Question 1: (57 marks: 85 minutes) Fresh Living Limited ('Fresh') is a distributor of natural and organic products produced in a socially sustainable manner. The Fresh head office is based in a prestigious office park from which it rents offices. The accountant is currently away on training and she admits to having very limited knowledge about the calculation and treatment of the company's tax calculations She has provided you with the following pre-adjustment trial balance and additional information of Fresh to assist staff in preparing the annual financial statements for the year ended 31 December 2018 Fresh Living Limited Pre-adjustment trial balance for the year ended 31 December 2018 R 6 718 750 1 000 000 Plant Investment in shares Inventory Accounts receivable Current tax payable Accounts payable Bank overdraft Ordinary share capital Retained earnings (1 January 2018) Loan payable Deferred taxation (1 January 2018) Revenue Dividend income (not taxable) Profit on sale of equipment Depreciation on equipment Donations made (Non-deductible for tax purposes) Finance charges (Deductible for tax purposes) Other expenses (Deductible for tax purposes) Dividends declared Revenue received in advance (Taxable when received) Rent expense prepaid (Deductible for taxation purposes when paid) 1 500 000 875 000 (132 500) (250 000) (617 500) (1 250 000) (2 000 000) (112 500) 777 (9 437 500) (31 250) ??? 312 500 15 000 343 750 3 891 250 62 500 (93 750) 187 500 Page 2 of 5 Additional information 1. Current taxation and deferred tax computations remain outstanding at 31 December 2018 2. Closing balances for accruals as at 31 December 2017 were as follows R Rent expense prepaid Revenue received in advance 125 000 31 250 3. An interim dividend was declared on 1 May 2018. R62 500 was paid out in respect of the interim dividend and the related dividend withholding tax. A final dividend of R125 000 was declared on 29 December 2018 and is payable on 20 January 2019. No journal entries have been processed in respect of the final dividend. 4. During the 2017 financial year, R687 500 was provided for as current income taxation The tax assessment for 2017 received during 2018 indicated a total assessed current income taxation of R750 000. No journal has been processed to account for the 2017 assessment received. The payment for the 2017 assessed tax remains outstanding at 31 December 2018. During the 2018 financial year. R555 000 of provisional tax payments were made and processed in respect of the 2018 tax year. There were no provisional tax payments made for the 2017 tax year. 5. A wear and tear allowance of R187 500 was granted on plant for tax purposes for the 2018 tax year. The tax base of the plant was R5 000 000 at 31 December 2018 6. An item of plant was sold during the 2018 year. Details of the sale are as follows: R Carrying amount at the date of sale Capital profit Non-capital profit Cost/Base cost Tax base 187 500 125 000 31 250 218 750 62 500 There was no movement in plant other than that which is evident from the information provided. . There are no other differences between accounting profit and taxable profit other than those evident from the information given The rate of income taxation is 30% (2017: 40%) and the inclusion rate is 80% for capital gains purposes for both the 2017 and 2018 years ended. Dividend tax is withheld at a rate of 20% Page 3 of 5 Question 1 (57 marks - 85 minutes) REQUIRED: Show and reference all workings Round off to the nearest rand. a) b) c) Marks Draft the entries in the accounting records of Fresh Living Limited, in journal form, to record all matters relating to dividends declared, current taxation and deferred taxation matters for the year ended 31 December 2018. Begin the current tax computation with the profit before tax" figure as it will appear in the profit or loss section of the Statement of Profit or loss and Other 34.5 Comprehensive income. Deferred taxation must be calculated using the balance sheet (carrying amount versus tax base) approach. Prepare the Statement of profit and loss and other comprehensive income of Fresh Living Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards. 5.0 Comparatives are not required. Prepare the Statement of changes in equity of Fresh Living Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards. 2.5 Comparatives are not required. Prepare only the equity and liabilities section of the Statement of financial position of Fresh Living Limited as at 31 December 2018 in terms of International Financial Reporting Standards. 6.0 Comparatives are not required. Prepare the following notes to the financial statements of Fresh living Limited for the year ended 31 December 2018 in terms of International Financial Reporting 9.0 Standards: Income taxation expense : Comparatives are not required Deferred taxation: Comparatives are required Total 57.0 d) (50 marks, 75 minutes) Question IGNORE ALL FORMS OF TAXATION Round off all amounts to the nearest rand. Siza Limited ("Siza") is a well-established company that sells a large variety of household and industrial fans throughout South Africa, Sza's financial year-end is 31 December 2018. The following is the draft trial balance of Siza as # 31 December 2018: Siza Limited Pre-adjustment trial balance as at 31 December 2018 Debit R Credit R 1 285 000 600 000 792 000 630 000 40 000 2 400 000 Ordinary share capital Retained eamings (1 January 2018) Revaluation reserve (1 January 2018) Trade payables Accrued expenses Property, plant and equipment: carrying amount (1 January 2018) Investment property (1 January 2018) Intangible assets: carrying amount (1 January 2018) Trade receivables Prepaid expenses Inventory Bank overdraft Revenue Cost of sales Rental income Operating expenses 1 200 000 406 250 410 000 75 000 23 500 106 250 3 500 000 ? 71 500 ? 7024 250 7 024 250 The accounting policy for land classified as property, plant and equipment is the revaluation model. The revaluation on the land is carried out annually on 31 December 2 You are provided with the following additional Information for the current year ended 31 December 2018: Assets The assets owned by Siza as at 31 December 2017 are tabled in Appendix 1 (Page 5). 1. Building is situated on land 1 which houses that administrative and warehouse premises of Siza. 2. Building 2 is stunted on land 2. The building is leased out to Thula Limited as per an operating lease contract. The lease agreement stipulates that a monthly rental of R6 500 is payable to Siza. Journal entries were correctly processed for the rental that was received in cash for 11 months from Thula Limited. The rental for December 2018 remains outstanding at your end. No journal entries were passed in this regard. Security services costing Siza R1 200 per month are provided to Thula Limited as per the lease agreement 3. There was an outbreak of wood borer beetles in the area which resulted in some furniture being adversely affected. The affected items had a combined cost of R150 000. These items were immediately removed on 30 June 2018 and destroyed at a cost of R1 500 which was paid in cash. Replacement furniture was purchased on credit at a cost of R190 000 on 1 July 2018 and immediately brought into use. No entrios had been processed for any matter relating to furniture 4. The distribution licence resulted from a contract with MicroFanz Limited which owns the design for the very popular micro fan that attaches to an individual's cell phone. Sua entered into the contract for an exclusivo distribution licence applicable to the Gauteng area only for a period of two yoars from 30 September 2016. This licence has increased the revenue of Siza which is expected to last for a period of five years. No journal entries relating to the distribution licence had been processed for the current financial year. 5. A patent was granted in perpetuity to Siza on the design of a new portable air conditioning unit. An impairment test was conducted and the recoverable amount at 31 December 2018 was R320 000. No journal entries had been processed in relation to the patent for the year ended 31 December 2018. 6. The following fair values, determined by Independent valuator R. Eator, relate to the land and buildings: Fair Value Land 1 Land 2 Building 2 31 December 2017 R780 500 R330 000 R870 000 31 December 2018 R838 500 R400 000 R950 000 Bank Loan On 30 September 2018, the company obtained a loan of R400 000 for the purposes of increasing the working capital of Siza. The bank loan stipulates the following repayment terms Due Date Amount (R) 14 Instalment 30 June 2019 100 000 204 Instalment 30 June 2020 150 000 3 Instalment 30 June 2021 150 000 Interest accrues and is paid annually on 30 September at a rate of 10%. per annum. The bank has the option to delay the 1* instalment by 7 months. Dividends Dividends of 10 cents per ordinary share were declared on 31 October 2018 (700 000 shares in issue). The dividends were payable in cash on 31 January 2019. No journal entries had been processed to record any aspect of the dividend declaration for the year ended 31 December 2018 Sales and Cost of sales Siza conducts sales using a 250% mark up on cost Operating Expenses The operating expenses are allocated as follows: Administration costs 50 Distribution costs 20 Other operating costs 30% All expenses relating to property, plant and equipment are considered part of administration costs. Appendix 1: Land 1 Land 2 Building 1 Building 2 Furniture Fittings Patent and Distribution Licence Purchase date 30 September 2015 30 June 2016 30 September 2015 30 June 2016 30 September 2016 30 September 2016 31 December 2017 Cost R300 000 R850 000 R150 000 R350 000 R400 000 Revaluation R1 000 000 Cost R1 000 000 Cost Fair value Fair value Cost Measurement model Cost NA NA Straight-line NA Depreciation method Straight-line NA Diminishing balance Residual value RO NA R100 000 NA R330 752 RO RO Useful life Indefinite NA 50 years NA 5 years Finite Indefinite 1 and 6 2 and 6 1 2 and 6 3 4 Roter to notes below 5 Question (50 marks; 75 minutes) REQUIRED: Ignore all forms of taxation. Show and reference ALL workings. Round off to the nearest rand. Marks 12 21 1 Prepare all the journal entries relating to the property, plant and equipment and the patent for the year ended 31 December 2018 Dates and narrations are required, 2 Prepare the following financial statements of Siza Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards: Statement of Profit or Loss and Other Comprehensive Income (The company uses the function of expense" method to reflect its income and expenses) Statement of Financial Position Comparatives are not required. 3 Draft a memorandum to the financial manager of Siza Limited wherein you discuss the identification of 'ACCRUED RENTAL INCOME of Siza Limited as a particular element of the financial statements and further discuss it's recognition in accordance with the conceptual framework of the International Accounting Standards Board. You must provide the journal entry that would be required as at 31 December 2018 for the lease income outstanding by Thula Limited for the year ended 31 December 2018. Total 17 50 Question 1: (57 marks: 85 minutes) Fresh Living Limited ('Fresh') is a distributor of natural and organic products produced in a socially sustainable manner. The Fresh head office is based in a prestigious office park from which it rents offices. The accountant is currently away on training and she admits to having very limited knowledge about the calculation and treatment of the company's tax calculations She has provided you with the following pre-adjustment trial balance and additional information of Fresh to assist staff in preparing the annual financial statements for the year ended 31 December 2018 Fresh Living Limited Pre-adjustment trial balance for the year ended 31 December 2018 R 6 718 750 1 000 000 Plant Investment in shares Inventory Accounts receivable Current tax payable Accounts payable Bank overdraft Ordinary share capital Retained earnings (1 January 2018) Loan payable Deferred taxation (1 January 2018) Revenue Dividend income (not taxable) Profit on sale of equipment Depreciation on equipment Donations made (Non-deductible for tax purposes) Finance charges (Deductible for tax purposes) Other expenses (Deductible for tax purposes) Dividends declared Revenue received in advance (Taxable when received) Rent expense prepaid (Deductible for taxation purposes when paid) 1 500 000 875 000 (132 500) (250 000) (617 500) (1 250 000) (2 000 000) (112 500) 777 (9 437 500) (31 250) ??? 312 500 15 000 343 750 3 891 250 62 500 (93 750) 187 500 Page 2 of 5 Additional information 1. Current taxation and deferred tax computations remain outstanding at 31 December 2018 2. Closing balances for accruals as at 31 December 2017 were as follows R Rent expense prepaid Revenue received in advance 125 000 31 250 3. An interim dividend was declared on 1 May 2018. R62 500 was paid out in respect of the interim dividend and the related dividend withholding tax. A final dividend of R125 000 was declared on 29 December 2018 and is payable on 20 January 2019. No journal entries have been processed in respect of the final dividend. 4. During the 2017 financial year, R687 500 was provided for as current income taxation The tax assessment for 2017 received during 2018 indicated a total assessed current income taxation of R750 000. No journal has been processed to account for the 2017 assessment received. The payment for the 2017 assessed tax remains outstanding at 31 December 2018. During the 2018 financial year. R555 000 of provisional tax payments were made and processed in respect of the 2018 tax year. There were no provisional tax payments made for the 2017 tax year. 5. A wear and tear allowance of R187 500 was granted on plant for tax purposes for the 2018 tax year. The tax base of the plant was R5 000 000 at 31 December 2018 6. An item of plant was sold during the 2018 year. Details of the sale are as follows: R Carrying amount at the date of sale Capital profit Non-capital profit Cost/Base cost Tax base 187 500 125 000 31 250 218 750 62 500 There was no movement in plant other than that which is evident from the information provided. . There are no other differences between accounting profit and taxable profit other than those evident from the information given The rate of income taxation is 30% (2017: 40%) and the inclusion rate is 80% for capital gains purposes for both the 2017 and 2018 years ended. Dividend tax is withheld at a rate of 20% Page 3 of 5 Question 1 (57 marks - 85 minutes) REQUIRED: Show and reference all workings Round off to the nearest rand. a) b) c) Marks Draft the entries in the accounting records of Fresh Living Limited, in journal form, to record all matters relating to dividends declared, current taxation and deferred taxation matters for the year ended 31 December 2018. Begin the current tax computation with the profit before tax" figure as it will appear in the profit or loss section of the Statement of Profit or loss and Other 34.5 Comprehensive income. Deferred taxation must be calculated using the balance sheet (carrying amount versus tax base) approach. Prepare the Statement of profit and loss and other comprehensive income of Fresh Living Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards. 5.0 Comparatives are not required. Prepare the Statement of changes in equity of Fresh Living Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards. 2.5 Comparatives are not required. Prepare only the equity and liabilities section of the Statement of financial position of Fresh Living Limited as at 31 December 2018 in terms of International Financial Reporting Standards. 6.0 Comparatives are not required. Prepare the following notes to the financial statements of Fresh living Limited for the year ended 31 December 2018 in terms of International Financial Reporting 9.0 Standards: Income taxation expense : Comparatives are not required Deferred taxation: Comparatives are required Total 57.0 d) (50 marks, 75 minutes) Question IGNORE ALL FORMS OF TAXATION Round off all amounts to the nearest rand. Siza Limited ("Siza") is a well-established company that sells a large variety of household and industrial fans throughout South Africa, Sza's financial year-end is 31 December 2018. The following is the draft trial balance of Siza as # 31 December 2018: Siza Limited Pre-adjustment trial balance as at 31 December 2018 Debit R Credit R 1 285 000 600 000 792 000 630 000 40 000 2 400 000 Ordinary share capital Retained eamings (1 January 2018) Revaluation reserve (1 January 2018) Trade payables Accrued expenses Property, plant and equipment: carrying amount (1 January 2018) Investment property (1 January 2018) Intangible assets: carrying amount (1 January 2018) Trade receivables Prepaid expenses Inventory Bank overdraft Revenue Cost of sales Rental income Operating expenses 1 200 000 406 250 410 000 75 000 23 500 106 250 3 500 000 ? 71 500 ? 7024 250 7 024 250 The accounting policy for land classified as property, plant and equipment is the revaluation model. The revaluation on the land is carried out annually on 31 December 2 You are provided with the following additional Information for the current year ended 31 December 2018: Assets The assets owned by Siza as at 31 December 2017 are tabled in Appendix 1 (Page 5). 1. Building is situated on land 1 which houses that administrative and warehouse premises of Siza. 2. Building 2 is stunted on land 2. The building is leased out to Thula Limited as per an operating lease contract. The lease agreement stipulates that a monthly rental of R6 500 is payable to Siza. Journal entries were correctly processed for the rental that was received in cash for 11 months from Thula Limited. The rental for December 2018 remains outstanding at your end. No journal entries were passed in this regard. Security services costing Siza R1 200 per month are provided to Thula Limited as per the lease agreement 3. There was an outbreak of wood borer beetles in the area which resulted in some furniture being adversely affected. The affected items had a combined cost of R150 000. These items were immediately removed on 30 June 2018 and destroyed at a cost of R1 500 which was paid in cash. Replacement furniture was purchased on credit at a cost of R190 000 on 1 July 2018 and immediately brought into use. No entrios had been processed for any matter relating to furniture 4. The distribution licence resulted from a contract with MicroFanz Limited which owns the design for the very popular micro fan that attaches to an individual's cell phone. Sua entered into the contract for an exclusivo distribution licence applicable to the Gauteng area only for a period of two yoars from 30 September 2016. This licence has increased the revenue of Siza which is expected to last for a period of five years. No journal entries relating to the distribution licence had been processed for the current financial year. 5. A patent was granted in perpetuity to Siza on the design of a new portable air conditioning unit. An impairment test was conducted and the recoverable amount at 31 December 2018 was R320 000. No journal entries had been processed in relation to the patent for the year ended 31 December 2018. 6. The following fair values, determined by Independent valuator R. Eator, relate to the land and buildings: Fair Value Land 1 Land 2 Building 2 31 December 2017 R780 500 R330 000 R870 000 31 December 2018 R838 500 R400 000 R950 000 Bank Loan On 30 September 2018, the company obtained a loan of R400 000 for the purposes of increasing the working capital of Siza. The bank loan stipulates the following repayment terms Due Date Amount (R) 14 Instalment 30 June 2019 100 000 204 Instalment 30 June 2020 150 000 3 Instalment 30 June 2021 150 000 Interest accrues and is paid annually on 30 September at a rate of 10%. per annum. The bank has the option to delay the 1* instalment by 7 months. Dividends Dividends of 10 cents per ordinary share were declared on 31 October 2018 (700 000 shares in issue). The dividends were payable in cash on 31 January 2019. No journal entries had been processed to record any aspect of the dividend declaration for the year ended 31 December 2018 Sales and Cost of sales Siza conducts sales using a 250% mark up on cost Operating Expenses The operating expenses are allocated as follows: Administration costs 50 Distribution costs 20 Other operating costs 30% All expenses relating to property, plant and equipment are considered part of administration costs. Appendix 1: Land 1 Land 2 Building 1 Building 2 Furniture Fittings Patent and Distribution Licence Purchase date 30 September 2015 30 June 2016 30 September 2015 30 June 2016 30 September 2016 30 September 2016 31 December 2017 Cost R300 000 R850 000 R150 000 R350 000 R400 000 Revaluation R1 000 000 Cost R1 000 000 Cost Fair value Fair value Cost Measurement model Cost NA NA Straight-line NA Depreciation method Straight-line NA Diminishing balance Residual value RO NA R100 000 NA R330 752 RO RO Useful life Indefinite NA 50 years NA 5 years Finite Indefinite 1 and 6 2 and 6 1 2 and 6 3 4 Roter to notes below 5 Question (50 marks; 75 minutes) REQUIRED: Ignore all forms of taxation. Show and reference ALL workings. Round off to the nearest rand. Marks 12 21 1 Prepare all the journal entries relating to the property, plant and equipment and the patent for the year ended 31 December 2018 Dates and narrations are required, 2 Prepare the following financial statements of Siza Limited for the year ended 31 December 2018 in terms of International Financial Reporting Standards: Statement of Profit or Loss and Other Comprehensive Income (The company uses the function of expense" method to reflect its income and expenses) Statement of Financial Position Comparatives are not required. 3 Draft a memorandum to the financial manager of Siza Limited wherein you discuss the identification of 'ACCRUED RENTAL INCOME of Siza Limited as a particular element of the financial statements and further discuss it's recognition in accordance with the conceptual framework of the International Accounting Standards Board. You must provide the journal entry that would be required as at 31 December 2018 for the lease income outstanding by Thula Limited for the year ended 31 December 2018. Total 17 50