FAC3701-FULL STUDY PACK FOR 2019 EXAM PREP INCLUDE PAST PAPERS QUESTIONS AND SOLUTIONS

FAC3701-FULL STUDY PACK FOR 2019 EXAM PREP INCLUDE PAST PAPERS QUESTIONS AND SOLUTIONS. The accounts receivable balance in the above trial balance consists only of rent paid in advance for the property the company currently occupies. The rent paid in advance relates to the rental for January 20.5, which was already paid in December 20.4. The accounts receivable balance at the end of the previous financial year amounted to Rnil. 2. The accounts payable balance in the above trial balance consists only of unearned sales revenue received in advance for lay away sales of goods which will be delivered in January 20.5 when the buyer makes the final payment. The accounts payable balance at the end of the previous financial year amounted to R nil. The sales revenue received in advance is included in gross income for tax purposes. 3. On 1 January 20.4, a minibus with an original cost of R600 000, was involved in a car accident and was damaged beyond repair. A claim was lodged with the company’s insurers and the company received proceeds of R500 000. The carrying amount and tax base of the minibus on the day of the accident amounted to R480 000 and R450 000 respectively. On 30 June 20.4, the company purchased a new minibus for R800 000 to replace the abovementioned minibus. 4. The following items are also included in the abovementioned loss before tax. i. Fine of R6 000 paid for contravention of the Companies Act. ii. Donations of R40 000 paid, of which R32 000 are not allowed for tax purposes. iii. R11 000 employees tax (PAYE) paid during the month of December 20.4 in respect of salaries and wages for November 20.4. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. iv. Foreign income amounting to R190 000 which is not taxable in South Africa in terms of a double taxation agreement. The company paid foreign taxes of R25 000 on this income. v. Dividends received in respect of listed investments and unlisted investments in South Africa amounting to R105 000. 5. The company provides for deferred tax on all temporary differences according to the comprehensive basis by using the financial position approach. There is certainty beyond any reasonable doubt that the company will have sufficient taxable profit in future against which any unused tax losses can be utilized. There are no other temporary differences except those mentioned in the question. 6. The SA Normal tax rate changed from 29% in 20.3 to 28% in 20.4. 7. Ignore the implications of capital gains tax. REQUIRED: 1. Calculate the taxable income/loss of Money More Limited for the year ended 31 December 20.4.(7½) 2. Calculate the deferred tax movement (including the rate change) in the statement of comprehensive income of Money More Limited for the year ended 31 December 20.4, using the financial position approach. (4½) Using the answer in 2.1 above prepare the journal entry for the deferred tax movement (including the rate change) in the statement of comprehensive income of Money More Limited for the year ended 31 December 20.4. (2) 3. Disclose only the income tax expense note (including the tax rate reconciliation using only Rvalues) to the annual financial statements of Money More Limited for the year ended 31 December 20.4. Your answer must comply with the requirements of Generally Accepted Accounting Practice. No comparative figures are required. All calculations must be done to the nearest Rand. No accounting policy notes are required. No other notes are required. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. QUESTION 7 PART A Crispie Limited is a manufacturer of chocolates and sweets. Crispie Limited sells its products with a 14-day money back guarantee if the consumer is dissatisfied with the product. The provision for money back guarantees consists of the following: Actual money back guarantees paid to consumers during the 20.4 and 20.5 financial years amounted to R18 000 and R20 000 respectively. On 28 February 20.5 Crispie Limited decided to discontinue the manufacturing of a specific production line and sold Machine Verdi. Crispie Limited leases all their other production machines. The following information relates to the sale of Machine Verdi on 28 February 20.5: The profit before tax of Crispie Limited for the year ended 31 December 20.5 amounted to R625 000 after including all the above mentioned information. Included in profit before tax are legal costs of R12 000 of which 60% is tax deductible. The SA Normal tax rate is 28%. The company had an assessed loss of R63 000 for the year ended 31 December 20.4. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. Assume that 50% of all capital gains are taxable. REQUIRED: Calculate only the current tax expense of Crispie Limited for the year ended 31 December 20.5. PART B The following is an extract from the statement of financial position general ledger accounts of Bike Mania Limited, a manufacturer of bicycles, for the year ended 28 February 20.6: Dr S A Revenue Service - current tax Cr 31/8/20.5 Bank (for 20.6 tax year) 30/9/20.5 Bank (for 20.5 tax year) 28/2/20.6 Bank (for 20.6 tax year) 28/2/20.6 Closing balance c/d 18 000 16 000 18 000 3 620 1/3/20.5 Opening balance b/d 7 600 15/8/20.5 Current tax expense (20.5 tax adjustment) 8 120 28/2/20.6 Current tax expense (for 20.6 tax year) 39 900 55 620 1/3/20.6 Opening balance b/d 3 620 55 620 Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. Additional information 1. The SA normal tax rate changed from 29% in 20.5 to 28% in 20.6. 2. The deferred tax balance account comprised of taxable temporary differences relating to accelerated wear and tear on plant and machinery. Deferred tax is provided for on all temporary differences according to the comprehensive basis using the financial position approach. 3. The adjustment in respect of the 20.5 current tax expense relates to the 20.5 tax assessment received on 15 August 20.5. Bike Mania Limited claimed expenses of R28 000 which were not allowed as a deduction by the SA Revenue Service. 4. The profit before tax for the year ended 28 February 20.6 amounted to R325 000. Included in profit before tax are the following items: 5. The income received from the UK is not taxable in South Africa in terms of a double taxation agreement. 6. You can assume that the calculations of current tax and deferred tax in the above general ledger accounts are correct. REQUIRED: Disclose tax in the notes to the annual financial statements of Bike Mania Limited for the year ended 28 February 20.6 according to the requirements of IAS 12 (AC 102) - Income taxes. The tax rate reconciliation must be given using R-values only. No calculations of current tax and deferred tax are required. No accounting policy notes are required. No other notes are required. Comparatives are not required. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. QUESTION 8 Power Limited is a well diversified company that develops, sells and installs exclusive equipment. As part of its expansion programme the company recently also started participating in investment and development activities in the property market. The financial statements of Power Limited for the year ended 30 September 20.4 were presented to the board of directors for authorisation for issue on 5 December 20.4. The following transactions have not yet been recorded in the books of Power Limited for the year ended 30 September 20.4. 1. The following sales invoices of Power Limited have not yet been processed: a) Invoice 685 amounting to R50 000 (before discount), in respect of equipment sold and delivered on 25 September 20.4 to Maxi Limited. A 10% trade discount on the invoice amount was allowed. Maxi Limited settled the invoice on 26 September 20.4. b) Invoice 686 amounting to R50 000 for equipment sold to Max Wholesalers on consignment. At year end Max Wholesalers has already sold 20% of the equipment. The equipment was supplied to Max Wholesalers at cost plus 25%. c) Invoice 687 for equipment sold on a cash on delivery (COD) basis to a customer in Durban. On 27 September 20.4 the customer paid R10 000 as settlement for the full amount of the invoice. The goods were delivered to the customer on 2 October 20.4. d) Invoice 688 for equipment sold to Fixit Limited. The equipment is not on hand and still has to be manufactured. It is expected to be delivered to Fixit Limited on 10 October 20.4. On 29 September 20.4 Fixit Limited paid an amount of R80 000 in advance for the order totalling R100 000. e) Invoice 701 amounting to R45 000 in respect of the installation of equipment for Mr Joe. Included in this invoice amount is R15 000 regarding installation which will start on 3 October 20.4. Mr Joe indicated that he is not satisfied with part of the installation that was completed on 30 September 20.4. This part of the installation, amounting to R5 000, will have to be redone. 2. On 1 October 20.2 Power Limited sold equipment with a cash selling price of R80 000 to Mr Kian. Mr Kian negotiated the following payment terms with the financial director of Power Limited: Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. 3. All installations of equipment done by Power Limited are carried out with a two month warranty. Previous experiences show that 10% of the installation has to be redone in the month following the month of installation and 5% in the second month after installation. Actual warranty costs paid during 20.4, relating to installations carried out in the previous financial year, amounted to R14 000. The balance of the provision for warranty costs on 30 September 20.3 amounted to R16 000. Installation fees to be used as a basis for the provision for warranty costs for the current financial year are as follows: R August 20.4 September 20.4 70 000 80 000 4. During November 20.4 the company’s workshop was damaged by a fire caused by lightning. On 1 December 20.4 a contract was concluded with To U Service Limited to repair the damage to the workshop at a cost of R100 000. These funds will be financed by means of a special reserve fund. The damage to the inventory held in the workshop amounted to R300 000. At the time of the incident the company was not insured. 5. On 15 August 20.4 the local municipality informed the project manager of Power Limited that one of the completed installations of special evaporating equipment in an industrial area must be removed. The installation is not allowed due to environmental protection rules. At 30 September 20.4, after several negotiations with the local municipality and the environmental board, the project manager of Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. Power Limited is of the opinion that it is not probable that they will have to remove the installed equipment. At year end the cost to remove the installed equipment can also not be reliably estimated. 6. The SA Normal tax rate is 28%. 7. Ignore the implications of value added tax. REQUIRED: 1. Please list points (1)-(2) above in your answer and in each of the above cases: a) Calculate the amount that should be recognised as revenue in the statement of comprehensive income of Power Limited for the year ended 30 September 20.4; and b) In each case give the reason why the amount should be included or excluded from revenue. Reasons should be provided irrespective of the amount being included or excluded from revenue. (11) 2. Disclose the abovementioned information in points (3)-(5) in the notes to the annual financial statements of Power Limited for the year ended 30 September 20.4 in terms of the requirements of IAS 37 (AC 130) - Provisions, contingent liabilities, contingent assets and IAS 10 (AC 107) - Events after the reporting period. Ignore accounting policy notes. Comparative figures are not required. Assume that all amounts are material. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. QUESTION 9 Rock Limited, incorporated on 1 April 20.2, is a nationwide retailer of toys. The following information is an extract from the draft financial statements of Rock Limited for the year ended 31 March 20.5: 20.5 R Dr/(Cr) 20.4 R Dr/(Cr) Profit before tax Retained earnings - 1 April 20.3 Inventory (700 000) 95 000 (225 000) (524 000) 140 000 Additional information 1. After the draft financial statements for the year ended 31 March 20.5 had been prepared, the directors decided at a board meeting held on 15 April 20.5 that the current inventory valuation method does not give a reliable presentation of the effect of inflation on the company’s profits. Hence, the directors decided to change the accounting policy in respect of the valuation of inventory from the weighted average method to the first-in-first-out method. However, the SA Revenue Service will not reopen the previous year’s tax assessments, but indicated that they will accept the new method of inventory valuation from the 20.5 financial year. No adjustments have been made to the draft financial statements to reflect the new inventory valuation method. The value of inventory based on the different valuation methods was as follows: Weighted average R First-infirst-out R 31 March 20.3 31 March 20.4 31 March 20.5 85 000 140 000 95 000 120 000 172 000 110 000 2. The following matters were also discussed at the board meeting held on 15 April 20.5 and they have not yet been recorded in the draft financial statements of Rock Limited for the year ended 31 March 20.5: a) As a result of the implementation of a new inventory control computer programme, the retraining of a large proportion of Rock Limited’s administrative and sales staff is required. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. Sufficient training is necessary in order for Rock Limited to effectively continue its business. The directors estimated that the future training costs will approximately amount to R35 000. b) As a result of several factors the directors decided to terminate the current operating lease agreement in the city centre and to move to a new shopping centre built in the suburbs in January 20.5. The terms of the current lease agreement state that early termination would result in a penalty payment of 80% of the remaining lease payments. The penalty is payable three months after termination of the lease agreement. The current lease agreement would have terminated on 31 March 20.6. The lease rental is R100 000 per annum, payable in arrears. All the lease payments for the year ended 31 March 20.5 are up to date. 3. The company provides for deferred tax on all temporary differences according to the comprehensive basis using the financial position approach. There is certainty beyond any reasonable doubt that the company will have sufficient taxable profit in future against which any unused tax losses can be utilized. There are no other exempt or temporary differences except those mentioned in the question. 4. The SA Normal tax rate has remained at 28% for the past three years. The taxable income of Rock Limited, before taking into account the change in inventory valuation amounted to R175 000 and R650 000 for the years ended 31 March 20.4 and 31 March 20.5, respectively. REQUIRED: 1. Calculate the profit before tax of Rock Limited for the years ended 31 March 20.4 and 31 March 20.5. 2. Calculate the current tax expense of Rock Limitedfor the years ended 31 March 20.4 and 31 March 20.5. 3. Calculate the deferred tax movement in the statement of comprehensive income of Rock Limitedfor the years ended 31 March 20.4 and 31 March 20.5, using the financial position approach. 4. Prepare only the relevant note in respect of the change in the inventory valuation in the notes to the annual financial statements of Rock Limited for the year ended 31 March 20.5 in terms of the requirements of IAS 8 (AC 103) - Accounting policies, change in accounting estimates and errors. No accounting policy notes are required. No other notes are required. All calculations must be done to the nearest Rand. Downloaded by: nbnetshiya | Distribution of this document is illegal S - The study-notes marketplace © 2016 Together We Pass. All rights reserved. QUESTION 10 Max Limited is a toy manufacturing company. The following is an extract of the trial balance of Max Limited for the year ended 30 June 20.5: Notes Dr/(Cr) R Profit before tax Dividends declared - 30 June 20.5 Trade receivables Buildings at cost - 30 June 20.5 Accumulated depreciation - buildings Deferred tax asset - 1 July 20.4 Rental received in advance in respect of July 20.5 Provision for accumulated annual leave 1 2 3 3 4 (934 750) 150 000 230 000 800 000 (128 000) 18 550 (7 500) (50 000) Additional information 1. Included in profit before tax are the following amounts: