FAC3702 Question Bank 2015

FAC3702/104/3/2015
Tutorial letter 104/3/2015
Distinctive Financial Reporting

FAC3702
Semesters 1 & 2
Department of Financial Accounting

This tutorial letter contains additional integrated questions with
suggested solutions.
IMPORTANT INFORMATION:
Please activate your myUnisa and myLife email addresses and ensure
you have regular access to the myUnisa module site FAC3702 as well
as your group site.
Note: This is an online module, and therefore your module is available

on myUnisa. However, in order to support you in your learning
process, you will receive some study material in printed format.
Contents
1 INTRODUCTION .......................................................................................................................... 3
2 LECTURERS AND CONTACT DETAILS ..................................................................................... 3
3 ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS..................................................... 4
2
FAC3702/104
1 INTRODUCTION
Dear Student,
Attached please find additional integrated questions with the suggested solutions. We
suggest that you do these integrated questions under exam conditions. Once you
have completed the integrated questions, you should compare your answer to the
suggested solutions. Your answers to these integrated questions must not be
submitted to Unisa. These integrated questions will indicate to you the standard
required of you in the exam and will help you to identify areas of weaknesses that you
must pay attention to.
You will notice in our suggested solutions, dealing with company financial statements, opposite certain
items calculations are shown in brackets. Such calculations are given for tuition purposes only and
consequently do not form part of the statutory disclosure requirements.
2 LECTURERS AND CONTACT DETAILS
Please use only the following e-mail address for all communication with the lecturers:
Students registered for first semester: [email protected]

Students registered for second semester: [email protected]
Please use the following telephone number for all communication with the lecturers:
012 429-4268
Lecturer Office
Mrs M Evans AJH van der Walt Building 02-55
Mrs M Els AJH van der Walt Building 02-58
Mrs FF Jaffer AJH van der Walt Building 02-57
Mr D Khumalo AJH van der Walt Building 02-43
3
3 ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS
The integrated questions are compiled as follows:
QUESTION SUBJECT MARKS TIME

No. (minutes)
1 IAS 16 - Property, plant and equipment 56 67

IAS 40 - Investment properties
IAS 21, IAS 32, IFRS 7, IFRS 9 - Effects of changes
in foreign exchange rates and Financial instruments
2 IAS 36 - Impairment of assets 31 37

IAS 38 - Intangible assets
IFRS 5 - Non-current assets held for sale and
Discontinued operations

IAS 36 - Impairment of assets
4 IAS 38 - Intangible assets 45 54



IAS 32, IFRS 7, IFRS 9 - Financial instruments


IFRS 5 - Non-current assets held for sale
IFRS 7, IFRS 9 - Effects of changes in foreign
exchange rates

IAS 32, IFRS 7, IFRS 9 - Financial instruments
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FAC3702/104
QUESTION SUBJECT MARKS TIME

No. (minutes)
11 IAS 21, IAS 32, IFRS 7, IFRS 9 - Effects of changes 50 60


13 IAS 21, IAS 32, IFRS 7, IFRS 9 - Effects of changes 46 55


5
QUESTION 1 (56 marks) (67 minutes)
Zaka Ltd is a stationery manufacturing company based in Cape Town. The financial year-end of the
company is 31 March. Details of the company’s assets are as follows:
Machinery
On 1 April 2010, Zaka Ltd placed a non-cancellable order for a Z1 pencil machine from a company in
China for 340 000 Chinese yuan (¥). The invoice amount is payable on 28 February 2011. On
1 September 2010, the order was shipped free on board (FOB) and the machine was available for use,
as intended by management on 30 September 2010.
On 1 April 2010, Zaka Ltd took out a forward exchange contract (FEC), for the same amount, to counter
the exchange rate fluctuations. The FEC will expire on 28 February 2011. Zaka Ltd chose to apply hedge
accounting and on 1 April 2010, designated the FEC as the hedging instrument and the firm commitment
and foreign creditor that arises as a result of this transaction, as the hedged items. The hedge complied
with all the requirements for hedge accounting and the hedge was considered to be highly effective at all
times during the period. Zaka Ltd accounts for the hedge using cash flow hedge accounting.
Due to a manufacturing defect in the Z1 pencil machine it could not perform at its optimum level. As a
result, Zaka Ltd withheld the payment to the Chinese company until the machine was repaired. On
15 March 2011 an engineer from China was sent to South Africa to repair the machine. On
31 March 2011, Zaka Ltd settled the outstanding supplier account.
The company uses the units of production method to depreciate its machinery. The useful life of this
machine was estimated to be 300 000 units with a Rnil residual value. Machinery is carried at cost less
accumulated depreciation and impairment losses. On 31 March 2011, the machine had produced 50 000
units.
The following dates and exchange rates are applicable:
Forward rate for

Spot rate FEC
Date ¥1 = R ¥1 = R FEC period
1 April 2010 1,04 1,11 11 months

1 September 2010 1,13 1,16 6 months
28 February 2011 1,03
31 March 2011 1,33
Manufacturing building
Zaka Ltd owns a property located at Sea Point which is used for the manufacturing of its products. The
property was purchased on 1 October 2008 for R6 000 000 (land: R2 500 000; building: R3 500 000) and
was available for use, as intended by management, on that date. On that date, the useful life of the
building was estimated to be 35 years. A residual value of R700 000 was allocated to the building.
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FAC3702/104
QUESTION 1 (continued)
Property will be revalued every three years and on 31 March 2011 the property was revalued for the first
time. Dr. Mula, an independent sworn appraiser, who holds a recognised and relevant professional
qualification and who has recent experience in the location and category of the property being valued,
determined the net replacement value of the property to be R5 400 000 (land: R2 450 000; building:
R2 950 000). These values were determined by reference to current market evidence. The residual
value and remaining useful life of the property remained unchanged. No decision has been made by the
company to sell this property.
Office building
Zaka Ltd owns a property of which it utilises 15% of the total floor space for administration purposes. The
building was purchased on 1 April 2010 for R2 000 000 (land: R500 000; building: R1 500 000). On that
date, Zaka Ltd entered into a lease contract with Bahiri Ltd to rent out the remainder of the building for
R12 000 per month. The directors of Zaka Ltd consider the 15% that Zaka Ltd occupies, to be
insignificant.
During the 2011 financial year, Zaka Ltd renegotiated with its tenant and agreed that Bahiri Ltd will now
only occupy 50% of the total floor space of the building, and the remainder will then be occupied by Zaka
Ltd as they required more office space. On 31 March 2011, Zaka Ltd took occupation of the 35% of the
floor space that was previously occupied by Bahiri Ltd. The directors of Zaka Ltd consider the 50% of the
floor space of the building that Zaka Ltd occupied from 31 March 2011, to be significant. At year-end on
31 March 2011, the property’s fair value was determined to be R2 250 000 (land: R525 000; building:
R1 725 000). The fair values were determined by Dr Mula with reference to current market evidence.
The office building is registered under one title deed and it cannot be divided or sold separately. No
decision has been made by the company to sell this property.
Additional information
1. It is the accounting policy of Zaka Ltd to account for owner occupied land and buildings using the
revaluation model on the net replacement value basis. Depreciation for the year is calculated on the
most recent revalued amount.
2. It is the accounting policy of Zaka Ltd to account for investment property using the fair value model.
3. The South African normal tax rate is 28%. 66,6% of all capital gains are taxable.
4. The South African Revenue Service allows the following as capital allowances:
• An annual building allowance of 5% on industrial and administration buildings according to
section 13(1) and 13quin of the Income Tax Act, on a straight-line method, not proportioned for
part of the year;
• a tax allowance on machinery, over 5 years, in terms of section 11(e) of the Income Tax Act, on
the straight-line method, apportioned for a part of the year.
5. Depreciation on land and buildings are provided for according to the straight-line method over their
estimated useful lives.
6. Deferred tax is provided for on all temporary differences using the statement of financial position
approach. There are no temporary differences other than those evident from the question.
7. Assume all amounts to be material.
7
REQUIRED
1. Prepare all the relevant journal entries (cash transactions included) in the
accounting records of Zaka Ltd for the year ended 31 March 2011, to account for
the machinery, the foreign exchange transaction and the forward exchange
contract. (19)
Your answer must comply with the requirements of International Financial

Reporting Standards (IFRS).
Note:
• Indicate the date on which each journal entry is made.
• Show all calculations.
• Journal narrations are not required.
• Ignore all tax implications.
2. Based on the given information, disclose the following notes to the annual financial
statements of Zaka Ltd for the year ended 31 March 2011: (37)
2.1.Property, plant and equipment (Disclose classes of property, plant and

equipment separately)
2.2. Deferred tax according to the statement of financial position approach.

Note:
• Accounting policy notes are not required.
• Ignore comparative information.
• Round all calculations to the nearest rand.
• A total column for the property, plant and equipment note is not required.
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FAC3702/104
QUESTION 1 SUGGESTED SOLUTION
1. JOURNAL ENTRIES
Debit Credit
R R
01 September 2010
Machinery 384 200
Accounts payables / Creditors / Trade payables 384 200
Recording of creditor
(340 000 x 1,13)
FEC Asset 17 000

Cash flow hedge reserve (OCI) 17 000
Revaluing FEC
[340 000 x (1,16 - 1,11)]
28 February 2011
FEC Asset 17 000
FEC Liability 27 200
Revaluing FEC
[340 000 x (1,16 - 1,03)]
OR:
Revaluing FEC
[340 000 x (1,16 - 1,03)]
28 February 2011
Bank 27 200
Settlement of FEC
[340 000 x (1,11 – 1,03)]
OR:
FEC Asset 17 000
Bank 27 200
Settlement of FEC
[340 000 x (1,11 – 1,03)]
31 March 2011
Foreign exchange difference / loss 68 000
Accounts payables / Creditors 68 000
Revaluing the creditor
[340 000 x (1,33 - 1,13)]

Bank 452 200
Payment to creditor
(340 000 x 1,33)
9
QUESTION 1 SUGGESTED SOLUTION (continued)
Debit Credit
R R
OR:
Foreign exchange difference / loss (P/L)
[340 000 x (1,33 – 1,13)] 68 000
Bank (340 000 x 1,33) 452 200
Restatement and payment of creditor
Reclassification adjustment (P/L) 4 533

Reclassification of cash flow hedge reserve
[27 200 x 50 000 / 300 000]
Depreciation 64 033
Accumulated depreciation: Machinery 64 033
Recording depreciation
[384 200 x 50 000 / 300 000]
ZAKA LTD
2. NOTES FOR THE YEAR ENDED 31 MARCH 2011

2.1. Property, plant and equipment
Land Buildings Machinery Total
R R R R
Carrying amount at beginning of year 2 500 000 3 380 000 - 5 880 000
Cost 2 500 000 3 500 000 - 6 000 000
Accumulated depreciation (calc 3) - (120 000) - (120 000)
Additions (calc 1) - - 384 200 384 200
Revaluation deficit (calc 1 and 2) (50 000) (360 769) - (410 769)
Depreciation (calc 1 and 3) - (69 231) (64 033) (133 264)
Transfer from investment property 525 000 1 725 000 - 2 250 000
1 2
Carrying amount at end of year 2 975 000 4 675 000 320 167 7 970 167
Cost/Gross carrying amount 2 975 000 4 744 231 384 200 8 03 431
Accumulated depreciation - (69 231) (64 033) (133 264)
1.
2 450 000 + 525 000
2.
2 950 000 + 1 725 000
Valuations were performed on 31 March 2011 by an independent sworn appraiser.
The carrying amount of land and buildings if it was carried at cost minus accumulated depreciation would
have amounted to R8 050 000 (land: R3 025 000; buildings: R5 025 000).
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FAC3702/104
2.2. Deferred Tax

R
Land: [(2 450 000 – 2 500 000) x 66,6% x 28%] + [(525 000 – 500 000) x 66,6% x 28%]
(calc 2 + 4) 4 662
Building: [(2 950 000 – 2 975 000) x 28%] + [(1 725 000 – 1 425 000) x 28%] (77 000)
Machine: [(320 167 - 345 780) x 28%] (calc 1) 7 172
Deferred tax liability at the end of year (65 166)
Note 1
The fair value adjustment on the building is calculated at 28% and not the capital
gains tax rate of 28% x 66,6%. The property was transferred from Investment
property to Property, plant and equipment.
CALCULATIONS
Calculation 1 - Machinery
Historical Deferred tax
Carrying carrying Temporary asset/
amount amount Tax base difference (liability)
R R R R R
Cost 01 September 2010 384 200 384 200 384 200
Depreciation (calc 1.1)/
Tax allowance (calc 1.2) (64 033) (64 033) (38 420)
Carrying amount
31 March 2011 (calc 1.3) 320 167 320 167 345 780 (25 613) 7 172
1.1 384 200 / 300 000 x 50 000 = 64 033

1.2 384 200 /5 x 6/12 = 38 420
1.3 (320 167 – 345 780) x 28% = 7 172
Calculation 2 - Land – Manufacturing property (Property, plant and equipment)

Tempo- Deferred
Historical rary tax
Carrying carrying Revaluation Exempt differ- asset/
amount amount deficit difference ence (liability)
R R R R R R
Cost
01 October 2008 2 500 000 2 500 000 - 2 500 000
Accumulated
depreciation - - - -
Carrying amount
31 March 2010 2 500 000 2 500 000 - 2 500 000 - -
Revaluation deficit
(calc 2.1.) (50 000) - (50 000) -
Depreciation - - - -
Carrying amount
31 March 2011
(calc 2.2) 2 450 000 2 500 000 (50 000) 2 500 000 50 000 9 324
11
2.1. (2 450 000 – 2 500 000) = 50 000

2.2. (2 450 000 – 2 500 000) x 66,6% x 28% = 9 324
Calculation 3 - Building – Manufacturing property (Property, plant and equipment)
Tempo-
Historical Revalua- rary Deferred
Carrying carrying tion differ- tax asset/
amount amount deficit Tax base ence (liability)
R R R R R R
Cost
01 October 2008 3 500 000 3 500 000 - 3 500 000
Accumulated
depreciation
(calc 3.1) /
Tax allowance
(calc 3.2) (120 000) (120 000) - (350 000)
Carrying amount
31 March 2010 3 380 000 3 380 000 - 3 150 000 230 000 (64 400)
Revaluation deficit
(calc 3.3) (360 769) - (360 769) -
Depreciation
(calc 3.4, 3.5, 3.7)
/Tax allowance
(calc 3.6) (69 231) (80 000) 10 769 (175 000)
Carrying amount
31 March 2011 2 950 000 3 300 000 (350 000) 2 975 000 (25 000) 7 000
3.1 [[(3 500 000 - 700 000) / 420] x 18] = 120 000
OR: [[(3 500 000 - 700 000) / 35] x 1,5] = 120 000
3.2 [(3 500 000 x 5%) x 2] = 350 000
3.3 [[(2 950 000 - 700 000) / 390 x 402] + 700 000] - 3 380 000 = - 360 769
OR: [[(2 950 000 - 700 000)/ 32,5 x 33,5] + 700 000] - 3 380 000 = - 360 769
OR: 2 950 000 + 69 231 = 3 019 231; 3 019 231 – 3 380 000 = - 360 769
3.4 [(3 380 000 - 360 769) - 700 000] / 402 x 12 = 69 231
OR: [3 019 231 - 700 000] / 402 x 12 = 69 231
OR: [(3 380 000 - 360 769) - 700 000] / 33,5 = 69 231
OR: (2 950 000 – 700 000) / 390 x 12 = 69 231
3.5 [(3 500 000 – 700 000) / 35] = 80 000
3.6 3 500 000 x 5% = 175 000
3.7 360 769 / 402 x 12 = 10 769
OR: 360 769 / 33,5 x 12 = 10 769
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FAC3702/104
Calculation 4 - Land – Administration property (Investment property transferred to Property, plant

and equipment)
Histo-
rical Fair value Exempt Deferred
Carrying carrying adjust- differ- Temporary tax asset/
amount amount ment rence difference (liability)
R R R R R R
Cost 1 April 2010 500 000 500 000 - 500 000
Fair value adjustment
(calc 4.1) 25 000 - 25 000 -
Carrying amount
31 March 2011
(calc 4.2) 525 000 - - 500 000 25 000 (4 662)
4.1 (525 000 – 500 000) = 25 000

4.2 (525 000 – 500 000) x 66,6% x 28% = 4 662
Calculation 5 - Building – Administration property (Investment property transferred to Property,

plant and equipment)
Histo- Fair
rical value Deferred
Carrying carrying adjust- Temporary tax asset/
amount amount ment Tax base difference (liability)
R R R R R R
Cost 1 April 2010 1 500 000 1 500 000 - 1 500 000
(calc 5.1) 225 000 - 225 000 -
Tax allowance
(calc 5.2) - - - (75 000)
Carrying amount
31 March 2011
(calc 5.3) 1 725 000 1 500 000 225 000 1 425 000 300 000 (84 000)
5.1 (1 725 000 – 1 500 000) = 225 000

5.2 1 500 000 x 5% = 75 000
5.3 (1 725 000 – 1 425 000) x 28% = 84 000
LECTURER’S COMMENT
For all the capital gains tax calculations use 28% x 66,6% to ensure that rounding
does not affect your answer. Do not round the CGT rate.
13
Vino Ltd is a company which produces and sells wine. The wine is produced in the Western Cape and
bottled at their plant in Gauteng. The company has a 31 March year-end.
Vino Ltd has been operating in the wine industry for the past 30 years. On 1 April 2009, they purchased
“Vino Veritas”, a brand name, for R4 125 000. The asset had an indefinite useful life and a residual value
of Rnil. The brand name was ready to be used, as intended by management, on acquisition date.
Due to employee strike action during the current financial year, the Gauteng bottling plant had to use
temporary workers to enable the plant to meet its current volume demands. The temporary workers were
not sufficiently trained in the operation of the machinery. This resulted in 20 000 bottles, filled during the
months of July and August 2010, to be spoilt as they had not been properly sealed.
Management only became aware of this problem after the brand received negative publicity and
subsequently decided to recall all those bottles of wine. However, most of these bottles had already
been sold to the public. On 31 March 2011, the impact of the negative publicity on the brand name was
assessed and the fair value less cost to sell on that date was estimated to be R2 400 000. Due to the
negative publicity, it was estimated that the brand name would now have a remaining useful life of only
5 years, from 31 March 2011.
Management expects the brand to generate the following cash flows over its remaining useful life:
Year Net cash inflow
R
1 April 2011 – 31 March 2012 1 200 000
1 April 2012 – 31 March 2013 1 000 000
1 April 2013 – 31 March 2014 800 000
1 April 2014 – 31 March 2015 500 000
1 April 2015 – 31 March 2016 500 000
On 31 October 2010, the directors decided to sell the Gauteng bottling plant and all of its assets. On that
date they approved a detailed formal plan of disposal. On 31 December 2010, the approved formal sales
plan was at a stage of completion where no realistic possibility of withdrawal existed and all the
requirements to classify the Gauteng bottling plant as held for sale were met. Management expects that
a binding sales agreement for all the assets will be concluded by 1 May 2011, and the assets will be sold
for cash.
Details of the bottling plant’s assets are as follows:
• Machinery with an original cost price of R8 000 000 was acquired on 1 July 2005. The machinery is
used specifically in the bottling process. It has a residual value of R80 000 and an expected useful
life of 15 years. The machinery was available for use, as intended by management, on acquisition
date. The carrying amount of the machinery on 1 April 2010 amounted to R5 492 000.
• The carrying amount of inventory on 31 December 2010 and 31 March 2011 amounted to R650 000
and R625 000 respectively. The net realisable value of the inventory amounted to R550 000 on
31 December 2010 and R525 000 on 31 March 2011.
• Vino Ltd developed a customised software package to be used in the bottling plant. The software
package met all the criteria for the recognition as an intangible asset. The software was used to
operate the machinery. The software was developed at a cost price of R860 000. It was estimated
that the software will have an expected useful life of 20 years. The software was available for use,
as intended by management, on 30 September 2007 and was brought into use on the same date.
The carrying amount on1 April 2010 amounted to R752 500.
• No provision for depreciation or amortisation has been made for the current financial year.
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FAC3702/104
• The fair value less costs to sell of the bottling plant, on the respective dates, is as follows:
- 31 October 2010 R6 400 000
- 31 December 2010 R6 250 000
- 31 March 2011 R6 225 000
1. A pre-tax discount rate of 15% is considered to be appropriate.
2. It is the accounting policy of Vino Ltd to account for intangible assets using the cost model.
3. Depreciation and amortisation is provided for in accordance with the straight-line method over the
expected useful life of the assets.
4. The South African normal tax rate is 28% for all applicable periods. 66,6% of all capital gains are
taxable.
5. Consider all amounts to be material to the financial statements.
REQUIRED
Disclose the following notes to the annual financial statements of Vino Ltd for the year
ended 31 March 2011: (31)
1. Intangible assets
2. Impairment loss
3. Non-current assets held for sale
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Note:
• Show all the data input into your financial calculator.
• Round all amounts to the nearest rand.
• Ignore any VAT implications.
• A total column for the intangible assets note is not required.
15
VINO LTD
NOTES FOR THE YEAR ENDED 31 MARCH 2011

Internally
Purchased: generated:
Brand Software
Name package Total
R R R
Carrying amount at the beginning of year 4 125 000 752 500 4 877 500
Cost 4 125 000 860 000 4 985 000
Accumulated amortisation (860 500 – 752 500) - (107 500) (107 500)
Amortisation (included in other expenses) (687 500) (32 250) (719 750)
Impairment loss (included in other expenses) (577 400) - (577 400)
Transferred to NCAHFS* (752 500 – 32 250) - (720 250) (720 250)
Carrying amount at the end of the year 2 860 100 - 2 860 100
Cost 4 125 000 - 4 125 000
Accumulated amortisation and impairment losses (1 264 900) - (1 264 900)
The brand name “Vino Veritas” has a remaining useful life of 5 years. The asset has a carrying amount
of R2 860 100 at year-end.
*NCAHFS = Non-current assets held for sale
2. Impairment loss
The brand name “Vino Veritas” received negative publicity during the current financial year. The negative
publicity is due to the 20 000 spoilt bottles of wine that were sold to the public. The impairment loss
amounted to R577 400. The recoverable amount is based on the value in use and is determined using a
pre-tax discount rate of 15%. The impairment loss was included in the statement of profit or loss and
other comprehensive income in the other expenses line item.
3. Non-current assets held for sale

A decision to dispose of the assets of the Gauteng bottling plant was taken on 31 October 2010 after a
formal detailed disposal plan for the assets of the bottling plant was approved. The plan regarding the
once-off sale of the assets was at a stage of completion on 31 December 2010, where no realistic
possibility of withdrawal existed. It is expected that the plan for the sale of the assets will be completed
by 1 May 2011 for cash.
The disposal group under discussion comprises:
ASSETS R
Plant and equipment 4 994 146
Intangible assets 705 854
Inventory (550 000 – 25 000) 525 000
6 225 000
An impairment loss of R116 250 was recognised upon initial classification of the disposal group as held
for sale. The impairment loss was included under loss after tax on remeasurement on the face of the
statement of profit or loss and other comprehensive income.
16
FAC3702/104
CALCULATIONS:
Brand name
R
Carrying amount 4 125 000
Cost price 4 125 000
Accumulated amortisation Rnil as asset previously had indefinite -
useful life
Amortisation 4 125 000 / 6 (687 500)
Impairment loss (577 400)
Carrying amount 2 860 100
Calculation of impairment loss
Using HP10bii financial calculator:
CF0 0
CF1 1 200 000
CF2 1 000 000
CF3 800 000
CF4 500 000
CF5 500 000
‘i = 15%
Comp NPV = R2 860 100
OR:
Alternative:
FV = 1 200 000 FV = 1 000 000 FV = 800 000 FV = 500 000 FV = 500 000
N=1 N=2 N=3 N=4 N=5
‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15%
PV = ? PV = ? PV = ? PV = ? PV = ?
R1 043 478 R756 144 R526 013 R285 877 R248 588
Total PV = R2 860 100
Value in use R2 860 100

Fair Value less cost to sell R2 400 000
Therefore recoverable amount is R2 860 100 as it is the higher of value in use or fair value less cost to
sell.
R
Carrying amount (4 125 000 – 687 500) 3 437 500
Recoverable amount 2 860 100
Impairment loss 577 400
17
Disposal group
Step 1:
Determine the carrying amount of all the individual assets in the disposal group at 31 December 2010
Machinery
R
Carrying amount on 1 April 2010 5 492 000
Depreciation [(8 000 000 – 80 000) / 15 x 9/12] (396 000)
Carrying amount on 31 December 2010 5 096 000
Software package
Carrying amount on 1 April 2010 752 500
Amortisation [860 000/20 x 9/12] (32 250)
Carrying amount on 31 December 2010 720 250
Inventory
Carrying amount on 31 December 2010 650 000
Write down to net realisable value (650 000 – 550 000) (100 000)
Net realisable value on 31 December 2010 550 000
Carrying value of disposal group on 31 December 2010 6 366 250
Step 2:
Determine the fair value less cost to sell the disposal group at 31 December 2010
Fair value less cost to sell (given) 6 250 000
Step 3:
Determine the lower of carrying amount and fair value less cost to sell at 31 December 2010
Measure the disposal group at fair value less cost to sell

Fair value less cost to sell (given) 6 250 000
Step 4:
Calculate impairment loss suffered at 31 December 2010
Carrying amount less fair value less cost to sell 116 250
Step 5:
Allocate the impairment loss to the assets
Carrying amount on Impairment loss Carrying amount after
initial classification allocated impairment allocated
R R R
Machinery(calc 1) 5 096 000 101 854 4 994 146
Software package (calc 2) 720 250 14 396 705 854
Inventory 550 000 nil 550 000
6 366 250 116 250 6 250 000
1. 5 096 000 / 5 816 250 x 116 250 = 101 854

2. 720 250 / 5 816 250 x 116 250 = 14 396
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FAC3702/104
Prop-Invest Ltd is a property investment company situated in Johannesburg, with property investments
in Gauteng and the Western Cape. The company has a 30 June year-end.
The following details are available regarding certain assets of Prop-Invest Ltd:
Property in Bedfordview, Gauteng
Prop-Invest Ltd purchased this property on 30 September 2009 for R1 000 000 (land: R300 000;
building: R700 000) for its own administrative purposes. The property was available for use as intended
by management on the date of purchase. On this date, the useful life of the building was estimated to be
35 years and a residual value of R100 000 was allocated to the building.
The property was revalued for the first time on 30 June 2011 and on this date the net replacement
values of the property were as follows:
R
Land 400 000
Building 700 000
No decision has been made by the company to sell this property. The residual value and the remaining
useful life of the property have remained unchanged.
Property in Struisbaai, Western Cape
This property was purchased on 28 February 2010 for R2 800 000 (land: R1 000 000; building:
R1 800 000) with the intention to earn rental income from it. On 31 March 2010, Prop-Invest Ltd entered
into a five (5) year operating lease contract with Mrs. Ndlovu, who uses the property for residential
purposes.
However, the return on the investment in properties located in the Western Cape did not meet
management’s expectations and subsequently the board of directors decided to sell all properties
located in the Western Cape and rather reinvest in Gauteng.
On 31 January 2011 a detailed formal plan of disposal was approved and publicly announced. On
30 June 2011, the approved formal sales plan was at a stage of completion where no realistic possibility
of withdrawal existed. Management expects that a binding sales agreement for the property will be
concluded by 30 September 2011. The property will be sold for cash. The property is marketed by an
estate agent at a price that is reasonable in relation to its current fair value. The commission payable to
the estate agent on the sale of the property will amount to R250 000.
On 31 January 2011 the sale of the property located in the Struisbaai geographical area met all the
requirements for classification as held for sale in terms of IFRS 5.
The fair values of the Struisbaai property, on the respective dates, are as follows:
30 June 2010 31 January 2011 30 June 2011

R R R
Land 1 050 000 1 056 000 1 061 000
Building 1 900 000 1 910 000 1 918 000
2 950 000 2 966 000 2 979 000
19
Motor vehicle
On 31 March 2011, Prop-Invest Ltd purchased a motor vehicle for R150 000 to be used by its courier.
The motor vehicle was available for use as intended by management on acquisition date. The motor
vehicle has an estimated useful life of 120 000 kilometres and a residual value of R10 000 was allocated
to the motor vehicle. The motor vehicle travelled a total distance of 7 000 kilometres during the 2011
financial year.
Recently, this motor vehicle manufacturer received a lot of negative publicity in the media due to defects
discovered in the motor vehicles caused by technical problems in their production process. On
30 June 2011, the fair value less cost to sell of this motor vehicle was estimated to be R120 000 as a
result of this negative publicity. There is no reason to believe that the motor vehicle’s value in use
materially exceeds its fair value less cost to sell.
No decision has been made by the company to sell this motor vehicle.
Additional information:
1. The following is an extract from the accounting policies of Prop-Invest Ltd:
1.1 Property, plant and equipment.
Owner occupied property is accounted for using the revaluation model. On revaluation, accumulated
depreciation is eliminated against the gross carrying amount of the asset. Depreciation for the year is
calculated on the most recent revalued amount.
All other property, plant and equipment is accounted for using the cost model.
1.2 Investment property.
Investment property is accounted for using the fair value model.
2. All the net replacement values and fair values of the properties were determined by Mr. Sharp, an
independent sworn appraiser. Mr. Sharp has recent experience in the location and category of the
property being valued. The net replacement values and the fair values were determined by reference
to current market prices on an arm’s length basis of similar properties in the same area.
3. The related income and expenses of the properties for the respective periods were as follows:
Bedfordview, Struisbaai,
Gauteng Western Cape
1 Jul 2010 - 1 Feb 2011 - 1 Jul 2010 - 1 Feb 2011 -
31 Jan 2011 30 Jun 2011 31 Jan 2011 30 Jun 2011
R R R R
Rental income - - 98 000 87 000
Direct operating
expenses 60 000 43 000 47 000 32 000
Finance cost on
mortgage bond 113 000 115 000 75 000 28 000
4. Depreciation on buildings is provided according to the straight-line method over the asset’s estimated
useful lives. Depreciation on motor vehicles is provided according to the units of production method.
20
FAC3702/104
5. The South African Revenue Service allows the following capital allowances:
• An annual allowance of 5% on the administrative building according to section 13quin of the
Income Tax Act, on the straight-line method, not proportioned for a part of the year.
• A tax allowance on vehicles in terms of section 11e of the Income Tax Act, on the straight-line
method, over 5 years, apportioned for a part of the year.
• The South African Revenue Service does not allow a building allowance on the abovementioned
residential buildings.
6. The applicable income tax rate has remained unchanged at 28% for the past few years. 66,6% of all
capital gains are taxable.
approach. There are no other temporary differences other than those evident from the question.
8. The carrying amount of the investment property will be recovered through sale..
9. On 1 July 2010, the deferred tax liability balances relating to the respective properties were as follows:
Bedfordview, Struisbaai,
Gauteng Western Cape
R R
Land - 9 324
Building 6 200 18 648
You can assume that these balances are correct.
10. All expenses paid are deductible for tax purposes.
REQUIRED
1. Prepare a statement of profit or loss and other comprehensive income for only the
discontinued operation of Prop-Invest Ltd for the year ended 30 June 2011,
according to the requirements of only IAS 1 – Presentation of financial statements,
IAS 12 – Income taxes and IFRS 5 – Non-current assets held for sale and
discontinued operations.
Present the detailed analysis of the discontinued operation on the face of the
Deferred tax should be calculated using the statement of financial position

approach. (18½)
Note:
• Round all calculations to the nearest Rand.
21
2. Disclose the following notes to the annual financial statements of Prop-Invest Ltd
for the year ended 30 June 2011: (31½)

(A total column for the property, plant and equipment note is not required.)
2.2. Investment property
2.3. Non-current asset held for sale
Standards (IFRS).
Note:
22
FAC3702/104
1. PROP-INVEST LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 30 JUNE 2011
R
Revenue (98 000 + 87 000) 185 000
Other income (6 000 + 10 000 + 5 000 + 8 000) (see calc 3 – fair value adjustments) 29 000
Other expenses (47 000 + 32 000) (79 000)
Finance costs (75 000 + 28 000) (103 000)
Profit before tax 32 000
Income tax benefit / Income tax expense (calc 1) (6 248)
Profit for the year from the discontinued operations 25 752
Calculation 1
R
Income tax expense – discontinued operation
Profit before tax (from statement of profit or loss and other comprehensive income) 32 000
Less: fair value adjustment on non-current asset held for sale (29 000)
Calculated taxable income on the discontinued operation 3 000
(185 000 – 79 000 – 103 000)
Income tax - current tax payable (3 000 x 28%) 840
Deferred tax – discontinued operation

Opening balance (given) (9 324 + 18 648) (27 972)
Closing balance (see calculation) (33 380)
Movement in deferred tax balance (cr to SFP) (33 380 – 27 972) (5 408)
SA normal tax benefit – discontinued operation

Current tax payable 840
Deferred tax 5 408
SA normal tax benefit – discontinued operation 6 248
Carrying Exempt Temporary

amount Tax base difference difference Deferred tax
R R R R R
Land 1 061 000 - 1 000 000 61 000 11 3751
Building 1 918 000 - 1 800 000 118 000 22 0052
Total 33 380
1.
61 000 x 66,6% x 28%
2.
118 000 x 66,6% x 28%
No capital allowance – property is not a commercial property and the residential property allowance
according to s13 (sex) does not apply.
23
PROP-INVEST LTD
NOTESE FOR THE YEAR ENDED 30 JUNE 2011

Land Building Vehicle Total
R R R R
Carrying amount at the beginning of the year 300 000 687 143 - 987 143
Cost 300 000 700 000 - 1 000 000
Accumulated depreciation (calc 2) - (12 857) - (12 857)
Additions (calc 4) - - 150 000 150 000
Depreciation (calc 2) - (18 045) (8 167) (26 212)
Impairment loss through profit or loss (included in
other expenses)(calc 4) - - (21 833) (21 833)
Revaluation (calc 2) 100 000 30 902 - 130 902
Carrying amount at the end of the year 400 000 700 000 120 000 1 220 000
Gross carrying amount 400 000 718 045 150 000 1 268 045
Accumulated depreciation and impairment
losses - (18 045) (30 000) (48 045)
An impairment loss of R21 833 was recognised on the motor vehicle due to the fact that the motor vehicle
manufacturer received a lot of negative publicity in the media. The recoverable amount of the motor
vehicle was determined as the fair value less cost to sell.
The valuation was performed on 30 June 2011. The fair values were determined by an independent sworn
appraiser.
The carrying amount if the land and buildings were carried at cost minus accumulated depreciation
would have amounted to R970 000 (land: R300 000; building: R670 000)
2.2. Investment property

Land Building Total
R R R
Carrying amount at the beginning of the year 1 050 000 1 900 000 2 950 000
Fair value adjustment (calc 3) 6 000 10 000 16 000
Transfer to non-current asset held for sale (1 056 000) (1 910 000) (2 966 000)
Carrying amount at the end of the year - - -
The valuation was performed on 31 January 2011. The fair values were determined by an independent
sworn appraiser.
2.3. Non-current asset held for sale
The board of directors decided to sell the Struisbaai property since the property investment did not meet
expectations. A formal plan of disposal was approved and publicly announced on 31 January 2011. On
30 June 2011 the sales plan was at a stage of completion where no realistic possibility of withdrawal
existed. Management expects that a binding sales agreement will be concluded by 30 September 2011.
The property will be sold for cash.
Non-current asset held for sale consist of the following:

R
Investment property – Struisbaai 2 979 000
24
FAC3702/104
Calculation 2 – Bedfordview property
Land: Histo-
rical
Carrying carrying Reval-
amount amount uation
R R R
Cost 30 September 2009 300 000 300 000 -
Revaluation 30 June 2011 (calc1) 100 000 - 100 000
Carrying amount 30 June 2011 400 000 300 000 100 000
1. 400 000 – 300 000 = 100 000
Calculation 2 – Bedfordview property

Historical Reval-
Building: Carrying carrying uation
amount amount R
R R
Cost 30 September 2009 700 000 700 000 -
Depreciation 30 June 2010 (calc 1) (12 857) (12 857) -
Carrying amount 30 June 2010 687 143 687 143 -
Revaluation 1 July 2010 (calc 2) 30 902 - 30 902
718 045 687 143 30 902
Depreciation 30 June 2011 (calc 3 – 5) (18 045) (17 143) (902)
Carrying amount 30 June 2011 700 000 670 000 30 000
1. [[(700 000 – 100 000) / 35] x 9/12] = 12 857

2. [((700 000 – 100 000) / 399 x 411) + 100 000] = 718 045; 718 045 – 687 143 = 30 902
OR: ((700 000 – 100 000) / 399) x 12 = 18 045; 700 000 + 18 045 = 718 045;
718 045 – 687 143 = 30 902
Total useful life in months = 35 x 12 = 420;

Remaining useful life in months at 1 July 2010 = 420 – 9 = 411;
Remaining useful life in months at 30 June 2011 = 411 – 12 = 399
3. 718 045 – 700 000 = 18 045 OR (718 045 – 100 000) / 411 x 12 = 18 045
4. (700 000 – 100 000) / 35 = 17 143 OR (687 143 – 100 000) / 411 x 12 = 17 143
5. 30 902 / 411 x 12 = 902
25
Calculation 3 – Struisbaai property
Land: Fair
Historical value
Carrying carrying adjust-
amount amount ment
R R R
Cost 28 February 2010 1 000 000 1 000 000 -
Fair value adjustment 30 June 2010 (calc 1) 50 000 - 50 000
Carrying amount 30 June 2010 1 050 000 1 000 000 50 000
Fair value adjustment 31 January 2011 (calc 2) 6 000 - 6 000
Transfer to NCAHFS* 1 056 000 1 000 000 56 000
1. 1 050 000 – 1 000 000 = 50 000

2. 1 056 000 – 1 050 000 = 6 000
3. 1 061 000 – 1 056 000 = 5 000
* Non-current assets held for sale
Calculation 3 – Struisbaai property
Building: Fair
Historical value
Carrying carrying adjust-
amount amount ment
R R R
Cost 28 February 2010 1 800 000 1 800 000 -
Fair value adjustment 31 January 2011 (calc 2) 10 000 - 10 000
Transfer to NCAHFS* 1 910 000 1 800 000 110 000
1. 1 900 000 – 1 800 000 = 100 000

2. 1 910 000 – 1 900 000 = 10 000
3. 1 918 000 – 1 910 000 = 8 000
* No-current assets held for sale
Calculation 4 – Motor vehicle

Historical
Carrying carrying
amount amount
R R
Cost 31 March 2011 150 000 150 000
Depreciation 30 June 2011 (calc 1) (8 167) (8 167)
Impairment loss 30 June 2011 (calc 2) (21 833) (21 833)
Carrying amount 30 June 2011 120 000 120 000
1. (150 000 – 10 000) / 120 000 x 7 000 = 8 167

2. (150 000 – 8 167) – 120 000 = 21 833
26
FAC3702/104
does not affect your answer. Do not round the CGT rate
In the instances where the deferred tax calculation or note was not required, only the
applicable calculations are included, not the entire table.
27
NewTV Ltd is a company operating in the broadcasting industry. The company has a 30 June year-end.
Broadcasting licence (Intangible asset)
In order for NewTV Ltd to broadcast films in South Africa, they require a broadcasting licence. On
1 September 2003 the Broadcasting Authority of South Africa (BASA) granted a public broadcasting
licence to NewTV Ltd at a cost of R1 500 000. The licence was granted for a period of 10 years. BASA
indicated that NewTV Ltd would receive an amount equal to 10% of the original cost of the licence when
it is revoked or renewed. The licence was available for use, as intended by management, on acquisition
date.
On 1 June 2011, BASA issued a final warning to NewTV Ltd due to the inappropriate content of a film
that they broadcasted on television. BASA revoked the broadcasting licence of NewTV Ltd with effect
from 30 June 2011. The licence will have no future economic benefits for NewTV Ltd as NewTV Ltd can
no longer broadcast any films after this date. They would have to reapply for a new licence in order to
broadcast any films in future.
Films (Intangible asset)
NewTV Ltd import films from the United States of America and broadcast them on South African
television stations. NewTV Ltd is not a retailer of films, but is the exclusive broadcaster of them in South
Africa. The following transactions, which have not yet been recorded in the accounting records of NewTV
Ltd, were entered into during the current financial year:
On 1 January 2011, NewTV Ltd placed a non-cancellable order for a new batch of films from the
American supplier, MegaMovie for an amount of $50 000. On 1 February 2011, the order was confirmed
in writing and a deposit equal to 10% of the purchase price was paid immediately. The remainder of the
purchase price is payable as follows:
• $20 000 is payable on 1 June 2011, on date of delivery of the films; and
• $25 000 is payable on 1 September 2011 as final settlement.
Upon delivery on 1 June 2011, all risks and rewards associated with the films were transferred to NewTV
Ltd and the films were immediately available for use as intended by management. It is expected that
these films will have a useful life of 2 years.
At year-end on 30 June 2011, there was no indication of impairment in relation to the films as a result of
the broadcasting licence having been revoked.
In order to hedge themselves against fluctuations in exchange rates, NewTV Ltd entered into the
following forward exchange contracts (FEC) with Zippo Bank:
• On 1 February 2011, a 4 month FEC to cover the first instalment of $20 000; and
• On 1 June 2011, a new FEC for the outstanding liability of $25 000, expiring on 1 September 2011.
On 1 February 2011, NewTV Ltd designated the forward exchange contracts as the hedging instruments
and any firm commitment or foreign currency creditor that arises as a result of the transaction, as the
hedged item. The hedge complied with all the requirements for hedge accounting and the hedge was
considered to be highly effective at all times during the period. NewTV Ltd decided to apply fair value
hedge accounting to the FEC’s as a hedge of the exposure to changes in fair value of the recognised
asset/liability.
28
FAC3702/104
The following exchange rates are applicable:

Forward rate for
Spot Rate FEC
Date $1 = R $1 = R Period
1 January 2011 7,45 -
1 February 2011 7,30 7,40 4 month FEC
1 June 2011 7,33 7,36 3 month FEC
30 June 2011 7,34 7,38 2 month 1 day FEC
1 September 2011 7,41 -
1. It is the accounting policy of the company to account for intangible assets using the cost model.
2. Amortisation of intangible assets is provided for according to the straight-line method over their
estimated useful lives.
3. Consider all amounts to be material.
REQUIRED
accounting records of NewTV Ltd, to correctly account for the batch of films
purchased (including amortisation), the hedged item, the hedging instrument, the
firm commitment and foreign currency creditor.
The journal entries should be made from order date until year-end on
30 June 2011. (25½)

Note:
• No abbreviations for general ledger accounts can be used.
• Show the date of each journal entry.
• Round all amounts to the nearest Rand.
2. Using your answer in (1) above, disclose the following notes to the annual financial
statements of NewTV Ltd for the year ended 30 June 2011: (19½)
2.1 Profit before tax
2.2Intangible assets (Broadcasting licence and Films)
Standards (IFRS).
Note:
29
1. JOURNAL ENTRIES
Debit Credit
R R
1 January 2011– No entry
1 February 2011
Deposit / Prepayment (SFP) 36 500

Bank [(50 000 x 10%) x 7,30] 36 500
1 June 2011
Fair value loss (P/L) 1 400

FEC Liability (SFP) [20 000 x (7,40 – 7,33)] 1 400
Firm commitment asset (SFP) 800

Fair value gain (P/L) 800
[20 000 x (7,40 – 7,36)]
Films/ Intangible asset [(45 000 x 7,33) + (5 000 x 7,30)] 366 350
Foreign Creditor (45 000 x 7,33) 329 850
Deposit 36 500
Films/ Intangible asset (SFP) 800

Firm commitment asset (SFP) 800
Foreign Creditor / Trade payables (20 000 x 7,33) 146 600

FEC liability [20 000 x (7,40 – 7,33)] 1 400
Bank (20 000 x 7,40) 148 000
30 June 2011 (Year-end)
Foreign exchange loss / Foreign exchange difference (P/L) 250

Foreign creditor / Trade payable [25 000 x (7,34 – 7,33)] 250
FEC asset 500

[25 000 x (7,36 – 7,38)]
Amortisation 15 298
Accumulated amortisation [(366 350 + 800) / 2) x 1/12] 15 298
30
FAC3702/104
NEWTV LTD
NOTES FOR THE YEAR ENDED 30 JUNE 2011
1. Profit before tax
Profit before tax includes the following:

R
Income:
Fair value gain (800 + 500) 1 300
Expenses:
Amortisation (calc 3) (calc 4) (15 298 + 135 000) 150 298
Loss on derecognition of intangible asset (calc 5) 292 500
Fair value loss 1 400
Foreign exchange difference (loss) 250
Purchased
Broadcasting
Film licence Total
R R R
Carrying amount at beginning of year - 577 500 577 500
Cost - 1 500 000 1 500 000
Accumulated amortisation (calc 1) - (922 500) (922 500)
Additions (calc 2) 367 150 - 367 150
Amortisation (included in other expenses)
(calc 3) (calc 4) (15 298) (135 000) (150 298)
Derecognition - (442 500) (442 500)
Carrying amount at end of year 351 852 - 351 852
Cost 367 150 - 367 150
Accumulated amortisation (15 298) - (15 298)
The film has a carrying amount of R351 852 and a remaining useful life of 23 months at year-end.
Calculations:
1. (1 500 000 – 150 000(1 500 000 x 10%)) x [(6 x 12) + 10] / (10 x 12) = 922 500
2. [(45 000 x 7,33) + (5 000 x 7,30)] + [20 000 x (7,40 – 7,36)] = 366 350 + 800 = 367 150
3. 367 150 / 2 x 1/12 = 15 298
4. (1500 000 – 150 000) / 10 = 135 000
5. Calculation of loss on derecognition of broadcasting licence:
R
Carrying amount at beginning 577 500
Amortisation for the year (135 000)
Carrying amount of asset on date revoked 442 500
Derecognition of intangible asset (442 500)
Amount received from BASA (10% x 1 500 000) 150 000
Net loss upon derecognition of licence (442 500 – 150 000) 292 500
31
ChocoCoffee Ltd is a company situated on the North Coast of Kwazulu Natal. The company has a
31 December year-end.
The following details are available regarding certain assets of the company:
Roasting machine
On 1 November 2010, ChocoCoffee Ltd placed an order for a coffee bean roasting machine from an
Italian company for €3 000. The invoice amount is payable on 30 June 2011. The order was shipped free
on board (FOB) on 1 December 2010 and the machine was available for use, as intended by
management, on 1 January 2011. The machine was brought into use on 1 January 2011.
On 1 November 2010, ChocoCoffee Ltd took out a forward exchange contract (FEC) for the same
amount as the purchase price of the roasting machine, to counter the exchange rate fluctuations. The
FEC will expire on 30 June 2011. ChocoCoffee Ltd chose to apply cash flow hedge accounting and on
1 November 2010, designated the FEC as the hedging instrument and any foreign currency creditor that
arises as a result of this transaction, as the hedged item. The hedge complied with all the requirements
for hedge accounting and the hedge was considered to be highly effective at all times during the period.
From transaction date the hedge is used as a hedge against variability in fair value.
The useful life of the machine was estimated to be 10 years with a residual value of R5 000. The residual
value and remaining useful life of the machine remained unchanged.
Spot rate Forward rate for FEC

Date €1 = R €1 = R FEC period
1 November 2010 10,21 10,30 8 months
1 December 2010 10,03 10,15 7 months
31 December 2010 10,36 10,42 6 months
30 June 2011 10,29
Processing plant
ChocoCoffee Ltd owns a processing plant used for the roasting, grinding and packaging of the coffee
beans. The property was purchased on 30 September 2010 for R3 000 000 (land: R1 000 000; building:
R2 000 000). The property was available for use, as intended by management, on acquisition date and
was also brought into use on this date. A residual value of R500 000 was allocated to the building. The
useful life of the building was estimated to be 25 years.
On 31 December 2011, the property was revalued for the first time. The net replacement value of this
property was determined to be R3 550 000 (land: R1 250 000; building: R2 300 000). The residual value
and remaining useful life of the property remained unchanged. No decision has been made by the
company to sell this property.
32
FAC3702/104
Administration building
ChocoCoffee Ltd bought this property on 1 February 2011 for R1 400 000 (land: R500 000; building:
R900 000) for its own administrative purposes. The property was available for use, as intended by
management, on acquisition date and was also brought into use on this date. On 1 February 2011, it was
determined that the building had an estimated useful life of 30 years, with no residual value. The
estimated useful life and residual value remained unchanged.
During October 2011, ChocoCoffee Ltd was approached by another company about the possibility of
leasing this specific property from ChocoCoffee Ltd. After discussions, the board of directors of
ChocoCoffee Ltd changed their original intention regarding the building and vacated the building on
31 October 2011. The building was ready to be leased out from 1 November 2011. A 6 (six) year
operating lease contract, effective from 1 November 2011, was concluded. ChocoCoffee Ltd will, in
future, rent offices for its own administrative purposes.
The respective net replacement values and fair values of this administration building were as follows:
31 October 2011 31 December 2011

R R
Land 530 000 540 000
Building 920 000 935 000
Office block
ChocoCoffee Ltd owns an office block which is leased out to Read First Ltd for their administrative
purposes. The property was purchased on 1 March 2011 for R1 600 000 (land: R600 000; building:
R1 000 000).
The fair value of this property on 31 December 2011 was determined to be R2 050 000 (land: R700 000;
building: R1 350 000).
1. It is the accounting policy of the company to account for property, plant and equipment using the
revaluation model on the net replacement value basis. The roasting machine will be revalued for the
first time during the 2012 financial year.
2. It is the accounting policy of the company to account for investment property according to the fair
value model. The carrying amount of the investment property will be recovered through sale.
3. It is the accounting policy of the company to provide for depreciation according to the straight-line
method over the assets’ estimated useful lives. Depreciation for the year is calculated on the most
recent revalued amounts.
4. All the net replacement values and fair values of the assets were determined by Mr Reddy, an
independent sworn appraiser, on the net replacement value basis. Mr Reddy has recent experience
in the location and category of the property being valued. The net replacement values and the fair
values were determined with reference to current market prices on an arm’s length basis of similar
properties in the same area.
33
• An annual allowance of 5% on the processing plant according to section 13(1) of the Income Tax
Act, on the straight-line method, not proportioned for part of the year.
• A tax allowance on machinery in terms of section 11(e) of the Income Tax Act, on the straight-
line method over 6 years, proportioned for a part of the year.
• There is no capital allowance granted on the administration buildings.
6. The applicable income tax rate has remained unchanged at 28% for the past few years. 66,6% of all
capital gains are taxable.
approach. The company will have sufficient taxable profit in future against which any unused tax
losses can be utilised. There are no other items causing temporary or exempt differences except
those identified in the question.
REQUIRED
accounting records of ChocoCoffee Ltd, to correctly account for the roasting
machine purchased, the hedged item, the hedging instrument and foreign currency
creditor. (20)
Prepare only the journal entries relevant to the following dates:

• 1 December 2010
• 31 December 2010
• 30 June 2011

Reporting Standard.
Note:
• No journal entry for depreciation is required.
34
FAC3702/104
2. Using the information in the above journals, as well as all the other information
given, disclose the roasting machine as well as all the other property, plant and
equipment in the notes to the annual financial statements of ChocoCoffee Ltd for
the year ended 31 December 2011, according to the requirements of only IAS 16
– Property, Plant and Equipment. (24½)
Note:
3. Calculate the deferred tax balance in the statement of financial position of

ChocoCoffee Ltd as at 31 December 2011, using the statement of financial
position approach. Your answer must comply with the requirements of IAS 12 –
Income Taxes. (15½)
Note:
35
1. JOURNAL ENTRIES
Debit Credit
R R
1 November 2010
Order date – No journal entry
1 December 2010
Transaction date
J1 Machine 30 090
Creditor 30 090
(3 000 x 10,03)
J2 Cash flow hedge reserve (OCI) 450

FEC liability 450
[3 000 x (10,30 – 10,15)]
J3 Machine 450
Cash flow hedge reserve (OCI) 450
31 December 2010
Year-end
J4 Foreign exchange difference / loss (P/L) 990
Creditor 990
[3 000 x (10,36 – 10,03)
J5 FEC asset 360

FEC liability 450
Fair value gain (P/L) [3 000 x (10,42 – 10,15)] 810
OR (Alternative for J5)

J6 FEC asset 810
Fair value gain (P/L) [3 000 x (10,42 – 10,15)] 810
30 June 2011
Settlement date
J7 Creditor 210
Foreign exchange difference / profit (P/L) 210
[3 000 x (10,36 – 10,29)]
36
FAC3702/104
Debit Credit
R R
J8 Fair value loss (P/L) 390
FEC asset 360
FEC liability 30
[3 000 x (10,42 – 10,29)]
OR (Alternative for J8)

FEC liability 390
[3 000 x (10,42 – 10,29)]
(If you journalised J5 and J8)

J10 FEC liability (reversing J8) 30
Creditor (3 000 x 10,29) 30 870
Bank (3 000 x 10,30) 30 900
(If you journalised J6 and J9)

J11 FEC liability (450 + 390) (reversing J2 + J9) 840
Creditor (3 000 x 10,29) 30 870
Bank (3 000 x 10,30) 30 900
FEC asset (reversing J6) 810
CHOCOCOFFEE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 2011
2. Property, plant and equipment

Land Building Machine Total
R R R R
Carrying amount at the beginning of
year 1 000 000 1 985 000 30 540 3 015 540
Cost 1 000 000 2 000 000 30 540 3 030 540
Accumulated depreciation
(calc 1.2) - (15 000) - (15 000)
Additions (calc 2.1 + calc 2.2) 500 000 900 000 - 1 400 000
Revaluations (calc 1.1 + 1.2 + 2.1 +
2.2) 280 000 433 289 - 713 289
Depreciation (calc 1.2 + 2.2 + 4) - (98 289) (2 554) (100 843)
Transfer to Investment property (calc
2.1 + 2.2) (530 000) (920 000) - (1 450 000)
Carrying amount at the end of the year 1 250 000 2 300 000 27 986 3 577 986
Gross carrying amount 1 250 000 2 375 789 30 540 3 656 329
Valuations were performed on 31 December 2011 by an independent sworn appraiser.
The carrying amount of land and buildings if it was carried at cost minus accumulated depreciation would
have amounted to R2 950 000 (land: R1 000 000; building: R1 925 000).
37
3. Calculation of deferred tax

Deferred
Carrying Exempt Temporary tax
amount Tax base difference difference Tax rate liability
R R R R R
Processing plant – 28% x
Land (calc 1.1) 1 250 000 - 1 000 000 250 000 66,6% 46 620
Processing plant –
Building (calc 1.2) 2 300 000 1 800 000 - 500 000 28% 140 000
Administration
property – Land 28% x
(calc 2.1) 540 000 - 500 000 40 000 66,6% 7 459
Administration
property – Building 28% x
(calc 2.2) 935 000 - 900 000 35 000 66,6% 6 527
Office block – Land 28% x
(calc 3.1) 700 000 - 600 000 100 000 66,6% 18 648
Office block –
Building 28% x
(calc 3.2) 1 350 000 - 1 000 000 350 000 66,6% 65 268
Roasting machine
(calc 4) 27 986 25 075 - 2 911 28% 815
Total deferred tax liability 285 337
Calculation 1 - Processing plant

1.1. Land Total Historical Exempt Deferred
carrying carrying Reval- difference Temporary tax asset
amount amount uation (*) difference / (liability)
R R R R R R
Cost
30 September 2010 1 000 000 1 000 000 - 1 000 000
Revaluation
(calc 1.1.1) 250 000 - 250 000 -
Carrying amount
31 December 2011
(calc 1.1.2) 1 250 000 1 000 000 250 000 1 000 000 250 000 (46 620)
1.1.1 1 250 000 – 1 000 000 = 250 000

1.1.2 (1 250 000 – 1 000 000) x 28% x 66,6% = 46 620
* - No capital allowance is allowed.
38
FAC3702/104
1.2. Building Tempo- Deferred

Total Historical rary tax asset /
carrying carrying Reval- differ- (liability)@
amount amount uation Tax base ence 28%
R R R R R R
Cost
30 September 2010 2 000 000 2 000 000 - 2 000 000
Depreciation / Tax
allowance
31 December 2010
(calc 1.2.1 – 1.2.2) (15 000) (15 000) - (100 000)
Carrying amount
31 December 2010 1 985 000 1 985 000 - 1 900 000 85 000 (23 800)
Revaluation
1 January 2011
(calc 1.2.3) 390 789 - 390 789 -
Depreciation / Tax
allowance
31 December 2011
(calc 1.2.4 – 1.2.6 + calc
1.2.2) (75 789) (60 000) (15 789) (100 000)
Carrying amount
31 December 2011
(calc 1.2.7) 2 300 000 1 925 000 375 000 1 800 000 500 000 (140 000)
1.2.1. [(2 000 000 – 500 000) / 25] x 3/12 = 15 000
1.2.2. 2 000 000 x 5% = 100 000
1.2.3. [(((2 300 000 – 500 000) / 285) x 297) + 500 000] = 2 375 789; 2 375 789 – 1 985 000 = 390 789
(25 years x 12 months = 300 months; 300 months – 3 months already passed = 297 months at the
beginning of the financial year. 297 – 12 months = 285 months at the end of the financial year
1.2.4. 2 300 000 – 2 375 789 = 75 789 OR [(2 375 789 – 500 000) / 297 x 12] = 75 789
1.2.5. [(2 000 000 – 500 000) / 25] = 60 000
1.2.6. 390 789 / 297 x 12 = 15 789
1.2.7. (2 300 000 – 1 800 000) x 28% = 140 000
Calculation 2 – Administration building
2.1. Land
Histo- Reval-
Total rical uation/ Exempt Tempo- Deferred
carrying carrying Fair value diffe- rary tax asset /
amount amount adj. rence (*) difference (liability)
R R R R R R
Cost
1 February 2011 500 000 500 000 - 500 000
Revaluation
(calc 2.1.1)
1 November 2011 30 000 - 30 000 -
Transfer to investment
property 530 000 500 000 30 000 500 000
(calc 2.1.2) 10 000 - 10 000 -
Carrying amount
31 December 2011
(calc 2.1.3) 540 000 500 000 40 000 500 000 40 000 (7 459)
39
2.1.1. 530 000 – 500 000 = 30 000

2.1.2. 540 000 – 530 000 = 10 000
2.1.3. (540 000 – 500 000) x 28% x 66,6% = 7 459
* No capital allowance is allowed.
2.2. Building Reval- Tempo-

Total Historical uation/ Exempt rary Deferred
carrying carrying Fair value difference differ- tax asset
amount amount adjustment (*) ence / (liability)
R R R R R R
Cost
1 February 2011 900 000 900 000 - 900 000
Depreciation
1 November 2011
(calc 2.2.1) (22 500) (22 500) - (22 500)
877 500 877 500 - 877 500
Revaluation
(calc 2.2.2)
1 November 2011 42 500 - 42 500 22 500
Transfer to
investment property 920 000 877 500 42 500 900 000 20 000 (5 600)
Rate reduction
(calc 2.2.3) 1 870
Fair value
adjustment
(calc 2.2.4) 15 000 - 15 000 -
Carrying amount
31 December 2011
(calc 2.2.5) 935 000 877 500 57 500 900 000 35 000 (6 527)
2.2.1. 900 000 / 30 x 9/12 = 22 500

2.2.2. 920 000 – 877 500 = 42 500
2.2.3. (920 000 – 900 000) x 28% = 5 600; 5 600 x 66,6% = 3 730, 5 600 – 3 730 = 1 870
2.2.4. 935 000 – 920 000 = 15 000
2.2.5. (935 000 – 900 000) x 28% x 66,6% = 6 527
Calculation 3 – Office block
3.1. Land Total Historical Fair value Exempt Deferred

carrying carrying adjust- difference Temporary tax asset /
amount amount ment. (*) difference (liability)
R R R R R R
Cost
1 March 2011 600 000 600 000 - 600 000
Fair value adjust-
ment
(calc 3.1.1) 100 000 - 100 000 -
Carrying amount
31 December 2011
(calc 3.1.2) 700 000 600 000 100 000 600 000 100 000 (18 648)
40
FAC3702/104
3.1.1. 700 000 – 600 000 = 100 000

3.1.2. (700 000 – 600 000) x 66,6% x 28% = 18 648
3.2. Building Fair Tempo-

Total Historical value Exempt rary Deferred
carrying carrying adjust- difference diffe- tax asset /
amount amount ment. (*) rence (liability)
R R R R R R
Cost
1 March 2011 1 000 000 1 000 000 - 1 000 000
Fair value
adjustment
350 000 - 350 000 -
(calc 3.2.1)
Carrying amount
31 December 2011
(calc 3.2.2) 1 350 000 1 000 000 350 000 1 000 000 350 000 (65 268)
3.2.1. 1 350 000 – 1 000 000 = 350 000

3.2.2. (1 350 000 – 1 000 000) x 28% x 66,6% = 65 268
Calculation 4 – Machinery
Total Tempo- Deferred tax asset /
carrying Tax rary (liability)
amount base difference @ 28%
R R R R
Cost
1 December 2010 30 540 30 090
Depreciation / Tax allowance
31 December 2011
(calc 4.1.1 – 4.1.2) (2 554) (5 015)
Carrying amount
31 December 2011 (calc 4.1.3) 27 986 25 075 2 911 (815)
4.1.1. 30 090 + 450 = 30 540; (30 540 – 5 000) / 10 = 2 554

4.1.2. 30 090 / 6 = 5 015
4.1.3. (27 986 – 25 075) x 28% = 815
does not affect your answer. Do not round the CGT rate.
41
THIS QUESTION CONSISTS OF TWO INDEPENDENT PARTS
PART A (29 marks) (35 minutes)
Koikoi Ltd is a company that manufactures batteries for motor vehicles. The company has a
31 December year-end.
The following details regarding certain assets of the company are available:
Purchased patent – Waya Waya
On 1 January 2005, the company acquired a battery patent, called Waya Waya, for R2 800 000. This
patent will ensure that the company manufacture more reliable batteries. On acquisition of the Waya
Waya patent, Koikoi Ltd also incurred consulting and legal fees amounting to
R47 000 and R23 000 respectively. These capital expenditures were paid in cash on acquisition date of
the patent. The patent’s useful life was determined to be 10 years and no residual value was allocated to
the patent. The patent was available for use, as intended by management, on acquisition date.
However, during the 2011 financial year, numerous customers complained about defective batteries.
After internal investigations, it was discovered that there is a defect present in some batches of batteries
already sold to customers. As a result, Koikoi Ltd had to recall the defective batteries already sold and
had to replace them, free of charge, with new ones. Sales of these batteries started to decrease
significantly due to the customer dissatisfaction and management had to assess the impact thereof on
the value of the patent.
On 31 December 2011, the fair value of the patent was estimated to be only R850 000. Legal and other
administration fees to sell the patent was estimated to amount to R60 000. Expected future net cash
inflows to be derived from the use of the patent was estimated to amount to R320 000 for the year ended
31 December 2012. The future net cash inflows will increase with 10% annually until 31 December 2014.
Internally generated patent - Setlopo
After the complications with the Waya Waya battery patent, Koikoi Ltd decided to develop its own
product and registered the patent as the Setlopo patent. Research and development of the Setlopo
patent commenced on 1 February 2011.
After completion of the research phase on 31 March 2011, the project manager and the chief financial
officer of Koikoi Ltd determined that all the criteria for the recognition of an intangible asset were
satisfied. On 1 August 2011, the development of the Setlopo patent was completed and it was available
for use, as intended by management, on this date.
The following costs directly relating to the Setlopo patent were evenly incurred during the research and
development phase:
R
Salaries 700 000
Consumables 100 000
General overheads 80 000
On 1 February 2011, a specialised machine was purchased at a cost of R2 000 000 from Tloung Ltd.
Koikoi Ltd paid R1 100 000 in cash immediately and the outstanding balance was settled on
30 November 2011. Tloung Ltd’s normal credit terms for these machines are 2 months. Management
intends to use the machine for the next 5 years, initially for the purpose of the development of the
Setlopo patent, thereafter for commercial production of the batteries.
42
FAC3702/104
Management estimated the residual value of this machine to amount to R300 000. The machine was
available for use, as intended by management, on 1 February 2011.
The Setlopo patent’s useful life was estimated to be 15 years. A residual value of Rnil was allocated to
the patent.
On 31 December 2011, management decided to sell the Setlopo patent as it was not generating income
as initially anticipated. The sale is expected to be completed by 29 February 2012 for cash. All of the
criteria as set out in IFRS 5 for classifying an asset as held for sale was met on 31 December 2011. The
fair value less cost to sell of the Setlopo patent on 31 December 2011 was determined to be R400 000.
1. It is the accounting policy of the company to account for intangible assets according to the cost
model.
2. It is the accounting policy of the company to provide for amortisation according to the straight-line
method over the assets’ estimated useful lives.
3. A pre-tax discount rate of 15% is considered to be appropriate.
REQUIRED
1. Calculate the impairment loss (if any) for the Waya Waya patent in the books of
Koikoi Ltd for the year ended 31 December 2011, according to the requirements of
IAS 36 – Impairment of Assets and IAS 38 – Intangible Assets. (10)
Note:
• Show all data input into your financial calculator.
2. Using your answer in (1) above, disclose the impairment loss note in the notes to
the annual financial statements of Koikoi Ltd for the year ended
31 December 2011, according to the requirements of only IAS 36 – Impairment of
Assets. (2½)
Note:
• Ignore any VAT and tax implications.
3. Calculate the total cost of the Setlopo patent to be capitalized in the statement of
financial position of Koikoi Ltd as at 31 December 2011, according to the
requirements of IAS 38 – Intangible Assets. (6½)
Note:
43
4. Using your answer in (3) above, disclose only the Setlopo patent in the notes to
the annual financial statements of Koikoi Ltd for the year ended 31 December
2011, according to the requirements of only IAS 38 – Intangible Assets. (6)
Note:
5. Disclose the “non-current assets held for sale” note to the annual financial
statements of Koikoi Ltd for the year ended 31 December 2011, according to the
requirements of IFRS 5 – Non-current assets held for sale and discontinued
operations. (4)
Note:
PART B (11 marks) (13 minutes)
On 2 January 2011, Mkana Ltd issued 1 000 convertible bonds at R1 500 per bond, resulting in total
proceeds of R1 500 000. These bonds are convertible into 150 ordinary shares at the option of the
holder, at any time until maturity on 31 December 2013. Interest is payable annually in arrears at a
nominal interest rate of 7%. When the bonds were issued, the prevailing market interest rate for similar
debt without a conversion option was 9%.
REQUIRED
Prepare the journal entries (cash transactions included) to account for the above
bonds in the accounting records of Mkana Ltd for the year ended 31 December 2011.
(11)
Standards (IFRS).
Note:
44
FAC3702/104
QUESTION 6 PART A SUGGESTED SOLUTION
1. Calculation of impairment loss on Waya Waya patent

R
Cost 1 January 2005 (2 800 000 + 47 000 + 23 000) 2 870 000
Accumulated amortisation (2 870 000 / 10 x 6) (1 722 000)
Carrying amount 31 December 2010 1 148 000
Amortisation (2 870 000 / 10) (287 000)
Carrying amount before impairment test 861 000
Alternative for carrying amount before impairment test:

Cost 1 January 2005 (2 800 000 + 47 000 + 23 000) 2 870 000
Accumulated amortisation 31 December 2011 (2 870 000 / 10 x 7) (2 009 000)
Carrying amount before impairment test (2 870 000 – 2 009 000) 861 000
Carrying amount before impairment test 861 000

Recoverable amount (higher of fair value less cost to sell and value in (799 014)
use)
Fair value less cost to sell (850 000 – 60 000) 790 000
Value in use: (using HP10Bii financial calculator) 799 014
CF0 =0
CF1 = R320 000
CF2 = R352 000 (320 0000 + 10%)
CF3 = R387 200 (352 000 + 10%)
i = 15%
Comp NPV = R799 014
Impairment loss (861 000 – 799 014) 61 986
KOIKOI LTD
2. Impairment loss
The Waya Waya battery patent was impaired during the year due to customer dissatisfaction about the
product. This is due to the fact that certain batches of the batteries had to be recalled from customers
due to defects discovered. The impairment loss amounted to R61 986. The recoverable amount is
based on value in use and is determined using a pre tax discount rate of 15%. The impairment loss was
included in profit/loss in the statement of profit or loss and other comprehensive income, in the other
expenses line item.
3. Total cost of the Setlopo patent
Research costs – to be expensed

R
Salaries R116 6671 x 2 233 333
Consumables R16 6672 x 2 33 333
Depreciation (R1 914 8593 – R300 000) / 5 x 2/12 53 829
320 495
45
QUESTION 6 PART A SUGGESTED SOLUTION (continued)
Development costs – to be capitalised

R
Salaries R116 6671 x 4 466 667
Consumables R16 6672 x 4 66 667
Depreciation (R1 894 8633 – R300 000) / 5 x 4/12 106 324
639 658
1.
Calculations 700 000 / 6 = 116 667
2.
100 000 / 6 = 16 667
3.
FV = R900 000
i = 15%/12
n = 10
Comp PV = R794 863
Therefore cost = R1 100 000 + R794 863 = R1 894 863
Research phase = 1 February 2011 – 31 March 2011 = 2 months

Development phase = 1 April 2011 – 1 August 2011 = 4 months
KOIKOI LTD
4. Intangible asset – Setlopo patent Patent:

Internally
generated
R
Carrying amount at the beginning of the year -
Cost -
Accumulated amortisation -
Additions (3 above) 639 658
Amortisation (included in other expenses) (639 658 / 15 x 5 / 12) (17 768)
Transferred to Non-current asset held for sale (621 890)
Carrying amount at the end of the year -
Cost -
Accumulated amortisation -
KOIKOI LTD
5. Non-current asset held for sale
On 31 December 2011, Koikoi Ltd decided to dispose of the Setlopo patent, as the patent was not
generating income as initially anticipated. It is expected that the sale of the patent will take place on
28 February 2012 and the sale will be for cash.
Patent R400 000
An impairment loss of R221 890 was recognised upon initial classification of the patent as non-current
asset held for sale. The impairment loss was included in the profit or loss section of the statement of
profit or loss and other comprehensive income, in the other expenses line item.
46
FAC3702/104
Calculation: Impairment loss on non-current asset held for sale

R
Patent 621 890
Impairment loss (621 890 – 400 000) (221 890)
Carrying amount 31 December 2011 400 000
QUESTION 6 PART B SUGGESTED SOLUTION
R
Present value of the principal (PV) 1 158 275
(R1 500 000 payable at the end of three years)
FV = 1 500 000
i = 9%
n=3
PMT = 0
Present value of the interest (PV) 265 786
(R105 000 payable annually in arrears for three years)
FV = 0
PMT = 105 000 (1 500 000 x 7%)
n=3
i = 9%
OR:
FV = 1 500 000
i = 9%
N=3
PMT = 105 000 (1 500 000 x 7%)
Comp PV = 1 424 061
Total liability component 1 424 061

Equity component (balancing figure) 75 939
Proceeds on bond issue 1 500 000
Journal entries
Debit Credit
R R
2 January 2011
Bank 1 500 000
Equity component of convertible bond (balancing) 75 939
Liability component of convertible bond 1 424 061
Initial recognition of convertible bond
31 December 2011
Finance cost (1 424 061 x 9%) 128 165
Liability component of convertible bond (balancing) 23 165
Bank (1 500 000 x 7%) 105 000
Recognition of finance cost, interest paid and discount of liability to fair value
47
Logo Logic Ltd is a printing company situated in Pretoria, Gauteng. The financial year-end of the
company is 30 June. Details of the company’s assets are as follows:
Manufacturing building
Logo Logic Ltd purchased a manufacturing building on 1 October 2010 for R5 400 000 (Land:
R1 500 000; Building: R3 900 000) where the design and printing of logos take place. The building has a
useful life of 30 years and a residual value of R450 000. The building was available for use, as intended
by management, on acquisition date.
Office building
Logo Logic Ltd owns an office building which is used as their administrative headquarters. The property
was purchased on 1 July 2011 for R2 850 000 (Land: R400 000; Building: R2 450 000). The building
has a useful life of 25 years and no residual value. The building was available for use, as intended by
management, on acquisition date.
During the 2012 financial year, the directors of the company decided to move their administrative
headquarters to the manufacturing building, as there was sufficient vacant space available for this
purpose and to increase profitability. On 1 May 2012, Logo Logic Ltd evacuated the office building and
relocated its administrative headquarters to the manufacturing building. Subsequently, on 1 May 2012 a
lease contract was signed with Blue Bell Ltd to rent the office building for a 10 year period, effective from
1 July 2012.
1. During the current financial year, the directors of Logo Logic Ltd decided to revalue land and
buildings for the first time. The accounting policy of Logo Logic Ltd to account for owner-occupied
land and buildings was thus changed during the current financial year from the cost model to the
revaluation model. Owner-occupied land and buildings will be valued using the net replacement value
basis. On revaluation of the asset, the accumulated depreciation is eliminated against the gross
carrying amount of the asset.
2. It is the accounting policy of Logo Logic Ltd to account for investment property using the fair value
model. The carrying amount of the investment property will be recovered through sale.
3. Depreciation on land and buildings are provided for according to the straight-line method over their
estimated useful lives. Depreciation is calculated on the most recent revalued amounts.
4. The properties were revalued by Mr Mabula, an independent sworn appraiser, who holds a
recognised and relevant professional qualification and who has recent experience in the location and
category of the property being valued. Values were determined on the net replacement value basis
with reference to current market evidence. The remaining useful life of the buildings remained
unchanged throughout.
48
FAC3702/104
The values applicable to the properties are as follows:
Manufacturing building:
Land Buildings
R R
Net replacement value on 30 June 2012 1 700 000 4 150 000
Residual value on 30 June 2012 - 550 000
Office building:
Land Buildings
R R
Fair value on 1 May 2012 480 000 2 600 000
Fair value on 30 June 2012 490 000 2 650 000
5. It is company policy to realise any revaluation surplus on the sale of the underlying assets.
6. The South African normal tax rate is 28%. 66,6% of capital gains are taxable.
• An annual building allowance of 5% on the manufacturing building according to section 13(1) of
the Income Tax Act, on the straight-line method, not proportioned for part of the year.
• No tax allowance on office buildings.
approach. There are no temporary differences other than those evident from the question. The
company will have sufficient taxable profit in future against which any unused tax losses can be
utilised.
9. Assume all amounts are material.
REQUIRED
Based on the information provided above, disclose the following notes to the annual
financial statements of Logo Logic Ltd for the year ended 30 June 2012:
1. Property, plant and equipment (A total column is not required) (26½)

2. Deferred tax (12½)
Standards (IFRS).
Note:
49
Popmusic Ltd is a company situated in Johannesburg, Gauteng that specialises in the distribution of
music in South Africa. The company has a 30 June year-end.
On 1 May 2009 Popmusic Ltd bought the rights to be the sole distributor of Rohonna’s music in South
Africa. Rohonna is a world famous artist from the United States of America. Popmusic Ltd bought the
distribution rights to her music for a period of 15 years for an amount of R780 000. A residual value of
Rnil was allocated to the distribution rights. The rights were available for use, as intended by
management, on acquisition date.
During the 2011 financial year, Rohonna was involved in a major scandal in the United States of America
which resulted in a significant decrease in the demand for her music in South Africa. On 30 June 2011,
the fair value less costs to sell of the distribution rights was estimated at R550 000 and the value in use
was determined to be R500 000.
During the 2012 financial year, Rohonna’s management team initiated a worldwide image makeover
project and invested a lot of time and money in improving her public image. The campaign was very
successful in South Africa and subsequently the demand for Rohonna’s music increased. On
30 June 2012, the fair value less costs to sell of the distribution rights was estimated at R650 000 and
the value in use was determined to be R620 000.
The useful life and residual value of the distribution rights remained unchanged throughout this period.
1. It is the accounting policy of Popmusic Ltd to account for intangible assets using the cost model.
2. Amortisation is provided for according to the straight-line method over the expected useful life of the
assets.
REQUIRED
Based on the information provided above, disclose the following notes to the annual
financial statements of Popmusic Ltd for the year ended 30 June 2012:
1. Intangible assets (13)

2. Impairment of assets (2)
Standards (IFRS).
Note:
50
FAC3702/104
LOGO LOGIC LTD
NOTES FOR THE YEAR-ENDED 30 JUNE 2012

Land Buildings Total
R R R
Carrying amount at the beginning of the year 1 500 000 3 813 750 5 313 750
Cost 1 500 000 3 900 000 5 400 000

Accumulated depreciation - (86 250) (86 250)
Additions 400 000 2 450 000 2 850 000
Revaluations (Land – calc 1 + 3)
(Building – calc 2 + 4) 280 000 695 351 975 351
Depreciation (Building – calc 2 + 4) - (209 101) (209 101)
Transfer to Investment property (480 000) (2 600 000) (3 080 000)
Carrying amount at the end of the year 1 700 000 4 150 000 5 850 000
Gross carrying amount 1 700 000 4 277 434 5 977 434

Accumulated depreciation - (127 434) (127 434)
Valuations were performed on 30 June 2012 by an independent sworn appraiser.
The carrying amount of the land and buildings, if it was carried at cost minus accumulated depreciation
would have amounted to R5 202 169 (land: R1 500 000; building: R3 702 169).
2. Deferred tax
R
Land: [(1 700 000 – 1 500 000) x 28% x 66,6%] + [(490 000 – 400 000) x 28% x 66,6%] (54 079)
Building: [(4 150 000 – 3 510 000) x 28%] + [(2 650 000 – 2 450 000) x 28% 66,6%] (216 496)
Deferred tax liability (270 575)
Calculation 1 - Land
Histo-
rical Deferred
Carrying carrying Reva- Exempt Temporary tax asset/
amount amount luation difference difference (liability)
R R R R R R
Cost
1 October 2010 1 500 000 1 500 000 - 1 500 000
Revaluation
surplus (calc 1.1) 200 000 - 200 000 -
Carrying amount
30 June 2012
(calc 1.2) 1 700 000 1 500 000 200 000 1 500 000 200 000 (37 296)
1.1. 1 700 000 – 1 500 000 = 200 000

1.2. (1 700 000 – 1 500 000) x 66,6% x 28% = 37 296
51
Calculation 2 Building
Histo- Tempo-
rical rary Deferred
Carrying carrying Reva- differ- tax asset/
amount amount luation Tax base rence (liability)
R R R R R R
Cost 1 October 2010 3 900 000 3 900 000 - 3 900 000

Accumulated
depreciation
(calc 2.1) / tax allowance
(calc 2.2) (86 250) (86 250) - (195 000)
Carrying amount
30 June 2011 3 813 750 3 813 750 - 3 705 000 108 750 (30 450)
Revaluation surplus
(calc 2.3) 463 684 - 463 684 -
Depreciation (calc 2.4 -
2.6) / tax allowance
(calc 2.2) (127 434) (111 581) (15 852) (195 000)
Carrying amount
30 June 2012 (calc 2.7) 4 150 000 3 702 169 447 831 3 510 000 640 000 (179 200)
2.1. (3 900 000 – 450 0000) / (30 x 12 = 360) x 9 = 86 250 OR

(3 900 000 – 450 000) / 30 x 9/12 = 86 250
2.2. 3 900 000 x 5% = 195 000
2.3. [(4 150 000 - 550 000) / 339 x 351] + 550 000 = 4 277 434 - 3 813 750 = 463 684 OR
[(4 150 000 - 550 000) / 28.25 x 29.25] + 550 000 = 4 277 434 - 3 813 750 = 463 684
360 – 9 = 351; 351 – 12 = 339
2.4. (4 277 434 - 550 000) / 351 x 12 = 127 434 OR 4 277 434 – 4 150 000 = 127 434
2.5. (3 813 750 - 550 000) / 351 x 12 = 111 581
2.6. 463 684 / 351 x 12 = 15 852
2.7. (4 150 000 – 3 570 000) x 28% = 179 200
Alternative for calculation of 2.3 and 2.4
Depreciation calculation: (4 150 000 – 550 000) / 339 x 12 = 127 434

Revaluation calculation: 4 150 000 + 127 434 = 4 277 434; 4 277 434 – 3 813 750 = 463 684
52
FAC3702/104
Reva- Tempo-
Historical luation/ rary Deferred
Carrying carrying Fair Exempt differ- tax asset/
amount amount value adj difference rence (liability)
R R R R R R
Cost
1 July 2011 400 000 400 000 - 400 000
Revaluation
1 May 2012
(calc 3.1) 80 000 - 80 000 -
Carrying amount
1 May 2012 480 000 400 000 80 000 400 000
Fair value
adjustment
30 June 2012
(calc 3.2) 10 000 - 10 000 -
Carrying amount
30 June 2012 (calc
3.3) 490 000 400 000 90 000 400 000 90 000 (16 783)
3.1. 480 000 - 400 000 = 80 000

3.2. 490 000 - 480 000 = 10 000
3.3. (490 000 – 400 000) x 66,6% x 28% = 16 783
Calculation 4 - Building
Histo- Reva- Tempo-
rical luation/ rary Deferred
Carrying carrying Fair differ- tax asset/
amount amount value adj Tax base rence (liability)
R R R R R R
Cost 1 July 2011 2 450 000 2 450 000 - 2 450 000
Depreciation
(calc 4.1) (81 667) (81 667)
Carrying amount
1 May 2012 2 368 333 2 368 333 - 2 450 000
Revaluation
1 May 2012
(calc 4.2) 231 667 - 231 667
Carrying amount
1 May 2012 2 600 000 2 368 333 231 667 2 450 000 150 000
Fair value
adjustment
30 June 2012
(calc 4.3) 50 000 - 50 000 -
Carrying amount
30 June 2012
(calc 4.4) 2 650 000 2 368 333 281 667 2 450 000 200 000 (37 296)
4.1. 2 450 000 / 300 x 10 = 81 667 OR 2 450 000 / 25 x 10/12 = 81 667

4.2. 2 600 000 – (2 450 000 – 81 667) = 231 667
4.3. 2 650 000 – 2 600 000 = 50 000
4.4. (2 650 000 – 2 450 000) x 66,6% x 28% = 37 296
53
QUESTION 7 PART B SUGGESTED SOLUTION
POPMUSIC LTD
NOTES FOR THE YEAR-ENDED 30 JUNE 2012
Purchased
Distribution
right
R
Carrying amount at beginning of the year 550 000
Cost 780 000
Accumulated amortisation and impairment losses (112 667 + 117 333) (230 000)
Amortisation included in other expenses (42 857)
Reversal of impairment loss included in other income 108 190
Carrying amount at end of the year 615 333
Cost 780 000
Accumulated amortisation (230 000 + 42 857 – 108 190) (164 667)
The intangible asset has a remaining useful life of 142 months (11,8 years or 11 years and 10 months)
and a carrying amount of R 615 333 at year-end.
2. Impairment loss reversal
The previous impairment of the distribution rights has been reversed due to the successful marketing
campaign by Rohonna’s managers, increasing the demand for her music in South Africa. The reversal
of the impairment loss amounted to R108 190. The recoverable amount is the fair value less costs to
sell. The reversal was limited to the carrying amount that would have been determined had no
impairment loss been recognised for the asset in prior years.
Calculation:
Intangible assets
After
Historical Impairment
R R
Cost 780 000 780 000
Accumulated amortisation [780 000 / (15 x 12 = 180) x 26] (112 667) (112 667)
Impairment (667 333 – 550 000) (117 333)
Fair value less cost to sell: R550 000
Value in use: R500 000
Current year amortisation (780 000 / 180 x 12); (52 000) (42 857)
[550 000 / (180 – 26 =154) x 12]
Carrying amount after current year amortisation 615 333 507 143
Reversal of impairment [(667 333 – 52 000) – 507 143] 108 190
54
FAC3702/104
Gelato Ltd is an ice-cream manufacturer with retail outlets situated in Johannesburg and Pretoria
respectively. The financial year-end of the company is 30 June.
The following information relates to the assets of the company:
Machinery
On 1 April 2011, Gelato Ltd ordered a new automated ice cream mixing machine from Italy. The machine
was invoiced on 30 April 2011 for an amount of €8 000 and was shipped free on board (FOB) on
31 May 2011. The machine arrived at Durban harbour on 30 June 2011 and was transported on
1 July 2011 to Johannesburg, at a cost of R15 000. The transport costs were paid, in cash, to the driver
upon arrival at the destination. The invoice from the Italian supplier is payable on 31 August 2011,
90 days from shipment date. This is considered to be normal payment terms for goods shipped
internationally.
On 1 June 2011, Gelato Ltd took out a forward exchange contract (FEC), for €8 000, to counter the
exchange rate fluctuations. The FEC will expire on 31 August 2011.
Gelato Ltd decided to apply hedge accounting, and on 1 June 2011, designated the FEC as the hedging
instrument and the foreign currency creditor that arises as a result of this transaction, as the hedged
item. The hedge complied with all the requirements for hedge accounting and the hedge was considered
to be highly effective at all times during the period. Gelato Ltd decided to apply fair value hedge
accounting to the FEC as a hedge of the exposure to changes in the fair value of the recognised
asset/liability.
The following exchange rates are applicable:
Spot rate Forward rate for FEC

Date €1 = R €1 = R FEC period
1 April 2011 7,30 -
30 April 2011 7,35 -
31 May 2011 7,42 -
1 June 2011 7,44 7,50 3 month
30 June 2011 7,45 7,48 2 month
31 July 2011 7,49 -
31 August 2011 7,52 -
On 31 July 2011, the machine was in the required location and condition for use as intended by
management. The machine is depreciated according to the number of mixing hours in operation. It is
expected that the machine has a useful life of 36 500 mixing hours. During the 2012 financial year, the
machine was in operation for 5 000 mixing hours. The machine has no residual value.
Pretoria Outlet
Gelato Ltd’s retail outlet in Pretoria opened during January 2010. Initially the outlet was situated in a very
busy shopping centre. However, during the current financial year, the centre’s anchor tenant relocated to
another centre resulting in a significant decrease in sales of the outlet to an unacceptable level. As a
result of this, the directors of Gelato Ltd approved a detailed formal plan of disposal for the outlet on
31 March 2012. All other requirements for classification of the disposal group as held for sale were also
met on this date. The fair value less costs to sell of the disposal group on date of classification as held
for sale was R100 000. At year-end the fair value less costs to sell was R95 000. Management expects
that a binding sales agreement for all the assets will be concluded by 1 January 2013, and the assets will
be sold for cash.
55
Details of the Pretoria outlet’s assets are as follows:

Carrying amount Recoverable amount
31 March 2012 31 March 2012
R R
Inventory 8 000 Not applicable
Delivery vehicles 33 000 35 000
Furniture and fittings 64 000 64 000
The inventory consists of sugar cones, serviettes, plastic cups and spoons. Inventory with a cost price of
R2 000 was sold during the period from 1 April 2012 to 30 June 2012. The net realisable value of the
inventory on 30 June 2012, is R3 000. No inventory was purchased during the 2012 financial year.
The related income and expenditure of the Pretoria outlet is as follows:

1 July 2011 1 April 2012
to to
31 March 2012 30 June 2012
R R
Revenue 25 000 6 000
Cost of sales 12 000 ?
Other expenses (including depreciation) 22 000 12 000
1. Inventory is accounted for at the lower of cost price or net realisable value. The South African
Revenue Service will allow a write down to net realisable value as a tax deduction.
2. The South African normal tax rate is 28%. 66,6% of capital gains are taxable.
approach. There was no difference between the carrying amount and the tax base of the individual
assets prior to classification thereof as held for sale. There are no temporary differences other than
those evident from the question. The company will have sufficient taxable profit in future against
which any unused tax losses can be utilised.
56
FAC3702/104
REQUIRED
accounting records of Gelato Ltd for both the years ended 30 June 2011 and
30 June 2012, to correctly account for the machinery purchased (including
depreciation), the hedged item, the hedging instrument and the foreign currency
creditor. (20½)
Journals relevant to the following dates should be prepared:

• 31 May 2011
• 30 June 2011
• 1 July 2011
• 31 August 2011
• 30 June 2012

Note:
• Indicate the date on which the journal entry is made.
2. Prepare the statement of profit or loss and other comprehensive income of Gelato
Ltd for the year ended 30 June 2012, relating only to the discontinued
operation. (11)
Note:
• Ignore the statement of profit or loss and other comprehensive income for the
continued operation.
3. Based on the given information, disclose the “Disposal group” note to the annual
financial statements of Gelato Ltd for the year ended 30 June 2012. (8½)

Note:
57
Debit Credit
R R
30 April 2011
No entry
31 May 2011
J1 Machine 59 360
Foreign creditor 59 360
(8 000 x 7,42)
30 June 2011
J2 Foreign exchange difference/loss(P/L) 240
Foreign creditor 240
[8 000 x (7,45 – 7,42)]

FEC liability 160
[8 000 x (7,50 – 7,48)]
1 July 2011
J4 Machine 15 000
Bank 15 000
31 August 2011
J5 Foreign exchange difference/loss (P/L) 560
Foreign creditor 560
[8 000 x (7,52 – 7,45)]
J6 FEC Liability (reverse J3) OR alternative J7 / 160

Fair value gain (P/L) J9 160
OR:
J7 FEC Liability (reverse J3) Alternative for J6 160
FEC Asset (balancing) 160
[8 000 x (7,52 – 7,48)]
J8 Foreign creditor (8 000 x 7,52) If you journalised 60 160

Bank (8 000 x 7,50) J7, alternative for 60 000
FEC Asset J10 160
58
FAC3702/104
Debit Credit
OR: R R
J9 FEC asset Alternative for J6 320
[8 000 x (7,52 – 7,48)]
J10 Foreign creditor (8 000 x 7,52) If you journalised 60 160

FEC Liability (reverse J3) J9, alternative for 160
Bank (8 000 x 7,50) J8 60 000
FEC Asset (reverse J10) 320
30 June 2012
J11 Depreciation 10 186
Accumulated depreciation 10 186
(59 360 + 15 000) / 36 500 x 5 000
GELATO LTD
2. STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR
ENDED 30 JUNE 2011
Discontinued operation R
Revenue (25 000 + 6 000) 31 000
Cost of Sales (12 000 + 2 000 + 3 000) (17 000)
Gross Profit 14 000
Other expenses (22 000 + 12 000) (34 000)
Loss before tax (20 000)
Income tax benefit [(20 000) x 28%] 5 600
Loss after tax (14 400)
Loss after tax with remeasurement of disposal group (3 600)
Loss with remeasurement of disposal group to fair value less cost to sell (5 000)
Income tax benefit (5 000 x 28%) 1 400
Loss for the year from discontinued operations (18 000)
59
GELATO LTD
NOTES FOR THE YEAR ENDED 30 JUNE 2011
3. DISPOSAL GROUP
A decision to dispose of the assets was taken and the directors of the company approved a formal
detailed disposal plan for the assets of the Pretoria Ice cream outlet. On 31 March 2012 all the
requirements for classification as held for sale were met. It is expected that the plan for the sale of the
assets will be completed by 1 January 2013 for cash.
The disposal group under discussion comprises:

ASSETS R
Furniture and fittings 60 701
Delivery vehicle 31 299
Inventory (given) 3 000
95 000
An impairment loss of R5 000 was recognised upon initial classification of the disposal group as held for
sale. The impairment loss was included under loss after tax on remeasurement on the face of the
CALCULATIONS
Calculation of disposal group value on initial classification:
Carrying
Carrying amount IFRS 5 amount Carrying
31 March 2012 Impairment loss after amount
(given) allocated Impairment 30 June 2012
R R R R
Inventory 8 000 - 8 000 3 000
Furniture & Fittings 64 000 (3 299) 60 701 60 701
Delivery vehicle 33 000 (1 701) 31 299 31 299
105 000 (5 000) 100 000 95 000
Furniture and Fittings:

Carrying amount on 31 March 2012 = R64 000 (given)
Recoverable amount upon initial recognition = R64 000, thus no impairment.
Delivery vehicle:
Carrying amount on 31 March 2012 = R33 000 (given)
Recoverable amount upon initial recognition = R35 000, thus no impairment.
Calculation of IFRS 5 impairment loss:

Carrying amount of disposal group R105 000 (8 000 + 64 000 + 33 000)
Fair value less cost to sell R100 000
Impairment loss R5 000
Allocation of impairment loss:

Assets under IFRS 5: (64 000 + 33 000 = 97 000)
5 000 x 64 000/97 000 = R3 299
5 000 x 33 000/97 000 = R1 701
60
FAC3702/104
Carrying amount of assets after allocation of impairment loss:

Furniture and Fittings 64 000 – 3 299 = R60 701
Delivery vehicle 33 000 – 1 701 = R31 299
Total = R92 000
Subsequent measurement:
Inventory:
R8 000 – R2 000 = R6 000
Net realisable value at 30 June 2012 = R3 000.
Write down to Net realisable value at year-end = R3 000 (6 000 – 3 000). Included in cost of sales.
61
Ngu-X Ltd is a company that produces mathematical digital video disks (DVD’s) for high school students.
The company has a 31 March year-end. The following information relates to the assets of the company:
Property - Johannesburg
On 1 October 2008 the company purchased a manufacturing property for R8 000 000 (Land:
R2 300 000; Building: R5 700 000). The residual value of the building on acquisition date was estimated
to be R5 000 000. The property was available for use, as intended by management, on the acquisition
date. The building is expected to have a useful life of 20 years. Both the residual value and useful life of
the building remained unchanged throughout the period.
The property was revalued for the first time on 31 March 2011. On this date the net replacement value
of the property was determined to be R8 800 000 (Land: R2 400 000; Building: R6 400 000).
On 1 February 2012 the directors of the company decided to relocate their manufacturing operations to
Port Elizabeth and therefore vacated this manufacturing building. They decided that the property should
subsequently be leased out to suitable tenants. New tenants occupied the building on
28 February 2012.
The respective fair values of the property were as follows:
Date Land Building

R R
1 February 2012 2 450 000 6 500 000
31 March 2012 2 600 000 6 750 000
Property - Port Elizabeth
As a result of the decision to relocate its manufacturing operations to Port Elizabeth, Ngu-X Ltd acquired
a manufacturing property in Port Elizabeth on 1 February 2012 for R9 000 000 (Land: R2 000 000;
Building: R7 000 000). The property was available for use, as intended by management, on acquisition
date. On acquisition date the residual value of the building was estimated to be R4 500 000. The
estimated useful life of the building was determined to be 25 years. Both the residual value and useful
life of the building remained unchanged throughout the period. No revaluation of this property was
performed in the current financial year as the property will only be revalued every two years.
DVD recording machine
The directors decided to sell the company’s existing DVD recording machine because the relocation
costs to move the existing machinery to Port Elizabeth were too expensive. All the requirements for
classification of the asset as held for sale were met on 30 November 2011. A binding sales agreement
regarding the machine was concluded on this date and management expects the cash sale to be
completed on 10 April 2012.
The recording machine was originally acquired on 1 March 2009 for R1 800 000 and was available for
use, as intended by management, on acquisition date. On acquisition date the useful life of the machine
was determined to be 700 000 units and the residual value R300 000.
62
FAC3702/104
From acquisition date until 31 March 2011 the machine produced 65 000 units. During the current
financial year until 30 November 2011, the machine had produced 80 000 units. The machine’s fair value
less costs to sell on 30 November 2011 was determined to be R1 500 000 and remained unchanged on
31 March 2012.
1. The following accounting policies apply to the assets of Ngu-X Ltd:

• Owner-occupied land and buildings are accounted for using the revaluation model. On
revaluation the accumulated depreciation is eliminated against the gross carrying amount of the
asset (net replacement value basis). It is the policy of the company to realise any revaluation
surplus upon disposal of the underlying asset.
• Machinery is accounted for using the cost model.
• Investment property is accounted for using the fair value model. The carrying amount of the
investment property will be recovered through sale.
• Depreciation on buildings is provided for according to the straight-line method over the estimated
useful lives of the buildings. Depreciation on machinery is provided for according to the units of
production method. Depreciation for the year is calculated on the most recent revalued amounts.
2. All the net replacement values and fair values of the properties were determined by Prof Charac, an
independent sworn appraiser, who holds a recognised and relevant professional qualification. Prof
Charac has recent experience in the location and category of the properties being valued. The net
replacement values and the fair values were determined with reference to current market prices on
an arm’s length basis of similar properties in the same area.
• An annual building allowance of 5% on the manufacturing building according to section 13(1) of
the Income Tax Act, on a straight-line method, not apportioned for a part of the year.
• A tax allowance on the machinery over 6 years according section 11(e) of the Income Tax Act on
the straight-line method, apportioned for part of the year.
4. The SA normal tax rate is 28%. 66,6% of capital gains are taxable.
approach. There are no other items causing temporary or exempt differences except those identified
in the question. The company will have sufficient profit in future against which any unused tax losses
can be utilised.
REQUIRED
1. Prepare only the following notes to the annual financial statements of Ngu-X Ltd
for the year ended 31 March 2012:
1.1. Property, plant and equipment. (A total column is not required.)

1.2. Non-current assets held for sale (26½)

63
Note:
• Round all calculations to the nearest rand.
2. Calculate the deferred tax balance in the statement of financial position of Ngu-X
Ltd on 31 March 2012, using the statement of financial position approach.
(14½)

Note:
On 30 November 2011 Bedazzle Ltd acquired 600 shares in Innovation Ltd from a broker at a price of
R9 per share and associated transaction costs amounted to R600. Bedazzle Ltd will settle their account
with the broker, in cash, on 31 January 2012. The broker charges an interest rate of 10% per annum on
all outstanding amounts. At year-end on 31 March 2012, the market value of Innovation Ltd’s shares
amounted to R11 per share. The shares are held for trading and are not held within a business model
with the objective to hold the shares in order to collect contractual cash flows.
REQUIRED
Prepare the journal entries (cash transactions included) to account for the above
transactions in the accounting records of Bedazzle Ltd for the year ended
31 March 2012. (10)
Standards (IFRS).
Note:
64
FAC3702/104
NGU-X LTD
NOTES FOR THE YEAR ENDED 31 MARCH 2012

R R R R
Carrying amount at the beginning of the
year 2 400 000 6 400 000 1 660 714 10 460 714
Gross carrying amount 2 400 000 6 480 000 1 800 000 10 680 000
Additions 2 000 000 7 000 000 - 9 000 000
Revaluations 50 000 166 667 - 216 667
Depreciation - (83 333) (171 429) (254 762)
Transfer to non-current assets held for sale - - (1 489 286) (1 489 286)
Transfer to investment property (2 450 000) (6 500 000) - (8 950 000)
Carrying amount at the beginning of the
year 2 000 000 6 983 333 - 8 983 333
Gross carrying amount 2 000 000 7 000 0000 - 9 000 000
Accumulated depreciation - (16 667) - (16 667)
Land and buildings was valued on 1 February 2012 by an independent sworn appraiser.
3. Non-current asset held for sale

A decision to dispose of the DVD recording machine was taken after approval of a detailed formal
disposal plan. The plan regarding the sale of the machine was at a stage of completion on
30 November 2011 where no realistic possibility of withdrawal existed. It is expected that the sale will be
completed by 10 April 2012. The sale will be made for cash.
R
Machinery 1 489 286
4. Deferred Tax
Deferred
Carrying Exempt Temporary tax
amount Tax base difference difference Tax rate liability
R R R R R R
Land –
Johannesburg 28% x
property 2 600 000 - 2 300 000 300 000 66,6% 55 944
Building –
Johannesburg
property 6 750 000 4 560 000 - 2 190 000 515 004
28% x
Above base cost1 1 050 000 - 1 050 000 66,6% 195 804
Below base cost2 5 700 000 4 560 000 1 140 000 28% 319 200
Building – Port
Elizabeth property 6 983 333 6 650 000 - 333 333 28% 93 333
Recording machine
1 489 285 875 000 - 614 285 28% 172 000
Total deferred tax liability 836 281
65
Calculations:
Johannesburg - Land
Revalua-
tions/ Deferred
Fair tax asset/
Historical value (liability)
Carrying carrying adjust- Exempt Temporary 28% x
amount amount ment difference difference 66,6%
R R R R R R
Cost 01 October 2008 2 300 000 2 300 000 - 2 300 000
Accumulated
depreciation - -
Carrying amount
31 March 2010 2 300 000 2 300 000 - 2 300 000 - -
Revaluation 100 000 - 100 000 -
Carrying amount
31 March 2011 2 400 000 2 300 000 100 000 2 300 000 100 000 (18 648)
Revaluation (calc 1) 50 000 - 50 000 -
Transfer to investment
property
1 February 2012 2 450 000 2 300 000 150 000 2 300 000
(calc 2) 150 000 - 150 000 -
Carrying amount
31 March 2012 2 600 000 2 300 000 300 000 2 300 000 300 000 (55 944)
1. 2 450 000 – 2 400 000 = 50 000

2. 2 600 000 – 2 450 000 = 150 000
66
FAC3702/104
Johannesburg - Building
Revalua- Deferred
tions/ Fair Tempo- tax asset/
Historical value rary (liability)
Carrying carrying adjust- differ- 28% x
amount amount ment Tax base rence 66,6%
R R R R R R
Cost 01 October 2008 5 700 000 5 700 000 - 5 700 000
Accumulated
depreciation (calc 1) /
Tax allowance (calc 2) (52 500) (52 500) - (570 000)
Carrying amount
31 March 2010 5 647 500 5 647 500 - 5 130 000 517 500 (144 900)
Revaluation (calc 3) 832 500 - 832 500
Depreciation (calc 4, 5,
6) / Tax allowance
(calc 7) (80 000) (35 000) (45 000) (285 000)
Carrying amount
31 March 2011 6 400 000 5 612 500 787 500 4 845 000 1 555 000 (435 400)
Depreciation (calc 8, 9) /
Tax allowance (calc 7) (66 667) (29 167) (37 500) (285 000)
Revaluation (calc 10) 166 667 - 166 667 -
Transfer to Investment
property
1 February 2012 6 500 000 5 583 333 916 667 4 560 000 1 940 000 543 200
Deferred tax adjustment
(calc 11) (74 816)
(calc 12) 250 000 - 250 000 -
Carrying amount
31 March 2012 (calc 13) 6 750 000 5 583 333 1 066 667 4 560 000 2 190 000 (515 004)
1. (5 700 000 - 5 000 000) / 240 x 18 = 52 500

(5 700 000 - 5 000 000) / 20 x 1,5 = 52 500
2. (5 700 000 x 5%) x 2 = 570 000
3. [((6 400 000 - 5 000 000) / 210 x 222) + 5 000 000] = 6 480 000; 6 480 000 -
5 647 500 = 832 500
20 x 12 = 240 months; 240 - 18 months already passed = 222; 222 - 12 months in current year
= 210 months
[((6 400 000 - 5 000 000) / 17,5 x 18,5) + 5 000 000] = 6 480 000; 6 480 000 -
5 647 500 = 832 500
4. [(5 647 500 + 832 500) - 5 000 000] / 222 x 12 = 80 000 OR 6 480 000 -
6 400 000 = 80 000
5. (5 700 000 - 5 000 000) / 240 X 12 = 35 000
6. (832 500 / 222 x 12 = 45 000
7. (5 700 000 x 5%) = 285 000
8. (6 400 000 - 5 000 000) / 210 x 10 = 66 667
(6 400 000 - 5 000 000) / 17,5 x 10/12 = 66 667
832 500 / 222 x 10 = 37 500
9. (5 700 000 - 5 000 000) / 240 x 10 = 29 617
10. 6 500 000 - (6 400 000 - 66 667) = 166 667
67
11. (6 500 000 - 5 700 000) x 28% x 66,6% = 149 184

(5 700 000 - 4 560 000) x 28% = 319 200
149 184 + 319 200 = 468 384
(6 500 000 - 4 560 000) x 28% = 543 200
543 200 - 468 384 = 74 816
12. 6 750 000 - 6 500 000 = 250 000
13. (6 750 000 - 5 700 000) x 28% x 66,6% = 195 804 + 319 200 (calc 11) = 515 004
Port Elizabeth – Building

Deferred tax
asset/
Carrying Temporary (liability)
amount Tax base difference @ 28%
R R R R
Cost 01 February 2012 7 000 000 7 000 000
Depreciation (calc 1) / Tax allowance
(calc 2) ( 16 667) ( 350 000)
Carrying amount 31 March 2012 6 983 333 6 650 000 333 333 (93 333)
1. [(7 000 000 - 4 500 000 / 25) x 2 / 12] = 16 667

2. (7 000 000 / 20) = 350 000
Machinery
Deferred tax
asset/
Carrying Temporary (liability)
amount Tax base difference @ 28%
R R R R
Cost 01 March 2009 1 800 000 1 800 000
(calc 1) / Tax allowance (calc 2) (139 286) (625 000)
Carrying amount
31 March 2011 1 660 714 1 175 000 485 714 (136 000)
Depreciation (calc 3) /
Tax allowance (calc 4) (171 429) ( 300 000)
Carrying amount 31 March 2012 1 489 285 875 000 614 285 (172 000)
1. (1 800 000 - 300 000) / 700 000 x 65 000 = 139 286

2. (1 800 000 / 6 x 1/12 ) + (1 800 000 / 6 x 2) = 625 000
3. (1 800 000 - 300 000) / 700 000) x 80 000 = 171 429
4. 1 800 000 / 6 = 300 000
5. Fair value less cost to sell = R1 500 000
Carrying amount = R1 489 285
Thus, no impairment loss
68
FAC3702/104
QUESTION 9 PART B SUGGESTED SOLUTION (continued)
Debit Credit
R R
30 November 2011
J1 Transaction cost 600
Investment in shares (600 x 9) 5 400
Creditor 6 000
31 January 2012
J2 Finance charges (6 000 x 10% x 2/12) 100
Creditor 100
J3 Creditor (6 000 + 100) 6 100

Bank 6 100
Alternative for J2 & J3

Finance charges (6 000 x 10% x 2/12) 100
Creditor 6 000
Bank 6 100
J4 31 March 2012
Investment in shares [600 x (11 - 9)] or [(600 x 11) – 5 400] 1 200
Fair value adjustment (Profit/loss) 1 200
69
Perfect Paint Ltd is a paint manufacturing company with a 31 December year-end.
Computer software
Perfect Paint Ltd purchased the latest computer software for mixing paint from the United States of
America (USA). Details of the transaction are as follows:
Perfect Paint Ltd placed a non-cancellable order with the American supplier on 1 January 2012. The
invoice price amounted to $10 500, payable as follows: $5 000 on shipment date and the balance of
$5 500 on 15 June 2012. The order was shipped free on board (FOB) on 15 March 2012. On that date
an amount of R11 500 was paid, in cash, to the South African Revenue Service for customs and excise
duty. On 1 April 2012 the software was installed and available for use, as intended by management.
Perfect Paint Ltd decided to take out a forward exchange contract (FEC) to hedge the $5 500 installment
payable on 15 June 2012. The FEC was entered into on 15 February 2012, for a four (4) month period
expiring on 15 June 2012.
Perfect Paint Ltd decided to apply hedge accounting and on 15 February 2012, designated the FEC as
the hedging instrument and the firm commitment and foreign currency creditor that arises as a result of
the transaction, as the hedged item. The hedge complied with all the requirements for hedge accounting
and the hedge was considered to be effective at all times during the period. Perfect Paint Ltd accounts
for the hedge of foreign currency risk using cash flow hedge accounting.
The following exchange rates are applicable to the transaction:
Date Spot rate FEC Rate Period

$1 = R $1 = R
1 January 2012 7,68 - -
15 February 2012 7,72 7,75 4 Months
15 March 2012 7,74 7,30 3 Months
15 June 2012 7,70 - -
The software is expected to have an estimated useful life of 5 years. A residual value of Rnil was
allocated to the software. Amortisation is accounted for in accordance with the straight-line method over
the estimated useful life of the software.
Internally generated formula
During the 2012 financial year, Perfect Paint Ltd embarked on a research and development project to
develop a formula for an odourless paint. Research commenced on 1 February 2012. One researcher
was employed full-time at a salary of R30 000 per month, to determine the feasibility of the project. This
researcher was the only salaried employee working on the project and was employed until production
commenced.
On 1 May 2012 management was presented with sufficient information to indicate that all the criteria for
recognition of an internally generated intangible asset were met. The development phase of the
odourless paint commenced on 1 May 2012 and was completed on 1 October 2012. Production of the
paint commenced immediately thereafter.
70
FAC3702/104
The following directly attributable costs were incurred evenly throughout the research and development
phase:
Water, electricity and services R8 000 per month
Depreciation on machinery used for the research and development of the formula, amounted to R18 000
for the year. Depreciation on property, plant and equipment for the year (excluding the machinery
above) amounted to R256 750.
The following directly attributable personnel costs (excluding the abovementioned researcher) were
incurred evenly only during the development phase:
Salaries and wages R40 000 per month
The formula has an estimated useful life of 4 years. No residual value was allocated to the formula.
Amortisation is accounted for in accordance with the straight-line method over the estimated useful life of
the formula.
On 31 December 2012 there were indications that the formula could be impaired due to a similar product
developed by a competitor. At that date, based on market research and using a pre tax discount rate of
16% per annum, the value in use of the formula was estimated to be R352 812. On 31 December 2012
the fair value less costs to sell of the formula was estimated to be R355 000.
1. It is the accounting policy of the company to account for intangible assets using the cost model.
REQUIRED
accounting records of Perfect Paint Ltd, to correctly account for the computer
software purchased (including amortisation), the hedged item and the hedging
instrument.
Only journal entries relevant to the following dates should be prepared:

• 15 March 2012
• 15 June 2012
• 31 December 2012 (22½)

Reporting Standards (FRS).
Note:
• No journal narrations are required.
71
2. Disclose the following notes to the annual financial statements of Perfect Paint Ltd
for the year ended 31 December 2012:
2.1 Intangible assets (Computer software and internally generated formula)

2.3 Impairment loss (26½)

Note:
72
FAC3702/104
Debit Credit
R R
1 January 2012 – No entry
15 March 2012
J1 Intangible asset – computer software (10 500 x 7,74) 81 270

Foreign creditor / Foreign supplier (10 500 x 7,74) 81 270
J2 Foreign creditor / Foreign supplier 38 700

Bank (5 000 x 7,74) 38 700
Alternative for J1 & J2

Intangible asset – computer software (10 500 x 7,74) 81 270
Bank (5 000 x 7,74) 38 700
J3 Intangible asset – computer software 11 500

Bank 11 500
J4 Cash flow hedge reserve (OCI) 2 475

FEC liability (SFP) 2 475
[(7,75 – 7,30) x 5 500]
15 June 2012
J5 Foreign creditor / Foreign supplier 220

Foreign exchange difference / Foreign exchange gain (P/L) 220
[(7,70 – 7,74) x 5 500]
J6 FEC Liability (SFP) 2 200

Cash flow hedge reserve account (OCI) 2 200
[(7,70 – 7,30) x 5 500)]
Cash flow hedge reserve account (OCI) 2 200

Fair value gain 2 200
J7 Foreign creditor / Foreign supplier (5 500 x 7,70) 42 350

FEC liability (2 475 – 2 200) 275
Bank (5 500 x 7,75) 42 625
Alternative for J7 (If student wrote Alternative for J6)

FEC liability 2 475
FEC asset 2 200
Bank (5 500 x 7,75) 42 625
31 December 2012
J8 Amortisation [(81 270 + 11 500) / 5 x 9/12] 13 916

Accumulated amortisation 13 916
J9 Reclassification adjustment (2 475 / 5 x 9/12) 371

Cash flow hedge reserve 371
73
PERFECT PAINT LTD
2.1 Intangible Assets
Internally
developed Purchased
R R
Carrying amount at beginning of year - -
Cost - -
Accumulated amortisation - -
Additions (calc 1) 397 500 95 245
Impairment loss, included in other expenses (calc 3) (17 656) -
Amortisation, included in other expenses (calc 2) (J8) (24 844) (13 916)
Carrying amount at end of year 355 000 81 329
Cost 397 500 95 245
Accumulated amortisation and impairment losses (42 500) (13 916)
Perfect Paint Ltd acquired a software licence during the current year. The software licence has a
remaining useful life of 4¼ years and a carrying amount of R81 329 at year-end. The company
developed an odourless paint formula during the year. The formula has a remaining useful life of 3¾
years and a carrying amount of R355 000 at year-end.
Profit before tax includes the following:

R
Income
Foreign exchange difference 2 200
Fair value gain 220
Expenses
Amortisation, included in other expenses (13 916 + 24 844) 38 760
Research costs (calc 1) 118 500
Depreciation (18 000 – 12 000 + 256 750) 262 750
Impairment loss, included in other expenses 17 656
Reclassification adjustment 371
2.3. Impairment loss
The intangible asset, a formula for an odourless paint was impaired during the current financial year due
to a competitor having developed a similar product. The impairment loss amounted to R17 656. The
recoverable amount of the asset is based on the fair value less cost to sell.
74
FAC3702/104
CALCULATIONS
1. Internally developed intangible assets

Research Development
costs costs Total
R R R
1 Feb 2012 – 1 May 2012 –
30 Apr 2012 1 Oct 2012
3 months 5 months
Salary – Researcher
30 000 x 3 = 90 000; 30 000 x 5 = 150 000 90 000 150 000 240 000
Water & electricity
8 000 x 3 = 24 000; 8 000 x 5 = 40 000 24 000 40 000 64 000
Depreciation
18 000 / 12 x 3 = 4 500; 18 000 / 12 x 5 = 4 500 7 500 12 000
7 500
Salaries & Wages
40 000 x 5 = 200 000 - 200 000 200 000
118 500 397 500 516 000
2. Amortisation – Internally generated intangible asset

397 500 / 4 x 3/12 = 24 844
3. Impairment loss
3.1. Carrying amount of the formula
397 500 – 24 844 = 372 656
3.2. Recoverable amount of the formula = 355 000
Higher of:
Value in use R352 812
Fair value less costs to sell R355 000
3.3. Impairment loss = 372 656 – 355 000 = 17 656
75
QUESTION 11 (50 marks)(60 minutes)
Farmcor Limited is a manufacturing company of insecticides, situated in the Limpopo province. The
company has a 28 February year-end.
The following details are available regarding the assets of the company:
Insecticide manufacturing machine
On 1 September 2011, Farmcor Limited placed a cancellable order, which is highly probable, for a new
insecticide manufacturing machine at a British supplier for £35 000 and paid 10% of the purchase price
as a refundable deposit on this date. The outstanding amount is payable on 31 May 2012. The machine
was shipped free on board (FOB) on 1 October 2011 and was available for use, as intended by
management, on 1 December 2011.
On 1 September 2011, Farmcor Limited took out a forward exchange contract (FEC) for the outstanding
amount due on the insecticide manufacturing machine, to counter any exchange rate fluctuations. The
FEC will expire on 31 May 2012. Farmcor Limited chose to apply cash flow hedge accounting and on
1 September 2011, designated the FEC as the hedging instrument and any highly probable forecast
transaction or foreign currency creditor that arises as a result of this transaction, as the hedged item.
The hedge complied with all the requirements for hedge accounting and the hedge was considered to be
highly effective at all times during the period. From transaction date, all the relevant hedging
documentation reflects that the hedge is used as a hedge against variability in fair value.
On 1 December 2011, the useful life of the machine was estimated to be 15 years with a residual value
of R25 000. The residual value and remaining useful life of the machine remained unchanged
throughout.
Date Spot rate Forward rate for FEC FEC period

£1 = R £1 = R
1 September 2011 12,35 14,78 9 months
1 October 2011 12,55 15,02 8 months
28 February 2012 13,67 15,07 3 months
31 May 2012 14,05 - -
Purchased intangible asset – PestAway patent
On 1 May 2011, Farmcor Limited acquired an insecticide patent, called PestAway, for R795 000. This
innovative patent positioned the company at the forefront of the insecticide market worldwide. On
1 May 2011, the patent’s useful life was determined to be 10 years and no residual value was allocated
to the patent. The patent was available for use, as intended by management, on acquisition date.
Over the past two years, the company decided to focus more on organic markets and on
30 November 2012, management decided to sell the PestAway patent. The sale is expected to be
completed by 31 May 2013 for cash. All the criteria as set out in IFRS 5 for classifying an asset as held
for sale, were met on 30 November 2012. The fair value less costs to sell of the PestAway patent on
30 November 2012 was determined to be R500 000, which remained unchanged at year-end.
76
FAC3702/104
Internally generated intangible asset – Organopest patent
On 1 March 2012, the company commenced with research on a new patent for organic insecticides as
part of their latest business strategy to enter the organic market. The research phase was completed on
30 September 2012. On this date the Chief Financial Officer of Farmcor Limited determined that all the
criteria for the recognition of an internally generated intangible asset were satisfied. On 1 October 2012,
the development of the Organopest patent commenced. The development was still in progress at year-
end.
The following costs were evenly incurred during the research and development phase of the Organopest
patent:
• The total salaries for the developers, full-time involved in both the research and development phase,
amounted to R76 000 per month.
• General administration expenses for the 2013 financial year amounted to R215 000.
• Water and electricity directly attributable to patent research and development for the 2013 financial
year amounted to R387 000.
Farmcor Limited also used the new insecticide manufacturing machine, that was purchased during the
2011 financial year, in the development phase of the Organopest patent for the period from
1 November 2012 until 31 January 2013.
You can assume that the carrying amount of the Organopest patent exceeds its recoverable amount on
28 February 2013.
Convertible bonds
In order to finance the development of the Organopest patent, Farmcor Limited decided to issue
convertible bonds to the public. On 15 April 2012, the company issued 2 500 automatically convertible
bonds at R750 per bond, amounting to total proceeds of R1 875 000. Each bond is automatically
converted into 100 ordinary shares on maturity on 15 April 2016. Interest is payable annually in arrears
at a nominal interest rate of 8.5% per annum. When the bonds were issued, the prevailing market
interest rate for similar debt, without the conversion option, was 10% per annum.
1. It is the accounting policy of the company to account for intangible assets according to the cost
model and to provide amortisation on intangible assets according to the straight-line method over the
assets’ estimated useful lives.
2. It is the accounting policy of the company to account for property, plant and equipment according to
the cost model and provide for depreciation on plant and equipment according to the straight-line
method over the assets’ estimated useful lives.
77
REQUIRED
1. Prepare all the relevant journal entries (including all cash transactions but
excluding depreciation) in the accounting records of Farmcor Limited, to
correctly account for the insecticide manufacturing machine purchased, the
hedged items and the hedging instrument. (26)
Journals relevant to only the following dates should be prepared:

• 1 September 2011
• 1 October 2011
• 28 February 2012
• 31 May 2012

Note:
2. Disclose the following notes to the annual financial statements of Farmcor Limited
for the year ended 28 February 2013:
1. Intangible assets (A total column is not required.) (13)

2. Non-current assets held for sale (4)

Note:
3. Prepare the journal entries (cash transactions included) to account for only the
issue of the bonds on 15 April 2012 and the conversion of the bonds on
15 April 2016, in the accounting records of Farmcor Limited. (7)

Note:
• Show the date of the journal entry.
• Show all data input into your financial calculator, where applicable.
78
FAC3702/104
1. Journal entries
Debit Credit
R R
1 September 2011 (Deposit payment date)
J1 Deposits paid / Prepayment 43 225
Bank 43 225
[(35 000 x 10% ) x 12,35]
1 October 2011 (Transaction date)

J2 Machine [43 225 + (35 000 x 90% x 12,55)] 438 550
Creditor [(35 000 x 90%) x 12,55] 395 325
Deposit paid 43 225
OR Machine 395 325

Creditor / Supplier / Foreign creditor / Foreign supplier 395 325
(35 000 x 90% x 12,55)
Machinery 43 225
Deposit paid 43 225
J3 FEC Asset (SFP) 7 560

[31 500 x (15,02 – 14,78)]
J4 Cash flow hedge reserve (OCI) 7 560

Machine 7 560
28 February 2012 (Year-end)

J5 Foreign exchange difference / loss (P/L) 35 280
[31 500 x (13,67 – 12,55)]
J6 FEC Asset (SFP) 1 575

Fair value gain (P/L) 1 575
[31 500 (15,07 – 15,02)]
J7 31 May 2012 (Settlement date)

Foreign exchange difference / loss (P/L) 11 970
[31 500 x (14,05 – 13,67)]
79
Debit Credit
R R
J8 Fair value loss (P/L) 32 130
FEC liability (SFP)[31 500 X (15,07 – 14,05)] 32 130
J9 Creditor (31 500 x 14,05) 442 575

FEC liability (SFP) (reverse J8) 32 130
FEC asset (SFP) (7 560 + 1 575) (reverse J3 & J6) 9 135
Bank (31 500 x 14,78) 465 570
Alt J8 Fair value loss(P/L) 32 130

FEC Liability (SFP) 22 995
FEC Asset (SFP) (7 560 + 1 575) (reverse J3 & J6) 9 135
[31 500 X (15,07 – 14,05)]
Alt J9 Creditor (31 500 x 14,05) 442 575

FEC liability (SFP) 22 995
Bank (31 500 x 14,78) 465 570
FARMCOR LIMITED
NOTES FOR THE YEAR ENDED 28 FEBRUARY 2013
2.1 Intangible assets

Internally
Other generated
Patent Patent Total
R R R
Carrying amount at the beginning of the year 728 750 - 728 750
Cost 795 000 - 795 000
Accumulated amortisation (calc 1) (66 250) - (66 250)
Additions – internally generated(calc 4) 548 017 548 017
Amortisation (calc 2) (59 625) - (59 625)
Transfer to non-current assets held for sale (669 125) - (669 125)
Carrying amount at the end of the year - 548 017 548 017
Cost - 548 017 548 017
Accumulated amortisation - - -
The internally generated intangible asset is a patent for organic insecticide and is still in the development
phase and has a carrying amount of R548 017 at year-end. The asset is not yet available for use.
80
FAC3702/104
Calculations
1. 795 000 / 120 x 10 = 66 250

2. 795 000 / 120 x 9 = 59 625
3. Internally generated intangible asset
Research Development
1 March – 1 Oct –
30 Sept 28 Feb 2013
2013
R R
Depreciation [(438 550 – 7 560 – 25 000) / 15 x 3/12] - 6 767
General overheads - -
Salaries (76 000 x 5) 532 000 380 000
Water and electricity (387 000 / 12 x 5) 225 750 161 250
Total 757 750 548 017
2.2 Non-current assets held for sale
On 30 November 2012 management decided to sell the PestAway patent, as the company decided to
focus more on the organic market. It is expected that the sale of the patent will take place on
31 May 2013 for cash.
R
PestAway patent 500 000
An impairment loss of R169 125 was recognised upon initial classification of the patent as held for sale.
The impairment loss was recognised in the profit and loss section on the face of the statement of profit
and loss and other comprehensive income, in the other expenses line item.
[Impairment loss calculation: (669 125 – 500 000)]
3 JOURNAL ENTRIES
R
Present value of the principal Nil
(no lump sum will be payable)
Present value of the interest (R159 375 annually in arrears) 505 197
FV = 0
Pmt = R159 375 (2 500 x 750 x 8,5%)
n=4
i = 10%
PV = 505 197
Total liability component 505 197

Equity compotent (balancing figure) 1 369 803
Proceeds of bonds issue 1 875 000
81
Debit Credit
Journal entries R R
15 April 2012
Bank 1 875 000
Equity component of convertible bond 1 369 803
Liability component of convertible bond 505 197
15 April 2016
Equity component of convertible bond 1 369 803
Share capital 1 369 803
82
FAC3702/104
Disco Limited is a distribution company situated in Johannesburg, South Africa. The financial year-end of
the company is 28 February. Details of the company’s assets are as follows:
Office park
Disco Limited purchased an office park on 1 September 2009 for R8 000 000 (Land: R2 000 000;
Buildings: R6 000 000). The office park consists of 4 buildings which can be sold as separate assets.
The various departments of Disco Limited occupy all four buildings. The four buildings were available for
use, as intended by management, on acquisition date. The four buildings have a useful life of 30 years
and a total residual value of R1 000 000.
The following information relating to the four buildings on 1 March 2012, which you must assume to be
correct, is available:
Building Land
Cost Accumulated Residual value Cost
depreciation
R R R R
Buildings 1 – 3 4 500 000 312 500 750 000 1 500 000
Building 4 1 500 000 104 167 250 000 500 000
Total 6 000 000 416 667 1 000 000 2 000 000
On 1 March 2012, Disco Limited decided to relocate their Human Resources department from building 4
to building 3, due to significant staff retrenchments in the company. The relocation took place on
1 March 2012 and Disco Limited subsequently decided to rent out the vacant building 4 to a tenant. On
1 May 2012 a lease for R50 000 per month, effective from 1 June 2012, was signed for building 4,
provided that Disco Limited will do certain structural changes to the offices inside. The improvements to
building 4 were done at a cost of R200 000 and were completed on 31 May 2012, a day before the new
tenant occupied the building.
During the current financial year, the directors of Disco Limited decided to revalue property for the first
time. The properties were revalued by Mr Wood, an independent sworn appraiser, who holds a
recognised and relevant professional qualification and who has recent experience in the location and
category of the property being valued. Values were determined with reference to current market
evidence. The remaining useful life and residual value of the buildings remained unchanged throughout
the period.
The net replacement values / fair values as determined by Mr Wood, are as follows:
Buildings 1 – 3 (total value)
Date of valuation Land Buildings Total value

R R R
28 February 2013 1 800 000 4 600 000 6 400 000
Building 4
Date of valuation Land Buildings Total value

R R R
1 March 2012 550 000 1 450 000 2 000 000
28 February 2013 610 000 1 700 000 2 310 000
83
On revaluation, accumulated depreciation is eliminated against the gross carrying amount of the asset
(net replacement value basis). Depreciation is calculated on the most recent revalued amounts.
Depreciation on buildings is provided for in accordance with the straight-line method over their estimated
useful lives. It is company policy to realise any revaluation surplus on the sale of the underlying assets.
Investment property is accounted for using the fair value model. The carrying amount of the investment
property will be recovered through sale.
Delivery vehicles
On 1 March 2012, Disco Limited had a fleet of ten delivery vehicles. The total cost and the accumulated
depreciation of all ten vehicles on 1 March 2012, amounted to R3 000 000 and R1 000 000 respectively.
On 31 December 2012, one of the delivery vehicles was involved in an accident. On this date the
carrying amount of this vehicle amounted to R150 000. On 28 February 2013, after the delivery vehicle
had been repaired, the panelbeaters informed Disco Limited that the delivery vehicle will, in future, only
be able to carry two thirds of the load that it originally used to carry before the accident. It is expected
that the vehicle will generate cash flows of R45 000 per year for the next 3 years. A pre-tax discount rate
of 10% per annum is considered appropriate. On 28 February 2013, the fair value less costs of disposal
of this vehicle amounted to R110 000. The estimated useful life of this vehicle remained unchanged as
initially estimated.
The delivery vehicles (including the accident vehicle) each has an estimated useful life of 150 000
kilometres and they each travelled an average distance of 28 000 kilometres during the current financial
year.
It is the accounting policy of Disco Limited to account for vehicles according to the cost model and
provide depreciation on vehicles according to the units of production method.
1. The South African normal tax rate is 28%. 66,6% of all capital gains are taxable.
2. The South African Revenue Service allows an annual building allowance of 5% on the office
buildings, as well as the improvements, according to section 13quin of the Income Tax Act, on a
straight-line method, not apportioned for a part of the year.
approach. There are no temporary differences other than those evident from the question. The
company will have sufficient taxable profit in future against which any unused tax losses can be
utilised.
4. Assume that land and buildings are categorised as separate asset classes.
84
FAC3702/104
REQUIRED
Based on the above information, disclose the following notes to the annual financial
statements of Disco Limited for the year ended 28 February 2013:
1. Property, plant and equipment (A total column is not required.) (33)

2. Deferred tax (Only for the office park.) (17)
Standards (IFRS).
Note:
• Show all data input into your financial calculator, where applicable.
85
DISCO LIMITED
Land Buildings Vehicles Total

R R R R
Carrying amount at the beginning of
the year 2 000 000 5 583 333 2 000 000 9 583 333
Cost 2 000 000 6 000 000 3 000 000 11 000 000
Accumulated depreciation (calc 2.1 +
4.1) - (416 667) (1 000 000) (1 416 667)
Revaluations (Land – calc 1.2 + 3.1) 350 000 611 950 - 961 950
(Building – calc 2.3 + 4.3)
Impairment loss (included in other
expenses) - - (38 092) (38 092)
Depreciation (Building – calc 2.4) (Vehicle
calc 5.1) - (145 283) (560 000) (705 283)
Transfer to Investment property (550 000) (1 450 000) - (2 000 000)
Carrying amount at the end of the year 1 800 000 4 600 000 1 401 908 7 801 908
Cost / Gross carrying amount 1 800 000 4 745 283 3 000 000 9 545 283
Accumulated depreciation and
impairment - (145 283) (1 598 092) (1 743 375)
Valuations were performed on 28 February 2013 by an independent sworn appraiser.
The carrying amount of the land and buildings, if it was carried at cost minus accumulated depreciation
would have amounted to R5 562 500 (land: R1 500 000; building: R4 062 500).
2. Deferred tax
R
Land
Property 1 – 3 [(1 800 000 – 1 500 000) x 66,6% x 28%] (55 944)
Property 4 [(610 000 – 500 000) x 66,6% x 28%] (20 513)
Building
Property 1 – 3 [(4 600 000 – 3 600 000) x 28%] (280 000)
Property 4 [(1 700 000 – 1 390 000) x 28%] (86 800)
Deferred tax liability (443 257)
86
FAC3702/104
CALCULATIONS:
OFFICE PARK – BUILDINGS 1 – 3

Deferred tax
Tempo- asset/
Historical rary (liability)
Carrying carrying Reva- differ- @ 66,6% x
amount amount luation Tax base rence 28%
R R R R R R
Cost
1 September 2009
(calc 1.1) 1 500 000 1 500 000 - 1 500 000
Revaluation surplus
(calc 1.2) 300 000 - 300 000 -
Carrying amount
28 February 2013 1 800 000 1 500 000 300 000 1 500 000 300 000 (55 944)
1.1. 2 000 000 / 4 x 3 = 1 500 000

1.2. 1 800 000 – 1 500 000 = 300 000
87
Calculation 2 - Building
Deferred
Historical Tempo- tax asset/
Carrying carrying Reva- rary (liability)
amount amount luation Tax base difference @28%
R R R R R R
Cost 1 September 2009 4 500 000 4 500 000 - 4 500 000
(calc 2.1)
/ building allowance (calc
2.2) (312 500) (312 500) - (675 000)
Carrying amount
28 February 2012 4 187 500 4 187 500 - 3 825 000 362 500 (101 500)
Revaluation surplus (calc
2.3) 557 783 - 557 783 -
Depreciation (calc 2.4 -
2.6) / building allowance
(calc 2.7) (145 283) (125 000) (20 283) (225 000)
Carrying amount
30 June 2013 4 600 000 4 062 500 537 500 3 600 000 1 000 000 (280 000)
1 September 2009 to 28 February 2010 = 6 months

1 March 2012 to 28 February 2012 = 24 months
2.1. Given
2.2. 4 500 000 x 5% x 3 = 675 000
2.3. [(4 600 000 - 750 000) / 318 x 330] + 750 000 = 4 745 283 – 4 187 500 = 557 783
360 – 30 = 330; 330 – 12 = 318
2.4. (4 745 283 - 750 000) / 330 x 12 = 145 283 OR 4 745 283 – 4 600 000 = 145 283
2.5. (4 500 000 – 750 000) / 30 = 125 000 OR (4 187 500 - 750 000) / 330 x 12 = 125 000
2.6. 557 783 / 330 x 12 = 20 283 OR 145 283 – 125 000 = 20 283
2.7. 4 500 000 x 5% = 225 000
OFFICE PARK – BUILDING 4

Calculation 3 – Land
Reva-
luation/ Deferred
Fair Tempo- tax asset/
Historical value rary (liability)
Carrying carrying adjust- differ- @66,6%
amount amount ment Tax base rence x 28%
R R R R R R
Cost 1 September 2009 500 000 500 000 - 500 000
Revaluation
1 March 2012 (calc 3.1) 50 000 - 50 000 -
Carrying amount
1 March 2012 550 000 500 000 50 000 500 000 50 000 (9 324)
(calc 3.2) 60 000 - 60 000 -
Carrying amount
28 February 2013 610 000 500 000 110 000 500 000 110 000 (20 513)
88
FAC3702/104
3.1. 550 000 - 500 000 = 50 000

3.2. 610 000 - 550 000 = 60 000
Calculation 4 – Building
Reva-
luation/ Tempo- Deferred
Historical Fair value rary tax asset/
Carrying carrying adjust- differ- (liability)
amount amount ment Tax base rence @28%
R R R R R R
Cost
1 September 2009 1 500 000 1 500 000 - 1 500 000
Accumulated
depreciation
(calc 4.1)
/ building allowance
(calc 4.2) (104 167) (104 167) (225 000)
Carrying amount
1 March 2012 1 395 833 1 395 833 - 1 275 000 120 833 (33 833)
Revaluation
1 March 2012 (calc
4.3) 54 167 - 54 167 -
Carrying amount
1 March 2012 1 450 000 1 395 833 54 167 1 275 000
Improvements
31 May 2012 200 000 200 000 200 000
Carrying amount after
improvements 1 650 000 1 595 833 54 167 1 475 000
28 February 2013
(calc 4.4) 50 000 - 50 000 -
Building allowance
(calc 4.5) - - (85 000)
Carrying amount
30 June 2012 1 700 000 1 595 833 104 167 1 390 000 310 000 (86 800)*
4.1. Given
4.2. 1 500 000 x 5% x 3 = 225 000 OR 675 000 / 3 = 225 000
4.3. 1 450 000 – 1 395 833 = 54 167
4.4. 1 700 000 – 1 450 000 – 200 000 = 50 000
4.5. (1 500 000 + 200 000) x 5% = 85 000
89
Calculation 5: Vehicles
5.1 Depreciation: R
Fleet: 3 000 000 / 150 000 x 28 000 = 560 000
5.2 Impairment: R
Carrying amount 28 February 2013 (given at 31 December 2012 and no further 150 000
kilometres)
Value in use: 111 908

i = 10%
n=3
PMT = 45 000
PV = R111 908
Fair value less cost to sell: 110 000
Recoverable amount is therefore 111 908
Impairment loss (R150 000 – R111 908) 38 092
Closing balance:
5.3. Accumulated depreciation and impairment:
1 000 000 + 560 000 + 38 092 = 1 598 092
90
FAC3702/104
PART A (36½ marks) (44 minutes)
Healthzone Ltd is a beverage manufacturing company in Mpumalanga, South Africa. The company’s
financial year-end is 28 February. The following information relates to the assets of the company:
Purchased intangible asset – Pumpup licence
In order to expand its business, Healthzone Ltd negotiated with an European company to acquire a
licence to manufacture and sell their energy drink, called Pumpup. The transaction was concluded on
1 June 2013 at a cost of 40 000 Euro's (€). The amount is payable in two instalments of €10 000 and
€30 000, on 30 September 2013 and 31 December 2013, respectively. The licence to manufacture and
sell Pumpup will be for a period of 15 years, effective from 1 June 2013. The licence was available for
use, as intended by management, on 1 June 2013. The licence has an estimated residual value of Rnil.
In order to hedge against the fluctuations in changes in foreign exchange rates, Healthzone Ltd entered
into a forward exchange contract (FEC) on 30 September 2013 for the remaining balance of €30 000,
owed to the European company. The cover was taken out for a period of 3 months.
The following dates and exchange rates are applicable to the transaction:
Date Spot rate Forward rate for FEC

€1=R €1=R
1 June 2013 10,89 -
30 September 2013 10,82 10,67 (3 months)
31 December 2013 10,86 -
Healthzone Ltd decided to apply hedge accounting and on 30 September 2013 designated the FEC as
the hedging instrument and the foreign currency creditor that arose as a result of this transaction, as the
hedged item. The hedge complied with all the requirements for hedge accounting and the hedge was
considered to be highly effective at all times during the period. Healthzone Ltd accounts for the hedge as
a fair value hedge.
With the increased popularity of energy drinks in South Africa, more competitors of similar energy drinks
entered the market, resulting in a significant decrease in the turnover of Healthzone Ltd. On
28 February 2014, Healthzone Ltd determined the value in use of the Pumpup licence to be R300 000,
calculated at a pre-tax discount rate of 12% per annum. On 28 February 2014, the fair value less costs
to sell of the licence amounted to R207 000. On this date, the remaining useful life and the residual value
of the licence remained unchanged.
Internally generated intangible asset – Vitamin enriched water formula
During the 2014 financial year, Healthzone Ltd embarked on a research and development project to
develop a new vitamin enriched water formula.
Research commenced on 1 August 2013. After completion of the research phase on 31 October 2013,
the project manager and the chief financial officer of Healthzone Ltd determined that all the criteria for
the recognition of an intangible asset were satisfied. On 28 February 2014, the development of the
formula was completed and ready for use, as intended by management. The formula has an estimated
useful life of 10 years. No residual value was allocated to the formula.
91
Two full-time researchers were employed for the total duration of the research and development phase
of the formula. A third researcher joined the project on 1 October 2013 and was allocated to this project
until the development thereof was completed. A researcher earns a monthly salary of R35 000.
The following costs, directly relating to the formula, were evenly incurred during the research and
development phase:
R
Water and electricity 350 000
General administrative and training expenses 120 000
1. It is the accounting policy of Healthzone Ltd to account for intangible assets according to the cost
model. Amortisation is provided for, using the straight-line method over the estimated useful lives of
the assets.
REQUIRED
accounting records of Healthzone Ltd to correctly account for the licence, the
hedged item and the hedging instrument. (15)
• 1 June 2013
• 30 September 2013
• 31 December 2013
Note:
• No journal entry in respect of amortisation is required.
• No abbreviations for general ledger accounts may be used.
• Ignore any tax implications.
2. Disclose the following notes to the annual financial statements of Healthzone Ltd
for the year ended 28 February 2014:
2.1 Profit before tax (10)
2.2 Intangible assets (A total column is not required) (9½)
2.3 Impairment loss (2)
Note:
• Ignore comparative figures.
92
FAC3702/104
PART B (9½ marks) (11 minutes)
On 1 March 2013, Investasure Ltd issued 4 900 automatically convertible debentures in an attempt to
obtain additional funds for the business. The debentures were issued at par with a face value of R550
per debenture. Interest is payable annually in arrears at a nominal interest rate of 6,5% per annum. After
a 4 year term, each debenture will automatically be converted to 600 ordinary shares at R1 each. When
these debentures were issued, the prevailing market interest rate for similar debt without a conversion
option was 7,5% per annum.
REQUIRED
Prepare all journal entries (cash transactions included) to record the above
transactions in the accounting records of Investasure Ltd for the year ended
28 February 2014. (9½)

• 1 March 2013
• 28 February 2014
Standards (IFRS).
Note:
• No abbreviations for general ledger accounts may be used.
• Show all the data input into your financial calculator.
• Ignore any tax implications.
93
PART A
Journal entries
Debit Credit
R R
1 June 2013
J1 License / Intangible asset 435 600
Accounts Payable / Creditor / Trade payables 435 600
Recording of foreign creditor
(40 000 x 10,89)
30 September 2013
J2 Accounts Payable 2 800
Foreign exchange difference / profit 2 800
Revaluing the creditor
[40 000 x (10,82 – 10,89)]
J3 Accounts Payable 700

Foreign exchange difference / profit Alternative 700
Revaluing the creditor for J2
[10 000 x (10,82 – 10,89)]
J4 Accounts payable (10 000 x 10,82) 108 200

Bank (10 000 x 10,82) 108 200
Payment of the first installment
Accounts payable Combined 111 000

journal
Bank (10 000 x 10,82) 108 200
replacing J2
Foreign exchange difference / profit
& J4
[40 000 x (10,82 – 10,89) 2 800
Revaluing the creditor and payment of first
installment
Accounts payable Combined 108 900

Bank (10 000 x 10,82) journal 108 200
Foreign exchange difference / profit replacing J3
[10 000 x (10,82 – 10,89)] & J4 700
Revaluing the creditor and payment of first
installment
94
FAC3702/104
Debit Credit
R R
J5 31 December 2013
Foreign exchange difference / loss 1 200
Accounts payable 1 200
If student
Revaluing the creditor wrote J2
[(30 000 x (10,86 -10,82)]
J6 Accounts payable Alternative 900

for J5 if
Foreign exchange difference / profit 900
student
Revaluing the creditor wrote J3
[(30 000 x (10,89 -10,86)]
J7 FEC asset 5 700

Fair value gain (P/L) 5 700
Revaluing FEC
[(30 000 x (10,86 – 10,67)]
J8 Accounts payable (30 000 x 10,86) 325 800

FEC asset (reversing J7) 5 700
Bank (30 000 x 10,67) 320 100
Settlement of creditor and FEC contract
HEALTHZONE LIMITED
1. Profit before tax
Included in profit before tax are the following:
R
Income:
Foreign exchange difference / profit (2 800 (J2) – 1 200 (J5)) 1 600
OR: (700 (J3) + 900 (J6))
Fair value gain 5 700
Expenses:
Amortisation (435 600 / 15 x 9/12) 21 780
Impairment loss (calc 1) 113 820
Research expense (calc 2) 395 000
95
2. Intangible Assets
Internally
Purchased generated
intangible Intangible
assset asset
Licences Formula
R R
Carrying amount at beginning of the year - -
Cost - -
Accumulated amortisation - -
Additions – purchased (from J1 ) 435 600 -
Additions – capitalisation of development costs (calc 2) - 620 000
Amortisation included in other expenses (21 780) -
Impairment loss included in other expenses (calc 1) (113 820) -
Carrying amount at end of year 300 000 620 000
Cost 435 600 -
Accumulated amortisation and impairment (135 600) -
The licence has a carrying amount of R300 000 and remaining useful life of 171 months (14 years and 3
months) at year-end.
The formula has a carrying amount of R620 000 and a remaining useful life of 10 years at year-end.
The impairment loss is included in the other expenses line item in the statement of profit or loss and
other comprehensive income.
3. Impairment loss
An impairment loss of R113 820 was recognised on the licence. This was due to the decrease in sales
due to increase of competitors. The recoverable amount was based on the value in use calculated by
using a pre-tax discount rate of 12%.
Calculations
1.Impairment loss calculation
R
Cost 435 600
Amortisation (21 780)
Carrying amount at end of year 413 820
Recoverable amount (300 000)
Impairment loss 113 820
2. Research and development cost
Research phase Development phase

1 Aug 2013 – 31 Oct 2013 1 Nov 2013 – 28 Feb 2014
3 months 4 months
R R
Water and 350 000 / 7 x 3 150 000 350 000 / 7 x 4 200 000
electricity
Salaries (35 000 x 3 x 2) 245 000 35 000 x 3 x 4 420 000
+ 35 000
395 000 620 000
96
FAC3702/104
PART B
Present value of interest 586 718

PMT =interest payable = 6,5% x 2 695 000 = 175 175
FV = 0
n = 4 years
i = 7,5%
Debit Credit
R R
1 March 2013
J1 Bank (4 900 x 550) 2 695 000

Liability component of convertible debenture 586 718
Equity component of convertible debenture 2 108 282
Recognition of convertible debentures
28 February 2014
J2 Finance cost (586 718 x 7,5%) 44 004

Liability component of convertible debenture 131 171
Bank (2 695 000 x 6,5%) 175 175
Recognition of finance cost, interest paid and partial
redemption
97
Khona Ltd is a manufacturing company based in Polokwane, South Africa. The company’s financial
year-end is 31 October. The following information relates to the assets of the company:
Manufacturing property - Polokwane
Khona Ltd operates from a building that the company purchased on 1 July 2010 for R9 000 000 (Land:
R2 000 000; Building: R7 000 000). The property was available for use, as intended by management, on
acquisition date. The building has an estimated useful life of 40 years with a residual value of
R3 000 000.
After an independent sworn appraiser performed a valuation of the property as at 31 October 2013, he
provided the management of Khona Ltd with the following gross replacement values for this property:
R
Land 2 050 000
Building 7 100 000
The residual value and remaining useful life of the building remained unchanged throughout the period.
Administration property – Cape Town
On 1 February 2012, Khona Ltd purchased the administration property at a cost of R8 200 000 (Land:
R1 900 000; Building: R6 300 000). The property was available for use, as intended by management, on
acquisition date. The building has an estimated useful life of 30 years and a residual value of
R5 000 000.
On 31 January 2013, the directors of Khona Ltd decided to relocate the head office from Cape Town to
Pretoria. On 28 February 2013, the company vacated the administration property and relocated to
Pretoria. The property was subsequently leased out and the new tenants took occupation on
1 March 2013.
After an independent sworn appraiser performed valuations of this property, he provided the
management of Khona Ltd with the fair values for this property as at the following dates:
28 February 2013 31 October 2013

R R
Land 1 960 000 2 100 000
Building 6 400 000 6 480 000
The residual value and remaining useful life of the building remained unchanged since the date of
purchase.
Machinery
Khona Ltd purchased a machine which was immediately available for use, as intended by management,
on 1 September 2010 for R2 400 000. The machine has an estimated useful life of 650 000 units, with a
residual value of R250 000.
However, due to the fact that the machine did not meet its expected production capacity, the directors
decided to dispose of it. A detailed formal disposal plan was publicly announced and on 30 April 2013
the disposal was at a stage of completion where no realistic possibility of withdrawal existed. A binding
sales agreement for the machine was concluded and management expects the sale to be completed on
20 December 2013. The machine will be sold for cash.
98
FAC3702/104
From acquisition date until 31 October 2012, the machine had produced a total of 185 000 units. During
the current financial year until 30 April 2013, the machine had produced 70 000 units. On 30 April 2013
the machine’s fair value less costs to sell, was determined to be R1 200 000.
On 31 October 2013, the fair value less costs to sell of the machine increased to R1 300 000 due to an
unprecedented demand for this type of machinery.
1. It is the accounting policy of Khona Ltd to account for owner-occupied land and buildings using the
revaluation model and to account for machinery using the cost model. On revaluation, the
accumulated depreciation is eliminated against the gross carrying amount of the asset. It is the policy
of the company to realise any revaluation surplus upon disposal of the underlying asset.
2. It is the accounting policy of Khona Ltd to account for investment property using the fair value model.
The carrying amount of the investment property will be recovered through sale.
3. Depreciation on buildings is provided for according to the straight-line method over the estimated
useful lives of the assets and is calculated on the most recent revalued amount. Depreciation on
machinery is provided for according to the units of production method.
4. All the gross replacement values and fair values of the properties were determined by an
independent sworn appraiser. The values provided were determined with reference to current market
prices of similar properties in the same location and condition.
5. The South African normal tax rate is 28% and 66,6% of capital gains are taxable.
6. The South African Revenue Services allows the following capital allowances:
• An annual building allowance of 5% on manufacturing buildings according to section 13(1) of the
Income Tax Act, on a straight-line method, not apportioned for a part of the year.
• A tax allowance on machinery, according to section 12C of the Income Tax Act, allowing a 40%
deduction in the first year of use, with a 20% deduction per year in the following three years.
• No tax allowance on administration buildings.
approach. There are no other temporary or exempt differences except those mentioned in the
question. The company will have sufficient taxable profit in future against which any unused tax
losses can be utilised.
8. Assume that land and buildings are regarded as separate classes of assets and that all amounts are
material.
99
REQUIRED
1. Disclose the following notes to the annual financial statements of Khona Ltd for the
year ended 31 October 2013:
1.1. Property, plant and equipment. (A total column is not required.) (30)
1.2. Investment property (5)
1.3. Non-current assets held for sale (5)

Note:
2. Calculate the deferred tax balance to be included in the statement of financial

position of Khona Ltd on 31 October 2013, using only the statement of financial
position approach. Indicate if the balance is a deferred tax asset or a deferred tax
liability. (14)

Note:
100
FAC3702/104
KHONA LTD
NOTES FOR THE YEAR ENDED 31 OCTOBER 2013
1.1. Property plant and equipment

R R R R
Carrying amount at beginning of year 3 900 000 13 034 167 1 788 077 18 722 244
Cost (Land: 2 000 000 + 1 900 000)
(Building: 7 000 000 + 6 300 000) 3 900 000 13 300 000 2 400 000 19 600 000
(Building: 32 500 (calc 4.1) + 233 333
(calc 2.1)) - (265 833) (611 923) (877 756)
Revaluation
(Land: 50 000 (calc 1.1) + 60 000
(calc 3.1))
(Building: 94 166 (calc 2.4) + 146 944
(calc 4.5)) 110 000 241 110 - 351 110
Depreciation (Building: 102 500 (calc 2.5)
+ 14 444 (calc 4.3)) - (116 944) (231 538) (348 482)
Transfer to Investment property (1 960 000) (6 400 000) - (8 360 000)
Transfer to Non-current asset held for
sale - - (1 556 539) (1 556 539)
Carrying amount at end of year 2 050 000 6 758 333 - 8 808 333
Cost / gross carrying amount 2 050 000 6 860 833 - 8 910 833
Accumulated depreciation - (102 500) - (102 500)
Land and buildings were revalued on 31 October 2013 by an independent sworn appraiser.
If the land and buildings had been carried under the cost model (cost less accumulated depreciation),
the carrying amount on 31 October 2013 of land would have been R2 000 000 and buildings R6 666 667
(Total R8 666 667).
1.2. Investment Property
Land Buildings Total

R R R
Carrying amount at beginning of year - - -
Transfer from property, plant and equipment 1 960 000 6 400 000 8 360 000
Fair value adjustment (calc 3.3, calc 4.6) 140 000 80 000 220 000
Carrying amount at end of year 2 100 000 6 480 000 8 580 000
Investment property was valued on 31 October 2013 by an independent sworn appraiser.
101
1.3. Non-Current Asset held for Sale
A decision to dispose of the machine was taken after approval of a detailed formal disposal plan due to
the fact that the machine did not meet its expected production capacity. The plan regarding the sale of
the machine was at a stage of completion on 30 April 2013 where no realistic possibility of withdrawal
existed. It is expected that the disposal will be completed by 20 December 2013. The machine will be
sold for cash.
R
Machinery 1 300 000
An impairment loss of R356 539 was recognised on initial classification of machinery as held for sale and
this amount was included in other expenses in the statement of profit or loss and other comprehensive
income.
A reversal of impairment loss of R100 000 was recognised on subsequent measurement of machinery
as held for sale and this amount was included in other income in the statement of profit or loss and other
comprehensive income.
OR: A total impairment loss of R256 539 (R356 539 – R100 000) was recognised on classification and
subsequent measurement of machinery to non-current asset held for sale. The amount was included in
other expenses in the statement of profit or loss and other comprehensive income.
2. Calculation of deferred tax balance at year-end:
R
Manufacturing property – land [(2 050 000 – 2 000 000 exempt difference) x 28% x 66,6%] 9 324
Administrative property – land [(2 100 000 – 1 900 000 exempt difference) x 28% x 66,6%] 37 296
Manufacturing property – building [(6 758 333 – 5 600 000) x 28%] 324 333
Administrative property – building [(6 480 000 – 6 300 000 exempt difference) x 28% x
66,6%] 33 566
Machine [(1 300 000 – 0) x 28%] 364 000
Deferred tax liability at end of the year 768 519
CALCULATIONS
Calculation 1 - Manufacturing property - land
Tempo- Deferred
Historical rary tax
Carrying carrying Reval- Tax Exempt differ- asset /
amount amount uations base difference rence (liability)
R R R R R R R
Cost 1 July 2010 2 000 000 2 000 000 - - 2 000 000
Revaluation (calc 1) 50 000 - 50 000 - -
Carrying amount
31 October 2013 2 050 000 2 000 000 50 000 - 2 000 000 50 000 (9 324)
1.1. 2 050 000 – 2 000 000 = 50 000

1.2. [2 050 000 – 2 000 000 (exempt)] x 28% x 66,6% = 9 324
102
FAC3702/104
Calculation 2 - Manufacturing property - building
Deferred
Historical Tempo- tax
Carrying carrying Reval- rary asset /
amount amount uations Tax base difference (liability)
R R R R R R
Cost 1 July 2010 7 000 000 7 000 000 - 7 000 000
Accumulated
depreciation (calc 1) /
Tax allowance (calc 2 x 3
years) ( 233 333) ( 233 333) - (1 050 000)
Carrying amount
31 October 2012 (calc 3) 6 766 667 6 766 667 - 5 950 000 816 667 (228 667)
Revaluation (calc 4) 94 166 - 94 166
Depreciation (calc 5 - 7) /
Tax allowance (calc 2) ( 102 500) ( 100 000) ( 2 500) (350 000)
Carrying amount
31 October 2013 (calc 8) 6 758 333 6 666 667 91 666 5 600 000 1 158 333 (324 333)
2.1. [(7 000 000 - 3 000 000) / 480] x 28 = 233 333 [40 year x 12 months = 480 months]
2.2. (7 000 000 x 5%) = 350 000
2.3. [(6 766 667 – 5 950 000) x 28%] = 228 667
2.4. [(7 100 000 – 3 000 000) / 480 x 452] + 3 000 000 = 6 860 833; 6 860 833 – 6 766 667 = 94 166
[480 total number of months – 28 months in previous financial periods = 452 remaining useful life]
2.5. [(6 766 667 + 94 166) - 3 000 000] / 452 x 12 = 102 500
2.6. (7 000 000 - 3 000 000) / 480 x 12 = 100 000
2.7. 94 166 / 452 x 12 = 2 500
2.8. (6 758 333 – 5 600 000) x 28% = 324 333
Calculation 3 - Administrative property - land
Reval-
uations/
Fair Tempo- Deferred
Historical value rary tax asset
Carrying carrying adjust- Tax Exempt differ- /
amount amount ment base difference rence (liability)
R R R R R R R
Cost
1 February 2012 1 900 000 1 900 000 - - 1 900 000
Revaluation
(calc 1) 60 000 - 60 000 -
Carrying amount
28 February 2013
(calc 2) 1 960 000 1 900 000 60 000 - 1 900 000 60 000 (11 189)
Fair value
adjustment (calc 3) 140 000 - 140 000 -
Carrying amount
31 October 2013
(calc 4) 2 100 000 1 900 000 200 000 - 1 900 000 200 000 (37 296)
103
3.1. 1 960 000 – 1 900 000 = 60 000

3.2. [1 960 000 – 1 900 000 (exempt)] x 28% x 66,6% = 11 189
3.3. 2 100 000 – 1 960 000 = 140 000
3.4. [2 100 000 – 1 900 000 (exempt)] x 28% x 66,6% = 37 296
Calculation 4 - Administrative property - building
Reval-
uations
/ Fair Deferred
Historical value Exempt Tempo- tax
Carrying carrying adjust- Tax differ- rary asset /
amount amount ment base rence difference (liability)
R R R R R R R
Cost
1 February 2012 6 300 000 6 300 000 - - 6 300 000
Accumulated
depreciation
(calc 1) (32 500) (32 500) -
Carrying amount
31 October 2012
(calc 2) 6 267 500 6 267 500 - - 6 300 000 282 500 (9 100)
Depreciation
(calc 3) (14 444) (14 444)
Carrying amount
28 February 2013
(calc 4) 6 253 056 6 253 056 - - 6 300 000 583 056 (13 144)
Revaluation
(calc 5) 146 944 - 146 944
Fair value
adjustment
(calc 6) 80 000 - 80 000
Carrying amount
31 October 2013
(calc 7) 6 480 000 6 253 056 226 944 - 6 300 000 810 000 (33 566)
4.1. [(6 300 000 - 5 000 000) / 360] x 9 = 32 500

4.2. [(6 267 500 – 6 300 000 (exempt)] x 28% = 9 100
4.3. [(6 300 000 – 5 000 000) / 360] x 4 = 14 444
4.4. [(6 253 056 – 6 300 000 (exempt)] x 28% = 13 144
4.5. 6 400 000 – 6 253 056 = 146 944
4.6. (6 400 000 - 6 480 000) = 80 000
4.7. [6 480 000 – 6 300 000 (exempt)] x 28% x 66,6% = 33 566
104
FAC3702/104
Calculation 5 - Machinery Deferred

tax
Carrying Temporary asset /
amount Tax base difference (liability)
R R R R
Cost 1 September 2010 2 400 000 2 400 000
Accumulated depreciation (calc 1) /
Tax allowance (calc 2) (611 923) (1 920 000))
Carrying amount 31 October 2012 (calc 3) 1 788 077 480 000 (1 308 077) (366 262)
Depreciation (calc 4) /
Tax allowance (calc 5) (231 538) (480 000)
Impairment loss (calc 6) (356 539) -
Reversal of impairment loss (calc 7) 100 000
Carrying amount 31 October 2013 (calc 8) 1 300 000 - (1 300 000) (364 000)
5.1. (2 400 000 - 250 000) / 650 000) x 185 000 = 611 923
5.2. (2 400 000 x 40%) + (2 400 000 x 20% x 2) = 1 920 000
5.3. (1 788 077 – 480 000) x 28% = 366 262
5.4. (2 400 000 - 250 000) / 650 000) x 70 000 = 231 538
5.5. 2 400 000 x 20% = 480 000
5.6. 1 788 077 – 231 538 = 1 556 539; 1 556 539 – 1 200 000 = 356 539
5.7. 1 300 000 – 1 200 000 = 100 000
5.8. (1 300 000 – 0) x 28%= 364 000
©
UNISA 2015
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FAC3702/104/3/2015

Tutorial letter 104/3/2015

Distinctive Financial Reporting

Department of Financial Accounting

Note: This is an online module, and therefore your module is available

2 LECTURERS AND CONTACT DETAILS

Students registered for first semester: [email protected]

The integrated questions are compiled as follows:

QUESTION SUBJECT MARKS TIME

1 IAS 16 - Property, plant and equipment 56 67

2 IAS 36 - Impairment of assets 31 37

3 IAS 16 - Property, plant and equipment 50 60

4 IAS 38 - Intangible assets 45 54

5 IAS 16 - Property, plant and equipment 60 72

6 IAS 36 - Impairment of assets 40 48

7 IAS 16 - Property, plant and equipment 54 65

8 IAS 36 - Impairment of assets 40 48

9 IAS 16 - Property, plant and equipment 51 61

QUESTION SUBJECT MARKS TIME

11 IAS 21, IAS 32, IFRS 7, IFRS 9 - Effects of changes 50 60

12 IAS 16 - Property, plant and equipment 50 60

13 IAS 21, IAS 32, IFRS 7, IFRS 9 - Effects of changes 46 55

14 IAS 16 - Property, plant and equipment 54 65

The following dates and exchange rates are applicable:

Forward rate for

1 April 2010 1,04 1,11 11 months

7. Assume all amounts to be material.

Your answer must comply with the requirements of International Financial

2.1.Property, plant and equipment (Disclose classes of property, plant and

Your answer must comply with the requirements of International Financial

QUESTION 1 SUGGESTED SOLUTION

FEC Asset 17 000

Accounts payables / Creditors 452 200

Reclassification adjustment (P/L) 4 533

2. NOTES FOR THE YEAR ENDED 31 MARCH 2011

QUESTION 1 SUGGESTED SOLUTION (continued)

2.2. Deferred Tax

1.1 384 200 / 300 000 x 50 000 = 64 033

Calculation 2 - Land – Manufacturing property (Property, plant and equipment)

2.1. (2 450 000 – 2 500 000) = 50 000

Calculation 3 - Building – Manufacturing property (Property, plant and equipment)

QUESTION 1 SUGGESTED SOLUTION (continued)

Calculation 4 - Land – Administration property (Investment property transferred to Property, plant

4.1 (525 000 – 500 000) = 25 000

Calculation 5 - Building – Administration property (Investment property transferred to Property,

5.1 (1 725 000 – 1 500 000) = 225 000

Details of the bottling plant’s assets are as follows:

1. A pre-tax discount rate of 15% is considered to be appropriate.

5. Consider all amounts to be material to the financial statements.

NOTES FOR THE YEAR ENDED 31 MARCH 2011

3. Non-current assets held for sale

The disposal group under discussion comprises:

QUESTION 2 SUGGESTED SOLUTION (continued)

Calculation of impairment loss

Using HP10bii financial calculator:

Total PV = R2 860 100

Value in use R2 860 100

Measure the disposal group at fair value less cost to sell

1. 5 096 000 / 5 816 250 x 116 250 = 101 854

QUESTION 3 (50 marks) (60 minutes)