Question 1
a) Identify and discuss the correct accounting treatment for the future deliveries of the Sparkly lipsticks, due to the decision taken by management on the 29th of September 2020, in the records of Siyanqoba Ltd. Provide all the journal entries required to account for the Machinery and the deferred tax thereon in the records of Siyanqoba Limited for the year ended 30 September 2020. Show all calculations clearly.Show all calculations clearly. Ignore the tax treatment only for this part.
b) Prepare the relevant IAS 8 note relating to the change in the depreciation method for the machinery for Siyanqoba Limited for the period 30 September 2020. Presentation and layout.
c) Discuss the deferred tax consequences ONLY of the Rosebank investment property for both the year ended 30 September 2019 and 30 September 2020 respectively. Include calculations to support your discussion.
d) Provide the tax expense note (excluding the tax rate reconciliation) to the statements of profit and loss of Siyanqoba Ltd for the year ended 30 September 2020 as required by International Financial Reporting Standards: (Comparative figures are not required).
Question 1 Siyanqoba Limited (Siyanqoba) is a diverse medium sized entity that manufactures various hygiene products including sanitisers, disinfectants, shampoo as well as toothpaste. The entity also owns retail stores where they sell products to final consumers around the country. Siyanqoba has a 30 September year-end and applies International Financial Reporting Standards (IFRS) in the preparation of their financial statements. You are responsible for the preparation of the annual financial statements for the period ended 30 September 2020. Sparkly lipstick On 1 December 2019 Siyanqoba entered into a non-cancellable supply agreement with Rhandza cosmetics manufacturers (Rhandza). In terms of the agreement Rhandza would supply a fixed amount of 10 000 sparkly lipsticks per month at a fixed price of R19 (excluding VAT) per stick to Siyanqoba for 24 months. This type of lipstick was very popular among the youth and was available in various shades. In terms of the agreement should any of the parties wish to cancel then a penalty of R1 050 000 will be paid by the cancelling party. SARS does not grant a deduction on such penalties. Delivery of the lipsticks would be made on the 1st of each month beginning 1 December 2019 and payments would be made on the last day of each month until the end of the agreement. Siyanqoba adds a mark-up of 75% to the sale of cosmetics when selling it to their customers. Due to the COVID-19 restrictions and the regulations which made the wearing of facial masks compulsory, the demand for the lipsticks dropped significantly. Even though Siyanqoba had been selling the lipstick at R19 (excluding VAT) from the beginning of August 2020, this had not stimulated the demand for the lipsticks. Due to the volatility and constant change in cosmetic trends, management could not foresee the revival of the sparkly lipstick sales in the foreseeable future. Thus, on 29 September 2020, management decided to drop the selling price for the current inventory on hand and all the future outstanding deliveries of the sparkly lipstick to R12.5 (excluding VAT) per stick. As at 30 September 2020, Siyanqoba has 26 000 units of the sparkly lipstick on hand. SARS allows the write down of inventory in the period of write down. All the delivery, sales as well as the impairment of inventory entries have been correctly recorded in the books of the entity. Machinery Siyanqoba acquired machinery with a useful life of 10 years, on 1 October 2015 for R5 000 000 with a nil residual value. Machinery was depreciated over its useful life using the straight-line method. The South African Receiver of Revenue (SARS) allows wear and tear of 10% on the machinery. The first revaluation was performed on 30 September 2017 to a fair value of R4 200 000. During the 2019 financial year due to the economic recession, there was a significant drop in the demand for the products manufactured by the machinery as such the machinery was impaired to its recoverable amount on 30 September 2019. At the beginning of the current period i.e. on 1 October 2019, management determined that the units of production method would represent better the consumption of the economic benefits on the machinery. As such a change was made from the straight-line method of depreciation to the units of production method on 1 October 2019. The following details were estimated by the specialised production team of the entity and approved by management. Expected units Estimated yearly maintenance costs Units to be produced yearly 30 000 000 units per year R35 000 per year from 1 Oct 2019 to 30 Sept 2022 Units to be produced yearly 20 000 000 units per year R45 000 per year from 1 Oct 2022 to 30 Sept 2025 Total 150 000 000 units R240 000 During the current period there was a significant jump in the demand for sanitisation products produced by the entity due to the Covid-19 pandemic. This led to the reassessment of the machinery's values as indicated below. The machinery's details for the current year end (30 September 2020) and the prior period (30 September 2019) are correctly shown in the table below 30 September 2019 Revalued carrying amount Tax base Fair value Costs to sell Value in use Revaluation surplus balance 30 September 2020 R ? R2 500 000 R2 400 000 R100 000 R2 450 000 R3 150 000 R3 000 000 R2 950 000 R200 000 R2 850 000 R150 000 Rosebank Building Siyanqoba acquired the building on 1 September 2019 at a cost of R12 000 000, with a total useful life of 50 years and nil residual value. The building was immediately rented out to a third party Masiphumelele Ltd (Masiphumelele) and thus correctly classified as investment property in the entity's books. SARS allows a wear and tear allowance of 5% per annum on the cost of the building, not apportioned for time. All the entries regarding the relevant transactions have been correctly accounted for in the books of the entity. The lease agreement was signed on 1 September 2019 and contained the following details: Lease receipts 1 September 2019 1 September 2020 1 September 2021 1 September 2022 1 September 2023 Total Amount (R) 250 000 300 000 350 000 400 000 450 000 1 750 000 The fair values for the building were determined by an independent and experienced valuer as follows; Fair value on 30 September 2019 Fair value on 30 September 2020 R 12 000 000 12 400 000 Additional information The profit before tax for the year was correctly calculated as R15 500 000 after considering all the information above. The deferred tax liability as at 30 September 2020 was correctly calculated as R1 743 000 after considering all the information above. Through the inspection of the audited annual financial statements of the prior period, 30 September 2019, the statement of financial position reflected a deferred tax asset of R423 000. On 31 January 2020 the entity's final tax assessment received from SARS indicated that the entity's taxable income for the year ended 30 September 2019 had been understated by R75 000. The normal tax rate is 28% and 80% of capital gains are taxable. An appropriate pre-tax discount rate of 11.5% p.a. has been determined as appropriate unless stated otherwise. Accounting policies . Machinery is measured on the revaluation model and the entity applies the net replacement method upon revaluations. Revaluation surplus is transferred to retained earnings as the relevant assets are being used. Investment property is measured using the fair model in accordance with IAS 40. The entity applies the First in first out (FIFO) for inventories. Question 1 Siyanqoba Limited (Siyanqoba) is a diverse medium sized entity that manufactures various hygiene products including sanitisers, disinfectants, shampoo as well as toothpaste. The entity also owns retail stores where they sell products to final consumers around the country. Siyanqoba has a 30 September year-end and applies International Financial Reporting Standards (IFRS) in the preparation of their financial statements. You are responsible for the preparation of the annual financial statements for the period ended 30 September 2020. Sparkly lipstick On 1 December 2019 Siyanqoba entered into a non-cancellable supply agreement with Rhandza cosmetics manufacturers (Rhandza). In terms of the agreement Rhandza would supply a fixed amount of 10 000 sparkly lipsticks per month at a fixed price of R19 (excluding VAT) per stick to Siyanqoba for 24 months. This type of lipstick was very popular among the youth and was available in various shades. In terms of the agreement should any of the parties wish to cancel then a penalty of R1 050 000 will be paid by the cancelling party. SARS does not grant a deduction on such penalties. Delivery of the lipsticks would be made on the 1st of each month beginning 1 December 2019 and payments would be made on the last day of each month until the end of the agreement. Siyanqoba adds a mark-up of 75% to the sale of cosmetics when selling it to their customers. Due to the COVID-19 restrictions and the regulations which made the wearing of facial masks compulsory, the demand for the lipsticks dropped significantly. Even though Siyanqoba had been selling the lipstick at R19 (excluding VAT) from the beginning of August 2020, this had not stimulated the demand for the lipsticks. Due to the volatility and constant change in cosmetic trends, management could not foresee the revival of the sparkly lipstick sales in the foreseeable future. Thus, on 29 September 2020, management decided to drop the selling price for the current inventory on hand and all the future outstanding deliveries of the sparkly lipstick to R12.5 (excluding VAT) per stick. As at 30 September 2020, Siyanqoba has 26 000 units of the sparkly lipstick on hand. SARS allows the write down of inventory in the period of write down. All the delivery, sales as well as the impairment of inventory entries have been correctly recorded in the books of the entity. Machinery Siyanqoba acquired machinery with a useful life of 10 years, on 1 October 2015 for R5 000 000 with a nil residual value. Machinery was depreciated over its useful life using the straight-line method. The South African Receiver of Revenue (SARS) allows wear and tear of 10% on the machinery. The first revaluation was performed on 30 September 2017 to a fair value of R4 200 000. During the 2019 financial year due to the economic recession, there was a significant drop in the demand for the products manufactured by the machinery as such the machinery was impaired to its recoverable amount on 30 September 2019. At the beginning of the current period i.e. on 1 October 2019, management determined that the units of production method would represent better the consumption of the economic benefits on the machinery. As such a change was made from the straight-line method of depreciation to the units of production method on 1 October 2019. The following details were estimated by the specialised production team of the entity and approved by management. Expected units Estimated yearly maintenance costs Units to be produced yearly 30 000 000 units per year R35 000 per year from 1 Oct 2019 to 30 Sept 2022 Units to be produced yearly 20 000 000 units per year R45 000 per year from 1 Oct 2022 to 30 Sept 2025 Total 150 000 000 units R240 000 During the current period there was a significant jump in the demand for sanitisation products produced by the entity due to the Covid-19 pandemic. This led to the reassessment of the machinery's values as indicated below. The machinery's details for the current year end (30 September 2020) and the prior period (30 September 2019) are correctly shown in the table below 30 September 2019 Revalued carrying amount Tax base Fair value Costs to sell Value in use Revaluation surplus balance 30 September 2020 R ? R2 500 000 R2 400 000 R100 000 R2 450 000 R3 150 000 R3 000 000 R2 950 000 R200 000 R2 850 000 R150 000 Rosebank Building Siyanqoba acquired the building on 1 September 2019 at a cost of R12 000 000, with a total useful life of 50 years and nil residual value. The building was immediately rented out to a third party Masiphumelele Ltd (Masiphumelele) and thus correctly classified as investment property in the entity's books. SARS allows a wear and tear allowance of 5% per annum on the cost of the building, not apportioned for time. All the entries regarding the relevant transactions have been correctly accounted for in the books of the entity. The lease agreement was signed on 1 September 2019 and contained the following details: Lease receipts 1 September 2019 1 September 2020 1 September 2021 1 September 2022 1 September 2023 Total Amount (R) 250 000 300 000 350 000 400 000 450 000 1 750 000 The fair values for the building were determined by an independent and experienced valuer as follows; Fair value on 30 September 2019 Fair value on 30 September 2020 R 12 000 000 12 400 000 Additional information The profit before tax for the year was correctly calculated as R15 500 000 after considering all the information above. The deferred tax liability as at 30 September 2020 was correctly calculated as R1 743 000 after considering all the information above. Through the inspection of the audited annual financial statements of the prior period, 30 September 2019, the statement of financial position reflected a deferred tax asset of R423 000. On 31 January 2020 the entity's final tax assessment received from SARS indicated that the entity's taxable income for the year ended 30 September 2019 had been understated by R75 000. The normal tax rate is 28% and 80% of capital gains are taxable. An appropriate pre-tax discount rate of 11.5% p.a. has been determined as appropriate unless stated otherwise. Accounting policies . Machinery is measured on the revaluation model and the entity applies the net replacement method upon revaluations. Revaluation surplus is transferred to retained earnings as the relevant assets are being used. Investment property is measured using the fair model in accordance with IAS 40. The entity applies the First in first out (FIFO) for inventories
