QUESTION 2 (25 marks)

Blue Builders Ltd Blue Builders is a construction company that develops various types of buildings and houses. The entity has a 31 December year-end.

Depreciation construction equipment

After drafting the financial statements for the current year ended 31 December 2021, it was discovered that depreciation on construction equipment costing R500 000 was depreciated at 25% under the diminishing (reducing) balance method from 1 July 2020, the date that equipment was utilized for the first time. The equipment was however available for use from 1 January 2020. The equipment has a residual value of zero.

Installation of safety equipment

New legislation was introduced during that year that required specialised safety equipment to be used during construction as of 1 December 2021. Any delays in the implementation of the law would incur a penalty of R16 000 per month. Blue Builders immediately purchased the safety equipment, however the supplier of the safety equipment could only deliver the equipment on 1 January 2022 and thus the safety equipment could not be used during construction that took place in December 2021. On 7 January 2022, Blue Builders received a notice from the local authorities for the penalty being levied. Blue Builders paid the penalty and are now looking to recover it from the supplier via a claim instituted against the supplier. Blue Builders discussed the matter with their legal advisors and identified that reimbursement of the penalty amount is not certain however it was probable that the supplier would reimburse Blue Builders for the full amount of the penalty. The matter will only be confirmed in a court case to be held on 15 February 2022 after the financial statements are authorised for issue by management.

Additional information:

The South African income tax rate has remained unchanged at 28% for the past three years. Ignore any VAT implications. Include all income tax implications.

REQUIRED:

Disclose all the information in the question above in the notes to the annual financial statements of Blue Builders for the financial year ended 31 December 2021 for,

The construction equipment, according to the requirements of only IAS 8 Accounting policies, changes in accounting estimates, and errors, and (21 marks)

Only the probable reimbursement of the penalty, according to the requirements of only IAS 37: Provisions, Contingent Liabilities, and Contingent Assets. (4 marks)

Show all calculations. Comparative figures and accounting policy notes are not required.