FAC3764 - 2024 - Study Pack 1

FAC3764/2024/Study pack 1
Department of Financial Accounting

IMPORTANT INFORMATION
This study pack contains integrated questions which will aid you in your preparation for
assessment 2.
These questions integrate learning units 1 to 3, which includes the following topics:
- The conceptual framework for financial reporting;

- Income taxes (IAS 12);
- Revenue from contracts with customers (IFRS 15); and
- Leases (IFRS 16).
Please note that this study pack does NOT contain all the content and principles included
in learning unit 1 – 3. This study pack should NOT be seen as a scope for assessment 2.
It is important to note that all knowledge obtained from the successful completion of first
and second year FAC modules are still applicable, and CAN be assessed within this
module. Therefore, it is important to note that any topic/concept/principle taught within
FAC modules in prior academic years can be assessed within any of the FAC3764
assessments.
Open Rubric
CONTENTS
Page
1 INTRODUCTION .......................................................................................................................... 3
2 LECTURERS AND CONTACT DETAILS ..................................................................................... 3
3 INTEGRATED QUESTIONS AND SOLUTIONS .......................................................................... 4
2
Dear Student
1 INTRODUCTION
Within this study pack we include integrated questions and suggested solutions. These integrated
questions will help you to prepare for assessment 2.
Study pack 1, contains questions which integrates learning units 1 to 3, which includes the following
topics:
- The conceptual framework for financial reporting;

- Income taxes (IAS 12);
- Revenue from contracts with customers (IFRS 15); and
- Leases (IFRS 16).
It is important to note that all knowledge obtained from the successful completion of FAC2601 and
FAC2602 are still applicable and can be assessed within this module. Therefore, it is important to note
that any topic/concept/principle taught within the FAC2601 and FAC2602 module can be assessed
within any of the FAC3764 assessments. For example: IAS 16 and IAS 40 was already covered in full
within the FAC2601 module and as a result all the related principles are presumed knowledge. IAS 16
and IAS 40 principles can thus be assessed within FAC3764’s assessment 2.
You will notice some calculations are in brackets opposite certain items in our suggested solutions
dealing with company financial statements. These calculations are given for tuition purposes only and
consequently do not form part of the statutory disclosure requirements.
You will notice that some sentences within the suggested solution to discussion questions are written in
Italics. These items written in Italics are provided as part of the suggested solution to provide context to
the solution or for tuition / explanatory purposes but are not awarded any marks.
2 LECTURERS AND CONTACT DETAILS
Please use only the following e-mail address for all communication with your lecturers:
FAC3764@unisa.ac.za
Please use only the following telephone numbers for communication with your lecturers:
Lecturers Telephone number

Edwin Mashaba 012 429 3943
Itani Phaduli 012 429 3232
Dumazile Selela 012 429 4844
Mothebudi Seabi 012 429 4677
3
3 INTEGRATED QUESTIONS AND SOLUTIONS
QUESTION 1 (26 marks) (47 minutes)
DD Armour Ltd is situated in Gauteng, South Africa, and specialises in the manufacture and sale of
armoured vehicles. The armoured vehicles are sold in South Africa and internationally. The company
has a financial year ending on 30 June.
DD Armour Ltd offers customers the option to purchase a standard armoured vehicle or, if they prefer,
the armoured vehicle can be made specific to their requirements. Custom-made armoured vehicles take
9 months to manufacture and deliver. All vehicles, whether custom-made or standard, must be serviced
every 15 000 km. South African customers have the option to purchase the armoured vehicles with a
120 000 km service plan. A service plan normally sells for R37 500. An armoured vehicle without the
service option is sold for R970 000.
The following information relates to the revenue transactions of DD Armour Ltd during the current
financial year:
1.1 On 1 August 20x21 DD Armour Ltd signed a contract with S4G Ltd, a South African security
company, for the purchase of 10 armoured vehicles at R985 000 per vehicle, including the
120 000km service plan option. The contract requires S4G Ltd to pay the purchase price, in cash,
on the date of delivery of the vehicles. S4G Ltd took legal ownership of the 10 vehicles on
1 November 20x21, and the total purchase price was also paid on this date. All 10 vehicles
underwent the 15 000 km service during the current financial year.
1.2 During the current financial year, DD Armour Ltd finalised a contract with SEAL Protection Ltd, an
international private security firm, for the purchase of five custom-made armoured vehicles at a cost
of R1 350 000 per vehicle. The requirements from SEAL Protection Ltd is very specific and the
vehicles cannot be sold to another customer and will be delivered to SEAL Ltd all at once. If
SEAL Ltd decides to cancel the contract, they will be required to pay DD Armour Ltd for the work
performed until the date of contract cancellation. The contract with SEAL Protection Ltd was signed
on 1 February 20x22, and DD Armour Ltd received a 50% deposit on the same date. Until
30 June 20x22, the manufacturing of the custom-made vehicles was 40% complete.
1.3 Securicor Ltd placed an order for a custom-manufactured armoured vehicle on 1 May 20x22. To
secure a vehicle, Securicor Ltd paid a refundable deposit of R550 000 on 15 June 20x22. On
30 June 20x22 the contract for the manufacture of the custom vehicle has not been signed as the
final design had not yet been approved. To boost the revenue figures for DD Armour Ltd for the
current financial year, the CFO (a registered CA(SA)) has requested the accountant to recognise
the deposit received as revenue from contracts with customers.
Additional information:
• DD Armour Ltd uses straight lining to measure the progress of performance obligations satisfied
over time.
• DD Armour Ltd performs credit and background checks on all customers to ensure creditworthiness
before a contract is signed.
4
QUESTION 1 (continued)
REQUIRED Marks
a) Discuss the correct recognition and measurement of transactions 23
1.1 and 1.2 in the accounting records of DD Armour Ltd for the
period ended 30 June 20x22, in terms of IFRS 15, Contracts with
customers.
The discussion must be supported with calculations.
b) Discuss the accounting (recognition and measurement) and ethical 3

considerations of transaction 1.3.
Please note:
Your answer must comply with the requirements of International

Financial Reporting Standards.
5
QUESTION 1: Suggested solution
a) Accounting treatment of transaction 1.1 and 1.2
IFRS 15 provides a five-step process for the recognition and measurement of revenue from contracts
with customers.
The first step requires the identification of the contract. An entity can only account for a contract with a
customer if the following criteria are met:
• The contract is approved by all parties who are committed to fulfilling the respective obligations.
• Each party’s goods/services are identifiable.
• The payment terms are identifiable.
• The contract has commercial substance.
• It is probable that the entity will collect the consideration to which it will be entitled in exchange for
the goods/services that will be transferred to the customer.
The second step is to identify the performance obligation. The performance obligations should be
identified at contract inception. The goods/services must either be distinct or a series of goods/services
that are substantially the same and that have the same pattern of transfer to the customer.
The third step is the determination of the transaction price. The transaction price is the amount of
consideration to which an entity expects to be entitled in exchange for transferring promised
goods/services to a customer (excluding amounts collected on behalf of third parties).
The fourth step requires the allocation of the transaction price to the identified performance obligations.
The transaction price should be allocated to each performance obligation in an amount that depicts the
amount of consideration to which the entity expects to be entitled in exchange for transferring the
promised goods/ services to the customer. To achieve this, the transaction price should be allocated to
each performance obligation identified in the contract on a relative stand-alone selling price basis.
The fifth (and last) step recognised revenue when or as the entity satisfies a performance obligation by:
• transferring a promised good/service to a customer;
• transferring a promised good/service (an asset) when (or as) the customer obtains control of that
asset; and
• controlling an asset is the ability to dictate how the asset will be used and the ability to obtain most
of its remaining benefits.
The performance obligation can be satisfied at a point in time or over time.
Transaction 1.1
From the information it is clear that a valid contract can be identified. A contract was signed on
1 August 20x21 for the purchase of 10 standard armoured vehicles at a cost of R985 000 per vehicle.
The contract states that full payment must be made on the date the vehicles are delivered. Since there
will be a change to the risk, timing or amount of the entity’s future cash flows, the contract has
commercial substance. It is probable for DD Armour Ltd to collect the consideration to which it is entitled
since the payment terms are clearly defined, and credit checks ensure customers are able to make the
payments.
DD Armour Ltd promises to deliver 10 armoured vehicles and included in the transaction is a 120 000km
service plan. Since the customer can benefit from the vehicle and service plan separately, the two are
distinct and there are two separate performance obligations per armoured vehicle sold.
The total performance obligations for transaction one is: 10 + 10 = 20.
6
QUESTION 1: Suggested solution (continued)
The transaction price is given as R985 000 per vehicle. Thus, the total transaction price is R985 000 x
10 = R9 850 000.
The transaction price must be allocated to the two performance obligations, based on the stand-alone
selling prices. The stand-alone selling price of one armoured vehicle is R970 000, whilst the selling price
of the 120 000km service plan is R37 500.
The transaction price is allocated as follows:

Allocation of
transaction Allocation of
price discount
R R
Armoured vehicle 1
948 337 21 663
Service plan 2
36 663 837
985 000 22 500
1
985 000 x 970 000 / 1 007 500
2
985 000 x 37 500 / 1 007 500
The transaction price allocated to performance obligation for one armoured vehicle is R9 483 370
(R948 337 x 10) and the service plan R366 630 (R36 663 x 10 .
According to the contract, all 10 vehicles must be delivered on the same date, meaning the performance
obligation is satisfied at a point in time. From the information, it is clear that S4G Ltd took ownership of
the vehicles on 1 November 20x21. On this date, the revenue of R9 483 370 must be recognised.
The obligation to perform the 120 000km service plan is satisfied over time, as S4G Ltd simultaneously
receives and consumes the benefits provided by DD Armour Ltd as they perform. On
1 November 20X21, the full amount of R366 630 must be recognised as revenue received in advance
and accounts receivable. All 10 vehicles have received the 15 000 km service. Once the vehicles are
serviced, R45 8293 must be recognised as revenue.
3
(10 x 15 000 / 120 000 x R36 663 = R45 829)
Transaction 1.2
From the information it is evident that a valid contract can be identified. A contract was signed on
1 February 20x11 with SEAL Ltd for the purchase of 5 custom made armoured vehicles at the cost of
R1 350 000. The contract states that the custom-made vehicles cannot be used by or sold to another
All 5 vehicles will be delivered at the same time. Since there will be a change to the risk, timing or amount
of the entity’s future cash flows, the contract has commercial substance. It is probable for DD Armour Ltd
to collect the consideration to which it is entitled since the payment terms are clearly defined, and credit
checks ensure customers can make the payments.
DD Armour Ltd promised to deliver 5 custom-made armoured vehicles; therefore, we are dealing with
only one performance obligation.
The transaction price is given as R1 350 000 per vehicle; thus, the total transaction price is
R1 350 000 x 5 = R6 750 000.
Since there is only a single performance obligation, the full transaction price will be allocated to the
custom-made vehicles.
7
According to the contract, all 5 vehicles must be delivered on the same date, but, since the custom-
made vehicles can only be used by SEAL Ltd and SEAL Ltd is required to pay for work performed to
date, if they should cancel the contract, the performance obligations will be satisfied over time. At the
end of the current financial year the manufacturing of the custom-made vehicles is 40% complete,
meaning that 40% of the R6 750 000 must be accounted for as revenue.
On 1 February 20x22, DD Armour Ltd received a deposit of R3 375 000 (R6 750 000 x 50%), which will
be recognised as a contract liability. On 30 June 20x22, R2 700 000 (R6 750 000 x 40%) of the contract
liability must be accounted for as revenue received from contracts with customers. The remaining 10%
of the contract liability will be recognised as revenue in the next financial year when the vehicles are
50% complete.
b) Accounting and ethical considerations of transaction 1.3
When deciding whether to recognise revenue, we consider the following:

• If the contract can be identified
• If the performance obligations can be identified
• As and when the performance obligations will be satisfied.
The first step in the recognition of revenue is the identification of a contract. A contract can only be
identified if:
• the parties to the contract have both approved the contract and are committed to performing their
respective obligations;
• the entity can identify each party’s rights regarding the goods/services to be transferred;
• the entity can identify the payment terms for the goods/services to be transferred; and
• if it is probable that the entity will collect the consideration to which it will be entitled in exchange for
the goods/services that will be transferred to the customer.
Insufficient information has been provided to determine whether a contract can be identified. However,
it is clear that our performance obligations have not been established as the final design of the vehicle
has not been approved yet.
Since we have not been able to identify the performance obligations, revenue cannot be recognised.
The refundable deposit of R550 000 received cannot be recognised as revenue but must be recognised
as a refund liability. The request by the CFO, a registered CA(SA), to recognise the deposit as revenue
is not in accordance with the International Financial Reporting Standards and is against the SAICA Code
of Ethics. If the CFO goes ahead and recognises this amount as revenue, this will constitute non-
compliance with laws and regulations.
8
Diamond Lodge Limited (Diamond Lodge), a luxury resort situated in the heart of Krugersdorp, is
regarded as a home away from home. The resort boasts 145 deluxe rooms and is home to a variety of
wildlife and rare bird species. Relaxing around the campfire, going on a game drive, or just spending an
afternoon by the pool is some of the best ways to enjoy Diamond Lodge.
Diamond Lodge is listed on the Johannesburg Stock Exchange and has a financial year ending on
31 May.
The financial manager, Mr. Ron Weasley resigned with immediate effect on 31 January 20X23. You
have been appointed as the new financial manager of Diamond Lodge. The Chief Financial Officer
(CFO), Mr. Tom Riddle, a CA(SA), has requested your assistance with the below matters:
Safari Vehicles
On 31 October 20X22, Mr. Ron Weasley placed an order for 4 safari (game-viewing) vehicles. At a
board meeting, which was held on 30 November 20X22, the board decided that 4 safari vehicles were
one too many to cater for the needs of Diamond Lodge and that only 3 safari vehicles will be used by
the company. A subsequent decision was made by the board that the 4th safari vehicle will be leased
out.
All 4 safari vehicles were delivered to Diamond Lodge on 1 December 20X22 and were available for
use, as intended by management, as well as brought into use, on this date. The cost of each safari
vehicle (which equals its fair value) amounted to R370 000 and was paid in cash on delivery date.
The following journal entry, which is correct, is the ONLY journal entry the accountant passed with
regards to the acquisition of the four safari vehicles:
Date Details Debit Credit

R R
1/12/20X22 Vehicles (SFP) (370 000 x 4) 1 480 000
Bank (SFP) 1 480 000
(Acquisition of 4 safari vehicles)
Diamond Lodge entered into a lease agreement with a neighboring lodge, Pumba Lodge (Pumba) on
1 December 20X22, to lease the additional safari vehicle to them. Legal fees amounting to R10 000 was
paid by Diamond Lodge, in cash on 1 December 20X22, to finalise the lease agreement.
The terms of the lease agreement were as follows:
• The lease will commence on 1 December 20X22.

• The lease term is 4 years.
• Installments of R120 000 is payable annually in arrears, commencing on 30 November 20X23.
• On expiry of the lease term, Diamond Lodge expects to be able to sell the vehicle for R40 000, but
there is no guarantee that this amount will be realised.
• Ownership of the safari vehicle will not transfer to Pumba Lodge at the end of the lease term.
The safari vehicle will be used by Pumba for a qualifying purpose and the lease contract is a lease
agreement for income tax purposes.
It is the accounting policy of the company to account for vehicles according to the cost model and to
provide for depreciation on the straight-line method over its estimated useful life of 5 years. On
acquisition date an insignificant residual value was allocated to the 4 safari vehicles.
The South African Revenue Service allows a tax allowance on the safari vehicles according to Section
11(e) of the Income Tax Act, according to the straight-line method over 4 years, apportioned for part of
a year. The South African Revenue Service tax the lease payments when it is received and do not limit
the capital allowance to the taxable lease income of Diamond Lodge.
9
Office property
To diversify the business operations, the board of directors decided to purchase an office property which
will be held to earn rental income through an operating lease.
The office property consisting of a building with 2 floors of office space, situated in Durban’s CBD, was
purchased for cash, on 1 March 20X23, on an auction at the bargain price of R4 000 000. You may
assume that the value of the land portion is negligible.
In addition to the abovementioned purchase price, Diamond Lodge incurred the following costs on
acquisition date, relating to the acquisition of the office property:
• Legal fees amounting to R30 000 was paid in cash to ensure the validity of the sales transaction as
the purchase agreement was prepared by the lawyers. The seller agreed within the purchase
agreement to reimburse Diamond Lodge 30% of the legal fees.
• Property transfer duty of R1 850 000 was paid in cash.
On 28 May 20X23, Diamond Lodge made a payment of R100 000 to Business Matters, a very popular
South African business magazine, to advertise the office property. The contract signed with Business
Matters stipulates that the advert will appear in the magazine for the next 6 months, starting from
1 June 20X23.
Even though Diamond Lodge advertised the office property through leasing agents since acquisition
date, the office property was still vacant on 31 May 20X23. On 31 May 20X23, an independent sworn
appraiser determined the fair value of the office property to be R5 900 000.
For the period 1 March 20X23 to year-end 31 May 2023, Diamond Lodge realised operating losses of
R110 000 on this vacant office property.
It is the accounting policy of Diamond Lodge to account for investment property according to the fair
value model.
The South African Revenue service do not grant any tax allowance in respect of this office property
whilst the payment of R100 000, made to Business Matters, will be tax deductible.
Vending machines
On 31 December 20X22, Diamond Lodge entered into an exchange transaction, which holds
commercial substance, with MachineMania (Pty) Ltd (MachineMania) to exchange their one-door
vending machine for a second-hand, bigger, 2-door vending machine. Based on the conditions of the
exchange transaction, Diamond lodge will make an additional cash payment on exchange date
amounting to R40 000 to MachineMania for the new vending machine.
The one-door vending machine was initially purchased on 1 January 20X18, for an amount of R175 000
and on this date an insignificant residual value was allocated to it. On 31 December 20X22, the carrying
amount of the one-door vending machine, correctly calculated, amounted to R29 167, whilst the
depreciation for the period 1 June 20X22 to 31 December 20X22, correctly calculated, amounted to
R17 014.
On 31 December 20X22, the fair value of the one-door vending machine and the two-door vending
machine was determined to be R80 000 and R150 000, respectively.
The new vending machine was available for use, as intended by management, as well as brought into
use on 1 January 20X23. An estimated residual value of R20 000 was allocated to the new 2-door
vending machine on exchange date. The depreciation for the period 1 January 20X23 to 31 May 20X23
on the new 2-door vending machine, correctly calculated, amounted to R6 944.
It is the accounting policy of the company to account for vending machines according to the cost model
and to provide for depreciation on the straight-line method over the estimated useful life of 6 years.
10
The South African Revenue Service allows a tax allowance on both the vending machines according to
Section 11(e) of the Income Tax Act, according to the straight-line method over 5 years, apportioned for
part of a year.
This exchange transaction has not yet been accounted for in the accounting records of Diamond Lodge
Ltd.
Additional information
Bookings have declined recently, and the CFO, Mr. Tom Riddle suggested that the finance team create
fake customer profiles and post positive reviews on Diamond Lodge’s website as well as other online
review platforms. Further, he also suggested “that it can only positively influence us, if we post negative
reviews about the surrounding lodges”.
Deferred tax is provided for on all temporary differences using the statement of financial position
approach. There are no other exempt or temporary differences except those resulting from the
information in the question. The company will have sufficient taxable profits and capital gains in the
future against which any unused tax losses can be utilised.
The South-African normal tax rate is 27% and the capital gains tax inclusion rate is 80%.
Assumptions:
All amounts are material, and you may ignore the implications of Value-Added Tax (VAT).
REQUIRED:
Marks
a) Discuss the classification of the lease of the safari vehicle, in the accounting 5
records of Diamond Lodge Ltd in terms of IFRS 16 – Leases, as far as possible
from the given information.
Communication skills: Logical argument 1
b) Assuming that the lease, of the safari vehicle, is classified as a finance lease, 11
prepare the general journal entries to account for the lease, using the gross
method in terms of IFRS 16 – Leases, in the accounting records of Diamond
Lodge Ltd, for the year ended 31 May 20X23.
Please note:
• Journal dates must be shown.
• Journals relating to tax are not required.
• Journal narrations are not required.
• No abbreviations for general ledger account names in your journals may be
used.
• Indicate in your journals if it is a statement of financial position (SFP) or
statement of profit or loss and other comprehensive income (P/L) general
ledger account.
c) The chief financial officer is unsure if the R100 000 payment to Business Matters 8
must be recognised as an asset or an expense in the financial statements of
Diamond Lodge Ltd.
Write an email to the chief financial officer to discuss, in terms of the Conceptual
Framework 2018, whether the payment to Business Matters, may be recognised
as an asset in the financial statements of Diamond Lodge Limited for the year
ended 31 May 20X23.
Communication skills: Presentation 1
11
REQUIRED: (continued)
Marks
d) Considering all the information provided, prepare the following notes to 15
accompany the financial statements of Diamond Lodge Limited for the year ended
31 May 20X23:
• Profit before tax note; and
• Deferred tax note
Please note:
• Only include deferred tax relating to the lease agreement (finance lease
receivable and leased asset) and the payment made to Business Matters.
• Indicate within your deferred tax note, if your net deferred tax balance is a
deferred tax asset or deferred tax liability.
• Your deferred tax note does not have to include any qualitative disclosures.
e) Discuss any ethical concerns that you may have regarding the CFO’s suggestion 3
of creating fake customer profiles and posting positive and negative reviews
respectively, on Diamond Lodge Limited’s website as well as on competitor’s
websites.
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative information is not required.
All calculations must be shown.
Calculations are to be done to the nearest Rand.
[44]
12
a) Discuss the classification of the lease of the safari vehicle, in the accounting records of
Diamond Lodge Ltd in terms of IFRS 16 – Leases, as far as possible from the given
information.
To be able to discuss the classification of the lease it must be first established if the lease is a finance
lease or an operating lease.
In terms of IFRS 16.61 -.68 a finance lease is a lease where the risks and rewards of ownership are
transferred to the lessee.
When assessing whether the risks and rewards transfer, we must look at the contract’s substance
rather than its legal form.
In terms of IFRS 16.63, the lease would be classified as a finance lease IF either one or a combination
of the following situations existed:
The term of the lease is for the major part of the economic life of the underlying asset (even if title will
not be transferred).
- The lease term is four years, and the useful life is 5 years indicating that the lease term is for
the major part of the economic life of the safari vehicle
On the inception date, the present value of the lease payments amounts to substantially all of the fair
value of the underlying asset.
- The fair value and present value of the minimum lease payments is substantially the same, at
R380 000 and R370 000.
Conclusion:
As two of the four indicators are met, the lease can be classified as a finance lease.
b) Assuming that the lease is classified as a finance lease, prepare the general journal entries
(cash transactions included) to account for the lease, using the gross method, in the
accounting records of Diamond Lodge Ltd, for the year ended 31 May 20X23.
Diamond Lodge Limited

Journals for the year ended 31 May 20X23
Debit Credit
R R
1 December 20X22
Jnl 1 Gross investment in lease / Finance lease receivable/ 520 000
Lease receivable: Gross investment (SFP)
(120 000 x 4) + 40 000
Unearned finance income / Finance lease 140 000
receivable/ Lease receivable: Unearned finance
income (SFP)
Vehicles / Safari vehicles (SFP) 370 000
Bank / Cash (SFP) 10 000
Vehicle leased out under finance lease
31 May 20X23
Jnl 2 Unearned finance income / Finance lease receivable: 25 038
Unearned finance income (SFP) [C1 and C2]
Finance income / Lease interest income / Lease 25 038
finance income (P/L)
Interest income earned
13
C1 – Interest rate implicit in the lease

PV = 380 000 (370 000 + 10 000)
FV = 40 000
PMT = 120 000
N=4
I = 13,178%
C2 – finance income for the 6 months ending 31 May 20X23

380 000 x 13,178% (or amort 1) = R50 076 x 6/12 = 25 038
Date Opening Interest at Closing

balance 13,178% p. a Capital Instalment balance
R R R R R
01/12/2022 380 000
30/11/2023 380 000 50 076 69 924 120 000 310 076
30/11/2024 310 076 40 862 79 138 120 000 230 938
30/11/2025 230 938 30 433 89 567 120 000 141 370
30/11/2026 141 370 18 630 101 370 120 000 40 000
c) Write an email to the chief financial officer to discuss, in terms of the Conceptual
Framework 2018, whether the payment to Business Matters, may be recognised as an asset
in the financial statements of Diamond Lodge Limited for the year ended 31 May 20X23.
To: Chief financial officer

From: Financial manager
Date: 29 May 20X23
Subject: Recognition of the payment of R100 000 to Business Matters as an asset.
Dear CFO
Since your request only made reference the the recognition of an asset, I limited my discussion to the
criteria for the recognition of an asset.
Please see the discussion below that indicates the advertising amount of R100 000 paid on
28 May 20X23, must be recognised as an asset for the year ended 31 May 2023.
An item can only be recognised as an asset if it meets the definition of an asset (Conceptual Framework
5.6) as well as the recognition criteria. Assets and any resulting income or expenses must only be
recognised if the user would find this information useful, this means giving information that is relevant
and a faithful representation.
ASSET DEFINITION
An asset is a present economic resource controlled by an entity as a result of past events (Conceptual
Framework 4.3).
An economic resource is a right that has the potential to produce economic benefits (Conceptual
Framework 4.4).
Right
Diamond Lodge has the right for the advertisements to appear in a very popular South African business
magazine in the following financial year (June to November), due to the payment which has been made
on 28 May 20X23.
14
Potential to produce economic benefits.

This right has the potential to produce economic benefits to Diamond Lodge, in the form of both:
Cash inflows through potential clients who might rent the office space, and
In the form of reduced future cash outflows since the cash payment for the magazine advertisements
have already been made (a prepayment) (Conceptual Framework 4.16 (d)).
Control
In this case, control arises from legal rights through the underlying contract with Business Matters as
payment has already been made.
Past event
The past event is the prepayment for the advertisement on 28 May 20X23, before the end of the
reporting period.
Therefore, the pre-payment meets the definition of an asset.
RECOGNITION CRITERIA
Relevant information / Relevance
The proof of payment for the advertising in advance provides information that is relevant as it is certain
that the prepayment exists.
The potential to produce economic benefits through cash inflows from any future office space to lease
has such a high level of measurement uncertainty (i.e., we cannot quantify the number or value of the
sales that will occur as a direct result of the magazine advertisement) that, if we were to recognise
such a benefit, we would not achieve faithful representation (Conceptual Framework 5.18).
However, the second potential economic benefit identified, being the reduced future cash outflow (i.e.,
reduced advertising cash outflows), has no measurement uncertainty at all (we know the amount that
has been prepaid) and thus faithful representation is not adversely affected, and this benefit may
therefore be recognised as an asset (Conceptual Framework 5.18).
Faithful representation
The advertising pre-payment was for an amount of R100 000; therefore, it can be reliably measured
(no measurement uncertainly exists).
Therefore, the pre-payment meets the recognition criteria.
Conclusion
The payment can be recognised as an asset in terms of the Conceptual Framework for Financial
Reporting in the financial statements for the year ended 31 May 20X23.
15
d) Considering all the information provided, prepare the following notes to accompany the
financial statements of Diamond Lodge Limited for the year ended 31 May 20X23.
Diamond Lodge Limited

Notes to the financial statements for the year ended 31 May 20X23
Profit before tax

Profit before tax is stated after the following has been taken into account:
R
Income
Finance income (part a) 25 038
Fair value adjustment (5 900 000 – 5 871 000) 29 000
Profit on exchange of asset 50 833
Expense
Direct operating expenses/losses in regard to investment property that is not earning 110 000
rental income/Operating losses (IP)
Depreciation 134 958
C1 – Investment property cost:

R
Purchase price 4 000 000
Legal fees (30 000 x 70%) 21 000
Transfer duty 1 850 000
5 871 000
C2 - Depreciation:
R
Safari vehicles - 370 000 x 3 = 1 110 000 / 5years x 6/12 111 000
Vending machine (old) – (given) 17 014
Vending machine (new) – (given) 6 944
134 958
C3 – Profit on exchange of asset

R
Carrying amount of 1-door vending machine on date of disposal 29 167
(given)
Cash consideration paid 40 000
Carrying amount of machine given up together with 69 167
consideration paid
Deemed cost price of asset received (80 000 + 40 000) 120 000
Profit on exchange of asset 50 833
16
Deferred tax
Analysis of temporary differences / The deferred tax balance comprises tax on the following types of
temporary differences:
R
Finance lease receivable 109 360
Leased asset (87 413)
Prepaid expenses -
Deferred tax liability at the end of the year 21 947
C4-Deferred tax
Carrying Tax Exempt Temporary Deferred tax

amount base difference difference (@27%)
R R R R R
Finance lease receivable 1

405 038 - - 405 038 109 360 DTL
Leased asset - 2
323 750 - (323 750) (87 413) DTA
Net investment in lease 405 038 323 750 - 81 288 21 947 DTL
Prepaid expenses 100 000 100 000 - - -

21 947
(520 000 – 140 000) + 25 038 = 405 038 OR 380 000 (PV) + 25 038 = 405 038
1
370 000 - (370 000/4 x 6/12) = 323 750

2
e) Discuss any ethical concerns that you may have regarding the CFO’s suggestion of creating
fake customer profiles and posting positive and negative reviews respectively, on Diamond
Lodge Limited’s website as well as on competitor’s websites.
The CFO is a qualified chartered accountant, a CA(SA), and must adhere to the SAICA Code of
Professional Conduct.
The suggestion of the CFO will lead to actions which are not straightforward and honest. Creating
false accounts and writing false reviews can be seen as a fraudulent activity.
The suggestion and resultant actions can impact the reputation of Diamond Lodge and is therefore
not in the best interest of Diamond Lodge Ltd.
In addition to reputation damage, there can be legal consequences for the company as well the
individuals involved (paying a fine, jail etc).
The CFO’s suggestion will lead to actions that are not conducted in good faith with a degree of care,
skill and diligence expected from a chartered accountant. The chief financial officer’s suggestion is
regarded as unethical.
17
PixieDust Ltd (“Pixie”) is a South African manufacturer and retailer of baby and children’s products and
educational toys. Pixie also manufactures special orders for companies that require corporate branding.
The company has branches across South Africa and grew significantly in the last few years and has a
large footprint in the toy market. Pixie has a 31 December financial year end.
The following relates to some of the assets and transactions of Pixie for the year ended
31 December 20X22:
1. ToysRme contract
Pixie received a special order on 1 October 20X22, from ToysRme Ltd (ToysRme) to manufacture 500
toy figurines. ToysRme requested that the toy figurines be specifically designed to look like their
company mascot. Due to lack of storage space, ToysRme requested Pixie to keep the toy figurines at
their premises until they free up storage space. Pixie agreed to keep the figurines in a separate room at
their warehouse until ToysRme collects the figurines on 31 January 20X23. The separate room can only
be accessed by authorised ToysRme and Pixie employees. ToysRme will be responsible for the
insurance costs on the figurines when they are stored at the Pixie warehouse. The total transaction price
as stipulated in the signed contract amounted to R557 500.
Pixie does not provide custodial services to its customers and decided to estimate the stand-alone
selling price for this service by using the residual approach. The cost to manufacture each figurine was
R800 and Pixie charges 25% margin on cost.
The junior accountant correctly identified the following two performance obligations in the ToysRme
contract:
• Sale of toy figurines and
• Storage costs.
The order was ready on 1 November 20X22. ToysRme inspected the order, confirmed that they had
been packed correctly according to the specifications provided, and immediately settled the full contract
price of R557 500 on 1 November 20X22.
2. Sandton property
On 1 January 20X16, Pixie purchased a property in Sandton for R5 000 000 (land: R1 000 000; building:
R4 000 000). The property was acquired to be used as Pixie’s headquarters. Pixie management
considers the land portion of the property to be significant in relation to the total property. On acquisition
date, Pixie estimated the useful life and residual value of the building to be 10 years and R100 000
respectively. The property was available for use as intended by management on 1 January 20X16.
The fair values of the land, on the respective dates, as determined by an independent sworn appraiser,
were as follows:
R
31 December 20X18…………………………………………………………………………. 1 100 000
31 December 20X20…………………………………………………………………………. 1 050 000
31 December 20X22…………………………………………………………………………. 970 000
The carrying value of the land did not differ materially from its fair value on 31 December 20X16,
31 December 20X17, 31 December 20X19, and 31 December 20X21 respectively.
It is the accounting policy of Pixie to account for the building in accordance with the cost model.
18
Depreciation is accounted for in accordance with the straight-line method over the estimated useful life
of the building. Land is accounted for in accordance with the revaluation model.
Assumptions
• All amounts are material.

• Ignore the implications of Value-Added Tax (VAT).
REQUIRED:
Marks
a) Discuss when PixieDust Ltd should recognise the revenue of the toy figurines sold 11
to ToysRme Ltd in its annual financial statements for the year ended
31 December 20X22.
Communication mark – logical argument 1
b) Prepare all the journal entries to account for the Sandton Property and the 18
ToysRme contract in the accounting records of PixieDust Ltd for the year ended
31 December 20X22.
• Dates are not required.
• Journal narrations are not required.
• No abbreviations for general ledger account names in your journals may be
used.
• Indicate in your journals if it is a statement of financial position (SFP) or
statement of profit or loss and other comprehensive income (P/L) general
ledger account.
Please note:
Standards (IFRS).
Accounting policy notes are not required.

[30]
19
a. Discussion on the revenue recognition of the transaction between PixieDust Ltd and
ToysRme in the annual financial statements for the period ended 31 December 20X22.
An entity determines when it has satisfied its performance obligation to transfer a product by evaluating
when a customer obtains control of that product. Revenue is recognised when control is transferred.
The following indicators of control were met:
• ToysRMe has fully paid for the toy figurines.

• They obtained legal title of the toy figurines.
• ToysRMe ensured that they are responsible for the insurance.
ToysRMe inspected and confirmed the figurines and accepted it on 1 November 20X22.
However, for some contracts, a customer may obtain control of a product even though that product
remains in the seller’s physical possession.
Pixie Limited received the consideration for the toy figurines from ToysRme, but the products sold
remain in the custody of ToysRme.
The sale of the toy figurines to ToysRme is therefore a bill and hold sale.
IFRS 15.B81 provides additional criteria that must be met for the customer to have obtained control of
a product in a bill-and-hold arrangement. These are:
• The reason for the bill-and-hold arrangement must be substantive.
ToysRme specifically requested that Pixie keep the toy figurines in their warehouse due to lackof storage
space, therefore, the reason for the arrangement is substantive.
• The product must be identified separately as belonging to the customer.
The toy figurines represent the company mascots of ToysRme and are therefore separately identifiable.
The toy figurines are stored in a separate room at the Pixie warehouse and the room can only be
accessed by authorised Pixie and ToysRme employees.
• The product currently must be ready for physical transfer to the customer.
The toy figurines are ready for collection by ToysRme as they have been inspected, confirmed and
accepted by ToysRMe.
• The entity cannot have the ability to use the product or to direct it to another customer.
The toy figurines were manufactured according to the ToysRMe’s specifications (ToysRme requested
that the figurines be designed to look like their company’s mascot), Pixie cannot usethem, or sell them
to a different customer.
Based on the above, all of the criteria to classify the transaction between Pixie and ToysRme as a bill
and hold arrangement have been met. Therefore, Pixie transferred control of the toy figurines to
ToysRMe on 1 November 20X22.
Revenue of the toy figurines should therefore be recognised on 1 November 20X22.
20
b. Journal entries to account for the Sandton property, and the ToyRme contract in the
accounting records of PixieDust Ltd for the year ended 31 December 20X22.
Debit Credit
R R
Jnl 1 Revaluation Surplus (OCI) (100 000 (20X18 Revaluation 50 000
surplus – 50 000 (20X20 Revaluation deficit))
Revaluation deficit (P/L) (80 000 (20X22) – 50 000 (OCI 30 000
balance))
Land (SFP) (1 050 000 – 970 000) 80 000
Jnl 2 Depreciation (P/L) 390 000

Accumulated depreciation: building (SFP) 390 000
Jnl 3 Bank (SFP) 557 500

Revenue (SFP) (800 x 125/100 x 500) 500 000
Income received in advance/contract liability (SFP) 57 500
Jnl 4 Cost of sales (P/L) (800 x 500) 400 000

Inventory/Finished goods (SFP) 400 000
Jnl 5 Income received in advance/contract liability (SFP) 38 333

Revenue (P/L) (57 500/3 x 2) 38 333
Alternative to Jnl 3 and Jnl 5

Bank (SFP) 557 500
Revenue (P/L) (800 x 125/100 x 500) + (57 500/3 x 2) 538 333
Income received in advance (SFP) 19 167
1
Depreciation for 20X22:
(4 000 000 – 100 000) / 10 = 390 000
21
Super Speed Ltd (Super) is a company that amongst other manufactures and sells go-carts to retailers
worldwide and has a 31 March year-end.
Lease agreement
On 1 March 20X20, Super entered into a non-cancellable lease agreement to lease welding equipment
from Weld It Ltd (Weld It) for five years. The lease agreement contains a lease as defined in IFRS 16,
Leases.
The following items were specified in the lease agreement:
Commencement date of lease ....................................................................................... 1 April 20X20

Fair value of welding equipment on 1 April 20X20 (incl. VAT) ................................... R 2 070 000
Lease term ...................................................................................................................... 5 Years
Instalments payable annually in arrears (incl. VAT) .................................................... R496 000
Date of first instalment ............................................................................................... 31 March 20X21
The Value Added Tax will also be financed by Weld It. Per the lease agreement, ownership of the
welding equipment will not transfer to Super at the end of the five-year lease term. Super entered into
an agreement with Go Ltd (Go) on 1 April 20X20 whereby Go will purchase the welding equipment from
Weld It on 31 March 20X25 for an unguaranteed residual value of R300 000. Go is not related to Super
nor to Weld It.
Weld It and Super both incurred commission payable to Mac Brokers for the conclusion of the lease
agreement. Weld It paid the total commission of R20 000 (excluding VAT) to Mac Brokers on
1 April 20X20. On the same day, Super refunded Weld It with R12 000 for its share of the commission.
It is the accounting policy of Super to account for equipment according to the cost model. It is the policy
of Super to depreciate the welding equipment over its useful life using the straight-line method. On
1 April 20X20, Super estimated the remaining useful life of the welding equipment to be six years with
an estimated residual value for purposes of depreciation of R250 000 (excl. VAT). The estimated residual
value remained unchanged since 1 April 20X20.
Land and Plant
On 1 December 20X20, Super purchased a piece of land for the erection of a plant for the manufacturing
of the go-carts. The company paid R1 150 000 (incl. VAT) in cash for the land. The building activities
started on 1 April 20X21 and the plant was available for use on 1 January 20X22 and brought into use
on 1 February 20X22.
The directors of Super decided that from 1 April 20X21, 50% of the welding equipment will be used in
the construction of the plant. Super incurred construction costs to the amount of R1 101 722 (incl. VAT)
during the construction period. The construction costs were paid in cash.
It is the accounting policy of Super to account for owner-occupied land and buildings according to the
cost model. It is the policy of Super to depreciate the plant at 15% per annum on the reducing balance
method. The estimated residual value of the plant at the end of its useful life will be R100 000.
22
Finance lease
Super entered into a finance lease agreement with Race-away Ltd on 1 April 20X21, whereby Race-
away Ltd will lease a machine from Super. The lease agreement is a lease in terms of IFRS 16, Leases.
The following information relates to the lease:
Commencement of agreement .................................................. 1 April 20X21

Cost price of machine ................................................................ R199 000
Period of lease agreement ........................................................ 4 years
Installment ................................................................................ R71 475 (paid annually in arrears
from 30 March 20x22)
Interest rate implicit in the lease ................................................ 16% per annum
The machine has no guaranteed or unguaranteed residual value. Super incurred R1 000 legal fees to
secure the lease agreement. At the end of the lease period the machine will be transferred to Race-away
Ltd at no additional cost. The machine was available for use and brought into use on 1 April 20x21.
The machinery was originally purchased on 1 March 20X21. The machine was available for use, as
intended by management, on the same day. It is the accounting policy of Super to account for machinery
according to the cost model. It is the policy of Super to account for depreciation on the machine according
to the units of production method. It is estimated that the machine can produce a total of 185 000 units.
During the 20X21 financial year, the machine produced 5 850 units.
Taxation
The South African Revenue Service allows a capital allowance on manufacturing plant as follows:
40% in the first year of use and 20% per annum in the following three years, not apportioned for periods
shorter than a year.
With the exception of Mac Brokers all other companies are registered VAT vendors. The following
taxation rates remained unchanged since 1 April 20X20:
SA Normal Tax rate................................................................................................................................. 27%

Value Added Tax rate ............................................................................................................................. 15%
The lease with Weld-it Ltd meets the definition of Part (b) of the Installment credit agreement (ICA)
definition.
23
REQUIRED:
Marks
a) Disclose the following notes to the annual financial statements of Super Speed Ltd for
the year ended 31 March 20X22:
• Property, plant and equipment 8
- A total column is not required.
• Leases 11½
• Net investment in finance leases 8½
• Profit before tax 4
b) Calculate the deferred tax balance in the accounting records of Super Speed Ltd as at 7
31 March 20X22.
- Exclude the finance lease transaction.
- Indicate within your deferred tax calculation, if your net deferred tax balance per
item is a deferred tax asset or deferred tax liability.
b) Prepare the extract of the statement of financial position of Super Speed Ltd for the year 5
ended 31 March 20x22.
Communication skill: Presentation and layout 1
Please note:
Standards (IFRS).
[45]
24
a) Disclose the following notes to the annual financial statements of Super Speed Ltd for the
year ended 31 March 20X22
SUPER SPEED LTD

NOTES FOR THE YEAR ENDED 31 March 20X22
1. Property, plant and equipment
Land Plant Machinery

R R R
Carrying amount at beginning of year 1 000 000 - 192 707
Cost (1 150 000 x 100/115) 1 000 000 - 199 000
Accumulated depreciation
(199 000 / 185 000 x 5 850) - - (6 293)
Additions (1 101 722 x 100/115 + 122 400) - 1 080 419 -
Depreciation - (40 516) -
Derecognition - - (192 707)
Carrying amount at end of year 1 000 000 1 039 903 -
Cost 1 000 000 1 080 419 -
Accumulated depreciation - (40 516) -
2 Leases
2.1 Right of use assets – Equipment
Carrying amount at the beginning of the year [C5] 1 305 599

Depreciation for the year [C5] (326 400)
Carrying amount at the end of the year 979 199
2.2 Maturity analysis of future payments outstanding on 31 March 20X22
Future lease payments (undiscounted)

For the year ended 31 March 20X23 [C4] 496 000
Total future lease payments 1 488 000
Total future finance costs ((496 000 x 5) - 1 889 999 - 185 172 - 154 719 250 110
[C4] OR 121 282 + 84 569 + 44 259 OR 590 001 – 185 172–154 719
Lease liability 1 237 890
Short-term portion presented under current liabilities [C4] 374 718
Long-term portion presented under non-current liabilities [C4] 863 172
2.3 Total cash outflows relating to leases:
Presented under financing activities

Cash payments for capital portion of lease liabilities [C4] 341 281
Presented under operating activities
Cash payments for interest portion of lease liabilities [C4] 154 719
Total cash outflow relating to leases 496 000
25
3. Net investment in finance leases
Reconciliation of net investment in finance leases:
R
Opening balance / carrying amount at the beginning of the year -
New leases entered into / additions (C8) 200 000
Finance income 32 000
Lease installments received (C8) (71 475)
160 525
Maturity analysis of the finance lease installments receivable at reporting date:
20X22 20X23 20X24 20X25

R R R R
Undiscounted lease payments 71 475 71 475 71 475 -
Unearned finance income (25 684) (18 357) (9 859) -
Net investment in leases 45 791 53 118 61 616 -
4. Profit before tax 20X22

R
Profit before tax is stated after taking the following into account:
Income
Finance income on net investment in finance lease [C8] 32 000
Expenses
Finance costs [C4] 154 719
Depreciation 244 516
Total depreciation (40 516 [C7] + 326 400 [C5]) 366 916
Depreciation capitalised [C6] (122 400)
CALCULATIONS
C1. Step 1: Calculate interest rate implicit in the lease

N=5
PV = 2 078 000 (2 070 000 + 8 000 lessor’s initial direct costs)
PMT = 496 000
FV = 300 000
I = 9,79747%
C2. Step 2: Calculate the present value of the lease liability at commencement date
N=5
I = 9,79747%
PMT = 496 000
FV = 0
PV = 1 889 999
C3. Step 3: Calculate right-of-use-asset R

Initial measurement of the lease liability 1 889 999
Value added tax (2 070 000 x 15/115) (270 000)
Initial direct costs of the lessee (commission paid by Ultra Speed Ltd) 12 000
1 631 999
26
C4. Step 4: Prepare the amortization table
Interest @ Closing
Instalments 9,79747% Capital balance
R R R R
1 April 20X20 1 889 999

31 March 20X21 496 000 a
185 172 310 828 1 579 171
31 March 20X22 496 000 b
154 719 341 281 1 237 890
31 March 20X23 496 000 c
121 282 374 718 863 172
31 March 20X24 496 000 84 569 411 431 451 741
31 March 20X25 496 000 44 259 451 741 -
2 480 000 590 001 1 889 999
a
1 889 999 x 9,79747%
b
1 579 171 x 9,79747%
c
1 237 890 x 9,79747%
C5. Calculation of depreciation and carrying amount of right-of-use asset

R
Right-of-use asset at inception of the lease [C3] 1 631 999
Depreciation for the year ended 31 March 20X21 (1 631 999/5 years) (326 400)
Carrying amount at 31 March 20X21 1 305 599
Depreciation for 20X22 (1 631 999/5) (326 400)
Carrying amount at 31 March 20X22 979 199
C6. Calculation of cost of plant R

Construction costs (1 101 722 x 100/115) 958 019
Depreciation on right-of-use asset capitalised ((326 400 x 9/12 x 50%) 122 400
Cost of plant at 1 January 20X22 1 080 419
C7. Calculation of depreciation and carrying amount of plant R

Cost at 1 January 20X22 1 080 419
Depreciation for 20X22 (1 080 419 x 15% x 3/12) (40 516)
Carrying amount at 31 March 20X22 1 039 903
C8. Present value of finance lease
Present value of lease at 16% per annum:

N= 4
I= 16% per annum
PMT = 71 475
FV = 0
PV = R200 000 (Fair value of the leased asset plus initial direct cost of the lessor)
27
Therefore, the amortisation table must be prepared based on R200 000 with an interest rate of 16% per
annum.
Interest @
Installment 16% Capital Balance
R R R R
1 April 20X21 - - - 200 000
31 March 20X22 (71 475) 1
32 000 2
39 475 160 525
31 March 20X23 (71 475) 3
25 684 4
45 791 114 734
31 March 20X24 (71 475) 5
18 357 6
53 118 61 616
31 March 20X25 (71 475) 7
9 859 8
61 616 -
1
200 000 x 16% = 32 000
2
71 475 – 32 000 = 39 475
3
160 525 x 16% = 25 684
4
71 475 – 25 684 = 45 791
5
114 734 x 16% = 18 357
6
71 475 – 18 357 = 53 118
7
61 616 x 16% = 9 859
8
71 475 – 9 859 = 61 616
The net investment in finance lease on 31 March 20X22 = R160 525, but R45 791 is receivable within
12 months and thus a current asset and the balance of R114 734 (R160 525 – R45 791) is a non-current
asset.
b) Calculate the deferred tax balance in the accounting records of Super Speed Ltd as at
31 March 20x22.
Deferred
tax Asset/
Carrying Temporary (Liability)
amount Tax base Differences @27%
R R R R
Right-of-use asset 979 199 - 979 199 (264 384)

Lease liability (1 237 890) a
(162 000) (1 075 890) 290 490
Land 1 000 000 Exempt Exempt -
Plant 1 039 903 b
574 811 465 092 (125 575)
(99 469)
2 070 000 x 15/115 x 3/5

a
958 019 x 60% OR [958 019 – (958 019 x 40%)]

b
28
c) Extract of the statement of financial position of Super Speed Ltd for the year ended
31 March 20X22
SUPER SPEED LTD

EXTRACT OF THE STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X22
ASSETS
Non-current assets Note
Property, plant and equipment 1 2 039 903
Right of use asset 2 979 199
Lease receivable / Net investment in finance lease 3 114 734
Current assets
Lease receivable / Net investment in finance lease 3 45 791
EQUITY AND LIABILITIES

Non-current liabilities
Non-current portion of lease liability 2 863 172
Deferred tax 99 469
Current liabilities
Current portion of lease liability 2 374 718
29
RFed Ltd is a manufacturer and retailer of various types of sports equipment.

The financial manager has prepared the draft annual financial statements of RFed Ltd for the year ended
29 February 20X20. Your assistance is required to finalise these draft annual financial statements
according to the requirements of International Financial Reporting Standards (IFRS).
The profit before tax of RFed Ltd for the year ended 29 February 20X20 amounted to R1 250 000,
including, inter alia, the following items:
Income R
Dividends received – South African listed companies .................................... ……. 224 000
Foreign income – United Kingdom (refer 3) …… ................................................... 600 000
Expenses
Depreciation (refer 1) (correctly calculated and accounted for) .............................. 769 200
Building ............................................................................................................. 113 200
Machinery ......................................................................................................... 416 000
Delivery vehicles ............................................................................................... 240 000
Additional information
1. Property, plant and equipment

The following information pertains to all the assets of RFed Ltd on 29 February 20X20:
1.1. Machinery
The machinery of RFed Ltd consists of Machine Nadal and Machine Djokovic. Details are as follows:
On 1 March 20X18 Machine Nadal and Machine Djokovic were acquired for R1 600 000 and
R1 400 000 respectively. On this date both machines were available for use, as intended by
management, and also brought into use.
On 1 December 20X19, RFed Ltd sold Machine Nadal for R1 800 000 as a result of the
discontinuance of the manufacturing of racket strings by RFed Ltd. On 1 December 20X19, the
carrying amount of Machine Nadal amounted to R1 088 000. The sale of Machine Nadal has not
yet been recorded in the accounting records of RFed Ltd for the year ended 29 February 20X20.
The carrying amount and tax base of Machine Djokovic on 29 February 20X20 amounted to
R896 000 and R840 000, respectively.
The machinery is depreciated according to the diminishing balance method at 20% per annum. On
acquisition date a residual value of Rnil was allocated to machinery. The expected useful lives and
residual values of machinery remained unchanged throughout the period.
1.2. Delivery vehicles
On 1 March 20X18, RFed Ltd acquired all the delivery vehicles at a cost of R1 060 000. On this
date, the delivery vehicles were available for use as intended by management, and also brought
into use.
The delivery vehicles are depreciated according to the straight-line method over the estimated
useful life of 4 years. The residual value of the delivery vehicles remained unchanged at R100 000
throughout the period.
The tax allowance on the delivery vehicles in terms of section 11(e) of the Income Tax Act, is 4 years
according to the straight-line method, apportioned for a part of a year.
30
1.3. Property in Rosebank
On 1 March 20X17, RFed Ltd acquired a property in Rosebank at a cost of R4 500 000 (land:
R1 500 000; building: R 3 000 000). RFed Ltd uses this property for its own business operations.
After the acquisition, the building was renovated and the property was then available for use, as
intended by management, and brought into use on 1 September 20X17. The following renovation
costs were incurred:
R
Architect fees ......................................................................…………………… 100 000
Fuel used to transport building materials to site ..................…………………… 40 000
Building materials and labour ..............................................…………………… 1 690 000
The building has an estimated useful life of 25 years and a residual value of R2 000 000 was
allocated to it. The useful life and residual value of the building remained unchanged throughout the
period. Depreciation on the building is provided for according to the straight-line method over the
estimated useful life of the building. This property was correctly accounted for in the accounting
records of RFed Ltd.
The SA Revenue Service provides an annual allowance of 5% on the building according to section
13quin of the Income Tax Act, on the straight-line method, not apportioned for a part of the year.
1.4 Land and buildings, machinery and delivery vehicles are accounted for according to the cost model.
1.5 Except for Machine Nadal no other assets were acquired or sold during the current financial year.
2. Allowance for credit losses
The SA Revenue Service allows 25% of the allowance for credit losses as a tax deduction. In the
previous financial year RFed Ltd made no allowance for credit losses because the company had no
credit sales. The estimated credit losses for the current year amounted to R300 000 and have not
been recorded in the accounting records of RFed Ltd for the year ended 29 February 20X20.
3. Taxation
3.1 Current tax
The balance of the “SA Revenue Service – current tax” account in the general ledger of RFed Ltd,
prepared by a newly appointed trainee accountant, consisted of the following:
R
Balance – 1 March 20X19 (relating to current tax due in respect of 20X19)........ 140 000
Foreign tax paid.................................................................................................. (40 000)
1st Provisional tax payment in respect of 20X20 financial year (52 000)
(30 September 20X19) ......................................................................................
Interest paid on late payment of 1st Provisional tax in respect of 20X20 financial (8 000)
year (30 September 20X19) ..............................................................................
Final payment in respect of current tax due according to 20X19 tax assessment
(30 November 20X19) ....................................................................................... (120 000)
2nd Provisional tax payment in respect of 20X20 financial year (36 000)
(29 February 20X20)
Balance – 29 February 20X20 ............................................................................ (116 000)
31
3.2 Deferred tax
The SA normal tax rate changed from 28% in previous years to 27% in 20X20. The capital gains
tax inclusion rate is 80%. The deferred tax asset balance on 28 February 20X19 amounted to
R46 922, which you can assume to be correct.
Deferred tax is provided for on all temporary differences in accordance with the statement of
financial position approach. The only temporary or exempt differences are those resulting from the
information given in the question. The company will have sufficient taxable profits and capital gains
in the future, against which any unused tax losses can be utilised.
Assumptions
• Assume all amounts are material.

• Ignore the implications of value added tax (VAT).
REQUIRED:
Marks
a) Calculate the correct profit before tax in the statement of profit or loss and other 2½
comprehensive income of RFed Ltd for the year ended 29 February 20X20, taking into
account all the above-mentioned information.
b) Calculate the deferred tax balance in the statement of financial position of RFed Ltd for 13½
the year ended 29 February 20X20, using the statement of financial position
approach. Indicate if the balance is a deferred tax asset or liability.
c) Disclose the income tax expense note, including the tax rate reconciliation, to the 16
annual financial statements of RFed Ltd for the year ended 29 February 20X20.
Use the profit before tax in the statement of profit or loss and other comprehensive
income as calculated in (a) above, as your starting point to calculate current tax.
The movement in temporary differences in the current tax calculation should be

calculated using the statement of financial position approach.
d) Disclose the property, plant and equipment note to the annual financial statements of 8
RFed Ltd for the year ended 29 February 20X20.
Standards.
Please note:
Standards.
Round off all calculations to the nearest Rand.
Show all calculations.
Comparative figures are required.
No other notes are required.
No accounting policy notes are required
[40]
32
a) Calculation of the correct profit before tax for the year ended 29 February 20X20
R
Profit before tax (given) 1 250 000
Profit on sale of machinery (1 800 000 – 1 088 000) 712 000
Credit losses (300 000)
Interest paid (8 000)
Adjusted profit before tax 1 654 000
b) Calculation of the deferred tax balance of RFed Ltd for the year ended 29 February 20X20
Taxable/ Deferred
(deductible) tax asset /
Carrying Tax Temporary (liability) @
Amount base difference 27%
20X20 R R R R
Land 1 500 000 1 500 000 - -
Building 4 547 0003 4 105 5004 441 500 (119 205)
Machine Djokovic 896 000 840 000 56 000 (15 120)
Delivery vehicles 580 000 530 0005 50 000 (13 500)
Allowance for credit losses 300 000 75 000 (225 000) 60 750
(300 000 x 25%)
Deferred tax liability 322 500 (87 075)
Movement in temporary differences (322 500 + (46 922 / 28%)) 490 079
1. Cost of building: 3 000 000 + 100 000 + 40 000 + 1 690 000 = 4 830 000
2. Accumulated depreciation: (4 830 000 – 2 000 000) / 300 x 30 = 283 000
3. Carrying amount: 4 830 0001 – 283 0002 = 4 547 000
4. Tax base: 4 830 000 – (4 830 000 x 5% x 3) = 4 105 500
5. Tax base: 1 060 000 – (1 060 000 / 4 x 2) = 530 000
c) Calculation of current tax by RFed Ltd to the SA Revenue Services for the year ended
29 February 20X20:
R
Profit before tax 1 654 000
Exempt differences (856 000)
Foreign Income (600 000)
Interest paid 8 000
Dividends received (224 000)
Capital profit on sale of machine (1 800 000 – 1 600 000) x (100% - 80%) (40 000)
Profit after exempt differences 798 000
Movement in temporary differences - taxable (322 500 + (46 922 / 28%) (490 079)
Taxable income 307 921
Current tax (307 921 x 27%) 83 139
33
RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20X20
Income tax expense

Major components of tax expense
20X20
R
Current tax expense – current year 63 139
- current year 83 139
- over provision prior year (140 000 - 120 000) (20 000)
Deferred tax expense – current 133 997
- current year (46 922 -1 676 + 87 075) or (490 079 x 27%) 132 321
- rate change (46 922 x 1/28) 1 676
Foreign tax 40 000
237 136
Tax rate reconciliation
Standard tax rate (1 654 000 x 27%) 446 580

Adjusted for exempt differences
Dividends received (224 000 x 27%) (60 480)
Interest on tax (8 000 x 27%) 2 160
Capital profit on sale of machinery (40 000 x 27%) (10 800)
Overprovision 20.19 (140 000 – 120 000) (20 000)
Rate change 1 676
Foreign income (600 000 x 27%) – 40 000 (122 000)
Effective tax rate 237 136
d)
RFED LTD
NOTES FOR THE YEAR ENDED 29 FEBRUARY 20X20
Property, plant and equipment

Delivery
Land Building Machinery Vehicle
R R R R
Carrying amount at the beginning of the
year 1 500 000 4 660 200 2 400 000 820 000
Cost / Gross carrying amount 1 500 000 4 830 0001 3 000 000 1 060 000
Accumulated depreciation - (169 800)2 (600 000)3 (240 000)
Depreciation (given) - (113 200) (416 000) (240 000)
Disposal - - (1 088 000) -
Carrying amount at the end of the year 1 500 000 4 547 000 896 000 580 000
Cost / Gross carrying amount 1 500 000 4 830 000 1 400 000 1 060 000
Accumulated depreciation - (283 000) (504 000) (480 000)
1. 1 600 000 + 1 400 000 = 3 000 000

2. Accumulated depreciation: (4 830 000 – 2 000 000) / 300 x 18 (6 + 12) = 169 800
3. Accumulated depreciation machinery = (1 600 000 + 1 400 000) x 20% = 600 000
©
Unisa 2024
34

FAC3764 - 2024 - Study Pack 1

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FAC3764/2024/Study pack 1

Department of Financial Accounting

- The conceptual framework for financial reporting;

- The conceptual framework for financial reporting;

2 LECTURERS AND CONTACT DETAILS

Lecturers Telephone number

Itani Phaduli 012 429 3232

Dumazile Selela 012 429 4844

Mothebudi Seabi 012 429 4677

QUESTION 1 (26 marks) (47 minutes)

The discussion must be supported with calculations.

b) Discuss the accounting (recognition and measurement) and ethical 3

Your answer must comply with the requirements of International

a) Accounting treatment of transaction 1.1 and 1.2

The performance obligation can be satisfied at a point in time or over time.

The total performance obligations for transaction one is: 10 + 10 = 20.

The transaction price is allocated as follows:

b) Accounting and ethical considerations of transaction 1.3

When deciding whether to recognise revenue, we consider the following:

Date Details Debit Credit

The terms of the lease agreement were as follows:

• The lease will commence on 1 December 20X22.

Diamond Lodge Limited

C1 – Interest rate implicit in the lease

C2 – finance income for the 6 months ending 31 May 20X23

Date Opening Interest at Closing

To: Chief financial officer

QUESTION 2: Suggested solution

Potential to produce economic benefits.

Therefore, the pre-payment meets the definition of an asset.

Relevant information / Relevance

Therefore, the pre-payment meets the recognition criteria.

QUESTION 2: Suggested solution (continued)

Diamond Lodge Limited

Profit before tax

C1 – Investment property cost:

C3 – Profit on exchange of asset

Carrying Tax Exempt Temporary Deferred tax

Finance lease receivable 1

Prepaid expenses 100 000 100 000 - - -

370 000 - (370 000/4 x 6/12) = 323 750

• All amounts are material.

Accounting policy notes are not required.

The following indicators of control were met:

• ToysRMe has fully paid for the toy figurines.

• The reason for the bill-and-hold arrangement must be substantive.

• The product must be identified separately as belonging to the customer.

Revenue of the toy figurines should therefore be recognised on 1 November 20X22.

Jnl 2 Depreciation (P/L) 390 000

Jnl 3 Bank (SFP) 557 500

Jnl 4 Cost of sales (P/L) (800 x 500) 400 000

Jnl 5 Income received in advance/contract liability (SFP) 38 333

Alternative to Jnl 3 and Jnl 5

The following items were specified in the lease agreement:

Commencement date of lease ....................................................................................... 1 April 20X20

Land and Plant

Commencement of agreement .................................................. 1 April 20X21

SA Normal Tax rate................................................................................................................................. 27%

SUPER SPEED LTD

1. Property, plant and equipment

Land Plant Machinery

2.1 Right of use assets – Equipment

Carrying amount at the beginning of the year [C5] 1 305 599