ACN301-T/201/1/2007 ACN311-V/201/1/2007
SCHOOL OF ACCOUNTING SCIENCES DEPARTMENT OF FINANCIAL ACCOUNTING GENERAL FINANCIAL REPORTING TUTORIAL LETTER 201/2007 FOR ACN301-T/ACN311-V Dear Student ANNEXURE A: SUGGESTED SOLUTION TO ASSIGNMENT 01/2007 Enclosed please find the suggested solution to assignment 01/2007. It is in your own interest to work through the suggested solution in conjunction with the assignment and your own answer. ANNEXURE B: MAY 2007 EXAMINATION: PREPARATION AND APPROACH Enclosed please find important information regarding your preparation and approach for the examination. ANNEXURE C: OCTOBER 2006 EXAMINATION PAPER WITH SUGGESTED SOLUTION Enclosed please find the October 2006 examination paper with suggested solution. PLEASE NOTE S A NORMAL TAX RATE FOR COMPANIES The company tax rate is 29%, effective for years of assessment ending on or after 1 April 2005. However, for practical reasons a tax rate of 30% was used in the studyguide for ACN301T/ACN311-V, but for exam purposes a tax rate of 29% will be used.
2
All the tutorial letters are available on the internet. Tutorial letters that include the solutions to assignment questions will be available on the internet on the due date of the assignment. Documents on the internet can be accessed via the UNISA website, after registering as a MyUnisa user (previously SOL user). Documents are in Acrobat Reader 6 format. Access can be obtained as follows: 1. 2. 3. 4. 5. 6.
Enter your user id and password. Select the relevant course code (eg. ACN301-T). Select the option resources. Click on “official study material”. A table with all the study material will appear. Select the relevant tutorial letter and click on it to open the file. (Tutorial letter will appear as follows: 201_2007_1_E)
AVAILABILITY OF LECTURERS: •
Telephonically
We are available for telephone enquiries from 8h00 to 13h00 on weekdays. During examinations, lecturers are telephonically available between 8h00 and 16h00 on weekdays, 3 days before the examination date. •
Personal visits
To avoid any disappointment, make an appointment with a lecturer as they are not always readily available. •
E-mail
You can also communicate with the lecturers via e-mail. Please note that feedback will not necessarily be given via e-mail. Therefore, it is important to give your student number, telephone number, fax number, e-mail address and postal address. Yours faithfully Y Mohamed (Mr) S Swart (Prof)
e-mail address
[email protected] [email protected]
LECTURERS: ACCOUNTING III (ACN301-T/ACN311-V)
Telephone numbers 429-4414 429-4088
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ACN301-T/ACN311-V/201
ANNEXURE A SUGGESTED SOLUTION TO ASSIGNMENT 01/2007 1.
The correct answer is (5) (1) It does give rise to a liability, refer the Framework par .60 (2) It does give rise to a liability, refer the Framework par .60 (3) It does give rise to a liability, refer the Framework par .60 (4) It does give rise to a liability, refer the Framework par .60 (5) (1) to (4) gives rise to a liability
2.
The correct answer is (4) (1) (2) (3) (4)
These are all part of the reliability characteristic, refer the Framework par .24. Materiality is part of relevance, refer the Framework par .24. These are all part of reliability characteristic, refer the Framework par .24. These are the qualitative characteristics of financial statements according to the Framework par .24. (5) Neutrality is part of reliability characteristic, refer the Framework par .24.
3.
The correct answer is (4) (1) (2) (3) (4) (5)
4.
The correct answer is (5) (1) (2) (3) (4) (5)
5.
This circumstance would give rise to separate disclosure, refer IAS 1 par. 87 (c) This circumstance would give rise to separate disclosure, refer IAS 1 par. 87 (g) This circumstance would give rise to separate disclosure, refer IAS 1 par. 87 (d) This circumstance would give rise to separate disclosure, refer IAS 1 par. 87 (a) (1) to (4) would give rise to separate disclosure
The correct answer is (4) (1) (2) (3) (4) (5)
6.
This is a description of materiality according to the Framework par. 30 This is a description of substance over form according to the Framework par. 35 This is a description of prudence according to the Framework par. 37 This is an incorrect description of prudence according to the Framework par. 37 This is a description of faithful presentation according to the Framework par. 33
This item would be separately disclosed, refer IAS 1 par. 96 (a) This item would be separately disclosed, refer IAS 1 par. 97 (b) This item would be separately disclosed, refer IAS 1 par. 97 (a) This item would be disclosed in the income statement as other income. This item would be separately disclosed, refer IAS 1 par. 97 (c)
The correct answer is (5) (1) This doesn’t meet any of the criteria of current assets, refer IAS 1 par. 57. (2) This meets the criteria of current assets, refer IAS 1 par. 57 (a) (3) This meets the criteria of current assets, refer IAS 1 par. 57 (b) even if it is expected to realise after the entity’s normal operating cycle, it is held primarily for the purpose of trading. (4) This does not meet any of the criteria of current assets, refer IAS 1 par. 57. (5) Both (2) and (3) meet the criteria of current assets, both held primarily for trading purposes.
4
7. The correct answer is (1)
Vehicles The carrying amount of the asset > than the tax base of the asset, therefore deferred tax liability Provision for guarantee The carrying amount of the liability > than the tax base of the liability, therefore deferred tax asset
Carrying amount R 1 120 000
16 000
Tax base R 700 000
4 000
Temporary difference R 420 000
12 000
Deferred tax liability
Deferred tax asset/ (liability) @ 29% R (121 800)
3 480
(118 320)
8. The correct answer is (1) R 6 000 (10 000)
Taxable profit for the year Less assessed loss brought forward from 20.5 Assessed loss current year
Assessed loss 9.
(4 000)
Carrying amount R -
Tax base R 4 000
Temporary difference R 4 000
The correct answer is (1) R 6 800 4 200 11 000
Deferred tax liability balance 28 February 20.6 Deferred tax asset balance 28 February 20.5 Deferred tax movement (dr to I/S) 10.
Deferred tax asset @ 29% R 1 160
The correct answer is (1) Carrying amount R
Deposits received in advance
15 000
Deferred tax asset balance 28 February 20.6 Deferred tax liability balance 28 February 20.5 Deferred tax movement (cr to I/S)
Tax base R -
Temporary difference R 15 000
Deferred tax asset @ 29% R 4 350 R 4 350 6 200 10 550
The deferred tax movement is limited to a credit movement of R6 200, as no deferred tax asset can be created due to the fact that there is no certainty that there will be sufficient taxable profit in future.
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ACN301-T/ACN311-V/201
ANNEXURE B: MAY 2007 EXAMINATION: PREPARATION AND APPROACH. The following matters regarding the May 2007 examination paper deserve your attention: 1. RELATIVE IMPORTANCE OF CERTAIN TOPICS IN THE STUDY MATERIAL There are no topics in the study material that are more important than others and no discussion will be conducted in this regard. None of the topics in the syllabus are excluded for examination purposes. You will be examined on all study material as per the study guides, prescribed books and tutorial letters. It is not sufficient to only work through your assignments because all the principles are not tested in there. Please ensure that you have received all the following study material: 1. 2. 3. 4.
Tutorial letter 101/2007 Tutorial letter 102/2007 Tutorial letter 202/2007 Study guide for ACN301-T/ACN311-V
If you have not received all the abovementioned study material, please contact DESPATCH at telephone number (012) 429-4104. 2. CHOICE OF CORRECT PAPER: ACN301-T/ACN311-V It is your responsibility to ensure that you receive the correct paper in the examination. If you are handed the wrong paper, you must immediately request the invigilator to hand you the correct paper. 3. EXAMINATION TECHNIQUE During the marking of examination papers in the past, the following general technique problems were identified: 3.1
Each question was not started on a separate page. The examination instructions are very specific in this regard, and should be adhered to.
3.2
Illegible handwriting made marking difficult. As a result marks may have been lost.
3.3
Students obviously deviated from the suggested timetable. If you are unable to complete a question within the suggested time, stop, and carry on with a next question. It has been proved that you will earn more marks on starting a next question, than continuing with the question of which the time has expired.
3.4
Many students did not answer what the question required. First read through the “required” section of each question before you read through the contents of the question. When you start answering the question, check that you are answering what is required and not what you think is required. Structuring your answer into subsections with appropriate headings helps a great deal in not making this mistake.
3.5
Subsections of answers were not always clearly identified. Structure the layout of your answer to group all subsections of one question together. Avoid including a subsection of a question at the end of your paper, and if you have no choice, refer to the subsection in the main body of your answer.
6 3.6
Many marks were lost due to problems involving calculations that were not shown. Bear in mind that sufficient calculations must be included in the presentation of your answer to enable us to follow your logic and award marks accordingly. If you made a calculation error and have not shown your calculations, we have nothing to work on to award marks for the principle you have applied. It will therefore be worthwhile to spend a few minutes to set out what you did. The calculations must of course be included in your answer and not at the back of your examination script or with other unrelated questions. They must obviously be cross referenced to your question.
4. FORMAT OF EXAMINATION PAPER The examination for May 2007 consists of 3 questions and the duration of the paper is 2 hours. 5. SUPPLEMENTARY EXAMINATIONS AND REMARKS Please take note of the following important information regarding supplementary examinations and remarks: •
Supplementary examinations will be conducted in October 2007 for students who failed the May 2007 examination paper.
•
To qualify for an additional examination opportunity you must obtain a final mark of 45% - 49% for the module. The final mark consists of the 10% year mark obtained plus 90% of the examination mark.
•
Only the examination mark will be taken into account in the supplementary examination (the year mark will not be taken into account).
•
Only students who obtain a final mark of 40% - 49% or 70% - 74% in a module may apply for the remark of such an examination answer book.
•
A student will not be entitled to a supplementay examination (if applicable) on grounds of a remark result.
This communication replaces any information regarding the matters above provided in Tutorial Letter 101. For more information refer to the general rules for study and examinations in Part 1 of the Unisa Calendar. 6. GROUP DISCUSSION CLASSES NO group discussion classes for this module will be presented this year. 7. PERSEVERE We would like to encourage you to tackle your studies with enthusiasm. Remember, success can only be achieved by effort and perseverance. Every year we find that many students do not turn up at the examination centre. You must never inflict this disservice on yourself. Remember that if you write, you have a chance; if you don’t, you have no chance. We wish you a pleasant study period.
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ACN301-T/ACN311-V/201
ANNEXURE C: OCTOBER 2006 EXAMINATION PAPER WITH SUGGESTED SOLUTION Attached please find the examination paper for October 2006 with the suggested solution. We suggest that you do this examination paper under exam conditions. Once you have completed the examination paper, you should then compare your answer to the suggested solution. Your answers to this examination paper must not be submitted to Unisa. This examination paper will indicate to you the standard required of you and will help you to identify areas of weaknesses that you must pay attention to.
PLEASE NOTE: 1.
The paper consists of THREE (3) questions.
2.
All questions must be answered.
3.
All calculations must be shown.
4.
Ensure that you are handed the correct examination answer book (blue for accounting) by the invigilator.
5.
Each question attempted, must commence on a new (separate) page.
6.
The required pass mark for this paper is 50%.
7.
PROPOSED TIME-TABLE: (Avoid deviating from this as far as possible.)
Question number
Subject
Marks
1
IAS 8 (AC 103) - Accounting policies, changes in accounting estimates and errors, IAS 12 (AC 102) - Income taxes
35
42
IAS 8 (AC 103) - Accounting policies, changes in accounting estimates and errors, IAS 12 (AC 102) - Income taxes.
34
41
Framework, IAS 10 (AC 107) - Events after balance sheet date, IAS 18 (AC 111) – Revenue; IAS 37 (AC 130) - Provisions, contingent liabilities and contingent assets.
31
37
100
120
2 3
TOTAL
Time (minutes)
8 QUESTION 1 (35 marks) (42 minutes) Top Chicks Limited is a broiler producer and distributor of chicken products. The broiler houses are situated on various farms around the Krugersdorp and Pietermaritzburg area where there are also two processing plants. 1. The following information is an extract from the asset register of Top Chicks Limited:
Description Land Administration building Vehicles Machinery
Cost 28/2/2005 R 4 000 000
Carrying amount 28/2/2005 R 4 000 000
Tax base 28/2/2005 R -
Cost 28/2/2006 R 4 000 000
Carrying amount 28/2/2006 R 4 000 000
Tax base 28/2/2006 R -
800 000 1 875 000 1 550 000
736 000 1 125 000 1 240 000
937 500 930 000
800 000 1 875 000 1 430 000
704 000 750 000 858 000
468 750 572 000
You can assume that the above details of the assets of Top Chicks Limited are correct, before taking into account the change in depreciation rate. (refer 3) 2. The following depreciation rates and capital allowances are applicable:
Administration building Vehicles (before rate change) Machinery
Depreciation rate
Wear and tear rate
4% straight-line 20% straight-line 5 years straight-line
25% straight-line 40/20/20/20
3. The company is responsible for its own distribution of products and uses a fleet of 40 similar vehicles for this purpose. All the vehicles were originally acquired on 1 March 2003 and no vehicles have been sold or purchased since then. After a review of the physical condition of the company’s assets at year end, the financial manager of Top Chicks Limited determined that depreciation on vehicles is incorrectly estimated, because the useful life of a vehicle is actually shorter than originally estimated. As a result thereof, the directors of Top Chicks Limited decided to change the depreciation rate used for vehicles to 25% per annum according to the straight-line method. The effect of this change has not yet been recorded in the company’s financial records for the year ended 28 February 2006. 4. Top Chicks Limited acquired all their machinery on 1 March 2004. On 28 February 2006 certain idle machinery was withdrawn from the manufacturing process and sold for R78 000. On this date the carrying amount and tax base of this machinery amounted to R72 000 and R48 000 respectively. The original cost of the machinery amounted to R120 000. There was no other machinery acquired or sold since 1 March 2004. 5. During March 2005 Top Chicks Limited purchased erf 1659, Clifton, for an amount of R1 500 000 after the company’s financial brokers identified it as an excellent investment opportunity. During February 2006 the directors of Top Chicks Limited sold erf 1659, Clifton, to developers for R2 300 000 for the development of luxury apartments. 6. During February 2006 Top Chicks Limited received a deposit of R50 000 for a large order from a customer for products that will only be delivered during March 2006.
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ACN301-T/ACN311-V/201
QUESTION 1 (continued) 7. On 1 January 2005 and 1 January 2006 Top Chicks Limited paid R216 000 and R240 000 respectively, in respect of the insurance premium which is annually payable in advance. The balance of the prepaid insurance premium on the balance sheet of Top Chicks Limited on 28 February 2005 and 28 February 2006 amounted to R180 000 and R200 000 respectively. 8. The profit before tax in the draft income statement of Top Chicks Limited for the year ended 28 February 2006 amounted to R 750 000, including the following: R Penalty on late submission of VAT return Depreciation Depreciation: administration building Depreciation: vehicles (before change in depreciation rate) Depreciation: machinery Legal expenses incurred for change of trademark (not tax deductible) Capital profit on sale of land (refer 5) Profit on sale of machinery (refer 4)
60 000 717 000 32 000 375 000 310 000 15 000 800 000 6 000
9. The SA Normal tax rate changed from 30% in 2005 to 29% in 2006. 50% of all capital gains are taxable. 10. Top Chicks Limited has carried an assessed loss of R51 500 forward from the 2005 financial year. 11. Deferred tax is provided for on all temporary differences according to the comprehensive basis using the balance sheet approach. There is assurance beyond reasonable doubt that there will be sufficient taxable profit in future to realise any tax benefit. There are no other exempt or temporary differences except those mentioned in the question. The deferred tax liability balance on 28 February 2005 amounted to R187 800. REQUIRED: 1. Calculate the current tax expense of Top Chicks Limited for the year ended 28 February 2006.
(12½)
2. Calculate the deferred tax movement in the income statement of Top Chicks Limited for the year ended 28 February 2006 using the balance sheet approach and indicate if it is a debit or credit movement to the income statement. (5½) 3. Disclose the following notes to the annual financial statements of Top Chicks Limited for the year ended 28 February 2006: • •
Change in depreciation rate; Income tax expense (including the tax rate reconciliation using R values but excluding the analysis of deferred tax note)
according to the requirements of IAS 8 (AC 103) - Accounting policies, changes in accounting estimates and errors and IAS 12 (AC 102) - Income taxes. No comparative figures are required. No accounting policy notes are required. All calculations are to be done to the nearest Rand.
(17)
10 QUESTION 2 (34 marks)(41 minutes) Pies Limited is a company that prepares a variety of pies in a central kitchen in Johannesburg which are then sold to various retail and franchise outlets throughout Gauteng. The following is an extract from the draft income statement and statement of changes in equity of Pies Limited for the year ended 31 March 2006: PIES LIMITED EXTRACT FROM DRAFT INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH 2006 2006 R
2005 R
Profit before tax Income tax expense
665 800 (193 082)
389 500 (112 955)
Profit for the period
472 718
276 545
PIES LIMITED EXTRACT FROM DRAFT STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2006 Retained earnings R Balance at 31 March 2004 Profit for the period
170 000 276 545
Balance at 31 March 2005 Profit for the period Dividends paid
446 545 472 718 (70 000)
Balance at 31 March 2006
849 263
Additional information 1.
Included in profit before tax are the following items: 2006 R Dividends received Restraint of trade payment (refer 2.4)
80 000 120 000
2005 R -
ACN301-T/ACN311-V/201
11 QUESTION 2 (continued) 2.
The following additional information is not included in the abovementioned extract from the draft income statement and statement of changes in equity of Pies Limited for the year ended 31 March 2006:
2.1
Due to the significant increase in the demand for pies in 2005, Pies Limited decided to expand their central kitchen in Johannesburg and therefore purchased a large number of ovens. During the current year’s audit it was discovered that an oven purchased on 1 January 2005 for R210 000, which was immediately put into use, was not recorded as an asset in the fixed asset register, but included in cost of sales in the income statement of Pies Limited for the year ended 31 March 2005. Pies Limited depreciates its ovens at 20% per annum according to the straight-line method. This policy adopted by the company is in agreement with the policy applied by the SA Revenue Service.
2.2
Inventories are valued according to the last-in-first-out (LIFO) method. However, after the draft financial statements for the year ended 31 March 2006 had been prepared, the company decided to change the method of inventory valuation to the first-in-first-out (FIFO) method, since this provides a more reasonable estimate of the cost price. A summary of the effect of the change in accounting policy for the inventory valuation is as follows:
FIFO method LIFO method
2006 R 145 000 (115 000)
Difference R
2005 R 115 000 (95 000)
Difference R
2004 R 90 000 (75 000)
30 000
10 000
20 000
5 000
15 000
The SA Revenue Service indicated that they will accept the new inventory valuation method and that they will re-open the previous years’ tax assessments. 2.3
During the debtors circularisation which was performed on 3 April 2006, the auditors of Pies Limited discovered a processing error of a sales invoice dated 12 December 2005. The sales transaction to a retail outlet was recorded as R34 000 instead of R43 000.
2.4
On 1 April 2005 a restraint of trade payment of R120 000 was paid to the retiring head chef, Mr Xavier. Mr Xavier was restrained from competing with the company for a period of 4 years from the date of payment. The SA Revenue Service indicated that they will allow R30 000 per annum as a deduction from the date of the restraint of trade payment for the next 4 years, in terms of section 11(cA) of the Income Tax Act.
3.
The secondary tax rate on companies has remained unchanged for the past two years at 12,5%. The previous dividend cycle of Pies Limited ended on 31 March 2005. There are no unutilised tax credits from the previous period available. The company’s directors are certain that the company will generate future taxable income and that dividends will be declared from retained earnings in the future.
4.
The SA Normal tax rate has remained at 29% for the past three years.
12 QUESTION 2 (continued) 5.
Deferred tax is provided for on all temporary differences according to the comprehensive basis using the balance sheet approach. There is assurance beyond reasonable doubt that there will be sufficient taxable profit in future to realise any tax benefit. There are no other exempt or temporary differences except those mentioned in the question.
6.
The implications of all the above financial transactions should be considered material.
REQUIRED: 1.
Calculate the current tax expense of Pies Limited for the years ended 31 March 2005 and 31 March 2006. (9½)
2.
Calculate the deferred tax balance in the balance sheet of Pies Limited for the year ended 31 March 2006, using the balance sheet approach. Indicate if it is a deferred tax asset or liability. (5½)
3.
Prepare the notes to the annual financial statements of Pies Limited for the year ended 31 March 2006, according to the requirements of only IAS 8 (AC 103) – Accounting policies, changes in accounting estimates and errors. Comparative figures are required.
No accounting policy notes are required.
(19)
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ACN301-T/ACN311-V/201
QUESTION 3 (31 marks)(37 minutes) THIS QUESTION CONSISTS OF 3 INDEPENDENT PARTS. PART A Beads for Africa Limited instituted a claim of R150 000 against Beads Limited for using their trademark in promotions which were widely advertised in the press. Beads Limited’s legal advisors are of the opinion that judgement will probably be in favour of the plaintiff, therefore Beads Limited decided to make a provision for this claim in their financial statements at year end. REQUIRED: 1. 2.
Identify the elements of financial statements which are relevant to the financial statements of Beads Limited in the abovementioned case; and State the recognition criteria of these elements identified in (1),
according to the requirements of the Framework for the preparation and presentation of financial statements. (4)
PART B State the disclosure requirements of a contingent asset in the financial statements according to the requirements of IAS 37(AC 130) – Provisions, contingent liabilities and contingent assets. (2)
PART C Goldsteel Limited is a company involved in the manufacturing, installation and distribution of security fences, gates and specialised security equipment. They supply a range of standard products as well as customised products. They are also involved in the assessment of security systems and to provide continuous security services. The financial statements of Goldsteel Limited for the year ended 30 June 2006 were presented to the board of directors for authorisation for issue on 30 September 2006. The profit before tax of Goldsteel Limited for the year ended 30 June 2006 amounted to R345 000 before taking into account all of the following transactions that have not yet been recorded: 1.
On 30 April 2006 Mr Paranoid paid a total amount of R25 500 in full settlement of his order consisting of the installation of a standard security fence amounting to R15 500 and a gate amounting to R10 000. Due to the fact that he chose a specific design for the gate, which must be specially manufactured, a period of 6 weeks from the order date is required before installation. On 15 June 2006 the manufacturing of the security fence was complete and the security fence was installed, but the gate was only installed on 4 July 2006.
2.
Diamond Limited, a major client of Goldsteel Limited, was liquidated on 12 July 2006. Diamond Limited owes Goldsteel Limited an amount of R126 000, which is included in debtors at year-end on 30 June 2006. Diamond Limited’s liquidator notified all creditors that the estimated liquidation dividend will be 15c in the Rand.
3.
On 26 June 2006 Goldsteel Limited sold security equipment on behalf of another company, Watchout Limited, for R65 000 to a client and received commission of 12,5% on all these consignment inventory sales.
14 QUESTION 3 (continued) 4.
On 18 July 2006 Big Ben Limited sued Goldsteel Limited for failing to meet specifications on certain security cameras which were installed at their premises during May 2006. The case will be heard in court on 15 September 2006. The security cameras installed at Big Ben Limited’s premises were faulty and did not work at the time of an armed robbery that took place there. The attorneys of Goldsteel Limited notified the financial director that Goldsteel Limited will probably lose the case and will be found liable for costs and compensation amounting to approximately R245 000.
5.
On 1 June 2005 Goldsteel Limited concluded a 3 year contract with Spy Limited to provide 24 hour security services at their premises at an annual security service fee of R240 000 with an escalation of 5% per annum. Consequently Spy Limited paid the security service fees which are annually payable in advance on 1 June.
6.
On 29 June 2006 Goldsteel Limited installed a specialised security system for Pickit Limited at their inventory delivery area for an invoice amount of R124 800. However, Pickit Limited is not satisfied with the automated gate and part of the installation of the automated gate will have to be redone. Goldsteel Limited estimated that they will have to incur costs of R32 500 for the re-installation of the automated gate.
7.
On 24 June 2006 Goldsteel Limited delivered and sold automated gates with a selling price of R45 000 on a cash on delivery basis (COD) to Secure Limited. At year-end on 30 June 2006 the balance of the “Debtors on COD account” amounted to R15 000.
8.
Due to the extent of their inventory loss Steal-away Limited decided to install security cameras throughout their warehouses in Midrand. They accepted a quote from Goldsteel Limited amounting to R60 000 for the installation of security cameras. The installation of the security cameras was completed on 5 June 2006 and the outstanding amount was subsequently settled in cash. Goldsteel Limited granted them a trade discount of R12 000 in order to ensure good business relations with them in future. According to the company policy in respect of early settlements, a cash discount of 2% is given by Goldsteel Limited if a customer settles an outstanding account in cash immediately.
9.
On 15 June 2006 an automated gate that was installed at a factory of Prep Limited fell and injured three of its employees. Prep Limited instituted a claim of R55 000 against Goldsteel Limited for negligence with the installation of the gate. The date of the court case has not been determined yet and the legal advisors of Goldsteel Limited are of the opinion that it is unlikely that the claim by Prep Limited will succeed.
10.
On 16 August 2006 the marketing director of Goldsteel Limited announced a 8% decrease in the selling price of Goldsteel Limited’s products in order to increase their current market share due to strong competition. This will result in an estimated decrease in profit before tax of Goldsteel Limited for the year ended 30 June 2007 of R680 000.
11.
During May 2005 the previous managing director of Goldsteel Limited, Mr Wiseguy, decided to resign. Consequently, the financial manager of Goldsteel Limited made a provision of R220 000 for the severance package to be paid out to Mr Wiseguy. In June 2005 the company decided to pay Mr Wiseguy R50 000, whilst finalising the dispute about the severance package with Mr Wiseguy. During August 2005 Mr Wiseguy decided to settle the dispute and an amount of R160 000 was paid to him as final settlement.
12.
Ignore any VAT implications.
13.
The implications of all the above financial transactions should be considered material.
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ACN301-T/ACN311-V/201
QUESTION 3 (continued) REQUIRED: 1.
Calculate the profit before tax of Goldsteel Limited for the year ended 30 June 2006.
2.
Disclose points (9) to (11) in the notes to the annual financial statements of Goldsteel Limited for the year ended 30 June 2006, according to the requirements of only IAS 10(AC 107) - Events after balance sheet date and IAS 37(AC 130) - Provisions, contingent liabilities and contingent assets. No accounting policy notes are required. All calculations are to be done to the nearest Rand. Comparative figures are not required.
(12½)
(12½)
16 SUGGESTED SOLUTION – OCTOBER 2006 EXAM PAPER QUESTION 1 1.
Calculation of current tax expense: Alternative R
R
Profit before tax (given) Change in depreciation (estimate): [(375 000 - 1 125 000/2)] Adjusted Profit before tax Exempt differences Capital profit on sale of land (800 000 x 50%) Penalty Depreciation: admin building Legal expenses Profit after exempt differences Temporary differences: Depreciation (375 000 + 310 000 + 187 500) Wear and tear: vehicles (1 875 000 x 25%) or (937 500 – 468 750) Wear and tear: machinery (1 550 000 x 20%) or (930 000 – 572 000 – 48 000) Profit on sale of machinery (given) Recoupment of machinery (78 000 – 48 000) Prepaid insurance 2005 Prepaid insurance 2006 Deposit received in advance Taxable income Less: assessed loss brought forward Taxable income Current tax expense @ 29% (365 750 x 29%) 2.
750 000 (187 500)
750 000
562 500 (293 000) (400 000) 60 000 32 000 15 000 269 500 147 750 872 500 (468 750) (310 000)
750 000 (293 000) (400 000) 60 000 32 000 15 000 457 000 (39 750) 685 000 (468 750) (310 000)
(6 000) 30 000 180 000 (200 000) 50 000 417 250 (51 500) 365 750 106 068
(6 000) 30 000 180 000 (200 000) 50 000 417 250 (51 500) 365 750 106 068
Calculation of deferred tax movement
Carrying Amount R
Vehicles Machinery Deposit received in advance Prepaid insurance premiums Deferred tax liability 28/2/2006 Deferred tax liability 28/2/2005 Deferred tax movement (cr to I/S) (1) 750 000 – 187 500
562 500(1) 858 000 50 000 200 000
Tax base R
Temporary difference R
468 750 572 000 -
93 750 286 000 50 000 200 000
Deferred tax asset/ (liability) @ 29% R (27 188) (82 940) 14 500 (58 000) (153 628) 187 800 34 172
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ACN301-T/ACN311-V/201
QUESTION 1 (continued) 3.
TOP CHICKS LIMITED NOTES FOR THE YEAR ENDED 28 FEBRUARY 2006
1.
Profit before tax: 2006 R
The profit before tax includes the following items: Depreciation (717 000 + 187 500)
904 500
Included in depreciation for 2006 is a change in estimate of R187 500, arising from the decision to depreciate vehicles at 25% instead of at 20% per annum according to the straight-line method. This change will result in a decrease of depreciation in future periods of R187 500. 2.
Income tax expense R
SA Normal tax Current tax Deferred tax – temporary differences (34 172 – 6260) or (147 750 – 51 500) x 29% Deferred tax – rate adjustment (187 800 x 1/30)
Tax rate reconciliation Standard tax (562 500 x 29%) Reconciling items: Exempt differences Capital allowance on buildings (32 000 x 29%) Legal expenses (15 000 x 29%) Penalty (60 000 x 29%) Profit on sale of land (400 000 x 29%) Adjustment to tax rate Effective tax
Mark plan
106 068 (27 912) (6 260) 71 896 R 163 125
9 280 4 350 17 400 (116 000) (6 260) 71 895
Marks
Calculation – current tax expense Calculation – deferred tax movement Notes - change in depreciation rate income tax expense tax rate reconciliation
12½ 5½ 4 4½ 8½
Total
35
18 QUESTION 2 1.
Current tax expense 2006 R 665 800 -
2005 R 389 500 210 000
(42 000) 10 000 9 000 (80 000) 120 000 (30 000)
(10 500) 5 000 -
Taxable income
652 800
594 000
Current tax @ 29% (652 800 x 29%);(594 000 x 29%)
189 312
172 260
Profit before tax (given) Add: oven capitalised Less: wear and tear on machine capitalised (210 000 x 20%);(210 000 x 20% x 3/12) Add: change in accounting policy (given) Add: sales transaction not recorded correctly (43 000 – 34 000) Less: dividends received Add: restraint of trade payment Less: restraint of trade payment
2.
Deferred tax balance Carrying amount R
STC (80 000 – 70 000) Restraint of trade payment (120 000 – 30 000)
Tax base R
-
10 000 90 000
Deferred Temporary tax difference asset R R 10 000 90 000
Deferred tax asset 3.
1 250 26 100
(10 000 x 12,5%) (90 000 x 29%)
27 350
PIES LIMITED
NOTES FOR THE YEAR ENDED 31 MARCH 2006 3.
Change in accounting policy
During the financial year the company changed its accounting policy in respect of the valuation of inventories from the last-in-first-out method to the first-in-first-out method. This change was necessary as this method provides a more reasonable estimate of the cost price. This change in policy was accounted for retrospectively and comparative amounts have been appropriately restated. The effect of the change is as follows: 2006 2005 R R Decrease in cost of sales 10 000 5 000 Increase in current tax expense (10 000 x 29%);(5 000 x 29%) (2 900) (1 450) Increase in profit 7 100 3 550 Increase in inventory Increase in current tax due (30 000 x 29%)(20 000 x 29%) Increase in equity Adjustment to retained earnings at beginning of 2005 (15 000 x 29%)
30 000 (8 700) 21 300
20 000 (5 800) 14 200 10 650
19
ACN301-T/ACN311-V/201
QUESTION 2 (continued) 4.
Error in respect of prior year
Correction of error in respect of oven purchased being expensed instead of being capitalised in 2005. The effect of the correction of this error on the results of 2005 is as follows:
Decrease in cost of sales (210 000 – 10 500) Increase in current tax expense (199 500 x 29%) Increase in profit
2005 R 199 500 (57 855) 141 645
Increase in property, plant and equipment Increase in current tax due Increase in equity
199 500 (57 855) 141 645
Mark plan
Marks
Calculation – current tax expense Calculation – deferred tax balance Notes - change in accounting policy - error in respect of prior year
9½ 5½ 12 7
Total
34
20 QUESTION 3 PART A The elements involved are: • Liability • Expense The items must 1. meet the definition of a liability and an expense; 2. probably lead to an outflow of future economic benefits from the entity; and 3. have a cost or value that can be measured reliably.
PART B 1.
A brief description of the nature of the contingent asset, and
2.
If practicable, an estimate of their financial effect.
PART C 1.
Profit before tax R Profit before tax (given) Mr Paranoid (fencing) Installation - Steal-Away Limited (60 000 - 12 000 - ((60 000 - 12 000) x 2%) Commission on sales (65 000 x 12,5%) COD sales (45 000 - 15 000) Spy Limited (240 000 x 11/12) + ((240 000 + 240 000 x 5%) x 1/12) Pickit Limited:sales :provision Provision for liquidation of Diamond Limited (126 000 x (100c – 15c)) Provision for compensation Big Ben Limited Reversal of provision for severance package (220 000 – 50 000 – 160 000) Profit before tax
2.
345 000 15 500 47 040 8 125 30 000 241 000 124 800 (32 500) (107 100) (245 000) 10 000 436 865
GOLDSTEEL LIMITED NOTES FOR THE YEAR ENDED 30 JUNE 2006
2.1
Contingent liability
On 15 July 2006 an automated gate that was installed at a factory of Prep Limited fell and injured three of its employees. Prep Limited instituted a claim of R55 000 against Goldsteel Limited for negligence with the installation of the gate. The legal advisors of Goldsteel Limited are of the opinion that their claim will not succeed. The legal costs to defend the claim are estimated to amount to R8 600.
21
ACN301-T/ACN311-V/201
QUESTION 3 (continued) 2.2
Event after balance sheet date
On 16 August 2006 the marketing director of Goldsteel Limited announced a 8% decrease in the selling price of Goldsteel Limited=s products in order to increase their current market share due to strong competition. This will result in an estimated decrease in profit before tax of Goldsteel Limited for the year ended 30 June 2007 of R680 000. 2.3
Provision for severance package of managing director R Carrying amount beginning of year (220 000 - 50 000) Provision used during the year Unused provision reversed during the year
170 000 (160 000) (10 000) -
Carrying amount end of year
The dispute with the managing director, Mr Wiseguy, regarding his severance package was resolved during April 2006 when it was finally settled.
Mark plan
Marks
PART A Identification Recognition criteria
1 3
PART B
2
PART C Calculation – Profit before tax Notes Contingent liability Event after balance sheet date Provision for severance package
12½ 4 3 5½
Total
31
8 UNISA 2007 ACN301-T_2007_TL_201_1_E_PDF
