FAC3761/104/0/2022

Tutorial Letter 104/0/2022

International Financial Accounting

FAC3761

Year module

Department of Financial Accounting

IMPORTANT INFORMATION:
This tutorial letter contains important information about your module.
Please register on myUnisa, activate your myLife e-mail address and make sure
that you have regular access to the myUnisa module website, FAC3761-22-Y1,
as well as your e-tutor group site.

Note: This is an online module and, therefore, the study material is available
on myUnisa. However, in order to support you in your learning process,
you will also receive some study material in printed format.

Open Rubric
 CONTENTS

Page

INTRODUCTION .................................................................................................................................... 3
LECTURERS AND CONTACT DETAILS .............................................................................................. 3
ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS ............................................................. 4

2
 FAC3761/104
Dear Student

INTRODUCTION
In this tutorial letter we provide additional questions and suggested solutions to further assist you in
preparing for the examination. We suggest that you answer these integrated questions under exam
conditions. Once you have completed the integrated questions, you should compare your answers with
the suggested solutions. Your answers to these integrated questions must not be submitted to
Unisa. These integrated questions will indicate to you the standard required of you in the examination
and will help you to identify areas of weakness that you must pay attention to.

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

LECTURERS AND CONTACT DETAILS

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

FAC3761@unisa.ac.za

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

Telephone
Lecturers Office
number
Ms R Horn Simon Radipere Building, 2-53 (012) 429 3287
Mr I Phaduli Simon Radipere Building, 2-46 (012) 429 3232

3
ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS
The integrated questions are compiled as follows:

QUESTION SUBJECT MARKS

NO.

1 IAS 12, Income taxes and IAS 16, Property, plant and equipment. 40

2 IAS 12, Income taxes, IAS 16, Property, plant and equipment, 40
IAS 38, Intangible assets and IAS 40, Investment property.

3 IAS 12, Income taxes, IAS 16, Property, plant and equipment, 40
IAS 38, Intangible assets and IAS 40, Investment property.

4 IAS 12, Income taxes, IAS 16, Property, plant and equipment, 40
IAS 38, Intangible assets and IAS 40, Investment property.

The following abbreviations are used throughout the document:

CGT Capital gains tax
SARS South African Revenue Service
NCAHFS Non-current asset held for sale
IAS International Accounting Standard
SFP Statement of financial position
OCI Other comprehensive income
P/L Profit or loss
IFRS International Financial Reporting Standards
FOB Free on board

4
 FAC3761/104
QUESTION 1 (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 20.20. 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 20.20 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 20.20:
1.1. Machinery

The machinery of RFed Ltd consists of Machine Nadal and Machine Djokovic. Details are as follows:
On 1 March 20.18 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 20.19, 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 20.19, 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 20.20.
The carrying amount and tax base of Machine Djokovic on 29 February 20.20 amounted to
R896 000 and R840 000, respectively.

The machinery is depreciated according to the reducing 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 20.18 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 at 25% per annum. 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.

5
 QUESTION 1 (continued)
1.3. Property in Rosebank

On 1 March 20.17 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 20.17. 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 20.20.

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 20.19 (relating to current tax due in respect of 20.19) ........... 140 000
Foreign tax paid.................................................................................................... (40 000)
1st Provisional tax payment in respect of 20.20 financial year (52 000)
(30 September 20.19) .........................................................................................
Interest paid on late payment of 1st Provisional tax in respect of 20.20 financial (8 000)
year (30 September 20.19) .................................................................................
Final payment in respect of current tax due according to 20.19 tax assessment
(30 November 20.19) .......................................................................................... (120 000)
2nd Provisional tax payment in respect of 20.20 financial year (29 February 20.20) (36 000)
Balance – 29 February 20.20 ............................................................................... (116 000)

6
 FAC3761/104
QUESTION 1 (continued)

3.2 Deferred tax

The SA normal tax rate changed from 29% in previous years to 28% in 20.20. The capital gains tax
inclusion rate is 80%. The deferred tax asset balance on 28 February 20.19 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
a) Calculate the correct profit before tax in the statement of profit or loss and
other comprehensive income of RFed Ltd for the year ended
29 February 20.20, taking into account all the above-mentioned information.
(2½)

b) Calculate the deferred tax balance in the statement of financial position of

RFed Ltd for the year ended 29 February 20.20, using the statement of
financial position approach. Indicate if the balance is a deferred tax asset
or liability. (13½)

c) Disclose the income tax expense note, including the tax rate reconciliation,
to the annual financial statements of RFed Ltd for the year ended
29 February 20.20.

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. (16)

d) Disclose the property, plant and equipment note to the annual financial
statements of RFed Ltd for the year ended 29 February 20.20.

Your answer must comply with the requirements of International Financial

Reporting Standards. . (8)
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

7
 SOLUTION QUESTION 1

a) Calculation of the correct profit before tax for the year ended 29 February 20.20
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 20.20

Taxable/ Deferred
(deductible) tax asset /
Carrying Tax Temporary (liability) @
Amount base difference 28%
20.20 R R R R
Land 1 500 000 1 500 000 - -
Building 4 547 0003 4 105 5004 441 500 (123 620)
Machine Djokovic 896 000 840 000 56 000 (15 680)
Delivery vehicles 580 000 530 0005 50 000 (14 000)
Allowance for credit losses 300 000 75 000 (225 000) 63 000
(300 000 x 25%)
Deferred tax liability 322 500 (90 300)
Movement in temporary differences (322 500 + (46 922 / 29%)) 484 300

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 20.20:
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 / 29%) (484 300)
Taxable income 313 700

Current tax (313 700 x 28%) 87 836

8
 FAC3761/104
SOLUTION QUESTION 1 (continued)

RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20.20

Income tax expense

Major components of tax expense
20.20
R
Current tax expense – current year 67 836
- current year 87 836
- over provision prior year (140 000 - 120 000) (20 000)
Deferred tax expense – current 137 222
- current year (46 922 -1 618 + 90 300) or (484 300 x 28%) 135 604
- rate change (46 922 x 1/29) 1 618
Foreign tax 40 000
245 058
Tax rate reconciliation

Standard tax rate (1 654 000 x 28%) 463 120

Adjusted for exempt differences
Dividends received (224 000 x 28%) (62 720)
Interest on tax (8 000 x 28%) 2 240
Capital profit on sale of machinery (40 000 x 28%) (11 200)
Overprovision 20.19 (140 000 – 120 000) (20 000)
Rate change 1 618
Foreign income (600 000 x 28%) – 40 000 (128 000)
Effective tax rate 245 058

d)
RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20.20

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

9
 QUESTION 2 (40 marks)(72 minutes)

BeautyVision Ltd is a manufacturer and retailer of beauty products within the cosmetic industry. The
company has a 31 December year end.

Details of the company’s assets are as follows:

Manufacturing plant

On 1 March 20.17, BeautyVision Ltd purchased a vacant land for R2 500 000, with the intention to
construct a manufacturing plant on the land. The construction of the building that will house the industrial
machinery of the plant commenced on 1 May 20.17 and was completed on 31 January 20.18 at a total
cost of R4 400 000 (excluding inspection costs below) which was paid in cash. Management considers
the land portion of the manufacturing plant to be significant.

In order to comply with national safety regulations, the building was inspected at a cost of R50 000 on
31 January 20.18. The safety inspector issued a satisfactory report and confirmed that the building
adhered to all necessary safety regulations.

The construction workers went on strike during the construction of the building. The construction workers
did not report for duty for a period of two weeks. Included in the total construction cost of the building
referred to above are salaries amounting to R80 000 with regard to labour costs paid to the striking
construction workers during the two-week strike period.

The building was available for use, as intended by management, on 1 February 2018, whilst it was only
brought into use on 1 March 20.18. On 1 February 20.18, a residual value of R2 300 000 was allocated
to the building and the useful life was estimated to be 30 years. Both the residual value and the estimated
useful life remained unchanged through-out the period.

It is the accounting policy of BeautyVision Ltd to account for the land using the revaluation model.
Revaluations will be made with sufficient regularity to ensure that the carrying amounts do not differ
materially from that, which would be determined using fair values at the end of the reporting period. It is
the policy of the company to realise revaluation surpluses through the sale of the underlying asset.

The fair values of the land, on the respective dates, as determined by an independent sworn appraiser,
were as follows:
R
31 December 20.19 ................................................................................................... 2 580 000
31 December 20.20 ................................................................................................... 2 630 000

It is the accounting policy of BeautyVision Ltd to account for the building in accordance with the cost
model. Depreciation is accounted for in accordance with the straight-line method over the estimated
useful life of the building.

10
 FAC3761/104
QUESTION 2 (continued)

Residential property

On 1 January 20.18, BeautyVision Ltd purchased an old abandoned residential property at a property
auction for R1 685 000 (land: R450 000; building: R1 235 000). On acquisition date, management
decided to utilise this property as a rental property. However, due to the fact that the building had been
vacant and abandoned for a long time, it had extensive damage and required major renovations in order
to secure a tenant. The renovation of the property was completed on 30 September 20.18 at a total cost
of R542 000. On 1 November 20.18, BeautyVision Ltd signed a lease agreement with a reputable tenant
to receive a monthly rental of R25 000. Direct operating expenses relating to this property amounted to
R9 500 per month.

The fair values of the property, on the respective dates, as determined by an independent sworn
appraiser, were as follows:
Land Building
R R
31 December 20.18 ................................................................................ 476 000 1 900 000
31 December 20.19 ................................................................................ 490 000 2 110 000

Investment property is accounted for using the fair value model. The carrying amount of investment
property will be recovered through the sale of the property.

Patent – DNA Sunscreen

On 1 February 20.20, BeautyVision Ltd started negotiations with an American company regarding the
acquisition of their newly developed patent for a DNA sunscreen which will offer greater protection the
longer it is exposed to the sun. On 1 March 20.20, negotiations between the two companies reached a
conclusion and the purchase agreement together with payment terms were finalised and signed on the
same date. The patent was purchased at a cost of R472 800 allowing BeautyVision Ltd the right to
manufacture the DNA sunscreen for a period of 10 years. The patent will have no residual value after
the 10-year contract period expires. The patent was available for use, as intended by management, as
well as brought into use, on 1 April 20.20.

Intangible assets are accounted for in accordance with the cost model. Amortisation is written off in
accordance with the straight-line method over the assets’ estimated useful life.

Manufacturing machine

On 1 October 20.20, BeautyVision Ltd purchased a new manufacturing machine at a cost of R1 680 000
and immediately paid a cash deposit of R580 000. BeautyVision Ltd negotiated special payment terms
with the seller and deferred payment of the remainder of the purchase price of the machine until
1 December 20.20. The seller’s normal credit terms are strictly 30 days after purchase date.

The manufacturing machine was transported to the manufacturing plant at a cost of R15 000 and was
installed and tested at an additional cost of R12 000. The manufacturing machine was available for use,
as intended by management, as well as brought into use, on 1 November 20.20. On 1 November 20.20,
an estimated useful life of 2 000 000 units and a residual value of R750 000 was allocated to the
manufacturing machine. From acquisition date until 31 December 20.20, the manufacturing machine
produced a total of 96 000 units.

Machinery is accounted for in accordance with the cost model. Depreciation is written off in accordance
with the units of production method.

11
 QUESTION 2 (continued)

Taxation

The South-African normal tax rate is 28%. The capital gains tax inclusion rate is 80%.

The South-African Revenue Service allows the following capital allowances:

 a 5% annual building allowance on the manufacturing building in terms of section 13(1) of the
Income Tax Act, according to the straight-line method; not apportioned for periods shorter than a
year.
 a tax allowance of 5% on the expenditure on patents, in terms of section 11(gC) of the Income
Tax Act, according to the straight-line method; not apportioned for periods shorter than a year.

The South African Revenue Service (SARS) allows no building allowance on the abovementioned
residential building.

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

 All amounts are material.

 Ignore the implications of Value-Added Tax (VAT).
 A pre-tax discount rate of 8,75% per annum is applicable (compounded annually).

12
 FAC3761/104
QUESTION 2 (continued)

REQUIRED
a) Disclose the land and building of the manufacturing plant in the property,
plant and equipment note to the annual financial statements of Beauty Vision
Ltd for the year ended 31 December 20.20. (8)

b) Prepare the relevant general journal entry in the accounting records of

BeautyVision Ltd, to correctly account for the deferred tax consequence of
the revaluation of the land of the manufacturing plant on 31 December 20.20.
(2½)

c) Disclose the profit before tax note to the annual financial statements of
BeautyVision Ltd for the year ended 31 December 20.20.

Include all the relevant disclosable income and expense items resulting
from the information given in the question. (15½)

d) Disclose the deferred tax balance, excluding the manufacturing machine,

in the notes to the statement of financial position of BeautyVision Ltd for the
year ended 31 December 20.20.

Indicate in your note whether the deferred tax balance per asset is a
deferred tax asset or a deferred tax liability. Your deferred tax note does not
have to include any qualitative disclosures. (14)

Please note:
Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Round off all calculations to the nearest Rand.
Show all calculations.
Comparative amounts are not required.
Accounting policy notes are not required.
Show all data input into your financial calculator where applicable.
Journal narrations are not required.
No abbreviations for general ledger account names may be used.

13
 SOLUTION QUESTION 2

a) BEAUTYVISION LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR-ENDED 31 DECEMBER 20.20

Property, plant and equipment note

Land Building
R R
Carrying amount at beginning of the year 2 580 000 4 237 750
Gross carrying amount/Cost (calc 2.1) 2 580 000 4 370 000
Accumulated depreciation (calc 2.2) - (132 250)
Revaluation surplus (calc 1.2) 50 000 -
Depreciation (calc 2.3) - (69 000)
Carrying amount at end of the year 2 630 000 4 168 750
Gross carrying amount/Cost 2 630 000 4 370 000
Accumulated depreciation - (201 250)

The land was revalued on 31 December 20.20, by an independent sworn appraiser. The carrying
amount of the land if carried under the cost model would have amounted to R2 500 000.

CALCULATIONS:

1. Manufacturing plant – Land

R
Cost 1 March 20.17 2 500 000
Revaluation 31 December 20.19 (calc 1.1) 80 000
Carrying amount 31 December 2019 2 580 000
Revaluation 31 December 20.20 (calc 1.2) 50 000
Carrying amount 31 December 20.20 2 630 000

1.1. 2 580 000 – 2 500 000 = 80 000

1.2. 2 630 000 – 2 580 000 = 50 000

2. Manufacturing plant – Building

R
Cost 31 January 20.18 (calc 2.1) 4 370 000
Accumulated depreciation (calc 2.2) (132 250)
Carrying amount 31 December 20.19 4 237 750
Depreciation (calc 2.3) (69 000)
Carrying amount 31 December 20.20 4 168 750

2.1. 4 400 000 + 50 000 – 80 000 = 4 370 000

2.2. [(4 370 000 (calc 2.1) – 2 300 000) / 360 x 23 ] = 132 250 (30 years x 12 months = 360
months); (1 February 20.18 to 31 December 20.19 = 11 months + 12 months = 23 months)
2.3. (4 370 000 – 2 300 000) / 360 x 12 = 69 000

(b) General journal entry to account for the revaluation and the related deferred tax on the land

Debit Credit
R R
Revaluation surplus (OCI) 11 200
Deferred tax liability (SFP) (50 000 x 80% x 28%) 11 200

14
 FAC3761/104
SOLUTION QUESTION 2 (continued)

(c) BEAUTYVISION LTD

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR-ENDED 31 DECEMBER 20.20

Profit before tax note

R
Profit before tax is calculated after the following
Income
Rental income earned from investment property (25 000 x 12) 300 000
Fair value adjustment [(490 000 – 476 000) + (2 110 000 – 1 900 000)] 224 000

Expenses
Direct operating expenses in regards to investment property that is earning 114 000
rental income (9 500 x 12)
Interest expense / Finance cost (1 100 000 - 1 084 132(calc 3.1)) OR Calc 4 15 868
Depreciation (69 000(calc 2.3) + 45 174(calc 3.2)) 114 174
Amortisation, included in cost of sales (472 800 / 10 x 9/12) 35 460

CALCULATIONS:
3. Manufacturing machine
R
Cost 1 October 20.20 (calc 3.2) 1 691 132
Depreciation (calc 3.3) (45 174)
Carrying amount 31 December 20.20 1 645 958

3.1. Present value of deferred payment

FV = R1 680 000 – R580 000 = R1 100 000
i = 8,75% for Hp10B11 (12 times per year used) or 0,73% for Sharp
n=2
PV = R1 084 132

3.2. Total cost = 580 000 + 1 084 1323.1 + 15 000 + 12 000 = 1 691 132

3.3. (1 691 1323.2 - 750 000) / 2 000 000 x 96 000 = 45 174

4. Alternative interest calculation

FV = R1 680 000 – R580 000 = R1 100 000

i = 8,75% for Hp10B11 (12 times per year used) or 0,73% for Sharp
n=2
PV = R1 084 132
1 INPUT 2 AMORT = R15 868

15
SOLUTION QUESTION 2 (continued)

d) BEAUTYVISION LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR-ENDED 31 DECEMBER 20.20
Deferred tax note excluding the manufacturing machine
Deferred
tax asset /
(liability)
R
Manufacturing plant – Land [(2 630 000 – 2 500 000) x 80% x 28%] (29 120)
Manufacturing plant – Building [(4 179 432 – 3 714 500) x 28%] (130 181)
Investment property - Land [(490 000 – 450 000) x 28% x 80%] (8 960)
Investment property - Building [(2 110 000 – (1 235 000 + 542 000) x 28% x 80%] (74 592)
Patent [(437 340 – 449 160) x 28%] 3 310

CALCULATIONS:

Tax base of building: 4 370 000 - (4 370 000 x 5% x 3) = 3 714 500

Carrying amount of patent: 472 800 - 35 460 = 437 340
Tax base of patent: 472 800 – (472 800 x 5%) = 449 160

16
 FAC3761/104
QUESTION 3 (40 marks)(72 minutes)

African Holiday Factory (AHF) Ltd is a company operating in different segments within the travel and
accommodation industry. The company is located in Pretoria, South Africa and has a 31 December year
end.
Details of the company’s assets are as follows:

Administration property

On 1 October 20.18, AHF Ltd purchased an administration property for R8 000 000 (Land: R2 300 000;
Building: R5 700 000). The residual value of the building on acquisition date was estimated to be
R5 000 000. The property was available for use, as intended by management, on the acquisition date.
The building is expected to have a useful life of 20 years. Both the residual value and useful life of the
building remained unchanged throughout the period.

The land was revalued for the first time on 31 December 20.19. On this date the fair value of the land
was determined to be R2 400 000.

On 1 June 20.20, the directors of the company decided to sell the property. AHF Ltd will in future lease
an office space within a shared office building from CoWorker SA Ltd, on a month-to-month basis.
AHF Ltd vacated the property on 30 June 20.20. A binding sales agreement was concluded on
1 July 20.20 and the administration property was sold for R8 500 000, cash.

It is the accounting policy of AHF Ltd to account for the land using the revaluation model. Revaluations
will be made with sufficient regularity to ensure that the carrying amounts do not differ materially from
that, which would be determined using fair values at the end of the reporting period. It is the policy of
the company to realise revaluation surpluses through the sale of the underlying asset.

It is the accounting policy of AHF Ltd to account for the building in accordance with the cost model.
Depreciation is accounted for in accordance with the straight-line method over the estimated useful life
of the building.

Mobile application
During 20.20, AHF Ltd began with the development of a mobile application that can be used by holiday
makers to browse, reserve and pay for holiday accommodation throughout all nine South African
provinces. Together with a 360˚ virtual tour of all accommodation offerings, the mobile application will
include various sightseeing locations and activities within a close proximity to the accommodation
offerings. It has been established that this mobile application will be very popular within the South African
market. The research and development of the mobile application commenced on 1 March 20.20.

The timeline of activities performed, together with applicable costs incurred (if any), are as follows:

Time period Cost incurred Description

1 March 20.20 - Management of AHF Ltd nominated two permanent

employees of the company to be part of a development team
dedicated to the research and development of the mobile
application. The employees working within this development
team will work exclusively on this research and development
project until the completion there-of. Both permanent
employees each earn a monthly salary of R25 000.

17
 QUESTION 3 (continued)

Time period Cost incurred Description

1 March 20.20 to R36 000 The development team commenced market research by
30 March 20.20 investigating all accommodation mobile applications in the
South African market. The aim of this market research was to
identify the limitations of each of the available mobile
applications. The development team hosted focus groups with
members of the general public to discuss the mobile
application features that will provide the mobile application of
AHF Ltd with a market advantage.
30 March 20.20 R2 000 The development team investigated whether internal
development of the mobile application will yield more
advantages than contracting out of the development of the
mobile application. The development team concluded that
internal development will result in a lower cost.
31 March 20.20 - The board of directors determined that the mobile application
satisfied all the criteria for intangible asset recognition and
approved the development of the application.
1 April 20.20 R350 000 AHF Ltd purchased an Integrated Development Environment
(IDE) which will be exclusively used for the research and
development project of the mobile application. Thereafter the
IDE will be used by AHF Ltd on another project. The IDE is a
software program which will be used to create, design and
test the mobile application. The IDE was available for use on
acquisition date and the useful life was estimated to be 2
years. A residual value of Rnil was allocated to the IDE.
1 April 20.20 - An IT specialist was contracted at R450 per hour to assist with
the development of the mobile application.
31 May 20.20 - The development team confirmed the development of the
prototype of the mobile application is complete.
31 May 20.20 R12 000 The development team together with the IT specialist hosted
a focus group with members of the general public to test the
prototype of the mobile application. Individuals involved in this
focus group were given the opportunity to test the mobile
application and make recommendations about improvements.
1 June 20.20 to R20 000 The IT specialist incorporated the suggested improvements to
30 June 20.20 the mobile application and tested it for the final time.
30 June 20.20 - The development team concluded that the development of the
mobile application was concluded.
30 June 20.20 - The IT specialist submitted his log of hours worked on the
development of the mobile application. During the period
1 April 20.20 to 30 June 20.20 the IT specialist worked 480
hours exclusively on the development of the mobile
application.
1 July 20.20 - The application is made available on various mobile
applications for sale to customers.

On 1 July 20.20, it was estimated that the mobile application will have a useful life of 3 years and an
insignificant residual value.

Intangible assets are accounted for in accordance with the cost model. Amortisation is written off in
accordance with the straight-line method over the asset’s estimated useful life.

18
 FAC3761/104

QUESTION 3 (continued)

Security software
On 1 October 20.19, AHF Ltd purchased security software at a cost of R960 000, in order to protect the
company from data breaches. An information technology (IT) specialist was contracted at a cost of
R80 000 to assist with the installation and implementation of the security software. Training cost of
R20 000 was incurred to train the staff of AHF Ltd about the operation of the security software to ensure
optimum cyber security is possible.

The security software was available for use, as intended by management on 1 November 20.19 and on
this date the useful life was estimated to be 2 years. An insignificant residual value was allocated to the
security software.

The useful life and residual value of the security software remained unchanged throughout the period.
Intangible assets are accounted for in accordance with the cost model. Amortisation is written off in
accordance with the straight-line method over the asset’s estimated useful life.

Knysna apartments

AHF Ltd owns a block of apartments in Knysna, Western Cape which are rented out under long term
residential lease agreements. AHF Ltd is responsible for the building maintenance on this block of
apartments, but these services are regarded as insignificant to the lease agreements. The block of
apartments were purchased on 1 February 20.19 at a cost of R5 200 000 (land: R2 000 000; building:
R3 200 000). The block of apartments was available for use, as intended by management, on
1 March 20.19.

On 1 February 20.20, the lift of the block of apartments was damaged beyond repair due to a technical
malfunction. As a result, AHF Ltd had to replace the lift on 29 February 20.20 with a new lift at a total
cost of R450 000. On this date, the fair value of the damaged lift was determined to amount to R35 000.

Investment property is accounted for in accordance with the fair value model. The carrying amount of
investment property will be recovered through sale.

The fair value of the block of apartments, on the respective dates, as determined by an independent
sworn appraiser, were as follows:
31 December 20.20
31 December 20.19 (including the new lift)
R R
Land ................................................................... 2 500 000 2 700 000
Building .............................................................. 3 800 000 4 300 000
6 300 000 7 000 000

Assumptions

 All amounts are material.

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

19
QUESTION 3 (continued)

REQUIRED
a) Prepare the relevant general journal entries, in the accounting records of
AHF Ltd, to correctly account for the sale of the administration property
together with any possible realisation of a revaluation surplus. (10)

b) The chief executive officer of AHF Ltd requires your input on the impact of
the costs incurred during the research and development of the mobile
application on the annual financial statements of AHF Ltd for the year ended
31 December 20.20.

Write a report to the chief executive officer wherein you address the following
aspects:
 Differentiation between the research and development phase together
with an explanation as to why this is necessary from an accounting
treatment process.
 Determination of the dates applicable to the research phase,
calculation of total cost incurred in the research phase together with
the accounting implications there-of.
 Determination of the dates applicable to the development phase,
calculation of total cost incurred in the development phase together
with the accounting implications there-of. (14)

c) Disclose the intangible asset and investment property note in the annual
financial statements of AHF Ltd for the year ended 31 December 20.20. (14)

d) AHF Ltd is currently the only company in South Africa offering a mobile
application that can be used by holiday makers to browse, reserve and pay
for holiday accommodation throughout all nine South African provinces.
Discuss by applying the requirements of IAS 38, Intangible assets, whether
management of AHF Ltd could have chosen to account for the mobile
application by applying the revaluation model as its accounting policy. (2)

Please note:
Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Round off all calculations to the nearest Rand.
Show all calculations.
Comparative amounts are not required.
Accounting policy notes are not required.
Show all data input into your financial calculator where applicable.
Journal narrations are not required.
No abbreviations for general ledger account names may be used.

20
 FAC3761/104
SOLUTION QUESTION 3

a) General journal entry to correctly account for the sale of the administration property:
Debit Credit
R R
Bank 8 500 000
Accumulated depreciation – Building (43 750 + 17 500) 61 250
Land @ Revalued amount 2 400 000
Building @ Cost 5 700 000
Profit on sale of property 461 250

Revaluation surplus (OCI) 100 000

Retained earnings 100 000

CALCULATIONS:

Administration property - Building

Carrying
amount
R
Cost 1 October 20.18 5 700 000
Accumulated depreciation (calc 2.1) (43 750)
Carrying amount 31 December 20.19 5 656 250
Depreciation (calc 2.2) (17 500)
Derecognition 1 July 20.20 (5 638 750)
Carrying amount 31 December 20.20 -

2.1 (5 700 000 - 5 000 000) / 240 x 15 = 43 750 (20 years x 12 months = 240 months);
(1 October 20.18 to 31 December 20.20 = 3 + 12 = 15 months)
2.2 (5 700 000 - 5 000 000) / 20 x 6/12 = 17 500 OR (5 700 000 – 5 000 000) / 240 x 6 = 17 500

b) Research and development of the mobile application

To: The Chief Financial Officer

AHF Ltd
From: ME
Date: June 20.22

RE: Input on the impact of the costs incurred during the research and development of the mobile
application on the annual financial statements of AHF Ltd for the year ended 31 December 20.20.

Differentiating between the research and development phase

In terms of IAS 38, Intangible assets, there is two distinct stages that occur during the creation of an
intangible asset. The research phase is the gathering of knowledge and understanding, whilst the
development phase is the application of the gathered knowledge and understanding in order to
create/develop an intangible asset.

It is important to distinguish between these phases as it affects the classification and recognition of the
costs incurred.

Costs incurred during the research phase must be expensed.

Once the intangible asset recognition criteria are met, the development phase starts and all costs
incurred should be capitalised/recognised towards the cost of the internally generated intangible asset.

21
 SOLUTION QUESTION 3 (continued)

(b) (continued)

Costs that can be capitalised towards the cost of the internally generated intangible asset are those that
are directly attributable to create, produce and prepare the asset in order to operate it in the manner as
intended by management. Capitalisation of costs cease when development is complete and the
internally generated intangible asset is available for use.

Determination of dates applicable to the research and development phase

The board of directors determined on 31 March 20.20 that the mobile application satisfied all the criteria
for intangible asset recognition and approved the development there-off on this date. The research
phase is therefore determined to be from the start of the project on 1 March 20.20 to 31 March 20.20.
The development phase starts on 1 April 20.20 and the development team concluded on 30 June 20.20
that the development of the mobile application was concluded. The development phase is therefore
determined to be from 1 April 20.20 to 30 June 20.20.

Calculation of research cost together with the accounting implication:

Research cost that should be expensed to the statement of profit or loss and other comprehensive
income amounts to R88 000.
R
Market research (given) 36 000
Investigation of development vs purchase (given) 2 000
Salaries of development team members (25 000 x 2 x 1 month) 50 000
Total research cost 88 000

Calculation of development cost together with the accounting implication:

Development costs that should be capitalised towards the cost of the internally generated intangible
asset amounts to R441 750.
R
Amortisation on the IDE (350 000 / 2 x 3/12) 43 750
Focus group testing of mobile application (given) 12 000
Incorporation of suggested improvements and final testing (given) 20 000
IT specialist (480 x 450) 216 000
Salaries of development team members (25 000 x 2 x 3) 150 000
Total development cost 441 750

22
 FAC3761/104
SOLUTION QUESTION 3 (continued)

c) AHF LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 20.20

Intangible asset note

Internally
Purchased generated
Security Mobile
software application
R R
Carrying amount at beginning of the year 953 333 -
Cost 1 040 000 -
Accumulated amortisation (86 667) -
Addition, through internal development - 441 750
Amortisation, included in other expenses (520 000) (73 625)
Carrying amount at the end of the year 433 333 368 125
Cost 1 040 000 441 750
Accumulated amortisation and impairment losses (606 667) (73 625)

The security software has a carrying amount of R433 333 and a remaining useful life of 10 months
at year end. The mobile application has a carrying amount of R368 125 and a remaining useful life
of 2,5 years (30 months) at year end.
Calculations Mobile application:
R
Cost 30 June 20.20 (from required a) 441 750
Amortisation (441 750 / 3 x 6/12) (73 625)
Carrying amount 31 December 20.20 368 125

Calculations Security Software:

R
Cost 1 October 20.19 (960 000 + 80 000) 1 040 000
Accumulated amortisation (1 040 000 / 2 x 2/12) (86 667)
Carrying amount 31 December 20.19 953 333
Amortisation (1 040 000 / 2) (520 000)
Carrying amount 31 December 20.20 433 333

Investment property note

(For calculation purposes) (Disclosure)
Land Building Total
R R R
Carrying amount at beginning of the year 2 500 000 3 800 000 6 300 000
Capitalisation / Additions - 450 000 450 000
Derecognition - (35 000) (35 000)
Fair value adjustment 200 000 85 000 285 000
Carrying amount at end of the year 2 700 000 4 300 000 7 000 000

The investment property was revalued on 31 December 20.20, by an independent sworn appraiser.
CALCULATIONS:

Land: 2 700 000 – 2 500 000 = 200 000

Building: 4 300 000 – (3 800 000 + 450 000 – 35 000) = 85 000

23
 SOLUTION QUESTION 3 (continued)

(d) Revaluation model

 IAS 38, Intangible assets stipulates that an entity can only choose to account for its intangible
asset according to the revaluation model if there is an active market for that particular asset.
 As AHF Ltd currently offers the only mobile application of its sort in South Africa, there is no active
market available and therefore the mobile application cannot be accounted for by applying the
revaluation model.
 AHF Ltd thus correctly decided to apply the cost model to account for their mobile application.

24
 FAC3761/104
QUESTION 4 (40 marks)(72 minutes)

Ndzalama Ltd (“Ndzala”) is a medical & pharmaceutical company based in South Africa. Ndzala has
over the past few years seen a significant growth in revenues due to an increased uptake of their
pharmaceutical offerings. Ndzala has a 30 June year end.

The following relates to the assets of Ndzala:

Property in Makhado

Ndzala acquired a property, in Makhado, on 1 May 20.18 at a cost price of R12 750 000 (land:
R5 000 000; building R7 750 000). The property was to be used as a manufacturing plant. On acquisition
date, Ndzala paid an additional amount of R1 150 000 to customise the building to suit its manufacturing
needs.

The building was available for use, and brought into use, as intended by management on 1 June 20.18.
Ndzala took official occupation of the building on the same date. As at 1 June 20.18, the building was
estimated to have a useful life of 25 years and a residual value of R400 000.

It is the accounting policy of the company to revalue land every two years. An independent sworn
appraiser provided Ndzala management with the following fair values for the land:
R
30 June 20.19 ............................................................................................................ 5 750 000
30 June 20.21 ............................................................................................................ 6 000 000

The residual value and useful life of the building remained unchanged throughout the period.

Manufacturing equipment

On 1 January 20.18, Ndzala acquired state-of-the-art manufacturing equipment from Zalawi Plc, a
company based in Malawi at a cost price of R1 100 000. The equipment was delivered at a fee of R2 200
which was paid in cash on 31 January 20.18. On 31 March 20.18, Ndzala paid an additional R14 400 in
cash, to a Malawian installation expert to install the equipment. During the installation phase capsules
were produced to test the functionality of the machine. The cost of the capsules produced during the
testing phase amounted to R50 000. Ndzala sold the capsules produced during the testing phase for
R30 000.

The manufacturing equipment was available for use, as intended by management, and brought into use
on 1 April 20.18. On this date, Ndzala management determined that the manufacturing equipment had
an estimated useful life of 10 years with no residual value. Both the useful life and the residual value of
the manufacturing equipment remained unchanged throughout the period.

25
 QUESTION 4 (continued)

Cold storage delivery vehicle

On 1 May 20.21, Ndzala entered into an exchange transaction with another pharmaceutical company
based in Nairobi, Kenya. Ndzala agreed to exchange one of its highly specialized packaging equipment
for a cold storage delivery vehicle. The Kenyan company’s cold storage delivery vehicle was customised
and met Ndzala’s needs for the delivery of medications and thus the exchange of the assets was
deemed to have commercial substance. On 1 May 20.21, the packaging equipment had a fair value of
R3 000 000 and a carrying amount of R2 100 000 (cost: R3 500 000; accumulated depreciation:
R1 400 000). Ndzala had purchased the packaging equipment on 1 January 20.16, and it was used in
the manufacturing process since the acquisition thereof. On 30 June 20.20 the accumulated
depreciation balance on the packaging equipment amounted to R1 000 000. The cold storage delivery
vehicle had a carrying amount of R2 500 000 (cost: R3 000 000; accumulated depreciation: R500 000)
on exchange date. As at the 1 May 20.21, the fair value of a customised cold storage delivery vehicle
could not be reliably measured. It can be assumed that all amounts provided are correct.

On 1 May 20.21, the cold storage delivery vehicle was ready for use as intended by management.
Ndzala determined that on this date, the cold storage delivery vehicle had an estimated useful life of
45 000 kms and no residual value. On 30 June 20.21, the cold storage delivery vehicle had clocked
2 500 kms.

Property in Sinoville

On 1 July 20.20, Ndzala purchased a property in Sinoville at a cost of R2 300 000 (land: R900 000;
building: R1 400 000). The property was available for use, as intended by management, as well as
brought into use, on acquisition date. Ndzala uses 20% of the floor space of the building for their own
purposes whilst the remaining 80% of the floor space of the building is leased out under a five (5) year
operating lease agreement for R25 000 per month. The directors of Ndzala consider the 20% of the floor
space of the building to be an insignificant portion, which cannot be sold separately. The building has
an estimated useful life of 35 years and a residual value of Rnil was allocated to it.

On 30 June 20.21, an independent sworn appraiser provided the management of Ndzala with the
following fair values for this Sinoville property:
R
Land ............................................................................................................................. 920 000
Building ........................................................................................................................ 1 500 000

Formula – Ketamine anxiety medication

On 1 September 20.20, Ndzala purchased a formula for a new Ketamine anxiety medication at a cost
of R1 053 250. Legal costs amounting to R48 000 were incurred, in cash, on acquisition date to finalise
the purchase agreement. The formula was available for use as well as brought into use, as intended by
management, on 1 November 20.20. On acquisition date management allocated a residual value of
R80 000 and an expected useful life of 6 years to the formula. A large advertising campaign to promote
this product was launched and carried out during December 20.20 at a cost of R50 000. This entailed
the creation and distribution of advertising brochures and the recording of a radio advert to create public
awareness about the anxiety medication. At year end on 30 June 20.21, Ndzala has no commitment
from a third party to purchase the formula at the end of its useful life and no active market exists for
such a formula.

26
 FAC3761/104
QUESTION 4 (continued)

Accounting policies

The following is an extract from the accounting policies of Ndzala:

 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 the
revaluations will be made with sufficient regularity to ensure that the carrying amounts do not differ
materially from which would be determined using the fair values at the end of the reporting period.
 Owner occupied buildings, delivery vehicles and manufacturing and packaging equipment are
accounted for using the cost model.
 Investment property is accounted for in accordance with the fair value model. The carrying amount
of the investment property will be recovered through sale.
 Intangible assets are accounted for in accordance with the cost model.
 Depreciation on the buildings and manufacturing and packaging equipment is provided for in
accordance with the straight-line method over the estimated useful lives of the assets.
 Depreciation on delivery vehicles is provided for in accordance with the units of production method.
 Amortisation on all intangible assets is written off in accordance with the straight-line method over
the expected useful lives of the assets.

Taxation

The South African normal tax rate is 28%. The capital gains tax inclusion rate is 80%.

The South African Revenue Services (SARS) allows a 5% annual building allowance according to
section 13quin of the Income Tax Act, on the straight-line method, not apportioned for part of the year.

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

Assumptions

 All amounts are material.

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

27
QUESTION 4 (continued)

REQUIRED

a) Prepare the relevant general journal entry in the accounting records of

Ndzalama Ltd, to correctly account for the exchange transaction entered
into. Support your answer with an explanation as to the principles you
followed to determine the cost of the acquired asset within the exchange
transaction. (5)

b) Disclose the property, plant and equipment note to the annual financial
statements of Ndzalama Ltd for the year ended 30 June 20.21. A total
column is not required. (15)

c) Calculate the deferred tax balance on 30 June 20.21 of Ndzalama Ltd

according to the statement of financial position approach, ONLY relating to
the land and building of the Sinoville property. Clearly indicate in your
answer the carrying amount, tax base, temporary difference and applicable
tax rate used. Indicate in your note whether the deferred tax balance is a
deferred tax asset or a deferred tax liability. (8)

d) Discuss the accounting treatment of the following costs incurred, relating to

the Ketamine anxiety medication formula in the accounting records of
Ndzalama Ltd for the year ended 30 June 20.21:
 legal cost;
 advertising cost. (9)

e) Discuss, with reasons if Ndzalama Ltd correctly allocated a residual value of

R80 000 to the Ketamine anxiety medication formula. (3)

Please note:
Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Round off all calculations to the nearest Rand.
Show all calculations.
Comparative amounts are not required.
Accounting policy notes are not required.
Journal narrations are not required.
No abbreviations for general ledger account names may be used.

28
 FAC3761/104
SOLUTION QUESTION 4

a) Journal entry to account for the exchange transaction entered into, together with a
discussion on the determination of the cost of the acquired asset.

In accordance with IAS 16:24, an asset acquired through an exchange transaction shall be measured
at the fair value of the asset given up, R3 000 000 unless:
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received, nor the asset given up is reliably measurable.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the
asset given up.

The exchange transaction has commercial substance and therefore, the cold storage delivery vehicles
should be recognised at a cost of R3 000 000.

Debit Credit
R R
Cold storage delivery vehicle @ Cost 3 000 000
Accumulated depreciation: Packaging equipment (given) 1 400 000
Packaging equipment @ Cost 3 500 000
Profit on exchange of asset 900 000

b) NDZALAMA LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR-ENDED 30 JUNE 20.21

Property, plant and equipment

Land Building Equipment Vehicles

R R R R
Carrying amount at the begin-
ning of year 5 750 000 8 191 667 3 365 365 -
Gross carrying amount/Cost 5 750 000 8 900 000 4 416 600 -
Accumulated depreciation - (708 333) (1 251 235) -
Revaluations 250 0001 - - -
Additions (as per part (b)) - - - 3 000 000
Disposals (given) - - (2 100 000) -
Depreciation - (340 000) (511 660) (166 667)
Carrying amount at the end of
the year 6 000 000 7 851 667 753 705 2 833 333
Gross carrying amount/Cost 6 000 000 8 900 000 1 116 600 3 000 000
Accumulated depreciation - (1 048 333) (362 895) (166 667)

Land was revalued on 30 June 20.21 by an independent sworn appraiser. The carrying amount of the
land if it was carried under the cost model, would have amounted to R5 000 000.

29
 SOLUTION QUESTION 4 (continued)

CALCULATIONS

1. Land – Property in Makhado

Carrying
amount
R
Cost 1 May 20.18 5 000 000
Revaluation surplus (calc 1.1) 750 000
Carrying amount 30 June 20.19 5 750 000
Revaluation surplus (calc 1.2) 250 000
Carrying amount 30 June 20.21 6 000 000

1.1 5 750 000 – 5 000 000 = 750 000

1.2 6 000 000 – 5 750 000 = 250 000

2. Building – Property in Makhado

Carrying
amount
R
Cost 1 May 20.18 (calc 2.1) 8 900 000
Accumulated depreciation (calc 2.2) (708 333)
Carrying amount 30 June 20.20 8 191 667
Depreciation (calc 2.3) (340 000)
Carrying amount 30 June 20.21 7 851 667

2.1 7 750 000 + 1 150 000 = 8 900 000

2.2 (8 900 000 – 400 000) / 300 x 25 months = 708 333 (25 years x 12 months = 300 months);
(1 June 20.18 to 30 June 20.20 = 1 + 12 + 12 = 25 months)
2.3 (8 900 000 – 400 000) / 300 x 12 = 340 000 OR (8 900 000 – 400 000) / 25 = 340 000

3. Manufacturing and packaging equipment

Carrying
amount
R
Cost (calc 3.1) 4 616 600
Accumulated depreciation (calc 3.2) (1 251 235)
Carrying amount 30 June 20.20 3 365 365
Depreciation (calc 3.3) (511 660)
Disposal (2 100 000)
Carrying amount 30 June 20.21 753 705

3.1 3 500 000 + (1 100 000 + 2 200 + 14 400 = 1 116 600) = 4 616 600
3.2 (1 000 000 + ((1 116 600 / 120) x 27)) = 1 251 235 (10 years x 12 months = 120 months);
(1 April 20.18 to 30 June 20.20 = 3 + 12 + 12 = 27 months)
3.3 [(1 400 000 – 1 000 000) + (1 116 600 / 10)] = 511 660

30
 FAC3761/104
SOLUTION QUESTION 4 (continued)

4. Vehicles
Carrying
amount
R
Cost 1 May 20.21 3 000 000
Depreciation (calc 4.1) (166 667)
Carrying amount 30 June 20.21 2 833 333

4.1. 3 000 000 / 45 000 x 2 500 = 166 667

c) Calculation of the deferred tax balance on the Sinoville property on 30 June 20.21.

Deferred tax
Carrying Temporary Asset /
amount Tax base difference Tax rate (Liability)
R R R R
Land 920 000 900 000 20 000 80% x 28% (4 480)
Building 1 500 000 1 330 000 170 000 (42 000)
1 500 000 1 400 000 100 000 80% x 28% 22 400
1 400 000 1 330 0001 70 000 28% 19 600

1. 1 400 000 – (1 400 000 x 5%) = 1 330 000

d) Accounting treatment of the legal and advertising cost incurred on the Ketamine anxiety
medication formula.

Legal cost:

Intangible assets are initially measured at cost. The cost price of an intangible asset includes the
purchase price and any directly attributable costs that is necessary to bringing the asset to the condition
that enables it to be used in the manner intended by management.

Legal cost is necessary cost to bringing the asset to the condition that enables it to be used by the
company.

Conclusion: Legal cost therefore qualifies as a directly attributable cost which should be capitalised
towards the cost of the Ketamine anxiety medication formula and written off over the estimated useful
life of the formula.

Advertising cost:

Capitalisation of costs ceases as soon as the intangible asset has been brought to the condition that
enables it to be used.

The extra advertising cost incurred to create public awareness regarding the Ketamine anxiety
medication was incurred after the intangible asset was available for use and should thus be expensed
and not be capitalised towards the cost of the intangible asset. In addition, advertising costs are listed
in IAS 38 as one of the costs that may never be capitalised as an intangible asset.

Conclusion: Advertising cost will be expensed to the statement of profit or loss and other comprehensive
income.

31
 SOLUTION QUESTION 4 (continued)

e) Residual value of the Ketamine anxiety medication formula

A residual value is defined as the expected proceeds on disposal of the asset less its expected cost of
disposal. The disposal proceeds and costs reflect those of the asset that is currently already of the age
and the condition that the asset is expected to be when it reaches the end of its useful life.

According to the requirements of IAS 38, Intangible assets, the residual value should be zero unless:
 A third party has committed to buying the intangible asset at the end of its useful life; or
 The intangible asset has an active market and the residual value can be measured from this
active market and it is probable that the active market will exist at the end of its useful life.

Conclusion: Ndzalama Ltd has no commitment from a third party to purchase the formula and the end
of its useful life and there is no active market currently for such formula, therefor a residual value of Rnil
should have been allocated to the Ketamine anxiety medication formula. Management of Ndzalama Ltd
incorrectly allocated a residual value of R80 000 to the Ketamine anxiety medication formula.

©
UNISA 2022
FAC3761_2022_TL_104_0_B.doc

32