QUESTION 1 · QUESTION 1 . The following information relates to Furniture Limited , a manufacturer...

QUESTION 1

The following information relates to Furniture Limited, a manufacturer and retailer of chairs, for the year ended

28 February 2011:

1. The profit before tax of Furniture Limited for the year ended 28 February 2011 amounted to R690 000,

according to the draft financial statements compiled by an inexperienced accounting clerk. The revenue of

Furniture Limited for the year ended 28 February 2011 consisted of the following: royalties received amounting

to R485 000 (2010: R220 000), cash on delivery sales amounting to R350 000 (2010: R50 000) and credit sales

amounting to R250 000 (2010: R40 000).

Included in cash on delivery sales above is an amount of R40 000 received on 2 February 2011 from Table

Limited in respect of an order for paints which was only dispatched to Table Limited on 10 March 2011.

Included in credit sales above is an amount of R10 000 owing by Radio Limited to Furniture Limited. However

on 10 April 2011 Radio Limited indicated that they are unable to pay the money’s due as they were placed

under liquidation and its creditors will probably only receive 10 cent in the rand as a liquidation dividend.

Included in other income of Furniture Limited for the year ended 28 February 2011 are dividends received from

an unlisted investment amounting to R60 000 (2010: R20 000) and an amount of R12 000 in respect of a profit

realized on the sale of Pro Fan. Pro Fan was originally purchased on 1 March 2008 at a cost of R20 000 and

sold on 1 March 2010 for R24 000. The carrying amount and tax base of Pro Fan on date of sale amounted to

R12 000 and R10 000 respectively.

2. Furniture Limited purchased all its machinery on 1 March 2008 at a cost of R500 000 (excluding Pro Fan) on

which date it was estimated that the machinery will have a useful life of 5 years and a R nil residual value. After

the draft financial statements have been prepared, the directors of Furniture Limited re-estimated the remaining

useful life of machinery and determined that their remaining useful life is actually only 2 years as they are

already used to their full capacity. The residual value of the machinery remained unchanged at R nil. On 28

February 2010 the carrying amount and the tax base of the machinery (excluding Pro Fan) amounted to R300

000 and R250 000 respectively. This change in the useful life of machinery has not been recorded yet in the

draft financial statements of Furniture Limited for the year ended 28 February 2011. The SA Revenue Service

allows a capital allowance on machinery over 4 years according to the straight-line method. No other machinery

were purchased or sold during the year except for Machine Max.

3. Included in current liabilities in the statement of financial position of Furniture Limited at 28 February 2011 is an

amount of R20 000 in respect of royalties received for the period from 1 March 2011 to 30 June 2011 for the

patent rights of “quick dry” paint manufactured by Furniture Limited.

4. The inexperienced accounting clerk made the following entries for the current year in the “current tax due to the

SA Revenue Service” account in the general ledger of Furniture Limited:

Dr SA Revenue Service – current tax Cr

31/08/2010 Bank (1st provisional 50 000

tax payment for 2011)

30/09/2010 Bank (final payment 15 000 of assessment

for 2010, including R4 000 interest and

R6 000 penalties for the late submission of tax return)

28/02/2011 Bank (2nd 70 000 provisional tax

payment for 2011)

135 000

01/03/2011 Balance b/d 115 000

01/03/2010 Balance b/d 20 000

(relating to 2010 tax year)

28/02/2011 Balance c/d 115 000

135 000

No provision for current tax has been made yet in the draft financial statements for the year ended 28

February 2011.

5. The SA Normal tax rate changed from 29% in 2010 to 28% in 2011. 50% of all capital gains are

taxable. The company provides for deferred tax on all temporary differences according to the

comprehensive basis using the statement of financial position approach. There are no other exempt

or temporary differences except those mentioned in the question. There is certainty beyond any

reasonable doubt, that the company will have sufficient taxable profit in the future against which any

deductible temporary differences can be utilised. The deferred tax liability balance on 28 February

2010 amounted to R15 080, which you can assume to be correct.

6. The financial statements of Furniture Limited for the year ended 28 February 2011 were presented to

the board of directors for authorization for issue on 20 April 2011.

7. Ignore any VAT implications

8. Assume all amounts to be material.

REQUIRED:

1. Calculate the correct profit before tax in the statement of profit or loss and other comprehensive

income of Furniture Limited for the year ended 28 February 2011 taking into account all the above

mentioned information.

2. Calculate the current tax due to the SA Revenue Service by Furniture Limited for the year ended 28

February 2011. Use the profit before tax in the statement of profit or loss and other comprehensive

income as calculated in (1) above as your starting point.

3. Calculate the deferred tax balance in the statement of financial position of Furniture Limited for the

year ended 28 February 2011 using the statement of financial position approach, according to the

requirements of IAS 12 – Income taxes. Indicate if your answer is a deferred tax asset or deferred tax

liability.

4. Disclose the tax rate reconciliation, using R-values only, in the annual financial statements of

Furniture Limited for the year ended 28 February 2011, according to the requirements of IAS 12 –

Income taxes.

All calculations must be shown.

Comparative figures are not required.

5. Disclose (1) and (2) in the notes to the annual financial statements of Furniture Limited for the year

ended 28 February 2011, according to the requirements of only IAS 8 – Accounting policies, changes

in accounting estimates and errors and IAS 18 – Revenue.

Comparative figures are required. No other notes are required.

No accounting policy notes are required.

QUESTION 2

Alpha Limited is a manufacturer and retailer of bedding products and appliances. Their products are

sold at their own retail outlet in Khaya, Cape Town as well as to various chain stores. The annual

financial statements of Alpha Limited for the year ended 28 February 2011 were presented to the board

of directors for authorization for issue on 25 April 2011.

The company provides for deferred tax on all temporary differences according to the comprehensive basis

using the statement of financial position approach. There are no other exempt or temporary differences

except those mentioned in the question. There is certainty beyond reasonable doubt that there will be

sufficient taxable profit in future against which any deductible temporary differences can be utilized.

The SA Normal tax rate has remained unchanged at 28% for the past three years.

Ignore any VAT implications.

Assume all amounts to be material.

Additional information

1. Alpha Limited has a policy to refund purchases of electric shavers sold within 2 months from the date

of sale to dissatisfied customers. This refund policy is generally known and advertised in the insert

packages of the electric shavers sold. A provision for refunds amounting to R25 000 was made in the

annual financial statements of Alpha Limited for the year ended 28 February 2010 (2009: R nil),

based on the past sales and refund history of these electric shavers. During the current financial year

R30 000 was paid to dissatisfied customers for electric shavers sold of which R9 000 related to sales

of electric shavers for the year ended 28 February 2010. The financial director estimated, based on

the sales for the year and the refund history, that R40 000 will most probably be refunded to

dissatisfied customers in the first two months of the next financial year for electric shavers sold during

the year ended 28 February 2011. The manufacturer of the electric shavers also provides a

guarantee to Alpha Limited for any manufacturing defects on these electric shavers. At year end on

28 February 2011 it is probable, but not virtually certain, that 60% of these estimated costs will be

refunded by the manufacturer of these electric shavers to Alpha Limited.

2. During February 2011 Brands Limited, an animal activist group, instituted a claim of R100 000 against

Alpha Limited. The group claims that Alpha Limited tested cosmetic products on animals, resulting in

animals being injured in the process. At year end on 28 February 2011, the legal advisor of Alpha

Limited is of the opinion that it is probable that Alpha Limited will not be found liable for the claim.

3. Alpha Limited valued all its inventory according to the last-in, first-out method. After the

draft financial statements for the year ended 28 February 2011 had been prepared, the

directors decided at a board meeting that the current inventory valuation method should

be changed to the first-in, first-out method in order to improve the matching of revenue

and expenses. Unfortunately the inventory valuations according to the first-in, first-out

method for all the years prior to 2011 could not be determined due to a malfunction in the

computer program which is used for the costing of inventory.

The inventory valuation according to the different methods on 28 February 2011 is as follows:

Raw Materials Work in

progress

Finished goods Total

R R R R

First-in, first

out method

88 000

120 000

370 000 578 000

Last-in, first

out method

78 000

108 000

340 000 526 000

The SA Revenue Service has indicated that they will accept the new inventory valuation method for tax

purposes.

During the current year’s audit it was discovered that finished goods inventory located at the Khaya retail

outlet, was inadvertently excluded in the abovementioned inventory valuations since the 2009 financial year.

The value of finished goods inventory located at the Khaya retail outlet on the respective dates was

as follows:

Last-in, first-out First-in, first-out

R R

28 February 2009 115 000 ?

28 February 2010 20 000 ?

28 February 2010 110 000 120 000

The SA Revenue Service has already indicated that they will re-open all the previous years’ tax assessments

as both the change in the inventory valuation method and the exclusion of finished goods located at the

Khaya retail outlet are considered material.

During the first week of April 2011 a water pipe burst in theKhaya retail outlet resulting in damage to finished

goods with a cost price of R60 000. The company was not insured for these damages at the time.

4. Mr Joe, an inexperienced accountant recently employed by Alpha Limited, recorded the following

journal entries in the accounting records of Alpha Limited for the year ended 28 February 2011:

Journal

no

Description

Debit

R

Credit

R

(i)

Debtors (SFP)

# Revenue

(SCI)*

Recording of generic products supplied to various chain

stores.

800 000

800 000

Journal

no

Description

Debit R

Credit R

(ii)

Bank (SFP) #

Revenue (SCI)*

Recording of gift vouchers sold in exchange for merchandise at

discounted prices.

50 000

50 000

(SFP)#: Statement of financial position

(SCI)*: Statement of profit of loss and other comprehensive income

During a review of the journal entries and subsequent discussions with the inexperienced accountant, Mr

Joe, it was confirmed that the above journal entries were the only entries made in the accounting records of

Alpha Limited for the year ended 28 February 2011 in respect of the information detailed below:

i. During January 2011, Alpha Limited started to manufacture generic cosmetic products. These generic

cosmetic products are sold on consignment basis. Generic cosmetic products with a sales price of

R800 000 were supplied on a consignment basis in January 2011 to the various chain stores at a

gross profit of 25% on cost price. At year end on 28 February 2011, the various chain stores had only

sold 40% of the consignment inventory supplied to them during the current year by Alpha Limited,

but no money’s have been received from the chain stores in respect of these consignment sales yet.

ii. During the current year the Khaya retail outlet in Cape Town sold gift vouchers amounting to R50

000, in exchange for the issue of cosmetic products to the bearer at a discount of 25% on selling

price, in an attempt to increase the turnover of the company. At year end on 28 February 2011, no

cosmetic products have been issued at discounted prices yet as no gift vouchers have been

redeemed.

REQUIRED:

1. Motivate with reasons, why a provision for refunds in additional information (1) should be raised in the

accounting records of Alpha Limited for the year ended 28 February 2011 according to the

requirements of a liability in terms of the The Conceptual Framework for Financial Reporting 2010.

2. Disclose additional information (1) and (2) above in the notes to the annual financial statements of

Alpha Provisions, contingent liabilities and contingent assets.


Comparative figures are required.

3. Disclose additional information (3) above in the notes to the annual financial statements of Alpha

Limited for the year ended 28 February 2011, according to the requirements of only IAS 8 –

Accounting policies, changes in accounting estimates and errors and IAS 10 – Events after the

reporting period.



4. Prepare the additional and correcting journals in the books of Alpha Limited taking into account all

the additional information in (4) above, for the year ended 28 February 2011. Use the journal number

provided in the question as your point of reference. Indicate if it is a statement of financial position

(SFP) or statement of profit or loss and other comprehensive income (SCI) general ledger account in

your journal.

Journal narrations are not required.

Ignore all tax implications.

5. Calculate the deferred tax balance in the statement of financial position of Alpha Limited for the year

ended 28 February 2011 using the statement of financial position approach. Indicate if your

answer is a deferred tax asset or deferred tax liability in the statement of financial position.

QUESTION 3

Milk Limited manufactures beauty products. The following information for Milk Limited for the year ended 29

February 20.4 was presented to you:

1. Profit before tax for the year ended 29 February 20.4 amounts to R211 903. The profit before

tax includes the following items:

R

Profit on sale of manufacturing plant 333

Depreciation (before change in accounting estimate) 64 818

Interest on bank overdraft 52 190

Increase in allowance for credit losses 5 000

Fine paid 300

Warranty costs 14 000

The following is an extract from the property, plant and equipment note to the draft annual financial

statements of Milk Limited on 29 February 20.4. You can assume that the information is correct.

Factory Building

Manufac-turing plant

Computer Equipment

R

R

R

Carrying amount - beginning of year

1 401 600

260 000

38 280

Cost Accumulated depreciation

1 460 000 (58 400)

325 000 (65 000)

47 850 (9 570)

Depreciation Disposals

(29 200) -

(30 833) (29 667)

(4 785) -

Carrying amount - end of year

1 372 400

199 500

33 495


1 460 000 (87 600)

285 000 (85 500)

47 850 (14 355)

7 years 7 years

Remaining useful life

47 years

The factory building, manufacturing plant and computer equipment were brought into use on 1

March 20.1.

2. The profit on sale of manufacturing plant is in respect of a manufacturing plant that was sold

on 30 September 20.3 for R38 000. The original cost price of the manufacturing plant on 1

March 20.1 was R40 000

3. After the above-mentioned note was presented to you, the directors of the company decided to

change its accounting estimate in respect of depreciation on computer equipment. The previous

pattern of depreciation differed from the actual pattern of consumption of economic benefits of the

computer equipment. As a result, the reducing balance method at 10% per annum will be applied

instead of the 10% straight-line method. The effect of the change has not been recorded in the

accounting records. The effect thereof must be recorded from the beginning of the financial yearA list

to support the allowance for credit losses has been submitted to the SA Revenue Services and only

25% of the allowance will be allowed as a tax deduction.

4. During 20.4 the company received its tax assessment for the year ended 28 February 20.3 from the

SA Revenue Service. The tax assessment showed that the SA Revenue Service has charged a

penalty of R300 for the late submission of the tax return.

5. On 29 February 20.4, the financial manager of Milk Limited decided to make a provision for warranty

costs of R14 000 in the financial statements. The provision is based on sales of a new product which

is guaranteed.

6. Statement of financial position items on 28 February 20.3: R

Allowance for credit losses 75 000

Insurance premium prepaid 10 000

Deferred tax liability 29 993

Statement of financial position items on 29 February 20.4: R

Allowance for credit losses ?


Provision for warranty costs 14 000

7. The following capital allowances (not pro-rata) are applicable for tax purposes:

Factory building 5% straight-line method

Manufacturing plant 20% straight-line method

Computer equipment 3 years straight-line method

8. The company provides for deferred tax on all temporary differences according to the comprehensive

basis using the financial position approach.

9. Milk Limited has carried an assessed loss of R21 564 forward from the previous year.

10. The tax rate has remained unchanged at 28% for the last two years

REQUIRED:

a) Calculate the taxable income of Milk Limited for the year ended 29 February 20.4.

b) Calculate the deferred tax movement in the statement of comprehensive income of Milk Limited for

the year ended 29 February 20.4 using the financial position approach. Indicate if the movement is a

debit or credit in the statement of comprehensive income.

c) Disclose the profit before tax note to the annual financial statements of Milk Limited for the year

ended 29 February 20.4

No other notes are required.

Calculations are to be done to the nearest R1 Ignore the implications of capital gains tax.

QUESTION 4

The following is the trial balance of Carlton Limited for the year ended 31 December 20.3 before taking into

account the change in accounting policy refer to in (3) below.

Debit

R

Credit

R

Share capital Retained earnings 31 December 20.2 Deferred tax liability 31 December 20.2 Deposit received in advance - Rent Trade receivables Bank overdraft Trade and other payables Profit before tax Inventory 31 December 20.3 Investment in a South African unlisted company

650 000

433 000 1 029 000

100 000 480 000

15 260 80 000

13 150 773 390 650 200

2 112 000

2 112 000 Additional information

1. On 1 July 20.3 all the computer equipment with an original cost of R650 000 was sold for R240 000.

The carrying amount and tax base of the computer equipment amounted to R325 000 and R243 750

respectively on that date. This sale of computer equipment has already been accounted for correctly

in the accounting records and the above trial balance.

2. The accountant of Carlton Limited did the following calculation which must be assumed to be correct.

R

Net profit as per trial balance Exempt differences

650 200 (36 000)

Dividends received from South African unlisted company Value added tax penalty

(40 500)

4 500

Temporary differences

614 200

145 000

Depreciation: computer equipment Wear and tear: computer equipment Accounting loss on sale of computer equipment Scrapping allowance on sale of computer equipment Deposit received in advance - Rent

65 000

(81 250) 85 000 (3 750) 80 000

Assessed loss brought forward from 20.2

759 200 (10 500)

Taxable income

748 700

3. After the abovementioned information had been prepared, the directors of the company

decided to value the inventory according to the first in first out method (FIFO), instead of

the last in first out method (LIFO) as previously done, in order to comply with the

accounting statement dealing with inventory valuation. A summary of the value of the

closing inventories based on the two methods, is as follows:

LIFO method

R

FIFO method

R

31 December 20.1 31 December 20.2 31 December 20.3

568 000 321 000 433 000

571 000 372 000 452 000

4. The deferred tax balance was analysed as follows in the notes to the statement of financial position

of Carlton Limited on 31 December 20.2:

R

Computer equipment

Assessed loss

18 200

(2 940)

Deferred tax liability

15 260

5. Depreciation on computer equipment is written off at 20% per annum on the straight line method

whilst wear and tear on computer equipment is written off at 25% per annum on the straight line

method.

6. The previous year’s tax assessments will not be re-opened by the South African Revenue Service

but the new policy of inventory valuation will be allowed for tax purposes as from the 20.3 tax year.

7. The tax rate has remained constant at 28% for the past 5 years.

8. Deferred tax is provided for on all temporary differences according to the comprehensive basis using

the financial position approach. The company is deemed to be a going concern and there is

reasonable assurance that there will be sufficient taxable profit in the future to realize any tax benefit.

REQUIRED:

Prepare the following notes to the annual financial statements of Carlton Limited for the year ended 31

December 20.3:

a) Profit before tax (excluding comparative figures)

b) All taxation notes (excluding comparative figures

c) Change in accounting policy (including comparative figures)

Accounting policy notes are not required.

All calculations must be shown and must be done to the nearest R1.

QUESTION 5

Capsule Laboratories Limited is currently engaged in preparing the annual financial statements for

the year ended 31 December 20.3. The annual financial statements will be approved for issue by the

directors of the company on 25 March 20.4.

The following transactions have not been recorded in the accounting records of Capsule Laboratories

Limited for the year ended 31 December 20.3.

Transactions with Sulphur Limited:

Sales invoices with attached delivery notes worth R650 000 (excluding VAT) for laboratory equipment

sold to Sulphur Limited during the year.

On 30 November 20.3, Sulphur bottles were sold to Sulphur Limited for R100 000. Sulphur Limited

immediately took “title and accepted billing” for the Sulphur bottles but delivery was only to be made

at the request of Sulphur Limited on 10 January 20.4, due to inadequate space on the premises of

Sulphur Limited.

On 1 October 20.3, consignment sales of microscopes of R800 000 were delivered to the premises of

Sulphur Limited. At year-end a remittance advice was received from Sulphur Limited indicating that

60% of the microscopes had still not been sold by them. The microscopes supplied to Sulphur

Limited was at cost plus 30%.

Installation fees received of R1 050 000 for various installations commenced and completed during

the year of laboratory equipment imported by Sulphur Limited. The installation fees received also

includes the following:

o R25 000 for an installation which is simple but will only commence in January 20.4.

o R15 000 for an installation carried out for Dioxide Limited but debited to Sulphur Limited’s

account.

On 1 January 20.3, a water distill machine was sold to Sulphur Limited with a 3 year maintenance

plan for R370 000. The estimated maintenance cost at the end of each year of the maintenance plan

is R6 000, R9 000 and R15 000 respectively. A water distill machine without a maintenance plan can

be sold for R330 000.

The minutes of a directors meeting held on 10 January 20.4 identified the need for additional funds for

expansion of Capsule Laboratories Limited’s activities. Consequently a rights issue of shares was made to

existing shareholders of 250 000 shares at R2 each. All shares offered were taken up by the shareholders on

31 January 20.4.

Capsule Laboratories Limited also sold various blood sampling machines with a warranty. Under the terms of

the warranty Capsule Laboratories Limited undertakes to, repair or replace defects that became apparent

within one year from date of sale. The total warranty provision for the year ended 31 December 20.2

amounted to R120 000, but the actual repairs done in 20.3 for the sales in 20.2 amounted to R100 000. The

warranty provision for the year ended 31 December 20.3 amounted to R150 000. On 15 January 20.4 an

intrinsic defect was discovered in the glucose metres manufactured by Capsule Laboratories Limited. As a

consequence thereof glucose metres sold, on hand, and manufactured will have to be repaired. The cost to

repair inventory glucose metres on hand is R50 000, cost to repair glucose metres already sold during 20.3 is

R80 000 and the cost to repair glucose metres already manufactured in 20.4 is R200 000.

On 1 November 20.3, as a result of wrong calibration of machine equipment sold by Capsule Laboratories

Limited, 5 patients instituted a legal claim of R100 000 each against Capsule Laboratories Limited after the

wrong medicine and blood results were given to them. At year end, on 31 December 20.3 the company’s

lawyers advised Capsule Laboratories Limited that it is probable that the company will be found liable for

these claims. As a result, Capsule Laboratories Limited instituted a claim of R400 000 against Blood

Supplies Limited, for supplying faulty callibration equipment to them. On 31 December 20.3, Capsule

Laboratories Limited’s lawyers are of the opinion that the claim against Blood Supplies Limited will probably

succeed but they are not virtually certain.

On 1 March 20.4, erf 67 in Pretoria owned by Capsule Laboratories Limited as an investment property was

expropriated by the government. Erf 67 was purchased a few years ago at a cost of R1 050 000. The fair

value of the property at 31 December 20.3 was R2 000 000. The proceeds receivable from the government

for the expropriation could not be determined as the government was still in the process of valuing the

property.

Assume that the SA Normal tax rate is 28%.

REQUIRED:

1. The accountant of Capsule Laboratories Limited wants to recognise the “bill and hold sale” as part of

revenue for the current year but is uncertain of the requirements that must be met before a “bill and

hold sale” can be recognised. State the requirements that must be met before the “bill and hold sale”

can be recognised as part of revenue for the current year in terms of the requirements of the

Appendix to IAS 18 (AC 111) - Revenue. Calculations need not form part of your answer. (4)

2. Calculate the amount of revenue arising from the transactions concluded with Sulphur Limited for

the year ended 31 December 20.3. You can assume that the requirements of the “bill and hold sale”

in (1) above have been met.

3. Disclose the abovementioned information relating to Provisions, contingent assets, and events after

the reporting period in the notes to the annual financial statements of Capsule Laboratories Limited

for the year ended 31 December 20.3.

Ignore any tax implications Ignore Accounting policy notes

Comparative figures are not required

Assume that all amounts are material.

QUESTION 6

The following is an extract of Money More Limited’s trial balance for the year ended 31 December 20.4:

Notes

Debit R

Credit R

Accounts receivable Accounts payable Minibus at cost (tax base R700 000) Accumulated depreciation: minibus Deferred tax - 1 January 20.4 Retained earnings - 1 January 20.4 Loss before tax Dividends declared - 31 December 20.4

1 2 3 3

4 5

10 000

800 000

125 500 85 000

30 000

80 000 8 700

655 000

The loss before tax in the above trial balance includes all the under mentioned additional information.


1. The accounts receivable balance in the above trial balance consists only of rent paid in advance for

the property the company currently occupies. The rent paid in advance relates to the rental for

January 20.5, which was already paid in December 20.4. The accounts receivable balance at the end

of the previous financial year amounted to Rnil.

2. The accounts payable balance in the above trial balance consists only of unearned sales revenue

received in advance for lay away sales of goods which will be delivered in January 20.5 when the

buyer makes the final payment. The accounts payable balance at the end of the previous financial

year amounted to R nil. The sales revenue received in advance is included in gross income for tax

purposes.

3. On 1 January 20.4, a minibus with an original cost of R600 000, was involved in a car accident and

was damaged beyond repair. A claim was lodged with the company’s insurers and the company

received proceeds of R500 000. The carrying amount and tax base of the minibus on the day of the

accident amounted to R480 000 and R450 000 respectively. On 30 June 20.4, the company

purchased a new minibus for R800 000 to replace the abovementioned minibus.

4. The following items are also included in the abovementioned loss before tax.

i. Fine of R6 000 paid for contravention of the Companies Act.

ii. Donations of R40 000 paid, of which R32 000 are not allowed for tax purposes.

iii. R11 000 employees tax (PAYE) paid during the month of December 20.4 in respect of salaries

and wages for November 20.4.

iv. Foreign income amounting to R190 000 which is not taxable in South Africa in terms of a

double taxation agreement. The company paid foreign taxes of R25 000 on this income.

v. Dividends received in respect of listed investments and unlisted investments in South Africa

amounting to R105 000.


basis by using the financial position approach. There is certainty beyond any reasonable doubt that

the company will have sufficient taxable profit in future against which any unused tax losses can be

utilized. There are no other temporary differences except those mentioned in the question.

6. The SA Normal tax rate changed from 29% in 20.3 to 28% in 20.4.

7. Ignore the implications of capital gains tax.

REQUIRED:

1. Calculate the taxable income/loss of Money More Limited for the year ended 31 December 20.4. (7½)

2. Calculate the deferred tax movement (including the rate change) in the statement of comprehensive

income of Money More Limited for the year ended 31 December 20.4, using the financial position

approach. (4½) Using the answer in 2.1 above prepare the journal entry for the deferred tax

movement (including the rate change) in the statement of comprehensive income of Money More

Limited for the year ended 31 December 20.4. (2)

3. Disclose only the income tax expense note (including the tax rate reconciliation using only R-

values) to the annual financial statements of Money More Limited for the year ended 31 December

20.4. Your answer must comply with the requirements of Generally Accepted Accounting Practice.

No comparative figures are required.

All calculations must be done to the nearest Rand. No accounting policy notes are required.


QUESTION 7

PART A

Crispie Limited is a manufacturer of chocolates and sweets. Crispie Limited sells its products with a 14-day

money back guarantee if the consumer is dissatisfied with the product. The provision for money back

guarantees consists of the following:

Actual money back guarantees paid to consumers during the 20.4 and 20.5 financial years amounted to R18

000 and R20 000 respectively.

On 28 February 20.5 Crispie Limited decided to discontinue the manufacturing of a specific production line

and sold Machine Verdi. Crispie Limited leases all their other production machines.

The following information relates to the sale of Machine Verdi on 28 February 20.5:

The profit before tax of Crispie Limited for the year ended 31 December 20.5 amounted to R625 000 after

including all the above mentioned information. Included in profit before tax are legal costs of R12 000 of

which 60% is tax deductible.

The SA Normal tax rate is 28%. The company had an assessed loss of R63 000 for the year ended 31

December 20.4.

Assume that 50% of all capital gains are taxable.

REQUIRED:

Calculate only the current tax expense of Crispie Limited for the year ended 31 December 20.5.

PART B

The following is an extract from the statement of financial position general ledger accounts of Bike Mania

Limited, a manufacturer of bicycles, for the year ended 28 February 20.6:

Dr S A Revenue Service - current tax Cr

31/8/20.5 Bank (for 20.6 tax year)



28/2/20.6 Closing balance c/d

18 000

16 000

18 000

3 620

1/3/20.5 Opening balance b/d 7 600 15/8/20.5 Current tax

expense (20.5 tax adjustment) 8 120

28/2/20.6 Current tax expense (for 20.6 tax year) 39 900

55 620

1/3/20.6 Opening balance b/d 3 620

55 620


1. The SA normal tax rate changed from 29% in 20.5 to 28% in 20.6.

2. The deferred tax balance account comprised of taxable temporary differences relating to accelerated

wear and tear on plant and machinery. Deferred tax is provided for on all temporary differences

according to the comprehensive basis using the financial position approach.

3. The adjustment in respect of the 20.5 current tax expense relates to the 20.5 tax assessment

received on 15 August 20.5. Bike Mania Limited claimed expenses of R28 000 which were not

allowed as a deduction by the SA Revenue Service.

4. The profit before tax for the year ended 28 February 20.6 amounted to R325 000. Included in profit

before tax are the following items:

5. The income received from the UK is not taxable in South Africa in terms of a double taxation

agreement.

6. You can assume that the calculations of current tax and deferred tax in the above general ledger

accounts are correct.

REQUIRED:

Disclose tax in the notes to the annual financial statements of Bike Mania Limited for the year ended 28

February 20.6 according to the requirements of IAS 12 (AC 102) - Income taxes. The tax rate reconciliation

must be given using R-values only.

No calculations of current tax and deferred tax are required.



Comparatives are not required.

QUESTION 8

Power Limited is a well diversified company that develops, sells and installs exclusive equipment. As part of

its expansion programme the company recently also started participating in investment and development

activities in the property market. The financial statements of Power Limited for the year ended 30

September 20.4 were presented to the board of directors for authorisation for issue on 5 December 20.4.

The following transactions have not yet been recorded in the books of Power Limited for the year ended 30

September 20.4.

1. The following sales invoices of Power Limited have not yet been processed:

a) Invoice 685 amounting to R50 000 (before discount), in respect of equipment sold and

delivered on 25 September 20.4 to Maxi Limited. A 10% trade discount on the invoice amount

was allowed. Maxi Limited settled the invoice on 26 September 20.4.

b) Invoice 686 amounting to R50 000 for equipment sold to Max Wholesalers on consignment. At

year end Max Wholesalers has already sold 20% of the equipment. The equipment was

supplied to Max Wholesalers at cost plus 25%.

c) Invoice 687 for equipment sold on a cash on delivery (COD) basis to a customer in Durban.

On 27 September 20.4 the customer paid R10 000 as settlement for the full amount of the

invoice. The goods were delivered to the customer on 2 October 20.4.

d) Invoice 688 for equipment sold to Fixit Limited. The equipment is not on hand and still has to

be manufactured. It is expected to be delivered to Fixit Limited on 10 October 20.4. On 29

September 20.4 Fixit Limited paid an amount of R80 000 in advance for the order totalling

R100 000.

e) Invoice 701 amounting to R45 000 in respect of the installation of equipment for Mr Joe.

Included in this invoice amount is R15 000 regarding installation which will start on 3 October

20.4. Mr Joe indicated that he is not satisfied with part of the installation that was completed

on 30 September 20.4. This part of the installation, amounting to R5 000, will have to be

redone.

2. On 1 October 20.2 Power Limited sold equipment with a cash selling price of R80 000 to Mr Kian. Mr

Kian negotiated the following payment terms with the financial director of Power Limited:

3. All installations of equipment done by Power Limited are carried out with a two month warranty.

Previous experiences show that 10% of the installation has to be redone in the month following the

month of installation and 5% in the second month after installation.

Actual warranty costs paid during 20.4, relating to installations carried out in the previous financial year,

amounted to R14 000. The balance of the provision for warranty costs on 30 September 20.3 amounted to

R16 000.

Installation fees to be used as a basis for the provision for warranty costs for the current financial

year are as follows:

R

August 20.4

September 20.4

70 000

80 000

4. During November 20.4 the company’s workshop was damaged by a fire caused by lightning. On 1

December 20.4 a contract was concluded with To U Service Limited to repair the damage to the

workshop at a cost of R100 000. These funds will be financed by means of a special reserve fund.

The damage to the inventory held in the workshop amounted to R300 000. At the time of the incident

the company was not insured.

5. On 15 August 20.4 the local municipality informed the project manager of Power Limited that one of

the completed installations of special evaporating equipment in an industrial area must be removed.

The installation is not allowed due to environmental protection rules. At 30 September 20.4, after

several negotiations with the local municipality and the environmental board, the project manager of

Power Limited is of the opinion that it is not probable that they will have to remove the installed

equipment. At year end the cost to remove the installed equipment can also not be reliably estimated.

6. The SA Normal tax rate is 28%.

7. Ignore the implications of value added tax.

REQUIRED:

1. Please list points (1)-(2) above in your answer and in each of the above cases:

a) Calculate the amount that should be recognised as revenue in the statement of

comprehensive income of Power Limited for the year ended 30 September 20.4; and

b) In each case give the reason why the amount should be included or excluded from revenue.

Reasons should be provided irrespective of the amount being included or excluded from

revenue. (11)

2. Disclose the abovementioned information in points (3)-(5) in the notes to the annual financial

statements of Power Limited for the year ended 30 September 20.4 in terms of the requirements of

IAS 37 (AC 130) - Provisions, contingent liabilities, contingent assets and IAS 10 (AC 107) - Events

after the reporting period.

Ignore accounting policy notes. Comparative figures are not required.


QUESTION 9

Rock Limited, incorporated on 1 April 20.2, is a nationwide retailer of toys. The following information is an

extract from the draft financial statements of Rock Limited for the year ended 31 March 20.5:

20.5 R Dr/(Cr)

20.4 R Dr/(Cr)

Profit before tax Retained earnings - 1 April 20.3 Inventory

(700 000) 95 000

(225 000) (524 000) 140 000


1. After the draft financial statements for the year ended 31 March 20.5 had been prepared, the

directors decided at a board meeting held on 15 April 20.5 that the current inventory valuation method

does not give a reliable presentation of the effect of inflation on the company’s profits. Hence, the

directors decided to change the accounting policy in respect of the valuation of inventory from the

weighted average method to the first-in-first-out method. However, the SA Revenue Service will not

reopen the previous year’s tax assessments, but indicated that they will accept the new method of

inventory valuation from the 20.5 financial year. No adjustments have been made to the draft financial

statements to reflect the new inventory valuation method.

The value of inventory based on the different valuation methods was as follows:

Weighted average

R

First-in-first-out

R

31 March 20.3 31 March 20.4 31 March 20.5

85 000

140 000 95 000

120 000 172 000 110 000

2. The following matters were also discussed at the board meeting held on 15 April 20.5 and they have

not yet been recorded in the draft financial statements of Rock Limited for the year ended 31 March

20.5:

a) As a result of the implementation of a new inventory control computer programme, the

retraining of a large proportion of Rock Limited’s administrative and sales staff is required.

Sufficient training is necessary in order for Rock Limited to effectively continue its business.

The directors estimated that the future training costs will approximately amount to R35 000.

b) As a result of several factors the directors decided to terminate the current operating lease

agreement in the city centre and to move to a new shopping centre built in the suburbs in

January 20.5. The terms of the current lease agreement state that early termination would

result in a penalty payment of 80% of the remaining lease payments. The penalty is payable

three months after termination of the lease agreement. The current lease agreement would

have terminated on 31 March 20.6. The lease rental is R100 000 per annum, payable in

arrears. All the lease payments for the year ended 31 March 20.5 are up to date.


basis using the financial position approach. There is certainty beyond any reasonable doubt that the

company will have sufficient taxable profit in future against which any unused tax losses can be

utilized. There are no other exempt or temporary differences except those mentioned in the question.

4. The SA Normal tax rate has remained at 28% for the past three years. The taxable income of Rock

Limited, before taking into account the change in inventory valuation amounted to R175 000 and

R650 000 for the years ended 31 March 20.4 and 31 March 20.5, respectively.

REQUIRED:

1. Calculate the profit before tax of Rock Limited for the years ended 31 March 20.4 and 31 March

20.5.

2. Calculate the current tax expense of Rock Limitedfor the years ended 31 March 20.4 and 31 March

20.5.

3. Calculate the deferred tax movement in the statement of comprehensive income of Rock Limitedfor

the years ended 31 March 20.4 and 31 March 20.5, using the financial position approach.

4. Prepare only the relevant note in respect of the change in the inventory valuation in the notes to the

annual financial statements of Rock Limited for the year ended 31 March 20.5 in terms of the

requirements of IAS 8 (AC 103) - Accounting policies, change in accounting estimates and errors.



All calculations must be done to the nearest Rand.

QUESTION 10

Max Limited is a toy manufacturing company. The following is an extract of the trial balance of Max

Limited for the year ended 30 June 20.5:

Notes

Dr/(Cr)

R

Profit before tax Dividends declared - 30 June 20.5 Trade receivables Buildings at cost - 30 June 20.5 Accumulated depreciation - buildings Deferred tax asset - 1 July 20.4 Rental received in advance in respect of July 20.5 Provision for accumulated annual leave

1

2 3 3

4

(934 750)

150 000 230 000 800 000

(128 000) 18 550 (7 500)

(50 000)


1. Included in profit before tax are the following amounts:

R

Legal fees (refer note 5) Dividends received Depreciation - buildings (refer note 3) Reversal of unused provision for accumulated annual leave made prior year (refer note 4) Provision for accumulated annual leave created (refer note 4) Research costs (refer note 6)

9 500

100 000 32 000

6 000 50 000 40 000

2. Trade receivables at year end consisted of the following:

20.5

R

20.4

R

Total amount outstanding Allowance for credit losses

250 000 (20 000)

395 000 (35 000)

230 000

360 000

The SA Revenue Service allows 25% of the list of credit losses as a deduction for tax purposes.

3. Buildings comprising the office buildings of the company are depreciated according to the straight-

line method over 25 years. The SA Revenue Service does not allow a wear and tear allowance on

office buildings.

4. A present obligation exists for the payment of unused accumulated annual leave of all current

employees of Max Limited. The employees’ service contracts stipulate that 10 days annual leave

can be accumulated per annum to be paid out on retirement, resignation or on special request of an

employee. The balance of the provision for accumulated annual leave for the year ended 30

June 20.4 amounted to R40 000.

5. The legal fees are not deductible for tax purposes.

6. The SA Revenue Service allows 25% per annum of the research costs as a deduction for tax

purposes because the expenditure is of a capital nature and for the purpose of scientific research.

7. The SA normal tax rate remained unchanged at 28% for both 20.4 and 20.5.


basis using the financial position approach. There are no other temporary differences except those

mentioned in the question. There is certainty beyond reasonable doubt that the company will have

sufficient taxable profit in future to utilise tax losses.

9. Provisional tax payments made during the current financial year in respect of the 20.5 tax year

amounted to R219 350.

10. After the tax calculation for the 20.4 financial year was carried out, the tax assessment for the 20.4

tax year was received. The assessment showed a taxable profit of R15 000 instead of the calculated

taxable profit of R5 000. The difference between the tax provision for 20.4 and the actual

assessment resulted from departmental policy applied by the SA Revenue Service. The 20.4 tax

assessment was accepted by Max Limited after enquiries had been made.

REQUIRED:

1. Calculate the current tax due to the SA Revenue Service by Max Limited for the year ended 30 June

20.5.

2. Calculate the deferred tax movement in the statement of comprehensive income of Max Limited for

the year ended 30 June 20.5, using the financial position approach. Indicate if it is a debit or credit

movement in the statement of comprehensive income.

3. Prepare only the income tax expense note (including the tax rate reconciliation using only R values)

to the annual financial statements of Max Limited, according to the requirements of IAS 12 (AC 102)

- Income taxes, for the year ended 30 June 20.5.

All calculations to be done to the nearest Rand.




QUESTION 11

You are the auditor of Computex Limited. The financial director of the company asked your advice on the

following transactions/events that have not been recorded in the company’s financial records for the year

ended 30 September 20.5:

1. Computex Limited invested in a childrens’ games software package on the following terms and

conditios:

Computex Limited acquired the software package from the supplier at a cost of R8 million.

Computex Limited sold the licence to a distributor, Paul Limited in exchange for annual

licence fees of R600 000 payable for a period of six years, as well as a final payment of the

licence fees amounting to R7 million at the end of the six year period. The final payment has

been secured by a bank with a sound reputation.

2. On 15 September 20.5 John Limited, a competitor, instituted a claim of R500 000 against Computex

Limited for a possible infringement of patent rights. On 30 September 20.5 the legal advisors of

Computex Limited are of the opinion that the claim will be unsuccessful.

3. The directors of Computex Limited estimated that the legal costs to defend the abovementioned

claim of John Limited will amount to R58 000.

4. Computex Limited have entered into a 5 year lease agreement with Apple Limited for a Ian Printer.

However, due to the rapid expansion of Computex Limited this printer has become inadequate for

the company’s requirements and they decided to replace it with the Ian Printer in order to increase

the production capacity of the company. They could however not cancel the existing lease agreement

that expires on 30 September 20.8. The rent on the Ian Printer amounts to R80 000 per annum and is

payable annually in arrears. All the rental payments on the Ian Printer has been made up to date.

Computex Limited managed to sublease the Ian Printer to Mr. J. Bravo for the next three years

commencing on 1 October 20.5 until the expiry of the lease agreement, at an annual rent of R60 000,

payable in arrears. The BigIan Printer was installed and put into use on 1 September 20.5.

5. Under new legislation the company is required to fit filters on all their heavy equipment before 31

January 20.6. The provision made for the fitting of filters for the year ended 30 September 20.4

amounted to R200 000. Actual costs incurred to fit filters during 20.5 amounted to R90 000. The

company acquired new heavy equipment during the current year and estimated that the fitting of

filters to this new equipment will amount to R40 000. On 30 September 20.5 it was established that

R100 000 will still have to be incurred to fit filters on the existing equipment.

6. During March 20.5 Computex Limited sued a competitor, S. Doo Limited for an infringement of a

licence amounting to R15 million. S. Doo Limited has offered Computex Limited R8 million in order to

settle the case out of court. The legal advisors of Computex Limited are of the opinion that the case

can be settled outside of court at a substantially higher amount than R8 million. The court case will

take place on 15 October 20.5.

REQUIRED:

1. Discuss the appropriate recognition and measurement as elements of the financial statements of

Computex Limited with regard to:

the software package; and

the licence fees in terms of the Framework and IAS 18 (AC 111) - Revenue. Give reasons for

your answers.

2. State the four conditions that must be met to recognise revenue from the rendering of services,

according to the requirements of IAS 18 (AC 111) - Revenue.

3. Disclose each of the above transactions/events referred to in (2) to (6) in the question, in the notes to

the annual financial statements of Computex Limited for the year ended 30 September 20.5. If no

recognition and disclosure in the annual financial statements for the year ended 30 September 20.5

is required, give reasons for your answer. Your answer must comply with the requirements of IAS 37

(AC 130) - Provisions, contingent liabilities and contingent assets. Assume all amounts to be material.


QUESTION 12

The provision for warranty costs for both the current and previous financial years was recorded in the above

trial balance based on the original assumption before the quality control survey was conducted. No provision

for warranty costs for the years prior to 20.4 was made.

Actual warranty costs paid in respect of jewellery sold with a material defect for the year ended 30

September 20.5 amounted to R110 000 (20.4: R50 000).

Machinery in the above extract of the trial balance comprise only of Machine Jenna which was replaced with

Machine Cleo. On 31 March 20.5 the old machine, Machine Jenna, was withdrawn from the manufacturing

process and was sold for R270 000. The carrying amount and tax base of Machine Jenna at the date of the

sale amounted to R193 750 and R150 000 respectively. On 1 April 20.5 the new machine, Machine Cleo,

with a cost price of R300 000 was brought into use. Depreciation on Machine Jenna is written off at 15% p.a.

according to the straight-line method. The directors decided to depreciate the newly acquired Machine Cleo

over 4 years according to the straight-line method. Included in profit before tax is depreciation on these

machines amounting to R56 250 (20.4: R37 500), as well as the profit on disposal of Machine Jenna.

The SA Revenue Service allows a wear and tear allowance of 20% p.a. according to the straight-line method

on machinery. Wear and tear is not apportioned on a pro rata basis for periods shorter than a year.

On 3 November 20.5 a material metal defect was discovered in various items in the company’s jewellery

range causing serious skin irritations to customers. Production of these items had commenced on 1

November 20.4 and considerable costs will have to be incurred to correct the defect. The following estimates

have been made:

R

Costs for defects in units sold during the year ended 30 September 20.5

- To recover 25 000

- To repair 148 000

Costs to recover and repair units manufactured since 1 October 20.5 60 000

The financial statements of Mignon Limited for the year ended 30 September 20.5 were presented to the

board of directors for authorisation for issue on 15 November 20.5.

Deferred tax is provided on all temporary differences according to the comprehensive basis using the

financial position approach. There are no other temporary differences except those mentioned in the

question. There is certainty beyond reasonable doubt that there will be sufficient taxable profit in future to

utilise tax losses.

The normal tax rate remained unchanged at 28% for the past two years.

REQUIRED:

1. Calculate the profit before tax of Mignon Limited for the years ended 30 September 20.4 and 30

September 20.5.

2. Calculate the current tax expense of Mignon Limited for the years ended 30 September 20.4 and 30

September 20.5.

3. Calculate the deferred tax balance in the statement of financial position of Mignon Limited for the

year ended 30 September 20.5, using the financial position approach, and indicate if it is an asset or

liability.

4. Disclose the relevant notes relating to:

a) the change in the warranty provision;

b) the costs due to the material metal defect in the annual financial statements of Mignon Limited

for the year ended 30 September 20.5. Your answer must comply with the requirements of

only IAS 8 (AC 103) - Accounting policies, changes in accounting estimates and errors and

IAS 10 (AC 107) - Events after the reporting period.

Assume all amounts to be material.

QUESTION 13

Bright Limited is an exclusive holiday resort situated on the banks of the Vaalriver. The resort offers various

activities for the holidaymaker including an 18 hole golf course, tennis courts, squash courts, swimming

pools and a bowling green. Mr Knowledge was recently appointed as the new financial manager of the

resort.

1. After a review of the asset register of Bright Limited, Mr Knowledge decided that the current

depreciation policy of the company does not give a realistic reflection of the actual pattern of

economic benefits derived from the depreciable assets. As a result Mr Knowledge decided to change

the depreciation method for the current year for lawnmowers, from the reducing balance method at

20% p.a. to the straight-line method. The total useful life of the lawnmowers had originally been

estimated as 5 years, which is still considered to be applicable. No other lawnmowers were acquired

or disposed of during the current year.

Mr Knowledge also decided to change the estimated residual value of the golf carts from R20 000 to

Rnil to reflect the increase in the usage of these assets. The company provides for depreciation on

the golf carts at 25% p.a. according to the straight-line method. No other golf carts were purchased or

disposed of during the current year.

No depreciation charge on these lawnmowers and golf carts has been accounted for in the current year.

Details of the lawnmowers and golf carts at 28 February 20.5 are as follows:

2. During the 20.5 financial year the board of directors decided to significantly reduce the maintenance

personnel of the company. On 28 February 20.5 the balance of the provision raised for the severance

packages for these redundant employees amounted to R45 000. During the current financial year

severance packages amounting to R76 000 were paid to these redundant employees according to

their service contracts.

3. On 15 January 20.6 Mrs Goody, a holidaymaker, instituted a claim of R250 000 against Bright

Limited after she was injured by a golf ball while strolling on the golf course. There are various

billboards on the premises warning holidaymakers to be aware of flying golf balls. The legal advisors

of Bright Limited are of the opinion that the claim will be unsuccessful. The legal costs to defend the

claim are estimated to amount to R25 000.

4. Due to recent flooding during December 20.5, most of the putting greens on the course will have to

be either repaired or redone completely. In January 20.6 a contract was concluded with Lolo Limited

to repair the golf course for an amount of R50 000. Payment will be made on completion of the work.

The work will commence on 1 April 20.6.

5. On 17 January 20.6 Bright Limited instituted a claim of R100 000 against Holidays Galore Limited.

They gained unauthorised access to Bright Limited’s database of holidaymakers to promote their

own resorts. At year-end on 28 February 20.6 the court case is in process and the lawyers of Bright

Limited are of the opinion that the claim will probably succeed, but they are not virtually certain.

6. During January 20.5 various chalets of the resort were damaged as a result of heavy rainstorms. The

holidaymakers had to evacuate the damaged chalets. At the time management estimated that R80

000 would have to be paid to these holidaymakers to compensate them for the inconvenience and

accounted for it in the financial statements for the year ended 28 February 20.5 . During the financial

year ended 28 February 20.5 and 28 February 20.6 an amount of R5 000 and R60 000 respectively,

was paid to these holidaymakers. On 28 February 20.6 Mr Knowledge established that no further

payments are due to these holidaymakers.

7. The profit before tax of Bright Limited for the year ended 28 February 20.6 amounted to R550 000,

before taking into account all the above mentioned items.

8. The company’s deferred tax asset balance on 28 February 20.5 amounted to R57 792. Deferred tax

is provided for on all temporary differences according to the comprehensive basis using the financial

position approach. There are no other temporary differences except those mentioned in the question.

There will be sufficient taxable profit in future against which deductible temporary differences can be

utilised.

9. The company’s tax assessment for the 20.5 tax year showed an assessed loss of R60 000. The SA

normal tax rate has remained 28% for the past two years.

10. Assume that all amounts are material.

REQUIRED:

1. Calculate the profit before tax of Bright Limited for the year ended 28 February 20.6.

2. Calculate the deferred tax movement in the statement of comprehensive income of Bright Limited

for the year ended 28 February 20.6, using the financial position approach. Indicate if it is a debit or

credit movement.

3. Disclose (1) to (6) in the notes to the annual financial statements of Bright Limited for the year ended

28 February 20.6 according to the requirements of only IAS 8 (AC 103) - Accounting policies,

changes in accounting estimates and errors and IAS 37 (AC 130) - Provisions, contingent liabilities

and contingent assets.



QUESTION 14

THIS QUESTION CONSISTS OF 2 INDEPENDENT PARTS.

PART A

Body-Forever Limited is a company that develops, manufactures and distributes exclusive exercise

equipment.

The financial statements of Body-Forever Limited for the year ended 31 August 20.5 were presented to the

board of directors for authorization for issue on 20 October 20.5. The SA Normal tax rate for the past two

years has remained at 28%.

The profit before tax of Body-Forever Limited for the years ended 31 August 20.4 and 31 August 20.5

amounted to R800 000 and R650 000 respectively, before taking into account the following:

1. During the preparation of the financial statements for the year ended 31 August 20.5 the newly

appointed financial manager discovered that revenue was incorrectly accounted for in the financial

statements for the year ended 31 August 20.4. The financial statements for the year ended 31 August

20.4 were prepared by an inexperienced accountant who was not conversant with the basic

principles of revenue recognition according to the requirements of IAS 18 (AC 111) - Revenue. You

can assume that the revenue was correctly recognised and accounted for in the financial statements

for the year ended 31 August 20.5. The SA Revenue Service indicated that they will reopen the

previous year’s tax assessment.

Included in profit before tax for the year ended 31 August 20.4 is revenue amounting to R 2 472 500,

consisting of the following:

1.1 Agency fees

The exercise equipment is sold through a network of independent distributors who are appointed with a

three-year contract. The distributors have to pay an exclusive agency fee of R75 000, payable in advance in

three equal annual instalments over the contract period. The first instalment of R25 000 is payable on the

commencement date of the contract.

The agency fees included in profit before tax for the year ended 31 August 20.4 consist of the following:

1.3 Consignment sales

The distributors sell instruction manuals and motivation journals of Body-Forever Limited on consignment at

a gross profit of 25% on the selling price. On 31 August 20.4 the cost of the unsold inventory on consignment


1.4 Commission on sales of diet supplements

Body-Forever Limited acts as an agent for Nutrients Limited and receives 20% commission on the sale of

their range of diet supplements. In the case of bad debts Body-Forever Limited is not entitled to the

commission. During the 20.4 financial year Body-Forever Limited sold diet supplements amounting to R275

000. On 31 August 20.4 an amount of R25 000 was outstanding and due for diet supplements.

1.5 During July 20.4 Body-Forever Limited acquired five sets of secondhand exercise equipment that needed

repairs before it could be sold to a customer again. They entered into an exchange transaction with Repairs-

on-call whereby Repairs-on-call will repair the equipment in exchange for one new set of exercise equipment

with a sales price of R70 000 and R5 000 cash. The repair work was completed, the new set of exercise

equipment delivered and the cash paid by 11 August 20.4.

2. On 31 July 20.5 the board of directors of Body-Forever Limited proposed an ordinary dividend of R45

000, subject to approval at the annual general meeting. At the annual general meeting, held on 16

October 20.5 the proposed dividends were declared.

3. Mr Muscle, a distributor of Body-Forever Limited, owes the company an amount of R80 000,

included in debtors at year end on 31 August 20.5. The liquidator of Mr Muscle informed all his

creditors that he was placed in liquidation on 15 October 20.5 and that the estimated liquidation

dividend would amount to 10c in the rand.

REQUIRED:

1. Calculate the amount that should have been recognised as revenue in the statement of

comprehensive income of Body-Forever Limited for the year ended 31 August 20.4 according to the

requirements of IAS 18 (AC 111) - Revenue. Show your calculations in detail.

2. Calculate the profit before tax of Body-Forever Limited for the years ended 31 August 20.4 and 31

August 20.5.

3. Disclose the incorrect recording of VAT and the abovementioned information in (2) and (3) in the

notes to the annual financial statements of Body-Forever Limited for the year ended 31 August 20.5

only in terms of the requirements of IAS 8 (AC 103) - Accounting policies, changes in accounting

estimates and errors, IAS 10 (AC 107) - Events after the reporting period.

Ignore accounting policy notes.

All calculations are to be done to the nearest Rand.


Pop Corn Limited is renowned for the high quality of maize it produces on its farms. During the year ended

31 December 20.5 they planted maize on all available land at a cost of R1,1 million. At the financial year-end

it appears from projections that they will reap a record crop which will yield a return of about R4,5 million. A

further two months will lapse before the maize is ready for sale.

The managing director and the financial director have a difference of opinion regarding the treatment of the

planting cost of the maize. In the previous year the planting cost of the crop was treated as an asset. After

the financial statements had been issued, hail and rain resulted in the loss of a substantial part of the crop

and they were unable to cover their costs. The crop was insured against rain and hail damage.

REQUIRED:

Discuss, with reasons, if the crop planting cost should be recognized as an asset in the financial statements

of Pop Corn Limited for the year ended 31 December 20.5, with reference to the requirements of the

Framework for the preparation and presentation of financial statements.

QUESTION 15

Star Flight Limited is a company operating as a national airline based in South Africa.

The profit before tax of Star Flight Limited amounted to R890 000 which includes the following items:

R

Depreciation – aircrafts (straight line method) 800 000

Dividends received from listed investments 45 000

Fines paid for flight cancellations (not tax deductible) 610 000

Allowance for credit losses 60 000

The SA Revenue Service allows a 25% deduction on allowance for credit losses. In the previous financial

years no allowance for credit losses was made.

Profit on expropriation of land by the government 350 000 This land was used to store aircrafts when not in

use. The cost of the land (considered to be the fair value) and proceeds on expropriation amounted to R690

000 and R1 040 000 respectively. No tax allowances or accounting allowances were claimed on this land.

Foreign income received from Mauritius 150 000. This income is not taxable in South Africa in terms of a

double taxation agreement.

Star Flight Limited paid foreign taxes of R30 000 on this income.

The following transactions have not yet been accounted for in the books of Star Flight Limited for the

year ended 28 February 20.7:

1. The management of the company decided to change the depreciation policy in respect of aircrafts

because the previous pattern of depreciation differs from the actual pattern of consumption of

economic benefits of the aircrafts. The reducing balance method will be applied from the year ended

28 February 20.7 at 20% per annum instead of the straight line method over 5 years. The carrying

amount and tax base of the aircrafts on 1 March 20.6 both amounted to R2,4 million and the original

cost of the aircrafts on acquisition was R4 million. The tax base of the aircrafts on 28 February 20.7

amounted to R1,6 million

2. On 31 January 20.7 the marketing director informed management of the possibility that the new logo

of the company appearing on all its aircraft will have to be changed after complaints were received

from its main competitor, Fly-to-the-moon Limited. The competitor claim that the new logo is very

similar to their own logo and started legal proceedings against Star Flight Limited. However, on 28

February 20.7 the legal advisors of Star Flight Limited are of the opinion that it is not probable that

Fly-to-the-moon Limited will be successful with their legal claim against the company.

3. After a review of the company’s insurance policy covering possible claims from passengers for

damaged or lost baggage and flight delays, the financial director of Star Flight Limited recommended

that the company cancel their current insurance policy with Quicksure Limited on 1 March 20.5 and

self insure in future. Based on previous years’ records the financial director estimated that these

claims from passengers amounted to approximately R240 000 a year. For the year ended 28

February 20.6, 25 claims amounting to R185 000 in total were submitted by passengers. On 28

February 20.6, it was possible that these claims of R185 000 would be successful. On 15 April 20.6

the court ruled that an amount of R178 000 should be paid for all the claims submitted during the

previous financial year, which was subsequently paid out. Claims amounting to R260 000 in total

were submitted by passengers during the year ended 28 February 20.7. The final outcome of these

claims will be determined during the court hearings scheduled for April 20.7. On 28 February 20.7,

the legal advisors of Star Flight Limited advised the company that the possibility is remote that the

company will be found liable for R65 000 of the claims submitted during the current financial year due

to incomplete records.

The company provides for deferred tax on all temporary differences according to the comprehensive basis

using the financial position approach. There are no other temporary or exempt differences except those

mentioned in the question. There is certainty beyond reasonable doubt that there will be sufficient taxable

profit in future against which deductible temporary differences can be utilised. The deferred tax asset

balance on 28 February 20.6 amounted to R51 800.

The current tax rate has remained unchanged at 28% for the past 2 years and all capital gains are taxable at

50%. According to the tax assessment received by Star Flight Limited for the year ended 28 February 20.6,

there was an overprovision of current tax of R42 000 because the accountant did not take into account a tax

incentive allowance.


REQUIRED:

1. Prepare the relevant journal entries for transaction (3) in the books of Star Flight Limited for the year

ended 28 February 20.7. No journal narrations are required.

2. Calculate the profit before tax of Star Flight Limited for the year ended 28 February 20.7.

3. Calculate the deferred tax movement in the statement of comprehensive income of Star Flight

Limited for the year ended 28 February 20.7, using only the financial position approach. Indicate

if it is a debit or credit movement i the statement of comprehensive income.

4. Disclose only the tax rate reconciliation using the R values in the annual financial statements of

Star Flight Limited for the year ended 28 February 20.7, according to the requirements of IAS 12 (AC

102) – Income taxes.

5. Disclose transactions (1), (2) and (3) in the notes to the annual financial statements of Star Flight

Limited for the year ended 28 February 20.7 according to the requirements of only IAS 8 (AC 103) -

Accounting policies, changes in accounting estimates and errors and IAS 37 (AC 130) – Provisions,

contingent liabilities and contingent assets.

Accounting policy notes are not required. No other notes are required.

No comparative amounts are required.

Calculations are to be done to the nearest R1.

QUESTION 16

Pty Limited is a company offering adventure trails for groups as part of a team building programme. The

following is an extract from the statement of financial position general ledger accounts of Pty Limited for the

year ended 29 February 2008:

Dr Provision for claims Cr

31/8/2007 Bank 29/2/2008 Claims (I/S) 29/2/2008 Closing balance c/d

50 000 15 000

150 000

1/3/2007 Opening balance b/d 65 000 29/2/2008 Claims (I/S) 150 000

215 000

1/3/2008 Opening balance b/d 150 000

215 000

Dr SA Revenue Service Cr

31/7/2007 Current tax expense (I/S) 31/8/2007 Bank (2008 tax year) 15/9/2007 Bank (2007 tax year) 29/2/2008 Bank (2008 tax year) 29/2/2008 Closing balance c/d

8 000 60

000 167 000 60 000 10

731

1/3/2007 Opening balance b/d 175 000 29/2/2008 Current tax expense (I/S) 130 731

305 731


305 731

Dr Deferred tax Cr

1/3/2007 Deferred tax expense (I/S) 29/2/2008 Closing balance c/d

7 500

362 069

1/3/2007 Opening balance b/d 217 500 29/2/2008 Deferred tax expense (I/S) 152 069

369 569


369 569


1. You can assume that the general ledger entries as well as the calculations of current tax and

deferred tax in the above general ledger accounts are correct.

2. Due to the nature of the adventure trails offered by Pty Limited there is a high risk that participants

can be injured.

During the financial year ended 28 February 2007, Mr Macho instituted a claim of R65 000 against

Pty Limited after being injured during a team building exercise. The dispute was settled out of

court on 31 August 2007 for an amount of R50 000.

On 15 January 2008 Mrs Tomboy fell from a quad bike and injured her neck. She instituted a claim

of R150 000 against Pty Limited for supplying its clients with unroadworthy bikes. After further

investigation the operations manager of Pty Limited determined that the brakes of the specific

quad bike were faulty at the time of the accident and that the company is probably liable for the

injuries sustained by Mrs Tomboy. The court case is scheduled for 30 April 2008.

On 2 February 2008 Mr Tarzan broke his ankle after participating in a rock climbing event. The

operations manager of Pty Limited indicated that his injury was due to his own irresponsible

behaviour. Mr Tarzan nevertheless instituted a claim of R25 000 for his injuries sustained against

Pty Limited but the legal advisors of Pty Limited are of the opinion that the claim will be

unsuccessful.




sufficient taxable profit in future against which any deductible temporary differences can be utilised.

4. The SA Normal tax rate changed from 29% in 2007 to 28% in 2008.

5. The deferred tax balance on 29 February 2008 comprised of temporary differences relating to:

R

Accelerated wear and tear allowances for tax purposes

Provision for claims

506 897

(144 828)

362 069

6. The profit before tax of Pty Limited for the year ended 29 February 2008 R1 050 000. Included in profit before tax are the following items:

amounted to

R

Dividends received 50 000 Fines paid 10 000 Interest paid – bank overdraft 30 000 Directors’ emoluments 45 000

7. The tax assessment of Pty Limited for the year ended 28 February 2007 showed that R8 000 was overprovided for the 2007 tax year, due to an incorrect tax calculation performed by the trainee accountant of Pty Limited.


REQUIRED:

Disclose the above information in the notes to the annual financial statements of Pty Limited for the

year ended 29 February 2008 according to the requirements of only IAS 12 (AC 102) – Income taxes and

IAS 37 (AC 130) – Provisions, contingent liabilities and contingent assets. The tax rate reconciliation must

be given using R-values only.

No calculations of current tax and deferred tax are required.



Comparative amounts are not required. (21)

PART B

Las Vegas Limited is a take-away restaurant on a street corner in Johannesburg. It sells hamburgers,

chips, toasted sandwiches, milkshakes etc. Over the past 10 years Las Vegas’ hamburger, the “Golden

Jackpot” has become very popular and well-known among local and international visitors. The “Golden

Jackpot” has become an international “must-eat” burger. Subsequently, the owner of Las Vegas Limited,

Mr Greedy is of the opinion that an amount of R1 million for goodwill relating to “The Golden Jackpot”

should be disclosed as an asset on the statement of financial position (balance sheet) of Las Vegas

Limited at year end on 29 February 2008.

REQUIRED:

Discuss with reasons, if Mr Greedy can capitalise and recognise this goodwill as an asset according to the

requirements of the Framework. (6)

QUESTION 17

My Books Limited is a publisher, retailer and distributor of books and magazines.

After the draft financial statements for the year ended 29 February 2008 had been prepared, the directors

decided at a board meeting held on 14 March 2008 that the current inventory valuation method does not

give a reliable presentation of the effect of inflation on the company’s profits. The directors subsequently

decided to change the accounting policy in respect of the valuation of inventory from the weighted average

method to the first-in-first-out method. The SA Revenue Service will not reopen the previous years’ tax

assessments but they will accept the new inventory valuation method from the 2008 financial year. No

adjustments have been made to the current year’s draft financial statements to reflect the new inventory

valuation method.

The value of inventory based on the different valuation methods was as follows:

29 February 2004 28 February 2005 28 February 2006 28 February 2007 29 February 2008

Last-in-first-out

R 350 000 650 000 280 000 480 000 290 000

Weighted average R 325 000 680 000 255 000 420 000 285 000

First-in-first-out

R 465 000 750 000 360 000 516 000 330 000

On 12 March 2008 a warehouse of My Books Limited in Midrand was partly destroyed in a fire,

presumably caused by lightning. At the time of the incident the company was not insured. According to a

preliminary estimate made by the warehouse manager of the damage, the cost of the inventory damaged

or destroyed amounted to R125 000. A building contractor quoted R400 000 to rebuild the part of the

warehouse destroyed in the fire.

After the draft financial statements for the year ended 29 February 2008 had been prepared, the

operations manager of My Books Limited determined that the actual depreciation policy used for

delivery vehicles did not give a realistic reflection of the actual pattern of economic benefits derived from

the delivery vehicles. Due to the vast distances between the various distribution outlets the distances

travelled by the delivery vehicles were actually more than originally estimated. As a result the financial

manager decided to change the depreciation policy for delivery vehicles from the reducing balance

method at 20% p.a. to the straight-line method. The useful life of a delivery vehicle was originally

estimated as 4 years, which is still considered to be applicable. No other delivery vehicles were acquired

or disposed of during the current financial year. The cost and accumulated depreciation of the delivery

vehicles on 28 February 2007 amounted to R1 250 000 and R450 000 respectively. The tax base of the

delivery vehicles on 28 February 2007 amounted to R750 000, after taking into account a wear and tear

allowance of 20% per annum calculated according to the straight-line method. No adjustments have been

made to the current year’s draft financial statements to reflect the new depreciation policy adopted.

As a result of an increase in crime in the area, the directors decided to relocate the warehouse in the

central business district of Johannesburg to the outskirts of Johannesburg. The current lease agreement

would originally have terminated on 31 August 2008. The current lease agreement of the warehouse

states that early termination would result in a penalty payment of 50% of the remaining lease payments,

payable in cash three months after termination of the lease agreement. The rental amount is R25 000 per

month, payable in arrears. The lease payments for the year ended 29 February 2008 were paid up to

date.The company provides for deferred tax on all temporary differences according to the comprehensive basis using

the financial position approach. There is certainty beyond any reasonable doubt that the company will have

sufficient taxable profit in future against which any deductible temporary differences can be utilised. There are

no other exempt or temporary differences except those mentioned in the question.

The profit before tax of My Books Limited for the year ended 29 February 2008 amounted to

R850 000 before taking into account all the abovementioned items.

The financial statements of My Books Limited for the year ended 29 February 2008 were presented to the

board of directors for authorisation for issue on 15 April 2008.

The SA Normal tax rate has remained unchanged at 28% for the past three years.


REQUIRED:

1. Calculate the deferred tax balance in the statement of financial position of My Books Limited for both

the years ended 28 February 2007 and 29 February 2008, using the financial position

approach. In each case indicate if it is a deferred tax asset or deferred tax liability balance. (9½)

2. Prepare the relevant notes to the annual financial statements of My Books Limited for the year

ended 29 February 2008 according to the requirements of only IAS 8 (AC 103) – Accounting policies,

changes in accounting estimates and errors and IAS 10 (AC 107) – Events after the reporting period




All calculations must be done to the nearest Rand.

QUESTION 18

Auto Limited is a retailer of motor vehicles, spares and accessories with distribution outlets throughout

Gauteng. Most of the company’s sales are financed by a financial institution, but for certain clients the

company will finance their purchases.

The financial statements of Auto Limited for the year ended 29 February 2008 were presented to the

board of directors for authorisation for issue on 30 April 2008. The SA Normal tax rate changed from 29%

in 2007 to 28% in 2008.

The profit before tax of Auto Limited for the year ended 29 February 2008 amounted to R1 750 000

before the following transactions have been taken into account by the trainee accountant as he is unsure

about the accounting treatment thereof:

1. The cash sale of five motor vehicles on 1 March 2007 to a courier company amounting in total to

R1 150 000 including a three year free maintenance contract. The financial manager estimated

that the cost of the free servicing of the vehicles amount to approximately R18 000 per vehicle for

the three year period.

2. The cash sale of a motor vehicle to Mrs Cool on 21 February 2008 amounting to R265 000.The

sales transaction was settled in cash on 22 February 2008. Although Mrs Cool took title and

accepted billing for the vehicle, delivery was only to be made at the request of Mrs Cool on

15 March 2008, after the sale of her previous vehicle.

3. The following are the details of the credit sale of a motor vehicle to a reputable customer, Mr

Anglo, on 1 March 2007:

R

Cash selling price 450 000 Deposit paid in cash 50 000 Instalments payable bi-annually in arrears 85 218 Nominal interest rate 15%

The following is the repayment schedule, which you can assume to be correct:

Date Instalment R

Capital

R

Interest

R

Balance Outstanding

R

1/03/2007 400 000

31/08/2007

29/02/2008

31/08/2008

28/02/2009

31/08/2009

28/02/2010

85 218 55 218 85 218 59 359 85 218 63 811 85 218 68 597 85 218 73 742 85 218 79 273

30 000 344 782 25 859 285 423 21 407 221 612 16 621 153 015 11 476 79 273

5 945 -

4. The company sells a range of motor vehicle accessories on a consignment basis through a

network of agents. The agents settle the total outstanding amount due to Auto Limited on

consignment inventory once within 3 months after year end. All consignment sales are made at a

gross profit of 25% on selling price. According to the consignment agreements the agents have to

return all the unsold accessories at year end to Auto Limited. The following details relate to

these accessories:

R

Accessories at cost delivered on consignment to agents during the current year 75 000

Accessories on consignment unsold at cost at year end

- 29 February 2008 15 000

- 28 February 2007 8 000

5. Auto Limited acts as an agent for Woolies Limited and receives 15% commission on the sale of

their range of sheepwool seat covers. In the case of credit losses (bad debts) Auto Limited is

not entitled to commission. During the 2008 financial year, Auto Limited sold seat covers

amounting to R90 000 but on 29 February 2008 an amount of R9 000 was still outstanding and due

for seat covers. It is uncertain if this amount will be recovered in future. On 29 February 2008

Woolies Limited paid the commission due to Auto Limited.

6. On 31 January 2008 the board of directors of Auto Limited proposed an ordinary dividend of

R125 000, subject to approval at the annual general meeting. At the annual general meeting held

on 25 April 2008 the proposed dividends were declared.

7. As a result of new technology used in the latest models of motor vehicles, the retraining of a large

proportion of Auto Limited’s workshop staff is required. Sufficient training is necessary in order for

Auto Limited to effectively continue its business and its high standard of service to clients. The

directors estimated that the future training costs will amount to approximately R55 000.

8. Auto Limited has the sole distribution rights to distribute a certain make of motor vehicle

throughout Gauteng. During the 2008 financial year Auto Limited sued another company, Exec

Cars Limited for R150 000 for infringement of their sole distribution rights. The company’s legal

advisors are of the opinion that Auto Limited’s claim will probably succeed.

9. During the previous financial year a trainee mechanic of Auto Limited damaged a client’s vehicle

whilst parking it in the workshop. Subsequently the client instituted a claim against Auto Limited for

damages to the vehicle amounting to R125 000. Auto Limited made a provision of R125 000 for

this in their books for the year ended 28 February 2007. During the current financial year

Auto Limited settled the claim out of court for R148 000.

10. On 29 February 2008 an amount of R45 000 was due by Xpress Limited to Auto Limited in

respect of service fees. The financial manager of Xpress Limited informed Auto Limited that the

company is currently experiencing serious cashflow problems and have lodged an application for

voluntary liquidation with the court, which will probably be successful. Xpress Limited gave Auto

Limited security for their debt amounting to R10 000. The management of Xpress Limited is of the

opinion that the creditors will not be entitled to any liquidation dividend other than their security.

11. Included in profit before tax for the year ended 28 February 2007 is an amount of R17 000 which

was incorrectly accounted for as cleaning expenses instead of a receivable (debtor). The SA

Revenue Service indicated that they will reopen the tax assessment for 2007.

Assume all amounts are material.

REQUIRED:

1. Prepare the journal entries for the above transactions (1) to (10) in the books of Auto Limited for

the year ended 29 February 2008. Show all your calculations. No journal narrations are required.

Ignore any VAT implications. (24)

2. Prepare the relevant notes in the books of Auto Limited for the year ended 29 February 2008 for

the above transactions (6), (7), (8) and (11)


QUESTION 19

Smart Limited manufactures Smart products. The following information for Smart Limited for the year

ended 29 February 2015 was presented to you:

1. Profit before tax for the year ended 29 February 2015 amounts to R211 903. The profit before tax

includes the following items:

R

Profit on sale of manufacturing plant 8 333 Depreciation (before change in accounting estimate) 64 818 Interest on bank overdraft 52 190 Increase in allowance for credit losses (provision for doubtful debts) 5 000 Fine paid 300 Warranty costs 14 000

2. The following is an extract from the property, plant and equipment note to the draft annual financial

statements of Smart Limited on 29 February 2015. You can assume that the information is correct.

Factory Building

Manufac-turing plant

Computer Equipment

R

R

R

Carrying amount - beginning of year

1 401 600

260 000

38 280


1 460 000 (58 400)

325 000 (65 000)

47 850 (9 570)

Depreciation Disposals

(29 200) -

(30 833) (29 667)

(4 785) -

Carrying amount - end of year

1 372 400

199 500

33 495


1 460 000 (87 600)

285 000 (85 500)

47 850 (14 355)

7 years 7 years

Remaining useful life

47 years

The factory building, manufacturing plant and computer equipment were brought into use on

1 March 2012.

3. The profit on sale of manufacturing plant is in respect of a manufacturing plant that was sold on

30 September 2014 for R38 000. The original cost price of the manufacturing plant on 1 March

2012 was R40 000.

4. After the above-mentioned note was presented to you, the directors of the company decided to

change its accounting estimate in respect of depreciation on computer equipment. The previous

pattern of depreciation differed from the actual pattern of consumption of economic benefits of the

computer equipment. As a result, the reducing balance method at 10% per annum will be applied

instead of the 10% straight-line method. The effect of the change has not been recorded in the

accounting records. The effect thereof must be recorded from the beginning of the financial year.

5. A list to support the allowance for credit losses (provision for doubtful debts) has been submitted to

the SA Revenue Services and only 25% of the allowance (provision) will be allowed as a tax

deduction.

6. During 2015 the company received its tax assessment for the year ended 28 February 2014

from the SA Revenue Service. The tax assessment showed that the SA Revenue Service has

charged a penalty of R300 for the late submission of the tax return.

7. On 29 February 2015, the financial manager of Smart Limited decided to make a provision for

warranty costs of R14 000 in the financial statements. The provision is based on sales of a new

product which is guaranteed.

8. Statement of financial position items on 28 February 2014: R

Allowance for credit losses (provision for doubtful debts) 75 000


Deferred tax liability 29 993

Statement of financial position items on 29 February 2015: R

Allowance for credit losses (provision for doubtful debts) ?


Provision for warranty costs 14 000

9. The following capital allowances (not pro-rata) are applicable for tax purposes:

9.1 Factory building 5% straight-line method

9.2 Manufacturing plant 20% straight-line method

9.3 Computer equipment 3 years straight-line method

10. The company provides for deferred tax on all temporary differences according to the

comprehensive basis using the financial position approach.

11. Smart Limited has carried an assessed loss of R21 564 forward from the previous year.

12. The tax rate has remained unchanged at 28% for the last two years.

REQUIRED:

(a) Calculate the taxable income of Smart Limited for the year ended 29 February 2015. (14)

(b) Calculate the deferred tax movement in the statement of comprehensive income of Smart Limited

for the year ended 29 February 2015 using the financial position approach. Indicate if the

movement is a debit or credit in the statement of comprehensive income. (9)

(c) Disclose the profit before tax note to the annual financial statements of Smart Limited for the year

ended 29 February 2015 in accordance with the requirements of the Companies Act, 1973 and

Generally Accepted Accounting Practice. (5)


Calculations are to be done to the nearest R1

Ignore the implications of capital gains tax.

QUESTION 20 Lab Limited is currently engaged in preparing the annual financial statements for the year ended 31

December 2014. The annual financial statements will be approved for issue by the directors of the

company on 25 March 2015.

The following transactions have not been recorded in the accounting records of Lab Limited for the

year ended 31 December 2014.

Transactions with MM Limited:

Sales invoices with attached delivery notes worth R650 000 (excluding VAT) for laboratory

equipment sold to MM Limited during the year.

On 30 November 2014, MM bottles were sold to MM Limited for R100 000. MM Limited

immediately took “title and accepted billing” for the MM bottles but delivery was only to be made at

the request of MM Limited on 10 January 2015, due to inadequate space on the premises of

MM Limited.

On 1 October 2014, consignment sales of microscopes of R800 000 were delivered to the

premises of MM Limited. At year-end a remittance advice was received from MM Limited

indicating that 60% of the microscopes had still not been sold by them. The microscopes supplied

to MM Limited was at cost plus 30%.

Installation fees received of R1 050 000 for various installations commenced and completed during

the year of laboratory equipment imported by MM Limited. The installation fees received also

includes the following:

o R25 000 for an installation which is simple but will only commence in January 2015.

o R15 000 for an installation carried out for Chromium Limited but debited to MM

Limited’s account.

On 1 January 2014, a water distill machine was sold to MM Limited with a 3 year maintenance plan

for R370 000. The estimated maintenance cost at the end of each year of the maintenance plan

is R6 000, R9 000 and R15 000 respectively. A water distill machine without a maintenance plan

can be sold for R330 000.

The minutes of a directors meeting held on 10 January 2015 identified the need for additional funds for

expansion of Lab Limited’s activities. Consequently a rights issue of shares was made to existing

shareholders of 250 000 shares at R2 each. All shares offered were taken up by the shareholders on 31

January 2015.

Lab Limited also sold various MM sampling machines with a warranty. Under the terms of the warranty

L a b Limited undertakes to, repair or replace defects that became apparent within one year

from date of sale. The total warranty provision for the year ended 31 December 2013

amounted to R120 000, but the actual repairs done in 2014 for the sales in 2013 amounted to

R100 000. The warranty provision for the year ended 31 December 2014 amounted to R150 000.

On 15 January 2015 an intrinsic defect was discovered in the glucose metres manufactured by Lab

Limited. As a consequence thereof glucose metres sold, on hand, and manufactured will have to be

repaired. The cost to repair inventory glucose metres on hand is R50 000, cost to repair glucose metres

already sold during 2014 is R80 000 and the cost to repair glucose metres already manufactured in

2015 is R200 000.

On 1 November 2014, as a result of wrong callibration of machine equipment sold by Lab Limited, 5

patients instituted a legal claim of R100 000 each against Lab Limited after the wrong medicine and MM

results were given to them. At year end, on 31 December 2014 the company’s lawyers advised Lab

Limited that it is probable that the company will be found liable for these claims. As a result, Lab

Limited instituted a claim of R400 000 against MM Supplies Limited, for supplying faulty callibration

equipment to them. On 31 December 2014, Lab Limited’s lawyers are of the opinion that the claim

against MM Supplies Limited will probably succeed but they are not virtually certain.

On 1 March 2015, erf 67 in Pretoria owned by Lab Limited as an investment property was expropriated by

the government. Erf 67 was purchased a few years ago at a cost of R1 050 000. The fair value of the

property at 31 December 2014 was R2 000 000. The proceeds receivable from the government

for the expropriation could not be determined as the government was still in the process of valuing the

property.

Assume that the S A Normal tax rate is 28%.

REQUIRED:

1. The accountant of Lab Limited wants to recognise the “bill and hold sale” as part of revenue for the

current year but is uncertain of the requirements that must be met before a “bill and hold sale” can

be recognised. State the requirements that must be met before the “bill and hold sale” can be

recognised as part of revenue for the current year in terms of the requirements of the Appendix to IAS

18 (AC 111) - Revenue. Calculations need not form part of your answer. (4)

2. Calculate the amount of revenue arising from the transactions concluded with MM Limited for the year

ended 31 December 2014. You can assume that the requirements of the “bill and hold sale” in (1)

above have been met. (7)

3. Disclose the abovementioned information relating to Provisions, contingent assets, and events after

the reporting period in the notes to the annual financial statements of Lab Limited for the year ended

31 December 2014. Your answer must comply with the requirements of the Companies Act, 1973 and

Generally Accepted Accounting Practice.

Ignore any tax implications

Ignore Accounting policy notes

Comparative figures are not required


QESTION 21

Exclusive Limited is a well diversified company that develo, sells and installs exclusive equipment. As

part of its expansion programme the company recently also started participating in investment and

development activities in the property market. The financial statements of Exclusive Limited for the

year ended 30 September 2015 were presented to the board of directors for athorisation for issue on

5 December 2015.

The following transactions have not yet been recorded in the books of exclusive Limited for the year

ended 30 September 2015.

1. The following sales invoices of Exclusive Limited have not yet been processed:

1.1 Invoice 685 amounting to R50 000 (before discont), in respect of equipment sold and delivered on

25 September 2015 to Maxi Limited. A 10% trade discont on the invoice amont was allowed. Maxi

Limited settled the invoice on 26 September 2015.

1.2 Invoice 686 amounting to R50 000 for equipment sold to Max Wholesalers on consignment. At year

end Max Wholesalers has already sold 20% of the equipment. The equipment was spplied to Max

Wholesalers at cost pls 25%.

1.3 Invoice 687 for equipment sold on a cash on delivery (COD) basis to a customer in Durban. On

27 September 2015 the customer paid R10 000 as settlement for the full amount of the invoice. The

goods were delivered to the customer on 2 October 2015.

1.4 Invoice 688 for equipment sold to Fixit Limited. The equipment is not on hand and still has to be

manufactured. It is expected to be delivered to Fixit Limited on 10 October 2015. On

29 September 2015 Fixit Limited paid an amount of R80 000 in advance for the order totalling

R100 000.

1.5 Invoice 701 amounting to R45 000 in respect of the installation of equipment for Mr Perfect. Included

in this invoice amount is R15 000 regarding installation which will start on 3 October 2015. Mr Perfect

indicated that he is not satisfied with part of the installation that was completed on 30 September 2015.

This part of the installation, amounting to R5 000, will have to be redone.

2. On 1 October 2013 Exclusive Limited sold equipment with a cash selling price of R80 000 to Mr

Helpme. Mr Helpme negotiated the following payment terms with the financial director of Exclusive

Limited:

Deposit paid in cash on 1 October 2013

4 Instalments payable annually in arrears

Nominal interest rate

The following is the repayment schedule, which you may assume to be correct:

Date Instalment Capital Interest R R R

R20 000 R18 115, 25

8% p.a.

Balance Outstanding

R

1/10/2013 1/10/2014 1/10/2015 1/10/20.5 1/10/20.6

18 115,25 18 115,25 18 115,25 18 115,25

13 315,25 14 380,47 15 530,91 16 773,37

4 800,00 3 734,78 2 584,34 1 341,88

60 000,00 46 684,75 32 304,28

16 773,37 -

3. All installations of equipment done by Exclusive Limited are carried ot with a two month warranty.

Previous experiences show that 10% of the installation has to be redone in the month following the

month of installation and 5% in the second month after installation.

Actual warranty costs paid during 2015, relating to installations carried out in the previous financial

year, amounted to R14 000. The balance of the provision for warranty costs on 30 September 2014


Installation fees to be sed as a basis for the provision for warranty costs for the crrent financial year

are as follows:

R

August 2015

September 2015

70 000

80 000

4. During November 2015 the company’s workshop was damaged by a fire caused by lightning. On

1 December 2015 a contract was concluded with To Service Limited to repair the damage to the

workshop at a cost of R100 000. These finds will be financed by means of a special reserve fnd. The

damage to the inventory held in the workshop amounted to R300 000. At the time of the incident the

company was not insured.

5. On 15 August 2015 the local municipality informed the project manager of Exclusive Limited that

one of the completed installations of special evaporating equipment in an industrial area mst be

removed. The installation is not allowed due to environmental protection riles. At 30 September 2015,

after several negotiations with the local municipality and the environmental board, the project manager

of E x c l u s i v e Limited is of the opinion that it is not probable that they will have to remove the

installed equipment. At year end the cost to remove the installed equipment can also not be reliably

estimated.

6. The SA Normal tax rate is 28%.

7. Ignore the implications of value added tax.

REQIRED: 1. Please list points (1)-(2) above in your answer and in each of the above cases:

(a) Calculate the amount that should be recognised as revenue in the statement of comprehensive

income of Exclusive Limited for the year ended 30 September 2015; and

(b) In each case give the reason why the amount should be included or excluded from revenue.

Reasons should be provided irrespective of the amount being included or excluded from

revenue. (11)

2. Disclose the abovementioned information in points (3)-(5) in the notes to the annal financial

statements of E x c l u s i v e Limited for the year ended 30 September 2015 in terms of

the requirements of IAS 37 (AC 130) - Provisions, contingent liabilities, contingent assets and IAS

10 (AC 107) - Events after the reporting period.

Ignore accounting policy notes. Comparative

figures are not required.


QUESTION 22 HT Limited is a toy manufacturing company. The following is an extract of the trial balance of HT

Limited for the year ended 30 June 2014:

Notes

Dr/(Cr) R

Profit before tax Dividends declared - 30 June 2014 Trade receivables Buildings at cost - 30 June 2014 Accumulated depreciation - buildings Deferred tax asset - 1 July 2013 Rental received in advance in respect of July 2014 Provision for accumulated annual leave

1

2 3 3

4

(934 750) 150 000 230 000 800 000

(128 000) 18 550 (7 500)

(50 000)

Additional information 1. Included in profit before tax are the following amounts:

R

Legal fees (refer note 5) Dividends received Depreciation - buildings (refer note 3) Reversal of unused provision for accumulated annual leave made prior year (refer note 4) Provision for accumulated annual leave created (refer note 4) Research costs (refer note 6)

9 500 100 000

32 000

6 000 50 000 40 000

2. Trade receivables at year end consisted of the following:

2014 R

2013 R

Total amount outstanding Allowance for credit losses (Provision for doubtful debts)

250 000 (20 000)

395 000 (35 000)

230 000

360 000

The SA Revenue Service allows 25% of the list of credit losses(doubtful debts) as a deduction for tax

purposes.

3. Buildings comprising the office buildings of the company are depreciated according to the straight-line

method over 25 years. The SA Revenue Service does not allow a wear and tear allowance on office

buildings.

4. A present obligation exists for the payment of unused accumulated annual leave of all current

employees of HT Limited. The employees’ service contracts stipulate that 10 days annual leave

can be accumulated per annum to be paid out on retirement, resignation or on special request of an

employee. The balance of the provision for accumulated annual leave for the year ended

30 June 2013 amounted to R40 000.

5. The legal fees are not deductible for tax purposes.

6. The SA Revenue Service allows 25% per annum of the research costs as a deduction for tax

purposes because the expenditure is of a capital nature and for the purpose of scientific research.

7. The SA normal tax rate remained unchanged at 28% for both 2013 and 2014.




sufficient taxable profit in future to utilise tax losses.

9. Provisional tax payments made during the current financial year in respect of the 2014 tax year


10. After the tax calculation for the 2013 financial year was carried out, the tax assessment for the 2013

tax year was received. The assessment showed a taxable profit of R15 000 instead of the

calculated taxable profit of R5 000. The difference between the tax provision for 2013 and the actual

assessment resulted from departmental policy applied by the SA Revenue Service. The 2013 tax

assessment was accepted by HT Limited after enquiries had been made.

REQUIRED:

1. Calculate the current tax due to the SA Revenue Service by HT Limited for the year ended 30 June

2014. (10½)

2. Calculate the deferred tax movement in the statement of comprehensive income of HT Limited

for the year ended 30 June 2014, using the financial position approach. Indicate if it is a debit or

credit movement in the statement of comprehensive income. (6)

3. Prepare only the income tax expense note (including the tax rate reconciliation using only R values)

to the annual financial statements of HT Limited, according to the requirements of IAS 12 (AC

102) - Income taxes, for the year ended 30 June 2014.

All calculations to be done to the nearest Rand.




QUESTION 23 ABC Limited is an exclusive holiday resort situated on the banks of the Vaalriver. The resort offers

various activities for the holidaymaker including an 18 hole golf course, tennis courts, squash courts,

swimming pools and a bowling green. Mr Sam was recently appointed as the new financial

manager of the resort.

1. After a review of the asset register of ABC Limited, Mr Sam decided that the current

depreciation policy of the company does not give a realistic reflection of the actual pattern of economic

benefits derived from the depreciable assets. As a result Mr Sam decided to change the

depreciation method for the current year for lawnmowers, from the reducing balance method at 20%

p.a. to the straight-line method. The total useful life of the lawnmowers had originally been estimated

as 5 years, which is still considered to be applicable. No other lawnmowers were acquired or disposed

of during the current year.

Mr Sam also decided to change the estimated residual value of the golf carts from R20 000 to Rnil to

reflect the increase in the usage of these assets. The company provides for depreciation on the golf

carts at 25% p.a. according to the straight-line method. No other golf carts were purchased or

disposed of during the current year.

No depreciation charge on these lawnmowers and golf carts has been accounted for in the current

year.

Details of the lawnmowers and golf carts at 28 February 2014 are as follows:

Cost

Accumulated depreciation

Carrying amount

Tax base

Wear and tear allowance (straight-line)

Lawn-mowers

R

90 000 (32 400)

57 600

54 000

20% p.a.

Golf carts R

400 000 (190 000)

210 000

240 000

20% p.a.

2. During the 2014 financial year the board of directors decided to significantly reduce the maintenance

personnel of the company. On 28 February 2014 the balance of the provision raised for the severance

packages for these redundant employees amounted to R45 000. During the current financial year

severance packages amounting to R76 000 were paid to these redundant employees according to

their service contracts.

3. On 15 January 2015 Mrs Goody, a holidaymaker, instituted a claim of R250 000 against ABC

Limited after she was injured by a golf ball while strolling on the golf course. There are various

billboards on the premises warning holidaymakers to be aware of flying golf balls. The legal advisors of

ABC Limited are of the opinion that the claim will be unsuccessful. The legal costs to defend the

claim are estimated to amount to R25 000.

4. Due to recent flooding during December 2014, most of the putting greens on the course will have to be

either repaired or redone completely. In January 2015 a contract was concluded with Golftrim Limited to

repair the golf course for an amount of R50 000. Payment will be made on completion of the work. The

work will commence on 1 April 2015.

5. On 17 January 2015 ABC Limited instituted a claim of R100 000 against Holidays Galore Limited.

They gained unauthorised access to ABC Limited’s database of holidaymakers to promote their own

resorts. At year-end on 28 February 2015 the court case is in process and the lawyers of ABC Limited

are of the opinion that the claim will probably succeed, but they are not virtually certain.

6. During January 2014 various chalets of the resort were damaged as a result of heavy rainstorms. The

holidaymakers had to evacuate the damaged chalets. At the time management estimated that R80 000

would have to be paid to these holidaymakers to compensate them for the inconvenience and

accounted for it in the financial statements for the year ended 28 February 2014 . During the financial

year ended 28 February 2014 and 28 February 2015 an amount of R5 000 and R60 000 respectively,

was paid to these holidaymakers. On 28 February 2015 Mr Sam established that no further

payments are due to these holidaymakers.

7. The profit before tax of ABC Limited for the year ended 28 February 2015 amounted to R550 000,

before taking into account all the abovementioned items.

8. The company’s deferred tax asset balance on 28 February 2014 amounted to R57 792. Deferred tax is

provided for on all temporary differences according to the comprehensive basis using the financial

position approach. There are no other temporary differences except those mentioned in the question.

There will be sufficient taxable profit in future against which deductible temporary differences can be

utilised.

9. The company’s tax assessment for the 2014 tax year showed an assessed loss of R60 000. The SA

normal tax rate has remained 28% for the past two years.


REQUIRED:

1. Calculate the profit before tax of ABC Limited for the year ended 28 February 2015. (6)

2. Calculate the deferred tax movement in the statement of comprehensive income of ABC Limited for

the year ended 28 February 2015, using the financial position approach. Indicate if it is a debit or

credit movement. (8)

3. Disclose (1) to (6) in the notes to the annual financial statements of ABC Limited for the year ended 28

February 2015 according to the requirements of only IAS 8 (AC 103) - Accounting policies, changes in

accounting estimates and errors and IAS 37 (AC 130) - Provisions, contingent liabilities and

contingent assets.



QUESTION 24 Solutions Limited is a diversified company involved in the landscaping of s, maintenance of s and

cultivation and sale of plants. The plants are sold through a distribution of franchise nurseries throughout

Gauteng.

1. The profit before tax of Solutions Limited for the year ended 28 February 2015 amounted to R850

000, before taking into account the following transactions that have not yet been accounted for:

1.1 On 30 June 2014 Solutions entered into a contract with a property developer of office

buildings, PF Limited, to supply the following services to them:

A landscaping contract to landscape the s of all their existing properties as well as their future

properties to be developed this year. The landscaping fees to be received in terms of this

contract are as follows:

Existing properties Future properties to be developed

R 520 000

1 420 000

The landscaping fees are receivable in cash as follows:

Stage of completion of landscaping contract 40% 100%

45% of total landscaping fees per contract 55% of total landscaping fees per contract

At year end on 28 February 2015, Solutions Limited have completed 35% of the

landscaping of PF Limited’s existing properties.

An annual maintenance contract for the maintenance of all the s of PF Limited’s existing

properties as well as their future properties to be developed this year. The

maintenance fee payable annually in advance for the existing properties of PF Limited

amounts to R120 000 per year, which was received in cash on 30 June 2014.The contract

stipulates that the maintenance fee will be reviewed annually to take into consideration the new

development of properties as well as a 5% escalation.

1.2 On 1 March 2014 Solutions Limited entered into a sales agreement with Mrs Poppy, a

landscape architect, which includes the supply of rose trees to her as well as the maintenance of

these rose trees for a period of five years thereafter. The original contract price amounted to

R80 000 of which it is estimated that 5% relates to the maintenance of these rose trees. The

payment of R80 000 was received in cash on 1 March 2014 when the rose trees were delivered. The

cost price of these rose trees supplied amounted to R36 000.

1.3 After a review of the draft financial statements of Solutions Limited for the year ended 28

February 2015, the financial director of Solutions Limited, Mr Green decided to change the current

inventory valuation method from the last-in-first-out (LIFO) method to the first-in-first-out (FIFO)

method in order to comply with Generally Accepted Accounting Practice.

The following is a summary of the closing inventory on 28 February:

According to the last-in-first-out method According to the first-in-first-out method Difference

2015 2014 2013 R R R 124 000 77 000 64 000 130 000 85 000 75 000

6 000 8 000 11 000

The SA Revenue Service indicated that they will not reopen the previous year’s tax assessments and that they will accept the new inventory valuation method for tax purposes.

2. The SA normal tax rate has remained unchanged at 28% for the past three years.



mentioned in the question. There is certainty beyond reasonable doubt that there will be sufficient

taxable profit in future against which deductible temporary differences can be utilised.


REQUIRED:

1. Prepare the relevant journal entries for the above transaction in (1.2) with Mrs Poppy in the books

of Solutions Limited for the year ended 28 February 2015. No journal narrations are required.(5)

2. Calculate the profit before tax of Solutions Limited for the year ended 28 February 2015. (5)

3. Calculate the deferred tax balance in the statement of financial position of Solutions Limited for the

year ended 28 February 2015 using only the financial position approach. Indicate if it is a

deferred tax asset or liability balance.

4. Disclose (1.3) in the notes to the annual financial statements of Solutions Limited for the year

ended 28 February 2015. Your answer must comply with the requirements of only IAS 8 (AC 103)

– Accounting policies, changes in accounting estimates and errors.

All calculations are to be done to the nearest Rand.

Comparative amounts are required.


QUESTION 25 The following is the trial balance of CTM Limited for the year ended 31 December 2014 before taking

into account the change in accounting policy refer to in (3) below.

Debit R

Credit

R Share capital

Retained earnings 31 December 2013 Deferred tax liability 31 December 2013 Deposit received in advance - Rent Trade receivables Bank overdraft Trade and other payables Profit before tax Inventory 31 December 2014 Investment in a South African unlisted company

650 000

433 000 1 029 000

100 000 480 000

15 260 80 000

13 150

773 390 650 200

2 112 000

2 112 000


1. On 1 July 2014 all the computer equipment with an original cost of R650 000 was sold for R240 000.

The carrying amount and tax base of the computer equipment amounted to R325 000 and R243 750

respectively on that date. This sale of computer equipment has already been accounted for correctly in

the accounting records and the above trial balance.

2. The accountant of CTM Limited did the following calculation which must be assumed to be correct.

R Net profit as per trial balance

Exempt differences

650 200 (36 000)

Dividends received from South African unlisted company Value added tax penalty

(40 500) 4 500


614 200

145 000

Depreciation: computer equipment Wear and tear: computer equipment Accounting loss on sale of computer equipment Scrapping allowance on sale of computer equipment Deposit received in advance - Rent

65 000 (81 250) 85 000

(3 750) 80 000

Assessed loss brought forward from 2013

759 200 (10 500)

Taxable income

748 700

3. After the abovementioned information had been prepared, the directors of the company decided to

value the inventory according to the first in first out method (FIFO), instead of the last in first out

method (LIFO) as previously done, in order to comply with the accounting statement dealing with

inventory valuation. A summary of the value of the closing inventories based on the two methods, is as

follows:

LIFO method

R

FIFO method

R

31 December 2012 31 December 2013 31 December 2014

568 000 321 000 433 000

571 000 372 000 452 000

4. The deferred tax balance was analysed as follows in the notes to the statement of financial position of CTM Limited on 31 December 2013: R

Computer equipment Assessed loss

18 200 (2 940)

Deferred tax liability

15 260

5. Depreciation on computer equipment is written off at 20% per annum on the straight line method whilst

wear and tear on computer equipment is written off at 25% per annum on the straight line method.

6. The previous year’s tax assessments will not be re-opened by the South African Revenue Service but

the new policy of inventory valuation will be allowed for tax purposes as from the 2014 tax year.

7. The tax rate has remained constant at 28% for the past 5 years.

8. Deferred tax is provided for on all temporary differences according to the comprehensive basis using

the financial position approach. The company is deemed to be a going concern and there is

reasonable assurance that there will be sufficient taxable profit in the future to realize any tax benefit.

REQUIRED:

Prepare the following notes to the annual financial statements of CTM Limited for the year ended 31

December 2014:

- Profit before tax (excluding comparative figures)

- All taxation notes (excluding comparative figures)

- Change in accounting policy (including comparative figures)

Accounting policy notes are not required.

All calculations must be shown and must be done to the nearest R1.

SOLUTIONS

QUESTION 1

1. Calculation of profit before tax for the financial year ended 28 February 2011:

3. Calculation of the deferred tax balance in the statement of financial position of Furniture Limited for the

financial year ended 28 February 2011:

5. FURNITURE LIMITED NOTES FOR THE YEAR ENDED 28 FEBRUARY 2011

QUESTION 2

1. Discussion in terms of the Conceptual Framework for Financial Reporting 2010

In order to recognise the provision for refunds as a liability both the definition of a liability as well as

the recognition criteria of a liability must be met in terms of the Conceptual Framework for Financial

Reporting 2010.

In terms of the liability definition

There must be a present obligation,

As a result of a past event, and

The settlement of which is expected to result in an outflow of future economic benefits (par.4.25(b))

In terms of the recognition criteria a liability which meets the definition of a liability may only be recognised

as a liability in the financial statements if:

It is probable that future economic benefits will flow from the entity, and

The element has a cost or value that can be measured reliably

Discussion

The provision for refunds meets the definition of a liability.

The past event is the selling of electric shavers during the current year to customers by Alpha Limited.

There is a present obligation as the guarantee of refunds is advertised in the package insert and it is

generally known.

The settlement of the obligation will result in outflow of cash (refunds) when customers return the

electric shavers to Alpha Limited.

The provision for refunds meets the recognition criteria

The value can be measured reliably as it is based on past sales and refund history of Alpha Limited.

The outflow of future economic benefits is probable.

Conclusion

Since both the definition and the recognition criteria have been met, the provision for refunds should be

treated as a liability in the financial statements.

2. Alpha LIMITED

NOTES FOR THE YEAR ENDED 28 FEBRUARY 2011

2.2 Contingent liability

A claim of R100 000 was received during the year for animal abuse from Brands Limited. The company’s

legal advisor is of the opinion that it is probable that the company will not be found liable for the claim.

2.3 Contingent asset

Alpha Limited sells its electric shavers, with a guarantee against manufacturing defects by the supplier/

manufacturer of the electric shavers. It is probable but not virtually certain that R24 000 (60% x 40 000) of

the electric shavers sold will be reimbursed by the manufacturer.

3. Alpha LIMITED


3.1 Events after the reporting period

During the first week of April 2011, finished goods with a cost of R60 000 at the Khaya retail outlet were

damaged due to a water pipe that burst.

3.2 Error in respect of the prior year

Correction of error relating to the discovery of finished goods located at the Khaya retail outlet not included

in finished inventories at year end since 2009. The opening balance of retained earnings at the beginning of

2010 was adjusted while the comparative amounts were restated accordingly. The effect of the adjustment

of this error is as follows:

3.3 Change in accounting policy

The company changed its current inventory valuation method from the last-in, first-out method to the first-in,

first-out method in order to improve the matching of income and expenses. It is not possible to account for

this change retrospectively as the value of inventories cannot be determined on the first-in, first-out method

on 28 February 2010 due to a malfunction in the computer program.

Consequently the change has been accounted for prospectively, without any adjustment against the opening

balance of retained earnings. The effect of the change in policy on the results for 2011 is as follows:

5. Calculation of deferred tax balance of Alpha Limited in the statement of financial position for the

year ended 28 February 2011.

QUESTION 3

(a) Calculation of taxable income for the year ended 29 February 20.4:

R

Profit before tax before change in estimate

211 903

Decrease in depreciation as a result of change in accounting estimate [4 785 - (38 280 x 10%)]

957

212 860

Exempt differences

300

Fine paid

300

Profit after exempt differences

213 160


(60 672)

Depreciation (29 200 + 30 833 + 3 828)

Building allowance (5% x 1 460 000)

Wear and tear: Plant kept [(325 000 - 40 000) x 20%] Wear and tear:

Plant sold (40 000 x 20%)

Wear and tear: Computer equipment (47 850/3)

Profit on sale of plant (given)

Recoupment on sale of plant (1)

Allowance for credit losses (80 000 – 75 000)

Allowance for credit losses 20.3 (Tax) (75 000 x 25%)

Allowance for credit losses 20.4 (Tax) (80 000 x 25%)

Warranty costs (provision)

Prepaid insurance premium 20.3

Prepaid insurance premium 20.4

63 861

(73 000)

(57 000)

(8 000)

(15 950)

(8 333)

22 000

5 000

18 750

(20 000)

14 000

10 000

(12 000)

152 488

Less: Assessed loss carried forward from 20.3

(21 564)

Taxable income

130 924

Calculations:

1. Recoupment on sale of plant

Cost price of asset 1/3/20.1

40 000

Wear and tear 20.2 (40 000 x 20%)

(8 000)

Wear and tear 20.3 (40 000 x 20%)

(8 000)

Wear and tear 20.4 (40 000 x 20%)

(8 000)

Tax base of machine sold

16 000

Selling price

38 000

Tax base

(16 000)

Recoupment

22 000

(b) Calculation of the deferred tax movement in the statement of comprehensive income of Milk

Limited for the year ended 29 February 20.4:

Carrying

amount

Tax base

Temporary

difference

Deferred

tax (asset)/

liability @

28%

R

R

R

R

Manufacturing plant (1)

199 500

114 000

85 500

23 940

Computer equipment (2)(3)

34 452

-

34 452

9 647

Factory building (4)

1 372 400

1 241 000

131 400

36 792

Prepaid insurance premium

12 000

-

12 000

3 360

Allowance for credit losses (5)

80 000

20 000

60 000

(16 800)

Provision for warranty costs

14 000

-

14 000

(3 920)

53 019

Deferred tax liability 29/02/20.4

53 019

Deferred tax liability 28/02/20.3

(29 993)

Movement for the year (Dr to SCI)

23 026

Calculations:

R

1. Tax base of manufacturing plant

Cost price 1/03/20.1

Wear & tear 28/02/20.2 (325 000 x 20%) Wear & tear 28/02/20.3 (325 000 x 20%) Wear & tear

29/02/20.4 (325 000 x 20%) Tax base of asset sold (a)

325 000

(65 000)

(65 000)

(65 000) (16

000)

Tax base of manufacturing plant

114 000

2. Carrying amount of computer equipment

Carrying amount 1/03/20.3 Depreciation on the reducing balance method 20.4

38280 (3 828)

Carrying amount 29/02/20.4

34 452

3. Tax base of computer equipment

Cost price 1/03/20.1 Wear & tear 28/02/20.2 (47 850/3) Wear & tear 28/02/20.3 (47 850/3) Wear & tear 29/02/20.4 (47 850/3)

47 850 (15 950) (15 950) (15 950)

Tax base of computer equipment

- 4. Tax base of factory building

Cost price 1/03/20.1 Building allowance 28/02/20.2 (1 460 000 x 5%) Building allowance 28/02/20.3 (1 460 000 x 5%) Building allowance 29/02/20.4 (1 460 000 x 5%)

1 460000 (73 000) (73 000) 73 000)

Tax base of factory building

1 241 000

5. Tax base of allowance for credit losses

80 000 x 25% = 20 000

(c) MILK LIMITED

NOTES FOR THE YEAR ENDED 29 FEBRUARY 20.4

Profit before tax

Included in depreciation for 20.4 is a change in estimate of R957 (4 785 – 3 828), that arose from the

decision to depreciate computer equipment on the reducing balance method instead of the straight line

method in future so as to reflect the consumption of the economic benefits of the assets. This change will

result in an increase of depreciation in future periods of R957.

QUESTION 4

CARLTON LIMITED

NOTES FOR THE YEAR ENDED 31 DECEMBER 20.3

2. Profit before tax

The profit before tax includes the following items:

R

Loss on sale of computer equipment Depreciation: computer equipment Dividends received - unlisted investment

85 000 65 000 40 500

5. Change in accounting policy

During the year, the company changed its accounting policy with respect to the valuation of inventory.

Carlton Limited previously accounted for inventory on the last in, first out (LIFO) method but has changed its

policy for accounting for inventory to the first in, first out (FIFO) method in order to comply with Generally

Accepted Accounting Practice.

The change in accounting policy has been accounted for retrospectively and the comparative amounts have

been appropriately restated. The effect of the change is as follows:

Calculations

1. Effect of change in accounting policy

2. Income tax expense

2.1 Current tax expense

20.3 R

Taxable income (given) Increase in closing inventory (see calculation 1)

748 700

19 0001

Taxable income

767 700

Current tax at 28%

214 956

1 3 000 + 48 000 - 32 000 (see calculation 1)

2.2 Deferred tax expense

Carrying amount R

Tax base

R


R

Deferred tax asset/ (liability)

@ 28% R

20.2

Closing inventory

372 000

321 000

51 000

(14 280)

Carrying amount of asset > tax base of asset, therefore deferred tax liability.

QUESTION 5

1. Requirements for a “bill and hold” sale

Revenue is recognised when the buyer takes title, provided:

(a) it is probable that delivery will be made;

(b) the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised; (c)

the buyer specifically acknowledges the deferred delivery instructions; and

(d) the usual payment terms apply. (IAS 18 (AC 111) Appendix par. 1)

2. Revenue arising from transactions concluded with Sulphur Limited

R Sales invoices

Bill and hold sales Consignment sales (800 000 x 40%) Installation fees (1 050 000 - 25 000 - 15 000) Sale of water distill machine Maintenance income [(370 000 - 330 000) x 6 000/30 000]

650 000 100 000 320 000

1 010 000 330 000

8 000

2 418 000

3. Disclosure

CAPSULE LABORATORIES LIMITED


2. Provisions

2.1 Provision for legal claims

R Carrying amount beginning of year

Provision created for the current year

- 500 000

Carrying amount end of year

500 000 On 1 November 20.3 5 patients became seriously ill, as a result of wrong callibration of machine equipment sold. The

sick patients started legal proceedings against the company, but the company disputes the claim. The company’s

lawyers advised the directors of Capsule Laboratories Limited that it is probable that the company will be found liable.

2.2 Provision for warranty claims

R

Carrying amount beginning of year Amount used during the year Unused amounts reversed Provision created for current year

120 000 (100 000) (20 000) 150 000

Carrying amount at the end of year

150 000

A provision of R150 000 has been recognised for the current year for expected warranty claims in respect of blood

sampling machines sold during the year. It is expected that all this expenditure will be incurred in the next financial

year.

2.3 Provision for repairs to glucose metres

R

Carrying amount beginning of year Provision created for the current year (50 000 + 80 000)

- 130 000


130 000

Due to an intrinsic defect in glucose metres manufactured, a provision to repair glucose metres on hand and already

sold have been made. It is expected that all this expenditure will be incurred in the next financial year.

3. Contingent asset

A claim of R400 000 has been instituted against Blood Supplies Limited for supplying faulty callibaration equipment.

This relates to the court case of 5 patients that became seriously ill. The claim receivable by Capsule Laboratories

Limited is taxable.

4. Events after the reporting period

4.1 Cost to repair material defects in glucose metres manufactured in 20.4 amount to R200 000, resulting in a

decrease of R144 000 (after tax) of the profit in the next financial year.

4.2 On 1 March 20.3, erf 67 was expropriated by the government. The fair value of the property at 31 December 20.3

was R2 000 000. The financial effect cannot be determined as the proceeds receivable from the government has not

been established.

4.3 A rights issue of 250 000 shares at R2 per share was made on 31 January 20.4. The issue was fully subscribed

QUESTION 6

1. Calculation of taxable income/(loss) for the year ended 31 December 20.4

R

Loss before tax (given)

(125 500)

Exempt differences:

(257 000)

Fine paid on contravention of the Companies Act Donations paid Foreign income Dividends received

6 000

32 000 (190 000) (105 000)

Loss after exempt differences Temporary differences

(382 500)

30 000

Recoupment on minibus (500 000 - 450 000) Profit on minibus (500 000 - 480 000) Depreciation: Minibus (given) Wear and tear (800 000 - 700 000) Rent: paid Unearned sales income

50 000

(20 000) 80 000

(100 000) (10 000) 30 000

Tax loss

(352 500)

2.1 Calculation of the deferred tax movement in the statement of comprehensive income for the year ended 31

December 20.4

Carrying amount R

Tax base R

Temporary difference R

Deferred tax

asset/ (liability) @

28% R

New minibus Rental paid in advance Unearned sales received Tax loss

720 000(1) 10 000

30 000 -

700 000 - -

352 500

20 000 10 000 30 000

352 500

(5 600) (2 800) 8 400

98 700

Total deferred tax asset at 31 December 20.4

98 700

(1) 800 000 - 80 000

8 700 98 700

Deferred tax - movement current year

Deferred tax liability 1 January 20.4 (given) Deferred tax asset 31 December 20.4

Deferred tax movement (credit to statement of comprehensive income)

107 400

Consists of: Temporary differences [(30 000 + 352 500(loss) x 28%] Rate change (8 700 x 1/29)

107 100 300

3. MONEY MORE LIMITED



QUESTION 7

PART A

PART B

BIKE MANIA LIMITED

QUESTION 8

PART 1

R 1.1

Invoice 685 [50 000 - (50 000 x 10%)] The criteria for the recognition of revenue are met: the significant risks and rewards of ownership of goods have been

transferred to the buyer; the entity retains neither continuing managerial involvement to the degree usually

associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; IIt is probable that the economic benefits associated with the transaction will flow to

the entity; and the costs incurred or to be incurred in respect of the transaction can be

measured reliably. (IAS 18 par. 14) Amount of revenue to be recognised is measured at fair value of the consideration received. In terms of par. 10 of IAS 18 (AC 111) the fair value of the consideration received is measured after taking into account the amount of any trade discount received. The net amount of the revenue, after deducting the trade discount, should be recognised.

45 000

(2)

1.2

Invoice 686 (50 000 x 20%) Consignment sales are only recognised as revenue when the goods are sold to a third party by the buyer. (IAS 18 Appendix par. 03)

10 000

(2)

1.3

Invoice 687 Revenue from COD sales is recognised when delivery is made and cash is received by the seller. Since the goods are delivered on 2 October 20.4, revenue should be recognised on 2 October 20.4. [IAS 18 Appendix par. 2(d)]

-

(1½)

1.4

Invoice 688 Revenue is recognised when the cash is received and the goods are delivered to the buyer. The company should not recognise this as a sale since money are received for items not held in inventory that still has to be manufactured, (IAS 18 Appendix par. 04), therefore the risks and rewards have not been transferred to the buyer.

-

(1½)

1.5

Invoice 701 (45 000 - 15 000) Installation fees recognised as revenue by reference to the stage of completion. (IAS 18 Appendix par. 10). Accrual for reinstallation to be done of R5 000.

30 000

(2)

2.

Instalment sales Revenue attributable to the sales price, exclusive of interest, is recognised at the date of sale. The interest element is recognised as revenue as it is earned, on a time proportion basis that takes into account the imputed rate of interest. (IAS 18 Appendix par. 08)

3 734,78

(2)

PART 2

POWER LIMITED

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.4

1. Provisions

Provisions for warranty costs

R

Carrying amount at beginning of year Costs incurred for 20.3 fees Unused amount reversed Provision created for the current year (1)

16 000 (14 000) (2 000) 15 500

Carrying amount at end of year

15 500

R

R

Carrying amount at beginning of year Costs incurred for 20.3 fees Unused amount reversed Provision created for the current year (1)

16 000 (14 000) (2 000) 15 500


15 500

A provision of R15 500 has been recognised for expected 2 month warranty claims on installation of equipment done

during the year. It is expected that this expenditure will be incurred in the next 2 months of the next financial year.

(1) (70 000 x 5%) (80 000 x 10%) + (80 000 x 5%)

3 500 12 000

15 500


Damage to assembly workshop

During November 20.4 the company’s assembly workshop was damaged by a fire caused by lightning. A

contract was concluded with To U Service Limited on 1 December 20.4 to repair the damage to the

assembly workshop at a cost of R100 000 (tax effect R28 000). These funds will be financed by means of a

special reserve fund. The damage to the inventory held in the workshop amounted to R300 000 (tax effect

R84 000). At the time of the incident the company was not insured.

3. Contingent liability

On 15 August 20.4 the municipality informed the project manager of Power Limited that one of the

completed installations which were done on special evaporating equipment in an industrial area must be

removed. The installation is not allowed due to environmental protection rules. The cost to remove the

installed equipment cannot be reliably estimated. After several negotiations with the municipality and the

environmental board, the project manager of Power Limited is of the opinion that it is not probable that they

will have to remove the installed equipment.

QUESTION 9


1.1 Change in accounting policy - inventory

20.3

R

Movement

R

20.4

R

Movement

R

20.5

R FIFO (new)

Weighted average (old)

120 000 (85 000)

172 000 (140 000)

110 000 (95 000)

Taxation @ 28%

35 000 (9 800)

(3 000)

840

32 000 (8 960)

(17 000)

4 760

15 000 (4 200)

25 200

(2 160)

23 040

(12 240)

10 800

4. ROCK LIMITED

NOTES FOR THE YEAR ENDED 31 MARCH 20.5


During the year the company changed its accounting policy in respect of the valuation of inventory from the weighted

average method to the first-in-first-out method. This change was necessary to ensure fair presentation of the effect of

inflation on the company’s results. The change in policy was accounted for retrospectively and comparative amounts

have been appropriately restated. The effect of this change is as follows

QUESTION 10

1. Current tax due to SA Revenue Service

R

Profit before tax (given) Adjust for exempt differences:

934 750 (58 500)

Legal fees Dividends received Depreciation: Office buildings

9 500 (100 000)

32 000

Temporary differences:

876 250

36 250

Research costs Allowances - research costs (40 000/4) OR (40 000 x 25%) Provision for leave (50 000 - 6 000) Actual leave payment (40 000 - 6 000) Rental received in advance Allowance for credit losses (35 000 - 20 000)(acc) Credit losses 20.4 (35 000 x 25%)(tax) Credit losses 20.5 (20 000 x 25%)(tax)

40 000 (10 000) 44 000

(34 000) 7 500

(15 000) 8 750

(5 000)

Taxable profit

912 500

Current tax @ 28% (912 500 x 28%)

255 500

(219 350)

Less: provisional tax payments

Due to SA Revenue Service

36 150

2. Deferred tax movement

3. MAX LIMITED LIMITED

NOTES FOR THE YEAR ENDED 30 JUNE 20.5

Income tax expense

Major components of tax expense

QUESTION 11

1. The issues at stake here are:

whether the software package can be recognised as an asset; and

if and how the licence fees can be recognised as revenue.

Software package:

In terms of the Framework an asset is:

resource under control of company;

resulting from a past event

from which future economic benefits will flow to the company.

Applying it to the software package:

The software package is under control of Computex Limited , the company has legal ownership of the software

package

the past event is the acquisition of software package;

future economic benefits - the company will receive license fees for the following 6 years.

Recognition

The software package is recognised as an asset in the statement of financial position because: • it meets the definition

of an asset, and

It is probable that future economic benefits associated with the item will flow to the enterprise, there is certainty

about the receipt of the license fees for the following 6 years; and

the cost can be measured with reliability, in this case the cost is R8 million.

Conclusion:

The investment in the software package meets the requirements to be recognised as an asset of R8 million.

Licence fees:

In terms of the Framework income is:

Increases in economic benefits in the form of inflows of assets or decreases of liabilities; •resulting in increases

in equity.

In this case the licence fees meet this definition.

Recognition

The licence fees are recognised as revenue in the statement of comprehensive income because: • it meets the

definition of income, and

An increase in future economic benefits, being the license fees, occur attributable to an increase in an asset,

the acquisition of the software package; and

the amount of revenue can be measured with reliability.

Conclusion:

In terms of IAS 18 (AC 111) the licence fee income represents a royalty and should be recognised on an accrual basis

in accordance with the substance of the relevant agreement. In this case the annual licence fee as well as the final

payment should be recognised over the term of the agreement (6 years) according to the straight-line method.

2. Conditions:

a) the amount of revenue can be measured reliably;

b) it is probable that the economic benefits associated with the transaction will flow to the entity;

c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and

d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.(IAS 18

par. 20)

3. COMPUTEX LIMITED



A claim of R500 000 was instituted against Computex Limited for a possible infringement of patent rights. The

company’s legal advisors are of the opinion that the claim will be unsuccessful.

2. Provision for onerous contract

R

Carrying amount 1 October 20.4

-Provision created during the year [(80 000 - 60 000) x 3] 60 000 Carrying amount 30

September 20.5 60 000

Computex Limited decided to replace the Ian Printer, leased from Jerry Limited, with the BigIan Printer. The lease

agreement with Jerry Limited only expires on 30 September 20.8. The annual lease instalment amounts to R80 000.

The Ian Printer was subsequently subleased to Mr. J. Bravo for R60 000 per annum, commencing from 1 October 20.5

until the expiry date of the lease agreement.

4. Contingent asset

During March 20.5 Computex Limited sued a competitor, S. Doo Limited for an infringement of a licence amounting to

R15 million. The court case will take place on 15 October 20.5.

PLEASE NOTE:

No disclosure or recognition of legal costs is required. There is no present obligation to incur the legal costs. A

provision should not be raised, as the legal costs relate to costs that will be incurred in the future.

QUESTION 12


20.5 R

20.4 R

Profit before tax (given) Change in provision for warranty claims 165 000 - [(6% x 600 000) + (4% x 1 500 000)] Costs to recover and repair defects (25 000 + 148 000)

480 000 69 000

(173 000)

650 000 -

-

376 000

650 000

2. Current tax expense

480 000

(10 000)

650 000

-

Profit before tax (given) Exempt differences: Capital profit on sale of asset (50% x (270 000 - 250 000))

470 000

140 000 (110 000)

56 250 (110 000)

(56 250) 100 000

650 000

135 000 (50 000) 37 500 (50 000)

--

Temporary differences: Provision for warranty claims (165 000 – (135 000 – 110 000)); (135 000 - 0) Actual warranty costs paid Depreciation (given) Wear and tear allowance [(250 000 x 20%) + (300 000 x 20%)];(250 000 x 20%) Profit on disposal (250 000 - 193 750) Recoupment of wear and tear (250 000 - 150 000) Taxable income

490 000

722 500

Current tax expense @ 28%

137 200

202 300

OR

20.5 R

376 000

(10 000)

20.4 R

650 000

-

Profit before tax (calculated in 1) Exempt differences: Capital profit on sale of asset (50% x (270 000 - 250 000))


366 000

71 000 (110 000) 173 000 56 250 (110 000)

(56 250) 100 000

650 000

135 000 (50 000)

- 37 500 (50 000)

--

Provision for warranty claims ((165 000 – 69 000) – (135 000 – 110 000)); (135 000 - 0) Actual warranty costs paid Provision for costs to recover and repair defects Depreciation (given) Wear and tear allowance [(250 000 x 20%) + (300 000 x 20%)];(250 000 x 20%) Profit on disposal (250 000 - 193 750) Recoupment of wear and tear (250 000 - 150 000)

Taxable income

490 000

722 500

Current tax expense @ 28%

137 200

202 300

4. MIGNON LIMITED


(a) Change in warranty provision

Profit before tax

Included in profit before tax is a change in accounting estimate that arose from the decision to change the estimates

used as a basis for making the provision for warranty costs due to the results of recent quality control surveys. This

change in estimate resulted in a decrease in provision for warranty claims created of R69 000. The cumulative effect of

this on future periods is unknown.

(b) Events after the reporting period


Profit before tax is stated after taking the following into account:

R

Cost in respect of the rectification of a material metal defect 173 000


The cost o rectification of a material metal defect in 20.6 for goods manufactured since 1 October 20.5 will

amount to R60 000.

QUESTION 13

3. Bright Limited

Included in depreciation is a change in accounting estimate amounting to R17 6801. This increase in depreciation

resulted from a decision to depreciate lawnmowers on the straight line method instead of the reducing balance method

and to change the residual value of golfcarts from R20 000 to Rnil. The cumulative effect of this change on future

periods will be a decrease in depreciation of R17 6801.

1 [((57 600 x 20%) + ((400 000 - 20 000) x 25%)) - (19 200 + 105 000)]

2. Contingent liabilities

2.1 Contingent liability – Holidaymaker

On 15 January 20.6 Mrs Goody, a holidaymaker, instituted a claim of R250 000 against Bright Limited after she was

injured by a Lolo. The legal advisors of Bright Limited are of the opinion that the claim will be unsuccessful. The legal

costs to defend the claim are estimated to amount to R25 000.

2.2 Contingent liability – Repair of Golf course

Due to recent flooding the putting greens on the course have been damaged and will have to be repaired. In January

20.6 a contract was conducted with Lolo Limited to repair the course for R50 000. The work will commence on 1 April

20.6.

During January 20.5 various chalets of the resort were damaged as a result of heavy rainstorms which resulted in the

evacuation and relocation of holidaymakers. Mr Knowldege established that no further payments are due to these

holidaymakers at 28 February 20.6.

4.Contingent asset

A claim was instituted against a company for gaining unauthorised access to Bright Limited’s database of

holidaymakers for promoting their own resorts. According to the company’s legal advisors it is

probable that the claim will be successful but the realisation of income is not virtually certain. If the claim

was to succeed Bright Limited will receive R100 000 before tax.

3. BODY-FOREVER LIMITED

PART B

The maize crop has an input cost of R1.1 million which is material and the cost can be measured with

realibility.

Treatment as an asset:

Definition of an asset and applying it to the crop:

Resource controlled by entity - crop is planted on entity’s land and is being developed and maintained by the

entity;

Resulting from past events - planting of the crop is the past event;

From which future economic benefits will flow to the entity - when the crop is harvested and sold in two

months’ time, future economic benefits will flow to the entity. There is a measure of uncertainty in that

natural causes like hail or crop disease can result in crop failure.

The market for maize might also crash before the crop is sold. The crop is insured, which reduces the risk of

crop failure.

Conclusion:

Yes, the crop planting costs should be recognized as an asset, as it complies with the definition of an asset.

QUESTION 15

On 31 January 20.7 the marketing director informed management that the new logo of the company

appearing on all its aircraft will have to change after complaints was received from its main competitor, Fly-

to-the-moon Limited and they started legal proceedings against the company. They claim that the new logo

is very similar to their own logo. On 28 February 20.7 the legal advisors of Star Flight Limited is of the

opinion that it is not probable that Fly-to-the-moon Limited will win their legal action.

After a review of the company’s insurance policy covering possible claims from passengers for damaged or

lost baggage and flight delays, the financial director of Star Flight Limited recommended that the company

cancel their current insurance policy with Quicksure Limited on 1 March 20.5 and self insure in future. The

final outcome of claims submitted by passengers during the year ended 28 February 20.7 will be determined

during the court hearings scheduled for April 20.7.

QUESTION 16 PART A PTY LIMITED NOTES FOR THE YEAR ENDED 29 FEBRUARY 2008 1. Income tax expense

SA Normal tax

Current tax expense - current year - overprovision prior year

Deferred tax expense - temporary differences - tax

rate change

Tax rate reconciliation

Standard rate of tax (R1 050 000 x 28%) Adjusted for exempt differences:

Dividends received (50 000 x 28%) Fines paid (10 000 x 28%)

Tax rate change Overprovision prior year

Effective tax

R

130 731 (8 000)

152 069

(7 500)

267 300

R

294 000 (14 000)

2 800 (7 500) (8 000)

267 300

2. Deferred tax

The deferred tax balance consists of the following:

Accelerated wear and tear allowance Provision for claims

R

506 897

(144 828)

362 069

3. Provision for claims R

Carrying amount 1 March 2007 Amount used during the year/paid Unused amounts reversed/transferred to the statement of comprehensive income during the year Provision created during the year

Carrying amount 29 February 2008

65 000 (50 000) (15 000) 150 000

150 000

Due to the nature of the adventure trails offered by Pty Limited there is a high risk that participants

can be injured. During the current year the claim instituted by Mr Macho of R65 000 was settled out of

court for R50 000. Mrs Tomboy instituted a claim of R150 000 against Pty Limited after she fell from her

quad bike on 15 January 2008 as a result of faulty brakes. The costs will probably be incurred during 2008 as

the court case is scheduled for 30 April 2008.


Mr Tarzan instituted a claim of R25 000 against Pty Limited after he broke his ankle during a rock climb.

The legal advisors of Pty Limited are of the opinion that the claim will be unsuccessful.

PART B

The R1 million goodwill should be capitalised if it meets the definition of an asset, as well as the

recognition criteria of assets as set in the Framework. If the definition or criteria is not met, the item should be

expensed.

The Framework defines an asset as:

a resource controlled by the enterprise,

as a result of past events, and

from which future economic benefits are expected to flow to the enterprise.

According to the Framework an asset is recognised:

when it is probable that future economic benefits will flow to the enterprise, and

the asset has a cost or value that can be measured reliably.

The definition and recognition criteria of an asset are not met as:

it can be argued that Las Vegas do control the burger as they make the burger and they have the secret

recipe; and

future economic benefits will flow to Las Vegas as they will keep on selling this burger to prospective clients,

but

the cost of the goodwill can not be measured reliable as Mr Greedy did not pay any amount for the goodwill

Conclusion

Since the self established goodwill does not meet the definition of an asset and the recognition criteria the goodwill

should not be capitalised.

QUESTION 17 1. Deferred tax balance – 28 February 2007

Carrying amount R

Tax base R

Temporary

difference R

Deferred tax asset/

(liability) R

Delivery vehicle Inventory

800 0001

516 000

750 000 150 000 420 000 96 000

(42 000) (26 880)

Deferred tax liability (68 880)

1 1 250 000 – 450 000

Deferred tax balance – 29 February 2008

Carrying amount R

Tax base R

Temporary

difference R

Deferred tax asset/

(liability) R

Delivery vehicle Inventory Provision – onerous contract

Deferred tax asset

400 0001

330 000 75 000

3

500 0002

100 000 28 000 330 000 - -

- 75 000 21 000

49 000

1 1 250 000 – 450 000 –((1 250 000 – 450 000) / 2)

2

750 000 – (1 250 000 x 20%)

3 (25 000 x 6) x 50%

2. Disclosure MY BOOKS LIMITED NOTES FOR THE YEAR ENDED 29 FEBRUARY 2008 1. Profit before tax

Depreciation – delivery vehicles

2008

R 400 000

1

2007

R 200 000

2

1 (1 250 000 – 450 000) / 2

2 [1 250 000 – (1 250 000 x 20%)] x 20%

Included in depreciation is a change in estimate amounting to R240 0003. This increase in depreciation resulted

from the decision to depreciate delivery vehicles according to the straight-line method instead of the reducing

balance method. This change will result in a decrease of depreciation in future periods of R240 000.

3 ((1 250 000 – 450 000) / 2) – ((1 250 000 – 450 000) x 20%)


During the year the company changed its accounting policy in respect of the valuation of inventory from the

weighted average method to the first-in-first-out method, in order to give a more reliable presentation of the effect of

inflation on the company’s profits. The change in policy was accounted for retrospectively and comparative amounts

have been appropriately restated. The effect of the change is as follows:

Increase in cost of sales [(516 000 – 420 000) – (330 000 – 285 000)] ; [(360 000 – 255 000) - (516 000 – 420 000)] Decrease in tax expense (51 000 x 28%) ; (9 000 x 28%)

Decrease in profit

Increase in inventory (330 000 – 285 000) ; (516 000 - 420 000); (360 000 – 255 000) Increase in current tax liability (45 000 x 28%) Increase in deferred tax liability (96 000 x 28%); (105 000 x 28%)

Increase in equity

Adjustment to retained earnings at the beginning of 2006 (360 000 – 255 000) – ((360 000 – 255 000) x 28%) OR

(360 000 – 255 000) x 72%

2008 R

(51 000)

14 280

(36 720)

45 000 (12 600)

-

32 400

2007 R

(9 000)

2 520

(6 480)

96 000

- (26 880)

69 120

1/3/2006 R

105 000

- (29 400)

75 600

75 600


On 12 March 2008 a warehouse of My Books Limited in Midrand was partly destroyed in a fire. The cost of the

inventory damaged or destroyed is estimated to amount to R125 000 and the damage to the warehouse is

estimated to amount to R400 000.

QUESTION18 1. Journals

Dr Cr R R

J1 Bank

Revenue (sales) Deferred maintenance liability (18 000 x 5)

1 150 000 1 060 000

90 000

Deferred maintenance liability 30 000 Revenue (service fees) ((18 000 x 5)/3) 30 000

OR

Bank

Sales (revenue) Service fees (revenue)(18 000 x 5)/3 Deferred maintenance liability(18 000 x 5) x 2/3

1 150 000 1 060 000

30 000 60 000

J2 Bank 265 000 Revenue(sales) 265 000

J3 Debtors/Receivables 400 000

Bank 50 000 Revenue (sales) 450 000

Bank (85 218 x 2) 170 436

Debtors /Receivables(59 359 + 55 218) 114 577 Interest received (30 000 + 25 859) 55 859


Revenue (sales) 80 000 (75 000 – 15 000) x 100/75

J5 Bank 12 150

Commission received 12 150 (90 000 – 9 000) x 15%

J6 Provision for claim (SFP) 125 000

Claim (SCI) 23 000 Bank 148 000

J7 Credit losses (bad debts) (SCI) 35 000

Allowance for credit losses (provision for doubtful debts)(SFP) 35 000 (45 000 – 10 000)


Retained earnings 17 000

2. AUTO LIMITED



Dividends declared after year end.

An ordinary dividend of R125 000 was proposed before year end and declared after year end at the

annual general meeting held on 25 April 2008.

2. Contingent asset

Auto Limited sued another company, Executive Cars Limited during the year for R150 000 for

infringement of his sole rights to distribute a certain make of motorvehicle. The company’s legal advisors

are of the opinion that Auto Limited’s claim will probably succeed.

3. Prior period error

Correction of debtor incorrectly accounted for as cleaning expenses. The comparative amounts have

been appropriately restated. The effect of this error on the results of 2007 is as follows:

2007 R

Decrease in expenses 17 000 Increase in tax expense (17 000 x 29%) (4 930)

Increase in profit 12 070

Increase in accounts receivable 17 000 Increase in current tax liability (17 000 x 29%) (4 930)

Increase in equity 12 070

QUESTION 19 (a) Calculation of taxable income for the year ended 29 February 2015:

R

Profit before tax before change in estimate

211 903 Decrease in depreciation as a result of change in accounting estimate [4 785

- (38 280 x 10%)]

957

212 860

Exempt differences

300 Fine paid

300

Profit after exempt differences

213 160


(60 672) Depreciation (29 200 + 30 833 + 3 828)

Building allowance (5% x 1 460 000) Wear and tear: Plant kept [(325 000 - 40 000) x 20%] Wear and tear: Plant sold (40 000 x 20%) Wear and tear: Computer equipment (47 850/3) Profit on sale of plant (given) Recoupment on sale of plant (1) Allowance for credit losses (provision for doubtful debt) (80 000 – 75 000) Allowance for credit losses (provision for doubtful debt): 2014 (Tax) (75 000 x 25%) Allowance for credit losses (provision for doubtful debt): 2015 (Tax) (80 000 x 25%) Warranty costs (provision) Prepaid insurance premium 2014 Prepaid insurance premium 2015

63 861 (73 000) (57 000)

(8 000) (15 950)

(8 333) 22 000

5 000

18 750

(20 000) 14 000 10 000

(12 000)

152 488

Less: Assessed loss carried forward from 2014

(21 564)

Taxable income

130 924

Calculations:

1. Recoupment on sale of plant

Cost price of asset 1/3/2012

40 000

Wear and tear 2013 (40 000 x 20%)

(8 000) Wear and tear 2014 (40 000 x 20%)

(8 000)

Wear and tear 2015 (40 000 x 20%)

(8 000)

Tax base of machine sold

16 000

Selling price

38 000

Tax base

(16 000)

Recoupment

22 000

(b) Calculation of the deferred tax movement in the statement of comprehensive income of Smart

Limited for the year ended 29 February 2015:

Carrying amount

Tax base

Temporary difference

Deferred tax (asset)/ liability @

28%

R

R

R

R

Manufacturing plant (1)

199 500

114 000

85 500

23 940

Computer equipment (2)(3)

34 452

-

34 452

9 647 Factory building (4)

1 372 400

1 241 000

131 400

36 792

Prepaid insurance premium

12 000

-

12 000

3 360 Allowance for credit losses(provision for

doubtful debts) (5)

80 000

20 000

60 000

(16 800) Provision for warranty costs

14 000

-

14 000

(3 920)

53 019

Deferred tax liability 29/02/2015

53 019

Deferred tax liability 28/02/2014

(29 993)

Movement for the year (Dr to SCI)

23 026

Calculations:

R

1. Tax base of manufacturing plant Cost price 1/03/2012 Wear & tear 28/02/2013 (325 000 x 20%) Wear & tear 28/02/2014 (325 000 x 20%) Wear & tear 29/02/2015 (325 000 x 20%) Tax base of asset sold (a)

325 000 (65 000) (65 000) (65 000) (16 000)

Tax base of manufacturing plant

114 000

2. Carrying amount of computer equipment

Carrying amount 1/03/2014 Depreciation on the reducing balance method 2015

38 280 (3 828)

Carrying amount 29/02/2015

34 452

3. Tax base of computer equipment

Cost price 1/03/2012 Wear & tear 28/02/2013 (47 850/3) Wear & tear 28/02/2014 (47 850/3) Wear & tear 29/02/2015 (47 850/3)

47 850 (15 950) (15 950) (15 950)

Tax base of computer equipment

-

4. Tax base of factory building R

Cost price 1/03/2012 Building allowance 28/02/2013 (1 460 000 x 5%) Building allowance 28/02/2014 (1 460 000 x 5%) Building allowance 29/02/2015 (1 460 000 x 5%)

1 460 000 (73 000) (73 000) (73 000)

Tax base of factory building

1 241 000

5. Tax base of allowance for credit losses (provision for doubtful debts) 80 000 x 25% = 20 000

(c) SMART LIMITED NOTES FOR THE YEAR ENDED 29 FEBRUARY 2015

Profit before tax

2015 R

2014 R

Profit before tax includes the following items: Profit on sale of manufacturing plant Depreciation

8 333 - 3 828

1 4 785

1 38 280 x 10%

Included in depreciation for 2015 is a change in estimate of R957 (4 785 – 3 828), that arose from the decision

to depreciate computer equipment on the reducing balance method instead of the straight line method in future

so as to reflect the consumption of the economic benefits of the assets. This change will result in a decrease of

depreciation in future periods of R957.

QUESTION 20 1. Requirements for a “bill and hold” sale

Revenue is recognised when the buyer takes title, provided:

(a) it is probable that delivery will be made;

(b) the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised; (c) the

buyer specifically acknowledges the deferred delivery instructions; and

(d) the usual payment terms apply. (IAS 18 (AC 111) Appendix par. 1)

2. Revenue arising from transactions concluded with MM Limited

R

Sales invoices Bill and hold sales Consignment sales (800 000 x 40%) Installation fees (1 050 000 - 25 000 - 15 000) Sale of water distill machine Maintenance income [(370 000 - 330 000) x 6 000/30 000]

650 000 100 000 320 000

1 010 000 330 000

8 000

2 418 000

3. Disclosure

LAB LIMITED

NOTES FOR THE YEAR ENDED 31 DECEMBER 2014 2. Provisions 2.1 Provision for legal claims R

Carrying amount beginning of year Provision created for the current year

- 500 000


500 000

On 1 November 2014 5 patients became seriously ill, as a result of wrong callibration of machine equipment sold. The sick patients started legal proceedings against the company, but the company disputes the claim. The company’s lawyers advised the directors of Lab Limited that it is probable that the company will be found liable. 2.2 Provision for warranty claims R

Carrying amount beginning of year Amount used during the year Unused amounts reversed Provision created for current year

120 000 (100 000) (20 000) 150 000

Carrying amount at the end of year

150 000

A provision of R150 000 has been recognised for the current year for expected warranty claims in respect of MM

sampling machines sold during the year. It is expected that all this expenditure will be incurred in the next financial

year.

2.3 Provision for repairs to glucose metres

R

Carrying amount beginning of year Provision created for the current year (50 000 + 80 000)

- 130 000


130 000

Due to an intrinsic defect in glucose metres manufactured, a provision to repair glucose metres on hand and

already sold have been made. It is expected that all this expenditure will be incurred in the next financial year.

3. Contingent asset

A claim of R400 000 has been instituted against MM Supplies Limited for supplying faulty callibaration equipment.

This relates to the court case of 5 patients that became seriously ill. The claim receivable by Dexter Lab Limited is

taxable.


4.1 Cost to repair material defects in glucose metres manufactured in 2015 amount to R200 000, resulting in a

decrease of R144 000 (after tax) of the profit in the next financial year.

4.2 On 1 March 2014, erf 67 was expropriated by the government. The fair value of the property at 31

December 2014 was R2 000 000. The financial effect cannot be determined as the proceeds receivable

from the government has not been established.

4.3 A rights issue of 250 000 shares at R2 per share was made on 31 January 2015. The issue was fully

subscribed.

QUESTION 21 PART 1

R

1.1

Invoice 685 [50 000 - (50 000 x 10%)] The criteria for the recognition of revenue are met: the significant risks and rewards of ownership of goods have been

transferred to the buyer; the entity retains neither continuing managerial involvement to the degree sally

associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to

the entity; and the costs incrred or to be incurred in respect of the transaction can be

measured reliably. (IAS 18 par. 14) Amount of revenue to be recognised is measured at fair vale of the consideration received. In terms of par. 10 of IAS 18 (AC 111) the fair vale of the consideration received is measured after taking into account the amount of any trade discont received. The net amount of the revenue, after dedcting the trade discont, should be recognised.

45 000

(2)

1.2

Invoice 686 (50 000 x 20%) Consignment sales are only recognised as revenue when the goods are sold to a third party by the buyer. (IAS 18 Appendix par. 03)

10 000

(2)

1.3

Invoice 687 Revenue from COD sales is recognised when delivery is made and cash is received by the seller. Since the goods are delivered on 2 October 2015, revenue should be recognised on 2 October 2015. [IAS 18 Appendix par. 2(d)]

-

(1½)

1.4

Invoice 688 Revenue is recognised when the cash is received and the goods are delivered to the buyer. The company should not recognise this as a sale since money are received for items not held in inventory that still has to be manfactred, (IAS 18 Appendix par. 04), therefore the risks and rewards have not been transferred to the buyer.

-

(1½)

1.5

Invoice 701 (45 000 - 15 000) Installation fees recognised as revenue by reference to the stage of completion. (IAS 18 Appendix par. 10). Accrual for reinstallation to be done of R5 000.

30 000

(2)

2.

Instalment sales Revenue attributable to the sales price, exclusive of interest, is recognised at the date of sale. The interest element is recognised as revenue as it is earned, on a time proportion basis that takes into account the imputed rate of interest. (IAS 18 Appendix par. 08)

3 734,78

(2)

PART 2

EXCLSIVE LIMITED

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 2015

1. Provisions

Provisions for warranty costs

R

Carrying amount at beginning of year Costs incrred for 2014 fees nsed amount reversed Provision created for the crrent year (1)

16 000 (14 000) (2 000) 15 500


15 500

A provision of R15 500 has been recognised for expected 2 month warranty claims on installation of eqipment done dring the year. It is expected that this expenditre will be incrred in the next 2 months of the next financial year. (1) (70 000 x 5%)

(80 000 x 10%) + (80 000 x 5%)

3 500 12 000

15 500


Damage to assembly workshop

Dring November 2015 the company’s assembly workshop was damaged by a fire cased by lightning. A contract was

conclded with To Service Limited on 1 December 2015 to repair the damage to the assembly workshop at a

cost of R100 000 (tax effect R28 000). These fnds will be financed by means of a special reserve fnd. The damage

to the inventory held in the workshop amounted to R300 000 (tax effect R84 000). At the time of the incident the

company was not insred.


On 15 Agst 2015 the mnicipality informed the project manager of Exclsive Limited that one of the completed

installations which were done on special evaporating eqipment in an indstrial area mst be removed. The installation

is not allowed de to environmental protection rles. The cost to remove the installed eqipment cannot be reliably

estimated. After several negotiations with the mnicipality and the environmental board, the project manager of

Exclsive Limited is of the opinion that it is not probable that they will have to remove the installed eqipment.

QUESTION 22

1. Current tax due to SA Revenue Service

R

Profit before tax (given) Adjust for exempt differences:

934 750 (58 500)

Legal fees Dividends received Depreciation: Office buildings

9 500 (100 000)

32 000


876 250

36 250

Research costs Allowances - research costs (40 000/4) OR (40 000 x 25%) Provision for leave (50 000 - 6 000) Actual leave payment (40 000 - 6 000) Rental received in advance Allowance for credit losses (Provision for doubtful debts) (35 000 - 20 000)(acc) Credit losses(Doubtful debts): 2013 (35 000 x 25%)(tax) Credit losses (Doubtful debts): 2014 (20 000 x 25%)(tax)

40 000 (10 000) 44 000 (34 000)

7 500 (15 000)

8 750 (5 000)

Taxable profit

912 500

Current tax @ 28% (912 500 x 28%)

255 500

(219 350)

Less: provisional tax payments

Due to SA Revenue Service

36 150

2. Deferred tax movement

Carrying amount R

Tax base R

Tempo-rary difference

R

Deferred tax asset

@ 28% R

Office buildings (800 000 - 128 000) Debtors OR Allowance for credit losses (Provision for doubtful debts) Provision for accumulated annual leave Rental received in advance Research costs

Net deferred tax asset 30 June 2014 Deferred tax asset 1 July 2013 (given)

Net movement for the year - Cr to the SCI

672 000 - 230 000 245 000

1

20 000 5 0002

50 000 - 7 500 - - 30 000

3

Exempt 15 000 4 200 15 000 4 200 50 000 14 000

7 500 2 100 30 000 8 400

28 700 (18 550)

10 150

1 250 000 - (20 000 x 25%)

2

20 000 x 25%

3 40 000 - (40 000 x 25%)

3. HT LIMITED

NOTES FOR THE YEAR ENDED 30 JUNE 2014

Income tax expense

SA Normal tax

248 150

Current tax expense - current year - underprovision prior year ((15 000 - 5 000) x 28%)

Deferred tax expense - temporary differences (36 250 x 28%)

255 500 2 800

(10 150)

Tax rate reconciliation:

Standard tax (934 750 x 28%)

261 730 Reconciling items:

Exempt differences Legal fees (9 500 x 28%) Depreciation: office buildings (32 000 x 28%) Dividends received (100 000 x 28%)

Underprovision prior year

2 660 8 960

(28 000) 2 800

Effective tax rate

248 150

QUESTION 23 1. Profit before tax

2015 R

Profit before tax (given) Depreciation - lawnmowers (57 600/3) Depreciation - golfcarts [210 000/2] Unused provision i.r.o. holidaymakers written back (80 000 – 5 000 – 60 000) Severance packages paid to redundant employees (76 000 - 45 000) Provision for repair of golf course

550 000 (19 200)

(105 000) 15 000 (31 000) (50 000)

359 800

2. Deferred tax movement - 2015

Carrying amount R

Tax base R

Temporary difference R

Deferred tax

asset/ (liability) @

28% R

Lawnmowers Golfcarts Provision repair of golfcourse

38 4001

105 0003

50 000

36 0002

160 0004

-

2 400 (672) 55 000 15 400 50 000 14 000

Closing balance Opening balance (given)

Deferred tax movement (debit to statement of comprehensive income)

28 728 (57 792)

29 064

1 57 600 - 19 200

2 54 000 - (90 000 x 20%)

3

210 000 - 105 000

4 240 000 - (400 000 x 20%)

3. ABC LIMITED NOTES FOR THE YEAR ENDED 28 FEBRUARY 2015 1. Profit before tax

2015 2014 R R

Depreciation 124 2001

109 4002

1

19 200 + 105 000 2

((57 600/0,80) – 57 600) + ((400 000 – 20 000) x 25%)

Included in depreciation is a change in accounting estimate amounting to R17 6801. This increase in

depreciation resulted from a decision to depreciate lawnmowers on the straight line method instead of the reducing

balance method and to change the residual value of golfcarts from R20 000 to Rnil. The cumulative effect of

this change on future periods will be a decrease in depreciation of R17 6801.

1 [((57 600 x 20%) + ((400 000 - 20 000) x 25%)) - (19 200 + 105 000)]


On 15 January 2015 Mrs Goody, a holidaymaker, instituted a claim of R250 000 against ABC Limited after she

was injured by a golfball. The legal advisors of ABC Limited are of the opinion that the claim will be unsuccessful.

The legal costs to defend the claim are estimated to amount to R25 000.

3. Provisions 3.1 Provision for repair of golf course

R Carrying amount beginning of year -Provision created during the year 50 000

Carrying amount end of year 50 000

In January 2015 a contract was concluded with Golftrim Limited to repair the golfcourse damaged by recent flooding. The work will commence on 1 April 2015. 3.2 Provision for holidaymakers - inconvenience

R Carrying amount beginning of year (80 000 - 5 000) Amount used during the year Unused amounts transferred to the statement of comprehensive income during the year


75 000 (60 000) (15 000)

-

During January 2014 various chalets of the resort were damaged as a result of heavy rainstorms which resulted in the evacuation and relocation of holidaymakers. Mr Sam established that no further payments are due to these holidaymakers at 28 February 2015. 3.3 Provision for severance packages - redundant employees Carrying amount beginning of year Amount used during the year


R 45 000

(45 000)

-

During the 2014 financial year the board of directors decided to significantly reduce the maintenance personnel of the company and paid severance packages to these redundant employees according to their service contracts.

4. Contingent asset

A claim was instituted against a company for gaining unauthorised access to ABC Limited’s database of

holidaymakers for promoting their own resorts. According to the company’s legal advisors it is probable that the

claim will be successful but the realisation of income is not virtually certain. If the claim was to succeed ABC

Limited will receive R100 000 before tax.

QUESTION 24 1. Journal entry

Dr Cr R R

1 March 2014 Bank 80 000

Sales (SCI) 76 000 Deferred revenue (SFP) (80 000 x 5%) 4 000

Cost of sales 36 000

Inventory 36 000 28 February 2015 Deferred revenue (SFP) (4 000/5) 800

Revenue (SCI) 800


R Profit before tax (given) Landscaping fees – PF Limited (520 000 x 35%) Maintenance fee – PF Limited (120 000 x 8/12) Mrs Poppy: Sale of roses

Cost of roses Maintenance of roses

Change in inventory valuation (8 000 – 6 000) Profit before tax

850 000 182 000

80 000 76 000

(36 000) 800

(2 000) 1 150 800

3. Deferred tax balance calculation Carrying amount

R Deferred maintenance income- PF (120 000 x 4/12) 40 000 Deferred maintenance income – Mrs Poppy (80 000 x 5% x 4/5) 3 200 Landscaping debtor 182 000 Deferred tax liability

Tax base R

-

--


R

40 000

3 200 182 000

Deferred tax

asset/(liability) R

11 200

896 (50 960) (38 864)

4. SOLUTIONS LIMITED



During the year the company changed its accounting policy with respect to the valuation of inventory. Solutions

Limited previously accounted for its inventory on the last-in-first-out method but has changed its policy of

accounting for inventory to the first-in-first-out method in order to comply with GAAP. This change in accounting

policy has been accounted for retrospectively and the comparative amounts have been appropriately restated.

The effect of this change is as follows:

Increase in cost of sales (8 000 – 6 000);(11 000 – 8 000) Decrease

in income tax expense (2 000 x 28%); (3 000 x 28%) Decrease in

profit Increase in inventory Increase in current tax liability (6 000 x 28%) Increase in deferred tax liability (8 000 x 28%) ; (11 000 x 28%)

Increase in equity Adjustment to retained earnings at beginning of 2014 (11 000 – (11 000 x 28%))

2015 2014 R R

(2 000) (3 000)

560 840 (1 440) (2 160)

6 000 8 000 (1 680) -

- (2 240) 4 320 5 760

1/3/2013 R

11 000 - (3 080)

7 920

7 920

QUESTION 25 CTM LIMITED

NOTES FOR THE YEAR ENDED 31 DECEMBER 2014


The profit before tax includes the following items: R

Loss on sale of computer equipment Depreciation: computer equipment Dividends received - unlisted investment

85 000 65 000 40 500


SA Normal tax

163 016

Current tax expense - current year (2.1) Deferred tax expense - temporary differences (2.2)

214 956 (51 940)

Tax rate reconciliation R

Standard tax rate [(650 200 - 32 000) x 28%] Adjusted for exempt differences: Dividends received from SA companies (40 500 x 28%) Value added tax penalty (4 500 x 28%)

173 096

(11 340) 1 260

Effective tax rate

163 016

OR

%

28,00

(1,83) 0,20

Standard rate of tax Adjusted for exempt differences: Dividends received from SA companies (40 500/618 200 x 28% x 100) Value added tax penalty (4 500/618 200 x 28% x 100) Effective tax rate (163 016/618 200 x 100) 26,37 4. Deferred tax

Analysis of deferred tax account

R

Income received in advance (80 000 x 28%)

22 400

Deferred tax asset at 31 December 2014

22 400


During the year, the company changed its accounting policy with respect to the valuation of inventory. CTM

Limited previously accounted for inventory on the last in, first out (LIFO) method but has changed its policy for

accounting for inventory to the first in, first out (FIFO) method in order to comply with Generally Accepted

Accounting Practice.

The change in accounting policy has been accounted for retrospectively and the comparative amounts have been

appropriately restated. The effect of the change is as follows:

(Increase)/decrease in cost of sales Decrease/(increase) in taxation expense

(Decrease)/increase in profit

Increase in inventory Increase in current taxation due (19 000 x 28%)

Increase in deferred tax liability (51 000 x 28%) ; (3 000 x 28%)

Increase in equity

2014 R

(32 000) 8 960

(23 040)

19 000 (5 320)

-

13 680

2013 R

48 000 (13 440)

34 560

51 000 - (14 280)

36 720

1.1.2013 R

3 000 - (840)

2 160

Adjustment to retained earnings at beginning of 2013 2 160

Calculations

1. Effect of change in accounting policy

2012 R

Diffe-rence

R

2013 R

Diffe-rence

R

2014 R

Inventory

New method Old method

571 000 568 000

372 000 321 000

452 000 433 000

Increase in profit due to increase in inventory

3 000

48 000

51 000

(32 000)

19 000

Income tax effect @ 28%

(840)

(13 440)

(14 280)

8 960

(5 320)

2 160

34 560

36 720

(23 040)

13 680


2.1 Current tax expense

2014 R

Taxable income (given) Increase in closing inventory (see calculation 1)

748 700

19 0001

Taxable income

767 700

Current tax at 28%

214 956

1 3 000 + 48 000 - 32 000 (see calculation 1)

2.2 Deferred tax expense

Carrying amount R

Tax base

R


R

Deferred tax asset/ (liability)

@ 28% R

2013

Closing inventory

372 000

321 000

51 000

(14 280)

Carrying amount of asset > tax base of asset, therefore deferred tax liability. 2014

452 000

Closing inventory

452 000

-

-

Carrying amount of asset is equal to tax base of asset therefore no deferred tax.

Rent received in advance

80 000

-

80 000

22 400

Carrying amount of liability > tax base of liability, therefore deferred tax asset.

Deferred tax liability 1 January 2014 (15 260 (given) + 14 280) Deferred tax asset 31 December 2014 Deferred tax expense (Cr to SCI)

29 540 22 400

51 94

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