Financial Accounting 300: Year Test 1 2023 - Suggested Solution
Financial Accounting 300: Year Test 1 2023 - Suggested Solution
To: pretty.tens@zentimental.com
From: student@gmail.com format*
Date: 5 August 2018
Subject: Recommended response to audit query
Dear Ms Tens
With reference to your request to assist with responses to audit queries received around
the balance sheet as at 30 June 2018, please find attached my recommendations in
Attachment A.
format**
If you have any further queries, please do not hesitate to contact me on xxx xxx xxxx.
Yours sincerely,
Student
Marking notes on format:
* This mark is awarded even if the date is omitted.
** This mark is not awarded if identifying / plausibly identifying information is used in the email
(e.g. own name / own number / plausibly own name / plausibly own number)
You should not identify yourself in the board exams in any way and should learn to do so from
undergraduate already. Moreover, avoid using terms that would associate you with the University of
Pretoria (e.g. Tuks or UP). Communication
If the email is not addressed to the correct person (Ms Tens / Chief Executive Officer of Zentimental),
one of the format marks is lost (provided at least one format mark was awarded).
Attachment A
Recommended response Reason
Alternative 1 Reason for alternative 1
Using “Balance sheet” as a heading to the An entity is permitted to use titles for the
statement of financial position is not an financial statements other than those used
error. within the standard (IAS 1.10).
Alternative 2 Reason for alternative 2
The heading to the statement should be “Statement of financial position” is the term
changed to “Statement of financial most commonly used in IFRS and financial
position” statements of South African entities, so
that using this term enhances the
comparability of the financial statements
with those of other entities.
(2 marks awarded as whole for a response
and reason that reflect a clearly connected and
reasonable thought process)
2
Marking note:
A student need not use the exact wording or format above to describe recommendations or provide
reasons. The implication of the answer provided should be assessed to determine the marks to be
awarded.
This part of the question tests how well you understand the presentation requirements of financial
statements. In particular, you should realise that recommendations in standards are not the same as
minimum requirements (the title of the statement is not a requirement) and be able to link the
requirements of IAS 1, the Conceptual Framework and other standards.
Knowledge, Critical Thinking, Communication, Business Acumen
3
R
Finished goods:
Zentamint Relaxation Tablets (calc 1) (3) 99528
Zentabulous Sleeping Tablets (calc 3) (7½) 2 938 737
Raw materials (calc 2) (2) 237 988
* Awarded for answering the required, i.e. totalling to the correct balance. As there is a separate
mark for totalling the calculations, separate calculations (which are not added together) can be
marked.
Marking notes:
• -½ throughout when a sign error is made based on the underlying calculations
Calculations
Units R / unit R
Opening balance on 1 July 2017 ^200 000 ^113 471
The opening balance should be lower of cost and
net realisable value. IAS 2 requires us to
consider inventories item-by-item in most cases,
so that the different types of finished goods need
to be considered separately.
Knowledge
Purchase on 1 January 2018 ^100 000 ^77 929
300 000 0,638 191 400
Under weighted average cost flow methods, a
new weighted average price needs to be
calculated after each purchase to be able to
account for subsequent sales.
Knowledge
Sales on 30 April 2018 ^(144 000) ^m/t0,638 (91 872)
Sales of finished goods are transferred out of
inventories and into cost of sales at the last
weighted average price.
Knowledge
Closing balance on 30 June 2018 156 000 99 528
(3 main calc)
4
2. Raw materials
Under first-in-first-out, the opening balance would be used up first, before the purchases of the
current year. As the units transferred to work-in-progress (5 500 000) are more than those in the
opening balance (112 300), the entire closing balance will be at the price of the purchases for the
year. The closing balance of raw materials can therefore be calculated directly and the opening
balance moved directly to finished goods (as the closing balance of work-in-progress was zero).
Knowledge & Critical thinking
Units R / unit R
Purchase on 1 July 2017 ^5 600 000 1,121 ^6 277 600
Purchases transferred to work-in- ^(5 387 700) ^ 1,121
m/t (6 039 612)
progress (5 500 000 – 112 300)
Closing balance on 30 June 2018 212 300 237 988
(2 main calc)
OR: [5 600 000^ – (5 500 000 – 112 300)^] x 6 277 600^ / 5 600 000^ = 237 988
A more detailed calculation will give the same answer as illustrated below:
Units R / unit R
Opening balance on 1 July 2017 112 300 1,020 114 546
Purchase on 1 July 2017 5 600 000 1,121 6 277 600
Transferred to work-in-progress (5 500 000) (6 154 158)
• Part of opening balance (112 300) 1,020 (114 546)
• Part of purchases (5 387 700) 1,121 (6 039 612)
(5 500 000 – 112 300)
Closing balance on 30 June 2018 212 300 237 988
(From calc 2
OR 6 277 600 – 237 988 calc 2)
Fixed costs of factory (1½)18 900 000
(20 160 000^ / 32^ x 30^)
As actual production is lower than normal
production, fixed costs are allocated to
inventories based on normal production.
Knowledge
Factory labour costs ^16 000 000
As the workers are paid per unit produced,
their costs are variable. Therefore, the actual
costs are allocated to inventories.
Knowledge & Critical thinking
5
Units R / unit R
Remove by-product (1)(74 900)
(76 000^ – 1 100^)
By-products are removed from the cost of the
main product and recognised at net
realisable value. As the by-product was sold
by reporting date, it does not form part of the
closing inventory balance.
Knowledge & Critical thinking
Inventory cost just before sales
transaction on 30 June 2018 31 200 000 1,342 41 856 737
Under weighted average cost flow methods,
a new weighted average price needs to be
calculated each time after new finished
products are added to be able to account for
subsequent sales. As production for the year
was completed before any sales occurred,
the total cost calculation is first completed
before sales transactions are recognised.
Knowledge
Sales ^(29 000 000) m/t1,342 (38 918 000)
Closing balance on 30 June 2018 2 200 000 2 938 737
(7½ main calc)
Marking notes:
• -½ if the administrative and accounting staff costs are capitalised to inventories
Administrative overheads may not be capitalised to inventories under IAS 2. Administrative and
accounting staff costs are therefore not capitalised. Knowledge & Critical thinking
• -½ if the sales representative costs are capitalised to inventories
Sales commission paid to the representatives is paid after the inventories are already in the condition
to be sold to the customer. Therefore, these costs cannot be capitalised to inventories. Knowledge
& Critical thinking
6
Zentimental Limited
Statement of changes in equity for the year ended 30 June 2021 -½ if omitted
* Awarded if closing balances for the year ended 30 June 2021 are presented (i.e. the line is
described and columns are totalled).
Marking notes:
• If dividends paid are deducted from profit / other comprehensive income / taxable income
instead of being shown as a separate line item, the amounts are NOT marked (i.e. the ½ marks
allocated to R12 500 000 million and R6 250 000 are lost).
After we have determined the profit for the year (separate item), we decide if we want to give it to
the owners (pay it out as dividends) or keep it (retain it) in the business (add it to retained earnings).
Therefore, dividends paid to shareholders are a transaction with the owners and not an expense in
profit or loss. Knowledge
• -½ throughout when a sign error is made based on the underlying calculations
• All financial statements should have comparative numbers, which were not specifically excluded
from the required. Although the opening balances for the comparative year (i.e. as at 30 June 2019)
were not provided in all cases, there is enough information to calculate these. Knowledge & Critical
thinking
• All amounts in equity are after tax numbers. The tax expense was not provided and therefore both
components, namely current tax and deferred tax, must be calculated. Knowledge
7
Calculations
R
Accounting profit before tax (given) ^ 1 687 300
Non-taxable income and non-deductible expenses
Local dividends received ^ (118 700)
Traffic fines paid ^ 14 800
Marking notes:
-½ if commissions received is adjusted for
-½ if staff expenditure paid is adjusted for
Local dividends are not taxable and traffic fines are not deductible. However,
commissions received are taxable and staff travel expenditure is deductible and
no adjustments are made for these. You must be able to distinguish between
relevant and irrelevant information provided in a question.
Knowledge & Critical thinking
Deduction for research and development expenditure (1 450 000)
[(4 300 000 – 1 400 000) x 50%)
The accounting profit includes 100% of the research and development cost
accounted for as an expense, we only need to deduct an additional 50% to get
to the taxable income (100% + 50% = 150% deduction). Knowledge & Critical
thinking
8
R
Amortisation of brand (3 600 000 / 50^ x 6 / 12^) (1)36 000
A purchased brand may be recognised as an intangible asset. The useful life
of the brand is determined by how long management expects to use it, not by
the fact that it can be renewed indefinitely. The residual value of an intangible
asset is generally assumed to be zero. The brand was available for use in the
middle of the year and therefore amortisation is apportioned.
Knowledge & Critical thinking
Temporary differences
Depreciation on factory building [13 000 000^ (calc 5.1) / 30^] (1)433 333
Impairment loss on factory building (calc 6) (½)2 098 091
Building allowance on factory building [13 000 000 (calc 5.1) x 5%] ^ (650 000)
Amortisation on technology asset (1 400 000 / 15^ x 3 / 12^) (1) 23 333
R
1 575 393
Assessed loss from 2020 (1 260 314)
• Actual loss (given) 2 011 099
• Limitation: higher of 1 260 314
R1 000 000 and 80% x 1 575 393 = 1 260 314
An assessed loss of prior years can be used to reduce taxable income of the
current year. However, there are limitations on the amount that can be
deducted. To calculate the limitation, we need the subtotal as shown above.
Knowledge
Taxable income 315 079
Marking note:
• Students are not penalised if the current tax calculation does not distinguish between non-
taxable income / non-deductible expenses and temporary differences.
4. Revaluation surplus
4.1. Opening balance
R
Fair value of land on 30 June 2019 ^ 4 100 000
Cost of land ^ (2 000 000)
Revaluation surplus balance before tax 2 100 000
Tax recognised in other comprehensive income (453 600)
(2 100 000 x 27% x 80% OR 2 100 000 x 21,6%)
Balance as at 30 June 2019 1 646 400
(OR 2 100 000(1) above x 78,4% = 1 646 400) (2 SCE)
Tax on revalued land is recognised in other comprehensive income at the
capital gains tax rate (IAS 12.51B & IAS 12.61A).
Knowledge
Marking note:
The revaluation movement must be used to receive the mark for using the correct tax rate in
calc 4.2. If the balance in the deferred tax calculation is used, the mark for the tax rate is awarded
in the calculation of the balance, but lost for this calculation.
10
5. Factory building
Allocated to land
(3 010 789(3 above) x 4 100 000 / 13 525 000^m/t) 912 698
(3½ calc 4.2)
Allocated to factory building (balancing) ^m/t 2 098 091
(½ calc 3)
3 010 789
11
Land: The deferred tax liability is calculated at the capital gains tax rate (IAS 12.51B). The result of the deferred tax calculation is the balance of the
liability and not the movement. Therefore, this is not the amount to be taken to other comprehensive income in the current year.
Brand: The temporary difference is exempt from deferred tax, as it would meet all the criteria of IAS 12.15(b).
Trade receivables: The future economic benefits are not taxable and therefore the tax base is equal to the carrying amount. The gross trade
receivables and the allowance for expected credit losses must be considered separately.
Allowance for trade receivables: Use the definition of a liability’s tax base to get to the tax base for the allowance, namely the carrying amount less
amounts deductible in the future. The carrying amount is R451 422 and, since R180 569 has already been deducted in the current year, the amount
deductible in the future is R270 853. The tax base is therefore R451 422 – R270 853 = R180 569.
Prepaid expenses: Reflect on the current tax calculation. The prepaid strategy session was fully deducted in 2021, there will be no future tax
deductions. The prepaid insurance and maintenance combined amounts to more than R100 000 and therefore will be expensed for tax in the future
(could not be deducted in 2021). The fact that there is no temporary difference reflects that fact that the accounting and tax treatment are the same
in 2021.
Unused tax loss: Part of the unused tax loss of 2020 has been used in the current tax calculation. The remaining unused tax loss can be deducted
in the future for tax purposes. It is not recognised for accounting purposes (carrying amount of zero), but has a tax base (future tax deductions).
Movement: The total deferred tax balance is calculated. Comparing this to the opening balance gives the movement for the year. Part of the
movement needs to be recognised in other comprehensive income (refer to notes to calc 4). Therefore, the amount recognised in other
comprehensive income is removed from the total movement to work out how much needs to be recognised in profit or loss.
Knowledge & Critical thinking
13
Theory Application
This means that it is equally likely that Zenlax
will be profitable and generate economic
benefits and that it will not be profitable – this
is therefore not “more likely than not”.
5. The availability of adequate Zentimental Limited has a long track record of
technical, financial and other developing and selling medication.^ On
resources to complete the 15 September 2022, the finance department
development and to use or sell the arranged the necessary bank overdraft
intangible asset. (financial resources) to complete the
development. With the finalisation of the
appointment of an expert in the development
of laxatives on 1 October 2022, the necessary
technical resources to complete the
development became available.
6. Its ability to measure reliably the Zentimental Limited has sophisticated internal
expenditure attributable to the systems that accurately track and allocate the
intangible asset during its costs of developing new medication / Accurate
development. expenditure amounts for the year ended
(2 marks for theory, 1 if incomplete) 30 June 2023 have been provided, indicating
that costs can be measured reliably.
Conclusion m/t
The conclusion depends on the alternative discussed under the application to
criterion number 4 and should flow logically from that to receive a conclusion mark:
Alternative 1 in criterion 4:
All the criteria for capitalisation were met on 1 October 2022, which is therefore the date
upon which capitalisation of costs to the Zenlax intangible asset should commence.
Alternative 2 & 3 in criterion 4:
As one of the required criteria for capitalising development costs has not been met by
30 June 2023, no costs may be capitalised to an intangible asset for the development of
Zenlax.
Marking notes:
• No application marks without appropriate theory
• As the required asked for a specific date, the dates (in bold) are required for the conclusion.
The required specified that all relevant criteria must be discussed and therefore the discussion
should focus on each applicable criterion, irrespective of whether or not a single criterion is
sufficient to base a conclusion on (i.e. if you think that it is not probable that future economic
benefits will be generated, no intangible asset may be recognised, but all the criteria must still
be discussed in this situation).
• No conclusion mark if the conclusion is not based on theory and application thereof.
15
This question tests whether you can deal with ambiguous information where more than one answer is
possible (similar to situations in practice). There is no specific one answer that is right or wrong, you are
awarded marks for your reasoning process. Therefore, it is important to show how you reach your
conclusion and that this conclusion matches your discussion. Knowledge, Critical Thinking, Business
Acumen, Communication
An intangible asset that is not yet available for use must be tested for impairment annually,
irrespective of whether or not there is an indication of impairment. If such an intangible
asset was initially recognised during the current annual period, it must be tested for
impairment before the end of the current annual period. ^
On 30 June 2023, the intangible asset recognised for Zenlax is not yet available for use.^
The intangible asset was first recognised during the year ended 30 June 2023, as its
development only commenced during this financial year.
Therefore, the intangible asset must be tested for impairment during the year ended
30 June 2023,^m/t with 30 June 2023 being the last possible date that it may be tested.
This question tests whether you can integrate IAS 38 and IAS 36 knowledge.
Knowledge & Communication
All expenditure before the capitalisation date (1 October 2022) is expensed in profit or loss.
The recruitment fees and legal fees are administrative in nature (rather than leading to the
creation of new knowledge) and have there not been taken to the research and development
expense account. However, if a student chooses the expense these as “Research and
development expense”, the account name is also accepted. Moreover, other account names
(e.g. “Administrative expenses”) would also be acceptable. The key factor is that the amounts
may not be capitalised as an asset. Knowledge, Critical Thinking, Business Acumen
16
Debit Credit
R R
3
Zenlax development (SFP)** 1 350 000
^ Bank (SFP) 1 350 000
(150 000 x 9) 1½
The expert’s salary was paid out of existing cash resources and therefore does not affect the
bank overdraft (does not add to borrowing cost). The salary is incurred after the capitalisation
criteria were met and therefore recognised as part of the intangible asset.
Knowledge & Critical Thinking
4
Zenlax development (SFP)** ^44 719
^ Accumulated amortisation: Patents (SFP) 44 719
1
5
Zenlax development (SFP)** ^1 798 400
^ Accumulated depreciation: equipment (SFP) 1 798 400
1
6
Zenlax development (SFP)** 10 504 028
^ Bank overdraft (SFP) ## 10 504 028
(5 144 900 + 2 174 523 + 3 184 605) 1½
7
Zenlax development (SFP)** (3½)938 936
^ Bank overdraft (SFP) ## 938 936
(calc 1) 4
8
Impairment loss (P/L) (6)3 179 588
^ Accumulated amortisation and impairment
losses: Zenlax development (SFP)** 3 179 588
6½
The intangible asset is not yet amortised as it is not available for use as management
intended. Knowledge
** Other account names for the intangible asset are acceptable, as long as they relate to the SFP
and are used consistently.
## Other account names are acceptable, as long as they distinguish between the cash balances of
the company (“Bank”) and the bank overdraft / facility.
Marking note:
• If the journal is correct, but in the work direction (i.e. Dr and Cr have been switched), the wording
marks are lost, but the amounts are marked.
• -1 if there is no clear indication of Dr and Cr (either as headings or per journal leg). In such a
case, if journals are not at least indented, the wording is not marked at all.
Calculations
17
Balance Interest
R R
Incurred on 01/10/2022 (drawn for full period) 5 144 900 (1)617 388
Amortisation and depreciation are not cash expenses and therefore do not affect the balance on the
bank overdraft. As interest compounds annually, interest on interest will only start on 1 October 2022
and does not affect the calculation. Knowledge & Critical Thinking
2. Impairment
R
Carrying amount of Zenlax development (2½)14 636 083
[1 350 000^m/t (jnl 3) + 44 719^m/t (jnl 4) + 1 798 400^m/t (jnl 5) +
10 504 028^m/t (jnl 6) + 938 936^m/t (calc 1)]
Recoverable amount, being the higher of: (3½)(11 456 495)
(-½ if lower amount used)
• Fair value less costs of disposal (given) 3 100 000
• Value-in-use 11 456 495
CF0 = 0^
CF1 = (5 000 000)
(mark is lost if sign is incorrect)
CF2 = 900 000^
CF3 to CF13 = 4 500 000
I/YR = 18%^
NPV = 11 456 495
Impairment loss 3 179 588
(6 jnl 8)
A pre-tax discount rate and pre-tax cash flows should be used to calculate a recoverable amount. The
cost to complete an asset should be taken into account if the asset is not complete. The recoverable
amount always reflects the full useful life of the asset, the impact of IAS 36 is only to limit the way in
which future cash flows are to be estimated. Knowledge
18
Error Reason
The trade discount was not removed from The cost of an item of property, plant and
the cost of the machinery / the trade equipment should exclude trade
discount was recorded in profit or loss. ^ discounts. [IAS 16.16(a)]
The fact that extended payment terms Extended payment terms are applicable
were permitted was not taken into account as the normal payment terms of three
in the initial measurement / the amount months have been extended to 18
paid for the machine was not discounted. months. ^ The cost of an item of property,
^ plant and equipment should be its cash
price equivalent and the purchase price
should be discounted when payment is
deferred beyond normal payment terms /
credit terms. [IAS 16.23]
The inspection component of the machine Each part of an item of property, plant and
was not depreciated separately / major equipment with a cost that is significant in
components were not depreciated relation to the total cost of the item must
separately / the total cost of the machine be depreciated separately. [IAS 16.43]
was depreciated as a single asset over 12 As the inspection relates to a major
years. ^ inspection and 10% of the cost of the
machine, it is likely to be a significant
component that should be depreciated
separately. ^
The initial recognition of the machine was The machine should be recognised when
in the incorrect year. ^ the transaction takes place (1 January
2022 falls into the year ended 30 June
2022) and not when cash flows occur.
This part of the question tests how well you understand the requirements of IAS 16 and whether you can
identify and explain where and why the financial manager went wrong.
Knowledge, Critical Thinking, Communication