Khoro Limited (Khoro) is a South African based company that specialises in the designing, manufacturing, installation, and servicing of wind turbines. The company is primary listed on the Johannesburg Stock Exchange as well as dually listed on the Lusaka Stock Exchange (LuSE) in Zambia. Khoro has a 30 September year end. 1. Manufacturing plant in Kalkfontein On 1 February 2021, Khoro acquired a vacant piece of land for R3 500 000, with the intention of constructing a manufacturing plant. Construction of the manufacturing plant commenced on 1 May 2021 and was completed on 1 July 2022 at a total cost of R8 800 000 (excluding the health and safety compliance costs below) which were paid in cash. Management considered the land portion of the manufacturing plant to be significant. To comply with the health and safety standards, an inspection was conducted at a cost of R250 000 on 1 August 2022. The inspector issued a compliance certificate which confirmed that the plant complies with all health and safety standard regulations of South Africa. The plant was available for use as intended by management on 1 August 2022 and was brought into use on the same date. On 1 August 2022, the plant was estimated to have a 15-year useful life and an estimated residual value of R950 000 was allocated to it. During the 2022 financial year, the manufacturing plant did not operate due to the stringent Covid-19 restrictions which affected the cash generation capabilities of the manufacturing plant. On 30 September 2022, Khoro estimated that the fair value less cost to sell and value in use of the plant amounted to R8 500 000 and R8 200 000, respectively. On 1 May 2023, Khoros management decided to lease out the manufacturing plant to Gole Ltd. The lease agreement contains a lease in terms of IFRS 16, Leases. The terms of the lease agreement were as follows: Commencement date .............................................................................................. 1 May 2023 Monthly instalment (Paid in arrears at the end of each month) .............................. R150 000 Yearly increases ...................................................................................................... 10% annually The lease term is for 3 years. Ownership of the manufacturing plant will not transfer to Gole Ltd at the end of the lease period. Gole Ltd does not have an option to buy the manufacturing plant from Khoro Ltd at the end of the lease term. At inception of the lease, the present value of the lease payments does not amount to the fair value of the manufacturing plant. On 30 September 2023, the fair value less cost to sell and value in use of the plant was determined to be R8 150 000 and R8 480 000, respectively. The estimated useful life and residual value of the plant remained unchanged throughout the period. 2. Property in Matatiele On 1 January 2021, Khoro acquired a property in Matatiele for R4 500 000 (Land: R850 000; Building: R3 650 000). The property was purchased with the intention to be rented out. A rental agreement was signed with Toekoms Ltd, a distributor and wholesaler of inverters and solar panels. On acquisition date, the building had an estimated useful life of 20 years and an insignificant residual value. The building was ready for use as intended by management, as well as brought into use, on acquisition date. During the 2023 financial year, the board of directors of Khoro decided to change the investment property accounting policy from the cost model to the fair value model to present users of financial statements with a more realistic market value of the investment property. FAC3764 Assessment 9 Page 4 of 9 QUESTION 1 (Continued) The following fair values of the property in Matatiele were received from an independent sworn appraiser for the respective years: Land Building Total R R R 30 September 2021 900 000 3 770 000 4 670 000 30 September 2022 910 000 3 870 000 4 780 000 30 September 2023 950 000 4 100 000 5 050 000 3. Zwanga division The Zwanga division of Khoro provides consultation services within the South-African market. During the 2023 financial year, Khoros board of directors took a strategic decision to sell the Zwanga division, within a single transaction. On 1 July 2023, the division met all the criteria to be classified as a disposal group held for sale in accordance with the requirements of IFRS 5, Non-current assets held for sale and discontinued operations. The disposal group consisted of the following assets: Inventory .................................................................................................................. Note 1 Windy trademark ..................................................................................................... Note 2 Vehicle ..................................................................................................................... Note 3 The fair value less cost to sell of the Zwanga division was determined to amount to R2 087 500 and R2 037 500 on 1 July 2023 and 30 September 2023, respectively. Note 1 The inventory was acquired at a cost of R300 000 and had the following net realisable values at each respective date: 01 July 2023. R310 000 30 September 2023................... R250 000 Note 2 The Windy trademark was acquired from Gadgets Galore Innovators for R1 100 000 on 31 October 2022. On acquisition date, an indefinite useful life together with a residual value of Rnil was allocated to the trademark. On 1 July 2023 and 30 September 2023, the Windy trademark had a recoverable amount of R1 025 000 and R999 000, respectively. Note 3 The vehicle was acquired on 1 October 2021, for R1 250 000. The vehicle was available for use as intended by management, as well as brough into use, on acquisition date. On acquisition date, the useful life of the vehicle was estimated to be 5 years with an insignificant residual value allocated to it. On 1 July 2023 and 30 September 2023, the recoverable amount of the vehicle was determined to amount to R820 000 and R810 000, respectively. Accounting policies Khoro accounts for inventory at the lower of cost and net realisable value. Khoro accounts for property, plant and equipment using the cost model. Depreciation on property, plant and equipment is accounted for in accordance with the straight-line method over the estimated useful life of the asset. Khoro accounts for intangible assets in accordance with the cost model. Amortisation on intangible assets is accounted for in accordance with the straight-line method over the estimated useful life of the asset. Before the change in accounting policy, Khoro accounted for investment property according to the cost model whilst depreciation on investment property, was accounted for using the straight-line method over the estimated useful life of the asset. After the change in accounting policy, Khoro accounts for investment property according to the fair value model. FAC3764 Assessment 9 Page 5 of 9 QUESTION 1 (Continued) Taxation The South African Revenue Service allows an annual building allowance of 5% on the Property in Matatiele, according to section 13(1) of the Income Tax Act, on a straight-line method, not apportioned for part of the year. The change in accounting policy on the Property in Matatiele, has no impact on tax legislation. The South-African normal tax rate is 27%. The capital gains tax inclusion rate is 80%. Deferred tax is provided for on all temporary differences using the statement of financial position approach. There are no items causing temporary or exempt differences except those identified in the question. The company will have sufficient profit in future against which any unused tax losses can be utilised. Assumptions All amounts are material. Ignore the implications of Value-Added Tax (VAT). REQUIRED: Marks a) Prepare all relevant general journal entries to correctly account for the manufacturing plant in Kalkfontein, in the accounting records of Khoro Limited for the year ended 30 September 2023. Journal narrations are required. Dates are not required. Tax consequences can be ignored. Communication mark presentation 14 1 b) Disclose the Property in Matatiele in the accounting records of Khoro Limited for the year ended 30 September 2023, in accordance with the requirements of only IAS 8, Accounting policies, changes in estimates and errors. 18 c) Advise the Chief Financial Officer (CFO) on the accounting implications (including measurement) of the decision to sell the Zwanga division in the accounting records of Khoro Limited on 1 July 2023. Limit your measurement discussion to 1 July 2023. Support your discussion with calculations, where applicable, Do not include any tax related discussions or calculations. Communication mark - Logical argument