Question 2

Best Store Limited is a profitable retailer of fishing reels and related accessories. It recently appointed a new managing director who is an expert on fishing but has limited experience in accounting. You are the accountant and the new managing director has asked you to prepare a draft set of financial statements for discussion with the rest of the board of directors.

The director has told you that a customer has ordered a Monster 1500 and has paid R12 500 for the reel on the 28th of December 2019. Unfortunately, the company does not have any in stock and therefore a special order will have to be done for this. The reel will only arrive after year end on the 12th January 2020. The director has requested you to ensure that this transaction is included when you prepare the financial statements.

The company purchased a spooling machine in 2018 which puts line on the reels. The machine was purchased on the 1 January 2018 for an amount of R75 000 and had a nil residual value. Due to the current economic downturn and reduction in sales and general foot traffic to the store, the directors decided to sell the machine. The machine was sold for an amount of R25 000 over the 1st of January 2019.

The company depreciates its machinery over a straight line method over 5 years. The tax authority allows a wear and tear allowance of 33 1/3% for the machinery. Profit before tax before considering the above noted transactions was R250 000 in 2018 and R175 000 in 2019. No payments were made to the tax authorities in any of the years and no amounts was owing in 2017. Tax is calculated at a rate of 30%. There were no other temporary nor permanent differences.

REQUIRED:

Draft a MEMORANDUM to the managing director in which you include the following:

A) The deferred tax calculation using the Balance sheet approach

B) The current tax calculation

C) Disclosure in the AFS relating to the above.

Your Memorandum must include all workings and comparatives to enable the managing director to understand the financial statements better.