QUESTION 2 25 MARKS Assume a dividend withholding tax of 20% and a company income tax rate of 28%. Value-added tax can be ignored. Denny Pest Control Ltd ('DPC') is a company situated in Johannesburg and is registered for value-added tax. The entity was incorporated on 1 July 2018 and at the same date the founder of the company, Mr Denny, took up 15 000 no par value ordinary shares at a price of R25 per share. Information relating to equity Mr Denny realised that the business had exceptional growth potential, but expansion would need a huge capital injection. The following transactions took place as a result of the decision to expand the business: 1. 65 000 ordinary no par value ordinary shares at R30 per share were offered to the public by means of a prospectus. The closing date for subscribing to the offer was 30 April 2019. Applications for 67 000 shares were received. The shares were allotted on 1 June 2019. Share issue expenses paid on 10 May 2019, relating to the share issue, amounted to R19 800. It is the policy of the company to write off share issue costs against retained earnings. 2. On 1 October 2019, 16 360 compulsory non- cumulative 12.5% convertible no par value preference shares were issued. Net receipts amounted to R378 800, after R30 200 share issue costs were deducted. 3. On 1 February 2020, the ordinary shareholders received the right to take up one ordinary share, for every five ordinary shares held, at a price of R28 per share. All the rights were taken up and the shares were allotted on 1 March 2020. At the date of the offer, the shares were trading at R32 per share. 4. 100 000 9% compulsory redeemable no par value cumulative preference shares were offered to the public at R1.50 per share. Closing date for subscriptions was 29 March 2020, at which date applications and EFT payments to the amount of R150 000 was received. The shares were allotted on 1 April 2020 and all necessary transactions to finalise the share issue were dealt with. 5. A loan with B&S Bank was negotiated to the amount of R600 000 at an interest rate of 7.5%. The funds were deposited into the bank account of DPC on 1 July 2019. The loan is repayable in annual payments of R195 000, inclusive of capital and interest, at 30 June of each year. Additional information: 1. Land is situated at erf 202, Johannesburg, with a cost price of R500 000 was purchased during the 2018 financial year. On 30 June 2020, a sworn appraiser appraised the land at R1 300 000, and DPC decided to apply the revaluation model on land from the current financial year. This was the first time the land was revalued. 2. DPC does not only provide pest control services but also sell pest control products. A consignment of pest control products with a cost price of R11 000 was recorded properly and placed in the storeroom. It was found during the stock take that took place during the last week of June 2020, that the entire consignment was already passed the expiry date and the goods had to be destroyed. The information in note 3 was prepared before the expired inventory was discovered. Inventory related expenses must be grouped together with cost of sales. 3. The accountant correctly prepared the following list of income and expenditure: Income R Nature of the amount Profit on sale of equipment 33 250 Operating income - see note 3.3 Rental income 236 160 Operating income - see note 3.4 Sales 2 506 800 Revenue Dividend income 55 000 Operating income Expenditure R Nature of the amount Cost of sales 597 000 Cost of sales Depreciation: vehicles 6 160 Supply of services to customers Depreciation: equipment 6 800 Administrative Telephone and internet 15 000 Additional information 3.1 Water, electricity and rates 9 250 Administrative Repairs and maintenance 4 980 Operating expenses Bank charges 1 740 Administrative Salaries and bonuses: staff 630 000 Additional information 3.2 Audit remuneration 12 700 Administrative Directors remuneration for 478 000 Administrative employees Sundry expenses 58 000 Operating expenses Fuel and vehicle related 213 000 Supply of services to customers expenditure note 3.5 - see 3.1. Telephone and internet expenditure primarily were incurred by staff performing the pest control services and it was decided that 70% of the amount will be allocated to the supply of the services to customers and the balance classified as administrative. 3.2 Salaries and bonuses to staff can be allocated on an equal basis between being administrative and the supply of services. 3.3 The accountant neglected to take the accumulated depreciation on the equipment sold to the amount of R20 000 into account when he calculated the profit on sale of equipment. 3.4 Rental income includes the rent for July 2020. The rental agreement stipulates that the tenant's rent increased by 12% as from 1 July 2020. 3.5 Included in vehicle related expenditure are a few traffic fines amounting to R6 900. 4. The SARS allows and uses the same depreciation methods and rates, as those applied by DPC. The income tax rate throughout the year was 28%. 5. The retained earnings as at 30 June 2019 were disclosed in the financial statements at R994 784. 6. On 1 July 2019 DCP had an amount of R16 700 due to SARS pertaining income tax. This amount was settled on 15 July 2019. DPC paid the following provisional tax payments during the financial year: 31 December 2018 R98 000; and 30 June 2019 R88 500. 7. An ordinary dividend of 150 cents per share was declared on 30 June 2020. All shareholders are natural persons. REQUIRED MARKS Sub- Total total (a) Prepare the statement of profit or loss and other comprehensive income according to the 'function of the expenses' method for Denny Pest Control Ltd for the year ended 30 June 2020. 14.0 Comparative figures and notes to the financial statement are not required. Communication skills - structure and layout 1.0 15 (b)Prepare the following line items to the equity and liability section of the statement of financial position for Denny Pest Control Ltd as at 30 June 2020 according to IAS 1: Presentation of financial statements: Equity 6.5 Loans 1.5 Trade and other payables 1.5 Comparative figures and notes to the financial statement are not required. Communication skills - structure and layout 0.5 10 TOTAL MARKS 25 QUESTION 2 25 MARKS Assume a dividend withholding tax of 20% and a company income tax rate of 28%. Value-added tax can be ignored. Denny Pest Control Ltd ('DPC') is a company situated in Johannesburg and is registered for value-added tax. The entity was incorporated on 1 July 2018 and at the same date the founder of the company, Mr Denny, took up 15 000 no par value ordinary shares at a price of R25 per share. Information relating to equity Mr Denny realised that the business had exceptional growth potential, but expansion would need a huge capital injection. The following transactions took place as a result of the decision to expand the business: 1. 65 000 ordinary no par value ordinary shares at R30 per share were offered to the public by means of a prospectus. The closing date for subscribing to the offer was 30 April 2019. Applications for 67 000 shares were received. The shares were allotted on 1 June 2019. Share issue expenses paid on 10 May 2019, relating to the share issue, amounted to R19 800. It is the policy of the company to write off share issue costs against retained earnings. 2. On 1 October 2019, 16 360 compulsory non- cumulative 12.5% convertible no par value preference shares were issued. Net receipts amounted to R378 800, after R30 200 share issue costs were deducted. 3. On 1 February 2020, the ordinary shareholders received the right to take up one ordinary share, for every five ordinary shares held, at a price of R28 per share. All the rights were taken up and the shares were allotted on 1 March 2020. At the date of the offer, the shares were trading at R32 per share. 4. 100 000 9% compulsory redeemable no par value cumulative preference shares were offered to the public at R1.50 per share. Closing date for subscriptions was 29 March 2020, at which date applications and EFT payments to the amount of R150 000 was received. The shares were allotted on 1 April 2020 and all necessary transactions to finalise the share issue were dealt with. 5. A loan with B&S Bank was negotiated to the amount of R600 000 at an interest rate of 7.5%. The funds were deposited into the bank account of DPC on 1 July 2019. The loan is repayable in annual payments of R195 000, inclusive of capital and interest, at 30 June of each year. Additional information: 1. Land is situated at erf 202, Johannesburg, with a cost price of R500 000 was purchased during the 2018 financial year. On 30 June 2020, a sworn appraiser appraised the land at R1 300 000, and DPC decided to apply the revaluation model on land from the current financial year. This was the first time the land was revalued. 2. DPC does not only provide pest control services but also sell pest control products. A consignment of pest control products with a cost price of R11 000 was recorded properly and placed in the storeroom. It was found during the stock take that took place during the last week of June 2020, that the entire consignment was already passed the expiry date and the goods had to be destroyed. The information in note 3 was prepared before the expired inventory was discovered. Inventory related expenses must be grouped together with cost of sales. 3. The accountant correctly prepared the following list of income and expenditure: Income R Nature of the amount Profit on sale of equipment 33 250 Operating income - see note 3.3 Rental income 236 160 Operating income - see note 3.4 Sales 2 506 800 Revenue Dividend income 55 000 Operating income Expenditure R Nature of the amount Cost of sales 597 000 Cost of sales Depreciation: vehicles 6 160 Supply of services to customers Depreciation: equipment 6 800 Administrative Telephone and internet 15 000 Additional information 3.1 Water, electricity and rates 9 250 Administrative Repairs and maintenance 4 980 Operating expenses Bank charges 1 740 Administrative Salaries and bonuses: staff 630 000 Additional information 3.2 Audit remuneration 12 700 Administrative Directors remuneration for 478 000 Administrative employees Sundry expenses 58 000 Operating expenses Fuel and vehicle related 213 000 Supply of services to customers expenditure note 3.5 - see 3.1. Telephone and internet expenditure primarily were incurred by staff performing the pest control services and it was decided that 70% of the amount will be allocated to the supply of the services to customers and the balance classified as administrative. 3.2 Salaries and bonuses to staff can be allocated on an equal basis between being administrative and the supply of services. 3.3 The accountant neglected to take the accumulated depreciation on the equipment sold to the amount of R20 000 into account when he calculated the profit on sale of equipment. 3.4 Rental income includes the rent for July 2020. The rental agreement stipulates that the tenant's rent increased by 12% as from 1 July 2020. 3.5 Included in vehicle related expenditure are a few traffic fines amounting to R6 900. 4. The SARS allows and uses the same depreciation methods and rates, as those applied by DPC. The income tax rate throughout the year was 28%. 5. The retained earnings as at 30 June 2019 were disclosed in the financial statements at R994 784. 6. On 1 July 2019 DCP had an amount of R16 700 due to SARS pertaining income tax. This amount was settled on 15 July 2019. DPC paid the following provisional tax payments during the financial year: 31 December 2018 R98 000; and 30 June 2019 R88 500. 7. An ordinary dividend of 150 cents per share was declared on 30 June 2020. All shareholders are natural persons. REQUIRED MARKS Sub- Total total (a) Prepare the statement of profit or loss and other comprehensive income according to the 'function of the expenses' method for Denny Pest Control Ltd for the year ended 30 June 2020. 14.0 Comparative figures and notes to the financial statement are not required. Communication skills - structure and layout 1.0 15 (b)Prepare the following line items to the equity and liability section of the statement of financial position for Denny Pest Control Ltd as at 30 June 2020 according to IAS 1: Presentation of financial statements: Equity 6.5 Loans 1.5 Trade and other payables 1.5 Comparative figures and notes to the financial statement are not required. Communication skills - structure and layout 0.5 10 TOTAL MARKS 25