QUESTION 1

Fresh Limited , a manufacturer of toothpaste, was taken to court over alleged defamation charges when the company accused a rival toothpaste manufacturer of fraud. Before year end (31 December 2018), the lawyer of Fresh Limited advised that, although losing the case was unlikely, legal fees and settlement costs could amount to R 900 000 in the event that the court case was lost. On 04 February 2019, the judge presiding over the case ruled that Fresh should pay R 1 000 000 to the plaintiff as well as pay all of the plaintiff's legal fees, which amounted to R 180 000. The financial statements had not yet been authorised for issue at the time of the court ruling.

Required:

Discuss how this information should be treated in the financial statements of Fresh Limited for the year ended 31 December 2018.

QUESTION 2

Richy Limited has plant that cost R 345 000 on 01 January 2016. Installation and modification costs R 69 000 (including vat). Transfer costs paid to lawyer amounted to R 20 000. Transport costs for bringing the asset to location amounted to R 20 000. The plant was ready for use on 01 January 2016. The machines were cleared on 01 March 2016 at a cost of R 10 000. Due to the low order levels in April 2016 the plant stood idle. Depreciation is provided over its useful life of 5 years using the straight-line method to a nil residual value. Richy Limited measures plant under the revaluation model. The plant was revalued as follows:

31 December 2016 R 310 000

31 December 2017 R 300 000

31 December 2018 R 250 000

Richy Limited transfers the maximum amount from the realized portion of the revaluation surplus to equity. VAT must be calculated at 15%.

Required:

Disclose the above information in the notes to the financial statements for years ending 2016, 2017 and 2018. (Include in your answer the journal entries that must be recorded in the journal.)