FAC3761
SUGGESTED SOLUTION TO MOCK EXAM

QUESTION 1

Part (a) – Discussion of accounting treatment of baking equipment.

LECTURER’S COMMENT
The transaction is a foreign currency transaction because Bake Away Ltd acquired
the baking equipment at a price that is denominated in a foreign currency, being
$55 900, and the corresponding creditor must also be settled in the foreign currency
($) (IAS 21.20).

Journal 1

Transaction date is 1 August 2019, the date that the baking equipment was shipped free on board. The
junior accountant used the incorrect spot rate as he/she used the spot rate on 1 July 2019 instead of
1 August 2019.

The journal entry that needs to be accounted for to correct the junior accountants incorrect acquisition
amount is as follows:
Dr Cr
R R
Equipment (SFP) 8 385
Foreign creditor / Foreign trade payable 8 385
$55 900 x R14,36 = R802 724 - 794 339 OR $55 900 x (14,36 – 14,21)

Journal 2

The journal that the junior accountant accounted for is correct.

Additional journal entry at year end: 30 June 2020

In terms of IAS 21, the monetary item, the outstanding foreign creditor balance must be translated to the
spot rate at year end.

The following journal entry should be accounted for:

Dr Cr
R R
Foreign exchange loss / difference (P/L) 5 871
Foreign creditor / Foreign trade payable 5 871
($55 900 – $25 000) x (R14,55 - R14,36)

1 

Open Rubric
 
 
QUESTION 1 (SUGGESTED SOLUTION CONTINUED)

b)
BAKE AWAY LTD
NOTES FOR THE YEAR ENDED 30 JUNE 2020

Property, plant and equipment

Land Building Equipment Machinery
R R R R
Carrying amount at beginning of year 1 750 000 3 289 583 375 000 144 028
Cost 1 750 000 3 500 000 750 000 150 000
Accumulated depreciation - (210 417)2 (375 000) (5 972)9.1
Additions - 725 0003 802 724J1 -
Revaluation surplus 500 0001 - -
Transfer to non-current asset held for sale - - (129 167) -
Depreciation (calc 2.3, 3.1, 4) - (84 167)4 (196 174)5 (35 834)9.2
Carrying amount at end of year 2 250 000 3 930 416 852 383 108 194
Gross carrying amount / Cost (calc 3.2) 2 250 000 4 225 0006 1 252 7247 150 000
Accumulated depreciation (calc 3.3) - (294 584) (400 341)8 (41 806)

The land was revalued by an independent sworn appraiser on 30 June 2020. The carrying value of the land
if carried on the cost model would have amounted to R1 500 000.

LECTURER’S COMMENT
The sentences below the PPE note, is called narrative information. This narrative
information is required by the disclosure requirements of IAS 16. This narrative
information should be included within your PPE note. It is easy marks to obtain. Do
not forget to include it.

CALCULATIONS:
1. 2 250 000 – 1 750 000 = 500 000
2. (3 500 000 – 975 000) / 360 x 30 = 210 417
1 January 2017 – 30 June 2019 = 6 months in the 2017 financial year, 12 months in the 2018 financial
year and 12 months in the 2019 financial year = 30 months
3. 690 000 + 35 000 = 725 000
3. (3 500 000 – 975 000) / 360 x 12 = 84 167

LECTURER’S COMMENT
Depreciation starts as soon as an asset is available for use. The renovated section
of the building was only available for use on 1 July 2020. No depreciation will thus
be written of on the renovated section within the 2020 financial year.

2 
 
 
QUESTION 1 (SUGGESTED SOLUTION CONTINUED)

5.
R
Equipment transferred to NCAHFS (300 000 / 6 x 5/12) 20 833
Existing equipment after transfer ((750 000 – 300 000) / 6) 75 000
New equipment (802 724 / 6 / 9/12) 100 341
196 174
6. 150 000 – 20 833 = 129 167
7. 750 000 + 802 724 – 300 000 = 1 252 724
8. 375 000 + 196 174 – 150 000 – 20 833 = 400 341

9.
Total Remainder Component
Cost 150 000 85 000 65 000
Accumulated depreciation
(85 000 / 6 x 2/12) / (65 000 / 3 x 2/12) (5 972)9.1 (2 361) (3 611)
Depreciation
(85 000 / 6) / (65 000 / 3) (35 834)9.2 (14 167) (21 667)
108 194 68 472 39 722

LECTURER’S COMMENT
The R5 972 depreciation written off on the machine utilised within the development
of the recipe in May and June 2019, will be capitalised towards the cost of the
internally generated intangible asset.

INTANGIBLE ASSETS
Internally
generated
Recipe
R
Carrying amount at beginning of the year 131 972
Cost 131 97210.1
Accumulated amortisation -
Additions 364 00010.2
Amortisation (74 396)11
Carrying amount at the end of the year 421 576
Cost 495 972
Accumulated amortisation (74 396)

The internally generated intangible asset has a remaining useful life of 51 months12 at year-end.

LECTURER’S COMMENT
The sentence below the IA note, is called narrative information. This narrative
information is required by the disclosure requirements of IAS 38. This narrative
information should be included within your IA note. It is easy marks to obtain. Do not
forget to include it.

3 
 
 
QUESTION 1 (SUGGESTED SOLUTION CONTINUED)

CALCULATIONS

10.
1 May 2019 – 1 July 2019 -
30 June 2019 01 Oct 2019
R R
Water and electricity (64 000 x 2/8) / (64 000 x 3/8) 16 000 24 000
Mr Chef Master (55 000 x 2) / (55 000 x 3) 110 000 165 000
Trainee chefs - 175 000
Machine – depreciation 5 972 -
131 97210.1 364 00010.2
11. (131 972 + 364 000) / 5 x 9/12 = 74 396
12. (5 x 12) - 9 = 51 months

LECTURER’S COMMENT
Development costs incurred within the 2019 financial year, will be capitalised
towards the cost of the internally generated intangible asset within the 2019 financial
year. Development costs incurred within the 2020 financial year, will be capitalised
towards the cost of the internally generated intangible asset within the 2020 financial
year.

(c)
Calculation of deferred tax
Deferred tax
Carrying Tax Applicable asset /
amount base tax rate (liability)
R R R
Land 2 250 000 1 500 000 80% x 28% (168 000)
Building 3 930 416 3 525 00013 28% (113 517)
Equipment (within PPE) 852 383 852 38314 28% -
Machinery 108 194 60 00015 28% (13 494)
Recipe 421 576 - 28% (118 041)
Equipment - NCAHFS 120 000 100 00016 28% (5 600)
Deferred tax liability 30 June 2020 (418 652)

CALCULATIONS
13. [3 500 000 – (3 500 000 x 5% x 4)] + 725 000 = 3 525 000
14.
R
Remaining mixing equipment (750 000 – 300 000 = 450 000)
450 000 – (450 000 / 6 x 4) 150 000
New baking equipment
802 724 – (802 724 / 6 x 9/12) 702 383
Total tax base of equipment 852 383
15. 150 000 – (150 000 x 40%) – (150 000 x 20%) = 60 000
16. 300 000 – (300 000 / 6 x 4) = 100 000

4 
 
 
LECTURER’S COMMENT
You will still receive a full year’s tax allowance on the equipment held within the non-
current asset held for sale classification.

LECTURER’S COMMENT
The mixing equipment is written off for accounting purposes and taxation purposes
over 6 years. If we look at the mixing equipment left under the property, plant and
equipment classification it makes sense that the carrying amount will equal the tax
base. Equal amounts of depreciation and tax allowances were received from the
2017 financial year to the end of the 2020 financial year. (The available for use date,
was the same as the brought into use date and no impairment losses was accounted
for).

5 
 
 
QUESTION 2

(a) – Calculation of impairment loss

Impairment loss of CGU

R
Carrying value (calc 1) 3 308 544
Recoverable amount (3 000 000)
Higher of: Fair value less costs to sell and 2 500 000
Value in use 3 000 000
Impairment loss of CGU 308 544

Allocation of CGU impairment loss

Dr Cr
R R
Impairment loss 308 544
Accumulated impairment loss – Building 225 5251
Accumulated impairment loss – Machinery 83 0192

CALCULATIONS

Carrying Allocation of Carrying

amount at CGU impairment amount after
31 March 2020 loss impairment loss
R R R
Building 2 162 500 (225 525)1 1 936 975
Machinery 796 044 (83 019)2 713 025
Inventory 350 000 - 350 000
3 308 544 (308 544) 3 000 000

LECTURER’S COMMENT
The value that the impairment loss can be allocated to is R2 162 500 + R796 044 =
R2 958 544. IAS 2 is outside the measurement scope of IAS 36 and thus no portion
of the impairment loss can be allocated to inventory.

1. 308 544 x (2 162 500 / 2 958 544) = 225 525

2. 308 544 x (796 044 / 2 958 544) = 83 019

6 
 
 
QUESTION 2 (SUGGESTED SOLUTION CONTINUED)

(b)
PROFIT BEFORE TAX
R
Income
Fair value adjustment 300 0003
Rental income from investment property 1 360 000

Expenses
Depreciation - Building (2 250 000 - 2 162 500) 87 500
Depreciation - Machinery (950 500 – 796 044) 154 456
Depreciation - Manufacturing equipment (220 000 x 25%) 55 000
Direct operating expenses with regards to investment property generating rental income 420 000
Amortisation, included in cost of sales (calc 2.2) 239 8494.2
Impairment loss on diabetic division 308 544a
Inventory write-down (370 000 – 350 000) 20 000

Included in amortisation for 2020 is in an increase in amortisation resulting from a change in estimate in the
useful life of the formula for high blood pressure pills of R239 8494.2. The useful life of the formula had
changed from indefinite to a definite useful life of 11 years on acquisition date. This change will result in an
increase in amortisation in future periods of R2 158 6424.3.

LECTURER’S COMMENT
Remember to disclose the effect of the change in estimate within the profit before
tax note. This is narrative disclosure which is required by the disclosure
requirements of IAS 8.

CALCULATIONS
3.
R
Land (3 000 000 – 2 800 000) 200 000
Building 5 800 000 – (5 200 000 + 500 000) 100 000
300 000
4.
Before change in After change in
estimate estimate Difference
R R R
Cost of the formula 2 398 4914.1 2 398 491
2020 Amortisation - (239 849)4.2 (239 849)
2 398 491 2 158 6424.3
Future amortisation - (2 158 642) (2 158 642)
2 398 491 - (2 398 491)
4.1 Cost of formula:
FV = R2 500 000
n=4
i = 12.5 / 12 (if you use a Sharp calculator) OR 12.5 if you use a Hp calculator and you have set your
calculator to 12 times per year
PV = R2 398 491
4.2 2 398 491 / 10 = 239 849

7 
 
 
QUESTION 2 (SUGGESTED SOLUTION CONTINUED)

ERROR IN RESPECT OF PRIOR YEAR

Correction of manufacturing equipment purchased incorrectly recorded as other operating expenses

instead of being capitalised for the year ended 31 March 2019. The effect of the error has been accounted
for retrospectively and comparative amounts have been appropriately restated. The effect of the correction
is as follows:
2019
R
Increase in cost of sales (220 000 x 25% x 7/12) (32 083)
Decrease in other operating expenses 220 000
Increase in income tax expense (187 917 x 28%) (52 617)
Increase in profit 135 300

Increase in PPE / equipment (220 000 – 32 083) 187 917

Increase in deferred tax liability [(187 917 – (220 000 - (220 000 x 40%)) x 28%] (15 657)
Increase in current tax payable / SARS [(220 000 – (220 000 x 40%) x 28%] (36 960)
Increase in equity 135 300

LECTURER’S COMMENT

R
Profit before tax decrease with the amount of depreciation (32 083)
accounted for in cost of sales
Profit before tax increase with the amount of the decrease in other 220 000
operating expenses
Increase in profit before tax 187 917
Total movement in taxable temporary difference (55 917)
R
Carrying amount of equipment 187 917
Tax base of equipment 132 000
Taxable temporary difference 55 917
Increase in taxable profit 132 000
Increase in current tax (132 000 x 28%) 36 960

8 
 
 
QUESTION 2 (SUGGESTED SOLUTION CONTINUED)

DEFERRED TAX
R
Land 112 0005
Building 431 2007
Deferred tax liability at end of year 543 200

CALCULATIONS:

5. (3 000 000 ˗ 2 500 000) × 80% × 28%

6. [4 500 000 - (4 500 000 x 5% x 4)] + 500 000 = 4 100 000
7.
Above base cost portion: 5 800 000 – (4 500 000 + 500 000) x 80% x 28% 179 200
Below base cost portion: (5 000 000 – 4 100 0006) x 28% 252 000
431 200

LECTURER’S COMMENT
The above base cost portion constitutes the temporary differences due to fair value
adjustments accounted for on the building of the investment property from
acquisition date to year-end date. Total fair value adjustments on the building within
previous financial periods amounted to R700 000. Total fair value adjustment on the
building within the current financial year, amounts to R100 000. Total fair value
adjustment from acquisition date until year-end date, thus amounts to R800 000.

The below base cost portion constitutes the temporary difference due to tax
allowances received on the building of the investment property from acquisition date
to year-end date. Total accumulated tax allowances received on the building of the
investment property from acquisition date until year-end date amounts to R900 000
(R4 500 000 x 5% x 4). The renovated section was only brought into use on
1 April 2020 (within the 2021 financial year) and will thus not affect your tax
allowance for the 2020 financial year.

LECTURER’S COMMENT
Please make sure that you answer what was required. This required asked for a
deferred tax note. You need to ensure that you know the difference between a
deferred tax note and a deferred tax calculation.

LECTURER’S COMMENT
Generally, a deferred tax reconciliation is required when the difference between the
opening and closing balance of deferred tax resulted from temporary differences
affecting other comprehensive income and profit or loss. Within this scenario the,
the movement in deferred tax only affected profit or loss.

9