FEEDBACK ON PREVIOUS EXAMINATION PAPERS
OCTOBER / NOVEMBER 2011
SOLUTION 1: ACCOUNTING POLICIES, HANGERS IN ACCOUNTING ESTIMATES AND
ERRORS, IAS 10 (AC107) – EVENTS AFTER THE REPORTING PERIOD 1AS12 (AC102) –
INCOME TAXES AND IAS 18 (AC111) REVENUE
Question 1.1.
Calculation of corrected profit before Tax of rainbow Limited for the year ended 28 February
2011
R
Provisional profit 690 000
Cash on delivery sales – reversed (40 000)
Credit loss [ 10 000 – 0.10) (9000)
Change in accounting estimate (300 – 500 ) (50 000)
Interest – tax (4000)
Realties – tax 2010 (6000)
Corrected profit 581000
Question 2
Calculation of current Tax Rainbow Limited for year ended 28 February 2011
R
Profit before tax (see 91) above) 581 000
Exempt differences (52 000)
Interest on tax 4 000
Penalties on tax 6000
Dividends received (60 000)
Capital profit on sale of machine (24 000 – 20 000) x (100 – 50%) (2000)
Temporary Differences 87 000
Cash on delivery sales 40 000
Profit on sale of machine (20 000 – 12 000) (8 000)
,Recoupment on sale of machine (20 000 – 10 000) 10 000
Depreciation (300 000 ÷ 2 ) 150 000
Tax allowance (500 000 ÷ 4) (125 000)
Royalties received in advance 20 000
Taxable income 616 000
Current tax (616 000 x 28%) 172 480
Question 3
Calculation of deferred Tax Balance in the Statement of Financial position of Rainbow Limited
as at 28 February 2011
Carrying Tax Base Temporary Deferred Tax
amount Difference Asset / Liability)
at 28 %
R R R R
Cash on delivery sales 40 000 - 40 000 11200
Royalties received in advance 20 000 - 20 000 5600
machinery (i) (ii) 25 000 (7000)
150 000 125 000
Deferred tax asset 9800
Machinery carrying Amount
R
Carrying amount : beginning of year 300 000
Depreciation (300 000 ÷ 2) (150 000)
Carrying amount : end of year 150 000
NB: The asset is depreciated over the revised useful life.
,(ii) Machinery: Tax Base
R
Tax base : beginning of year 250 000
Tax allowance (500 000 ÷ 4) (125 000)
Tax base - end of year 150 000
Question 4
Tax Rate Reconciliation R
Standard tax (581 000 (1) 28%) 162680
Exempt Differences
Interest on tax (4000 x 28%) 1120
Penalties on tax (6 000 x 28%) 1680
Dividends received (60 000 x 28%) (16800)
Capital profit on sale of machinery (20 000 x 28%) (560)
Adjustments to tax rate (15 080 x 1/29) (520)
Over provision 2010 [ 20 000 – (15 000 – 4000 – 6000) ] (15 000)
132 600
Question 5
Rainbow Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2011
Profit before tax 2011 2010
Profit after tax is stated after taking the following into R R
account
Revenue consists of: 485 000 220 000
Royalties received 560 000
Sale of goods (250 000 + 350 000 – 40 000 90 000
40 000 + 50 000
, Other income
Dividends received 60 000 20 000
Profit on realization of machinery 12 000 -
Expenses
Depreciation (300 ) 150 000
(500 000 + 20 000) ÷ 5 104 000
Included in depreciation for 2011 is a change in estimate of R50 000 (300 000/2 - 500 000/5),
arising from the decision to change the remaining useful life in the current year to only 2 years
as the machinery had already been used to fully capacity. This change will result in decrease
in depreciation in future period of R50 000.
NOTES
1. Calculation of Profit before tax
Cash on delivery sales are recognized when delivery has been made and cash received.
The R40 000 received on 2 February 2011 from Glow Limited was in respect of an
order of paints which was only dispatched on 10 March 2011 (after year end – 28
February 2011), as such this should not be part of the sales for the current financial
year.
The unrecoverable debt by stone Limited, R9000 [R10 000 X (1R – R0.90)] is an
adjusting event after the reporting period. The bankruptcy of a customer which occurs
after reporting period usually confirms that a loss already existed on the reporting date
and this should be adjusted accordingly by writing off the unrecoverable amount as a
credit loss.
The change in accounting estimate results from the change in the remaining useful life.
The remaining useful life of 2 years will be used to allocate the carrying amount at the
beginning of the year (R300 000). This will result in depreciation of R150 000 (R300 000
÷ 5). The original depreciation was R100 000 (R500 000 ÷ 5). The difference is the
change in accounting estimate.
2. Calculation of current Tax
Dividends received and a portion of capital gains on profits on the sale of assets which
is not taxable are exempt income.
OCTOBER / NOVEMBER 2011
SOLUTION 1: ACCOUNTING POLICIES, HANGERS IN ACCOUNTING ESTIMATES AND
ERRORS, IAS 10 (AC107) – EVENTS AFTER THE REPORTING PERIOD 1AS12 (AC102) –
INCOME TAXES AND IAS 18 (AC111) REVENUE
Question 1.1.
Calculation of corrected profit before Tax of rainbow Limited for the year ended 28 February
2011
R
Provisional profit 690 000
Cash on delivery sales – reversed (40 000)
Credit loss [ 10 000 – 0.10) (9000)
Change in accounting estimate (300 – 500 ) (50 000)
Interest – tax (4000)
Realties – tax 2010 (6000)
Corrected profit 581000
Question 2
Calculation of current Tax Rainbow Limited for year ended 28 February 2011
R
Profit before tax (see 91) above) 581 000
Exempt differences (52 000)
Interest on tax 4 000
Penalties on tax 6000
Dividends received (60 000)
Capital profit on sale of machine (24 000 – 20 000) x (100 – 50%) (2000)
Temporary Differences 87 000
Cash on delivery sales 40 000
Profit on sale of machine (20 000 – 12 000) (8 000)
,Recoupment on sale of machine (20 000 – 10 000) 10 000
Depreciation (300 000 ÷ 2 ) 150 000
Tax allowance (500 000 ÷ 4) (125 000)
Royalties received in advance 20 000
Taxable income 616 000
Current tax (616 000 x 28%) 172 480
Question 3
Calculation of deferred Tax Balance in the Statement of Financial position of Rainbow Limited
as at 28 February 2011
Carrying Tax Base Temporary Deferred Tax
amount Difference Asset / Liability)
at 28 %
R R R R
Cash on delivery sales 40 000 - 40 000 11200
Royalties received in advance 20 000 - 20 000 5600
machinery (i) (ii) 25 000 (7000)
150 000 125 000
Deferred tax asset 9800
Machinery carrying Amount
R
Carrying amount : beginning of year 300 000
Depreciation (300 000 ÷ 2) (150 000)
Carrying amount : end of year 150 000
NB: The asset is depreciated over the revised useful life.
,(ii) Machinery: Tax Base
R
Tax base : beginning of year 250 000
Tax allowance (500 000 ÷ 4) (125 000)
Tax base - end of year 150 000
Question 4
Tax Rate Reconciliation R
Standard tax (581 000 (1) 28%) 162680
Exempt Differences
Interest on tax (4000 x 28%) 1120
Penalties on tax (6 000 x 28%) 1680
Dividends received (60 000 x 28%) (16800)
Capital profit on sale of machinery (20 000 x 28%) (560)
Adjustments to tax rate (15 080 x 1/29) (520)
Over provision 2010 [ 20 000 – (15 000 – 4000 – 6000) ] (15 000)
132 600
Question 5
Rainbow Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 28 FEBRUARY 2011
Profit before tax 2011 2010
Profit after tax is stated after taking the following into R R
account
Revenue consists of: 485 000 220 000
Royalties received 560 000
Sale of goods (250 000 + 350 000 – 40 000 90 000
40 000 + 50 000
, Other income
Dividends received 60 000 20 000
Profit on realization of machinery 12 000 -
Expenses
Depreciation (300 ) 150 000
(500 000 + 20 000) ÷ 5 104 000
Included in depreciation for 2011 is a change in estimate of R50 000 (300 000/2 - 500 000/5),
arising from the decision to change the remaining useful life in the current year to only 2 years
as the machinery had already been used to fully capacity. This change will result in decrease
in depreciation in future period of R50 000.
NOTES
1. Calculation of Profit before tax
Cash on delivery sales are recognized when delivery has been made and cash received.
The R40 000 received on 2 February 2011 from Glow Limited was in respect of an
order of paints which was only dispatched on 10 March 2011 (after year end – 28
February 2011), as such this should not be part of the sales for the current financial
year.
The unrecoverable debt by stone Limited, R9000 [R10 000 X (1R – R0.90)] is an
adjusting event after the reporting period. The bankruptcy of a customer which occurs
after reporting period usually confirms that a loss already existed on the reporting date
and this should be adjusted accordingly by writing off the unrecoverable amount as a
credit loss.
The change in accounting estimate results from the change in the remaining useful life.
The remaining useful life of 2 years will be used to allocate the carrying amount at the
beginning of the year (R300 000). This will result in depreciation of R150 000 (R300 000
÷ 5). The original depreciation was R100 000 (R500 000 ÷ 5). The difference is the
change in accounting estimate.
2. Calculation of current Tax
Dividends received and a portion of capital gains on profits on the sale of assets which
is not taxable are exempt income.
