FEEDBACK ON PREVIOUS EXAMINATION PAPERS

OCTOBER / NOVEMBER 2011

SOLUTION 1: ACCOUNTING POLICIES, HANGERS IN ACCOUNTING ESTIMATES AND

ERRORS, IAS 10 (AC107) – EVENTS AFTER THE REPORTING PERIOD 1AS12 (AC102) –
INCOME TAXES AND IAS 18 (AC111) REVENUE

Question 1.1.
Calculation of corrected profit before Tax of rainbow Limited for the year ended 28 February
2011

R
Provisional profit 690 000
Cash on delivery sales – reversed (40 000)
Credit loss [ 10 000 – 0.10) (9000)
Change in accounting estimate (300 000 / 2 – 500 000 / 5) (50 000)
Interest – tax (4000)
Realties – tax 2010 (6000)
Corrected profit 581000

Question 2
Calculation of current Tax Rainbow Limited for year ended 28 February 2011

R
Profit before tax (see 91) above) 581 000
Exempt differences (52 000)
Interest on tax 4 000
Penalties on tax 6000
Dividends received (60 000)
Capital profit on sale of machine (24 000 – 20 000) x (100 – 50%) (2000)
Temporary Differences 87 000
Cash on delivery sales 40 000
Profit on sale of machine (20 000 – 12 000) (8 000)
Recoupment on sale of machine (20 000 – 10 000) 10 000
Depreciation (300 000 ÷ 2 ) 150 000
Tax allowance (500 000 ÷ 4) (125 000)
Royalties received in advance 20 000

Taxable income 616 000

Current tax (616 000 x 28%) 172 480

Question 3
Calculation of deferred Tax Balance in the Statement of Financial position of Rainbow Limited
as at 28 February 2011

Carrying Tax Base Temporary Deferred Tax

amount Difference Asset / Liability)
at 28 %
R R R R
Cash on delivery sales 40 000 - 40 000 11200
Royalties received in advance 20 000 - 20 000 5600
machinery (i) (ii) 25 000 (7000)
150 000 125 000
Deferred tax asset 9800

Machinery carrying Amount

R
Carrying amount : beginning of year 300 000
Depreciation (300 000 ÷ 2) (150 000)
Carrying amount : end of year 150 000

NB: The asset is depreciated over the revised useful life.

(ii) Machinery: Tax Base

R
Tax base : beginning of year 250 000
Tax allowance (500 000 ÷ 4) (125 000)
Tax base - end of year 150 000

Question 4

Tax Rate Reconciliation R

Standard tax (581 000 (1) 28%) 162680
Exempt Differences
Interest on tax (4000 x 28%) 1120
Penalties on tax (6 000 x 28%) 1680
Dividends received (60 000 x 28%) (16800)
Capital profit on sale of machinery (20 000 x 28%) (560)
Adjustments to tax rate (15 080 x 1/29) (520)
Over provision 2010 [ 20 000 – (15 000 – 4000 – 6000) ] (15 000)
132 600

Question 5
Rainbow Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2011

Profit before tax 2011 2010

Profit after tax is stated after taking the following into R R
account
Revenue consists of: 485 000 220 000
Royalties received 560 000
Sale of goods (250 000 + 350 000 – 40 000 90 000
40 000 + 50 000
Other income
Dividends received 60 000 20 000
Profit on realization of machinery 12 000 -

Expenses
Depreciation (300 000 / 2) 150 000
(500 000 + 20 000) ÷ 5 104 000

Included in depreciation for 2011 is a change in estimate of R50 000 (300 000/2 - 500 000/5),
arising from the decision to change the remaining useful life in the current year to only 2 years
as the machinery had already been used to fully capacity. This change will result in decrease
in depreciation in future period of R50 000.

NOTES
1. Calculation of Profit before tax
Cash on delivery sales are recognized when delivery has been made and cash received.
The R40 000 received on 2 February 2011 from Glow Limited was in respect of an
order of paints which was only dispatched on 10 March 2011 (after year end – 28
February 2011), as such this should not be part of the sales for the current financial
year.
The unrecoverable debt by stone Limited, R9000 [R10 000 X (1R – R0.90)] is an
adjusting event after the reporting period. The bankruptcy of a customer which occurs
after reporting period usually confirms that a loss already existed on the reporting date
and this should be adjusted accordingly by writing off the unrecoverable amount as a
credit loss.
The change in accounting estimate results from the change in the remaining useful life.
The remaining useful life of 2 years will be used to allocate the carrying amount at the
beginning of the year (R300 000). This will result in depreciation of R150 000 (R300 000
÷ 5). The original depreciation was R100 000 (R500 000 ÷ 5). The difference is the
change in accounting estimate.

2. Calculation of current Tax

Dividends received and a portion of capital gains on profits on the sale of assets which
is not taxable are exempt income.
 NB. In the question, the capital gains tax was 50% but currently it is 66.6%. the
remaining 50 % (100 – 50) is not taxable.
Penalties and interest on tax are not deductible for the tax. As a result these should be
added back as they had been deducted.
The cash on delivery sales for goods delivered after year – end are taxable during the
year when they are received. As a result the R40 000 cash on delivery sales deducted
when we calculated profit before tax has to be added back.
SARS calculates recoupment on sale of non – current assets as the difference between
the selling price and tax base of the non – current asset on date of sale. This places
profit on sale assets which is not recognized by SARS, as such, this should be reversed
by subtracting it. This will be the difference between the cost and carrying amount since
the capital gains tax was dealt with separately.
SARS does not deduct depreciation but allows a tax allowance based on its own rules
as stated in the Income Tax Act.. In this case the deductible tax allowance was over 4
years using the straight line method as opposed to our depreciation in accounting.
Income received in advance is taxed in the year of receipt according to SARS but
accounting recognizes this income on royalties according to substance of agreement.
As a result, the royalties received in advance have to be added.
The current tax is calculated using the current year’s tax rate.

Calculation of Deferred Tax

Temporary differences nay either be:
(a) Taxable Temporary differences: These refer to temporary differences that will result in
taxable amounts in determining taxable profit (tax loss) of future periods when the
carrying amount of the asset is recovered or when the carrying amount of a liability is
settled.
Rule 1: When carrying amount of asset > tax base of the asset = Deferred tax liability

Rule 2: When carrying amount of liability < tax base of the liability = Deferred Tax liability

(b) Deductible temporary differences: These will result in amounts that are deductible in
determining taxable profit / tax loss) of future periods when the carrying amount of the
asset is recovered or when the liability is settled.
Rule 3: carrying amount of asset < tax base of asset = deferred tax asset
Rule 4: Carrying amount of liability > tax base of the liability = Deferred tax asset

Solution 2:
FRAMEWORK IAS8 (AC 103) – ACOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS, IAS10 (AC107) – EVENTS AFTER THE REPORTING PERIOD,
IAS12 (AC102)- INCOME TAXES, IAS18(AC111) – REVENUE AND IAS37 (AC130) –
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

1. A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity’s resources embodying
economic benefits. All the criteria for an item to be classified as a liability exists if:
(i) There is a present obligation as a result of a past event: in this case there is a
present obligation since there is a policy to refund purchases of electric shavers sold
within 2 months from the date of sale to dissatisfied customers and the policy is
generally known and advertised in the insert packages of the electric shavers sold.
(ii) This obligation should arise from past event: the past event are the sales already
made to customers during the financial year.
(iii) The settlement of the obligation will result in outflows of cash when dissatisfied
customers return an electric shavers.
(iv) It is possible to make a reliable estimate of the amount of the payment / outflow. In
this case there is a reasonable estimate based on refund history and the sales for
the year.
(v) This liability meets all the definition, recognition and measurement criteria. As such,
a liability should be disclosed in the financial statements.

Question 2
SEMINGTON LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY
 (i) PROVISIONS FOR REFUNDS
2011 2010
R R
Carrying amount at beginning of year 25 000 -
Unused provision reversed (25 000 – 9000) (16 000)
Provision used during year (9 000)
Provision created for the year 40 000
Carrying amount at end of year 40 000 25 000

Provision has been made for the refund of purchases of electric shavers sold within 2 months
from the date of sale to dissatisfied customers. This amount will most probably be refunded to
dissatisfied customers in the first two months of the next financial year.

(ii) Contingent Liability

During February 2011, a claim of R100 000 was instituted by Blue Cross Limited
against the company for animal abuse emanating from the test of cosmetic products
on animals, allegedly resulting in injury to the animals. The company’s legal advisor
is of the opinion that it is probable that Bemington will not be found liable of the
aforementioned claim.

(iii) Contingent Asset

The supplier (manufacturer of electric shavers) provides a guarantee to the company
for any manufacturing defects on electric shavers. At year, it is probable, but not
virtually certain that R24 000 (60% of the expected R40 000 defective products) will
be refunded by the manufacturer.

Question 3
Bemington Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2011
3.1. Change in Accounting Policy
After the financial year the company directors decided at a board meeting that the current
inventory valuation method should be changed to the first – in, first – out method in order to
improve the matching of revenue and expenses. This change in accounting policy was not
accounted for retrospectively since the inventory valuations according to the first – in, first – out
method for all the years prior to 2011 could not be determined due to a malfunction in the
computer program used for the costing of inventory.

As a result, the change has been accounted for prospectively, without any adjustment against
the opening balance of returning earnings. The effect of the change for 2011 is as follows.

2011 (R)
Decrease in cost of sales (578 000 + 120 000) – (526 000 + 110 000) 62 000
Increase in income tax expense (62 000 x 28%) (17360)
Increase in profit for the year 44640

Increase in inventory 62 000

Increase in current tax due (62000 x28%) (17360)
Increase in equity 44640

Question 4
BEMINGTON LIMITED
GENERAL JOURNAL – YEAR ENDED 28 FEBRUARY 2011
R R
(i) Revenue (SCI) (800 000 x (100 – 40%)) 480 000
Debtors (SFP) 480 000

Cost of sales (SCI) (800 000 X 40% X 100⁄125 ) 256 000

Inventory (SFP) 256 000

(ii) Revenue (SCI) 50 000

Income received in advance (SFP) 50 000

NOTES
Consignment sales: revenue is recognized when goods are sold by the recipient to a third party.
In this case, only 40% has so far been sold to third parties. As such the other 60% (100% -
40%) should be reversed.
The 40% goods sold should be included in cost of sales at cost price.
The gift vouchers are only recognized upon redemption.
At this point, they should be regarded as revenue received in advance.

Question 5
CALCULATION OF DEFERRED TAX BALANCE FOR THE YEAR ENDED 28 FEBRUARY
2014

Carrying Tax Base Temporary Deferred Tax

Amount ( R) Difference ® Asset /
(Liability 28%
R
Provision for claims 40 000 - 40 000 11 200
Income received in advance 50 000 - 50 000 14 000
Deferred Tax Assets 25 200

3.2. Error
Correction in respect of finished goods inventory located at the Isipingo retail outlet which was
excluded in inventory valuations since the 2009 financial year. The effect of the correction on
the opening balance of retained earnings at the beginning of 2010 was adjusted while the
comparative amounts were restated accordingly. The effect of the correction is as follows.

2010 01/03/2009
R R
Increase in cost of sale (115 000 – 20 000) (95 000)
Decrease in taxation expense (95 000 x 28%) 26 600
(68 400)

Increase in inventory 20 000 115 000

Increase in current taxation due (20 000 x 28%) (5600)
(115 000 x 28%) (32 200)
Increase in equity 14400 82800
Adjustment to retained earnings at beginning of year
2010 [(115 000 x (1 – 0.28)] 82 800

3.3. Events after the reporting period

During the first week of April 2011, finished goods with a value of R60 000 was damaged due to
a burst water pipe at the Isipingo retail. The company was not insured for these damages.
MAY / JUNE 2012

Solution 1
Question 1
Pastry Cook Ltd
General Journal
Debit Credit
Revenue [225 000/50 x R1.20] (P/L 5400
Deferred Income (SFP) 5400

Question 2
PASTRY COOK LTD
CALCULATION OF CORRECTED PROFIT BEFORE TAX IN THE STATEMENT OF PROFIT
OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31
DECEMBER 2011

R
Provisional tax 1250 000
Income received in advance – customer loyalty programme (5400)
Consignment sales (70 000 x 80% x 130⁄100 ) 72 800

Consignment cost of sales (70 000 x 80%) (56 000)

Change in accounting policy – accounting (38 000 – 25 000) 13 000
Repair of detective machines (20000)
Fines – provisional tax (5500)
Corrected profit before tax 1248 900
Question 3
Pastry Cook Ltd
CALCULATION OF CURRENT TAX DUE TO SA REVENUE SERVICE FOR THE YEAR
ENDED 31 DECEMBER 2011

R
Profit before tax 1248 900
Exempt Differences (44 500)
Exempt Differences 5500
Fine for late submission (50 000)
Foreign income (47 600)
Temporary Differences 5400
Income received in advance – loyalty programme 44 000
Depreciation of ovens (240 000 ÷ 208 000) + (720 00 – 60 000) (55 000)
Tax allowance – oven (240 000 ÷4 ) x 8⁄12 + (120 000/4) x 6/12] 50 000

Loss on sale of oven

Scrapping allowance oven [60 000 – (120 000/4 x 6/12) – (60 000 – 50 000) ] (35 000)
Change in accounting policy – accounting (13 000)
Change in accounting policy – closing inventory 38 000
Additional cost – manufacturing defects 20 000
Manufacturing defects cost incurred (102 000)
Taxable income 1156 800
Current tax at 28% 323904
Under provision - 2010 8000
Provisional tax payments (120 000 + 110 000) (230 000)
Amount due to SARS 101904

Question 4
PASTRY COOK LTD
CALCULATION OF PEFERRED TAX BALANCE IN THE STATEMENT OF FINANCIAL
POSITION AT 31 DECEMBER
 Carrying Tax base Temporary Deferred Tax
Amount Difference Asset /
Liability at
28%
2010 R R R R
Oven 72 000 60 000 12 000 (3360)
Inventory 445 000 420 000 25 000 (7000)
Provision for manufacturing
Defects (110 000 – 28 000) 82 000 - 82 000 22 960
Deferred tax asset 12 600

2011 Carrying Tax Base Temporary Deferred Tax

Amount Difference Asset /
(liability) at
28%
R R R R
Deferred income 5400 - 5400 1512
Oven (tax Base 240 000 – (240 000 ÷ 4 x 8/12) 208 000 200 000 8000 (2240)
(728)

Question 5
PASTRY COOK LTD
TAX RATE RECONCILIATION IN THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 2011
R
Standard tax (124 8900 x 28% 349 692
Exempt Differences
Fine (5500 x 28%) 1540
Foreign income (50 000 x 28% - 6500) (7500)
Under provision of tax – prior year 8000
351 732
Question 6
Pastry cook
NOTES TO THE FINANACIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011

(i) Change in accounting policy

After the financial year the company directors decided to change the inventory valuation
method from last – in first out method to the first in, first out method as this will result in a
fair presentation of the financial position and operating results of the company because
of fluctuations in inventory prices. The change in policy was accounted for
retrospectively and comparative amounts have been appropriately restated.
The effect of the change for 2011 is as follows:
2011 2010 01/01/2010
R R R
Decrease in cost of sales : (38 000 – 25 000) 13000
(25000 – 9000) 16 000
Increase in current tax expense
(13000 x 28%) (3640)
16000 x 28%) (4480)
Increase in profit 9360 11520

Increase in inventory 38 000 25 000 9000

Increase in current tax due (10 640)
Increase in deferred tax liability (7000) (2520)
27360 18 000 6480
Adjustment to retained earnings at the beginning of 2010 6480

(ii) Provision for Manufacturing Defects

2011 2010
R R
Carrying amount beginning of year (110 000 – 28 000) 82 000
Provision used during year (82 000) (28 000)
Provision created for the year - 110 000
Carrying amount at end of year - 82 000
Provision was made in November 2010 for manufacturing defects whose repair was pledged by
Pastry Cook Ltd to repair all defective biscuit machines already sold to customers. This repair
was to be done free of charge and these repairs were triggered by the discovery of a material
manufacturing defect in a specific range of biscuit machines. At year end, it is expected that no
further costs to repair these defective biscuit machines manufactured will have to incurred in
the next financial year.

SOLUTION 2
PART A
(i) Revenue is recognized when
(a) Significant risks and rewards of ownership are transferred;
(b) No continual managerial involvement or effective control associated with oewnership
is maintained;
(c) Amount of revenue can be measured reliably;
(d) It is probable that the economic benefits associated with the transaction will flow to
the entity.
(e) The costs incurred or to be incurred in respect of the transaction can be measured
reliably.

With regards to the sale of the laptops;

(a) The risks and rewards of ownership have been transferred to the client – there is a full
reimbursement from NCC which also offers the warrant to customers.
(b) Malwart no longer has any managerial control associated with ownership of the
computers;
(c) The price of the laptops is given at R10 000 per laptop.
(d) The economic benefits will flow to Malwart as there will be a reimbursement from NCC
Cellular.
(e) Costs incurred can be measured at R8000 / laptop.
As such, the sale of laptops should be regarded as revenue as it fulfills all the conditions at
being recognized as revenue.
 (ii) Mallwart Ltd

General Journal
Debit credit
R R
Accounts receivable (SFP) (60 X 10 000) 600 000
Revenue (P/L) 600 000

Cost of sales (P/L) (60 X 8000) 480 000

Inventory (SFP) 480 000

Accounts receivable (110 x 500) SFP 55 000

Commission Recevable (P/L) 55 000

Depreciation (850 000 ÷ 5) P/L) 170 000

Accumulated depreciation (SFP) 170 000
Machinery (SFP) 850 000
Accumulated depreciation (SFP) 170 000
Retained earnings (SFP) (850 000 – 170 000) 680 000

Provision for warranty claims (SFP)

Warranty claims (P/L)
[ 4% X 4600 000) + (3360 000 X 3%) + (25 00000 X 2%)] – (5% X 103 000
460 000)
103 000

(iii) The R850 000 wage clock machines costs should be capitalized if it meets the
definition of an asset and it should meet the criterion for recognition as per the
conceptual financial Reporting.

An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
In this case the wage clock machines are controlled by the company and there are probable
future economic benefits to be derived from the use of the machines. The past event is the
purchase of the machines and the cost can be measured reliably (R850 000).
As such the wage clock machines should be recorded as assets.

(iv) Error
Correction in respect of new wage clock machines installed incorrectly debited to
wages in the 2011 financial year. The effect of the correction of this error on the
opening balance of retained earnings at the beginning of 2011 was adjusted
while the comparative amounts were restated accordingly. The effect of the
correction is as follows:

2011
R
Decrease in expenses (850 000 – 170 000) 680 000
Increase in tax expenses (680 000 x 28%) (190 000)
Increase in profit 489 600

Increase in property, plant and equipment (850 000 – 170 000) 680 000
Increase in current tax due (190 400)
Increase in equity 489 600

2. Contingent Liability
On 31 January 2012, a claim of R400 000 was institute by the Labour Union representing
Mallwart Lt’s employees against the company for not adhering to the original terms as
agreed upon during the takeover of Small Cart Ltd. The original agreement required the
company not to decrease their employee numbers by more than 10% and the company
reduced the employee numbers by 15%, 5% more than the agreed upon rate. The
company’s legal advisors are of the opinion that it is not probable that the Labour Union will
be successful with their claim against Mallwart Ltd.

3. Contingent Asset
In February 2012 the company instituted a claim of R740 000 against FlamFlung Lt
relating to defective 3D High definition LED televisions since the company was obliged
to recall all such televisions sold to customers and refund the customers in full.
 At year end, the legal advisors are of the opinion that it is probable but not virtually
certain that the company will be successful with their claim.

PART B

STATEMENT OF CHANGES IN EQUITY EXTRACT AS A T 31 MARCH 2012

Retained Earnings
R
Balance at beginning of year 1490 000
Total Comprehensive Income for the year 1372 000
Dividends : Ordinary (650 000)
Balance at end of year 2212000

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENE 31 MARCH 2012

1. Events after the reporting period

On 5 April 2012 the board of directors declared a preference dividend of 10c per share
for the year ended 31 March 2012. The effect of the dividend is that it will reduce
retained earnings by R10 000 (100 000 shares x 10c per share).
OCTOBER / NOVEMBER 2012

SOLUTION 1 : CONCEPTUAL FRAMEWORK , ACCOUNTING POLICIES, CHANGES IN

ACCOUNTING ESTIMATES AN ERRORS, EVENTS AFTER THE REPORTING PERIOD,
MINCOME TAXES, REVENUE AND PROVISIONS, CONTINGENT LIABILITIES A ND C
ONTINGENT ASSETS

Question 1
An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
This should only be recognized if:
(a) It is probable that any future economic benefit associated with the item will flow to or
from the entity and
(b) The item has a cost or value that can be measured with reliability.

In this particular instance, it is not clear if the entity has control over the resource and it
is difficult or unclear as to the measurement of the future expected economic benefits
although the improve image might have an indirect effect on benefits. As such, this
donation falls short of the definition of an asset and hence should not be capitalize.

2. 4Feed Limited
General Journal

Debit Credit
R R
Revenue (SCI) 60 000
Income received in advance (SFP) 60 000

Inventory (60 000 x 100/120 ) (SFP) 50 000

Cost of Sales (SCI) 50 000
NOTES
Revenue should only be recognized when significant rights an rewards of ownership are
transferred and when no continuing managerial involvement or effective control associated with
ownership is maintained. The risks transfer on 10 July 2012, after year end, as such this s ale
should be recognize in the financial statements for the year ended 30 June 2013.

3. CALCULATION OF CORRECTED PROFIT BEFORE TAX FOR 4 FEED LIMITED

FOR THE YEAR ENED 30 JUNE 2012

R
Provisional profit before tax 940 000
Income received in advance (60 000)
Cost of sales on income received in advance 50 000
Depreciation on equipment (360 000 – 40 000/4) (80 000)
Inventory – damaged (210 000)
Corrected profit before tax 639 500

Question 4
CALCULATION OF 4 FEE LIMITED’S CURRENT TAX DUE TO THE SA REVENUE
SERVICE FOR THE YEAR ENE 30 JUNE 2012

R
Profit before tax (see 3) 639 500
Exempt Differences (130 000)
Donations 110 000
Foreign income received from Zimbabwe (240 000)
Temporary Differences 33250
Income received in advance 60 000
Depreciation 80 000
Tax allowance (500 000 ÷ 5) (100 000)
Decrease in allowance for credit losses (account 40 000 – 31 000) (9000)
 Decrease in allowance for creit losses – tax (25% x 9000) 2250
Taxable income 542 750
Current tax at 28% (542 750 x 28%) 151970
Provisional tax payments (65 000 + 55 000) (120 000)
Amount due to SARS 31970

Question 5

CALCULATION OF DEFERRED TAX IN THE STATEMENT OF FINANCIAL POSITION AS

AT 30 JUNE 2012

Carrying Tax Base Temporary Deferred Tax

Amount Difference Asset/
(Liability) at
28%
R R R R
Income received inadvance 60 000 - 60 000 16 800
Manufacturing Equipment
(360 000 – 40 000 – 80 000) 240 000
(340 000 – 100 000 – 40 000) 200 000 40 000 (11 200)
Allowance for credit losses 31 000
(31 000 x 25%) 7750 23250 6510
Deferred tax asset – 30 June 2012 12110

Question 6
4FEED LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENED 30 JUNE 2012
 R
Income Tax Expense
Tax Rate Reconciliation
Standard tax rate [ 639 500 (3) x 28% 179 060
Exempt Differences
Donations paid (110 000 x 28%) 30 800
Foreign income (240 000 x 28%) – 36 000 (31200)
178 660

Question 7
4FEED LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012

1. PROFIT BEFORE TAX

Included in depreciation for 2012 is a change in accounting estimate which resulted in an
increase in the depreciation of R16 000 [ 80 000 – (360 000 – 40 000) x 20% ] arising
from the pre – decision to change the method of the depreciation to the straight – line
method from reducing balance method on the manufacturing equipment. The remaining
useful life of the manufacturing equipment was taken to be 4 years. This Change will
result in a decrease of depreciation in future periods of R16 000.

2. Contingent Asset
4 Feed Limited repaired burst water pipes in the warehouse. The incident happened in
June 2012. Due to the damage caused by the burst water pipes it is probable but not
virtually certain, that the landlord of the warehouse will refund 4Feed Limited for the
repair costs incurred.

3. Contingent Liability
During January 2012, a claim of R500 000 was received from the Benfontein Horse
Racing Club against the company after one of its champion race horses died during a
horse race allegedly due to horse feed it ate which was produced by 4Feed Limited an
initial test found traces of toxic substances in the specific batch of horse feed. A t year
 end, the legal advisors of 4Feed Limited advised the company that it is not probable that
4Feed Limited will be found liable for the claim.

No provision and no disclosure should be made for the claim of R100 000 made by Mr.
Kansvat on 20 January 2012 as the legal advisors of 4Feed Limited are of the opinion
that the probability of the claim being successful is remote.

4. Error
Correction in respect of repair costs incorrectly recorded in the general ledger as
additions / improvements to the manufacturing equipment instead of the repair expense
account.

The correction of the error has been accounted for retrospectively an comparative
amounts have been appropriately restate including the correction on the opening
balance of retained earnings at the beginning of 2012.

R
Increase in expenses 35088
Decreased in current tax expense (35 088 x28%) (9825)
Decrease in profit 25 263
40 000
Decrease in manufacturing equipment account 4912
Increase in VAT input account 35 088
Decrease in current tax liability (35 088 x 28%0 (9825)
Decrease in equity 25 263
SOLUTION 2
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS,
EVENTS AFTER THE REPORTING PERIOD, INCOME TAXES, REVENUE, PROVISIONS,
CONTINGENT LIABILITIES AND CONTINGENT ASSETS AND FAIR VALUE
MEASUREMENT

PART A
1. Revenue from the rendering of services should be recognized after satisfying the
following:
(a) It is probable that future economic benefits will flow to the entity:
(b) The revenue can be measured reliably.
(c) In accordance to the stage of completion which should be measurable at the end of
the reporting period.
(d) The related costs can be measured reliably.
If the outcome, of a transaction pertaining to the rendering of services cannot be
estimated reliably then the revenue should only be recognized to the extent of the
recoverable.

2. DATACAPS LIMITED
GENERAL JOURNAL –
2010 DEBIT CREDIT
R R
Dec 31 Provision for data recovery costs (SFP) 230 000
Bank (SFP) 230 000

2011
Jan 31 Provision for data recovery costs (SFP) 127 000
Bank (SFP) 127 000

2011
Mar1 Off – site back up costs (SCI) 400 000
Bank (SFP) 400 000

2012
Feb 29 Provision for data recovery costs (SFP) 328 000
 (685 000 – 230 000 – 127 000)
Bank (SFP) 328 000
Data recovery costs (SC1)
(328 000 – 305 000) 23 000

Feb 29 Licence fees paid in advance (SFP)

(60 000 X (2 X 12-2) / 2) 55 000
Licence fees paid (SCI) 55 000

Feb 29 Service fees received (SCI) 1000

50 000 X 2%
Allowance for settlement
Discounts granted (SFP) 1000

NOTE
The licence fees were paid for a period of two years in January 2012 and the year end is
February 2012. The licence fees expenses to be recognized is only for two months
(January to February 2012) and the remainder has to be treated as an advance payment
which would be recognized in the relevant periods.

Question 3
DATA CARDS LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENED 29 FEBRUARY
2012

3.1. PROVISONAL FOR DATA RECOVERY COSTS

2012 2011
R R
Carrying amount at beginning ,of year 328 000 -
Provision created for the year 685 000
Provision used during year (2011 (230 000 + 127 000) (305 000) (357 000)
Unused provision received (328 000 – 305 000) 23 000
- 328 000
On 31 October 2010 Datacaps Limited’s computer data warehouse was completely destroyed
by a fire caused by arson. As a result, data of a client was completely destroyed in the fire after
which Datacaps assured the client that the data will be recovered at no additional costs to the
client. The estimated costs totaling R662 000 (R230 000 + R127 000 + R305 000) have already
been incurred and at year end it is expected that no further costs will be incurred.

3.2. Change in Accounting Policy

 After the review of the raft financial statements, the financial director decided to change
the current inventory.
 Valuation method to the first – in , first – out method from the last – in, first out method in
order to improve the matching of revenue and expenses to ensure a more fair
presentation of the financial position of the company.
 The change has only been accounted for retrospectively from the beginning of 2012
since the value of inventory according to the first – in , first – out method on 28 February
2010 could not be determined as some of Datacaps Limited data was destroyed in a fire.
The effect of the change is as follows:

2012 2011
R R
Decrease in cost of sales (12 000 – 20 000) 100 000
Increase in income tax expense (100 000 x 28%) (28 000)
72 000
Increase in inventory 120 000 20 000
Increase in deferred tax liability (20 000 x 28%) (5600)
Increase in incurrent tax liability (120 000 x 28%) (33600)
86400 14400

Adjustment to retained earnings at the beginning of 2012 14 400

3.3. Event after the reporting Period

On 31 March 2012 ASBA Limited downgrades all credit ratings for companies in the IT Industry.
The announcement by ASBA Limited resulted in significant decline in the share price of
Datacaps Limited from R2 per share to 50c per share and it is furthermore expected that
Datacaps will experience a significant decline in profits in future due to the negative market
sentiment towards the IT Industry after the announcement.

4. DATA CAPS LIMITED

CALCULATION OF DEFERRED TAX IN THE STATEMENT OF FINANCIAL POSITION AS
AT FEBRUARY

Carrying Tax Base Temporary Deferred Tax

Amount Difference Asset / Libility)
at 28%
2011 R R R R
Provision for data recovery costs 328 000 - 328 000 91840
Inventory 195 000 175 000 20 000 (5600)
Deferred Tax Asset 86240

2012
Expenses prepaid 55 000 - 55 000 (15400)
Allowance for settlement
Discounts granted 1000 - 1000 280
(15120)

NB: The question has not given SARS’ treatment of allowance for settlement discounts granted;
as such we have assumed that this is not recognized by SARS. If we assume that SARS
recognizes the allowance, then there would be no deferred tax on the allowance.

For tax purposes an expense is not deductible for tax purposes until the expense is actually
paid or incurred. In terms of S23(e) of the Income Tax Act a taxable income if this deduction
originate from as reserve transfer or any other capitalization of income (raising a provision).

The tax base of the provision is the carrying amount less the amount that will be deductible for
tax purposes in future. Due to the deductibility of actual expenses incurred, the tax base will be
nil because the claim will only be deductible for tax purposes when it is settled.
PART B
Market participants are buyers and sellers in the principal or most advantageous) market for the
respective asset or liability and these should have all of the following characteristics:
(i) Independence: the participants must be independent of each other, although the
price in a related party transaction may be used as an input to a fair value
measurement if the entity has evidence that the transaction was entered into at
market terms.
(ii) Knowledgeable: the participants should have a reasonable understanding about the
asset or liability and the transaction using all available information, including
information that might be obtained through due diligence efforts that are usual,
normal, or customary.
(iii) The participants should be able to enter into a transaction for the asset or liability ;
and
(iv) The participants should be willing to enter into a transaction for the asset or liability,
i.e. they are motivated but not forced or otherwise compelled to do so.
MAY / JUNE 2013

SOLUTION 1
CONCEPTUAL FRAMEWORK, PRESENTATION OF FINANCIAL STATEMENTS,
ACCOUNTING ESTIMATES AND ERRORS. EVENTS AFTER THE REPORTING PERIOD
INCOME TAXES AND PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT
ASSETS.

1. (a) Repair Costs – expense

Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants (par. 4.25 (b) ).

(b) Provision for manufacturing defects – Liability

A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits (par
4.4 (b)).

2. Eprint Limited
Calculation of the current tax due to SA Revenue service for the year ended 31 March 2013

R
Provisional profit 1144 000
Exempt Differences (137 075)
Penalty (2240 x 100/28) 8000
Foreign income) (120 000)
Capital profit on sale of machine (49 5075 – 420 000)x (100 – 66.6%) (25075)

Temporary Differences (7300)

Depreciation (63 000 +29 200) 92 200
Tax allowance [420 000 ÷ 4) + (584 000 ÷ 4)] (251 000)
Provision for manufacturing defects (43500 – 6500) 37 000
Profit on sale of machinery [ 159 075 – (495075 – 420 000)] (84 000)
Recoupment on sale of machinery [ 420 000 – (420 000 / 4 x 2 210 000
Repair costs (29500)
Change in accounting policy accounting 18000
Taxable income 999625

Current tax at 28% (999625 x 28% 279 895

Provisional tax payments (28 000 + 22 000) (50 000)
Amount due to the SA Revenue Service 229 895

3. Eprint Limited

CALCULATION OF THE DEFERRED TAX BALANCE IN THE STATEMENT OF FINANCIAL

POSITION AS AT 31 MARCH 2013

Carrying Tax Base Temporary Deferred Tax

Amount Difference at 28% Asset
/ (Liability)
R R R R
Machinery (1) 438 000 116 800 (32 704)
554 800

Provision for machinery defects 43500 - 43500 12180

Inventory 230 000 290 000 60 000 16800
Deferred tax liability (3724)

(i) 584 000 – 29200 = 554 800

(ii) 584 000 – (584 000/4) = 438 000

4. Eprint Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH
2013
Income tax expenses
Major components of tax expense:

2013
R
Current tax expense – current year (see 2) 279 895
Deferred (movement) tax expense – current (3724 – 1680) 2044
Foreign tax 240 00
305 939

Question 5
E. PRINT LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2013
1. PROVISION FOR MANUFACTURING DEFECTS

2013 2012
R R
Carrying amount at beginning of year 36 000 -
Provision created for the year 43 500 36 000
Provision used during the year (29 500) -
Unused provision reversed (36 000 – 29 500) (6500)
Carrying amount at end of year 435 00 36 000

During February 2012, E print Limited implemented a guarantee policy to repair all electronic
books with a manufacturing defect at no cost to the customer, within 6 months from data of sale.

2. Events after the reporting period

On 15 April 2013, Eprint Ltd became aware that kids’ books Limited, a significant customer was
currently experiencing serious financial and cash flow problems after their national warehouse,
which was not insured, was destroyed by a fire on 9 April 2013. There is uncertainty if kids
Books Limited will be able to settle the outstanding debt, due to Eprint Limited which totals R130
130.

QUESTION 6
Eprint Limited
Extract from the statement of changes in equity for the year ended 31 March 2013

Retained
Earnings
R
Balance at 1 April 2011 (1827760 + 12 240) 1840 000
Change in accounting policy (12240)
Restated balance 1827760
Changes in equity for 2012
Total comprehensive income for the year (Restated) 650 000
Balance at 31 March 2012 2477760
Changes in equity for 2013
Total comprehensive income for the year
(1144000 – 305 959) 838061
Balance at 31 March 2013 3315821

Question 7
Eprint Limited
EXTRACT OF THE STATEMENT OF FINHANCIAL POSIOTION AS AT 31 MARCH 2013

2013 2012
ASSETS R R
CURRENT ASSETS
Inventory 230 000 103 000

SOLUTION 2:
ACCOUNTING POLICIES, CHANGS, ACCOUNTING ESTIMATES AND ERRORS, INCOME
TAXES, REVENUE, PROVISIONS, CONTINGENT LIABILITIES AN CONTINGENT ASSETS
AND FAIR VALUE MEASUREMENTS
 1. Bill and hold sales are recognize when buyer takes title and it is probable that delivery
will be made.
The item subject of delivery should be on hand, identified and read for delivery to the
buyer at the time the sale is recognized. The buyer should specifically acknowledge the
deferred delivery instructions and the usual payment terms should apply.

2. CARNASTIE LIMITED
GENERAL JOURNAL
Debit Credit
R R
Bank 620 730
Membership fees / revenue 620 730
(85 +14) + (5700 x 1.1.)

Bank (1330 x 513) 682290

Revenue 9682290 – 6156) 676 134
Deferred income (12 x 513) 6156

Revenue (48 500 + 80 000) 128 500

Trade payables 128 500

Depreciation 117188
Accumulated Depreciation 117 188
[1406250/3 – (1406 250 – 1054 688) ]

Bank 400 000

Revenue 400 000

Cost of sales (400 000 x 100/125) 320 000

Inventory 320 000

NB: The bill an hold sale should be recognized as a sale during the current financial period
because , it is probable that delivery will be made and all other conditions are met as specified
in part (1) of this question since Caddyshack took title and accepted billing of the goods which
are currently in stock.

3. CARNASTIE LIMITED
Calculation of deferred tax balance for the year ended 28 February 2013
Carrying Tax Base Temporary Deferred Tax at
Amount Difference 28%
Asset / 9Liability)
R R R R
Deferred income 6156 - 6156 1724
Machinery 1 2 62500 17500
937 500 1000 000

Deferred tax asset 19224

1. [1406 250 – ( 1 406 250 ÷ 3) ] =

2. [ 2500 000 – (2500 000 ÷ 5 ) x 3] =

CARNASTIE LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2013

1. Profit before tax

Included in depreciation for 2013 is a change in accounting estimate which resulted in an
increase in depreciation of R117188 [(1406250 – 1054688)] arising from the decision to
change the method of providing for depreciation from the reducing balance to the
straight line method on the tractor. The remaining useful life of the tractor was taken to
be 3 years. This change will result in a decrease of depreciation in future periods of
R117 188.

2. Error
Correction in respect of credit notes incorrectly debited to the trade payable account.
The effect of the correction on the opening balance of retained earnings at the beginning
 of 2013 was adjusted while the comparative amounts were rested accordingly. The
correction was done retrospectively.

2013 2012
R R
Decrease in revenue (190 000 + 260 000) 450 000
(48 500 + 80 000) 128 500
Decrease in current tax expense (450 000 x 28%) (126 000)
(28 500 x 28%) (35 980)
92520 324 000
Increase in trade payables 128 500 450 000
Decrease in current tax liability (35980) (126 000)
Adjustment to retained earnings at beginning of year 2013 92520 324 000

3. Contingent Liability
On 12 February 2013, a claim of R3 500 000 was instituted by Geen Peace against
Carnastie Limited after environmental damage caused to a wetland adjacent to the
company’s Golf course allegedly caused by fertilizer used by the company on their
greens which allegedly polluted the environmentally sensitive wetland. At the year end,
the legal advisors of Cornastie Limited advised the company that they were of the
opinion that it is not probable that the claim will be successful.

4. Contingent Asset
Carnastie Limited instituted a claim of 340 000 against Fallaway Golf on 31 January
2013 relating to a patent infringement for the illegal copying of the Bling brand’s
technology. The legal advisor has advised that there is sufficient evidence against
Fallaway Golf to prove the infringement and it is therefore, probable but not virtually
certain that the claim will be successful.

PART B
1. Fair value is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date.
2. The transaction price and the fair value of an asset might differ on the initial
recognition of an asset due to the following:
(a) The transaction is between related parties:
(b) The transaction takes place under duress or the seller is forced to accept the
price in the transaction;
(c) The unit at account represented by the transaction price is different from the unit
of account for the asset measured at fair value.
(d) The market in which the transaction takes place is different from the principal
market (or most advantageous market).
OCTOBER / NOVEMBER 2013

SOLUTION 1
1. CONCEPTUAL FRAMEWORK , ACCOUNTING ,POLICIES , CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS, INCOME TAXES, REVENUE
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS ANS FAIR
VALUE MEASUREMENT.

LAWNERS LIMITED
GENERAL JOURNAL
Debit Credit
R R
Dividends expense (SOCIE) (500 000 X 10C) 50 000
Dividend payable (SFP) (50 000 – 750) 42 500
SARS – dividends tax payable (SFP) (50 000 X 15%) 7 500

2. A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.

In this case, there is a present obligation as the company has declared the dividend and
will pay the dividend refers to the investment made by the partners entitling them to the
dividend and the declaration of the dividend which has taken place. The liability for
dividends tax also has to be paid at the end of the month following the month in which
the dividend was paid or became payable to the beneficial owner. The declared dividend
will result in an outflow of resources from the entity on the date that the dividend will be
paid out and next month (July) 2013) when the company is required to pay the
withholding tax.

Since this dividend declared meets the entire criterion for classifying under the liabilities.
 3. LAWNERS LIMITED
GENERAL JOURNAL
Debit Credit
R R
Retained earnings (beginning of year): (81000 + 54 000) 135 000
Deferred income (loyalty award credits (SFP) 135 000

Revenue (P/L) 115 400

Deferred income (SFP) 115 400

4. LAWNERS LIMITED
CALCULATION OF THE CORRECTED PROFIT BEFORE TAX IN THE STATEMENT
MOF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE EYAR
ENDED 30 JUNE 2013

R
Provisional profit before tax 1150 000
Deferred income – loyalty award credits (115 400)
Depreciation : Manufacturing Equipment (excluding spray painting equipment (416 640)
[(1868 800 – 480 000) ÷ 2 – (1868 800 – 480 000) x 20%
Corrected profit before tax 617 960

Solution 2
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS,
EVENTS AFTER THE REPORTING PERIOD, INCOME TAXES, REVENUE AND THE
REPORTING PERIOD, INCOME TAXES, REVENUE AND PROVISIONS , C ONTINGENT
LIABILITIES AN C ONTINGENT ASSETS
 1. BOXTER LIMITED
GENERAL JOURNAL

Debit Credit
R R
Accrued Income (1385 x 2155 x 20%) (SFP) 596 935
Commission Earned (P/L) 596 935

Credit losses (P/L) 17 500

Provision for credit losses (SFP) 17 500

Bank (SFP) 750 000

Revenue (P/L) [750 000 – 43125)] 706 875
Income Prepaid (SFP) 45 000 X 23/24 43 125

Cost of sales (P/L) [750 000X 100/125) 600 000

Inventory (SFP) 600 000

The above journal entry assumes that the mark up is added on the total cost including the
maintenance plan. If it is assumed that the mark – up is added on the cost excluding the
maintenance plan, the last journal entry will be as follows;

Cost of sales (P/L0 [ 750 000 – 45 000) X 100/125 564 000

Inventory (SFP) 564 000

2. BOXTER LIMITED
CALCULATION, OF DEFERRED TAX IN THE STATEMENT OF FINANCIAL POSITION FOR
THE YEAR ENDED 28 FEBRUARY 2013
 Carrying Tax Base Temporary Deferred Tax
amount Difference Asset (Liability
at 28%
R R R R
Inventory 683 000 486 000 197 000 (55160)
Provision for credit losses 17500 - 17500 4900
Income received in advance 43125 - 43125 12075
Provision for warranty costs 307 000 - 307 000 85960
Deferred tax asset 47775

3. BOXER LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2013

1. Change in Accounting Policy

After a review of the draft financial statements, the financial director decided that the current
inventory valuation method should be changed to the first – in, first – out method from the last –
in, first out method to ensure that more appropriate estimates of the value of inventory is
ascertained. This change in accounting policy has already been recorded in the accounting
records retrospectively. The effect of the change for 2013 is as follows;

2013 2012
R R
Decrease in cost of sales (829 500 – 787 500) 42 000
(780 000 – 750 000) 30 000
Increase in income tax expense at 28% (11760) (8400)
30240 21600
Increase in inventory (683 000 – 486 000) 197 000
(510 000 – 355 000) 155 000
Increase in deferred tax liability (155 000 x 28%) (43400)
9197 000 x 28%) (55160)
141 840 111600

Adjustment to retained earnings at the beginning 111 600

 2. Provision for warranty costs
2013 2012
R R
Carrying amount at beginning of year 212 000
Provision used during year (100 911)
Unused provision reversed(212 000 – 100911) (111089)
Provison created for the year 307 000 212 000
Carrying amount at end of year 307 000 212 000

Provision has been made for warranty costs to repair defective vehicle tracking systems
returned by customers under a two year mechanical warranty.
Based on past experience it is estimated that 12% of the vehicles tracking systems sold are
retuned with defects that has to be repaired.

3. Provision for onerous contract

2013 2014
R R
Carrying amount at beginning of year - -
Provision created for the year
950% x 30 000 x 6) 90 000 -
Carrying amount at end of year 90 000 -
Provision has been made for lease expenses resulting from onerous contract. Boxter Limited
rebooted its manufacturing plant in Port Elizabeth to Cape Town.
The current lease agreement would result in a penalty of 50% of the remaining lease payments
due, payable in cash within three months after termination of the agreement. The remaining
period up to contractual agreement data is six months (March to August).

4. Events after the reporting period

On March 31, the eastern side of the Cape Town manufacturing plant was destroyed in
a fire, caused by the defective installation of electrical wiring during the relocation. The
damage involved was estimated at R500 997, within R10 997 relating to damaged
inventory. The company’s insurance policy does not cover this contingency and the
claim was repudiated by the insurance company. A contract has been concluded with
VolksWerkers Limited to repair the damaged manufacturing plant at a cost of R500 000.
 5. Contingent Liability
A contract was concluded to repair a manufacturing plant with VolksWerkers at a cost of
R500 000. Refer to note 4.

5. LAWNERS LIMITED
CALCULATION OF CURRENT TAX EXPENSE FOR THE YEAR ENDED 30 JUNE 2013

R
Profit before tax (see 4) 617 960
Exempt differences 64 980
Capital profit on sale of spray painting equipment (780 000 – 750 000 ) x (100 – (10 020)
66.6%)
Depreciation – administration buildings 75 000
Temporary differences 164800
Depreciation – manufacturing buildings 100 000
Depreciation - manufacturing equipment [301760 + 416640 (see 4) 718 400
Deferred income – loyalty award credits 115 400
Profit on sale of spray painting equipment
[750 000 – (480 000 – 24 000) (294 000)
Recoupment on sale of spray painting
Equipment [750 000 – (450 000 – 150 000)] 450 000
Tax allowance – manufacturing building (125 000)
Tax alliance – manufacturing equipment (800 000)
Taxable profit 847740
Temporary difference – Tax loss carried forward from previous year (95000)
Taxable profit for the year 752740

Current tax at 28% (752740 x 28%) 210 767

 6. LAWNERS LIMITED
CALCULATION OF DEFERRED TAX IN THE STATEMENT OF FINANCIAL POSITION FOR
THE YEAR ENDED 30 JUNE 2013

Carrying Tax Base Temporary Deferred

Amount Difference Asset
(liability ) at
28%
R R R R
Deferred income (115400 +81000 + 54 000) - 250 400 70 112
Manufacturing building 18750002 125 000 (35 000)
Manufacturing equipment 694 4003 10 00004 594 400 (166 432)
(131320)

1. 2100 000 – 100 000 = 2000 000

2. 2000 000 – 125 000 = 1875 000
3. [(1868800 – 480 000) ÷ 2] = 694400
4. (1200 000 – 450 000) – (800 000 – 150 000) = 100 000

7. LAWNERS LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2013

1. Profit before tax

Included in depreciation for 2013 is a change in accounting estimate which resulted in an
increase in depreciation of R416 640 [(1868800 – 480 000) ÷ 2 – (301760 – 24000)] arising
from the decision to change the method of depreciation to the straight line method over 2years
from the reducing balance method on the manufacturing equipment. The remaining useful life of
the manufacturing equipment was taken to be 2years. This change will result in a decrease of
depreciation in future periods at R416 640).

2. Error
Correction in respect of revenue attributable to loyalty award credits which was incorrectly
recorded by including this revenue immediately on delivery of goods sold since 2011 financial
year. The effect of the correction on the opening balance of retaining earnings at the beginning
of 2012 was adjusted while the comparative amounts were restated accordingly. The effect of
the correction is as follows;

2013 2012 2011

R R R
Decrease in revenue (115400) (81000) (54 000)
Decrease in taxation expense at 28% 32312 22680 15 120
Decrease in profit 83088 58320 38880
Increase in deferred income 115400 81000 54 000
Decrease in current taxation liability (32312) (22680) (15120)
Decrease in equity 83088 58320 38880
Adjustment to retained earnings
At beginning of year 38880
(58 320 – 38 880) 97 200

3. Contingent Liability
On 21 April 2013, a claim of R850 000 was instituted by Lazee Limited against Lawners Limited
for defective lawnmower tractors sold to Lazee Limted which allegedly resulted in a lawnmower
tractor’s brakes failing causing injury to two of Lazee Limited’s holidaymakers. The company’s
legal advisors are of the opinion that it is probable, but not virtually certain, that Lawners Limited
will not be found liable for the claim.

4. Contingent Asset
On 31 May 2013, Lawners Limited instituted a legal claim of R250 000 against a newspaper as
a result of the negative publicity received by the company due to a headline news item that
appeared in the paper adversely describing the quality of the lawnmower products
manufactured and sold by lawnerss Limited. The article was titled “Lawnmower tractor injures
holidaymakers” resulted from injuries to two journalists of the paper on holiday allegedly caused
by a failure in the brakes of a lawnmower tractor sold by Lawnmowers Limited to Lazee Limited.
At year end, the legal advisors of the company are of the opinion that it is probable but not
virtually certain, that lawners Limited will be successful with their claim.

8. The three most widely used valuation techniques that can be used to determine the fair
value of the buildings according to IFRS13 – Fair value measurement are :
(a) The market approach
(b) The cost approach
(c) The income approach

9. The following three factors should be considered in determining the highest and best use
of the buildings according to IFRS 2013 – fairvalue measurement.
(a) A use that is physically possible. (e.g.) the location or size of the property.
(b) A use that is legally permissible : this takes into account any legal restrictions on the
use of the asset.
(c) A use that is financially feasible: takes into account whether or not it generates
adequate income or cash flows.
MAY / JUNE 2014

SOLUTION 1
1. CONCEPTIONAL FRAMEWORK FOR FINANCIAL REPORTING 2010, ACCOUNTING
POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS , PROVISIONS,
CONTINGENT LIABILITIES AND CONTINGENT ASSETS AND INCOME TAXES.

(a) Expense – Claim

An expense is recognized when an expenditure produces no future economic benefits or
when, and to the extent that, future economic benefits do not qualify, or cease to qualify,
for recognition in the statement of financial position as a asset. The claim will not
produce no future economic benefits. This claim will result in a decrease in economic
benefits; therefore it qualifies to be recognized as an expense.

(b) Provision for claim – liability

A liability is a present – obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.
This should be raised as the legal advisors have advised that judgment will probably be
in favor of Designer Kitchen Ltd. This result from past events (duplication of kitchen
cupboard designs) and the amount involved can be estimated). As such a liability should
be recognized.

2. KITCHEN SUPPLY LTD

CALCULATION OF CORRECTED PROFIT BEFORE TAX IN THE STATEMENT OF
PROFIT OR LOSS AN OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
28 FEBRAURY 2014

R
Provisional profit 960 000
Depreciation Delivery vehicles (25% x 750 000 – (20% x 750 000) repairs (37500)
Depreciation: Administration building (180 000 x 5%) (9000)
Corrected profit before tax 913 500
 3. KITCHEN SUPPLY LTD
CALCULATION OF CURRENT TAX DUE TO THE SA REVENUE SERVICE FOR THE EYAR
ENDED 28 FEBRUARY 2014

R
Profit before tax (see 2 above) 913 500
Exempt Differences 10 660
Capital profit on sale at machinery (150 000 – 140 000) x (100% - 66.6%) (3340)
Foreign income receive from the United Kingdom (20 000)
Legal fees 15 000 x (100% - 40) 9000
Fines paid to department of Trade and industry 25 000
Temporary differences 98 000
Profit on sale of machine (140 000 – 84 000) (56 000)
Recoupment on sale of machine (140 000 – 70 000) 70 000
Depreciation (470 000 + 375 000 + 9000) 516500
Claims 90 000
Income received in advance 40 000
Insurance premium – accounting (110 000 + 50 000 – 80 000) 80 000
Insurance – SARS (110 000)
Tax allowance. Delivery vehicles (375000 – 87500) (187 500)
Tax allowance – machinery (825 000 – 460 000) (345 000)
Taxable income 1002160
Current tax (1022160 x 28%)
Provisional tax payments (60 000 + 50 000) (110 000)
Amount due to SARS 176205

4. KITCHEN SUPPLY LTD

CALCULATION OF DEFERRED TAX BALANCE IN THE STATEMENT OF FINANCIAL

POSITION AS AT 28 FEBRUARY 2014
 Carrying Tax base Temporary Deferred Tax
Amount Difference Asset /
(liability) at
28%
R R R R
Income received in advance 40 000 - 40 000 11200
Prepaid expenses : insurance 80 000 - 80 000 (22400)
Provision for claim 90 000 - 90 000 25 200
Delivery vehicles 26 2500 187500 75 000 (21 000)
Machinery 576 000 480 000 96 000 (26 880)
Deferred tax liability (33 880)

(i) Delivery vehicles carrying amount = 300 000 – 375 00 = 262 500

5. KITCHEN SUPPLY LTD

TAX RATE RECONCILIATION R

Standard tax (913 500 x 28%) 255780
exempt Differences
Capital profit on sale of machine (3340 x 28%) (935)
Foreign income (20 000 x 28%) – 5000) (600)
Legal fees (9000 x 28%) 2520
Fines (25 000 x 28%) 7000
263765

6. KITCHEN SUPPLY
NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR THR YEAR ENDED 28
FEBRUARY 2014

1. Profit before tax

Included in depreciation for 2014 is a change in accounting estimate which resulted in an
increase depreciation of R37 500 on the vehicles arising from the decision to change the
method of depreciation to 25% per annum, according to the straight – line method from 20% per
annum straight – line method.
The remaining useful life of the asset was taken to be shorter than originally estimated. This
change will result in a decrease of depreciation in future periods of R37 500.

2. Contingent liability
On 15 January 2014, a claim of R50 000 was instituted by a customer against Kitchen Supply
Ltd for claimed sub – standard installation. The legal advisors were of the opinion that it is not
probable that Kitchen Supply Lt will be found liable for the claim, as the installation met all the
quality control specifications at the time of the installation.

3. Error
Correction in respect of air conditioners purchased and installed in the administration
building but incorrectly expensed as repairs in the statement of profit or loss and other
comprehensive income. The effect of the correction on the opening balance of retained
earnings at the beginning of 2013 was adjusted while the comparative amounts were
restated accordingly. The effect of the correction is as follows;
2014 2013
R R
Decrease in repairs 180 000
Increase in depreciation (180 000 x 5%) (9000) (9000)
Decrease in taxation expense (9000 x 28%) 2520
Increase in taxation expense (47880)
(6480) 123120

Increase in Administration building (180 000 – 9000) 62000 171000

Increase in current tax due (45360) (47 8800
116640 123120

Adjustment to retained earnings

At beginning of year 2013 123 120
SOLUTION 2
ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS,
EVENTS AFTER THE REPORTING PERIOD, REVENUE, PROVISIONS, CONTINGENT
LIABILITES AN CONTINGENT ASSETS AND FAIR VALUE MEASUREMENT

1. SQUAD CARS LTD

GENERAL JOURNAL
Repair (P/L) 45000
Revenue (P/L) 45 000

Bank (SFP) 15 000

Debtor/ Mr Surprise (SF) 3000
Revenue 18 000

Cost of sales (18 000 x 30/100) P/c 12 600

Inventory SFP 12 600

Employee benefits 91.5% x 320 000) (P/L) 4800

Expenses accrued (SFP) 4800

Repair costs (P/L) (600 000 X 35%) + (1000 000) X 5% 260 000
Provision for warrants (SFP) 260 000

Repair costs (P/L) (600 000 X 35%) + (1000 000) X 5% 156 000
Provision for warranty (SFP) 156 000

Debtors / (60 % x 260 000)

Repairs

2. CONTINGENT ASSET
The supplier of battery operated go – karts undertakes to recoup 60% of the repair costs
incurred by Squard car Ltd from the supplier for free repairs to detective g – karts, returned
within the three month guarantee period by Squad Cars’ customers. This recoupment will be
subject to inspection by supplier to determine the causes of the repairs. It is probable but not
virtually certain that R156 000 will be recouped from the supplier by the year – end.
 3. SQUAD CARS LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2014

1. Provision for Severance Package

2014 2013
R R
Carrying amount at beginning of year 180 000 -
Provision used during year (130 000 + 40 000) (170 000) -
Unused provision reversed (180 000 – 170 000) (10 000) -
Provision created for the year - 180 000
Carrying amount at end of year - 180 000

In January 2013, a provision for the severance package of the just resigned managing director
to be paid out. Although this was expected to be paid out by July 2013, the payments were only
made in July and November 2013 due to a dispute on the severance packages.

2. Change in Accounting
After the financial year the company directors decided at a board meeting that the
current inventory valuation method should be changed to the first – in , first – out method
from the last – in, first – out method in order to comply with the international Financial
Reporting Standards and to give a more reliable value of inventory on hand. This change
in reliable value of inventory on hand. This change in accounting policy was
retrospectively accounted for all the years from 2013 to current year.

As a result, the change has been accounted for retrospectively. The effect of the change
for the years is as follows.
 2014 2013
Increase in cost of sales(8000 – 6000) (11000 – 8000) (2000)
(3000)
Decrease in income tax expense 560 840
(1440) (2160)
Increase in inventory 6000 8000
Increase in current tax due (1680)
Increase in deferred tax liability 28% (2240)
4320 5760 7920
Adjustment to retained earnings at beginning of year 2013 7920

3. Events after the Reporting Period

On the 10th of April 2014, Squad Cars Ltd successfully obtained a second mortgage of R320
000 secured against land and buildings from CAT Bank at an interest rate of 10% per annum.
The loan will finance the expansion of the trading premises.
4. Fair value refers to the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement data.
the following are the characteristics of an asset that should be taken into account when
determining the fair value of an asset according to IFRS 13 – fair value measurement.
(a) The condition and location of the asset;
(b) Any restrictions on the sale or use of the asset;