QUESTION 1 (50 marks) (90 minutes) Bevmart Ltd is a manufacturer of fast-moving consumer goods, situated in Midrand, South Africa. The company is listed on the JSE and has a 30 June year end (the current financial year has 365 days). Bevmart Ltd has two manufacturing divisions, processed foods, and fresh foods (this includes fresh and flash frozen fruits and vegetables). Bevmart Ltd operates a 5-day working week. All employees are entitled to 20 days of accumulating leave per year, vesting. The following information relates to the fresh and frozen foods division as well as some of the assets of the company: Fresh and frozen foods division (FF division) The FF division of Bevmart Ltd manufactures and packages both fresh and flash frozen foods. During the current financial year, the management of Bevmart Ltd noticed a decline in the orders for their FF division products. The marketing division of Bevmart Ltd embarked on a consumer research project, the results of the study showed that as part of cost-saving measures, consumers are planting their own community vegetable gardens, providing fresh fruits and vegetables to the community, resulting in the decline in demand for store bought fruits and vegetables. On 30 June 2023, the recoverable amount of the FF division was estimated to be R1 450 000. The FF division consists of the following assets: Goodwill (carrying amount) ............................................................................................. R125 000 Packaging machinery ...................................................................................................... Note 1 Inventory ......................................................................................................................... Note 2 Delivery vehicle ............................................................................................................... Note 3 1. Bevmart Ltd purchased the packaging machinery on 5 August 2020 at a cost of R1 575 000. An amount of R18 500 was paid in cash, on 6 August 2020, for the delivery of the packaging machinery. Since the packaging machinery is very specialised, Bevmart Ltd had to pay a consultant R5 700 to train their employees on how to use the packaging machine effectively. The packaging machinery was available for use, as intended by management, and brought into use on 1 September 2020. The packaging machinery has an estimated useful life of 7 years and a residual value of R185 000 was allocated to it. On 30 June 2023, the recoverable amount of the packaging machinery was estimated to be R950 000. 2. On 30 June 2023, the carrying amount and net realisable value of the inventory amounted to R48 000 and R45 000, respectively. 3. Bevmart Ltd purchased the delivery vehicle, which was specifically customised for the transport of flash frozen vegetables on 30 April 2021, at a cost of R723 850. On acquisition date, the delivery vehicle was wrapped at a cost of R95 000, in specific Bevmart Ltd branding, to assist with public brand awareness. The delivery vehicle was available for use, as intended by management, and brought into use, on 31 May 2021. On acquisition date, the delivery vehicle had an estimated useful life of 850 000km. No residual value was allocated to the delivery vehicle. On 1 July 2022, management of Bevmart Ltd estimated the remaining useful life of the delivery vehicle to only be 650 000km, due to the bad road conditions in South Africa. The delivery vehicle travelled 135 458kms and 123 500kms for the 2022 and 2023 financial years, respectively. The recoverable amount of the delivery vehicle on 30 June 2023, was unknown. Page 3 of 5 QUESTION 1 (continued) As part of the financial year end procedures, the junior accountant of Bevmart Ltd, prepared the following two calculations: Impairment loss of the FF division on 30 June 2023 R Goodwill ....................................................................................................................... 125 000 Packaging machinery ................................................................................................... 11 026 786 Inventory ...................................................................................................................... 48 000 Delivery vehicle ............................................................................................................ 2532 774 Carrying amount of FF division .................................................................................... 1 732 560 Recoverable amount .................................................................................................... (1 450 000) Impairment loss on FF division .................................................................................... 282 560 1 [(1 575 000 + 18 500 + 5 700) [(1 599 200 - 185 000) / 84 months x 34 months = 1 026 786 2 (723 850 + 95 000) (818 850 / 850 000 x 135 458) (818 850 / 650 000 x 123 500) = 532 774 Allocation of impairment loss of the FF division on 30 June 2023 Amount allocated Carrying amount after allocation R R Goodwill (125 000 / 1 732 560 x 282 560) ............................................ 20 386 104 614 Packaging machinery (1 026 786 / 1 732 560 x 282 560) .................... 167 457 859 329 Inventory (48 000 / 1 732 560 x 282 560) ............................................. 7 828 40 172 Delivery vehicle (532 775 / 1 732 560 x 282 560) ................................. 86 889 445 885 282 560 1 450 000 Monitoring software Bevmart Ltd purchased an artificial intelligence monitoring software on 4 April 2023, from an international software developer, at a cost of $185 000. The full invoice amount is payable by Bevmart Ltd on 31 August 2023. The software will be used to monitor the speed and driving habits of Bevmart Ltds drivers. The software was available for use, as intended by management, on 1 May 2023. On acquisition date it was determined that the software has an estimated useful life of 8 years, and no residual value was allocated to it. The speed and driving habit report created by the monitoring software, if found favorable by the insurance company, will be used to calculate a monthly insurance rebate. The following exchange rates are applicable: $1 = 1R 4 April 2023 .............................................................................................................. 15,80 1 May 2023 .............................................................................................................. 15,87 30 June 2023 ........................................................................................................... 15,96 31 August 2023 ........................................................................................................ 16,10 Preservative formula During the prior financial year, the management of Bevmart Ltd embarked on a research and development project to develop a healthier preservative alternative, to be used in the production of processed foods. The research commenced on 1 July 2022 and on 1 September 2022 all the criteria for the recognition of an internally generated intangible asset were met. The development of the formula was completed on 28 February 2023. The formula was available for use, as intended by management, on 1 March 2023. The formula has an estimated useful life of 10 years and a residual value of Rnil was allocated to it. Page 4 of 5 QUESTION 1 (continued) The following costs were incurred during the research and development phase: 1 July 2022 28 February 2023 R General administrative costs ...................................................................... 158 650 Water and electricity .................................................................................. Note 1 Salaries laboratory technicians ............................................................... Note 2 Depreciation laboratory equipment ......................................................... Note 3 Vehicle ....................................................................................................... Note 4 1. Total water and electricity cost incurred for the period 1 July 2022 to 28 February 2023 amounted to R164 550. The costs were incurred evenly throughout the period. 2. Three laboratory technicians, which are permanent employees of Bevmart Ltd, worked full time on the research and development of the formula in the 2023 financial year. Each laboratory assistant is paid a monthly salary of R55 000. Bevmart Ltds permanent employees receive a 6% increase on 1 July of each year. All Bevmart Ltds permanent employees took 15 days annual leave during the current 2023 financial year. Once development of the preservative formula was completed, these three laboratory technicians started a new research project. 3. Laboratory equipment was used for the period 1 September 2022 until 31 December 2022, during the development of the formula. The total depreciation on the laboratory equipment, for the full 2023 financial year, which you can assume has been calculated correctly, amounted to R75 000. 4. The research and development division of Bevmart Ltd donated a brand-new SUV to an employee of the Department of Health, who will assist Bevmart Ltd to ensure the approval and classification of their new formula as a healthier and safer than any other preservatives currently available, is obtained. The vehicle was purchased on 1 February 2023, at a cost of R1 150 000. The vehicle was delivered to the employee of the Department of Health, on acquisition date. On acquisition date it was determined that the vehicle has an estimated useful life of 5 years, and no residual value has been allocated to it. Additional information: 1. Bevmart Ltd has the following accounting policies: Machinery is accounted for in accordance with the cost model. Depreciation is provided for on the straight-line method over the estimated useful life. Vehicles are accounted for in accordance with the cost model. Depreciation is provided for on the units of production method. Intangible assets are accounted for in accordance with the cost model. Amortisation is provided for on the straight-line method over the estimated useful life. Inventory is carried at the lower of its carrying amount and net realisable value. 2. Changes in accounting estimates are accounted for in accordance with the reallocation method. Assumptions: You may ignore the implications of public holidays; The leave cycle of BevMart Ltd is 1 July 2022 to 30 June 2023. All amounts are material; and You may ignore the implications of Value-Added Tax (VAT). Page 5 of 5 QUESTION 1 (continued) REQUIRED: Marks a) Critically discuss the impairment loss and allocation of impairment loss calculations of the FF division, as prepared by the junior accountant of Bevmart Ltd on 30 June 2023. (You can assume that the casting and cross casting of the calculations prepared by the junior accountant is correct.) Include within your discussion a corrected impairment loss calculation of the FF division of Bevmart Ltd on 30 June 2023. Communication skill Logical argument 24 1 b) Disclose the profit before tax note in the annual financial statements of Bevmart Ltd for the year ending 30 June 2023. Include all the relevant disclosable income and expenses items resulting from the information given in the question together with disclosure regarding the change in useful life of the delivery vehicle. 22 c) Advise the CFO of Bevmart Ltd, whom is a CA(SA), on the legal and ethical considerations of the donation of the SUV by the research and development division to the employee of the Department of Health, once he becomes aware of it. 3 Please note: Your answer must comply with the requirements of International Financial Reporting Standards (IFRS). Accounting policy notes are not required. Comparative information is not required. All calculations must be shown. Calculations are to be done to the nearest Rand