Part B