Galati Telecoms Limited ordered new equipment from the United States for €300 000 on 15 April 2020. The new equipment was shipped free on board on 30 April 2020 and was delivered at the premises of Yamagata Limited on 25 May 2020. Shipping costs amounted to R386 400 (Including VAT), paid cash on 31 May 2020. Local engineers installed the new equipment at a cost of R178 570 (paid cash on 30 June 2020) and the new equipment was available for use as intended by management on 30 June 2020 . The new equipment has a residual value of R295 000.

The new equipment’s (point 1 above) cost of €300 000  is repayable in 3 equal installments every 5 months, with the first payment due on 1 October 2020.

A 5-month forward exchange contract (FEC) with regards to the 2nd payment of the foreign creditor was taken out on 1 October 2020 at €1 = R18.05.

Relevant exchange rates (Spot rates):

          15 April 2020                                                   €1 = R19.94

30 April 2020                                                   €1 = R19.95

25 May 2020 €1 = R19.18

30 June 2020 €1 = R19.42

1 October 2020 €1 = R19.72

31 December 2020 €1 = R17.98

The relevant comparative (market related) forward exchange contract (FEC) rates applicable on 31 December 2020 are:

2 months                                                         €1 = R18.20

4 months                                                         €1 = R17.53

6 months                                                         €1 = R17.30

Government grant

Galati Telecoms Limited received a government grant of R1 000 000 on 1 January 2020 to subsidise 15% of future wages incurred by the company. Galati Telecoms Limited has complied with all the conditions laid out to obtain the grant. Wages incurred and paid during the year ended 31 December 2020 amounted to R900 000.

It is the accounting policy of Galati Telecoms Limited to present such a grant as an adjustment to expenses.

Galati Telecoms Limited received another government grant of R500 000 on 1 July 2020 for the acquisition of the new equipment (point 1 above). It is the accounting policy of Galati Telecoms Limited to account for a grant related to an asset as other income. The company complied with all the conditions for obtaining the grant.

General

Galati Telecoms Limited is a registered VAT vendor and all transactions are valid VAT transactions in terms of the VAT Act. All amounts are excluding VAT, unless otherwise stated.

Assume a VAT rate of 15% and a normal taxation rate of 28%.

Equipment is depreciated at 20% per year on the straight-line basis.

The estimates of depreciation method, useful life and residual value are reviewed annually and have remained unchanged for all assets.

It is the accounting policy of the company to account for Property, plant and equipment in accordance with the cost valuation model.

1.Calculate the imported cost of the asset at the transaction date, excluding the shipping and installation.

2.Calculate the total cost of the asset including the shipping and installation.

3.Calculate the year end balance of the foreign creditor as on 31 December 2020.

4.Calculate the foreign exchange profit or loss on the forward exchange contract (FEC) for the year ending 31 December 2020. A profit should be indicated in brackets - (123456)