FAC3702 ASSIGNMENT 02

ASSIGNMENT 02 (20 marks) (36 minutes) Shop-A-Lot Ltd is an online retail company with a 31 December year-end. Shop-A-Lot Ltd prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). Security software On 1 March 2017, Shop-A-Lot Ltd purchased security software from an United States of America (US) company at a cost of R1 000 000, in order to protect clients’ personal details from data breaches. An information technology (IT) specialist was contracted at a cost of R60 000 to assist with the installation and implementation of the security software. Training costs of R20 000 was incurred to train the staff of Shop-A-Lot Ltd about the operation of the security software to ensure optimum security of all their clients’ personal details. The security software was available for use, as intended by management, on 1 April 2017 and on this date the useful life was estimated to be 2 years. A residual value of Rnil was allocated to the security software. During December 2018 Shop-A-Lot Ltd started to experience limited technical capabilities of the security software after data breaches of a few of their clients’ personal details occurred. On 31 December 2018, after contacting the US company from which Shop-A-Lot Ltd purchased their security software, management discovered that an updated version of this security software is not available. Therefore due to the fact that the security software is outdated, they would in future have to invest in other security software which includes newer and more enhanced security measures that was recently launched on the market. On 31 December 2018, the fair value less costs to sell and value in use of the security software were determined to be R110 000 and R90 000, respectively. The useful life and residual value of the security software remained unchanged throughout the period. Mobile application During the 2017 financial year, Shop-A-Lot Ltd commenced with a research and development project to develop a mobile application that could be downloaded and used by the public in order to enhance their online shopping experience. The research and development of the mobile application commenced on 1 November 2017. On 31 March 2018 the board of directors determined that the mobile application satisfied all the criteria for intangible asset recognition and approved the development of the mobile application. The development of the mobile application was completed on 31 July 2018. Shop-A-Lot Ltd incurred the following costs during the research and development of the mobile application: x Integrated Development Environment (IDE) Shop-A-Lot Ltd purchased an IDE on 1 November 2017 at a cost of R200 000. The IDE will be exclusively used for the research and development project of the mobile application. Thereafter the IDE will be used by Shop-A-Lot Ltd on another project. The IDE is a software programme which will be used to create, design and test the mobile application. The IDE was available for use on 1 November 2017, as intended by management and on this date the useful life was estimated to be 2 years. A residual value of Rnil was allocated to the IDE. Questions 1 – 10 relate to the annual financial statements of Shop-A-Lot Ltd for the year ended 31 December 2018. Intangible asset - Learning Unit 3 Impairment indicators Will the R60 000 and the R20 000 form part of the cost price of the intangible asset? Read 3.4.1 on page 90 of the study guide. Intangible asset - Learning Unit 3! Will have to distinguish between the research and development phase. Why? Read page 93 to 94 of the study guide. Also refer to Examples 6 and 7 of Learning Unit 3. This is an intangible asset - therefore amortisation.