QUESTION $2(25$ Marks$)$

Graham Hospitals Limited is a company that manufactures ventilators on specialised machinery and supply hospitals in

Africa since $2015$ with ventilators which they use in their intensive care units. The company$$s financial year end is $28$

February.

You are given the following Statement of Comprehensive Income for the year ended $29$ February $2020.$

The above statement of comprehensive income for the year ended $29$ February $2020,$ was prepared before adjusting for the

effects as explained in additional information $1$ and $2.$

Additional Information

$1.$ Equipment

The following information on equipment is supplied to you and was correctly recorded in the financial years ending $28$

February $2019$ and $29$ February $2020.$

Cost of equipment purchased on $1$ March $20182500000$

Depreciation $-28$ February $2019(600000)$

Impairment loss $-28$ February $2019(200000)$

Depreciation $-28$ February $2020(550000)$

Actual carrying amount on $28$ February $20201150000$

Historical carrying amount on $28$ February $20201300000$

Adjustment at $29$ February $2020$

On $29$ February $2020,$ the recoverable amount of the equipment has been estimated at R$1350000.$ Management would

like to take the recoverable amount for equipment into account and record the applicable adjustments.

The auditor confirmed the following tax implications

Any impairment loss on the equipment is tax deductible, and

If there is reversal on the equipment$$s impairment loss the reversal will be taxable.

$2.$ Machinery

The following information on machinery is supplied to you.

$1$ March $2015$ Machinery purchased at R$5000000$ to manufacture

ventilators.

$$ The total useful life of the machinery was estimated at $25$

years and the estimated residual value was R$1000000.$

$$ Machinery will be depreciated on a straight line basis.

During the $2020$ financial year $$ Since the outbreak of coronavirus, there were an increase

in demand for ventilators and ICU$-$Ventilator Limited has

increased their production of ventilators. Consequently the

company had to change the estimated useful life of their

manufacturing machines as from $1$ march $2019.$

$$ The total useful life of machinery was re$-$estimated at $20$

years and the estimated residual life was changed to R$500$

$000.$

$$ The $2020$ depreciation on machinery was correctly

recorded and taken into account in the financial statements

in accordance to original estimates.

$$ Management would like you to take the change in

e s t i m a t e i n t o a c c o u n t a n d r e c o r d t h e a p p l i c a b l e

adjustments. The company uses the re$-$allocation method

to account for changes in estimates.

$3.$ Income tax

The corporate tax rate is $28\%$

Required

$2\mathrm{.}1.$ Calculate the impairment loss $/$ reversal on equipment on $29$ February $2020.(2$ marks$)$

$2\mathrm{.}2.$ Supply the journal entry to record the impairment $/$ reversal on equipment at $29$ February $2020.(2$ marks$)$

$2\mathrm{.}3.$ Refer to additional information number $2$ to: Calculate the effect of the change in estimate on machinery

using the re$-$allocation method. Detailed workings are required to show the following:

$$ The carrying amount at $28$ February $2019.$

$$ The machinery$$s depreciation $($before and after change in estimate$)$ for the financial year ended $29$

February $2020.$

$$ The carrying amount at $29$ February $2020.$

$$ The machinery$$s future depreciation $($before and after change in estimate$),$ at $29$ February $2020.$

$(7$ marks$)$

$2\mathrm{.}4.$ Prepare the following notes to the financial statements of Graham Hospitals Limited for the year ended

$29$ February $2020$ in accordance to international financial reporting standards

$$ Profit before tax

$$ Change in accounting estimate $($Accounting policies are not required$)$

$(10$ marks$)$

$2\mathrm{.}5.$ Prepare statement of comprehensive income of Graham Hospitals Limited for the year ended $29$

February $2020$ in accordance to international financial reporting standards. Show workings.

$(4$ marks$)$

NB: $($Comparatives are required for part $2\mathrm{.}3,2\mathrm{.}4$ and $2\mathrm{.}5)$