FAC3703 EXAM PACK

c) i) Discussion re recognition of government grant A government grant is initially recognised when the amount is received or receivable – which was received on 1 April 2016, and when it is reasonably assured that the conditions attached will be met, i.e., that the entity will not retrench any staff under 35 years of age. The subsequent recognition of a government grant depends on the type of grant and the accounting policy of the entity. This government grant is an income-based grant as it relates to a youth wage subsidy. In addition, it relates to future employment payments of youth employed by the entity. The government grant is initially recognised as a liability in the statement of financial position, and then recognised as a deduction against the related expense, i.e., employee benefits, over the period of the condition attached, i.e., 3 years. ii) Calculation balance of government grant in statement of financial position Government grant received recognised as deferred income liability 45 000 Amount realise in profit or loss as deduction against employee benefits (11 250) (45 000 x 9/36) 33 750 d) Calculation of movement in deferred tax CA TB TD DT@ 28% Leave pay obligation 52 154 - 52 154 14 603 A Bonus obligation 22 917 - 22 917 6 417 A Deferred tax asset at 31 December 2016 21 020 A CA TB TD DT@ 28% Leave pay obligation 62 857 - 52 154 14 603 A Bonus obligation 25 208 - 22 917 6 417 A Government grant def inc liability 33 750 - 33 750 9 450 A Deferred tax asset at 31 December 2016 34 108 A .’. Movement in deferred tax balance = 34 108 A – 21 020 A = 18 088 Deferred tax (SFP) 18 088 Income tax expense: deferred tax (PL) 18 088 e) 1 – c 2 – b (62 857 (W1) x 40/60) 3 – a 4 – b 5 – b 6 – ? (In our opinion there is no correct answer as the government grant to be realised in 2017 would be (40 500 x 12/36) less any change in estimate relating to the repayment of R4 500. The amount recognised in 2016 of 11 250 (c)(ii) versus what should have been recognised on the government grant of R40 500 x 9/36 = 10 125, is 1 125. The total grant to be recognised in PL for 2017 is therefore 12 375 (13 500 – 1 125). It appears as if UNISA meant for option d to be selected.) 3 Question 2 a) Disclosure of notes in financial statements VS Con Ltd Notes to the financial statements for the year ended 29 February 2016 2. Profit before tax 2016 Profit before tax includes: Income Profit on disposal of machinery (500 000 – 450 000 (note 3)) 50 000 Finance income 127 437 Funds invested (7 900 (shares) + 2 041 (loan)) 9 941 Capitalised (2 041) Expenses Finance costs 33 400 Total (37 400 + 31 262 (W1)(J3)) 68 662 Capitalised (W2) (35 262) Depreciation (51 000 (W1)(J5) + (90 000 + 71 290 (note 3)) 212 290 3. Property, plant and equipment Machinery Flowline Carrying amount at 1 March 2015 540 000 - Cost 900 000 - Acc depreciation (900 000 x 24/60) (360 000) - Additions - 1 283 221 Cost - 1 250 000 Borrowing costs (35 262 (W2) – 2 041 (W2)) - 33 221 Depreciation (900 000 x 6/24); (1 283 221 x 2/36) (90 000) (71 290) Disposal (450 000) - Cost (900 000) - Acc depreciation (360 000 + 90 000) 450 000 - Carrying amount at 29 February 2016 - 1 211 931 Cost Accumulated depreciation 3. Lease liability VS Con Ltd entered into a lease agreement on 31 August 2015 machinery. The lease term is 5 years. The instalments are R65 000 payable biannually in arrears, commencing 29 February 2016. The effective interest rate per annum is 12,5%. VS Con Ltd paid R10 000 legal fees to enter into the lease agreement. Ownership of the delivery vehicle will transfer to the company Ltd at the end of the lease term on payment of the guaranteed residual value of R50 000. 4 3.1 Right of use asset Carrying amount at beginning of year Machinery - Total - Acquired during the year (500 000 (W1)(J1) + 10 000 (W1)((J2)) 510 000 510 000 Depreciation (W1)(J5) (51 000) (51 000) Carrying amount at end of year 459 000 459 000 3.2 Maturity analysis Future lease payments (undiscounted) 2017 130 000 (65 000 x 2) 2018 130 000 (65 000 x 2) 2019 130 000 (65 000 x 2) 2020 130 000 (65 000 x 2) 2021 115 000 (65 000 + 50 000) Total future lease payments 635 000 Future finance costs (168 738) (Amort 2-10 : Int) Principal (lease liability) 466 262 Non-current 392 326 Balancing figure Current 73 936 Amort 2-3: Prin 3.3. Total cash outflows relating to leases Presented under financing activities Cash payments for principal portion of lease liabilities (65 000 – 31 262) 33 738 Presented under operating activities - Cash payments for interest portion of lease liabilities (W1)(J3) 31 262 Legal fees paid to enter into lease agreement 10 000 Total cash outflow relating to leases (W1)(J4) 75 000 W1. END mode; PV = 500 000; n = 10 (5 x 2); PMT = (65 000); FV = (50 000); i = comp = 6, 2524 (per biannual period. .’. per annum = 6,2524 x 2 = 12,50%) J1. Right of use asset Lease liability (SFP) (SFP) 500 000 500 000 J2. Right of use asset Bank (SFP) (SFP) 10 000 10 000 J3. Finance costs Lease liability (PL) (SFP) 31 262 31 262 AMORT 1 – 1: INT = 31 262, BAL = 466 262, PRIN = 33 738 J4. J4. 5 (500 000 (J1) + 10 000 (J2)) x 6/60 = 51 000 W2. Borrowing costs Total costs Funded by: 1 250 000 Share issue (600 000) Not a borrowing Lease / Sale of asset (500 000) Assume specific borrowing General pool of funds (150 000) From 1 November, .’. 2 months .’. BC capitalised Specific loan 31 262 (W1)(J3) General pool 4 000 (150 000 x 16% (C1) x 2/12) 35 262 Less income on funds invested (2 041) Shares Not a borrowing, ,.’. not deducted Liability .’. total to be capitalised 33 221 Given C1. WACD calc .’. 48 000 / 300 000 = 16% 100 000 x 18% = 18 000 200 000 x 15% = 30 000 300 000 48 000 b) Calculation of basic earnings per share and dividend per share Basic earnings per share (1 325 000 / 2 637 500 (W4)) R0,50 Dividend per share (60 000 / 2 650 000 (W4)) R0,02 W4. AWNOS: Total shares 2016 (CY) Opening balance 5 000 000 5 000 000 31 Jan 2016 Share issue (Value) 300 000 x 11/12 275 000 5 300 000 5 275 000 30 Jun 2016 Share consol (No value) (2 650 000) /2 (2 637 500) Total and Basic number of shares 2 650 000 2 637 500 6 Question 3 Cashmere Ltd Notes to the financial statements for the year ended 31 December 2016 8. Operating segments Reconciliation of segment profit before tax to financial statement profit before tax Profit before tax from reportable segments (6 530 000 + 5 169 500) Headoffice expenses (2 360 000) Intersegment eliminations: Unrealised profit on inventory (660 000 x 50% x 20/120) (55 000) Cash basis adjustments: Increase in trade receivables (8 230 000 + 6 120 000) Increase in trade payables (5 189 400 + 3 155 000 + 35 230) (8 379 630) Depreciation (1230 000 + 730 450 + 210 000) (2 170 450) Fair value loss on inv property (230 000) Profit before tax of the entity 1 FAC3703 May-Jun 2017 Paper 2 Suggested solution Question 1 a) Basic and diluted earnings per share calculations: Basic earnings per share (4 499 510 (W1) / 5 600 000 (W3)) R0,80 Diluted earnings per share calculation: Diluted earnings per share (4 499 501 (W1) / 5 750 000 (W3)) R0,78 b) Calculate basic headline earnings per share: Basic headline earnings per share (4 452 708 (W7) / 5 600 000 (W3)) R0,80 W1. Earnings: Net profit for the year - parent 4 567 010 Less: Preference dividend (R750 000 x 9%) (67 500) Basic earnings 4 499 510 Share options Convertible debentures - 23 473 Anti-dilutive Gross interest saving 32 601 (W2) Tax (32 601 x 28%) (9 128) Diluted earnings 4 522 983 W2. Convertible debentures issued 1 Aug 2016 (2 months to RD!) 1 Aug 2016 30 Sep 2016 FV = (2 000 000) PMT = (160 000) i = 11% n = 5 PV = comp = 1 778 246 (1 778 246 x 11% x 2/12) or AMORT 1-1: INT x 2/12