ACCC 372

STUDY UNIT 1:
INCOME TAX

QUESTION PACK
Compiled by: Prof RR de Villiers
Reviewed by: Prof RR de Villiers
Copyright © 2022 edition. Review date 2022.
North-West University

No part of this document may be reproduced in any form or in any way without the written permission of the publishers.
 INDEX OF QUESTIONS
Question MA Study unit (Primary) Required L
1: Suits 30 SU 1: Income tax (IAS 12) Disclosure 1
SU 2: Property, plant and equipment (IAS 16)
SU 4: Investment property (IAS 40)
2: Poema 30 SU 1: Income tax (IAS 12) Disclosure 2
SU 2: Property, plant and equipment (IAS 16)
3: Tax Man 40 SU 1: Income tax (IAS 12) Journal entries 2
SU 2: Property, plant and equipment (IAS 16) Presentation
Discussion
4: Mangwanani 32 SU 1: Income tax (IAS 12) Presentation 3
SU 2: Property, plant and equipment (IAS 16) Discussion
5: YAG 30 SU 1: Income tax (IAS 12) Discussion 3
SU 2: Property, plant and equipment (IAS 16)
6: KUCC 40 SU 1: Income tax (IAS 12) Journal entries 3
SU 2: Property, plant and equipment (IAS 16) Presentation
SU 4: Investment property (IAS 40) Discussion
7: G&T 50 SU 1: Income tax (IAS 12) Presentation 3
SU 2: Property, plant and equipment Discussion
(IAS 16, IFRIC 1) Disclosure
SU 4: Investment property (IAS 40)

Note 1: The mark allocation (‘MA’) in the suggested solutions may differ between questions of a
similar nature. Marks allocated to a question depend on the difficulty of the question, the insight
required in order to answer the question and thus the time that is required to complete the question.
The mark allocation is provided to give you a guide as to the time that will be required to complete the
question.

Note 2: The level (‘L’) of the questions are provided to give you an indication of when to do these
questions during the process of you mastering the study unit(s). Please see below for detail:

• Level 1: These questions should be done after all the study material, which includes the textbook
and class notes, have been thoroughly studied to determine if you have mastered the basic
principles in connection with the study unit(s). These questions may also contain some basic
principles of a study unit(s) completed in prior modules (i.e. ACCC 271).

• Level 2: These questions test the basic principles of the study unit(s) on a higher level and
should be completed only after the level 1 questions have been completed. These questions
may also contain some basic principles of a study unit(s) completed in prior modules (i.e. ACCC
271). These questions provide an introduction to the level this study unit(s) will be assessed at
during tests or exams.

• Level 3: These questions test more advanced principles of the study unit(s) on a higher and
more integrated level and should only be completed after the level 2 questions have been
completed. These questions are also integrated with other study units completed during this
module (i.e. ACCC 372) or previous modules of a similar nature (i.e. ACCC 271). These
questions should be tackled in preparation for tests or exams to determine whether the learning
outcomes, as stipulated in the module overview document, have been mastered. Some of these
questions will also be completed and discussed in detail during the tutorial session of this specific
study unit.
When completing the level 1 & 2 questions, the following steps should be taken for EACH
question to enable you to get test and/or exam ready:

- Step 1: Allow yourself as much time as required for you to really work through the question
slowly and ensure that you really grasp the concepts and the scenario. After completing this,
do the question completely and use as much time as needed to complete the question
properly. It is extremely important that you actually write out your attempt as you would have
done in the test and/or exam.
- Step 2: When you are done, mark yourself by comparing your written attempt to the
suggested solution. When marking yourself, it is important that you identify what aspects /
study units / principles you still need to work on and then to actually go back to those aspects
/ study units / principles in your study material and revise it again or study principles you
might have missed (or misunderstood) the first time.
- Step 3: Go back to the study material on the aspects / study units / principles you still need
to work on (i.e. those identified in Step 2) and revise those BEFORE commencing with the
next question. After having done so, and you are now comfortable with the aspects /
study units / principles you needed to work on, continue with the next question by following
the aforementioned steps again.

When completing the level 3 questions, the following steps should be taken for EACH question
to enable you to get test and/or exam ready:

- Step 1: Allow yourself 0.3 minutes per mark reading time. It is extremely important that you
read, high light etc. as you would have done in the test and/or exam.
- Step 2: Allow yourself 1.5 minutes per mark writing time after the reading time is up. It is
extremely important that you actually write out your attempt as you would have done in the
test and/or exam.
- Step 3: When your time is up, you can continue writing to complete the question. You can
consider continue writing in a different colour pen for example (after your time is up) to give
you an indication of what you would have been able to do in the actual test and/or exam
under the time allowed.
- Step 4: Mark yourself by comparing your written attempt to the suggested solution. When
marking yourself, it is important that you identify what aspects / study units / principles you
still need to work on and then to actually go back to those aspects / study units / principles
in your study material and revise it again or study principles you might have missed (or
misunderstood) the first time.
- Step 5: Go back to the study material on the aspects / study units / principles you still need
to work on (i.e. those identified in Step 4) and revise those BEFORE commencing with the
next question. After having done so, and you are now comfortable with the aspects /
study units / principles you needed to work on, continue with the next question by following
the aforementioned steps again.

DISCLAIMER: Please note that these questions are not to provide you with any scope for
the test and/or exams. It is merely for practice purposes to give you an opportunity
to evaluate your test and/or exam readiness before writing the actual tests and/or exams.
You should therefore still study every principle in each study unit, even if it is not
included in any of the test and/or exam question packs.
TIME
Allow 0.3 minutes per mark to read the question and 1.5 minutes per mark to write the suggested
solution, for example a 40 mark question should take you 12 minutes to read (0.3 x 40 marks) and 1
hour (1.5 x 40 marks) to write.

ACTION VERBS
That which you as student should learn (and that which will be assessed by the lecturer later) are
always formulated with a specific verb – which is known as the action verb in the formulation of the
outcome, assignment or exam question.

In the Accounting context the following verbs are regularly used in the formulation of exam questions
(please note the meaning of each):

Present: Show accounting information on the face of financial statements, in

the correct format.
Analyse: Investigate and discuss in detail.
Prepare: Provide an account, statement or notes in the correct format.
Calculate/determine: Calculate/determine the amount/value of.
Describe: Give a proper description of exact detail.
Discuss: Give your opinion on.
Discuss critically: Give your critical opinion on.
Prove: Support the answer with logical arguments and application of facts.
Define: Give a comprehensive definition of.
Differentiate: List and discuss the differences between.
Evaluate: Assess a matter based on certain criteria.
Give an overview: Summarise a large amount of knowledge in a logical and systematic
manner without losing the essence of the matter.
Identify: Choose the correct description of an item.
Journalise: Write up a transaction in the form of a journal entry.
Classify: Classify in a group or class.
List: List facts one by one.
Measure: Determine the amount at which the item will be included in the
financial statements.
Name: Only give the names of.
Note/write up: Write the information on the source document in the journal.
Develop/create: Develop a document/system by using given information.
Disclose: Show required accounting information in detail in the notes to the
financial statements.
Post: Carry information over from the journals to the ledger (provide a
ledger entry).
Explain: Clarify or interpret in an unbiased way.
Account for: Treat transactions in the correct accounting manner in the journal,
ledger or financial statements.
Compare: Matters are set against each other and differences and similarities are
pointed out.
Complete: Provide additional information on the given data.
Value: Determine the value of.
IMPORTANT INFORMATION
If a question does not explicitly state that the following are not required, they are required by
default:

Disclosure of comparative figures. The disclosure of comparative figures is a requirement of IAS 1

and must always be provided. If the question however does not require comparative figures to be
disclosed, the question will specifically state that comparative figures are not required.

Journal narrations. It is general practice to always provide journal narrations (descriptions), in order
to keep a record of the reasons for general journals in practice.

Presentation brackets. If uncertainty can arise over the type of account, the type of account should
be shown in brackets after the account name, e.g. in journals (i.e. specify ‘P/L’, ‘OCI’, ‘SFP’ or ‘SCE’
in brackets after the account name). It is also not sufficient to simply specify ‘SPLOCI’ – be more
specific in specifying either ‘P/L’ or ‘OCI’.

Taxation. Taxation is always required, except if it is clearly excluded in the required.

WARNING AGAINST PLAGIARISM

ASSIGNMENTS ARE INDIVIDUAL TASKS AND NOT GROUP ACTIVITIES (UNLESS EXPLICITLY
INDICATED AS GROUP ACTIVITIES).

Copying of text from other learners or from other sources (for instance prescribed material or directly
from the internet) is not allowed – only brief quotations are allowed and then only if indicated as such.

You should reformulate existing text and use your own words to explain what you have read. It is
not acceptable to retype existing text and just acknowledge the source in a footnote – you should be
able to relate the idea or concept, without repeating the original author to the letter.

The aim of the assignments is not the reproduction of existing material, but to ascertain whether you
have the ability to integrate existing texts, add your own interpretation and/or critique of the texts and
offer a creative solution to existing problems.

Be warned: students who submit copied text will obtain a mark of zero for the assignment and
disciplinary steps may be taken by the Faculty and/or University. It is also unacceptable to do
somebody else’s work, to lend your work to them or to make your work available to them to
copy – be careful and do not make your work available to anyone.
QUESTION 1 30 marks

Ignore value-added tax and dividend tax.

The following information pertains to Suits Ltd (‘Suits’) for the year ended 28 February 2014
(‘FY2014’). You are assisting the new accountant, Mr Harvey Specter, with various taxation issues in
order to finalise the annual financial statements.

Machinery
Suits revalues machinery annually in accordance with IAS 16 Property, Plant and Equipment.
Machinery is revalued by Mr Michael Ross, a sworn appraiser, annually on 1 March. The following
information is available for the machinery that makes customised suits:

Description R
Cost (1 March 2011) 800 000
Gross replacement value (1 March 2012) 900 000
Revaluation surplus balance in the statement of changes in equity (after tax) 56 800
(28 February 2013)

Depreciation is provided on the straight-line method to an insignificant residual value, over an

estimated useful life of ten years. The South African Revenue Service (SARS) allows a section 12C
wear-and-tear allowance of 20% per annum on the straight-line method; not apportioned for periods
shorted than a year.

On 1 March 2013, the gross replacement value of the machine was R1 050 000 with an insignificant
residual value. There is no intention to sell the asset.

Suits realises the revaluation surplus to retained earnings over the useful life of the asset.

Office building
Due to the significant increase in the demand for suits, Suits decided to expand and therefore acquired
an office building on 1 September 2011 for R800 000 in cash. Although the office building was
immediately available for use, it was only brought into use from 1 December 2011. The building has
an insignificant residual value. There is no intention to sell the office building.

Suits accounts for buildings on the cost model in accordance with IAS 16 and provides for
depreciation on the straight-line basis at 2.5% per annum. The office building does not qualify for any
tax allowances.

Land
Suits purchased vacant land in Cape Town and Durban for R1 000 000 each on 1 March 2013. Suits
sold the Cape Town land on 31 December 2013 for R1 060 000. Suits accounts for this land as
investment property on the fair value model in accordance with IAS 40 Investment Property. The land
in Durban had a fair value of R1 100 000 on 28 February 2014.

Insurance
Suits pays insurance annually in advance. The prepaid payment relating to FY2014 paid on
28 February 2013 amounted to R50 000 and R30 000 was paid on 28 February 2014 in connection
with FY2015. The SARS allows a section 11(a) deduction in the year of payment.
Profit before tax
The accounting profit before tax for FY2014 amounted to R2 200 000 after the above information, as
well as the following items, was correctly taken into account as:

Item Dr. / (Cr.)

Dividends received from a South African company (213 000)
Fine for contravention of the Companies Act 140 000

Other information
• During the budget speech in February 2013, the Minister of Finance announced that the
companies’ tax rate will decrease from 29% to 28% for all financial years starting on or after
1 March 2013.
• The assessed loss for FY2013 amounted to R160 000. The board of directors was of the opinion
that the company will make enough taxable profits in the foreseeable future to utilise this unused
tax loss as the company’s budget includes new contracts to deliver business suits.
• The deferred tax liability balance amounted to R37 700 at 28 February 2013.
• Assume a normal tax rate of 28% for FY2014 and that 66.6% of capital gains are taxed resulting
in an effective capital gains tax rate of 18.648% for all financial years.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• There are no temporary differences other than those that are apparent from the given information.

MARKS
REQUIRED: Sub-
Total
total
Prepare the income tax expense note to be disclosed in the individual financial
statements of Suits for FY2014. You are required to show non-deductible and
non-taxable items separately from deductible and taxable items in your current
tax calculation. Deferred tax should be calculated on the statement of financial
position method. Accounting policy notes and comparative figures are not
required. 29
Communications skills – presentation and layout 1 30
TOTAL MARKS 30
QUESTION 2 30 marks

Ignore value-added tax and dividend tax.

POEMA Pty (Ltd) (‘POEMA’) is a fuel filling station operating in the Mpumalanga province. The filling
station provide commuters with a one-stop-shop where they can fill up their motor vehicles whilst also
shopping at the convenience store and other restaurants available at the premises.

POEMA was incorporated four years ago and initially made some losses before it started to show
profits during the previous financial year which ended on 31 December 2019 (‘FY2019’). As the new
financial accountant appointed at POEMA, you were presented with the following background
information with regards to the financial activities of POEMA for FY2020 and FY2021:

FILLING STATION PROPERTY

The filling station property consists of the actual land and the building. The building is used for the
offices, the convenience store and other restaurants. The property was acquired on 1 April 2017 for
an immediate cash payment of R5 500 000 in total of which R1 000 000 is attributable to the land
portion of the property, which is also deemed material in relation to the total value of the property. The
property was also ready for and taken into use on 1 April 2017. The initial useful life estimates of the
building amounts to 20 years with an insignificant residual value. The South African Revenue Service
(SARS) does not allow any capital allowances on the building. The fair value of the land and buildings
amounted to the following on the respective dates:

Date Land Building

31 December 2019 R1 500 000 R4 800 000
31 December 2020 R1 650 000 R4 950 000

EQUIPMENT
The equipment at the filling station consists of the fuel pumps, tyre pressure pumps, and other
equipment used within the convenience store. The equipment was acquired for at an immediate cash
payment of R3 500 000 in total on 1 May 2017. The equipment was ready for and taken into use on
1 May 2017. The initial useful life estimates on the equipment amounted to ten years with a residual
value of R800 000. The SARS allows a section 11(e) wear-and-tear allowance over five years from
the date the equipment is taken into use; apportioned for periods shorter than a year.

INVENTORY
The inventory of POEMA consist of fuel as well as the other inventory items such as consumables
and the various items sold at the convenience store. The SARS allows the gross inventory balance
as a deduction when the inventory is actually sold and does not allow the write-down to net realisable
value as a deduction from the closing inventory balance. The inventory balance consisted of the
following for the following financial years:

Description FY2020 FY2019

Gross inventory balance R1 500 000 R1450 000
Write-down to net realisable value recognised in profit or loss (R230 000) (R210 000)
Net inventory balance R1 270 000 R1 240 000

TRADE DEBTORS
The gross debtors balance amounted to R850 000 at the end of FY2020 (FY2019: R750 000) before
the allowance for credit losses balance of R75 000 for FY2020 (FY2019: R60 000) has been taken
into account. The SARS allows a section 11(j) deduction on the accounting allowance for credit losses
of 40% per annum during both years of assessment.
TRADE CREDITORS AND ACCRUED EXPENSES
The trade creditors balance amounted to R950 000 at the end of FY2020 (FY2019: R820 000) in total
and includes an accrued expenses balance of R210 000 for FY2020 (FY2019: R180 000). The SARS
allows the expenses in connection with the trade creditors as a deduction when incurred and allows
the accrued expenses as a deduction when paid in cash. All trade creditor and accrual balances at
the end of a specific month are settled during the following month.

PREPAID EXPENSES
The prepaid expenses balance amounted to R350 000 at the end of FY2020 (FY2019: R220 000) in
total. These expenses relate to expenses being incurred in the following financial year. The SARS
applies the section 23H limitation on these expenses which results in POEMA only being able to claim
these expenses as a deduction in the year of assessment it is actually incurred and not when paid in
cash.

INCOME RECEIVED IN ADVANCE

The income received in advance is a result of the restaurant owners which pay their monthly rental a
month in advance. The income received in advance balance amounted to R150 000 at the end of
FY2020 (FY2019: R165 000) in total. This rental income receipts are not kept in a separate bank
account and the SARS therefore taxes these amounts on receipt.

OTHER CURRENT MATTERS

POEMA had a correctly calculated assessed loss of R337 739 at the end of FY2020 (FY2019:
R2 500 000) for the FY2020 year of assessment and had no under or over provision for current tax in
any financial year.

The correctly calculated and recognised deductible deferred tax balance for FY2019 amounted to
R181 419. Of this balance, R382 438 (credit) pertains to the revaluations of items of property, plant
and equipment accounted for on the revaluation model in prior financial years. POEMA correctly
concluded at the end of FY2019 that the company had enough future taxable profits to utilise any
deductible temporary differences.

The correctly calculated profit before tax for FY2020 amounted to R2 160 000 on 31 December 2020.
This profit includes a restraint of trade expense amounting to R110 000 which was paid to a
competitor which prohibits the competitor to open another filling station within a 50km radius of the
POEMA filling station. The SARS does not allow any deduction for this expense.

Additional information
• Owner-occupied land and the buildings are accounted for on the revaluation model in accordance
with IAS 16 Property, Plant and Equipment and revaluations are performed at the end of each
financial year. Any revaluation surplus balances are realised to retained earnings over the
remaining useful life of the underlying asset.
• All other items of property, plant and equipment are accounted for on the cost model in accordance
with IAS 16.
• Depreciation is accounted for on the straight-line method.
• All useful life and residual value estimates remained unchanged unless the contrary is clearly
evident or stated.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• All disclosures required in the individual financial statements are always presented in rand.
• Assume a normal tax rate of 28% for FY2020 (FY2019: 29%) and that 80% of capital gains are
taxed at an effective capital gains tax rate of 22.4% for FY2020 (FY2019: 23.2%).
• There are no temporary differences other than those that are apparent from the given information.
 MARKS
REQUIRED: Sub-
Total
total
Prepare the income tax expense note to be disclosed in the individual financial
statements of POEMA for FY2020. Your deferred tax calculation should be
prepared using the statement of financial position method and should include all
assets and liabilities even if it results in no temporary differences. Clearly indicate
the following as part of your calculation:
• Whether each of the temporary differences result in a deferred tax asset or
liability; and
• Whether the resulting deferred tax asset or liability is recognised in profit or loss
or in other comprehensive income.
Accounting policy notes and comparative figures are not required. 29
Communications skills – presentation 1 30
TOTAL MARKS 30
QUESTION 3 40 marks

Ignore value-added tax and dividend tax.

Tax Man (Pty) Ltd (‘Tax Man’) is a manufacturer of luxury motor vehicles situated in Bloemfontein.
The company opened its doors for business during FY2015 and has since grown into a profitable
business. You are the financial accountant of Tax Man and you are in the process of finalising the
individual financial statements for the financial year ended 28 February 2017 (‘FY2017’). You obtained
the following information which you require to finalise the taxation workings and some financial
statement disclosures for the current financial year:

Land
Tax Man purchased land in Bloemfontein for R600 000 on 1 July 2015 and paid in cash immediately.
Land is accounted for on the revaluation model in terms of IAS 16 Property, Plant and Equipment.

Admin building
The admin building was bought from its previous owner at a total cost of R920 000 which was paid in
cash on 1 September 2015. The building was ready for use on 1 September 2015 but was only taken
into use on 1 January 2016. Tax Man accounts for buildings on the cost model in terms of IAS 16 and
provides for depreciation on a straight-line basis at 5% per annum to an insignificant residual value.
The South African Revenue Service (SARS) does not allow any tax allowances on the admin building.
It is the intention of Tax Man to use the admin building until the end of its useful life. To date, the
residual value and useful life estimate remained unchanged.

Equipment
The equipment used to manufacture the luxury vehicles was obtained at a total cost of R1 500 000
which was paid in cash immediately on 1 January 2016. The equipment was ready for and taken into
use on this date. Depreciation is provided on a straight-line basis to an insignificant residual value
over an estimated useful life of 20 years. The SARS allows a section 12C wear-and-tear allowance
of 20% per annum on a straight-line basis; not apportioned for periods shorted than a year.

Tax Man accounts for equipment on the revaluation model in terms of IAS 16. It is the intention of
Tax Man to use the equipment until the end of its useful life. To date, the residual value and useful
life estimate remained unchanged.

Trade debtors
Tax Man’s gross trade debtors balance at the end of FY2017 amounted to R3 450 000 (FY2016:
R3 175 000). Tax Man provided for an allowance for credit losses for both years resulting to a balance
of R517 500 and R476 250 respectively at the end of FY2017 and FY2016. The SARS grants a 25%
deduction of the accounting allowance for credit losses in terms of section 11(j) each year.

Deposits received
Tax Man received a number of orders for a new luxury vehicle scheduled to be released during
July 2017. The orders are subject to a 50% deposit to be paid by the customer on the date the order
is placed. The orders are cancellable by the customer at any point in time and the vehicles are not
controlled by the customers before its release date. The total value of the deposits received during
FY2017 amounted to R620 000 on 28 February 2017, which was correctly accounted for as revenue
received in advance in the statement of financial position. No such deposits were received in any
previous financial year. The SARS taxes the deposits on receipt and allows them as a deduction
should it be paid back to the customer. No cancellations has taken place in any period under review.
Security monitoring
Tax Man pays the security monitoring annually in advance. The prepaid payment relating to FY2017
year amounted to R36 000 and was paid on 28 February 2016. R45 000 was paid on
28 February 2017 in connection with FY2018. The SARS allows a section 11(a) deduction in the year
the payment is made.

Revaluation surplus
The before tax revaluation surplus balance in the statement of changes in equity was made up as
follows for the respective assets:

Land Equipment
Dr. / (Cr.) Dr. / (Cr.)
Balance on 1 March 2016 (R150 000) (R162 500)
Revaluation during FY2017 (R100 000) (R193 193)
Realisation to retained earnings - R8 193
Balance on 28 February 2017 (R250 000) (R347 500)

Profit before tax

The accounting profit before tax for FY2017 amounted to R1 860 000 after correctly taking into
account the above-mentioned transactions as well as the following items:

Item Dr. / (Cr.)

Dividends received from an equity investment in a South African company (R150 000)
Fine paid due to non-compliance with CO2 omission regulations R120 000

Deferred tax
The net taxable temporary differences at the end of FY2016 resulted in the deferred tax recognised
in the statement of financial position having a balance amounting to R18 580 which consists of
temporary differences recognised in both profit or loss and other comprehensive income. Of this
balance, a credit of R76 275 is as a result of the revaluation of the land and the equipment during
FY2016. The remainder of the balance consists of the deferred tax on other items recognised in profit
or loss.

Accounting policies and other information

• The tax clerk correctly determined that the non-taxable and non-deductible items for current tax
purposes results in a nett non-deductible difference of R16 000 for FY2017.
• The assessed loss for FY2016 amounted to R180 000. Tax Man’s board was of the opinion that
company will make enough taxable profits in the foreseeable future to utilise this unused tax loss
as the company’s budget includes various new vehicle launches that would render enough
taxable income in the future.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• Tax Man revalues its assets in terms of IAS 16 (if applicable) at the end of the financial year
using the net replacement value method and realises the revaluation surplus to retained
earnings over the remaining useful life of the asset.
• Assume a normal tax rate of 28% for FY2017 (FY2016: 27%) and that 80% of capital gains are
taxed at an effective capital gains tax rate of 22.4% for all financial years under consideration.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• There are no temporary differences other than those that are apparent from the given information.
 MARKS
REQUIRED: Sub-
Total
total
(a) Prepare the journal entry required to account for the current tax payable in
the individual financial statements of Tax Man for FY2017. Journal narrations
are not required. 10 10
(b) Calculate the total deferred tax expense to be recognised in profit or loss in
the individual financial statements of Tax Man for FY2017. Your calculation
should be performed using the statement of financial position method and
should include all assets and liabilities even if it results in no temporary
differences. Clearly indicate the following as part of your calculation:
• Whether each of the temporary differences result in a deferred tax asset
or liability; and
17
• Whether the resulting deferred tax asset or liability is recognised in profit
or loss or in other comprehensive income.
Communications skills – presentation and layout 1 18
(c) Prepare the tax rate reconciliation, presented in percentages, as an extract
from the income tax expense note, to be disclosed in the individual financial
statements of Tax Man for FY2017. Accounting policy notes and comparative
figures are not required. Round to two decimals. 4
Communication skills – presentation and layout 1 5
(d) In a report to the management of Tax Man, discuss whether, and to what
extent, Tax Man is allowed to recognise a deferred tax asset in its individual
financial statements if ONLY the following information is applicable (i.e. ignore
any other information):
• Tax Man has taxable temporary differences of R120 000 and deductible
temporary differences of R180 000 for the current financial year.
• Tax Man had no taxable or deductible temporary differences in any prior
financial year.
• It is not probable that the entity will make sufficient taxable profits in the
future against which the deductible temporary differences may be
utilised.
• Management has however recently appointed a new tax consultant that
identified opportunities for favourable tax planning, so much so that 50%
of the net deductible temporary difference can be utilised in the following
couple of years.
• Management has the intention to recover the carrying amount of all
assets and liabilities through the use thereof.
Support your discussion with appropriate amounts and calculations. Limit 6
your discussion to the requirements of IAS 12 Income Taxes.
Communication skills – presentation and layout 1 7
TOTAL MARKS 40
QUESTION 4 32 marks

Ignore value-added tax.

Mangwanani (Pty) Ltd (‘Mangwanani’) is an African day spa specialising in refreshing a person’s body
and mind in a tranquil African setting. Mangwanani developed its own range of products, which are
uniquely South African, used during relaxation and spa therapies. All products used are made with
natural and naturally derived ingredients and fragranced with essential oil in line with its awareness
of its carbon footprint. Mangwanani has a 30 June financial year-end and was incorporated on
1 July 2014.
The financial manager of Mangwanani provided you, a technical consultant employed by
Mangwanani, with the following information (you can assume that the calculations provided are
arithmetically accurate):
• The FY2016 deferred tax calculation;
• The journal entry processed to account for the FY2016 deferred tax;
• Notes on the items included in the FY2016 deferred tax calculation.

The FY2016 deferred tax calculation

DT p/l
CA TB TD
Items % Dr. / (Cr.) or
R R R R OCI
Closing balance on 30 June 2015 (106 587)
30 June 2016 REASON: the cost is realise through sale hence we assume that managements
Land (Note 1) intention is to sell hence using the CGT rate for everything above cost
6272
Historical carrying amount* 1 320 000 1320 000 - 1 320 000 28% Exempt p/l
@22.4%
Revaluation surplus* 280 000 - 280 000 28% (78 400) OCI

Office building (Note 2) Managements intention is to use the asset hence we use the statutory tax rate of 28%
Historical carrying amount* 315 000 - 315 000 28% (88 200) p/l
Revaluation surplus* 175 000 - 175 000 22.4% (39 200) OCI 49 000

Therapy rooms (Note 3)

Historical carrying amount*# 708 333 765 000 + (56 667) 28% 15 867 p/l
Revaluation surplus*# 221 667 - 221 667 28% (62 067) p/l
leads to a deferred tax liability because the CA is less than the CA
Equipment*# (Note 4) 541 667 390 000 151 667 28% 42 467 p/l

Trade debtors (Note 5) CA for debtors is supposed to be 250 000, this is because the tax base of an asset that is not taxable its = CA
Gross carrying amount* 250 000 - 250 000 28% (70 000) p/l
Allowance for credit losses* (62 500) - (62 500) 28% 17 500 p/l
The tax base of allowance for credit losses is 15 625 because the tax base of a liability is CA - amount taxable in the future. =350000- 75%
of this amount
Revenue received in 135 000 135 000 - 28% - p/l
advance* (Note 6) TB of income received in advance id CA minus amounts not taxable ein the future
CA is equal to 550 00
Trade payables* (Note 7) 550 000 - 550 000 28% 154 000 p/l
Closing balance on 30 June 2016 (143 033)
* Assume that the historical carrying amount and revaluation surplus balance (if applicable) are calculated
correctly.
#
Assume that the tax base is calculated correctly in accordance with IAS 12 Income Taxes.
 The journal entry processed to account for the FY2016 deferred tax

Dr. Income tax expense (p/l) R143 033

Cr. Deferred tax (SoFP) R143 033
Recognition of deferred tax for FY2016

Notes on the items included in the FY2016 deferred tax calculation

Note 1: Land
The land on which Mangwanani is operating was originally purchased from the previous owner at a
total cost of R1 320 000 which was paid immediately in cash. The land was revalued to its fair value
of R1 500 000 and R1 600 000 on 30 June 2015 and 30 June 2016 respectively.

Note 2: Office building

The office building was bought from its previous owner at a total cost of R350 000 which was paid in
cash immediately on 1 July 2014. The office building was ready for and taken into use on the same
date. Mangwanani provides for depreciation on a straight-line basis at 5% per annum to an
insignificant residual value. The South African Revenue Service (SARS) does not allow any tax
allowances on the office building. It is the intention of Mangwanani to use the office building until the
end of its useful life. To date, the residual value and useful life estimate remained unchanged. The
office building was revalued to its fair value of R420 000 and R490 000 on 30 June 2015 and
30 June 2016 respectively.

Note 3: Therapy rooms

The therapy rooms were erected by Mangwanani during the first three months after its incorporation.
These rooms were completed on 1 October 2014 at a total cost of R850 000. These rooms were not
ready for use on this date as they still needed to be fitted with the necessary equipment. The rooms
were, therefore, fitted with the necessary equipment and was ready for and taken into use on
1 November 2014.

Mangwanani provides for depreciation on a straight-line basis at 10% per annum to an insignificant
residual value. The SARS allows a section 13quin capital allowance of 5% per annum on these rooms;
not apportioned for periods shorter than a year. It is the intention of Mangwanani to use the therapy
rooms until the end of its useful life. The therapy rooms were revalued to its fair value of R900 000
and R930 000 on 30 June 2015 and 30 June 2016 respectively.

Note 4: Equipment
The equipment used in the therapy rooms were originally purchased for R650 000 on
30 October 2014. The equipment was ready for and taken into use on 1 November 2014.
Mangwanani provides for depreciation on a straight-line basis at 10% per annum to an insignificant
residual value. The SARS allows a section 11(e) wear-and-tear allowance of 20% per annum on this
equipment; apportioned for periods shorter than a year. It is the intention of Mangwanani to use the
equipment until the end of its useful life.

Note 5: Trade debtors and allowance for credit losses

Mangwanani’s gross trade debtors balance on 30 June 2016 amounted to R250 000 (FY2015:
R200 000). Mangwanani provided for an allowance for credit losses for both years resulting in a
balance of R62 500 on 30 June 2016 and a movement of R22 500 recognised as an expense in profit
or loss on 30 June 2016. The SARS grants a 25% deduction of the accounting allowance for credit
losses in terms of section 11(j) each year.
Note 6: Revenue received in advance
Any reservation made by a client is subject to a 20% refundable deposit. The reservations are
cancellable by the client at any point in time. The total value of the deposits received in connection
with appointments for FY2017 amounted to R135 000 on 30 June 2016. These deposits were
correctly accounted for as revenue received in advance in the statement of financial position on
30 June 2016. All the appointments made for FY2015 and FY2016 were attended by the clients during
the respective financial years. The SARS taxes the deposits on receipt and allows them as a
deduction should it be paid back to the customer.
Note 7: Trade payables
The trade payables balance amounted to R550 000 on 30 June 2016 and relates to amounts
outstanding to various suppliers payable during July 2016. The expenses in connection with these
costs are included in other expenses on the statement of profit or loss and other comprehensive
income. The SARS allows these expenses as a deduction in terms of section 11(a) on the date it is
incurred and not when it is actually paid.
Accounting policies and other information
• The correctly calculated profit before tax for FY2016 amounted to R1 450 000 on 30 June 2016.
This profit includes other expenses to the value of R10 000 that is not deductible for income tax
purposes. During the prior financial year, Mangwanani’s total net temporary differences resulted
in a deferred tax liability being recognised. No assessed loss was incurred during the 2015 year
of assessment.
• Mangwanani revalues land, office buildings and therapy rooms in terms of IAS 16 Property, Plant
and Equipment at the end of the financial year using the net replacement value method and
realises the revaluation surplus to retained earnings over the remaining useful life of the asset.
• All other items of property, plant and equipment are accounted for on the cost model in terms of
IAS 16.
• Assume a normal tax rate of 28% and that 80% of capital gains are taxed at an effective capital
gains tax rate of 22.4% for all financial years under consideration.
• There are no temporary differences other than those that are apparent from the given information.

MARKS
REQUIRED: Sub-
Total
total
(a) Calculate the current tax payable to be recognised in the individual statement
of profit or loss and other comprehensive income of Mangwanani for the 2016
year of assessment. You are required to show non-deductible and non-
taxable items separately from deductible and taxable items in your
calculation. 10 10
(b) Identify and discuss any errors from the following information provided to you
by the financial manager of Mangwanani:

• The FY2016 deferred tax calculation; and

• The journal entry processed to account for the FY2016 deferred tax.
Each error identified should be supported by a valid reason(s) and a
recommendation on the correct treatment of the error in the calculation or
journal entry. Include amounts as part of your discussion where possible from
the given information. Limit your reasons to the requirements of IAS 12. You
are not required to prepare a new, correct deferred tax calculation. 21
Communication skills – clarity of expression 1 22
TOTAL MARKS 32
QUESTION 5 30 marks

Ignore value-added tax and dividends tax.

You are a consultant at You’re a Genius (Pty) Ltd (‘YAG’), a firm that provides outsourced accounting
services to a variety of clients across South Africa. All of YAG’s clients are registered at the South
African Revenue Service (SARS) as ordinary residents. The following information pertaining to one
of these clients are provided below:

DAP (Pty) Ltd (‘DAP’)

DAP is a property transfer attorney firm that specialises in providing its clients with quick, efficient and
reliable legal services when their clients purchase or sell any properties. The company was
incorporated on 1 January 2019 and has a 31 December financial year end (‘FY’). The following
information was confirmed to be correct and accurately calculated for DAP:

FY2019
Dr. / (Cr.)
Note 1
Profit / loss for the year (before tax) (R250 000)
Note 2
SARS payable (SoFP) (R311 720)
Note 3
Deferred tax (SoFP) R168 200

Note 1: DAP made an accounting loss before tax amounting to R1 450 000 during FY2020 in contrast
to the profit it made during FY2019.

Note 2: The SARS payable balance of R311 720 was settled on 1 January 2020. No provisional
payments were made in any financial year. DAP has a correctly calculated assessed loss amounting
to R715 000 for the 2020 year of assessment. The statutory tax rate of DAP changed at the beginning
of FY2020 from 29% to 28% and has remained unchanged to date. Capital gains have always been
included at an inclusion rate of 80%.

Note 3: The net deductible deferred tax balance of R168 200 consist amongst other things of a credit
amounting to R34 800 which was recognised at the end of FY2019 in connection with the revaluation
of land above its original cost. No other items of other comprehensive income were recognised during
FY2019. The management of DAP always assessed DAP as having enough future taxable profits to
recognise any deductible temporary differences. This assessment was however revised at the end of
FY2020 and it was noted that DAP will now only have enough future taxable profits to recognise 70%
of deductible temporary differences. It was also confirmed that no tax planning opportunities existed
at the end of FY2020.

The financial manager at DAP provided you with the following final income tax expense note, with
supporting calculations and notes (Notes 4 – 8) that will be included in the individual financial
statements of DAP for FY2020, and he requires your expertise advice on the matter:

DAP (Pty) Ltd

Notes to the individual financial statements of DAP (Pty) Ltd for the year ended
31 December 2020

9. Income tax expense 2020

Main components of income tax expense
Current tax expense (715 000 x 28%) 200 200
Deferred tax expense 298 000
- Normal temporary differences Note 4 292 200
- Tax rate change (168 200 x 1/29) 5 800
Total income tax expense 498 200
DAP (Pty) Ltd
Notes to the individual financial statements of DAP (Pty) Ltd for the year ended
31 December 2020 (continued …)

Tax rate reconciliation 2020

Loss before tax at statutory rate (1 450 000 x 28%) (406 000)
Tax rate change (168 200 x 1/29) 5 800
Total income tax expense (400 200)

Note 4: Deferred tax calculation and normal temporary difference movement for FY2020 to be
recognised in profit or loss:

Carrying Tax Temporary % Deferred tax

Deferred tax
amount base difference Dr. / (Cr.)
Land Note 5
Up to cost R1 500 000 R- R1 500 000 28% Exempt
(IAS 12.15(b)

Above cost R100 000 R- R100 000 28% R28 000

Building Note 5
Historical carrying amount R2 250 000 R- R2 250 000 28% Exempt
(IAS 12.15(b)

Revaluation surplus R200 000 R- R200 000 28% (R56 000)

Accrued expenses Note 6 R1 850 000 R- R1 850 000 28% (R518 000)
Provisions Note 7 R460 000 R460 000 R- 28% R-
Deposits received Note 8 R850 000 R850 000 R- 28% R-
Goodwill R100 000 R- R100 000 28% (R28 000)
Deferred tax balance on 31 December 2020 R518 000

SoFP
Item
Dr. / (Cr.)
Deferred tax (SoFP) – Balance on 1 January 2020 R168 200
Tax rate change (R168 200 x 1/29) R5 800
Deferred tax (SoFP) – Balance on 31 December 2020 (R518 000 x 90%) (R466 200)
Normal temporary difference movement for FY2020 to be recognised in profit
(R292 200)
or loss

Note 5: The land and buildings were acquired for an immediate cash consideration on
1 January 2020. The land and buildings was ready for and taken into use on the same date. The land
was considered to be material in relation to the total value of the property. The land and building are
accounted for on the revaluation model in accordance with IAS 16 Property, Plant and Equipment and
are revalued at the end of the financial year. The building had an insignificant residual value and an
estimated useful life of 15 years on its acquisition date. These estimates have remained unchanged
to date. At the end of FY2020 the land and building was revalued with R100 000 and R200 000
upwards respectively. The SARS allows no allowances on the land nor the building. The building is
held with the intention to use the building until the end of its useful life.

Note 6: The SARS allows these expenses as a deduction when incurred and not only when paid. All
these accrued expenses were incurred during FY2020.

Note 7: The SARS allows these expenses as a deduction when paid in cash. All these expenses were
incurred during FY2020, however, none has been paid at the end of FY2020.
Note 8: These deposits received are non-refundable and SARS taxes these deposits on the earlier
of receipt or accrual. All these deposits were received during FY2020.

MARKS
REQUIRED: Sub-
Total
total
With reference to the information about Client 1:
Identify and briefly discuss, supported by valid reason(s), any errors/omissions
in the following:
i) Income tax expense note to the individual financial statements of DAP for the
year ended 31 December 2020;
ii) Deferred tax balance calculation at the end of FY2020; and
iii) Normal temporary difference movement calculation for FY2020 to be
recognised in profit or loss.
You can assume that all calculations provided are arithmetically accurate. Limit
your errors and omissions to those evident from the given information. Do not
discuss the consequential effect of any errors or omissions identified. The
identification of any qualitative disclosure or accounting policy note
requirements omitted are not required. Limit your reason(s) to the requirements
of IAS 12 Income Taxes and IAS 1 Presentation of Financial Statements. You
are not required to perform any calculations or to provide any recommendations
on the correct treatment of the errors or omissions identified.

Present your discussion in the following table format:

Error / omission Reason(s) 29

Communication skills – presentation and layout 1 30

TOTAL MARKS 30
QUESTION 6 40 marks

Ignore value-added tax and dividend tax.

Khaya Ububezi Conference Centre (Pty) Ltd (‘KUCC’) is a distinguished 4 star graded conference
facility near Parys, situated on the banks of the Vaal river. This conference facility accommodates
conferencing and corporate functions and caters for the specific needs of the conference delegate
within an African inspired setting.

KUCC has a 31 December financial year end and the statutory audit for the 2017 financial year has
just been completed. You, as the financial manager of KUCC, are now tasked with the job to evaluate
and rectify, where necessary, the several errors and omissions identified by the auditors, as well as
to finalise the financial statements for approval by the board at the end of March 2018.

Below is an extract from the initial trial balance of KUCC provided to the auditors for the financial year
ended 31 December 2017 (‘FY2017’), before any of the errors and omissions identified and noted
below, were corrected and taken into consideration:

Balance
General ledger account
Dr. / (Cr.)
GL-123: Current tax expense (p/l) R390 192
GL-129: Deferred tax expense (p/l) R57 739
GL-661: SARS payable (SoFP) R390 192
GL-669: Deferred tax (SoFP) – 31 December 2017 R46 783
GL-731: Revaluation surplus: Owner-occupied land (SoCE) – 31 December 2016 (R115 200)
GL-140: Revaluation surplus: Owner-occupied land (OCI) (Before tax) R100 000

The only errors and omissions identified by the auditors (not yet correctly accounted for in
the above balances) are listed below:

Error 1: Incorrect tax rate used in the FY2017 deferred tax calculations to reflect the manner
of recovery of the fair value adjustments of the vacant land held for capital appreciation
In performing the FY2017 deferred tax calculation, KUCC was of the opinion that they correctly
rebutted the rebuttable presumption on the manner of recovery of the carrying amount of a piece of
vacant land. Details in connection with this vacant land included the following:

Description Amount
Cost on 1 January 2017 (paid immediately in cash) R950 000
Fair value on 31 December 2017 R1 200 000
Fair value adjustment recognised in profit or loss during FY2017 R250 000

Error 2: Incorrect depreciation expense on the office building

The depreciation expense on the office building was incorrectly calculated as R75 000 instead of
R85 000, i.e. KUCC used R75 000 in the FY2017 current and deferred tax calculation. The South
African Revenue Service (SARS) does not allow any capital allowances on the office building. It is the
intention of KUCC to use the office building until the end of its useful life.

Error 3: Incorrect tax base for general creditors

At the end of the FY2017, KUCC had a general creditors balance of R260 000. KUCC included a tax
base of Rnil when calculating the deferred tax effect of these general creditors in the FY2017 deferred
tax calculation. However, the SARS allows the expenses in connection with these general creditors
as a section 11(a) deduction when it is actually incurred and not only when it is actually paid.
Error 4: Incorrect treatment of prepayment in the FY2017 deferred tax calculation
KUCC pays for its liquor licence yearly in advance on 31 December of each year. The prepayment
relating to FY2018 was paid on 31 December 2017 and amounted to R75 000. KUCC classified the
temporary difference arising from the prepayment as a deductible temporary difference in the deferred
tax calculation. It was however correctly accounted for in the FY2017 current tax calculation. The
SARS allows the prepayment as a deduction in terms of section 11(a) when it is actually paid.

Omission 1: Exclusion of FY2017 deferred tax effect of computer equipment

The correctly calculated FY2017 deferred tax movement of R5 167 on the computer equipment was
not included in the FY2017 deferred tax calculation. The tax rate change and the current tax impact
was, however, correctly accounted for. The movement was calculated as follows:

Amount
Description
Dr. / (Cr.)
Taxable temporary difference during FY2016 of R18 457 x 29% (R5 354)
Tax rate change during FY2017 of R5 353 x 1/29 R185
Taxable temporary difference during FY2017 of R36 914 x 28% (R10 336)
Total movement (R5 167)

Omission 2: Exclusion of current tax effect of data projectors

KUCC exchanged its old data projectors for more technologically advanced data projectors on
30 June 2017. The total effect thereof in the deferred tax calculation was correctly accounted for
during FY2017, whilst the effect of both the old and new data projectors were omitted from the FY2017
current tax calculation. Details of the old and new data projectors include the following:

Old data projectors

Cost on 1 January 2016 (ready for and taken into use on same date; paid R150 000
immediately in cash)
Fair value on 30 June 2017 R125 000
Useful life as of 1 January 2016 10 years
New data projectors
Fair value on 30 June 2017 (ready for and taken into use on same date) R130 000
Useful life as of 30 June 2017 10 years

The residual values of both the old and new projectors were considered immaterial. The useful life
and residual value estimates remained unchanged. The exchange transaction had commercial
substance as defined in terms of IAS 16 Property, Plant and Equipment. The SARS allows a section
11(e) wear-and-tear allowance over 15 years on both the old and new projectors; apportioned for
periods shorter than a year. KUCC has never had any intention to sell any of its data projectors. The
SARS deems the exchange transaction as if the old projectors were sold and the new projectors were
obtained for the same consideration as would be recognised for accounting purposes in terms of
IAS 16.

Omission 3: Exclusion of deposits received from the FY2017 current and deferred tax
calculation
KUCC receives deposits for conferences on receiving a booking for a future conference. The deposit
is refundable on cancellation of the booking, which results in control only passing when the conference
takes place. At the end of FY2017, KUCC received deposits to the value of R80 000 which were
correctly classified as revenue received in advance during FY2017. SARS taxes the deposits on the
earlier of receipt or accrual. The effect of these deposits were however not included in the current and
deferred tax calculation for FY2017. No such deposits were received at the end of the prior financial
year.
Omission 4: Exclusion of allowance for credit losses from the FY2017 current tax calculation
The SARS allows a section 11(j) deduction of 25% of the accounting allowance for credit losses each
year. The effect of the allowance was correctly accounted for in the FY2017 deferred tax calculation.
However, the FY2017 current tax calculation does not include the effect of the allowance for credit
losses. The allowance for credit losses of KUCC amounted to the following at the respective dates:

Amount
Description
Dr. / (Cr.)
Balance on 31 December 2016 (R150 000)
Balance on 31 December 2017 (R160 000)

Accounting policies and other information

• The correctly calculated accounting profit before tax, after correctly considering the above errors
and omissions amounted to R1 950 000. This profit includes a net non-deductible difference of
R2 000. The latter consists of dividends received form a local listed company to the value of
R10 000 and the remaining balance consists of other non-deductible expenses incurred during
FY2017. The latter items were correctly accounted for in the FY2017 current tax calculation.
• The correctly calculated net deductible deferred tax balance on 31 December 2016 amounted to
R80 922.
• The assessed loss for FY2016 amounted to R360 000. KUCC’s board has always been of the
opinion that the company will make taxable profits in the foreseeable future to utilise any unused
tax losses.
• Assume that none of the identified errors and omissions affect any of the prior year balances.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position and was done correctly during FY2017.
• Owner-occupied land is accounted for on the revaluation model and is revalued at the end of
the financial year in terms of IAS 16.
• All other items of property, plant and equipment are accounted on the cost model in terms of
IAS 16.
• Investment property is accounted for on the fair value model in terms of IAS 40 Investment
Properties.
• Depreciation and amortisation are accounted for on the straight-line method.
• KUCC always utilises any tax deductions received from SARS in the year of assessment they
are entitled to do so.
• Assume a normal tax rate of 28% for FY2017 (FY2016: 29%) and that 80% of capital gains are
taxed at an effective capital gains tax rate of 22.4% during FY2017 (FY2016: 23.2%).
• Assume that all other information provided are correctly and accurately accounted for to the
extent that it is not affected by the errors and omissions noted.
• There are no temporary differences other than those that are apparent from the given information.
 MARKS
REQUIRED: Sub-
Total
total
(a) Prepare the correcting journal entry required to correct the current tax expense
in the individual financial statements of KUCC for FY2017. Start your
calculation with the wrong current tax expense of R390 192 provided in the
extract from the trail balance. A journal narration is not required. 11 11
(b) For each of the specific errors and omissions identified affecting the deferred
tax balance calculation, briefly discuss the effect (i.e. debit or credit), if any,
that the correction of the error or inclusion of the omission will have on the
FY2017 deferred tax balance in the statement of financial position. For each
effect discussed, or if the specific error or omission will have no effect on the
deferred tax balance, provide a brief (i.e. only one) reason from IAS 12 Income
Taxes to support your discussion of the effect on the deferred tax balance.
Support your discussion with appropriate amounts and calculations.
14
Present your discussion in the following table format:

Error/ Effect of the correction/ Amount IAS 12

omission # inclusion on the deferred tax reason
balance (i.e. debit or credit)

Communication skills – structure 1 15

(c) Assuming that the correctly calculated taxable deferred tax balance of KUCC
amounted to R41 953 on 31 December 2017 and that all the above errors and
omissions have correctly been accounted for, prepare the deferred tax general
ledger account in the individual statement of financial position of KUCC for
FY2017. All items (i.e. movements) that are required to be disclosed
separately under the main components section of the income tax expense
note should be presented separately in the general ledger account. All
movements in the deferred tax general ledger account that affects profit or
loss and other comprehensive income should be presented separately.
Clearly indicate whether the movements in the account affects profit or loss or
other comprehensive income where applicable. 7 7
(d) Assuming that the correctly calculated total income tax expense recognised in
profit or loss amounts to R560 350 on 31 December 2017 and that all the
above errors and omissions have correctly been accounted for, prepare the
tax rate reconciliation, presented in amounts, as an extract from the income
tax expense note to be disclosed in the individual financial statements of
KUCC for FY2017. Accounting policy notes and comparative figures are not
required. 6
Communication skills – presentation and layout 1 7
TOTAL MARKS 40
QUESTION 7 50 marks

Ignore value-added tax and dividend tax.

G&T Consultants Inc. (‘G&T’) is an accounting consulting firm specialising in providing clients with
high quality assistance in connection with the International Financial Reporting Standards (‘IFRS’).
G&T has various divisions, each specialising in specific IFRS standards.

During January 2019, G&T advertised a permanent employment position in one of its divisions in the
Sunday Times newspaper. This division mainly provides consultation services to clients in connection
with IAS 12 Income Taxes, IAS 16 Property, Plant and Equipment and IFRIC 1 Changes in Existing
Decommissioning, Restoration and Similar Liabilities. As an expert in these fields you applied for the
position and was short-listed for an interview. Upon your short-listing, you were informed by the
Human Resources Department that you are required to complete several unrelated case studies in
connection with IAS 12, IAS 16 and IFRIC 1 as part of the interview process. A few days later you
received the following unrelated case studies and other relevant information to enable you to complete
the case studies in preparation for the interview:
--------------------------
ACCOUNTING POLICIES TO BE USED AND OTHER INFORMATION:
You can assume the following in connection with each case study unless the contrary is clearly stated
or evident:

• All companies reflected in the case studies have a 31 December financial year end.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• Depreciation is accounted for on the straight-line method.
• All companies always utilise any tax deductions received from the South African Revenue
Service (SARS) in the year of assessment they are entitled to do so.
• Assume a normal tax rate of 28% and that 80% of capital gains are taxed at an effective capital
gains tax rate of 22.4% for all financial years under consideration.
• Assume that any initial useful life and residual value estimates remained unchanged unless the
contrary is clearly stated or evident.
• Assume an after tax discount rate of 7.92% as appropriate where necessary.
• There are no temporary differences other than those that are apparent from the given information
in each case study.
• Abbreviations generally used within the case studies include the following:
- Carrying amount [CA]
- Historical carrying amount [HCA]
- Revalued carrying amount [RCA]
- Tax base [TB]

CASE STUDY 1: COMPANY A (PTY) LTD (‘COMPANY A’)

Company A is a company specialising in the retailing industry. Due to the economic downturn and
customers’ spending power decreasing, Company A had an assessed loss of R145 000 for the 2017
year of assessment. Company A’s profitability increased slightly during the 2018 financial year
(‘FY2018’) and the profit before tax amounted to R450 000 and includes non-taxable dividends and
non-deductible donations to the value of R110 000 and R135 000 respectively. The financial
accountant summarised some of the transactions (transaction 1 - 6 below) affecting, and also already
correctly taken into account in Company A’s profit before tax for FY2018 above. The financial
accountant also provided you with his initial proposed thoughts on some of the deferred tax
implications (‘DTI’s’) of each transaction (transaction 1 - 6 below) for FY2018.
 Revaluation surplus = 70 000 Up to cost CA = 350 000
deferred tax to OCI = 70 000*22.4%= (15680 ) L
• Transaction 1 TB= 350 000
Company A purchased a piece of owner-occupied land during FY2017 to the value of R350 000
paid in cash on the same date. The land is measured on the revaluation model in terms of IAS 16
and was revalued to its fair value of R420 000 for the first time during FY2018.
Proposed DTI’s: A taxable temporary difference of R420 000 (R420 000 [RCA] – R0 [TB])
would arise as the tax base on the land would amount to R0. This taxable temporary difference
would be measured by using the normal tax rate of 28% resulting in a deferred tax liability and
an income tax expense in profit or loss of R117 600 (R420 000 x 28%) being recognised.
• Transaction 2
Company A built an office building which was completed during FY2017 to the value of
R2 950 000. The office building was ready for and taken into use on the same date and has an
insignificant residual value. The office building is measured on the revaluation model and was
revalued to its net replacement value on 1 January 2018 for the first time. The office building had
a remaining useful life of 219 months on 31 December 2018 with an insignificant residual value.
Any revaluation surplus recognised is realised to retained earnings as the asset is being used.
The following correctly calculated balances in connection with this office building are provided to
you on the respective dates:

Item Dr. / (Cr.)

Historical carrying amount on 31 December 2018 R2 691 875
Revaluation surplus balance on 31 December 2018 (before tax) R626 306

The SARS allows a section 13quin capital allowance on this office building at 5% per annum; not
apportioned for periods shorter than a year. Company A has the intention to use the office building
until the end of its useful life and then to scrap it. dpr ?
Proposed DTI’s: The only taxable temporary difference that would arise will amount to
R2 691 875 (R2 691 875 [HCA] – R0 [TB]) as a result of the difference between the historical
carrying amount and the tax base of the office building.
w & t = 2 950 000*5%=147 00
• Transaction 3
Company A purchased a piece of equipment during FY2017 which is measured on the cost model
in terms of IAS 16. The correctly calculated carrying amount and tax base amounted to R350 000
(FY2017:R420 000) and R180 000 (FY2017:R220 000) respectively on 31 December 2018. The
residual value is regarded to be insignificant. The company has the intention the use its
equipment until the end of its useful life.
Proposed DTI’s: A deductible temporary difference of R170 000 (R350 000 [CA] – R180 000
[TB]) would arise as a result of this equipment. This deductible temporary difference would be
measured by using the capital gains tax rate of 22.4% resulting in a deferred tax asset of
R38 080 (R170 000 x 22.4%) being recognised.
• Transaction 4
Company A purchased an office building for R1 460 000 in cash on 1 January 2018 from its
previous owner. The office building had an estimated useful life of 20 years and an insignificant
residual value on this date. Company A leases out this office building to an unrelated third party
in terms of IFRS 16 Leases and has therefore correctly classified the office building as investment
property in terms of IAS 40 Investment Property. The SARS does not allow any capital
allowances on this office building.
This office building is measured on the fair value model in terms of IAS 40. The fair value of the
office building amounted to R1 950 000 on 31 December 2018 which resulted in a fair value
adjustment to the value of R490 000 being recognised in profit or loss during FY2018.
 Company A has correctly proven the intention to use the office building to consume substantially
all of the economic benefits embodied within this investment property over time, rather than to
sell it in the future.
Proposed DTI’s: A temporary difference of R0 (R1 460 000 [CA] – R1 460 000 [TB]) would
arise on the difference between the historical carrying amount and the tax base.
• Transaction 5
Company A received rental income on 31 December 2018 to the value of R250 000 for the month
of January 2019 in connection with the building noted in transaction 4 above. The SARS taxes
this rental income on the earlier of receipt or accrual. The tenants have never before paid any
rental in advance.
Proposed DTI’s: A temporary difference of R0 (R250 000 [CA] – R250 000 [TB]) would arise
on the rental income received in advance.
• Transaction 6
Company A accrued for leave pay during December 2018 to the value of R125 000 on
31 December 2018. The SARS allows this expense as a deduction when paid in cash.
Proposed DTI’s: A temporary difference of R0 (R125 000 [CA] – R125 000 [TB]) would arise
on the provision (accrual).

CASE STUDY 2: COMPANY B (PTY) LTD (‘COMPANY B’)

Company B acquired a depreciable asset on 1 December 2016 for R1 500 000 in cash. The asset
was ready for and taken into use on 1 January 2017. It was estimated that the asset would have a
useful life of ten years and an insignificant residual value. The asset is measured on the cost model
in terms of IAS 16 and the correctly calculated carrying amount as reflected in the individual statement
of financial position of Company B amounted to R1 800 000 on 31 December 2017.
Company B is also required by law to dismantle the asset at the end of its useful life. On
31 December 2017, this liability had a correctly calculated balance of R555 000. On 1 January 2018,
it was noted that the future cost changed, and that Company B would now have to pay a contractor
R1 662 724 to dismantle the asset at the end of its useful life. The SARS does not allow any capital
allowances on the initial cost of the asset (i.e. the R1 500 000).
The dismantling cost would only be deductible from taxable income when it is paid in cash as per
confirmation received from SARS. Company B has the intention to use the asset until the end of its
useful life and then to sell the dismantled asset for an insignificant amount.

CASE STUDY 3: COMPANY C (PTY) LTD (‘COMPANY C’)

The following information provided to you relates to Company C for the financial year ended
31 December 2018:
• Company C made a profit before tax of R1 250 000 which includes non-deductible fines and non-
taxable interest received from a tax-free savings account.
• Company C had a correctly calculated net taxable temporary difference of R75 739 on
31 December 2018 (FY2017: R80 000 net deductible temporary difference).
• On 31 December 2017, it was evident that Company C will make enough taxable profits in future
to only recognise 50% of any deductible temporary differences with no future tax planning
opportunities.
• On 1 January 2018, Company C revalued one of its property, plant and equipment items for the
first time. The revaluation surplus recognised in other comprehensive income amounted to
R189 900 (after tax). All other assets are measured on the cost model in terms of IAS 16.
• Company C has always had the intention to use all its assets until the end of its useful lives.
• The normal tax rate changed from 27% to 28% on 1 January 2018 and the correctly calculated
effective tax rate to be disclosed in the tax rate reconciliation for FY2018 amounted to 28.752%.
• The following journal entry was processed to recognise the correctly calculated total deferred tax
expense in profit or loss for FY2018:

Dr. Deferred tax (SoFP) R41 843

Cr. Income tax expense (p/l) R41 843

Company C provided you with the following draft income tax expense note which will be included in
the individual financial statements of Company C for FY2018:

Notes to the individual financial statements of Company C for the financial year ended
31 December 2018
2018
12. Income tax expense R
The major components of the income tax expense are as follows:
Current tax expense ?
Deferred tax expense ?
- Movement in normal temporary differences ?
- Tax rate change ?
- Other items ?
?

MARKS
REQUIRED: Sub- Total
total
(a) With reference to case study 1 only, calculate the current tax payable to be
recognised in the individual statement of profit or loss and other
comprehensive income of Company A for the 2018 year of assessment. You
are required to show non-deductible and non-taxable items separately from
deductible and taxable items in your calculation. 10 10
(b) With reference to case study 1 only, identify and briefly discuss, supported
by valid reason(s), any errors in the financial accountants’ initial thoughts on
some of the proposed DTI’s of each transaction.

Each error identified should be supported by a recommendation on the correct

treatment as per the initial thoughts provided and include given amounts
where possible. You are not required to present any calculations. Limit your
discussion to the requirements of IAS 12 and to the errors evident within the
initial thoughts provided. You can assume that the calculations are
mathematically accurate. 18
Communication skills – logical argument 1 19
(c) With reference to case study 2 only, prepare an extract from the individual
statement of financial position of Company B for FY2018 reflecting all affected
asset and liability line items. Comparative figures are not required. 9
Communication skills – presentation and layout 1 10
(d) With reference to case study 3 only, prepare and complete the income tax
expense note provided to be disclosed in the individual financial statements
of Company C for FY2018. Comparative figures are not required. A tax rate
reconciliation is not required. 10
Communication skills – presentation and layout 1 11
TOTAL MARKS 50