Suggested Solution: FAC3764 Assessment 2 2024 (40 marks) (72 minutes)

Question 1 Suggested solution

a) Write a memorandum to the Group Chief Financial Officer (CFO) of Ngoma advising her on
whether the river flowing through the Nongoma farm is an asset and whether it can be
recognised as a separate asset in the accounting records of Ngomalungundu Ltd for the year
ended 31 March 2024.

To: Group Chief Financial Officer

From: FAC3764 Student
Date: 24 April 2024
Re: Advise on whether the river flowing through the Nongoma farm is an asset and whether it can be
recognised as an asset in the accounting records of Ngomalungundu Ltd.
This memorandum serves to provide guidance on whether the river flowing through the Nongoma farm
is an asset and whether it can be recognised as a separate asset in the accounting records of Ngoma.
The conceptual framework requires that an item meets the definition of an asset and recognition
criteria for such an item to be recognised as an asset.
Asset Definition:
An asset is a present economic resource controlled by an entity as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
Each of the elements of the definition are discussed below:
a. Right (present economic resource)
Ngoma has a right to access the water resources from the river flowing through its Nongoma farm
as it is legally entitled to use the water for irrigation purposes.
b. Potential to produce economic benefits

Ngoma is able to obtain economic benefits from the river because it will be using the water from
the river to irrigate its crops which will then be sold to generate income.
or
Ngoma is able to obtain economic benefits from the river because it will save money on its
municipal water bill as it will be using the water from the river to irrigate its crops.

c. Control
The conceptual framework stipulates that control exists if the entity has the present ability to:

 Direct the use of the economic resource and

 Obtain economic benefits that flow from the resource.
or
 Prevent other parties from directing the use of the economic resource and
 From obtaining the economic benefits that may flow from it.

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 Suggested Solution: FAC3764 Assessment 2 2024 (40 marks) (72 minutes)
In this case, Ngoma does not have the full ability to decide on the use of the water resources from the
river٨. This is because, the river simply passes through the farm and although Ngoma is legally entitled
to use the water resources, it lacks the ability to prevent others from using such resources before
the river enters its farm and after it exits its farm. In addition, how the water resources are used prior to
the river entering the farm and after it has exited the farm is outside the control of Ngoma.
Therefore, Ngoma does not have control over the river and its associated water resources.
d. Past event
The purchase of the farm (signing of the purchase agreement) on 1 February 2024 (prior to year end
of the 31 March 2024), is the past event that led to the resource arising.
Conclusion
As the control element is not met, the river flowing through the Ngoma farm does not meet the
definition of an asset as outlined in the conceptual framework.
Therefore, the river is not an asset and cannot be recognised as a separate asset in the accounting
records of Ngoma.
Regards
FAC3764 student
Maximum discussion marks: 8
Presentation mark: 1
Logical argument: 1
Total [10]

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 Suggested Solution: FAC3764 Assessment 2 2024 (40 marks) (72 minutes)
b) Critically evaluate, with reasons, the journal entry processed by the junior accountant of
Ngomalungundu Ltd in respect of the agreement entered into with SaveU supermarket for
the financial year ended 31 March 2024.
 Discuss both correct and incorrect aspects of the journal entry where applicable.
 Support your discussion with calculations and provide any correcting journal entry/(s), if any.
 Do not include any tax related discussions or calculations.

Correct/Incorrect aspect Correct accounting treatment/journal

The date of the journal entry
is correct and the journal
narration is also correct.
The junior accountant
processed the sale against
the correct account
(revenue)
The junior accountant
processed the cash received
for the sales of the potatoes
against the correct account
(bank)
IFRS 15 requires revenue to be recognised in an amount which
reflects the consideration to which the entity expects to be entitled
in exchange for the goods and services.

The revenue amount of R170 000 is incorrect as Ngoma does not

expect to be entitled to a portion of this amount because it will
be refunded to SaveU as a rebate when SaveU reaches the
required sales volume. This portion should be recognised as a
refund liability.

Therefore, the refund liability amount of R25 500 = (8 500X3)

should be recognised in the accounting records of Ngoma for the
year ended 31 March 2024
or
the correct revenue amount should be R144 500 (R17 x R8 500).

The following correcting journal entry should be processed:

Dr Revenue 25 500
Cr Refund liability 25 500

Alt 1 (Assuming no journal entry was processed):

Dr Bank 170 000
Cr Revenue 144 500
Cr Refund liability 25 500

Maximum marks [7]

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 Suggested Solution: FAC3764 Assessment 2 2024 (40 marks) (72 minutes)

c) Calculate the amount of current tax payable to the South African Revenue Service (SARS) as
it would be disclosed in the statement of financial position of Ngomalungundu Ltd as at 31
March 2024.
 The movement in temporary differences in the current tax calculation should be calculated using
the statement of financial position approach.
 All assets and liabilities evident from the scenario should be considered.

2024
R
Profit before tax 5 550 000
Revenue – SaveU contract (170 000 – 25 500) 144 500
Official opening expense/ Entertainment expenses (150 000)
Depreciation – Processing plant1 (86 250)
Depreciation – ROU Asset2 (741 851)
Finance cost – Lease liability2 (192 867)

Adjusted profit before tax 4 523 532

Exempt differences:
Dividends received (550 000 X 20%) (110 000)
Legal fees 133 000

Taxable profit before temporary differences 4 546 532

Movement in temporary differences (22 646 / 27% + 476 4733) (560 347)I

Assessed loss (122 000)

Taxable income 3 864 185

Current tax expense (3 864 185 x 27%) 1 043 330

Less provisional tax payments (190 000 + 55 500) (245 500)
Current tax payable to SARS on 31 March 2024 797 830

Total [20]

Workings:

1. Depreciation processing plant

(10 350 000 (9 800 000 + 550 000) / 20) x 2/12 = 86 250

2. Lease:

Lease liability – Finance cost:

N = 3; PMT = 900 000; I = 12.3%; Comp PV = 2 150 553

Finance cost (Apr 2023) = AMRT 1, INT x 1/12 or (2 150 553 x 12.3%) x 1/12 = 22 043
Finance cost (1 May 2023 – 31 Mar 2024) = AMRT 2, INT x 11/12 or (2 150 553 x 1.123 – 900 000)
x 12.3% x 11/12 = 170 824
Total finance cost: 22 043 + 170 824 = 192 867

ROU Asset – Depreciation:

2 150 553 + 75 000 = 2 225 553 / 3 = 741 851

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 Suggested Solution: FAC3764 Assessment 2 2024 (40 marks) (72 minutes)

3. Movement in temporary differences

Deferred tax
Carrying Temporary (Asset)/Liability
amount Tax base difference @27%
R R R R
31 March 2024
Refund liability (25 500) 0 (25 500) (6 885)
Land (farm) 1 125 000 1 125 000 0 0
Processing plant 10 263 750a 9 832 500b 431 250 116 438
ROU Asset 803 672c 0 803 672 216 991
Lease liability (1 685 895)d 0 (1 685 895) (455 192)
Balance: 31 March 2024 (476 473) (128 648)

Workings
a.
(10 350 000 – 86 250) = 10 263 750
b.
(10 350 000 X 95%) = 9 832 500 or [10 350 000 – (10 350 000 x 5%)] = 9 832 500

c.
741 851 x 13/12 = 803 672 or [2 225 553 – (741 851 x 23/12)] = 803 672
or [2 225 553 – (2 225 553 / 36 x 23)] = 803 672

d.
AMRT 1, BAL = 1 515 071 + 170 824 = 1 685 895
or (2 150 553 x 1.123 – 900 000) + 170 824 = 1 685 895

d) In a recent engagement with the group Chief Financial Officer (CFO) of Ngomalungundu Ltd,
she indicated that the company will not be paying any income tax due to SARS as this may
deprive the executive management team from earning their bonuses.

Discuss any ethical considerations you may have regarding the suggestion by the CFO around the
non-payment of income tax to the South African Revenue Services, in terms of the SAICA Code of
Professional Conduct (CPC) and any other applicable legislation.

The CFO is a CA(SA) and must comply with the requirements of the SAICA code of professional conduct
(CPC).

The CPC states that all members must act with professional competence and due care and adhere to
all laws and regulations.

In accordance with the tax act, Ngoma is liable to pay income tax on all taxable income earned.

The proposal by the CFO is illegal and not compliant with laws and regulations.

The proposal by the CFO is indicative of his lack of integrity and is unethical. Together with the non-
compliance with laws and regulations, the CFO is in direct contravention of the SAICA CPC.

The conduct of the CFO also raises a self-interest threat to compliance with the fundamental principles
as the CFO seeks to engage in non compliance for own benefit.

The CFO should withdraw the suggestion and ensure that the income tax due to SARS is paid in
accordance with the Income Tax act.

Maximum [3]

UNISA 2024