FAC3764/2023/Study pack 1

Department of Financial Accounting

IMPORTANT INFORMATION

This study pack contains integrated questions which will aid you in your preparation for
assessment 3.

These questions integrate learning units 1 to 4, which includes the following topics:

- The conceptual framework for financial reporting;

- Income taxes (IAS 12);
- Revenue from contracts with customers (IFRS 15);
- Leases (IFRS 16);
- Fair value measurement (IFRS 13);
- Property, plant and equipment (IAS 16); and
- Investment property (IAS 40).

Please note that this study pack does NOT contain all the content and principles included
in learning unit 1 – 4. This study pack should NOT be seen as a scope for assessment 3.

Open Rubric
 FAC3764/2023/Study pack 1

CONTENTS

Page

1 INTRODUCTION ............................................................................................................................ 3
2 LECTURERS AND CONTACT DETAILS ...................................................................................... 3
3 INTEGRATED QUESTIONS AND SOLUTIONS............................................................................ 4

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 FAC3764/2023/Study pack 1
Dear Student

1 INTRODUCTION

Within this study pack we include integrated questions and suggested solutions. These integrated
questions will help you to prepare for assessment 3.

Study pack 1, contains questions which integrates learning units 1 to 4, which includes the following
topics:

- The conceptual framework for financial reporting;

- Income taxes (IAS 12);
- Revenue from contracts with customers (IFRS 15);
- Leases (IFRS 16);
- Fair value measurement (IFRS 13),
- Property, plant and equipment (IAS 16); and
- Investment property (IAS 40).

You will notice some calculations are in brackets opposite certain items in our suggested solutions
dealing with company financial statements. These calculations are given for tuition purposes only and
consequently do not form part of the statutory disclosure requirements.

2 LECTURERS AND CONTACT DETAILS

Please use only the following e-mail address for all communication with your lecturers:

FAC3764@unisa.ac.za

Please use only the following telephone numbers for communication with your lecturers:

Lecturers Telephone number

Marilize Els 012 429 8766

Itani Phaduli 012 429 3232

Dumazile Selela 012 429 4848

Nosipho Gumede 012 429 4633

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 FAC3764/2023/Study pack 1
3 INTEGRATED QUESTIONS AND SOLUTIONS

QUESTION 1 (40 marks) (60 minutes)

Look and Find Ltd, is a fraud investigations agency in Pretoria, South Africa. The company is listed on
the JSE and has a 31 March year end. Details of the assets of the company are as follows:
Menlyn property

Look and Find Ltd owns a property in Menlyn, Pretoria which the company acquired on 1 January 20X16
for R2 500 000 (Land: R500 000; Building: R2 000 000). Look and Find Ltd conducts its operations from
these premises. On acquisition date the property was available for use, as intended by management,
and brought into use. The building has an estimated useful life of 25 years and a residual value of
R550 000 was allocated to the building.

The fair values of the land, on 31 March 20X18 and 31 March 20X20, as determined by an independent
sworn appraiser, amounted to R600 000 and R650 000 respectively. The estimated useful life and
residual value remained unchanged throughout the period.

Century City property

Look and Find Ltd acquired a property in Century City, Cape Town, on 1 June 20X19 for R3 500 000
(Land: R1 000 000; Building: R2 500 000). Look and Find Ltd decided to lease the property and
concluded lease agreements with various tenants. On request of the tenants, Look and Find Ltd modified
the building to improve access controls, prior to leasing it out. The modifications were completed on
1 August 20X19 at a cost of R100 000. The modifications are considered to be capital of nature for both
accounting and taxation purposes.

Look and Find Ltd earned rental income from 1 September 20X19, of R200 000 per month and since
acquisition of the property incurred direct operating expenses of R75 000 per month in respect of the
property.

On 31 March 20X20, an independent sworn appraiser determined the fair value of the property to be
R4 510 000 (Land: R1 510 000; Building: R3 000 000).

Equipment

On 1 April 20X19, Look and Find Ltd purchased specialised computer equipment to assist the company
to process large amounts of data collected during its investigations. The computer equipment included
finger print and voice recognition capabilities. Look and Find Ltd incurred the following costs in respect
of the equipment purchased:

R
Purchase price .................................................................... ..................................... 805 000
Trade discount received ....................................................... ..................................... 25 000
Costs of testing whether the equipment is functioning properly ................................ 15 750
Professional fees for software engineer .............................. ..................................... 55 000

On acquisition date the equipment was available for use, as intended by management, and brought into
use. The equipment has an estimated useful life of 4 years and a residual value of R155 000. The
estimated useful life and residual value of the equipment remained unchanged throughout the period.

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 FAC3764/2023/Study pack 1
QUESTION 1 (continued)

Vehicles

Look and Find Ltd owns 2 similar vehicles, Vehicle A and Vehicle B, that employees use to conduct their
investigations. The vehicles were both acquired on 1 April 20X18 at a cost of R375 000 each. The
vehicles were available for use, as intended by management, as well as brought into use on acquisition
date. On acquisition date an estimated useful life of 100 000 kilometers and a residual value of Rnil was
allocated to each vehicle.

On 1 August 20X19, vehicle A was involved in an accident and had to be written off by the company.
Look and Find Ltd lodged an insurance claim for the loss of the vehicle and received an amount of
R150 000 from the insurance company.

Details of the distances travelled by Vehicle A and Vehicle B, during the respective periods, are as
follows:

Period Vehicle A Vehicle B

kilometers Kilometers
1 April 20X18 – 31 March 20X19 ...... ................ 25 000 30 000
1 April 20X19 – 31 July 20X19……………..…… 10 200 15 000
1 August 20X19 – 31 March 20X20 .. …………… - 14 500

Additional information

1. The following is an extract from the accounting policies of Look and Find Ltd:

 Owner-occupied land is accounted for using the revaluation model. It is the policy of the company
to realise any revaluation surplus upon disposal of the underlying asset. It is company policy that
revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ
materially from which would be determined using fair values at the end of the reporting period.
 Owner-occupied buildings, equipment and vehicles are accounted for using the cost model.
 Investment property is accounted for in accordance with the fair value model.
 Depreciation on buildings and equipment are provided for in accordance with the straight-line
method over the estimated useful lives of the assets.
 Depreciation on vehicles is provided for in accordance with the units of production method.

2. The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%.

3. Deferred tax is provided for on all temporary differences in accordance with the statement of financial
position approach. There are no other items causing temporary or exempt differences except those
mentioned in the question. The company will have sufficient taxable profits in the future, against
which any unused tax losses can be utilised.

4. The SA Revenue Service allows the following tax allowances:

 a 5% annual building allowance on all the buildings, according to section 13(1) of the Income Tax
Act, on the straight-line method, not apportioned for part of the year.
 a tax allowance on the computer equipment according to Section 11(e) of the Income Tax Act, in
accordance with the straight-line method over 4 years, apportioned for part of a year. Assume the
cost of the computer equipment is the same for accounting and tax purposes.
 a tax allowance on vehicles according to Section 11(e) of the Income Tax Act, in accordance with
the straight-line method over 4 years, apportioned for part of a year.

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 FAC3764/2023/Study pack 1
QUESTION 1 (continued)

Assumptions

 Land and buildings are regarded as separate classes of assets.

 Ignore the implications of Value-Added Tax (VAT).
 All amounts are material.

REQUIRED
Marks
Disclose the following notes to the annual financial statements of Look and Find Ltd for
the year ended 31 March 20X20:

 Property, plant and equipment (A total column is not required) 17½

 Profit before tax; and 11½
 Deferred tax 11
- Indicate within your deferred tax note, if your net deferred tax balance is a
deferred tax asset or deferred tax liability.
- Your deferred tax note does not have to include any qualitative disclosures.
Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative amounts are not required.
Show all calculations.
Round all amounts to the nearest Rand.
40

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 FAC3764/2023/Study pack 1
QUESTION 1: Suggested solution

LOOK AND FIND LTD

NOTES FOR THE YEAR ENDED 31 MARCH 20X20

1. Property, plant and equipment

Land Buildings Equipment Vehicles

R R R R
Carrying amount at the beginning of the 600 000 1 811 500 - 543 750
year
Cost 600 000 2 000 000 - 750 000
Accumulated depreciation (calc 2.1;6.1) - (188 500) - (206 250)
Depreciation (calc 2.2; 5.2; 6.2) - (58 000) (173 938) (148 875)
Addition 850 750
Derecognition of vehicle (calc 6) - - - (243 000)
Revaluation surplus (calc 1.1) 50 000 - - -
Carrying amount at the end of the year 650 000 1 753 500 676 812 151 875
Gross carrying amount 650 000 2 000 000 850 750 375 000
Accumulated depreciation - (246 500) (173 938) (223 125)

Land was revalued on 31 March 20X20 by an independent sworn appraiser. If land was carried on the
cost model, the carrying amount of the land would have been R500 000.

2. Profit before tax

R
Income
Fair value adjustment (510 000 + 400 000) (calc 3.1; 4.1) 910 000
Rental income from investment property (200 000 x 7) 1 400 000
Proceeds on claim from insurance company 150 000

Expenses
Depreciation (58 000 + 173 934 + 148 875) (calc 2.2; 5.2; 6.3) 380 809
Direct operating expenses from investment property that is not earning rental income 225 000
(75 000 x 3)
Direct operating expenses from investment property earning rental income
(75 000 x 7) 525 000
Loss on derecognition of vehicle 243 000

Deferred tax
R
Owner-occupied property: Land (650 000 ˗ 500 000) x (80% × 27%) (32 400)
Owner-occupied property: Building (1 753 500 – 1 500 000 (calc 2.3)) x 27% (68 445)
Investment property: Land (1 510 000 – 1 000 000) x (80% x 27%) (110 160)
Investment property: Building [(3 000 000 – 2 600 000) x (80% x 27%)] + [(2 600 000 (121 500)
– 2 470 000 (calc 4.2)) x 27%]
Equipment (676 816 – 638 062 (calc 5.3)) x 27% (10 464)
Vehicles (151 875 – 187 500 (calc 6.3)) x 27% 9 619
Deferred tax liability (333 350)

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 FAC3764/2023/Study pack 1
QUESTION 1 (continued)

CALCULATIONS

Menlyn property

1. Land

1.1 650 000 – 600 000 = 50 000

2 Building

2.1 Accumulated depreciation – beginning of the year

(2 000 000 – 550 000) / 300 x 39 = 188 500
25 years x 12 = 300 months
1 January 20X16 – 31 March 20X19 = 3 + (3x12) = 39 months

2.2 Depreciation – 20X20 year end

(2 000 000 – 550 000) / 25 years = 58 000

2.3 Tax base = 2 000 000 – (2 000 000 x 5% x 5 years) = 1 500 000

Century City property

3. Land

3.1 1 510 000 – 1 000 000 = 510 000

4 Building

4.1 3 000 000 – (2 500 000 + 100 000) = 400 000

4.2 Tax base = 2 600 000 – (2 600 000 x 5%) = 2 470 000

5. Equipment

5.1 Cost = 805 000 - 25 000 + 15 750 + 55 000 = 850 750

5.2 Depreciation = (850 750 - 155 000) / 4 = 173 938
5.3 Tax base = 850 750 – (850 750 / 4) = 638 062

6. Vehicles
Total Vehicle A Vehicle B
R R R
Cost 750 000 375 000 375 000
Accumulated depreciation (calc 6.1) (206 250) (93 750) (112 500)
Carrying amount 31 March 20X19 543 750 281 250 262 500
Depreciation (calc 6.2) (148 875) (38 250) (110 625)
394 875 243 000 151 875
Loss on derecognition (243 000) (243 000) -
Carrying amount 31 March 20X20 151 875 - 151 875

6.1 Accumulated depreciation

Vehicle A – 375 000 / 100 000 = 3,75 x 25 000 = 93 750
Vehicle B – 3,75 x 30 000 = 112 500

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 FAC3764/2023/Study pack 1

QUESTION 1 (continued)

6.2 Depreciation
Vehicle A – 3,75 x 10 200 = 38 250
Vehicle B – 3,75 x (15 000 + 14 500) = 110 625
6.3 Tax base - 375 000 – (375 000 / 4 x 2) = 187 500

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 FAC3764/2023/Study pack 1
QUESTION 2 (30 marks( (54 minutes)

PixieDust Ltd (“Pixie”) is a South African manufacturer and retailer of baby and children’s products and
educational toys. Pixie also manufactures special orders for companies that require corporate branding.
The company has branches across South Africa and grew significantly in the last few years and has a
large footprint in the toy market. Pixie has a 31 December financial year end.

The following relates to some of the assets and transactions of Pixie for the year ended
31 December 20X22:

1. ToysRme contract

Pixie received a special order on 1 October 20X22, from ToysRme Ltd (ToysRme) to manufacture 500
toy figurines. ToysRme requested that the toy figurines be specifically designed to look like their
company mascot. Due to lack of storage space, ToysRme requested Pixie to keep the toy figurines at
their premises until they free up storage space. Pixie agreed to keep the figurines in a separate room at
their warehouse until ToysRme collects the figurines on 31 January 20X23. The separate room can only
be accessed by authorised ToysRme and Pixie employees. ToysRme will be responsible for the
insurance costs on the figurines when they are stored at the Pixie warehouse. The total transaction price
as stipulated in the signed contract amounted to R557 500.

Pixie does not provide custodial services to its customers and decided to estimate the stand-alone
selling price for this service by using the residual approach. The cost to manufacture each figurine was
R800 and Pixie charges 25% margin on cost.

The junior accountant correctly identified the following two performance obligations in the ToysRme
contract:
 Sale of toy figurines and
 Storage costs.

The order was ready on 1 November 20X22. ToysRme inspected the order, confirmed that they had
been packed correctly according to the specifications provided, and immediately settled the full contract
price of R557 500 on 1 November 20X22.

2. Sandton property

On 1 January 20X16, Pixie purchased a property in Sandton for R5 000 000 (land: R1 000 000; building:
R4 000 000). The property was acquired to be used as Pixie’s headquarters. Pixie management
considers the land portion of the property to be significant in relation to the total property. On acquisition
date, Pixie estimated the useful life and residual value of the building to be 10 years and R100 000
respectively. The property was available for use as intended by management on 1 January 20X16.

The fair values of the land, on the respective dates, as determined by an independent sworn appraiser,
were as follows:
R
31 December 20X18…………………………………………………………………………. 1 100 000
31 December 20X20…………………………………………………………………………. 1 050 000
31 December 20X22…………………………………………………………………………. 970 000

The carrying value of the land did not differ materially from its fair value on 31 December 20X16,
31 December 20X17, 31 December 20X19, and 31 December 20X21 respectively.

It is the accounting policy of Pixie to account for the building in accordance with the cost model.

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 FAC3764/2023/Study pack 1
QUESTION 2 (continued)

Depreciation is accounted for in accordance with the straight-line method over the estimated useful life
of the building. Land is accounted for in accordance with the revaluation model.

Assumptions

 All amounts are material.

 Ignore the implications of Value-Added Tax (VAT).

REQUIRED:
Marks
a) Discuss when PixieDust Ltd should recognise the revenue of the toy figurines sold 11
to ToysRme Ltd in its annual financial statements for the year ended
31 December 20X22.
Communication mark – logical argument 1
b) Prepare all the journal entries to account for the Sandton Property and the 18
ToysRme contract in the accounting records of PixieDust Ltd for the year ended
31 December 20X22.
 Dates are not required.
 Journal narrations are not required.
 No abbreviations for general ledger account names in your journals may be
used.
 Indicate in your journals if it is a statement of financial position (SFP) or
statement of profit or loss and other comprehensive income (P/L) general
ledger account.
Please note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Accounting policy notes are not required.

Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
30

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 FAC3764/2023/Study pack 1
QUESTION 2: Suggested solution

a. Discussion on the revenue recognition of the transaction between PixieDust Ltd and
ToysRme in the annual financial statements for the period ended 31 December 20X22.

An entity determines when it has satisfied its performance obligation to transfer a product by evaluating
when a customer obtains control of that product. Revenue is recognised when control is transferred.

The following indicators of control were met:

 ToysRMe has fully paid for the toy figurines.

 They obtained legal title of the toy figurines.
 ToysRMe ensured that they are responsible for the insurance.

ToysRMe inspected and confirmed the figurines and accepted it on 1 November 20X22.

However, for some contracts, a customer may obtain control of a product even though that product
remains in the seller’s physical possession.

Pixie Limited received the consideration for the toy figurines from ToysRme, but the products sold
remain in the custody of ToysRme.

The sale of the toy figurines to ToysRme is therefore a bill and hold sale.

IFRS 15.B81 provides additional criteria that must be met for the customer to have obtained
control of a product in a bill-and-hold arrangement. These are:

 The reason for the bill-and-hold arrangement must be substantive.

ToysRme specifically requested that Pixie keep the toy figurines in their warehouse due to lackof storage
space, therefore, the reason for the arrangement is substantive.

 The product must be identified separately as belonging to the customer.

The toy figurines represent the company mascots of ToysRme and are therefore separately identifiable.
The toy figurines are stored in a separate room at the Pixie warehouse and the room can only be
accessed by authorised Pixie and ToysRme employees.

 The product currently must be ready for physical transfer to the customer.

The toy figurines are ready for collection by ToysRme as they have been inspected, confirmed and
accepted by ToysRMe.

 The entity cannot have the ability to use the product or to direct it to another customer.

The toy figurines were manufactured according to the ToysRMe’s specifications (ToysRme requested
that the figurines be designed to look like their company’s mascot), Pixie cannot usethem, or sell them
to a different customer.

Based on the above, all of the criteria to classify the transaction between Pixie and ToysRme as a bill
and hold arrangement have been met. Therefore, Pixie transferred control of the toy figurines to
ToysRMe on 1 November 20X22.

Revenue of the toy figurines should therefore be recognised on 1 November 20X22.

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 FAC3764/2023/Study pack 1
QUESTION 2: Suggested solution

b. Journal entries to account for the Sandton property, and the ToyRme contract in the
accounting records of PixieDust Ltd for the year ended 31 December 20X22.

Debit Credit
R R
Jnl 1 Revaluation Surplus (OCI) (100 000 (20X18 Revaluation 50 000
surplus – 50 000 (20X20 Revaluation deficit))
Revaluation deficit (P/L) (80 000 (20X22) – 50 000 (OCI 30 000
balance))
Land (SFP) (1 050 000 – 970 000) 80 000

Jnl 2 Depreciation (P/L) 390 000

Accumulated depreciation: building (SFP) 390 000

Jnl 3 Bank (SFP) 557 500

Revenue (SFP) (800 x 125/100 x 500) 500 000
Income received in advance/contract liability (SFP) 57 500

Jnl 4 Cost of sales (P/L) (R800 x 500) 400 000

Inventory/Finished goods (SFP) 400 000

Jnl 5 Income received in advance/contract liability (SFP) 38 333

Revenue (P/L) (57 500/3 x 2) 38 333

Alternative to Jnl 3 and Jnl 5

Bank (SFP) 557 500
Revenue (P/L) (800 x 125/100 x 500) + (57500/3 x 2) 538 333
Income received in advance (SFP) 19 167
1
Depreciation for 20X22:
(4 000 000 – 100 000) / 10 = 390 000

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 FAC3764/2023/Study pack 1
QUESTION 3 (40 marks) 72 minutes)

Sonder Grense Ltd (“SG”) is a manufacturer and retailer of solar panels based in Mutulagole village,
South Africa. SG has over the past few years seen a significant growth in revenue due to increased
demand for its solar panels. SG has a 31 March year end.

You may assume the following:

 All amounts are material.
 Implications of Value-Added Tax (VAT) may be ignored.
 A pre-tax discount rate of 7,75% per annum is applicable (compounded annually).
 The South African normal tax rate is 27%. The capital gains tax inclusion rate is 80%.

SG has the following accounting policies:

 The owner-occupied land is accounted for using the revaluation model. It is the policy of the company
to realise any revaluation surplus upon disposal of the underlying asset. It is company policy that
revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ
materially from which would be determined using fair values at the end of the reporting period.
 The manufacturing building, the manufacturing machine and the vehicles is accounted for in
accordance with the cost model.
 The investment property is accounted for in accordance with the fair value model.
 Depreciation on the manufacturing building and vehicles is provided for in accordance with the
straight-line method over the estimated useful lives of the asset.
 Depreciation on the manufacturing machine is provided for in accordance with the units of production
method.

The following relates to the assets of SG:

1. Property in Mutulagole village

On 1 September 20X18, SG purchased a vacant piece of land in Mutulagole for R1 150 000, with the
intention to construct a factory on the land. SG contracted a leading construction company to construct
the factory but awarded the contract to prepare the site to a local contractor in Mutulagole. The
construction of the factory commenced on 1 June 20X19 and was completed on 31 January 20X20.
Management considers the land portion of the factory to be significant.

The following costs were incurred by SG in relation to the factory:

 Site preparation costs R175 000,
 Total construction cost R2 800 000,
 Administration and other general overheads R525 000.

The total construction cost and the administration and other general overhead costs were paid in cash
on completion of the factory and the site preparation costs were settled on 31 January 20X21. The
normal credit terms of the local contractor are strictly 30 days from the invoice date of 31 January 20X20.

The factory was available for use, as intended by management on 31 January 20X20, whilst it was only
brought into use on 1 April 20X20. On 31 January 20X20, a residual value of R150 000 was allocated
to the factory and the useful life was estimated to be 20 years. Both the useful life and residual value of
the factory remained unchanged throughout the period.

The fair value of the land, on 31 March 20X22, as determined by an independent sworn appraiser,
amounted to R1 750 000. The material difference noted between the carrying amount and the fair value
as determined at year end was a result of increased property transactions in the Mutulagole village as
from the middle of the 20X21 calendar year.

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 FAC3764/2023/Study pack 1
QUESTION 3 (continued)

Taxation

The SA Revenue Service allows for a 5% annual tax allowance on manufacturing buildings in
accordance with section 13(1) of the Income Tax Act, on the straight-line method, not apportioned for
periods shorter than a year. You may assume that the cost of the factory for the purpose of section 13
(1) amounts to the sum of the site preparation cost of R175 000 and the total construction cost of
R2 800 000.

2. Manufacturing machine

On 1 June 20X20, SG purchased a solar panel manufacturing machine for R 1 275 000 from a company
based in Mafikeng. The machine must be inspected every two years. The last inspection performed on
the machine was on 31 May 20X20 by the seller and the inspection cost was included in the purchase
price. On acquisition date, the present value of the future expected inspection cost to be incurred was
estimated to amount to R130 000.

The machine was available for use as intended by management, as well as brought into use, on
30 June 20X20. On 30 June 20X20, an estimated useful life of 1 800 000 manufactured panels and a
residual value of R300 000 was allocated to the machine. From acquisition date until 31 March 20X22,
SG manufactured a total of 296 000 (20X21: 96 000) panels. Due to unforeseen factors, the physical
inspection of the machine was performed on 31 March 20X22, at a cost of R133 000.

Taxation

The SA Revenue Service allows for a 40% deduction in the first year in which the manufacturing machine
is brought into use and thereafter a 20% deduction per annum for the next three years, not apportioned
for periods shorter than a year, according to section 12C of the Income Tax Act.

3. Property in Piesanghoek

To diversify their business portfolio, SG’s management resolved to acquire an office block in
Piesanghoek. SG acquired the property in Piesanghoek on 1 October 20X21 at a cost of R5 500 000
(land: R500 000; building: R5 000 000). The property was acquired with the intention to rent out short
term fully furnished office space. The ancillary services offered by SG on the property are considered
insignificant. The property was available for use, as intended by management, and brought into use on
acquisition date. On acquisition date a residual value of R250 000 was allocated to the building of the
property and the useful life was estimated to be 22 years.

The fair value of the property, on 31 March 20X22, as determined by an independent sworn appraiser,
amounted to R6 500 000 (land: R750 000; building: R5 750 000).

Taxation

The SA Revenue Service allows for a 5% annual tax allowance on commercial buildings, according to
section 13quin of the Income Tax Act, on the straight-line method, not apportioned for periods shorter
than a year.

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 FAC3764/2023/Study pack 1
QUESTION 3 (continued)

4. Vehicles

On 1 December 20X19, SG bought a Kombi for an amount of R750 000. The Kombi was used by SG
management for office and administrative travels.

The Kombi was available for use, as intended by management, and brought into use on
1 December 20X19. On this date, SG management determined that the Kombi had an estimated useful
life of 5 years with a residual value of R50 000. Both the useful life and the residual value of the Kombi
remained unchanged throughout the period.

On 1 November 20X21, SG management decided to sell the Kombi as it started to give them mechanical
problems. The sale was concluded on 1 February 20X22 for cash amounting to R80 000.

The following journal entry is the only accounting entry, related to the Kombi, recorded for the year
ended 31 March 20X22 as the sale of the Kombi has not yet been recorded in the accounting records
of SG:
DR CR
R R
Depreciation (P/L) 116 6671
Accumulated depreciation (SFP) 116 667
1(750 000 – 50 000) / 60 X 10 = 116 667

Taxation

The SA Revenue Service allows for a tax allowance on the Kombi in accordance with S11(e) of the
Income Tax Act in accordance with the straight-line method over 4 years, apportioned for periods shorter
than a year.

5. Property in Sinoville

On 31 January 20X22, SG acquired an additional property in Sinoville to be rented out as a

manufacturing property under a long-term rental agreement. The property was acquired at a cost of
R6 100 000 (land: R1 000 000; building: R5 100 000). The ancillary services offered by SG on the
property are considered insignificant. The property was available for use, as intended by management,
and brought into use on acquisition date. On acquisition date the useful life of the building of the
manufacturing property was estimated to be 25 years.

On 31 January 20X22, the financial director of SG concluded that there is clear evidence which proves
that the fair value of this manufacturing property would not be reliably determinable on a continuing
basis.

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 FAC3764/2023/Study pack 1
QUESTION 3 (continued)

REQUIRED:
Marks

a) Disclose the following notes to the annual financial statements of Sonder Grense Ltd for
the year ended 31 March 20X22:
 Property, plant and equipment
- Excluding the vehicle. 17½
- A total column is not required.
 Investment property
- Excluding the property in Sinoville.
 Deferred tax 2½
- Only relating to the property in the Mutulagole village and the property in
Piesanghoek. 9½
- Indicate within your deferred tax note, if your net deferred tax balance is a
deferred tax asset or deferred tax liability.
- Your deferred tax note does not have to include any qualitative disclosures.
b) Prepare the relevant general journal entry to correctly record the transaction related to 5½
the Kombi in the accounting records of Sonder Grense Ltd for the year ended
31 March 20X22.
- Journal narrations are not required.
- No abbreviations for general ledger account names in your journals may be used.
- Indicate in your journals if it is a statement of financial position (SFP) or statement
of profit or loss and other comprehensive income (P/L) general ledger account.
c) The accountant of Sonder Grense Ltd is struggling to understand how to subsequently 4
measure the property in Sinoville. The accountant correctly classified the property as an
investment property and correctly accounted for the acquisition and related initial
measurement of the property. However, no other accounting journal entries relating to
this property in Sinoville have been accounted for.

Advise the accountant of Sonder Grense Ltd on the correct subsequent measurement
of this property. Support your discussion with calculations, where necessary.
Communication mark: Logical argument 1
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Accounting policy notes are not required.

Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
40

17
 FAC3764/2023/Study pack 1
QUESTION 3: Suggested solution

a) Disclose: property, plant and equipment, investment property and deferred tax notes.

SONDER GRENSE LTD

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR-ENDED 31 MARCH 20X22

1) Property, plant, and equipment

Land Building Machine
R R R
Carrying amount at beginning of the year 1 150 000 2 798 356 1 181 183
Gross carrying amount/Cost 1 150 000 2 2 962 413 1 275 000
Accumulated depreciation - 4 (164 057) 7 (93 817)

Revaluation surplus 1600 000 - -

Depreciation - 5 (140 621) 8(158 889)

Derecognition of inspection cost incurred - - (16 250)

Capitalisation od inspection cost incurred - - 133 000
Carrying amount at end of the year 1 750 000 2 657 735 1 139 044
Gross carrying amount/Cost 1 750 000 2 962 413 1 278 000
Accumulated depreciation - (304 678) (138 956)

The land was revalued on 31 March 20X22, by an independent sworn appraiser. The carrying amount
of the land if carried under the cost model would have amounted to R1 150 000.

Calculations:
1 1 750 000 – 1 150 000 = 600 000
2 2 800 000 + 162 4133 = 2 962 413
3 Future Value 175 000
N 1
I 7,75%
Present value 162 413
4 (2 962 413 – 150 000) / 240months X 14months = 164 057
5 (2 962 413 – 150 000) / 240 months X 12 months = 140 621

Inspection
Machine Component Total
R R R
6 Cost (1 275 000 – 130 000) 1 145 000 130 000 1 275 000
7 Depreciation 20X21 (93 817)
(1 145 0006 – 300 000) x 96 000/1 800 000; (45 067)
(130 000 / 2years x 9/12months) (48 750)
Carrying amount 20X21 1 099 933 81 250 1 181 183
7b Depreciation 20X22 (1 145 000 - 300 000) x (93 889) (65 000) (158 889)
200 000/1 800 000; (130 000 / 2years)
1 006 044 16 250 1 022 294
Derecognition of inspection cost - (16 250) (16 250)
Capitalisation od inspection cost incurred - 133 000 133 000
Carrying amount 1 006 044 133 000 1 139 044

18
 FAC3764/2023/Study pack 1
QUESTION 3: Suggested solution (continued)

2) Investment Property
R
Carrying amount at the beginning of the year -
Additions 5 500 000
Fair value adjustment (6 500 000 – 5 500 000) 1 000 000
Carrying amount at the end of the year 6 500 000

The fair value of the land and building on 31 March 20X22 was determined by an independent sworn
appraiser.

3) Deferred tax
R
Owner-occupied property: Land (1 750 000 – 1 150 000) x (80% x 27%) (129 600)
Owner-occupied property: Building (2 657 735(from PPE note) – 2 528 7501) x 27% (34 826)
Investment property: Land (750 000 – 500 000) x (80% x 27%) (54 000)
Investment property: Building (5 750 000 – 5 000 000) x (80% x 27%) = 162 000
+ (5 000 000 – 4 750 000) x 27%=67 500 (229 500)
Deferred tax liability (447 926)

1. Tax base manufacturing building: (175 000 + 2 800 000) – (2 975 000) x 5% x 3years) = 2 528 750
OR (175 000 + 2 800 000) X 85%
2. Tax base investment building: 5 000 000 – (5 000 000 × 5%) = 4 750 000 OR R5 000 000 x 95%

Non-
taxable Taxable / Deferred
Total capital (deductible) tax asset/
Carrying Tax temporary gain above temporary (liability)
@
amount base difference base difference 27%
Land R R R R R R
Cost 500 000 500 000 – – –
Fair value 250 000 – 250 000 (50 000) 200 000
adjustment1.1, 1.2
Carrying
amount
31/3/20X221.3, 1.4 750 000 500 000 250 000 (50 000) 200 000 (54 000)

Building
Cost 5 000 000 5 000 000 –
Fair value 750 000 – 750 000 (150 000) 600 000
adjustment1.5, 1.6
Tax allowance1.7 – (250 000) 250 000 250 000
Carrying
amount
31/3/20X221.8, 1.9 5 750 000 4 750 000 1 000 000 (150 000) 850 000 (229 500)
1.1 750 000 – 500 000 = 250 000
1.2 20% of the fair value above base cost is not taxable (750 000 – 500 000) × 20% = 50 000
1.3 Taxable temporary difference 250 000 – 50 000 = 200 000
1.4 Total deferred tax = 200 000 × 27% = 54 000
1.5 5 750 000 – 5 000 000 = 750 000
1.6 20% of the fair value above base cost is not taxable (5 750 000 – 5 000 000) × 20% = 150 000
1.7 5 000 000 × 5% = 250 000
1.8 Taxable temporary difference 1 000 000 – 150 000 = 850 000
1.9 Total deferred tax = 850 000 × 27% = 229 500

19
 FAC3764/2023/Study pack 1
QUESTION 3: Suggested solution (continued)

b) Prepare: journal entries to record all transactions related to the Kombi for the year ended
31 March 20X22.
Debit Credit
R R
Bank (SFP) 80 000
Accumulated depreciation (SFP) 1303 333

Loss on sale of Kombi / vehicle (P/L) (balancing) 3366 667

Kombi / Vehicles (SFP) 750 000

1[(750 000 – 50 000) / 60] X 262 = 303 333
2(4+12+10)months = 26
3(750 000 – 303 333 – 80 000) = 366 667

c) Advise the accountant of Sonder Grense Ltd on the correct subsequent measurement of
this property. Support your discussion with calculations, where necessary.

There is a rebuttable presumption within IAS 40, Investment property, that an entity can reliably measure
the fair value of an investment property on a continuing basis. If, in exceptional cases as mentioned
here in the question, there is clear evidence that the fair value of the investment property is not reliably
determinable on a continuing basis, SG shall measure that investment property using the cost model
in IAS 16, Property, plant and equipment. The residual value of the investment property shall be
assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.

The accountant therefore should account for depreciation amounting to R340 000 on the building of
the Sinoville property, in the current financial year. Therefore the carrying amount of the investment
property in Sinoville amounts to R6 066 000 at year-end on 31 March 20X22.

SG should continue to measure all its other investment property, at fair value since this was the model
chosen to measure SG’s investment property.

Calculations to support the above discussion:

Land Building Total
R R R
Cost 1 000 000 5 100 000 6 100 000
Depreciation - (34 000) (34 000)
(5 100 000 / 25 x 2/12)
Carrying amount at year-end 1 000 000 5 066 000 6 066 000

20
 FAC3764/2023/Study pack 1
QUESTION 4 (45 marks) (81 minutes)

Super Speed Ltd (Super) is a company that amongst other manufactures and sells go-carts to retailers
worldwide and has a 31 March year-end.

Lease agreement

On 1 March 20X20, Super entered into a non-cancellable lease agreement to lease welding equipment
from Weld It Ltd (Weld It) for five years. The lease agreement contains a lease as defined in IFRS 16,
Leases.

The following items were specified in the lease agreement:

Commencement date of lease ....................................................................................... 1 April 20X20

Fair value of welding equipment on 1 April 20X20 (incl. VAT) ................................... R 2 070 000
Lease term ...................................................................................................................... 5 Years
Instalments payable annually in arrears (incl. VAT) .................................................... R496 000
Date of first instalment ................................................................................................. 31 March 20X21

The Value Added Tax will also be financed by Weld It. Per the lease agreement, ownership of the
welding equipment will not transfer to Super at the end of the five-year lease term. Super entered into
an agreement with Go Ltd (Go) on 1 April 20X20 whereby Go will purchase the welding equipment from
Weld It on 31 March 20X25 for an unguaranteed residual value of R300 000. Go is not related to Super
nor to Weld It.

Weld It and Super both incurred commission payable to Mac Brokers for the conclusion of the lease
agreement. Weld It paid the total commission of R20 000 (excluding VAT) to Mac Brokers on
1 April 20X20. On the same day, Super refunded Weld It with R12 000 for its share of the commission.

It is the accounting policy of Super to account for equipment according to the cost model. It is the policy
of Super to depreciate the welding equipment over its useful life using the straight-line method. On
1 April 20X20, Super estimated the remaining useful life of the welding equipment to be six years with
an estimated residual value for purposes of depreciation of R250 000 (excl. VAT). The estimated residual
value remained unchanged since 1 April 20X20.

Land and Plant

On 1 December 20X20, Super purchased a piece of land for the erection of a plant for the manufacturing
of the go-carts. The company paid R1 150 000 (incl. VAT) in cash for the land. The building activities
started on 1 April 20X21 and the plant was available for use on 1 January 20X22 and brought into use
on 1 February 20X22.

The directors of Super decided that from 1 April 20X21, 50% of the welding equipment will be used in
the construction of the plant. Super incurred construction costs to the amount of R1 101 722 (incl. VAT)
during the construction period. The construction costs were paid in cash.

It is the accounting policy of Super to account for owner-occupied land and buildings according to the
cost model. It is the policy of Super to depreciate the plant at 15% per annum on the reducing balance
method. The estimated residual value of the plant at the end of its useful life will be R100 000.

21
 FAC3764/2023/Study pack 1
QUESTION 4 (continued)

Finance lease

Super entered into a finance lease agreement with Race-away Ltd on 1 April 20X21, whereby Race-
away Ltd will lease a machine from Super. The lease agreement is a lease in terms of IFRS 16, Leases.
The following information relates to the lease:

Commencement of agreement................................................... 1 April 20X21

Cost price of machine ................................................................. R180 000
Selling price of leased machine.................................................. R210 000
Period of lease agreement ......................................................... 4 years
Installment .................................................................................. R71 475 (paid annually in arrears
from 30 March 20x22)
Market-related interest rate ........................................................ 16% per annum
Interest rate implicit in the lease ................................................. 14% per annum

The machine has no guaranteed or unguaranteed residual value. Super incurred R500 legal fees to secure
the lease agreement. At the end of the lease period the machine will be transferred to Race-away Ltd at
no additional cost. The machine was available for use and brought into use on 1 April 20x21.

The machinery was originally purchased on 1 January 20X21. The machine was available for use, as
intended by management, on the same day. It is the accounting policy of Super to account for machinery
according to the cost model. It is the policy of Super to account for depreciation on the machine according
to the units of production method. It is estimated that the machine can produce a total of 185 000 units.
During the 20X21 financial year, the machine produced 5 850 units.

Taxation

The South African Revenue Service allows a capital allowance on manufacturing plant as follows:
40% in the first year of use and 20% per annum in the following three years, not apportioned for periods
shorter than a year.

With the exception of Mac Brokers all other companies are registered VAT vendors. The following
taxation rates remained unchanged since 1 April 20X20:

SA Normal Tax rate................................................................................................................................. 27%

Value Added Tax rate ............................................................................................................................. 15%

The lease with Weld-it Ltd meets the definition of Part (b) of the Installment credit agreement (ICA)
definition.

22
 FAC3764/2023/Study pack 1
QUESTION 4 (continued)

REQUIRED:

Marks

a) Disclose the following notes to the annual financial statements of Super Speed Ltd for
the year ended 31 March 20X22:
 Property, plant and equipment 8
- A total column is not required.
 Leases 11½
 Net investment in finance leases 8½
 Profit before tax 4
b) Calculate the deferred tax balance in the accounting records of Super Speed Ltd as at 7
31 March 20X22.
- Exclude the finance lease transaction.
- Indicate within your deferred tax calculation, if your net deferred tax balance per
item is a deferred tax asset or deferred tax liability.
b) Prepare the extract of the statement of financial position of Super Speed Ltd for the year 5
ended 31 March 20x22.
Communication skill: Presentation and layout 1

Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
45

23
 FAC3764/2023/Study pack 1
QUESTION 4: Suggested solution

a) Disclose the following notes to the annual financial statements of Super Speed Ltd for the
year ended 31 March 20X22

SUPER SPEED LTD

NOTES FOR THE YEAR ENDED 31 March 20X22

1. Property, plant and equipment

Land Plant Machinery

R R R
Carrying amount at beginning of year 1 000 000 - 174 308
Cost (1 150 000 x 100/115) 1 000 000 - 180 000
Accumulated depreciation
(180 000 / 185 000 x 5 850) - - (5 692)
Additions (1 101 722 x 100/115 + 122 400) - 1 080 419 -
Depreciation - (40 516) -
Derecognition - - (174 308)
Carrying amount at end of year 1 000 000 1 039 903 -
Cost 1 000 000 1 080 419 -
Accumulated depreciation - (40 516) -

2 Leases

2.1 Right of use assets – Equipment

Carrying amount at the beginning of the year [C5] 1 305 599

Depreciation for the year [C5] (326 400)
Carrying amount at the end of the year 979 199

2.2 Maturity analysis of future payments outstanding on 31 March 20X22

Future lease payments (undiscounted)

For the year ended 31 March 20X23 [C4] 496 000
For the year ended 31 March 20X24 [C4] 496 000
For the year ended 31 March 20X25 [C4] 496 000
Total future lease payments 1 488 000
Total future finance costs ((496 000 x 5) - 1 889 999 - 185 172 - 154 719 250 110
[C4] OR 121 282 + 84 569 + 44 259 OR 590 001 – 185 172–154 719
Lease liability 1 237 890
Short-term portion presented under current liabilities [C4] 374 718
Long-term portion presented under non-current liabilities [C4] 863 172

2.3 Total cash outflows relating to leases:

Presented under financing activities

Cash payments for capital portion of lease liabilities [C4] 341 281
Presented under operating activities
Cash payments for interest portion of lease liabilities [C4] 154 719
Total cash outflow relating to leases 496 000

24
 FAC3764/2023/Study pack 1
QUESTION 4: Suggested solution (continued)

3. Net investment in finance leases

Reconciliation of net investment in finance leases:

R
Opening balance / carrying amount at the beginning of the year -
New leases entered into / additions (C8) 200 000
Finance income 32 000
Lease installments received (C8) (71 475)
160 525

Maturity analysis of the finance lease installments receivable at reporting date:

20X22 20X23 20X24 20X25

R R R R
Undiscounted lease payments 71 475 71 475 71 475 -
Unearned finance income (25 684) (18 357) (9 859) -
Net investment in leases 45 791 53 118 61 616 -

4. Profit before tax 20X22

R
Profit before tax is stated after taking the following into account:

Income
Finance income on net investment in finance lease [C8] 32 000

Expenses
Finance costs [C4] 154 719
Depreciation 244 516
Total depreciation (40 516 [C7] + 326 400 [C5]) 366 916
Depreciation capitalised [C6] (122 400)

CALCULATIONS

C1. Step 1: Calculate interest rate implicit in the lease

N=5
PV = 2 078 000 (2 070 000 + 8 000 lessor’s initial direct costs)
PMT = 496 000
FV = 300 000
I = 9.79747%

C2. Step 2: Calculate the present value of the lease liability at commencement date
N=5
I = 9.79747%
PMT = 496 000
FV = 0
PV = 1 889 999

C3. Step 3: Calculate right-of-use-asset

Initial measurement of the lease liability 1 889 999
Value added tax (2 070 000 x 15/115) (270 000)
Initial direct costs of the lessee (commission paid by Ultra Speed Ltd) 12 000
1 631 999

25
 FAC3764/2023/Study pack 1
QUESTION 4: Suggested solution (continued)

C4. Step 4: Prepare the amortization table

Interest @ Closing
Instalments 9,79747% Capital balance
R R R R

1 April 20X20 1 889 999

31 March 20X21 496 000 a185 172 310 828 1 579 171
31 March 20X22 496 000 b154 719 341 281 1 237 890
31 March 20X23 496 000 c121 282 374 718 863 172
31 March 20X24 496 000 84 569 411 431 451 741
31 March 20X25 496 000 44 259 451 741 -
2 480 000 590 001 1 889 999

a1 889 999 x 9,79747%

b1 579 171 x 9,79747%
c1 237 890 x 9,79747%

C5. Calculation of depreciation and carrying amount of right-of-use asset

R
Right-of-use asset at inception of the lease [C3] 1 631 999
Depreciation for the year ended 31 March 20X21 (1 631 999/5 years) (326 400)
Carrying amount at 31 March 20X21 1 305 599
Depreciation for 20X22 (1 631 999/5) (326 400)
Carrying amount at 31 March 20X22 979 199

C6. Calculation of cost of plant R

Construction costs (1 101 722 x 100/115) 958 019
Depreciation on right-of-use asset capitalised ((326 400 x 9/12 x 50%) 122 400
Cost of plant at 1 January 20X22 1 080 419

C7. Calculation of depreciation and carrying amount of plant R

Cost at 1 January 20X22 1 080 419
Depreciation for 20X22 (1 080 419 x 15% x 3/12) (40 516)
Carrying amount at 31 March 20X22 1 039 903

C8. Present value of finance lease

At inception of the lease it is necessary to calculate what the selling price would be if a normal market-
related interest rate had been charged.

Present value of lease at 16% per annum:

N= 4
I= 16% per annum (market related)
PMT = 71 475
FV = 0
PV = R200 000 (the fair value excluding initial direct cost)

26
 FAC3764/2023/Study pack 1
QUESTION 4: Suggested solution (continued)

The selling price should have been R200 000 (fair value) and not R210 000. The amortization table must
be prepared for R200 000 with an interest rate of 16% per annum.

Interest @
Installment 16% Capital Balance
R R R R
1 April 20X21 - - - 200 000
31 March 20X22 (71 475) 132 000 239 475 160 525
31 March 20X23 (71 475) 325 684 445 791 114 734
31 March 20X24 (71 475) 518 357 653 118 61 616
31 March 20X25 (71 475) 79 859 861 616 -
1 200 000 x 16% = 32 000
2 71 475 – 32 000 = 39 475
3 160 525 x 16% = 25 684
4 71 475 – 25 684 = 45 791
5 114 734 x 16% = 18 357
6 71 475 – 18 357 = 53 118
7 61 616 x 16% = 9 859
8 71 475 – 9 859 = 61 616

Thus the net investment in finance lease on 31 March 20X22 = R160 525, but R45 791 is receivable
within 12 months and thus a current asset and the balance of R114 734 (R160 525 – R45 791) is a non-
current asset.

b) Calculate the deferred tax balance in the accounting records of Super Speed Ltd as at
31 March 20X22.
Deferred
tax Asset/
Carrying Temporary (Liability)
amount Tax base Differences @27%
R R R R

Right-of-use asset 979 199 - 979 199 (264 384)

Lease liability (1 237 890) a(162000) (1 075 890) 290 490
Land 1 000 000 Exempt Exempt
Plant 1 039 903 b574 811 465 092 (125 575)
(99 469)

a2 070 000 x 15/115 x 3/5

b958 019 x 60% OR [958 019 – (958 019 x 40%)]

27
 FAC3764/2023/Study pack 1
QUESTION 4: Suggested solution (continued)

c) Extract of the statement of financial position of Super Speed Ltd for the year ended
31 March 20X22

SUPER SPEED LTD

EXTRACT OF THE STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X22

ASSETS
Non-current assets Note
Property, plant and equipment 1 2 039 903
Right of use asset 2 979 199
Lease receivable / Net investment in finance lease 3 114 734

Current assets
Lease receivable / Net investment in finance lease 3 45 791

EQUITY AND LIABILITIES

Non-current liabilities
Non-current portion of lease liability 2 863 172
Deferred tax 99 469

Current liabilities
Current portion of lease liability 2 374 718

28
 FAC3764/2023/Study pack 1
QUESTION 5 (40 marks) (72 minutes)

RFed Ltd is a manufacturer and retailer of various types of sports equipment.

The financial manager has prepared the draft annual financial statements of RFed Ltd for the year ended
29 February 20X20. Your assistance is required to finalise these draft annual financial statements
according to the requirements of International Financial Reporting Standards (IFRS).
The profit before tax of RFed Ltd for the year ended 29 February 20X20 amounted to R1 250 000,
including, inter alia, the following items:
Income R
Dividends received – South African listed companies ..................................... ……. 224 000
Foreign income – United Kingdom (refer 3) …… .................................................... 600 000
Expenses
Depreciation (refer 1) (correctly calculated and accounted for) ............................... 769 200
Building ............................................................................................................... 113 200
Machinery............................................................................................................ 416 000
Delivery vehicles ................................................................................................. 240 000
Additional information

1. Property, plant and equipment

The following information pertains to all the assets of RFed Ltd on 29 February 20X20:
1.1. Machinery

The machinery of RFed Ltd consists of Machine Nadal and Machine Djokovic. Details are as follows:
On 1 March 20X18 Machine Nadal and Machine Djokovic were acquired for R1 600 000 and
R1 400 000 respectively. On this date both machines were available for use, as intended by
management, and also brought into use.
On 1 December 20X19, RFed Ltd sold Machine Nadal for R1 800 000 as a result of the
discontinuance of the manufacturing of racket strings by RFed Ltd. On 1 December 20X19, the
carrying amount of Machine Nadal amounted to R1 088 000. The sale of Machine Nadal has not
yet been recorded in the accounting records of RFed Ltd for the year ended 29 February 20X20.
The carrying amount and tax base of Machine Djokovic on 29 February 20X20 amounted to
R896 000 and R840 000, respectively.

The machinery is depreciated according to the diminishing balance method at 20% per annum. On
acquisition date a residual value of Rnil was allocated to machinery. The expected useful lives and
residual values of machinery remained unchanged throughout the period.
1.2. Delivery vehicles

On 1 March 20X18, RFed Ltd acquired all the delivery vehicles at a cost of R1 060 000. On this
date, the delivery vehicles were available for use as intended by management, and also brought
into use.

The delivery vehicles are depreciated according to the straight-line method over the estimated
useful life of 4 years. The residual value of the delivery vehicles remained unchanged at R100 000
throughout the period.

The tax allowance on the delivery vehicles in terms of section 11(e) of the Income Tax Act, is 4 years
according to the straight-line method, apportioned for a part of a year.

29
 FAC3764/2023/Study pack 1
QUESTION 5 (continued)
1.3. Property in Rosebank

On 1 March 20X17, RFed Ltd acquired a property in Rosebank at a cost of R4 500 000 (land:
R1 500 000; building: R 3 000 000). RFed Ltd uses this property for its own business operations.
After the acquisition, the building was renovated and the property was then available for use, as
intended by management, and brought into use on 1 September 20X17. The following renovation
costs were incurred:
R
Architect fees ....................................................................... …………………… 100 000
Fuel used to transport building materials to site .................. …………………… 40 000
Building materials and labour .............................................. …………………… 1 690 000

The building has an estimated useful life of 25 years and a residual value of R2 000 000 was
allocated to it. The useful life and residual value of the building remained unchanged throughout the
period. Depreciation on the building is provided for according to the straight-line method over the
estimated useful life of the building. This property was correctly accounted for in the accounting
records of RFed Ltd.

The SA Revenue Service provides an annual allowance of 5% on the building according to section
13quin of the Income Tax Act, on the straight-line method, not apportioned for a part of the year.

1.4 Land and buildings, machinery and delivery vehicles are accounted for according to the cost model.

1.5 Except for Machine Nadal no other assets were acquired or sold during the current financial year.

2. Allowance for credit losses

The SA Revenue Service allows 25% of the allowance for credit losses as a tax deduction. In the
previous financial year RFed Ltd made no allowance for credit losses because the company had no
credit sales. The estimated credit losses for the current year amounted to R300 000 and have not
been recorded in the accounting records of RFed Ltd for the year ended 29 February 20X20.

3. Taxation

3.1 Current tax

The balance of the “SA Revenue Service – current tax” account in the general ledger of RFed Ltd,
prepared by a newly appointed trainee accountant, consisted of the following:
R

Balance – 1 March 20X19 (relating to current tax due in respect of 20X19) ........ 140 000
Foreign tax paid.................................................................................................... (40 000)
1st Provisional tax payment in respect of 20X20 financial year (52 000)
(30 September 20X19) ........................................................................................
Interest paid on late payment of 1st Provisional tax in respect of 20X20 financial (8 000)
year (30 September 20X19) ................................................................................
Final payment in respect of current tax due according to 20X19 tax assessment
(30 November 20X19) ......................................................................................... (120 000)
2nd Provisional tax payment in respect of 20X20 financial year (36 000)
(29 February 20X20)
Balance – 29 February 20X20 .............................................................................. (116 000)

30
 FAC3764/2023/Study pack 1
QUESTION 5 (continued)

3.2 Deferred tax

The SA normal tax rate changed from 28% in previous years to 27% in 20X20. The capital gains
tax inclusion rate is 80%. The deferred tax asset balance on 28 February 20X19 amounted to
R46 922, which you can assume to be correct.

Deferred tax is provided for on all temporary differences in accordance with the statement of
financial position approach. The only temporary or exempt differences are those resulting from the
information given in the question. The company will have sufficient taxable profits and capital gains
in the future, against which any unused tax losses can be utilised.

Assumptions

 Assume all amounts are material.

 Ignore the implications of value added tax (VAT).

REQUIRED:

Marks

a) Calculate the correct profit before tax in the statement of profit or loss and other 2½
comprehensive income of RFed Ltd for the year ended 29 February 20X20, taking into
account all the above-mentioned information.

b) Calculate the deferred tax balance in the statement of financial position of RFed Ltd for 13½
the year ended 29 February 20X20, using the statement of financial position
approach. Indicate if the balance is a deferred tax asset or liability.

c) Disclose the income tax expense note, including the tax rate reconciliation, to the 16
annual financial statements of RFed Ltd for the year ended 29 February 20X20.

Use the profit before tax in the statement of profit or loss and other comprehensive
income as calculated in (a) above, as your starting point to calculate current tax.

The movement in temporary differences in the current tax calculation should be

calculated using the statement of financial position approach.
d) Disclose the property, plant and equipment note to the annual financial statements of 8
RFed Ltd for the year ended 29 February 20X20.

Your answer must comply with the requirements of International Financial Reporting
Standards.

Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards.
Round off all calculations to the nearest Rand.
Show all calculations.
Comparative figures are required.
No other notes are required.
No accounting policy notes are required
40

31
 FAC3764/2023/Study pack 1
QUESTION 5: Suggested solution

a) Calculation of the correct profit before tax for the year ended 29 February 20X20
R
Profit before tax (given) 1 250 000
Profit on sale of machinery (1 800 000 – 1 088 000) 712 000
Credit losses (300 000)
Interest paid (8 000)
Adjusted profit before tax 1 654 000

b) Calculation of the deferred tax balance of RFed Ltd for the year ended 29 February 20X20

Taxable/ Deferred
(deductible) tax asset /
Carrying Tax Temporary (liability) @
Amount base difference 27%
20X20 R R R R
Land 1 500 000 1 500 000 - -
Building 4 547 0003 4 105 5004 441 500 (119 205)
Machine Djokovic 896 000 840 000 56 000 (15 120)
Delivery vehicles 580 000 530 0005 50 000 (13 500)
Allowance for credit losses 300 000 75 000 (225 000) 60 750
(300 000 x 25%)
Deferred tax liability 322 500 (87 075)
Movement in temporary differences (322 500 + (46 922 / 28%)) 490 079

1. Cost of building: 3 000 000 + 100 000 + 40 000 + 1 690 000 = 4 830 000
2. Accumulated depreciation: (4 830 000 – 2 000 000) / 300 x 30 = 283 000
3. Carrying amount: 4 830 0001 – 283 0002 = 4 547 000
4. Tax base: 4 830 000 – (4 830 000 x 5% x 3) = 4 105 500
5. Tax base: 1 060 000 – (1 060 000 / 4 x 2) = 530 000

c) Calculation of current tax by RFed Ltd to the SA Revenue Services for the year ended
29 February 20X20:
R
Profit before tax 1 654 000
Exempt differences (856 000)
Foreign Income (600 000)
Interest paid 8 000
Dividends received (224 000)
Capital profit on sale of machine (1 800 000 – 1 600 000) x (100% - 80%) (40 000)
Profit after exempt differences 798 000
Movement in temporary differences - taxable (322 500 + (46 922 / 28%) (490 079)
Taxable income 307 921

Current tax (307 921 x 27%) 83 139

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 FAC3764/2023/Study pack 1
QUESTION 5: Suggested solution (continued)

RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20X20

Income tax expense

Major components of tax expense
20.20
R
Current tax expense – current year 63 139
- current year 83 139
- over provision prior year (140 000 - 120 000) (20 000)
Deferred tax expense – current 133 997
- current year (46 922 -1 676 + 87 075) or (490 079 x 27%) 132 321
- rate change (46 922 x 1/28) 1 676
Foreign tax 40 000
237 136
Tax rate reconciliation

Standard tax rate (1 654 000 x 27%) 446 580

Adjusted for exempt differences
Dividends received (224 000 x 27%) (60 480)
Interest on tax (8 000 x 27%) 2 160
Capital profit on sale of machinery (40 000 x 27%) (10 800)
Overprovision 20.19 (140 000 – 120 000) (20 000)
Rate change 1 676
Foreign income (600 000 x 27%) – 40 000 (122 000)
Effective tax rate 237 136

d)
RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20X20

Property, plant and equipment

Delivery
Land Building Machinery Vehicle
R R R R
Carrying amount at the beginning of the
year 1 500 000 4 660 200 2 400 000 820 000
Cost / Gross carrying amount 1 500 000 4 830 0001 3 000 000 1 060 000
Accumulated depreciation - (169 800)2 (600 000)3 (240 000)
Depreciation (given) - (113 200) (416 000) (240 000)
Disposal - - (1 088 000) -
Carrying amount at the end of the year 1 500 000 4 547 000 896 000 580 000
Cost / Gross carrying amount 1 500 000 4 830 000 1 400 000 1 060 000
Accumulated depreciation - (283 000) (504 000) (480 000)

1. 1 600 000 + 1 400 000 = 3 000 000

2. Accumulated depreciation: (4 830 000 – 2 000 000) / 300 x 18 (6 + 12) = 169 800
3. Accumulated depreciation machinery = (1 600 000 + 1 400 000) x 20% = 600 000

©
Unisa 2023

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