Office property To diversify the business operations, the board of directors decided to purchase an office property which will be held to earn rental income through an operating lease. The office property consisting of a building with 2 floors of office space, situated in Durbans CBD, was purchased for cash, on 1 March 2023, on an auction at the bargain price of R4 000 000. You may assume that the value of the land portion is negligible. In addition to the abovementioned purchase price, Diamond Lodge incurred the following costs on acquisition date, relating to the acquisition of the office property: Legal fees amounting to R30 000 was paid in cash to ensure the validity of the sales transaction as the purchase agreement was prepared by the lawyers. The seller agreed within the purchase agreement to reimburse Diamond Lodge 30% of the legal fees. Property transfer duty of R1 850 000 was paid in cash. On 28 May 2023, Diamond Lodge made a payment of R100 000 to Business Matters, a very popular South African business magazine, to advertise the office property. The contract signed with Business Matters stipulates that the advert will appear in the magazine for the next 6 months, starting from 1 June 2023. Even though Diamond Lodge advertised the office property through leasing agents since acquisition date, the office property was still vacant on 31 May 2023. On 31 May 2023, an independent sworn appraiser determined the fair value of the office property to be R5 900 000. For the period 1 March 2023 to year-end 31 May 2023, Diamond Lodge realised operating losses of R110 000 on this vacant office property. It is the accounting policy of Diamond Lodge to account for investment property according to the fair value model. The South African Revenue service do not grant any tax allowance in respect of this office property whilst the payment of R100 000, made to Business Matters, will be tax deductible. Vending machines On 31 December 2022, Diamond Lodge entered into an exchange transaction, which holds commercial substance, with MachineMania (Pty) Ltd (MachineMania) to exchange their one-door vending machine for a second-hand, bigger, 2-door vending machine. Based on the conditions of the exchange transaction, Diamond lodge will make an additional cash payment on exchange date amounting to R40 000 to MachineMania for the new vending machine. The one-door vending machine was initially purchased on 1 January 2018, for an amount of R175 000 and on this date an insignificant residual value was allocated to it. On 31 December 2022, the carrying amount of the one-door vending machine, correctly calculated, amounted to R29 167, whilst the depreciation for the period 1 June 2022 to 31 December 2022, correctly calculated, amounted to R17 014. On 31 December 2022, the fair value of the one-door vending machine and the two-door vending machine was determined to be R80 000 and R150 000, respectively. The new vending machine was available for use, as intended by management, as well as brought into use on 1 January 2023. An estimated residual value of R20 000 was allocated to the new 2-door vending machine on exchange date. The depreciation for the period 1 January 2023 to 31 May 2023 on the new 2-door vending machine, correctly calculated, amounted to R6 944. Page 4 of 5 QUESTION 1 (continued) It is the accounting policy of the company to account for vending machines according to the cost model and to provide for depreciation on the straight-line method over the estimated useful life of 6 years. The South African Revenue Service allows a tax allowance on both the vending machines according to Section 11(e) of the Income Tax Act, according to the straight-line method over 5 years, apportioned for part of a year. This exchange transaction has not yet been accounted for in the accounting records of Diamond Lodge Ltd. Additional information Bookings have declined recently, and the CFO, Mr. Tom Riddle suggested that the finance team create fake customer profiles and post positive reviews on Diamond Lodges website as well as other online review platforms. Further, he also suggested that it can only positively influence us, if we post negative reviews about the surrounding lodges. Deferred tax is provided for on all temporary differences using the statement of financial position approach. There are no other exempt or temporary differences except those resulting from the information in the question. The company will have sufficient taxable profits and capital gains in the future against which any unused tax losses can be utilised. The South-African normal tax rate is 27% and the capital gains tax inclusion rate is 80%. Assumptions: All amounts are material, and you may ignore the implications of Value-Added Tax (VAT)