QUESTION $2(45$ marks$)$

B&M Manufacturers Ltd is a company with a $31$ December financial year$-$end. The

company operates in the clothing industry and manufactures various clothing ranges.

You are presented with information relating to several of the company$$s assets.

Cutting Machine

A new cutting machine was purchased on $2$ November $2023$ from an American

supplier. B&M Manufacturers Ltd paid the full purchase price of $$155000$ on $31$

January $2024.$

The cutting machine was shipped FOB shipping point on $5$ November $2023.$ The

machine arrived in South Africa on $15$ November $2023.$ B&M Manufacturers Ltd paid

R$15000$ for the machine to be transported from the harbour to their premises. A further

R$50000$ was spent on the assembly and installation of the cutting machine. The

cutting machine was ready for use on $1$ December $2023.$

B&M Manufacturers Ltd estimated the cutting machine to have a useful life of $6$ years

and a residual value of R$250000.$ The South African Revenue Service $($SARS$)$ allows

for a tax deduction of $40\%$ in the first year of use and $20\%$ in the three following years.

This allowance is not apportioned for part of a year.

The following exchange rates are applicable:

Date Spot rate Average rate

$2$ November $2023$ $$1=$ R$14,36$ $$1=$ R$14,40$

$5$ November $2023$ $$1=$ R$14,41$ $$1=$ R$14,43$

$31$ December $2023$ $$1=$ R$14,51$ $$1=$ R$14,48$

$31$ January $2024$ $$1=$ R$14,48$ $$1=$ R$14,45$

Distribution Agreement

B&M Manufacturers Ltd has been looking into expanding its product range and

offerings. Their research indicated that many South Africans buy clothing online from

overseas suppliers, with the most popular one being Shine.

Recently the customs duty for these types of sales has increased dramatically causing

South Africans to reduce buying from Shine. B&M Manufacturers Ltd$,$ therefore,

decided to enter into an agreement with Shine, whereby B&M Manufacturers Ltd will

be the sole distributor of Shine clothing in South Africa.

In terms of the distribution agreement, B&M Manufacturers Ltd paid Shine R$2000000$

on $1$ August $2023$ for the exclusive right to distribute their clothing in South Africa. The

distribution agreement will be valid for a period of $4$ years, starting $1$ August $2023.$

Additional information:

$$ All items of property, plant and equipment are measured using the cost model.

$$ All intangible assets are measured using the cost model.

$$ Depreciation on all assets is provided for according to the straight$-$line method, and

residual values are insignificant.

$$ The income tax rate applicable is $27\%.$

REQUIRED:

$2\mathrm{.}1)$ With reference to the information under Cutting Machine, prepare an extract

from the Statement of Financial Position and an extract from the Statement of

Profit or Loss and Other Comprehensive Income of B&M Manufacturers Ltd for

the financial year ended $31$ December $2023,$ showing ALL balances relating to

the Cutting Machine.

$$ Comparative figures are not required.

$$ Notes are not required.

$$ Round all amounts to the nearest Rand where applicable.

$(25$ marks$)$

$2\mathrm{.}2)$ B&M Manufacturers Ltd requires advice on IAS $40$: Intangible Assets. With

reference to the information under Distribution Agreement, discuss how B&M

Manufacturers Ltd should classify and measure the distribution agreement in

their financial statements at $31$ December $2023.$

$$ Include amounts and calculations as part of your discussion where necessary.

$$ Round all amounts to the nearest Rand where applicable.

$(20$ marks$)$