QUESTION 1 Page 1 of 2

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1 QUESTION Page of 2 Part The following information pertains to Free Willy Ltd for the year ended 30 June 20.6:. On July 20.4 the board of Free Willy Ltd decided to revalue machinery in future on a gross replacement value basis. The machinery is revalued annually on July by Mr Jaws, a sworn appraiser. The following information in respect of the machinery is available: R Cost ( July 20.3) Taxation value ( July 20.5) Gross replacement value ( July 20.4) The machinery is depreciated over its estimated useful life of 0 years. Assume that there will be no residual value. 3. The SARS grants a wear and tear allowance of 5% per annum on the straight-line method. 4. On July 20.5 the gross replacement value amounted to R and the remaining useful life was estimated to be 0 years. 5. It is company policy to realise revaluation surpluses annually as the relevant asset is used. At the present time there is no intention to sell the asset. 6. Two years ago the company began research on a product that can prolong the shelf life of fresh produce. The research was completed on 30 September 20.5 and on October 20.5 the company commenced with the development of the product. The total marketable units is estimated to be and units of the product has already been sold at year-end. The following costs were incurred for the year ended 30 June 20.6: R Research costs (income nature) Development costs (capital nature) Management is of the opinion that the development costs comply with the asset recognition criteria. Development costs are amortised on the basis of units sold compared to total marketable units. 8. As a result of more competition management estimate that the remaining units will be sold in equal volumes over the next four years at a reduced profit of 60c per unit. The appropriate rate for this type of asset is 4% after tax. The fair value for this type of asset does not exist. You may assume that for this type of asset SARS allow a write off over 4 years not pro-rated. 9. During the year ended 30 June 20.5 Free Willy Ltd made a provision for guarantee of R The new auditors felt that the provision was understated by R and Free Willy has agreed to increase by this amount for the year ended 30 June Free Willy changed its accounting policy for valuing inventory from FIFO to Weighted Average at the end of the 20.6 year. The following table represents the values using both bases. No figures presented have taken into account the change in accounting policy FIFO bases Weighted average During the year a motor vehicle with the same carrying value and tax value was sold and a profit of a capital nature of R was made.

2 QUESTION Page 2 of 2 2. It is the policy of Free Willy to make provision for account receivables of 5% of the balance at year end. The accounts receivable balance was R at 30 June 20.5 and R at June In terms of s(i) SARS allows 25% off list of doubtful debts. 3. Free Willy purchased office equipment in terms of a financial lease agreement. The details of which are: Cost price of machinery: R4 000 (including VAT) Date of commencement: July 20.4 Lease term: 5 years Installment payable in arrears: R p.a (including VAT) on 30 June Useful life: 5 years Interest rateis 9,905% Wear & tear: 25% (4 years straight line) The repayment has already been worked out which you can assume to be correct. The interest for the year ended 30 June 20.5 was R 292, for the year ended 30 June 20.6 was R9 439 and for the year ended 30 June 20.7 was R Assume a taxation rate of 28% and that there are no other temporary differences other than those evident from the available information. The tax rate in the previous years was 30%. 5. Included in profit before tax is foreign income amounting to R on which R5 000 foreign tax was paid on 5 May Due to double tax agreement the amount is not taxed in South Africa. 6. Ignore VAT and assume that SARS will only recognise the change in accounting policy in the year that the change is made. 7. Free Willy is certain that there is assurance beyond reasonable doubt that there will be sufficient taxable profit, in the future to realise tax benefits. 8. Profit before tax (fully taxable) amounts to R AFTER taking the above-mentioned items into account. YOU ARE REQUIRED TO: Marks Disclose the following notes to the financial statements for the year-ended 30 June 20.6, in accordance with IFRS and the Fourth Schedule to the Companies Act. With regard to the revaluation surplus in part (4) below show the disclosure in the Statement of Comprehensive Income and the Statement of Changes in Equity for the year ended 30 June Comparatives are not required () Profit before tax (2) Tax note to the income statement (SOCI) (3) Tax note to the balance sheet (SOFP) (4) Revaluation Surplus (5) Property, plant and equipment (6) Internally generated intangible assets (7) Finance lease (only the note relating to interest bearing borrowings is required) (8) Change in Accounting policy [4 [23] [7] [5] [0] [5] [5 [7]

3 QUESTION (Suggested Solution) Page of 6 Part NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE Profit before taxation Profit before taxation includes the following items: Expenses Research costs [W2] Development costs - impairment loss [W3] amortised [W3] Depreciation on machinery As previously [W4] Change in estimate [W4] (9 000) Finance lease - Interest Depreciation R / Provision for guarantee The change in estimate was a result of a change in useful life regarding a revaluation. The change in estimate will result in an increase depreciation of R9 000 in future periods. 2 Taxation 2. SA Normal taxation Current [W8] Deferred [W8] Rate change [W] 68 2 Foreign tax Tax reconciliation Profit before tax Tax at 28% Exempt temporary differences Profit on sale of vehicle x 33.3% (2 797) 0.5 Foreign Income (28% of ) (600) 0.5 Tax rate adjustment [W] Deferred Taxation Accelerated wear and tear ( ) x 28% [W] Revaluation ( ) x 28% [W] Development Costs ( x 28%) [W9] Account receivable (8 750 x 28%) [W9] (5 250).5 Finance lease ( ) x 28% [W9] ( 772).5 Provision ( x 28%) (36 400) Cr

4 QUESTION (Suggested Solution) Page 2 of 6 4. Statement of Comprehensive Income for the year ended 30 June 20.6 Other comprehensive income Gain on property [W] 28% (20 000) Total comprehensive income for the year ended Statement of Changes in Equity for the year ended Revaluation earnings Retained earnings Balance at 30/6/20.5 [W] % (90 000) - 70% (0 000) XXX Other comprehensive income for the year - Transfer to retained earnings [W] ( )/0 (4 240) XXX 5. Property, plant and equipment Machinery R Carrying amount at beginning of year Gross carrying amount Accumulated depreciation (80 000) Additions [W6] - Interest capitalised - Revaluation [W] Depreciation (76 000) Carrying amount at end of year Gross carrying amount Accumulated depreciation (76 000) Remaining useful life 9 years Machinery is revalued annually on July by Mr Jaws, an independent sworn appraiser, on a gross replacement value basis. If the machinery had been carried at cost less accumulated depreciation, the carrying amount would have been R [W] Internal generated intangible assets - development costs R Capitalised during the year Impairment loss (included in profit before tax) ( 6 430) Amortised (30 000) Unamortised development costs Gross carrying amount Accumulated amortisation & impairment loss (36 430) Development costs are amortised over the estimated marketable units. The impairment loss of R6 430 in respect of development costs results from increased competition and thus lower profits. The recoverable amount is based on the value in use and a discount rate of 20% per annum is used. 2

5 QUESTION (Suggested Solution) Page 3 of 6 7. Non-current liability (Finance lease) Interest bearing borrowings Finance lease ( ) Less: Short erm portion The finance lease is secured by plant and machinery (refer note 3). The lease bears interest at an effective rate of 9.905%. Installments of R are payable in arrears. The final installment is payable of 8. Change in accounting policy During the year the company changed its accounting policy in respect of the valuation of inventories from the first-out method to the weighted average method. This change was effected to ensure fair presentation of the effect of inflation on the company's balance sheet. The change in policy was accounted for retrospectively and comparative amounts have been appropriately restated. The effect on this change is as follows: R R (Increase)/decrease cost of sales (0 000) (Increase)/decrease in tax expense (6 000) Decrease)/increase in net profit (7 000) Decrease in inventory Taxation (2 000) (8 000) Decrease in equity WORKINGS: W. Revaluation of machinery Total Revaluation Historical Taxation Temporary Cost value difference Cost Depreciation - 30/6/.4 (70 000) - (70 000) (05 000) Revaluation Depreciation - 30/6/.5 (80 000) 4 (0 000) (70 000) (05 000) Revaluation Depreciation - 30/6/.6 (76 000) 6 (20 000) (56 000) 7 (05 000) / 0 years = x 5% = / 0 years = = = / 9 years = / 0 years x 2 years = = = / 0 = / 0 =

6 QUESTION (Suggested Solution) Page 4 of 6 W2. Research costs - written off in income statement W3. Development costs Amortised 75 / 625 x (30 000) Carrying value Recoverable amount = / 4 = units per annum x 0,6 = R cash flow per annum PV of R at 20% for 4 years x 2,588 = Impairment Finacial calculator n = 4; i = 20%; PMT = ; PV = W [W] / 8 = [W] = W5. CALCULATIONS: B/S 20.6 I/S 20.6 B/S 20.5 I/S 20.5 B/S 20.4 Weighted average FIFO (40 000) (60 000) (0 000) (50 000) Tax (7 000) (35 000) W =

7 QUESTION (Suggested Solution) Page 5 of 6 W8. Accounting Profit Exempt temporary differences (29 990) - Profit on sale of vehicle x 33.3% Foreign income Temporary difference (84 078) Taxable Income Current tax x 28% Deferred tax x 28% W9. Deferred tax (balance sheet approach) Deferred tax at 30 June 20.5 CV TB TD Machinery Inventory (60 000) Accounts receivable (5 000) Provision for guarantee (05 000) Finance lease Asset Liability ( = 8 708; (84 092) 2 Liability (VAT / 5) = 2 800; (34 092) DT x 30% = Dr Deferred tax at 30 June 20.5 CV TB TD Machinery Development Costs Accounts Receivable (8 750) Inventory Provision for guarantee (30 000) Finance lease Asset Liability = = (66 33) Liability VAT DT x 28% = CR

8 QUESTION (Suggested Solution) Page 6 of 6 W0. Accounts Receivable 20.5 Accounting provision: 5 % of Tax provision: 25% of CV: TB: Accounting provision: 5 % of Tax provision: 25% of CV: TB: W. Deferred Tax 20.5 Balance b/d Balance c/d Revaluation x 28% I/S movement Rate x 2 / OR Deferred tax balance 20.5 Deferred tax on revaluation x 28% Rate adjustment Dr (33 600) Cr (68)Cr Cr Income statement movement (balancing figure) Deferred tax balance Cr

9 QUESTION Page of 2 Part 2 Issue One of Superheroes Ltd's most successful products is the Amazon Girl "2-in- Shampoo and Conditioner". On 3 December 203 Superheroes Ltd sold 0 million bottles of this product to Beautyshop at a price of R8 per bottle. The selling price was settled in cash immediately. The sales agreement however stipulates that Superheroes Ltd will buy each one of these bottles back from Beauty Shop after 3 months, at R20 per bottle. The costs to manufacture one bottle amounted to R5. Superheroes Ltd recognised a profit of R30 million on this transaction in its accounting records. REQUIRED: Briefly discuss the correct accounting treatment of the above issue in the financial statements of Superheroes Ltd for the year ended 3 December 203, in terms of Statements of Generally Accepted Accounting Practice. Marks [8] Note: - Include calculations where applicable; - Ignore tax; - Ignore disclosure requirements; - Ignore the impact on the cash flow statement. Issue 2 You are the partner of the audit of Angel Ltd, a company in the retail sector. While busy with the audit for the year ended 3 December 203, the following came to your attention: On January 20, Angel Ltd entered into an agreement with Scorpion Ltd, in terms of which an office machine was leased from Scorpion Ltd for a period of three years. The annual lease payments were as follows: Date of payment Amount 3 December 20 R December 202 R December 203 R7 000 The interest rate implicit in the lease was 0% per annum. The machine had an economic life of four years. As there was no certainty that ownership of the machine would pass to Angel Ltd at the end of the lease term, the company accounted for the lease as an operating lease equalising the lease payments over the lease term. However, according to your calculations the present value of the above minimum lease payments amounts to substantially all of the fair value of the machine, and therefore the lease is a finance lease and should be accounted for as such. Angel Ltd incurred initial direct costs of R2 000 in negotiating the lease, which were included in other expenses in the income statement for the year ended 3 December 20. Assume a tax rate of 28% and that the company has a recognised deferred tax asset of R

10 QUESTION Page 2 of 2 REQUIRED: Prepare the note on prior period errors as it will appear in the financial statements of Angel Ltd for the year ended 3 December 203. Marks [23] Note: - Ignore VAT, - Round amounts off to the nearest rand, - Your answer should comply with Statements of GAAP Issue 3 Fly Ltd operates an airline between Johannesburg and Cape Town. The company recently introduced a customer loyalty program, in terms of which customers earn air miles when buying tickets. As soon as a customer has accumulated air miles, these miles may be exchanged in return for a free ticket. There is reasonably certainty that all customers will utilise their free air miles. REQUIRED: Briefly explain how the sale of an airline ticket should be accounted for in terms of Statements of Generally Accepted Accounting Practice. If you are of the opinion that there is more than one acceptable accounting treatment, all alternatives should be discussed. Do not address revenue recognition criteria. Marks [4] Issue 4 ONLY LEVEL 2 Houses-for-the-nation Limited is a construction company with a 3 December year-end and issued ordinary shares with a par value of R each. A major part of Houses-for-thenation Limited's income is derived from government contracts for the building of houses for people identified by the Gauteng and Limpopo provincial government. In order to protect their future main source of income, the directors of Houses-for-the-nation Limited decided during July 203 to issue shares in the company to twenty of its previously disadvantaged employees. On August 203 these employees each received ordinary shares, at no consideration, in the company. They are prohibited to transfer these shares for five years. The ordinary shares of Houses-for-the-nation Limited traded at R30 per share on August 203. The fair value of the shares, after the transfer restriction was taken into account, amounted to R23,40 per share on August 203. REQUIRED: Marks Discuss, with reference to Statements of Generally Accepted Accounting Practice, how this transaction should be accounted for in the financial statements of Housesfor-the-nation Limited for the year ended 3 December 203. [4]

11 QUESTION (Suggested Solution) Page of 4 Part 2 Issue Recognition of revenue Recognition of criteria - general Revenue from the sale of goods may only be recognised when (IAS8 par 4): - The amount of revenue can be estimated reliably; [The revenue of the transaction can be measured reliably, namely 0 mil x R8 = R80 mil]. 0,5 - The costs incurred with the transaction can be estimated reliably; [The costs can be measured reliably, namely 0 mil x R5 = R50 mil] 0,5 - It is probable that the economic benefits associated with the transaction will flow to the entity; [There is certainty regarding the inflow of the economic benefits, since the purchase price has already been settled in cash] 0,5 Recognition criteria - focus point: - The seller has transferred all significant risks and rewards of ownership; (The risks and rewards of ownership of the assets are not transferred, since the products will be bought 0,5 back at a fixed price. It makes no difference to Beautyshop (the purchaser) whether the 0,5 price of the product increases or decreases. Superheroes Ltd (the seller) will benefit from an increase in the price, since the bottles, having been bought back, could be sold at the current market price - The seller retains neither continuing managerial involvement nor effective control over the assets. [Inventory that will be bought back at a fixed price on a fixed date effectively constitutes continuing managerial involvement. Therefore the revenue from the sale of the inventory may not be recognised. Treatment of the proceeds received: The sale-and-buy-back transaction represents in essence a financial transaction. The amount which is received from Beautyshop represents a financial liability (if stated only liability then 0,5), since in terms of the contract between Superheroes Ltd and Beautyshop, there is a contractual obligation on Superheroes Ltd to deliver an amount of R200 million in cash after 3 months. Thus, this liability should initially be recognised in the balance sheet at fair value and should 0,5 thereafter be carried at amortised cost. 0,5 Max 8

12 QUESTION (Suggested Solution) Page 2 of 4 Issue 2 Angel Ltd Notes for the year ended 3 December 203 Prior period error Correction of error relating to a finance lease which was incorrectly accounted for as an opening lease. The opening balance of equity at the beginning of 202 was adjusted, while the comparative amounts were restated accordingly. The effect of the correction of this error on the results of 20x6 was as follows: 202 R Increase in finance costs [W] (2 496) 2 Decrease in other expenses [W4] 740 2,5 Decrease in tax expense [ ) x 28%] 2,5 Decrease in profit for the period (545) Increase in finance lease liability [W] (5 455),5 Increase in property, plant and equipment (33 78 [W2] x /3) 260,5 Decrease in accrued lease payments ( ) ,5 Increase in deferred tax asset [( ) x 28%] 54,5 Decrease in equity (4) Adjustment against retained earnings at the beginning of 202 (562 [W5] x 72%) 404 9,5 Total 24 Max 23 CALCULATIONS W. Amortisation table Interest Capital Balance January (a) 3 December (b) (c) (d) 3 December (e) (f) (g) (a) CF (0) = 0 CF () = ,5 CF (2) = ,5 CF (3) = ,5 i = 0 0,5 Therefore NPV = 3 78 (b) 3 78 x 0% = 3 78 (c) = (d) = (e) x 0% = (f) = (g) = Marks transferred to [W5] 3

13 QUESTION (Suggested Solution) Page 3 of 4 W2. Depreciation per annum Present value of minimum lease payments 3 78 Initial direct costs Cost of machine Depreciation (33 78 / 3) 260 0,5 Marks transferred to [W5] 2,5 W3. Equalised lease instalment per annum ( ) / Marks transferred to [W5] W4. Decrease in other expenses - net for 20 Equalised lease instalment [W3] Depreciation [W2] ( 260) 740 Marks transferred to note 2 W5. Adjustment against retained earnings beginning of 20 Equalised lease instalment [W3] Depreciation [W2] ( 260) 2,5 Finance costs [W] (3 78) 3 Initial direct costs Marks transferred to note 8,5

14 QUESTION (Suggested Solution) Page 4 of 4 Issue 3 In terms of IFRIC3 awards credits must be recognised as a separately identifiable component of the sales transactions, with the fair value of the total consideration received or receivable being allocated between the award credits and the other components of the sale. 2 The portion of the revenue relating to loyalty points shall be deferred and recognised on 2 redemption i.e. as soon as the customer has accumulated air miles. The balance of the revenue (revenue from ticket sales - deferred revenue) should be recognised. 2 Max 5 Issue 4 Houses-for-the-nation Limited issued equity instruments for no consideration. IFRIC8 clarifies that IFRS2 also applies to transactions in which the goods or services received as consideration for the equity instruments cannot specifically be identified. IFRS2 therefore applies to the accounting for BEE transactions where the fair value of the cash or other assets received is less than the fair value of the equity instruments granted. The fair value of the equity instruments granted amounts to (20 x x 23.40) R and the consideration received is Rnil. AC503.3 states that the difference between the fair value of the equity instruments (R ) granted and the fair value of the cash (Rnil) received, i.e. the BEE credentials, represents an intangible item that does not meet the definition of an intangible asset. Therefore it does not qualify for recognition as an intangible asset. The difference should be expensed. The expense of R should be recognised in full on August 203, because there are no service considerations and no vesting period applicable on the transaction (the post-vesting transfer restriction is not a vesting condition) Total 6 Max 4

15 QUESTION 2 Page of 0 Part ONLY LEVEL 2 JPR Ltd is a diversified company dealing in merchandise and vehicle spares. JPR Ltd sells merchandise through the internet. A significant portion of the merchandise is manufactured inhouse. About 5% of JPR's merchandise is imported. It has sophisticated computer programs that integrate orders, deliveries and payments. The board of directors of JPR decided to close by (by abandonment) their spare division. Details of which are outlined in WORKING PAPER E500. As a means of expansion JPR Ltd has made a number of acquisitions over the past few years. The accountant of JPR Ltd resigned a few months before year end due to sustained IFRS stress, pressure and subsequently a severe heart attack that required major heart surgery. The audit team was called in and prepared the following WORKING PAPERS that relates to some events or transactions that need to be finalised for the year end 3 December 20. Wherever relevant a discount rate of 2% is applicable. WORKING PAPER A00 B200 C300 E500 E600 DESCRIPTION General information Purchase of imported inventory Acquisition of land and machinery Abandonment of spares division Transactions not yet processed WORKING PAPER A00 General Information The following is an extract from the provisional trial balance of JPR Ltd on 3 December 20. Dr Cr R R Cost of sales Interest paid Operational expenses Sales Included in the INTEREST EXPENSE is interest of R for 2 months ended 3 December 20 incurred on a loan that was used to finance the construction of a plant. The construction of the plant commenced on April 20 and is expected to be completed on 3 August Operational expenses exclude any expenses that may be evident in WORKING PAPER B200, C300, E500 & E The tax rate is 28% and CGT rate is 66.6%. 4. An appropriate discount rate of 2% is applicable. 5. JPR Ltd elects to measure the non-controlling interest of all its subsidiaries at its proportionate share of the acquirees identification net assets at the acquisition date.

16 QUESTION 2 Page 2 of 0 WORKING PAPER B200 Purchase of imported inventory On November 200, the company placed an order (which may not be cancelled) for the acquisition of inventory at a cost of $ On the same date the company entered into a six-month forward exchange contract (FEC) to buy $ The inventory was shipped free on board on 3 January 20. The hedge meets all the hedging criteria, and the designated hedge risks are the changes in the fair value of the firm commitment and the resulting creditor as a result of changes in foreign exchange rates. 70% of the inventory was sold before 3 December 20 (the financial year end of the company). The creditor must be settled in full on May 20. As a result of the strengthening of the Rand against the Dollar the net realisable value of the inventory was R at year-end. It is the policy of the company to treat a firm commitment as a fair value hedge. The following exchange rates applied: Spot rate $ = R Forward rate $ = R November 200 7,60 7,75 (6 month FEC) 3 December 200 7,50 7,62 (5 month FEC) 3 January 20 7,65 7,7 (3 month FEC) May 20 8,00 WORKING PAPER C300 Property, plant and equipment AQUISITION OF LAND On 2 July 200 JPR Ltd acquired land at a cost of R3 million in Midrand. The land was immediately leased to Parking (Pty) Ltd. On July 20, JPR Ltd re-occupied the land for the purposes of using it for parking for its own directors and senior staff. The details in respect of the land is as follows: Fair value at 3 December 200 Fair value at July 20 Fair value at 3 December 20 R3,5m R3,65m R4,00m The above fair values of the land reflects it market value for existing use, based on prices in an active market. For capital gains tax purposes the fair value of the land on October 200 was R3,2m. ACQUISITION OF NEW MACHINERY On July 20 the new machinery was purchased at a cost of R The full purchase price was payable immediately on July 20, but JPR Ltd was experiencing cash flow problems. The seller agreed that 50% of the amount be paid immediately and the remainder at 28 December 20, without charging any interest. This prolonged periods exceeds normal credit terms (actually COD). This machinery was installed and brought into use on July 20 and it is expected that dismantling costs amounting to R will be incurred at the end of its five year useful life.

17 QUESTION 2 Page 3 of 0 WORKING PAPER E500 ABANDONMENT OF SPARES DIVISION During November 20, the board of directors of JPR Limited decided to close down - by abandonment - their vehicle spares division, which represents a major line of business, with effect from 3 March 202. A detailed plan for closing down the division was agreed by the board of directors in terms of which the following actions were taken: * Redundency notices were sent to the staff of the division on the 24 December 20, with redundancy being effective on 3 March 202. Redundancy packages offered to the staff amounted to R3.2 million. * Letters were sent to customers on 28 February 20, warning them to seek an alternative source of supply with effect from April 202. * In addition, this division operates from leased premises and the lease cannot be cancelled nor can the premises be sub-let to another user. The lease term is for another four year subsequent to the closure date of 3 March 202. The annual rental on the leased premises is R per annum (payable in arrears), although the landlord has indicated that he is willing to settle for a penalty payment of two years rental payable on 3 December 20 if the leased property is vacated in its entirety by 3 March 20.2 * JPR Limited estimated that additional operating losses to be incurred prior to the closure will amount to R.6 million. WORKING PAPER E600 JOURNALS NOT YET PROCOSSED Capitalised finance lease On November 20 JPR Ltd leased a computer fro a three-year period at a lease rental of R per annum payable annually in advance. JPR Ltd capitalised this finance leae in its accounting records. The lease agreement reflects a cash cost for the computer of R , VAT of R and finance charges of R On November 20 JPR Ltd paid its first annual rental of R Part 2 ONLY LEVEL 2 On January 200 Eagle Ltd held 80% of the shares in Griffon Ltd. Griffon Ltd owned a warehouse that was built at a cost of R8 million on land acquired at a cost of R2 million and brought into use on 3 December As the warehouse is surplus to current requirements, it has been let to Eagle Ltd on a five year lease. During the 202 financial year rental income of R2 million was received from Eagle Ltd, while Griffon Ltd incurred operating costs of R relating directly to the property. An independent property valuator valued the warehouse at R22 million on 3 December 202. Although the property had not been valued at 3 December 20, the property valuator has estimated the value of the property at that date to have been R20 million. The warehouse was shown at its original cost of R0 million in the 20 statement of financial position.

18 QUESTION 2 Page 4 of 0 Part 3 In order to finalise the financial statements of Junglebook Ltd for the year ended 30 June 20., the following transactions must be considered:. Junglebook Ltd is experiencing fierce competition within the industry. In an attempt to create a new market entry, the company constructed a plant in a sensitive conservation area on the coast of Mexico. The plant was ready for use on December 20.0 and has a useful life of 20 years. There is currently no legislation that requires the company to restore the environmental damage at the end of the period. The company however has a well-know environmental policy of restoring all environmental damage that they cause. The company has a record of compliance in order for the company to keep up a good corporate image. * The directors made no provision for the cost of restoring the environment because they believe that no legal obligation exists. Environmentalists determined that the restoration costs would amount to R at the end of the useful life of the plant. A market related discounted rate is 9% before tax (capitalized monthly). * Due to the high level of wear and tear on the plant, the company expects that components of the plant should b replaced every five years because of technical reasons. The directors provided an amount of R per month to cover the estimated costs. No replacements were required for the financial year ended 30 June 20., but the directors believe that he provision should be included, as components need to be replaced in the financial year ended 30 June Shortly before year-end, an explosion at the plant caused extensive damage, and a worker was seriously injured. The employee indicated shortly after year-end that he is going to submit a claim of R2 million against the company for medical expenses. The legal advisors of Junglebook Ltd are of the opinion that the case against the company will not succeed. On the date that the directors authorized the financial statements for issue, the company had not received any legal action from the employee. The directors are not sure whether any adjustments or disclosure of the claim are required. Assume that this claim of R is material 3. On July 20.0 Junglebook Ltd sold machinery at a cash price of R to a well-know businessman. According to the contract the sale includes a three-year free maintenance plan. It is estimated that the maintenance plan represents 7% of the purchase price. The financial director is unsure about the revenue recognition of this transaction. 4. A trade discount was granted to a client on the sale of inventory. The client settled the full account immediately in cash, and an additional cash discount of 5% was allowed. The financial director is uncertain about the correct accounting treatment of the transaction. 5. Specialised machinery manufactured by Junglebook Ltd was sold to Tarzan Ltd on 25 June 20. under a special contract. The sale was subject to installation the next day. The specific sales agreement provides that Tarzan Ltd has two weeks to recall the contract if they are dissatisfied with the machine s performance. The financial director recognized the income from sales in the financial year ended 30 June 20..

19 QUESTION 2 Page 5 of 0 Part 4 You are an audit manager conducting the audit of Setshoge Medical Equipment (Pty) Ltd ( Setshoge ) for the year ended 3 July 20.. The financial manager of Setshoge has asked you to assist him with a few technical issues.. Leave Setshoge has 50 junior level employees who are in the same salary bracket. Each employee is entitled to 22 days leave per annum of which a maximum of 2 days may be carried forward to the next year, while the rest are forfeited. Employees will not be remunerated for any accumulated leave when they leave the company. In the current year, 90 employees have taken 2 days leave whiles 42 had taken 20 days leave. Of all the employees, 7 employees did not take any leave. On 3 July 20.0 the leave balances of all employees amounted to 0 days each. It is the policy of Setshoge to account for leave firstly from the balance brought forward from the previous year and then from of the current year s entitlement. Management approved a salary increase of 6.75% which came into effect on August The total salary expense for the 50 employees for the 20.0 financial year amounted to R There are 252 working days in a year. It is estimated that 5% of the workforce will resign or retire in the next year before utilizing their leave entitlement. 2. Bonuses It is customary for Setshoge to award its management team with an annual cash bonus equal to 2.5 times their monthly salary. The cash bonus is normally paid in December. The financial manager has indicated that as at 3 July 20., the board had not yet approved the cash bonuses. There are, however, no financial reasons why the bonuses will not be paid. The total salaries of the management team for the 20. financial year amounted to R The management team has used up all its leave entitlement as at 3 July 20..

20 QUESTION 2 Page 6 of 0 Part 5 Julies Mazibuko is a trainee accountant at an audit firm that has branches across South Africa. He has been temporarily assigned to the Technical Department of the firm to expose him to different functions within the audit firm. The Technical Department is responsible for assisting audit teams with queries on financial reporting issues. Julies received the following from the audit senior assigned to the Olympic group of companies. When providing assistance to technical matters you may assume that all current International Financial Reporting Standards (IFRSs) have always been in existence and are currently fully effective. You may also ignore all transitional provisions is any IFRS. From: Thabile To: Julius Date: 5 January 203 Subject: Assistance on the audit of the Olympic group Good day Julius Thank you for your willingness to assist me with a few issues that emerged during the audit of the Olympic group and certain individual companies within the group. Here is the background information that you requested. Our audit firm has been responsible for the audit of the Olympic group the last four years. Olympic Ltd ( Olympic) is listed on the Johannesburg Securities Exchange and the group consists of various companies that operate in several business sectors. The end of the current reporting period for all companies in the Olympic group is 3 December 202. All companies in the group adopted IFRSs a few years ago. Please take the following into account when preparing your comments. * It is the policy of the Olympic group to present items of other comprehensive income as an amount before the related tax effect, with one amount for the aggregate amount of income tax relating to those items (in accordance with par. 9(b) of IAS, Presentation of Financial Statements). * It is the policy of the Olympic group to transfer any realised cumulative gains or losses on instruments classified as at fair value through other comprehensive income to retained earnings, where applicable (in accordance with par and par. B5.7. of IFRS9, Financial Instruments). I also attach (see summary below) some information for purposes of clarity: Attachment name Attachment A Attachment B Attachment C Details Information in respect of the Olympic group and certain companies within the group Information on the financing of Makelt s constructed plant Information on the investments of Investco Regards Thabile

21 QUESTION 2 Page 7 of 0 Attachment A Information in respect of the Olympic group and certain companies within the group The Olympic group is structured as follows: Olympic Ltd 80% 00% Other subsidiaries Makelt Ltd Investco Ltd Operations The operations of the Olympic group are diversified and each company operates solely in its particular sector. The business activities of Olympic are mainly to hold investments in its subsidiaries. Olympic receives dividends from its subsidiaries and distribute them to its shareholders. The group administration function is also housed in Olympic. Olympic has held an 80% interest in Makelt Ltd ( Makelt ) since its incorporation a few years ago. Makelt is a company which manufacturers household appliances. Makelt sells its branded products exclusively to a larte retailer. Investco Ltd ( Investco ) is wholly owned by Olympic. It is a company which invests in various financial instruments. Attachment B Information on the financing of Makelt s constructed plant During 20 Makelt identified the need to expand its operating capacity as a result of a substantial and sustainable increase in the demand for its products. Makelt commenced with the construction of anew plant on January 202 and, as intended by management, the plant was available for use on 30 June 202. The total cost of the plant amounted to R Makelt partly financed the construction of the plant by issuing R0 convertible debentures to the pubic on April 202 at their face value. Interest is payable annually in arrears at a nominal rate of 6% per annum. The maturity date of the debentures is 3 March 206. Each debenture is convertible at the option of the holder into two ordinary shares of Makelt on the date of maturity. Debentures which are not converted into ordinary shares will be redeemed at par value on 3 March 206. On April 202 the prevailing market interest rate for similar debt instruments without conversion rights was 8% per annum. Makelt s shares traded at R4,25 each on April 202. Makelt incurred direct incremental transaction costs of R to issue these instruments. On 3 December 202 the prevailing market interest rate for similar debt instruments without conversion rights was 8,2% per annum. On this date Makelt s shares traded at R4,33 each. The plant does not meet the definition of a qualifying asset as defined in IAS23, Borrowing Costs.

22 QUESTION 2 Page 8 of 0 Attachment C Information on the investment of Investco Name of investment Notes Carrying amount on 3/2/20 Existing investments Listed investment in Medal Ltd R Other listed investments R Money market R New investments made during 202 Convertible preferences shares in Torch Ltd 2 n.a. Options in Goldwinn Ltd 3 n.a. Notes. Investco purchased ordinary shares in Medal Ltd ( Medal ) on November 2006 at R3,40 each. Investco also incurred direct incremental transaction costs of R7 000 at that date. Investco acquired these shares as a long-term investment and expected annual dividends and capital growth in excess of the general increase in inflation. Investco classified this investment as at fair value though other comprehensive income. Investco s investment in these shares never resulted in significant influence, control or joint control over Medal. The fair value of Medal s shares was R5,23 each on 3 December 20. During January and February 202 the fair value of Medal s shares increased significantly due to the company s excellent results as published in its financial statements as well as public announcements regarding expected synergies from new acquisitions concluded by Medal. On 29 February 202 the directors of Investco decided to realize some of the gains resulting from the higher market price of the shares and sold shares in Medal at R5,88 per share. Investco paid capital gains tax on this transaction. At 3 December 202 the money market value of Medal s shares was R5,5 each. 2. On July 202, Investco invested R in Torch Ltd ( Torch ) by acquiring R0 convertible preference shares from Torch. The preference shares are compulsorily convertible on 3 December 205 on the basis of two ordinary shares fro each preference share. Dividends on the preference shares are payable semi-annually in arrears at a nominal rate of 5,75% per annum. In terms of its contract with Investco payment of the preference dividends is compulsory for Torch. On July 202 the prevailing market yield for similar preference shares without conversion rights was 8,36% per annum. Investco incurred direct incremental transaction costs of R 000 on the acquisition of these instruments. The preference shares were acquired by the group for strategic purposes, as Torch is the main supplier of materials used by some of the subsidiaries of the Olympic group. Investo s management does not expect to actively trade the preference shares, but does not necessarily expect to hold all of them to maturity. On 3 December 202 the prevailing market yield for similar preference shares without conversion rights was 8,4% per annum. 3. The directors of Investco have considered ordinary shares of Goldwinn Ltd ( Goldwinn ) to be a viable investment for speculative purposes since 20. On 5 November 202 Investco acquired an option to purchase ordinary shares of Goldwinn at R2,75 per share, when Goldwinn s shares were trading at that price. Investco paid R for the option on 8 November 202. Investco also had to pay a commission of 5% of the purchase price of the option to the broker who negotiated the deal. The option will expire on 5 February 203. On 3 December 202 the option was worth R85 000, at which date Goldwinn s shares traded at R2,97 each.

23 QUESTION 2 Page 9 of 0 Part ONLY LEVEL 2 REQUIRED: Marks (a) Discuss the accounting and tax treatment of the interest. (refer WP A00) [5] (b) Write a report to the chief executive office of JPR Ltd indicating to what extent (if any) the closure of the vehicle spares division should be reflected in the annual financial statements for the year ended 3 December 20. Reasons for the inclusion or non-inclusion of items should be provided in your answer. Ignore all forms of taxation. (refer WP E500) [3] (c) Provide the journal entry for the transaction outlined in WORKING PAPER E600. Also discuss the tax implications of the transactions outlined in WORKING PAPER E600 (d) Calculate the profit before tax that should be disclosed in the Statement of Profit or Loss and OCI for the year ended 3 December 20. (Refer to parts (a) to (c) above, general information and Working Papers A00, B200, C300 and D400 where applicable) [3] [6] (e) Use the balance sheet approach (SOFP) and calculate the deferred tax balance at 3 December 20 for each of the following categories and in each case indicate whether there is a DTA or DTL e.g: CV TB TD DT DTA or DTL Asset x 30% 5,6 DTL (i) the imported inventory (refer WP B200) (ii) the machinery (refer WP C300) (iii) the provison (refer WP C300 & E500) [7] Part 2 ONLY LEVEL 2 REQUIRED Marks Discuss the appropriate accounting treatment of the warehouse in the annual financial statements of Griffon Ltd AND the group financial statements of Eagle Ltd for the financial year ended 3 December 202. Discuss the definition of an investment property and the effect of adopting the requirements of IAS40. Ignore note disclosure as well as any deferred tax implications. [0] Part 3 ONLY LEVEL REQUIRED Marks Prepare a memorandum explaining the accounting treatment of each of the five issues [25]

24 QUESTION 2 Page 0 of 0 Part 4 ONLY LEVEL REQUIRED Marks (a) Calculate the leave balance accrual of Setshoge Medical Equipment (Pty) Ltd for the year ended 3 July 20. [5] (b) Discuss how Setshoge Medical Equipment (Pty) Ltd should account for the management bonuses on 3 July 20.. [5] Communication skills logical flow and conclusion Please note: [] * Journal narrations are not required * Ignore the effects of taxation * Ignore comparative amounts * Round all amounts to the nearest Rand * Your answer must comply with International Financial Reporting Standards Part 5 REQUIRED: (a) Prepare the journal entries that should have been processed with regard to the separate financial statements of Makelt in respect of the convertible debentures for the financial reporting period ended 3 December 202. Ignore taxation. Communication skills presentation Marks [0] [] (b) Prepare the journal entries that should have been processed with regard to the separate financial statements of Investco in respect of the investment in Medal and the sale of the shares for the financial reporting period ended 3 December 202. Communication skills presentation [4] [] (c) Prepare an internal memo to advise the audit senior of Investco on the correct classification, recognition and measurement of the investment in the convertible preference shares in Torch, in the separate financial statements of Investco for the financial reporting period ended 3 December 202. Ignore taxation. Communication skills structure; logical argument [0] [2] Part 5 (d) below ONLY LEVEL 2 (d) Discuss the correct classification, recognition and measurement of the option to acquire ordinary shares in Goldwinn, in the separate financial statements of Investco for the financial reporting period ended 3 December 202. Ignore taxation. Communication skills clarity of expression [5] [] Total [44]

25 QUESTION 2 (Suggested Solution) Page of 7 Part ONLY LEVEL 2 (a) Accounting treatment of Interest The interest of R included in the interest expense is overstated. The statement on capitalisation of borrowing cost (IAS23) requires that borrowing cost incurred on a qualifying 0,5 asset should be capitalised. A qualifying asset is an asset that takes a substantial period of time before it is ready for its 0,5 intended use. The plant will take at least 8 months before it is ready for use and is thus a 0,5 qualifying asset. The interest of R8 750 (R x 9/2) should be capitalised to the asset and the balance should be expensed in the SOCI. 0,5 (Note: This is a specific loan taken out on January 20. The construction of the plant 0,5 commenced on April 20. Therefore interest in the st 3 months is expensed.) The interest that is capitalised to the asset will be depreciated over the life of the asset as soon as the asset is brought into use. 0,5 There may be a risk that the asset may be over capitalised. An impairment test through IAS36 should be done and if the carrying value exceeds the recoverable amount the 0,5 difference should be written off to the SOCI. 0,5 From a tax perspective however, capitalisation is prohibited. The interest incurred will not be 0,5 allowed as a deduction as the asset is not yet in use, therefore not in the production of Income. 0,5 In the year that the plant is brought into use the cumulative interest will be allowed as deduction only if sa (pre-trade expenditure) applies. Any interest incurred after the plant is brought into use will be deducted under s(a) read with s24j A deferred tax liability will arise as the CV of the asset will exceed the TB Max 5 (b) Report TO: CHIEF EXECUTIVE OFFICER - JPR LIMITED REPORT ON VEHICLE SPARES DIVISION CLOSURE 0,5 * I represent below an assessment of the accounting implications of the above closure on the year ended 3 December 20 financial statements. * IAS37 defines "restructuring" as a programme that is planned and controlled by management, and materially changes either the scope of the business undertaken by an enterprise, or the manner in which that business is conducted. Typically such a provision is made in respect of a 'downsizing' caused by adverse trading circumstances. * A provision for restructuring (constructive obligation) may only be realised where: 0,5 - the enterprise has a detailed formal plan for the restructuring identifying part of the business, location and number of employees affected, as well as the cost and timing of the obligation. 0,5 - has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected. 0,5