QUESTION 1 (51 marks) (92 minutes) Super Foods Ltd (SF Ltd) is a company listed on the Johannesburg Stock Exchange. SF Ltd manufactures food products and sells it to major food retailer companies. The company has a 31 December year end. Contract with Movers Ltd SF Ltd entered into a lease agreement, as defined in IFRS 16, Leases with Movers Ltd on 1 April 2020 to lease four forklifts from Movers Ltd. The forklifts were used to transfer packaged manufactured goods. SF Ltd and Movers Ltd incurred initial direct costs of R16 451 and R10 000 respectively to negotiate the following lease terms: Cost/fair value of four forklifts.. R1 000 000 Instalment payable bi-annually in arrears. R85 000 Lease term......... 8 years Unguaranteed residual value. R80 000 Guaranteed residual value. R120 000 Commencement date of lease. 1 April 2020 Ownership of the forklifts will not transfer to SF Ltd at the end of the lease term. The estimated useful life of the forklifts is 10 years with no residual value. SF Ltd did not elect the simplified approach in accounting for the lease. It is the policy of the company to present the right of use assets separately from property, plant and equipment in the statement of financial position. All finance costs are capitalized to the underlying liability. Construction of Warehouse On 1 April 2020, SF Ltd decided to construct a new warehouse for the storing of their inventory. The warehouse meets the definition of a qualifying asset in terms of IAS 23, Borrowing Costs. On 1 May 2020, Finbank granted a loan of R4 800 000 to SF Ltd for the construction of the warehouse and paid the amount to SF Ltd on the following dates: R 1 May 2020 2 100 000 1 July 2020 2 700 000 The loan bears interest at a rate of 10 % per annum, compounded annually on 30 April. The repayment of capital and interest will commence in 2023. SF Ltd temporarily invested surplus funds and received interest thereon to the amount of R25 000 for the period 1 May 2020 to 30 September 2020. The interest was earned evenly throughout the period. The dates relevant to the construction of the warehouse are as follows: Commencement of construction. 1 May 2020 Building ready for use.. 1 December 2020 Building brought into use... 2 January 2021 The total costs incurred by the building contractor to construct the warehouse and funded only from the loan, were as follows: R 1 May 2020 1 600 000 1 August 2020 2 200 000 31 October 2020 1 000 000 5 QUESTION 1 (continued) Due to the COVID-19 pandemic the government instituted a lockdown period from 1 July 2020 to 31 August 2020. During this period all construction activities were ceased. SF Ltd applies the cost model in terms of IAS 16, Property, Plant and Equipment for all its property, plant and equipment items and depreciates its assets using the straight-line method over the expected useful life of the assets. On 1 December 2020, a residual value of R100 000 was allocated to the warehouse and the estimated useful life of the building was determined to be 20 years Human resources SF Ltd's employees are entitled to 24 vacation leave days per calendar year. All employees must take six vacation leave days in April and another seven days during December to allow for routine machine maintenance. Leave days not taken during any calendar year are transferred to the next calendar year and must be taken on or before 31 March of the next year, after which these leave days will be forfeited. As at 31 December 2020, employees that earn 40% of the total salaries had taken all their leave days. The remaining employees only took the compulsory leave days and the remaining leave days were transferred to the following calendar year. It is expected that on average 70% of the remaining leave days transferred to the following year will be used before 31 March 2021. There are 250 working days in a year and there were no resignations or new appointments during the 2020 financial year. 2% of the cost to company relate to employees who were assigned to the construction of the warehouse. These employees took no leave during the period of construction. They took the compulsory leave in April and 8 days in December. All the remaining days were taken in January 2021. The total gross monthly salaries of SF Ltd's employees amounted to R4 000 000. This is the amount after the increase of 10% that takes effect annually on 1 April. All employees are entitled to a thirteenth cheque that is equal to one month's salary 30 November of each year. 14% of the monthly salaries are paid to a provident fund of which 8% are recovered from the employees. Taxation The South-African normal tax rate is 28%. The capital gains tax inclusion rate is 80% resulting in an effective capital gains tax rate of 22.4% for all financial years under consideration. Deferred tax is provided for on all temporary differences in accordance with the statement of financial position approach. The only temporary differences are those resulting from the information given 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 Revenue Service allows a 5% annual building allowance on the warehouse building in terms of section 13quin of the Income Tax Act, according to the straight-line method; not apportioned for periods shorter than a year. 6 QUESTION 1 (continued) REQUIRED: Marks (a) 13 1 (b) Prepare all the journal entries required to account for the lease of the four forklifts in the accounting records of SF Ltd for the year ended 31 December 2020. You may ignore the tax implications of the lease and the split between the short-term and long-term portions of the balance outstanding on the lease on 31 December 2020 only for part (a). Communication skills: presentation Prepare the statement of financial position of SF Ltd as at 31 December 2020 as far as possible from the given information. The cash and cash equivalents and retained earnings/accumulated loss need not be presented. Communication skills: layout and structure Discuss how Movers Ltd will classify the lease contract with SF Ltd in its own accounting records. TOTAL 31 1 (C) 6 [52] Please note: Your answers must comply with the requirements of International Financial Reporting Standards (IFRS). All percentages must be rounded off to four decimal places. All amounts should be rounded off to the nearest rand. All amounts are material. Comparative amounts are not required. Accounting policy notes are not required. Show all data input into your financial calculator and calculations where applicable. No abbreviations for general ledger account names may be used. Ignore the implications of Value Added Tax (VAT). QUESTION 1 (51 marks) (92 minutes) Super Foods Ltd (SF Ltd) is a company listed on the Johannesburg Stock Exchange. SF Ltd manufactures food products and sells it to major food retailer companies. The company has a 31 December year end. Contract with Movers Ltd SF Ltd entered into a lease agreement, as defined in IFRS 16, Leases with Movers Ltd on 1 April 2020 to lease four forklifts from Movers Ltd. The forklifts were used to transfer packaged manufactured goods. SF Ltd and Movers Ltd incurred initial direct costs of R16 451 and R10 000 respectively to negotiate the following lease terms: Cost/fair value of four forklifts.. R1 000 000 Instalment payable bi-annually in arrears. R85 000 Lease term......... 8 years Unguaranteed residual value. R80 000 Guaranteed residual value. R120 000 Commencement date of lease. 1 April 2020 Ownership of the forklifts will not transfer to SF Ltd at the end of the lease term. The estimated useful life of the forklifts is 10 years with no residual value. SF Ltd did not elect the simplified approach in accounting for the lease. It is the policy of the company to present the right of use assets separately from property, plant and equipment in the statement of financial position. All finance costs are capitalized to the underlying liability. Construction of Warehouse On 1 April 2020, SF Ltd decided to construct a new warehouse for the storing of their inventory. The warehouse meets the definition of a qualifying asset in terms of IAS 23, Borrowing Costs. On 1 May 2020, Finbank granted a loan of R4 800 000 to SF Ltd for the construction of the warehouse and paid the amount to SF Ltd on the following dates: R 1 May 2020 2 100 000 1 July 2020 2 700 000 The loan bears interest at a rate of 10 % per annum, compounded annually on 30 April. The repayment of capital and interest will commence in 2023. SF Ltd temporarily invested surplus funds and received interest thereon to the amount of R25 000 for the period 1 May 2020 to 30 September 2020. The interest was earned evenly throughout the period. The dates relevant to the construction of the warehouse are as follows: Commencement of construction. 1 May 2020 Building ready for use.. 1 December 2020 Building brought into use... 2 January 2021 The total costs incurred by the building contractor to construct the warehouse and funded only from the loan, were as follows: R 1 May 2020 1 600 000 1 August 2020 2 200 000 31 October 2020 1 000 000 5 QUESTION 1 (continued) Due to the COVID-19 pandemic the government instituted a lockdown period from 1 July 2020 to 31 August 2020. During this period all construction activities were ceased. SF Ltd applies the cost model in terms of IAS 16, Property, Plant and Equipment for all its property, plant and equipment items and depreciates its assets using the straight-line method over the expected useful life of the assets. On 1 December 2020, a residual value of R100 000 was allocated to the warehouse and the estimated useful life of the building was determined to be 20 years Human resources SF Ltd's employees are entitled to 24 vacation leave days per calendar year. All employees must take six vacation leave days in April and another seven days during December to allow for routine machine maintenance. Leave days not taken during any calendar year are transferred to the next calendar year and must be taken on or before 31 March of the next year, after which these leave days will be forfeited. As at 31 December 2020, employees that earn 40% of the total salaries had taken all their leave days. The remaining employees only took the compulsory leave days and the remaining leave days were transferred to the following calendar year. It is expected that on average 70% of the remaining leave days transferred to the following year will be used before 31 March 2021. There are 250 working days in a year and there were no resignations or new appointments during the 2020 financial year. 2% of the cost to company relate to employees who were assigned to the construction of the warehouse. These employees took no leave during the period of construction. They took the compulsory leave in April and 8 days in December. All the remaining days were taken in January 2021. The total gross monthly salaries of SF Ltd's employees amounted to R4 000 000. This is the amount after the increase of 10% that takes effect annually on 1 April. All employees are entitled to a thirteenth cheque that is equal to one month's salary 30 November of each year. 14% of the monthly salaries are paid to a provident fund of which 8% are recovered from the employees. Taxation The South-African normal tax rate is 28%. The capital gains tax inclusion rate is 80% resulting in an effective capital gains tax rate of 22.4% for all financial years under consideration. Deferred tax is provided for on all temporary differences in accordance with the statement of financial position approach. The only temporary differences are those resulting from the information given 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 Revenue Service allows a 5% annual building allowance on the warehouse building in terms of section 13quin of the Income Tax Act, according to the straight-line method; not apportioned for periods shorter than a year. 6 QUESTION 1 (continued) REQUIRED: Marks (a) 13 1 (b) Prepare all the journal entries required to account for the lease of the four forklifts in the accounting records of SF Ltd for the year ended 31 December 2020. You may ignore the tax implications of the lease and the split between the short-term and long-term portions of the balance outstanding on the lease on 31 December 2020 only for part (a). Communication skills: presentation Prepare the statement of financial position of SF Ltd as at 31 December 2020 as far as possible from the given information. The cash and cash equivalents and retained earnings/accumulated loss need not be presented. Communication skills: layout and structure Discuss how Movers Ltd will classify the lease contract with SF Ltd in its own accounting records. TOTAL 31 1 (C) 6 [52] Please note: Your answers must comply with the requirements of International Financial Reporting Standards (IFRS). All percentages must be rounded off to four decimal places. All amounts should be rounded off to the nearest rand. All amounts are material. Comparative amounts are not required. Accounting policy notes are not required. Show all data input into your financial calculator and calculations where applicable. No abbreviations for general ledger account names may be used. Ignore the implications of Value Added Tax (VAT)