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FAC3701 EXAM PACK.

FAC3701 EXAM PACK. FAC3701 - General Financial Reporting. CONCEPTUAL FRAMEWORK, ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS, INCOME TAXES, PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS & REVENUE PART A (a) Liability in respect of network airtime (i) The resulting from rent received in advance will result in a performance obligation. This performance obligation should be quantified and recognised as a liability if it fits into the definition of a liability in terms of the Conceptual Framework (par 4.4(b)) and if it meets the recognition criteria. (ii) A liability is  a present obligation;  arising from past events; and  The settlement of which is expected to result in an outflow from the entity of economic benefits. (iii) Test whether a liability exists (application of components of definition).  There is a present obligation because of a past event. The past event is the rental that has been received in advance. This creates a present obligation hat the entity cannot avoid in future.  It is probable that an outflow of economic benefits will be required to settle the obligation, as the entity has to provide to provide accommodation with respect to rental received.  It should be possible to make a reliable estimate of the amount of the obligation, as the rental paid is known, and it might be assumed that the tenant will make use of the accommodation. (iv) Conclusion A liability exists in respect of the rental prepaid. There is, however, certainty about the the length of the period paid for (July 2017). Therefore, the liability should be classified as a liability. 5 (b) FURPAWS LTD CALCULATION OF THE CORRECT PROFIT BEFORE TAX IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017 R Provisional profit before tax Rental Income Change in accounting estimate (45 000 − 15 000) 3 895 000 35 000 10 000 Corrected profit before tax 940 000 (c) FURPAWS LTD CALCULATION OF CURRENT TAX EXPENSE IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017 R Profit before tax 940 000 Exempt Differences (312 400) Foreign Income Penalty on late submission of PAYE return Capital profit on sale of machinery (650 000 − 567 000) ∗ 20% (301 000) 5 200 (16 600) Profit after exemptions Temporary Differences 627 600 650 750 Allowance for credit losses – accounting Allowance for credit losses – SARS (17 000 ∗ 25%) Depreciation on delivery vehicles Profit on sale of machinery (567 000 − 396 600) Prepaid expenses – 2016 Rent income prepaid – 2017 Recoupment on sale of machinery (567 000 − 226 800) Change in accounting estimate – depreciation Capital allowances – delivery vehicles (438 000 − 219 000) 17 000 (4 250) 172 200 (170 400) 32 000 55 000 340 200 (10 000) 219 000 Taxable Income 1 278 350 Income tax at 28% 357 938 6 (d) FURPAWS LTD CALCULATION OF THE DEFERRED TAX BALANCE FOR THE YEARS ENDED 30 JUNE 2017 Carrying Amount Tax Base Temporary Difference Deferred Tax Asset / (Liability) at 28% 2017 Allowance for credit losses Income prepaid Delivery vehicles 17 000 55 000 369 4001 4 250 - 219 000 12 750 55 000 150 400 3 570 15 400 (42 112) Deferred tax liability 23 142 Deferred Tax Asset / (Liability) at 29% 2016 Prepaid expenses Delivery vehicles Machinery 32 000 531 600 396 900 - 438 000 226 800 32 000 93 600 (170 100) (9 280) (27 144) (49 329) Deferred tax liability 85 753 Calculations 1. (359 400 + 10 000) = 369 400 (e) FURPAWS LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 INCOME TAX EXPENSE Major components of tax expense R Current tax expense – current year (c) Deferred tax expense 357 938 (62 611) Current [(85 753 − 23 142 − 2 957) (59 654) (2 957) 7 Change in tax rate (d) (85 753 ∗ 1 29 ) Foreign tax 60 200 355 527 (f) FURPAWS LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 1. Profit before tax Included in depreciation for 2017 is a change in estimate resulting in a decrease in depreciation in delivery vehicles for the current year of R10 000 (172 200 – 162 200) that arose from the decision to change the remaining residual value of delivery vehicles in the current year from R15 000 to R45 000. This change will result in a decrease of depreciation in future periods of R20 000(10 000 ∗ 2). 2. Contingent Liability On 25 May 2017 a claim of R25 000 was instituted against Furpaws Ltd by Mr. Bulldog. The claim relates to a claim by Mr. Bulldog for emotional suffering allegedly resulting from the death of his dog which he claims to have died after eating contaminated food manufactured by Furpaws Ltd. The legal advisors of Furpaws Ltd are of the opinion that it is not probable that the Mr. Bulldog will be successful with his claim against the company as all the dog food manufactured by the company is subjected to strict quality control procedures before being distributed to the retailers and Mr. Bulldog`s dog had reportedly experienced health problems in the past. (g) FURPAWS LTD GENERAL JOURNAL Date Details Debit Credit R R 2017 May 31 Dividends (SOCIE) SARS – Dividends tax payable (SFP) (250 000 ∗ 80% ∗ 15%) Dividends payable (SFP) (250 000 − 20 000) 250 000 30 000 220 000 8 PART B 1. 5 2. 4 3. 3 4. 2 ( 4 400 000 11 000 000 ∗ 16 000 000) =

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