QUESTION $(40$ marks$)(72$ minutes$)$

Ngomalungundu Ltd $($Ngoma$)$ is a farming enterprise based in Piesanghoek, Makhado. Ngoma has

over the years grown to become one of the largest producers of potatoes and pumpkins in Africa. Ngoma

is listed on the Namibian Stock Exchange $($NSx$)$ and has a $31-$March year end.

The following relates to some of the transactions, assets & liabilities of Ngoma for the year ended

$31$ March $2024$:

$1.$ Farm in Nongoma

On $1$ February $2024,$ Ngoma acquired a farm in Nongoma, KwaZulu$-$Natal for R$1125000.$ The farm

was acquired to be used as an expansion of its current potato farming business within the KwaZulu

Natal province. The strategic location of the farm and the favorable climate conditions in the area makes

it the ideal location for potato farming. The farm covers an area spanning $650$ hectares and has a large

river flowing through it$.$ Ngoma is legally entitled to use the water from the river for irrigation purposes.

The river is one of the largest in South Africa and never runs dry. Over the years, the river has proved

to be a reliable water source for most communities in the area.

On $1$ April $2024,$ you received the following email from the group Chief Financial Officer $($CFO$)$ of Ngoma

in relation to the river running through the farm:

From: Ms$.$ Sibongile Ngomane $($Group CFO$)$

To: FAC$3764$ Student

Date: $1$ April $2024$

Subject: Recognition of the river in the financial statements

Good Day

Hope this email finds you well.

I have been discussing the issue around the river flowing through the newly acquired Nongoma farm

with the Group Chief Executive Officer. He is of the view that this river should be recognized as a

separate asset in the Ngoma financial statements.

This will also have a positive impact on the financial position of the company.

Kind Regards

Ms$.$ Sibongile Ngomane CA $($SA$)$

Group CFO $$ Ngomalungundu Ltd

$2.$ Contract with SaveU supermarket

On $1$ August $2023,$ Ngoma entered into an agreement with SaveU supermarket in Eswatini to supply

potatoes at R$20$ per kg$.$ The agreement stipulated that if SaveU supermarket buys more than $10000$kgs

of potatoes within a twelve$-$month period, the price per kg will be retrospectively reduced to R$17.$ At the

time of the agreement and throughout the period when the potatoes were sold, it was expected that

SaveU supermarket would qualify for the rebate.

On $31$ March $2024,$ Ngoma delivered $8500$kgs of potatoes to SaveU supermarket. Ngoma still

estimated that the sales to SaveU would exceed $10000$kgs by $31$ July $2024.$ All sales made to SaveU

supermarket are settled in cash on the date of delivery.

Page $4$ of $6$

QUESTION $($continued$)$

The junior accountant has prepared the following journal entry to account for the agreement between

Ngoma and SaveU supermarket for the year ended $31$ March $2024$:

Debit

R

Credit

R

$31$ March $2024$ Bank $($SFP$)170000$

Revenue $($P$/$L$)170000$

Recognition of revenue for the sale of $8500$kg of potatoes

$3.$ Property in Modjadjiskloof

On $1$ March $2023,$ Ngoma began the construction of a processing plant in Modjadjiskloof. The

construction of the plant was completed on $31$ December $2023$ at a total cost of R$9800000($excluding

compliance costs referred to below$).$

To adhere to health and safety regulations, a health inspection was conducted at a cost of R$550000$ on

$15$ January $2024.$ On $31$ January $2024,$ the inspector issued a compliance certificate confirming that the

plant complies with all health and safety requirements of South Africa and on that date, the plant was

available for use as intended by management.

Ngoma hosted an event to officially open the plant on $15$ February $2024$ at a cost of R$150000.$

It is the accounting policy of Ngoma to account for the processing plant on the cost model and to provide

for depreciation on the straight$-$line method over an estimated useful life of $20$ years. On

$31$ January $2024,$ an insignificant residual value was allocated to the processing plant.

$4.$ Spraying tractors

On $1$ May $2022,$ the directors of Ngoma decided to lease $5$ spraying tractors from Bafana leasing $($Pty$)$

Ltd $($Bafana$).$ The lease agreement contains a lease in terms of IFRS $16,$ Leases. Below is an extract

from the signed lease agreement between Ngoma and Bafana:

Commencement date $..............................................................................................1$ May $2022$

Annual instalment $($paid in arrears on $30$ April$)......................................................$ R$900000$

Ngoma$$s incremental borrowing rate $.......................................................................12\mathrm{.}3\%$ p$.$a$.$

$$ The lease term is for a non$-$cancellable period of $3$ years with an option to renew the lease for an

additional $2$ years. The directors of Ngoma are not sure whether they will exercise the renewal

option as this will depend on the circumstances at the point of renewal;

$$ Ngoma incurred and paid legal and administrative costs of R$75000$ to enter into the lease;

$$ Ownership of the tractors will not transfer to Ngoma at the end of the lease term;

$$ The implicit interest rate is indeterminable;

$$ The tractors were estimated to have a useful life of $5$ years on $1$ May $2022$;

$$ SARS recognizes the lease of the tractors as a rental agreement in terms of part $($b$)$ of the definition

of an instalment credit agreement in the VAT Act, which means all lease payments are deductible

when paid.

Page $5$ of $6$

QUESTION $($continued$)$

Additional information:

$$ The profit before tax of Ngoma for the year ended $31$ March $2024$ amounted to R$5550000.$ The

profit was calculated before taking into account the effect of all the transactions above but after

taking into account the following:

o Dividends received in respect of a $20\%$ shareholding interest acquired in a JSE listed farming

company, Chewa Ltd $($Chewa$)$ in $2023.$ Chewa declared a final dividend of R$550000$ to all

registered shareholders on $31$ December $2023.$ The dividend was paid on $28$ February $2024.$

o Legal fees amounting to R$133000$ were incurred and paid by Ngoma during the $2024$ financial

year. The legal fees are not deductible for tax purposes.

$$ The opening deferred tax liability as per the audited annual financial statements for the year ended

$31$ March $2023,$ amounted to R$22646.$ You should assume this amount to be correct in all respects,

the information provided in the scenario is not sufficient to recalculate it$.$

$$ The first and second provisional tax payments made during the current financial year, which have

not been recorded in the accounting records of Ngoma, amounted to R$190000$ and R$55500$

respectively. Ngoma had an assessed loss of R$122000$ for the year ended $31$ March $2023.$ A

deferred tax asset was provided for against the assessed loss as Ngoma anticipated to have

sufficient taxable profit in future against which any unused tax losses can be utilized.

$$ The South African normal tax rate is $27\%$ and the capital gains inclusion rate is $80\%.$ These tax rates

were also applicable in the previous financial year.

$$ The South African Revenue Service $($SARS$)$ allows a $5\%$ annual building allowance on the

processing plant in terms of section $13(1)$ of the Income Tax Act, not apportioned for periods shorter

than a year.

$$ SARS allows a tax allowance on tractors over a period of $5$ years on the straight$-$line method in

terms of section $11($e$)$ of the Income Tax Act, apportioned for periods shorter than a year.

$$ Deferred tax is provided for on all temporary differences in accordance with the statement of financial

position approach. There are no other items causing temporary differences, except for those

mentioned in the question. The company will have sufficient taxable profits and capital gains in the

future, against which any unused tax losses can be utilized.

$$ All property, plant and equipment are accounted for on the cost model in accordance with IAS $16$

Property, plant and equipment.

Assumptions

All amounts are material.

Ignore the implications of Value$-$Added Tax $($VAT$).$

Page $6$ of $6$

REQUIRED:

Marks

a$)$ Write a memorandum to the Group Chief Financial Officer $($CFO$)$ of Ngoma

advising her on whether the river flowing through the Nongoma farm is an asset

and whether it can be recognised as a separate asset in the accounting records

of Ngomalungundu Ltd for the year ended $31$ March $2024,$ with reference to the

Conceptual Framework.

Communication mark $$ Presentation

Communication mark $$ Logical argument

$8$

$1$

$1$

b$)$ Critically evaluate, with reasons, the journal entry processed by the junior

accountant of Ngomalungundu Ltd in respect of the agreement entered into

with SaveU supermarket for the financial year ended $31$ March $2024.$

$$ Discuss both correct and incorrect aspects of the journal entry where

applicable.

$$ Support your discussion with calculations and provide any correcting

journal entry$/($s$),$ if any.

$$ Do not include any tax related discussions or calculations.

$7$

c$)$ Calculate the amount of current tax payable to the South African Revenue

Service $($SARS$)$ as it would be disclosed in the statement of financial position

of Ngomalungundu Ltd as at $31$ March $2024.$

$$ The movement in temporary differences in the current tax calculation

should be calculated using the statement of financial position approach.

$$ All assets and liabilities evident from the scenario should be considered,

even if they have no deferred tax consequences.

$20$

d$)$ In a recent engagement with the Group Chief Financial Officer $($CFO$)$ of

Ngomalungundu Ltd$,$ she indicated that the company will not be paying any

income tax due to SARS as this may deprive the executive management team

from earning their bonuses.

Discuss any ethical considerations you may have regarding the suggestion by

the Group CFO around the non$-$payment of income tax to the South African

Revenue Services, in terms of the SAICA Code of Professional Conduct $($CPC$)$

and any other applicable legislation.

$3$

Please note:

Your answer must comply with the requirements of International Financial Reporting

Standards $($IFRS$).$

Round off all calculations to the nearest Rand.

All calculations must be shown.

Comparative amounts are not required.

Accounting policy notes are not required.

$[40]$

$$

UNISA $2024$