The company produces, bottles and dispatches carbonated beverages from its factory in Newtown. A manufacturing property (consisting of land and buildings) was originally acquired for R6 000 000 which houses the bottling plant and production facilities. At the time of the acquisition 25% of the purchase price was attributed to land and 75% of the purchase price was attributable to the factory building. The South African Revenue Service (‘SARS’) accepted the allocation of the purchase price between land and buildings. It has always been the intention of the company to make use of the manufacturing property when producing carbonated beverages. Although Carling has only been producing soft drinks from the Newtown facility for a relatively short period, sales of the popular soft drink have sky rocketed, prompting the company to look for larger production premises in order that they may increase the production of Carling beverages. To this end the company purchased a new manufacturing property in Pretoria on 1 January 2021 for R10 000 000. When allocating the purchase price, it was deemed that 10% of the purchase price was attributable to land whilst 90% was attributable to the building. The existing bottling plant was expanded and moved to the Pretoria premises during March 2021. Production from the Pretoria bottling plant began on 1 April 2021.

Rather than sell the Newtown property, Carling decided to retain it and lease the property to another manufacturing company in terms of an operating lease effective from 1 April 2021. The details of the Newtown property are as follows:

Accumulated depreciation (buildings) – 1 January 2021 (675 000)

Fair value – 1 April 2021 Land 2 000 000 Buildings 6 000 000

Fair value – 31 December 2021 Land 2 200 000 Buildings 6 200 000

Owner-occupied property is accounted for using the cost model whilst investment property is accounted for using the fair value model. Owner-occupied buildings are depreciated on a straight-line basis over 20 years to a zero residual value

Land is not depreciated. SARS allows Carling an annual building allowance of 10% on the cost (not apportioned) in the computation of Income tax. The normal taxation rate is 28% and the inclusion rate (for Capital Gains Tax purposes) is 66.6%.

Carling has a 31 December year end and reports in terms of International Financial Reporting Standards.

Required:

a) List five main items which do not qualify as investment properties. (5)

b) Prepare the journal entries that Carling Ltd will record in respect of the above-mentioned information as it pertains to the Newtown property for the financial year ended 31 December 2021.Journal entries in respect of the deferred taxation consequences of the above-mentioned transactions are not required. (10) c)

Explain, with reference to the appropriate paragraphs in IAS 12: Income Taxes, what the deferred taxation consequences will be for Carling Ltd with regard to the Newtown property being reclassified from Property, Plant and Equipment to Investment Property on 1 April 2021. Your answer should set out the consequences for land and buildings separately. Where possible refer to the actual amounts involved as marks are awarded for these. (15) Note: Show calculations, since marks are awarded for calculations. (30)