FAC3701 EXAM PACK 2 GENERAL FINANCIAL REPORTING 3 OCTOBER – NOVEMBER

FAC3701 EXAM PACK 2 GENERAL FINANCIAL REPORTING 3 OCTOBER – NOVEMBER SOLUTION 1: 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