Metal steel Ltd (Metal steel) is a company listed on the Johannesburg Stock Exchange (JSE) with a 31 December financial year end. The company invests in various operations and is currently preparing financial statements for the financial year ended 31 December 2020. Management is under pressure to finish preparing the financial statements in order to apply for a loan. In addition, the performance bonus of management is dependent on whether Metal steel reports profit made for the year.

You are recently appointed as a finance manager reporting directly to the chief financial officer and you are requested to process the transactions below as they were not processed in the 2020 financial year.

1. Office building

Metal steel, acquired a loan of R6 500 000 on 1 March 2018 to construct an office building (qualifying asset) on leased land. The R6 500 000 was recorded as work in progress in the general ledger for the year ended 2019. Interest on the loan amounted to R1 144 000 for the 22 months period and was incurred evenly. Construction activities were suspended for two months i.e. from April to May 2019 due to hailing storms. The financial accountant expensed interest incurred on the loan for the 2018 and 2019 financial years on 31 December 2018 and 31 December 2019 respectively. The loan and incurred interest were settled on 31 December 2019. The prior period errors identified have not been adjusted for.

The building was available for use on the 1 January 2020 and the useful life was estimated at 25 years. Assume that the land on which the office building is situated is immaterial. In accordance with legislation, Metal steel is obliged to return the site to its original condition at the end of its useful life.

On 1 January 2020 it was estimated that the present value of the future costs to dismantle the building at the end of its useful life amounts to R250 000. The pre-tax discount rate used to calculate the present value of the dismantling costs, was 12% per annum. On 31 December 2020, the dismantling costs were re-estimated to R1 447 000 on 31 December 2044. The South African Revenue Service (SARS) grants an allowance on this building in accordance with section 13quin of the Income Tax Act, calculated at 5% per year on the cost of the building, which is not apportioned for part of a year.

2. Land and factory building

Togo Ltd (Togo), an 80% subsidiary of Metal Steel has the following accounting policies that are in line with the accounting policies of the Metal steel group:

Land classified as property, plant and equipment are accounted for according to the cost model in terms of IAS 16 Property, plant and equipment and is not depreciated.

Factory buildings, classified as property, plant and equipment are accounted for according to the cost model in terms of IAS 16 Property, plant and equipment and are depreciated over their useful lives on a straight-line basis taking their residual values into account.

Investment properties are accounted for according to the fair value model in terms of IAS 40 Investment property.

The cash generating units of Togo consist of a garbage collection division, recycling division and a recycled product retail store. Togo owns the factory building and land which is used by the garbage collection division and the recycling division. 75% of the factory building and land is used by the garbage collection division and 25% thereof by the recycling division. Although both of these divisions are on the same property, the factory building and land can be sold separately if needed. Togo also rents a building in Parys from which they operate the retail store.

Closure of recycling division

Due to the negative influence of continued load shedding, Togo decided to close the recycling division and outsource the recycling process. On 31 December 2020 the directors made a formal decision to sell the recycling division. The land and factory building used by the recycling division will not be sold but will be rented out to a manufacturing company.

On 31 December 2020 the carrying amount of Togos factory building and land (all depreciation until this date was already recognised) were as follows: R
Factory building and land	1 680 000

The factory building and land was acquired on 1 July 2008 at a total cost of R3 680 000. The useful life of the factory building was estimated at 20 years. On this date the cost of the land amounted to R480 000 (included in the total cost). The residual value of the factory building is immaterial and the useful life remained unchanged. The factory building and land has never been subjected to impairment. SARS grants a tax allowance of 5% per annum on the cost (not apportioned for a part of a year) of the factory building. No allowance on land is granted.

On 31 December 2020 the fair value of the recycling divisions factory building and land (the 25% portion of the factory building and land that is allocated to the recycling division) amounted to R1 071 000 (R866 000 for the factory building and R205 000 for the land).

Additional information

The company tax rate for South African companies is 28% and 80% of capital gains are taxable.

PART I (a) Prepare journal entries to correctly account for the office building in the financial statements of Metal steel Ltd for the financial year ended 31 December 2020. Please note: Consider tax implications. Journal dates are required. Journal narrations are not required. Draft a memorandum to the directors of Togo Ltd wherein you discuss the different alternative deferred tax measurements regarding Togos investment property (factory building and land which previously was used by the recycling division) as at 31 December 2020. Please note: A discussion of recognition, presentation and disclosure are not required. Calculations must be provided as part of your discussion, however calculations provided which has not been discussed will not be marked. Communication skills: Logical flow and layout

15 17 1

(c) Assume that you are an assistant audit manager at Alact Inc and Metal steel Ltd is a new client. Describe the risk of material misstatement at the overall financial statement level of Metal steel Ltd, which are evident from the background information provided.