QUESTION 3 73 MARKS

PART A 43 MARKS

Tech Steel Trailers Ltd (‘Tech Steel’) was incorporated in June 2008 and commenced with trading
as from 1 July 2008. The financial year-end is 30 June. The company applies International
Financial Reporting Standards (IFRS).

Tech Steel mainly manufactures and sells trailers to South-African residents. The trailer sales were
doing extremely well during the last two years, but the directors still felt that they can perform much
better. During the 2017 financial year the directors also started to buy and sell trailer parts.

Tech Steel rented a premises in the industrial area in Vanderbijlpark until the owner of the
premises sold the property at the end of December 2013. The new owners of the premises allowed
Tech Steel to continue renting on a monthly basis. This made the directors of Tech Steel realise
that it was time to own their own property, the most important reason being that it would then be
their property to do with as they see fit, and that it will also be an investment into the future of the
company. Tech Steel continued with the month to month lease until the date that their own
premises was ready to be occupied.

Tech Steel has been a registered VAT vendor as from 1 September 2009. Tech Steel has various
directors who are responsible for the management of the entity. All directors agreed to apply a
policy to only conduct business with other businesses also registered for VAT, and ensured that
proper documents are kept in order to claim valid input VAT deductions at all times. Assume a VAT
rate of 14%.

Tech Steel adopted various accounting policies pertaining to tangible and intangible assets
and it can be summarised as follows:

Property, plant and equipment

 Land is not depreciated. Land is accounted for under the revaluation model in terms of IAS 16
Property, Plant and Equipment at the beginning of a year.

 Buildings are depreciated over the expected useful life of the building, taking into account
estimated residual values. Buildings are accounted for under the cost model in terms of IAS 16.

 The welding machine and spray-oven will be depreciated over its expected useful life taking
into account estimated residual values. It will be accounted for under the cost model in terms of
IAS 16.

No changes in useful lives or estimated residual values took place during the current financial year
for any asset.

Investment property
 All investment property is measured based on the fair value model in terms of
IAS 40 Investment Property.

Intangible assets
 All assets classified as intangible assets will be carried on the cost model in terms of
IAS 38 Intangible Assets.

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Land and buildings
Tech Steel was very fortunate to find the most ideal property. The property is close to
Arcellor Mittal, the main supplier of steel for manufacturing the trailers. It is also located in the
industrial area of Vanderbijlpark, being close to the old rented premises and therefore clients would
have no problem finding the new premises.

Over the past years of trading, Tech Steel has accumulated funds for expansion purposes. The
company, therefore, acquired a piece of land on 1 January 2015 at a cost of R942 000 (including
VAT) and the full amount was settled by electronic transfer. Due to cash shortages for erecting the
building, Tech Steel negotiated a specific loan with SAAB bank. The loan amounted to R1 600 000
at an interest rate of 8% per year. The interest would accumulate on an annual basis and be
capitalised to the loan account on the 31 December each year. The loan would have to be repaid
in a once off instalment of which the due date is 1 July 2019. The amount borrowed was paid into
the bank account of Tech Steel on 1 January 2015. Expenditure on the building project can be
summarised as follows:

Amount paid
Date of payment Details to payment
(including VAT)
1 January 2015 Architectural services R228 000
15 June 2015 Sub-contractor for foundation R342 000
20 September 2015 Sub-contractor for erecting the building exclusive R820 800
of the roof
10 January 2016 Sub-contractor for adding the roof R256 500
31 March 2016 Sub-contractor for electrical, painting and plumbing R182 400

The amounts as summarised above, were funded from the loan acquired from SAAB bank and
other cash held in the bank account of Tech Steel. The building was certified as complete and
ready to be used on 1 May 2016. It was estimated by the accountant and financial director that the
building will be depreciated over a useful life of 30 years, and that R550 000 (excluding VAT) will
be deemed to be the estimated residual value.

On 30 June 2017 the useful life of the building remained unchanged but the residual value was
estimated at R500 000 (excluding VAT).

On 1 July 2015, a company called Van Staden Revaluators Ltd (‘Van Staden’) performed a
valuation on the above mentioned land and found the fair value to be R1 820 000 (excluding VAT).

Tech Steel was very impressed with the professional service that Van Staden delivered and,
therefore, decided to employ the company again to perform the revaluation as on 1 July 2016. The
fair value was calculated as R800 000 (excluding VAT) as at 1 July 2016.

VAAL Centre
Tech Steel bought a building called Vaal Centre in central Vanderbijlpark many years ago. The
purpose of the acquisition was to earn rental income and the hope was that the value of the
property would increase over time. On 1 September 2016, Tech Steel decided that due to the fact
that all rental agreements expired on 30 November 2016, that not one of the contracts would be
renewed. As from 1 December 2016, the property was utilised for administration purposes and the
estimated remaining useful life is set at 25 years, having no residual value.

Fair values were determined as follows:

Date Fair values – Net replacement value
(excluding VAT)
30 June 2016 R1 750 000
30 November 2016 R1 790 000

On 30 June 2017, the carrying amount and fair value of the Vaal Centre property did not materially
differ.

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On 1 September 2016, Tech steel paid R7 980 (inclusive of VAT) in order to repair the plumbing of
the building.

The total rent received for the period 1 July 2016 to 30 November 2016 amounted to R96 900
(inclusive of VAT).

Other assets
Details of other assets:
Asset type Cost price Acquisition date Estimated Useful
(including VAT) residual value life
(excluding
VAT )
Rand value Rand value
Spray-oven 1 026 000 1 October 2013 100 000 10 years
Welding machine 364 800 1 July 2015 50 000 4 years

On 1 March 2017, a major part of the spray-oven was removed and had to be replaced as it
caused all paintwork to appear dull and smudged. This major part had not been recorded as a
separate component on date of acquisition of the spray-oven. The accountant and financial director
are both of the opinion that this major part made up at least 60% of the original cost price of the
spray oven and also 60% of the estimated residual value. The old part was sold to the scrap-yard
on 1 March 2017 and a total of R3 477 (including VAT) was received for the part.

On 1 April 2017, the supplier of the major part and Tech Steel negotiated a lease contract in order
to replace the part. The contract stipulated 36 monthly payments of R14 000 payable in arrears,
together with one final balloon payment of R30 000. The fair value of the part amounted to
R505 000 on 1 April 2017. Ownership will not pass over to Tech Steel at the end of the lease term.
The residual value is Rnil for the purposes of IAS 16. This is the first time that Tech Steel
conducted business with a non-vendor. Tech Steel had to pay their lawyer R2 280 (inclusive of
VAT) for legal fees in order to ensure the contract is a legal binding contract. The supplier of the
part estimated that it will be able to sell the part to a third party (even though no contracts or
guarantees as in place to confirm this) for R100 000 (excluding VAT) at the end of the lease term.
The spray-oven continued with normal activities from 1 April 2017 when the part was delivered and
installed.

Tests on possible impairments have been performed in previous financial years for the welding
machine. Tech Steel had to impair welding machine with R7 500 during the financial year ended
30 June 2016. The following amounts were calculated by Van Staden and are stated for your
perusal:

Date Asset type Net replacement Cost to sell Value in use

value (excluding (excluding
(excluding VAT) VAT) VAT)
30 June 2017 Welding Machine R189 000 R2 000 R175 000

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 MARKS
REQUIRED:
Subtotal Total
(a) Prepare the land and the buildings column in the property,
plant and equipment note to be disclosed in the financial
statements of Tech Steel for the financial year ended 24
30 June 2017.

The accounting policy note and other qualitative information of

the note are not required.
1
Communication skills – presentation and layout 25
(b) Prepare all journal entries required to account for all the
transactions that involve the spray-oven for the financial year
ended 30 June 2017. (No lease journals are required) 9

Journal narrations are not required. 9

(c) Prepare the profit before tax note to be disclosed in the
financial statements of Tech Steel for the financial year ended
30 June 2017. Only include the related effect of the investment
property and welding machine in the note. 8

Comparative figures and other descriptions as part of the note

are not required.

Communication skills – presentation and layout 1 9

TOTAL MARKS 43

TOTAL: 100
File reference: 8.1.7.2.2

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