Question 1 (75 marks: 100 minutes) : PART A (20 marks: 27 minutes) You are an audit senior who has been assisting with the audit of Harlequin Ltd (Harlequin) for the year ended 31 December 2019. You are attending a training course at the office and you commenced your day by reading a concerning email received from the vac student, based at the client: To: auditsenior@audit.co.za From: vaccie@audit.co.za RE: Audit matter - Harlequin Lid Mrs Audit Senior It came to my attention that our client, Harlequin, a company that operates in the technology sector and is listed on the JSE, with the assistance of a partner company APP SA, launched a load shedding smartphone application during the year ended 31 December 2019. This application will be used to provide detailed schedules of planned power outages. Harlequin entered into a contract with APP SA to manufacture the application at a contract fee of R55 million. In the end, however, APP SA invoiced Harlequin for R65 million due to the costs of unforeseen technological problems. On 31 December 2019 Harlequin had only paid the deposit of R10 million to APP SA. In addition to the expenses relating to the hardware, Harlequin owes R8 million to APP SA that launched the load shedding application for Harlequin. In terms of the launch contract. Harlequin obtains exclusive rights to utilise the application for a period of ten years. Harlequin is, however, not permitted to lease the application to any other technology company and APP SA may prevent usage of the load shedding app at any time. It is expected that the usage being prevented will be extremely rare during the forthcoming ten-year period. At the end of the ten-year period, the ownership of the load shedding application will pass to APP SA. Question 1 PART A continued overleaf 2 Question 1 PART A continued On 31 December 2019 management of Harlequin expected to use the load shedding application for the full period for which it will be available for use to Harlequin. I have an idea how the above matter should be treated and tested at an audit level but am uncertain. Please can you confirm how Harlequin should account for the above transaction in their financial statements for the year ended 31 December 2019, Regards Vaccie REQUIRED: Show all workings Marks 20.0 Draft an email response to your vac student, discussing, solely with reference to the Conceptual Framework for Financial Reporting, how Harlequin Limited should account for the above transaction in their financial statements for the year ended 31 December 2019. Total 20.0 Question 1 continued PART B (55 marks: 73 minutes) IGNORE VAT Sparkling Clean Limited ('SC) is a bath/shower product manufacturer with a 31 March year-end. The ordinary activities of SC include the manufacturing and selling of vibrantly coloured bath bombs, soaps, solid shampoo bars and massage bars. The following relates to the year ended 31 March 2018: Non-current assets SC owns the following non-current assets that are of particular interest to the financial manager: . A recipe for bath bombs Goodwill Soap machine Jelly machine Recipe for bath bombs SC purchased a new recipe for bath bombs (bathing candy) in the hope that these items will gain increased popularity amongst consumers. The purchase took place on 6 January 2018 and although not ready for immediate use, the recipe is sure to be a success. SC are currently registering the bath bomb recipe in their own name and this is expected to be finalised at the beginning of the next financial year. Goodwill Goodwill of R3 million arose from the purchase of a division of a shampoo producing company on 3 June 2012. The division performed well in the first three years, however, demand for the product fell toward the end of 2015. As a result of this, an impairment of R500 000 and a further R650 000, was processed for the year ended 31 March 2016 and 31 March 2017 respectively, Question 1 PART B continued overleaf Question 1 PART B continued Demand has since picked up and the financial manager has calculated the recoverable amount of Goodwill to be R5 million as at 31 March 2018. After completing the calculation, the financial manager was extremely delighted as he believes that this means that goodwill has increased in value. Soap machine A recent health report has indicated that colourful soaps may be harmful to human skin. This report has led to a large drop in sales of products and demand for SC soaps, in particular, has fallen. Internal sales data reflects a major drop in forecasted sales. The damage to the SC soap brand is considered so severe that it is unlikely that the brand will recover and therefore SC is considering shutting down the division. The financial manager has no idea of what effect this could have on the financial statements as the division has not yet been closed. Bath Jelly machine With the fear of the soap division being shut down, more attention has been paid to the extremely popular, high-end, bath jelly products to boost income. As this machine is old, the accountant calculates the recoverable amount annually. For the year ended 31 March 2017, the recoverable amount (being the value in use) was determined to be triple the carrying amount. Unfortunately, the accountant has fallen ill and has been away from work for the last three months. The financial manager is worried that the calculation of the recoverable amount will not be completed before 31 March 2018 and has asked if this would result in the auditors being unhappy as International Financial Reporting Standards has not been fully complied with. Question 1 PART B continued Taxation After all relevant consultations and considering all information, the financial manager has correctly calculated profit before tax for the year ended 31 March 2018 as R11 465 000. The following amounts have been considered in this calculation: Details R 19 500 8 200 Dividend Income Speeding fines Prepaid expenses (31 March 2017) Prepaid expenses (31 March 2018) Income received in advance (31 March 2017) Income received in advance (31 March 2018) Depreciation Impairment Reversal of impairment Profit on sale of vehicle 25 700 50 000 90 000 65 000 1 801 400 738 500 28 000 86 000 The tax consultant has provided the following guidance in respect to your tax calculations: Dividend income is exempt from tax Speeding fines are classified as non-deductible expenses. Prepaid expenses are deductible for tax purposes when paid. Revenue received in advance is taxed when received. The tax rate applicable to SC changed from 30% to 25% on 1 April 2017 - The capital gains inclusion rate is 80% . Wear and tear tax allowances have been correctly calculated at R2 846 000 The profit on sale of vehicle relates to a delivery van with an original cost of R450 000 which was sold for R500 000. The tax base on disposal has been correctly calculated at R320 000 and the base cost was R450 000. Question 1 PART B continued overleaf 6 Question 1 PART B continued A tax assessment was received on 25 September 2017 showing an assessed current tax of R3 495 890 for the year ended 31 March 2017, although R3 575 800 had been provided for in the financial statements. The following note to the financial statements has been correctly prepared by the financial manager for the year ended 31 March 2018 with respect to deferred tax balances: Income received in advance Prepaid expense Property, plant and equipment Deferred tax asset / liability) 31 March 2017 27 000 (7 710) (197 730) (178 440) 31 March 2018 16 250 (12 500) (224 800) (221 050) REQUIRED: Show and reference ALL workings. Round off your final answers to the nearest rand. Marks Prepare a memorandum addressed to the financial manager of Sparkling (a) Clean Limited discussing the treatment of the four non-current assets that 22.0 are of particular interest to him in terms of IAS 36 Impairment of Assets. The financial manager was involved in a car accident prior to completing the income tax note for the Statement of Profit or Loss and Other Comprehensive Income. Using the taxation information that has been provided, prepare the income tax expense note to the financial statements (b) 33.0 for Sparkling Clean Limited for the year ended 31 March 2018. Note: you are required to address both the disclosure requirements of IAS 12:79 (tax expense note) and IAS 12:81(c) (tax rate reconciliation). Accounting policy notes and comparatives are not required. Total 55.0 Question 2 (60 marks: 80 minutes) The Jurassic Group consists of Jurassic Limited ("Jurassic") and its subsidiary. Stego Limited ("Stego"). The group has a 31 December year end. The pre-closing trial balances of Jurassic and Stego as at 31 December 2019 are as follows: Jurassic Stego Debit Credit Debit Credit 500 000 200 000 Ordinary share capital Preference share capital (12% non- redeemable shares) 100 000 700 000 250 000 Retained earnings as at 1/01/2019 Revaluation gain - OCI 216 000 130 000 Long term loan - Stego 200 000 Long term loan - Volcano Bank 100 000 Deferred tax-OCI 84 000 36 400 Accumulated depreciation - Buildings 100 000 Shareholders for dividend 100 000 Profit before interest paid and tax 1 141 200 792 000 Buildings at fair value 1 500 000 Plant at fair value 460 000 Investment in Stego 235 000 Loan to Jurassic 200 000 Accounts receivable 80 000 15 000 Bank 314 744 174 840 Interest paid 22 000 15 000 Tax expense 319 456 258 760 Ordinary dividends declared / paid 402 000 400 000 Preference dividends declared / paid 12 000 2 957 200 2 957 200 1 572 000 1 572 000 Question 2 continued overleaf 8 Question 2 continued The following information is relevant to Jurassic Jurassic revalued its buildings on 31 December 2018 using the net replacement value method. The carrying amount of the buildings at that date was R1 200 000 and the fair value was R1 500 000. The remaining useful life of the buildings at the date of the revaluation was 15 years. In December 2019, the directors again considered the valuation of the properties and noted that there was no material change to the previous valuation The loan from the bank was taken out on 1 January 2019 and bears interest at a rate of 10% per annum The loan to Jurassic was granted on 1 May 2019 and bears interest at 9% per annum The following information is relevant to Stego Purchase of ordinary shares in Stego on 1 July 2017 Jurassic purchased 85% of the ordinary share capital of Stego and paid for the shares as follows. -R190 000 cash paid - Issuing 10 000 Jurassic shares to the seller at market value. The market value of Jurassic's shares was R3.50 per share on 1 July 2017 The balance on retained earnings of Stego was R120 000 at that date and the share price of Stego was R1.5235 per ordinary share. Stego had a revaluation surplus of R nil on the acquisition date. Al the net identifiable assets of Stego were considered to be fairly valued, with the exception of their plant. At acquisition date the fair value of the plant was estimated to be R552 500. The useful life and residual value of the plant have remained unchanged throughout the life of the plant. The plant was originally purchased by Stego on 1 January 2016 for R550 000 when the useful life was estimated to be 10 years and a residual value of zero. Question 2 continued The Receiver of Revenue grants a wear and tear allowance on plant of 10% per annum, not apportioned for time. The directors of Jurassic agreed with Stego's estimated useful life of the plant. No entry was processed in the records of Stego with regards to the fair value of the plant at acquisition The management of Jurassic decided to measure the non-controlling interest in Stego at fair value on consolidation Stego revalued its plant (previously considered undervalued at acquisition date) on 31 December 2019 to its fair value of R460 000 . Purchase of preference shares in Stego on 1 January 2019 The investment in the preference shares of Stego was purchased by paying R10 000 in cash. During the 2019-year end, Stego declared and paid an interim dividend of R 1.50 per ordinary share and declared a final dividend of Ro.50 per ordinary share on 31 December 2019. The final dividend will be paid on 15 January 2020. The preference dividend for the year was declared and paid on 31 December 2019. . Additional information: The standard tax rate is 28% and the inclusion rate for capital gains is 80%. The issued share capital of Stego consists of 200 000 ordinary shares and 100 000 preference shares. The non-redeemable preference shares of Stego are classified as equity. Question 2 continued overleaf 2 10 Question 2 continued REQUIRED: : Show all workings Round off to the nearest rand unless instructed otherwise Marks Prepare the journal entry relating to Jurassic's investment in Stego in the separate accounting records of Jurassic Limited for the year ended 31 December 2017, (a) 4.5 (b) Prepare the Analysis of equity worksheet of Stego Limited as at 31 December 2019 using the information provided. (Detach the template provided in the question paper and include in your answer booklet.) 17.0 Prepare the consolidating journal entries relating only to the revaluation of (c) Stego's plant on 31 December 2019. 7.5 Prepare the consolidated statement of profit or loss and other comprehensive income of the Jurassic Group for the year ended 31 December 2019. (d) 14.0 Ignore comparatives Prepare the following columns of the consolidated statement of changes in equity of the Jurassic Group for the year ended 31 December 2019 9.0 (e) Retained earnings Non-controlling interest You must include the statement headings Prepare an extract of the consolidated statement of financial position of the Jurassic Group at 31 December 2019, detailing current and non-current 0 liabilities 8.0 Comparatives are not required. Total 60.0 Comparatives are not required. Question 1 (75 marks: 100 minutes) PART A (20 marks: 27 minutes) You are an audit senior who has been assisting with the audit of Harlequin Lid (Harlequin) for the year ended 31 December 2019. You are attending a training course at the office and you commenced your day by reading a concerning email received from the vac student, based at the client: To: auditsenior@audit.co.za From: vaccie@audit.co.za RE: Audit matter - Harlequin Ltd Mrs Audit Senior It came to my attention that our client Harlequin, a company that operates in the technology sector and is listed on the JSE, with the assistance of a partner company APP SA, launched load shedding smartphone application during the year ended 31 December 2019. This application will be used provide detailed schedules of planned power outages. Harlequin entered into a contract with APP SA to manufacture the application at a contract foe of R55 million. In the end, however, APP SA invoiced Harlequin for R65 million due to the costs of unforeseen technological problems. On 31 December 2019 Harlequin had only paid the deposit of R10 million to APP SA, In addition to the expenses relating to the hardware, Harlequin owes R8 million to APP SA that launched the load shedding application for Harlequin. In terms of the launch contract, Harlequin obtains exclusive rights to utilise the application for a period of ten years. Harlequin is, however, not permitted to lease the application to any other technology company and APP SA may prevent usage of the load shedding app at any time. It is expected that the usage being prevented will be extremely rare during the forthcoming ten-year period. At the end of the ten-year period, the ownership of the load shedding application will pass to APP SA. Question 1 PART A continued overleaf 2 Question 1 PART A continued On 31 December 2019 management of Harlequin expected to use the load shedding application for the full period for which it will be available for use to Harlequin I have an idea how the above matter should be treated and tested at an audit level. but am uncertain. Please can you confirm how Harlequin should account for the above transaction in their financial statements for the year ended 31 December 2019 Regards Vaccie REQUIRED: Show all workings Marks 20.0 Draft an email response to your vac student, discussing, solely with reference to the Conceptual Framework for Financial Reporting, how Harlequin Limited should account for the above transaction in their financial statements for the year ended 31 December 2019. Total 20.0 Question 1 (75 marks: 100 minutes) : PART A (20 marks: 27 minutes) You are an audit senior who has been assisting with the audit of Harlequin Ltd (Harlequin) for the year ended 31 December 2019. You are attending a training course at the office and you commenced your day by reading a concerning email received from the vac student, based at the client: To: auditsenior@audit.co.za From: vaccie@audit.co.za RE: Audit matter - Harlequin Lid Mrs Audit Senior It came to my attention that our client, Harlequin, a company that operates in the technology sector and is listed on the JSE, with the assistance of a partner company APP SA, launched a load shedding smartphone application during the year ended 31 December 2019. This application will be used to provide detailed schedules of planned power outages. Harlequin entered into a contract with APP SA to manufacture the application at a contract fee of R55 million. In the end, however, APP SA invoiced Harlequin for R65 million due to the costs of unforeseen technological problems. On 31 December 2019 Harlequin had only paid the deposit of R10 million to APP SA. In addition to the expenses relating to the hardware, Harlequin owes R8 million to APP SA that launched the load shedding application for Harlequin. In terms of the launch contract. Harlequin obtains exclusive rights to utilise the application for a period of ten years. Harlequin is, however, not permitted to lease the application to any other technology company and APP SA may prevent usage of the load shedding app at any time. It is expected that the usage being prevented will be extremely rare during the forthcoming ten-year period. At the end of the ten-year period, the ownership of the load shedding application will pass to APP SA. Question 1 PART A continued overleaf 2 Question 1 PART A continued On 31 December 2019 management of Harlequin expected to use the load shedding application for the full period for which it will be available for use to Harlequin. I have an idea how the above matter should be treated and tested at an audit level but am uncertain. Please can you confirm how Harlequin should account for the above transaction in their financial statements for the year ended 31 December 2019, Regards Vaccie REQUIRED: Show all workings Marks 20.0 Draft an email response to your vac student, discussing, solely with reference to the Conceptual Framework for Financial Reporting, how Harlequin Limited should account for the above transaction in their financial statements for the year ended 31 December 2019. Total 20.0 Question 1 continued PART B (55 marks: 73 minutes) IGNORE VAT Sparkling Clean Limited ('SC) is a bath/shower product manufacturer with a 31 March year-end. The ordinary activities of SC include the manufacturing and selling of vibrantly coloured bath bombs, soaps, solid shampoo bars and massage bars. The following relates to the year ended 31 March 2018: Non-current assets SC owns the following non-current assets that are of particular interest to the financial manager: . A recipe for bath bombs Goodwill Soap machine Jelly machine Recipe for bath bombs SC purchased a new recipe for bath bombs (bathing candy) in the hope that these items will gain increased popularity amongst consumers. The purchase took place on 6 January 2018 and although not ready for immediate use, the recipe is sure to be a success. SC are currently registering the bath bomb recipe in their own name and this is expected to be finalised at the beginning of the next financial year. Goodwill Goodwill of R3 million arose from the purchase of a division of a shampoo producing company on 3 June 2012. The division performed well in the first three years, however, demand for the product fell toward the end of 2015. As a result of this, an impairment of R500 000 and a further R650 000, was processed for the year ended 31 March 2016 and 31 March 2017 respectively, Question 1 PART B continued overleaf Question 1 PART B continued Demand has since picked up and the financial manager has calculated the recoverable amount of Goodwill to be R5 million as at 31 March 2018. After completing the calculation, the financial manager was extremely delighted as he believes that this means that goodwill has increased in value. Soap machine A recent health report has indicated that colourful soaps may be harmful to human skin. This report has led to a large drop in sales of products and demand for SC soaps, in particular, has fallen. Internal sales data reflects a major drop in forecasted sales. The damage to the SC soap brand is considered so severe that it is unlikely that the brand will recover and therefore SC is considering shutting down the division. The financial manager has no idea of what effect this could have on the financial statements as the division has not yet been closed. Bath Jelly machine With the fear of the soap division being shut down, more attention has been paid to the extremely popular, high-end, bath jelly products to boost income. As this machine is old, the accountant calculates the recoverable amount annually. For the year ended 31 March 2017, the recoverable amount (being the value in use) was determined to be triple the carrying amount. Unfortunately, the accountant has fallen ill and has been away from work for the last three months. The financial manager is worried that the calculation of the recoverable amount will not be completed before 31 March 2018 and has asked if this would result in the auditors being unhappy as International Financial Reporting Standards has not been fully complied with. Question 1 PART B continued Taxation After all relevant consultations and considering all information, the financial manager has correctly calculated profit before tax for the year ended 31 March 2018 as R11 465 000. The following amounts have been considered in this calculation: Details R 19 500 8 200 Dividend Income Speeding fines Prepaid expenses (31 March 2017) Prepaid expenses (31 March 2018) Income received in advance (31 March 2017) Income received in advance (31 March 2018) Depreciation Impairment Reversal of impairment Profit on sale of vehicle 25 700 50 000 90 000 65 000 1 801 400 738 500 28 000 86 000 The tax consultant has provided the following guidance in respect to your tax calculations: Dividend income is exempt from tax Speeding fines are classified as non-deductible expenses. Prepaid expenses are deductible for tax purposes when paid. Revenue received in advance is taxed when received. The tax rate applicable to SC changed from 30% to 25% on 1 April 2017 - The capital gains inclusion rate is 80% . Wear and tear tax allowances have been correctly calculated at R2 846 000 The profit on sale of vehicle relates to a delivery van with an original cost of R450 000 which was sold for R500 000. The tax base on disposal has been correctly calculated at R320 000 and the base cost was R450 000. Question 1 PART B continued overleaf 6 Question 1 PART B continued A tax assessment was received on 25 September 2017 showing an assessed current tax of R3 495 890 for the year ended 31 March 2017, although R3 575 800 had been provided for in the financial statements. The following note to the financial statements has been correctly prepared by the financial manager for the year ended 31 March 2018 with respect to deferred tax balances: Income received in advance Prepaid expense Property, plant and equipment Deferred tax asset / liability) 31 March 2017 27 000 (7 710) (197 730) (178 440) 31 March 2018 16 250 (12 500) (224 800) (221 050) REQUIRED: Show and reference ALL workings. Round off your final answers to the nearest rand. Marks Prepare a memorandum addressed to the financial manager of Sparkling (a) Clean Limited discussing the treatment of the four non-current assets that 22.0 are of particular interest to him in terms of IAS 36 Impairment of Assets. The financial manager was involved in a car accident prior to completing the income tax note for the Statement of Profit or Loss and Other Comprehensive Income. Using the taxation information that has been provided, prepare the income tax expense note to the financial statements (b) 33.0 for Sparkling Clean Limited for the year ended 31 March 2018. Note: you are required to address both the disclosure requirements of IAS 12:79 (tax expense note) and IAS 12:81(c) (tax rate reconciliation). Accounting policy notes and comparatives are not required. Total 55.0 Question 2 (60 marks: 80 minutes) The Jurassic Group consists of Jurassic Limited ("Jurassic") and its subsidiary. Stego Limited ("Stego"). The group has a 31 December year end. The pre-closing trial balances of Jurassic and Stego as at 31 December 2019 are as follows: Jurassic Stego Debit Credit Debit Credit 500 000 200 000 Ordinary share capital Preference share capital (12% non- redeemable shares) 100 000 700 000 250 000 Retained earnings as at 1/01/2019 Revaluation gain - OCI 216 000 130 000 Long term loan - Stego 200 000 Long term loan - Volcano Bank 100 000 Deferred tax-OCI 84 000 36 400 Accumulated depreciation - Buildings 100 000 Shareholders for dividend 100 000 Profit before interest paid and tax 1 141 200 792 000 Buildings at fair value 1 500 000 Plant at fair value 460 000 Investment in Stego 235 000 Loan to Jurassic 200 000 Accounts receivable 80 000 15 000 Bank 314 744 174 840 Interest paid 22 000 15 000 Tax expense 319 456 258 760 Ordinary dividends declared / paid 402 000 400 000 Preference dividends declared / paid 12 000 2 957 200 2 957 200 1 572 000 1 572 000 Question 2 continued overleaf 8 Question 2 continued The following information is relevant to Jurassic Jurassic revalued its buildings on 31 December 2018 using the net replacement value method. The carrying amount of the buildings at that date was R1 200 000 and the fair value was R1 500 000. The remaining useful life of the buildings at the date of the revaluation was 15 years. In December 2019, the directors again considered the valuation of the properties and noted that there was no material change to the previous valuation The loan from the bank was taken out on 1 January 2019 and bears interest at a rate of 10% per annum The loan to Jurassic was granted on 1 May 2019 and bears interest at 9% per annum The following information is relevant to Stego Purchase of ordinary shares in Stego on 1 July 2017 Jurassic purchased 85% of the ordinary share capital of Stego and paid for the shares as follows. -R190 000 cash paid - Issuing 10 000 Jurassic shares to the seller at market value. The market value of Jurassic's shares was R3.50 per share on 1 July 2017 The balance on retained earnings of Stego was R120 000 at that date and the share price of Stego was R1.5235 per ordinary share. Stego had a revaluation surplus of R nil on the acquisition date. Al the net identifiable assets of Stego were considered to be fairly valued, with the exception of their plant. At acquisition date the fair value of the plant was estimated to be R552 500. The useful life and residual value of the plant have remained unchanged throughout the life of the plant. The plant was originally purchased by Stego on 1 January 2016 for R550 000 when the useful life was estimated to be 10 years and a residual value of zero. Question 2 continued The Receiver of Revenue grants a wear and tear allowance on plant of 10% per annum, not apportioned for time. The directors of Jurassic agreed with Stego's estimated useful life of the plant. No entry was processed in the records of Stego with regards to the fair value of the plant at acquisition The management of Jurassic decided to measure the non-controlling interest in Stego at fair value on consolidation Stego revalued its plant (previously considered undervalued at acquisition date) on 31 December 2019 to its fair value of R460 000 . Purchase of preference shares in Stego on 1 January 2019 The investment in the preference shares of Stego was purchased by paying R10 000 in cash. During the 2019-year end, Stego declared and paid an interim dividend of R 1.50 per ordinary share and declared a final dividend of Ro.50 per ordinary share on 31 December 2019. The final dividend will be paid on 15 January 2020. The preference dividend for the year was declared and paid on 31 December 2019. . Additional information: The standard tax rate is 28% and the inclusion rate for capital gains is 80%. The issued share capital of Stego consists of 200 000 ordinary shares and 100 000 preference shares. The non-redeemable preference shares of Stego are classified as equity. Question 2 continued overleaf 2 10 Question 2 continued REQUIRED: : Show all workings Round off to the nearest rand unless instructed otherwise Marks Prepare the journal entry relating to Jurassic's investment in Stego in the separate accounting records of Jurassic Limited for the year ended 31 December 2017, (a) 4.5 (b) Prepare the Analysis of equity worksheet of Stego Limited as at 31 December 2019 using the information provided. (Detach the template provided in the question paper and include in your answer booklet.) 17.0 Prepare the consolidating journal entries relating only to the revaluation of (c) Stego's plant on 31 December 2019. 7.5 Prepare the consolidated statement of profit or loss and other comprehensive income of the Jurassic Group for the year ended 31 December 2019. (d) 14.0 Ignore comparatives Prepare the following columns of the consolidated statement of changes in equity of the Jurassic Group for the year ended 31 December 2019 9.0 (e) Retained earnings Non-controlling interest You must include the statement headings Prepare an extract of the consolidated statement of financial position of the Jurassic Group at 31 December 2019, detailing current and non-current 0 liabilities 8.0 Comparatives are not required. Total 60.0 Comparatives are not required. Question 1 (75 marks: 100 minutes) PART A (20 marks: 27 minutes) You are an audit senior who has been assisting with the audit of Harlequin Lid (Harlequin) for the year ended 31 December 2019. You are attending a training course at the office and you commenced your day by reading a concerning email received from the vac student, based at the client: To: auditsenior@audit.co.za From: vaccie@audit.co.za RE: Audit matter - Harlequin Ltd Mrs Audit Senior It came to my attention that our client Harlequin, a company that operates in the technology sector and is listed on the JSE, with the assistance of a partner company APP SA, launched load shedding smartphone application during the year ended 31 December 2019. This application will be used provide detailed schedules of planned power outages. Harlequin entered into a contract with APP SA to manufacture the application at a contract foe of R55 million. In the end, however, APP SA invoiced Harlequin for R65 million due to the costs of unforeseen technological problems. On 31 December 2019 Harlequin had only paid the deposit of R10 million to APP SA, In addition to the expenses relating to the hardware, Harlequin owes R8 million to APP SA that launched the load shedding application for Harlequin. In terms of the launch contract, Harlequin obtains exclusive rights to utilise the application for a period of ten years. Harlequin is, however, not permitted to lease the application to any other technology company and APP SA may prevent usage of the load shedding app at any time. It is expected that the usage being prevented will be extremely rare during the forthcoming ten-year period. At the end of the ten-year period, the ownership of the load shedding application will pass to APP SA. Question 1 PART A continued overleaf 2 Question 1 PART A continued On 31 December 2019 management of Harlequin expected to use the load shedding application for the full period for which it will be available for use to Harlequin I have an idea how the above matter should be treated and tested at an audit level. but am uncertain. Please can you confirm how Harlequin should account for the above transaction in their financial statements for the year ended 31 December 2019 Regards Vaccie REQUIRED: Show all workings Marks 20.0 Draft an email response to your vac student, discussing, solely with reference to the Conceptual Framework for Financial Reporting, how Harlequin Limited should account for the above transaction in their financial statements for the year ended 31 December 2019. Total 20.0