1. Question 1 [32 marks 48 minutes] You have been appointed as the accountant of AC Milan (PTY) Limited, a remarkably successful company. The previous accountant had already started finalising the financial statements of AC Milan (PTY) Limited for the reporting period ended 31 December 2020. You are satisfied with the statement of profit or loss and the statement of changes in equity, except for certain outstanding entries regarding cost of sales. A competent assistant accountant prepared the following information for purposes of preparing the statement of financial position: The following balances in respect of assets, liabilities and equity were obtained from the trial balance, as of 31 December 2020. Additional DR information CR Land Buildings (at cost) III 1 750 000 III 8 700 000 Plant and equipment (include leased items) Trademark (at cost) III, IV, V 7 500 000 2 400 000 Buildings-accumulated depreciation Plant and equipment: accumulated depreciation III 3 045 000 III 2 400 000 Trademarks: Accumulated amortisation III 1 200 000 Trademarks: Accumulated impairment 360 000 Investment in shares of other companies (Listed) 4 300 000 Trade inventories 3 880 000 Trade receivables 15 985 000 Allowance for credit losses VI 1 950 000 Office supplies on hand (on 31 Dec 2020) Insurance prepaid on 31 December 2020 850 000 1 000 000 Provisional tax payments 1980 000 VAT input tax 960 000 Term deposit (term expires on 30 April 2021) Bank Ordinary share capital Retained earnings Mortgage bond Lease payable Trade payables Rent received in advance VAT output SARS Income tax payable Shareholders for dividends Short term provisions 215 000 1 650 000 IX 12 000 000 10 535 000 VIII V XI 51 170 000 7 275 180 1 506 794 3 922 078 96 000 1 479 948 2 150 000 2 000 000 1 250 000 51 170 000 Subsequent measurement of assets and liabilities is as follows: II. II.1 II.2 II.3 II.4 II.5 II.7 Land is reflected at cost price less accumulated impairment, if applicable The buildings, plant and equipment are reflected at cost price less accumulated depreciation and accumulated impairment, if applicable The trademarks are reflected at cost price less accumulated amortisation and accumulated impairment, if applicable. Investment is shares of other companies is reflected at fair value. The term deposit is reflected amortized cost. Loans incurred are reflected at amortized costs. III. The information in respect of property, plant, and equipment as well as trademarks for the reporting period ended 31 December 2020 are as follows: III.1 III.2 The land, with buildings on it were purchased on 2 January 2014 for R 1 450 000 (VAT exclusive price). Depreciation is written off on all property, plant, and equipment items (except for land), in accordance with the straight-line method. Amortisation of trademarks is written off on the straight-line method. The useful lives of the above-mentioned items are as follows: III.3 III.4 Buildings 20 years Plant and equipment (owned and leasehold) Trademarks 6 years 12 years III.5 Income and expenses in respect of property, plant, and equipment as well as trademarks, which have already been correctly included in the statement of profit or loss for the reporting period ended 31 December 2020 are as follows: Income Gain on disposal of plant and equipment (cost price of the item amounts to R900 000 and the carrying amount of the item at the time of sale was R225 000 Insurance compensation for a plant items destroyed in a fire Expenses: Depreciation-buildings R120 000 650 000 IV. Depreciation-plant and equipment-owned Depreciation-plant and equipment- leasehold Amortisation -Trademarks Impairment- trademarks Loss on plant items destroyed in fire (the cost of the item is R1 200 000) 435 000 475 000 300 000 200 000 360 000 700 000 On 2 January 2020, a plant item was acquired by means of a lease. The useful life of the right of use of the plant items is six years. The plant item has been appropriately recognised as part of plant items). The following portion of repayment schedule is applicable. DATE Total INSTALMENT capital interest @10% per year Capital amount outstanding 2January 2020 31December 2020 31December 2021 31 December 2022 Lease Instalment due Instalment due Instalment due: 473 206 473 206 293 206 322 527 180 000 150 679 R1 800 000 1506 794 1184 267 473 206 354 779 118 427 829 488 V. VI. VII. VIII. On 31 December 2020, AC Milan (PTY) Limited purchased a plant item from a registered VAT vendor on credit. The Invoice amount of R 1 414 500. The item has already been appropriately recognised. As at 31 December 2020, AC Milan (PTY) Limited increased allowance for credit losses. from R1 910 000 to R1 950 000. The authorized share capital of AC Milan (PTY) Limited comprises 8 000 000 ordinary shares with no par value. On 31 December 2019, the number of issued shares was 2 000 000 ordinary shares of R2 each. During the month of June 2020, a further 2 000 000 shares were allotted and paid for at R4 per share. No other ordinary shares were issued by AC Milan (PTY) Limited during the current financial reporting period. The mortgage bond was incurred on 2 January 2014 to finance acquisition of the property and is payable in 20 equal annual instalments, which repays capital and interest. The following portion of the repayment schedule is applicable: DATE Total Instalment capital interest @10% Capital per year amount outstanding 2January 2014 Amount 8 000 000 5 258 589 31 Dec 2013-31 Dec2019 Instalment 1 to 6 400 473 4 668 927 7 410 527 135 31 December 2021 Instalment 7 876 400 347 741 053 7 275 180 148 31 December 2022 Instalment 7 876 400 882 727 518 7 126 298 Required a) Present the above-mentioned information in the statement of financial position of AC Milan (PTY) Limited as at 31 December 2020. [13 marks] b) Prepare a schedule showing the reconciliation of property, plant, and equipment's beginning and end of year balances. [11 marks] c) Prepare a disclosure note in respect of authorized and issued share capital to accompany the statement of financial position as of 31 December 2020. [4 marks] d) The AC Milan (PTY) Limited is contemplating to acquire equipment for COVID- 19 monitoring for its employees. The new equipment will cost R800,000. The estimated residual value is R50,000. The equipment will have a useful life of five years and the company expects to use it 10,000 hours over the five-year economic life. If you were the administrator of the health and safety in the company, which method of depreciation would you deem as most appropriate? Justify your answer. [4 marks]