Fac3702 Exam Pack.

FAC3702 EXAM PACK. Financial Reporting. IAS Limited is a manufacturing concern that handles a great number and variety of Inventory in the manufacturing process. To effectively manage the Inventory the board of directors has decided to buy a sofisticated Inventory management software system which was placed in the market by a system developer from Italy. On 2 January 2014 IAS Limited applied for a licence for the right to use the software system. On 15 March 2014 the licence was awarded to IAS Limited and it was invoiced on that date for the amount of €50 000. The system was installed for a further amount of R5 000 and brought into use on 1 April 2014. The expected useful life of the licence is 5 years with no residual value. The licence would be amortised over this period on the straight-line method. The amortisation cost should be included in manufacturing costs. IAS Limited must pay the amount owing of €50 000 on 15 January 2015 and to hedge itself against unfavourable fluctuations in the exchange rate the company entered into a forward exchange contract (FEC) in respect of this liability for the period from 15 March 2014 until 15 January 2015. According to the licence contract IAS Limited has to pay royalties at the end of each year to the amount of €10 000 to the Italian developer. For the year ended 31 December 2014 the amount is allocated pro rata for the period during which the system was in use. No forward exchange contract was taken out on the royalty payable at year-end since the contract stipulates that it should be translated at the average rand/euro exchange rate for the particular period and IAS Limited considers that to be sufficient cover against exchange rate fluctuations. Additional information 1. The documented risk management strategy for foreign currency risks of IAS Limited provides for the following: ● exposure to fluctuations in foreign exchange rates are to be hedged by means of forward exchange contracts (except where royalties are paid on the average exchange rate of the period) ● hedge effectiveness is to be assessed on an on-going cumulative basis from the inception of the hedge by comparing the offsetting effects of gains or losses arising from fluctuations in spot exchange rates to those arising from changes in the fair value of forward exchange contracts designated in their entirety. 2. The exchange rates on the relevant dates were as follows: 15 March 2014 01 April 2014 31 December 2014 15 January 2015 Spot rate €1 = R 8.10 8.02 7.95 8.00 FEC ending on 15 January 2015 €1 = R 8.15 8.08 7.98 - The average exchange rate for the period 1 April 2014 to 31 December 2014 was R7.97 to the euro. 65 FAC3702/101 © 2015 Together We Pass. All rights reserved. REQUIRED: 1. Name 3 conditions of hedging to which a transaction must comply before hedge accounting may be applied. (3) 2. Prepare the journals in the accounting records of IAS Limited to account for all the foreign currency transactions up to settlement of the liability on 15 January 2015. IAS Limited complied with the required criteria to use hedge accounting throughout the reporting period. Show calculations for each journal. No journal descriptions are required. Dates of entry must be indicated. (15½) 3. Disclose the following notes to the annual financial statements of IAS Limited for the year ended 31 December 2014: ● profit before tax ● intangible assets ● financial instruments (14½) Your answer must comply with the requirements of Generally Accepted Accounting Practice. No comparative figures are required. Ignore any tax implications. © 2015 Together We Pass. All rights reserved. QUESTION 5 Swiss Limited distributes household appliances in Durban, Johannesburg and Cape Town. Due to losses in the Durban branch the board of directors formally decided on 31 December 2014 to discontinue and dispose of the operations of this branch and publicly announced their decision on that date. On the same date a binding sales agreement was entered into with a buyer at arm’s length in terms of which all of the assets and accompanying liabilities of the branch would be sold for the amount of R300 000 and would be transferred on 31 January 2015. The Durban branch was previously reported in the Durban segment. The following information relates to the different branches for the year ended 31 December 2014: Revenue Cost of sales Other expenses Direct costs of discontinuance - actual Direct costs of discontinuance - provision Durban R 120 000 (85 000) (55 000) (15 000) (12 000) Cape Town R 680 000 (400 000) (130 000) - - Johannesburg R 650 000 (380 000) (90 000) - - On 31 December 2014 the carrying amounts of the assets and liabilities of the Durban branch were as follows: Equipment Inventory Trade receivables Trade payables R 290 000 75 000 50 000 (70 000) 345 000 Additional information 1. The sales contract specified the following: ● obsolete inventory to the amount of R5 000 must be written off against the carrying amount; ● credit losses (bad debts) to the amount of R10 000 must be written off against the carrying amount; ● any provision regarding the discontinuance will be taken over by the buyer. 2. The income tax rate is 30%. The South African Revenue Service will allow all direct discontinuance costs as deduction, but only in the year of payment. The write down of obsolete inventory and Credit Losses will also be allowed as deductions against income. 3. On 31 December 2014 the assets and liabilities of the Durban branch met all the requirements to be classified as a disposal group. 4. Included in “Other expenses” of the continuing branches is depreciation on assets to the amount of R52 000. The wear and tear on these assets for the current year amounted to R45 000. There is no temporary difference between the depreciation and wear and tear of the assets of the discontinued branch. © 2015 Together We Pass. All rights reserved. 5. Deferred tax is provided for on all temporary differences according to the statement of financial position method. There are no other temporary differences which could give rise to deferred tax except those evident from the question. Swiss Limited will have sufficient taxable income in future against which any arising deferred tax asset could be utilised. REQUIRED: (a) Prepare the statement of comprehensive income, and (b) the following notes to the annual financial statements of Swiss Limited for the year ended 31 December 2014: 1. Income tax expense 2. Disposal group. Your answer must comply with the requirements of Generally Accepted Accounting Practice. Comparative notes are not required. © 2015 Together We Pass. All rights reserved. QUESTION 5 Swiss Limited distributes household appliances in Durban, Johannesburg and Cape Town. Due to losses in the Durban branch the board of directors formally decided on 31 December 2014 to discontinue and dispose of the operations of this branch and publicly announced their decision on that date. On the same date a binding sales agreement was entered into with a buyer at arm’s length in terms of which all of the assets and accompanying liabilities of the branch would be sold for the amount of R300 000 and would be transferred on 31 January 2015. The Durban branch was previously reported in the Durban segment. The following information relates to the different branches for the year ended 31 December 2014: Revenue Cost of sales Other expenses Direct costs of discontinuance - actual Direct costs of discontinuance - provision Durban R 120 000 (85 000) (55 000) (15 000) (12 000) Cape Town R 680 000 (400 000) (130 000) - - Johannesburg R 650 000 (380 000) (90 000) - - On 31 December 2014 the carrying amounts of the assets and liabilities of the Durban branch were as follows: Equipment Inventory Trade receivables Trade payables R 290 000 75 000 50 000 (70 000) 345 000 Additional information 1. The sales contract specified the following: ● obsolete inventory to the amount of R5 000 must be written off against the carrying amount; ● credit losses (bad debts) to the amount of R10 000 must be written off against the carrying amount; ● any provision regarding the discontinuance will be taken over by the buyer. 2. The income tax rate is 30%. The South African Revenue Service will allow all direct discontinuance costs as deduction, but only in the year of payment. The write down of obsolete inventory and Credit Losses will also be allowed as deductions against income. 3. On 31 December 2014 the assets and liabilities of the Durban branch met all the requirements to be classified as a disposal group. 4. Included in “Other expenses” of the continuing branches is depreciation on assets to the amount of R52 000. The wear and tear on these assets for the current year amounted to R45 000. There is no temporary difference between the depreciation and wear and tear of the assets of the discontinued branch. © 2015 Together We Pass. All rights reserved. 5. Deferred tax is provided for on all temporary differences according to the statement of financial position method. There are no other temporary differences which could give rise to deferred tax except those evident from the question. Swiss Limited will have sufficient taxable income in future against which any arising deferred tax asset could be utilised. REQUIRED: (a) Prepare the statement of comprehensive income, and (b) the following notes to the annual financial statements of Swiss Limited for the year ended 31 December 2014: 1. Income tax expense 2. Disposal group. Your answer must comply with the requirements of Generally Accepted Accounting Practice. Comparative notes are not required. © 2015 Together We Pass. All rights reserved. QUESTION 6 You are the financial accountant of Real Giants Limited, a manufacturing company situated in Western Park. Real Giants Limited specializes in the manufacturing of T5 cables. The company has a 31 December year-end. The following is an extract concerning their assets: Land and Buildings Land and buildings were bought on 1 January 2013 at a cost of R1 250 000 (land: R500 000; manufacturing building: R750 000). At that stage 5% of the building was used by Real Giants Limited in the manufacturing process. The portion of the building of 5% is regarded as insignificant. The remaining space was rented out. Due to the demand for T5 cables, Real Giants Limited expanded their production facilities and as a result did not renew the rental agreement that expired on 1 January 2014, but occupied the whole manufacturing building for their own manufacturing activities. The following were the fair values (net replacement values) on the different dates indicated: 31/12/201 3 01/01/201 4 31/12/201 4 01/01/201 3 Fair value Fair value Fair value Useful life Land Building R R - 30 years Machine On 30 June 2013 Real Giants Limited bought a new machine with a useful life of ten (10) years and no residual value. The machine must undergo a major inspection every 2 000 working hours, therefore approximately once a year. The estimated cost of a major inspection is R15 000. Due to the increase in production of T5 cables, the inspection was done on 1 January 2014 at a cost of R20 000. The machine was idle for a period of one (1) month during the servicing of the machine. R 30/06/2013 Original cost of machine 150 000 Additional information: 1. The following are the accounting policies of Real Giants Limited concerning its assets: ● land and buildings are carried under IAS 16 (AC 123) Property, Plant and Equipment at revalued amounts according to their net replacement values; ● machinery is carried at cost less accumulated depreciation and impairment losses; ● revaluation surpluses are realised when the underlying assets are sold; ● investment property is carried at fair value. 2. The South African Revenue Service allows the following as deductions against income: © 2015 Together We Pass. All rights reserved. ● a 5% building allowance per annum on industrial buildings, not proportioned for part of the year, ● a 40/20/20/20% wear and tear deduction per annum on machinery, not proportioned for part of the year, ● the inspection fees as a section 11(a) deduction in the year that it is paid. 3. The applicable income tax rate is 30%. 69 FAC3702/10 1 4. Deferred tax is provided for on all temporary differences by using the statement of financial position method. 5. The revaluations were done by B & Q, a firm of independent sworn appraisers. B & Q holds a recognised and relevant professional qualification and has recent experience in the location and category of the property being valued. The fair values were determined by reference to current market evidence and the latest valuation took place on 31 December 2014. REQUIRED: Disclose the above information in the following notes to the annual financial statements of Real Giants Limited for the year ended 31 December 2014. Your answer must comply with the requirements of Generally Accepted Accounting Practice: property, plant and equipment investment property deferred tax Comparative figures are not required. Round off all calculations to the nearest rand. © 2015 Together We Pass. All rights reserved. QUESTION 7 Flint Limited is a company in Gauteng that manufactures pencils. It owns a manufacturing building in Valhalla, erf 80, which was acquired on 1 January 2012. The cost price of R1 700 000 included R500 000 for the land and the remainder for the building. The company depreciates the building on the straight-line basis over 12 years while the South African Revenue Service allows a building allowance of 10% per annum. On 30 September 2015 Flint Limited decided to move their manufacturing business to new premises and to rent out the existing building. The market value of the land on that date was R900 000 and that of the building R1 000 000. From 1 October 2015 the building was ready to be leased out. On 1 November 2015 a lessee occupied the manufacturing building in terms of a 5 year operating lease agreement. The rental income is R22 000 per month. The rent that Flint Limited paid for the building that it has occupied in terms of an operating lease amounted to R17 500 per month. Flint Limited incurred the following monthly expenses on the manufacturing building that it owns during the 2015 financial year: short-term insurance of R2 500 property rates of R1 200 and security services of R1 000. On year-end 31 December 2015 a sworn appraiser, Valere Valuers, valued the manufacturing building at fair value with reference to active market prices of similar properties in similar condition and locality. The following values were determined: R Land in Valhalla 940 000 Building in Valhalla 1 025 000 Flint Limited bought a bakkie on 1 July 2003 for use in the manufacturing enterprise. The cost price of the bakkie was R84 000, VAT excluded. The company depreciated the vehicle on the straight-line basis at 20% per annum. No residual value was allocated to the vehicle. The South African Revenue Service allowed wear and tear at 25% per annum pro-rata for the period in use. On 31 March 2015 the bakkie was involved in an accident and the insurer decided to write off the vehicle and to pay out to Flint Limited the amount of the replacement value. An amount of R57 000, VAT included, was received a month later. All of the above-mentioned information is correctly accounted for in profit before tax of R950 000 for the year ended 31 December 2015. Assume the following applicable tax rates for all the mentioned periods: normal tax rate of 30% statutory inclusion rate of 50% of capital gains in the taxable income of companies which has been unchanged since 1 October 2001 VAT rate of 14%. Flint Limited accounts for investment property according to the fair value model and property, plant and equipment according to the cost model. 78 FAC3702/101 © 2015 Together We Pass. All rights reserved. REQUIRED: 1. Prepare the journals in the accounting records of Flint Limited relating to the financial information on the vehicle (the bakkie) during the 2015 financial year. Your answer must comply with the requirements of IAS 16 (AC 123).65-66. Ignore the following (in the journal entries only): deferred tax implications journal descriptions. (6) 2. Disclose the following notes of Flint Limited for the year ended 31 December 2015 based on the given information. Your answer must comply with the requirements of Generally Accepted Accounting Practice. 1. Property, plant and equipment (ignore the total column) 2. Investment property 3. Deferred tax 4. Profit before tax 5. Tax expense Ignore comparative information. Round off all calculations to the nearest rand.