QUESTION 4 (24 MARKS, 43 MINUTES) You are currently working at AK auditors and are part of the audit team. You and your team are currently busy with the weekly briefing with regards to your audits and client issues that came up during the previous weeks that need to be addressed. The partner in charge asked you to address the following issues after he provided you with the background information. 1. Upcoming approval of Bultainment's financial statements The directors of Bultainment (Pty) Ltd ('Bultainment) have asked you for advise on the basis of preparation of the current year's financial statements that must be approved at the upcoming directors meeting that's also the shareholders meeting on 1 June 2020. The directors are very uncomfortable with the 29 February 2020 financial statements as Bultainment is struggling to survive. Bultainment is a company operating in Potchefstroom situated in the student area providing a save, controlled environment for students to party. Their main source of income is the selling of liquor to students. Bultainment has a 28 February year end and AK auditors performed the audit for the current year and found no irregularities. The following is a very short summary of the Statement of financial positions items as at 29 February 2020. The financial statements were prepared in accordance to International Financial Reporting Standards ("IFRS"). R ASSETS Property, plant and equipment Inventory 5 250 000 320 000 46 000 Cash LIABILITIES Loan - SBF bank Trade creditors Bank overdraft 3 500 000 366 000 110 000 The property, plant and equipment consist mainly of the building that Bultainment operates from which they just bought before the current year end for Rs 100 000. The remaining assets consists of fridges, tables, chairs, counters and glasses. The purchase of the building was financed with a loan from SBF bank and the approval of the loan was based on the past 5 years financial statements and a future cash flow projections. Since the preparation of the 2020 financial statements the Covid-19 pandemic occurred and a national lockdown was imposed from 28 March 2020 resulting in the restriction on the movement and gathering of people and a prohibition on the sale of liquor. Furthermore, the university indicated that all learning for the academic year will be conducted via an online platform and that the return of students to campus is not compulsory when lockdown measures eases. Bultainment maxed out all their cash and is currently unable to pay salaries and trade creditors. Bultainment has no income as the lockdown restrictions prohibits the sale of liquor and the gathering of more than 50 people. SBF bank is in the process of repossessing the building as Bultainment is unable to pay the loan instalments. 2. Murano (Pty) Ltd ("Murano") The financial director of Murano contacted the audit partner with regards to assistance with the correction of an accounting error. During the preparation of Murano's draft financial statements for 29 February 2020 the financial director of the company discovered that the accountant incorrectly did not capitalise borrowing cost on the factory premises. The entity commenced with the construction of its new factory premises on 1 October 2017 and the construction was financed by specific loans. All the construction activities were completed by 1 May 2018 on which date the factory premises were brought into use. The factory has a useful life of 20 years and depreciation is written of on the straight-line basis. SARS indicated that the tax assessments for 2018 and 2019 will not be reopen. SARS will allow the pre- production interest as a deduction against the taxable income of the 2020 financial year. The financial director provided the detail of the borrowing costs incurred during the financial years ending 28 February 2018 and 2019. 2019 2018 R R Total borrowing cost incurred during the year 166 788 240 455 Borrowing cost incurred during capitalisation period 85 000 210 000 Interest earned on surplus funds invested during capitalisation 0 25 500 period Extract of amounts from the draft 2020 financial statements as prepared by the financial director before the error was detected. The amounts for 2019 and 2018 are the amounts as published in the financial statements. 2020 2019 2018 R R R 2 851 455 1 850 777 2 245 123 Total comprehensive income for the year Dividends paid Retained earnings as at 28 February 0 (200 000) 19 452 919 (300 000) 16 801 464 15 250 687 REQUIRED: MARKS Total Sub- total (a) 6 Advise the directors of Bultainment (Pty) Ltd on the appropriateness of the 29 February 2020 financial statements by applying your IFRS knowledge. Communication skills - Logical argument. 1 7 16 (b) Prepare the statement of changes in equity (only the retained earnings column) of Murano (Pty) Ltd for 29 February 2020 after adjusting the amounts for the correction of the error and disclose the note for the correction of the error in accordance with IFRS. Communication skills - Layout TOTAL MARKS QUESTION 4 1 17 24 QUESTION 4 (24 MARKS, 43 MINUTES) You are currently working at AK auditors and are part of the audit team. You and your team are currently busy with the weekly briefing with regards to your audits and client issues that came up during the previous weeks that need to be addressed. The partner in charge asked you to address the following issues after he provided you with the background information. 1. Upcoming approval of Bultainment's financial statements The directors of Bultainment (Pty) Ltd ('Bultainment) have asked you for advise on the basis of preparation of the current year's financial statements that must be approved at the upcoming directors meeting that's also the shareholders meeting on 1 June 2020. The directors are very uncomfortable with the 29 February 2020 financial statements as Bultainment is struggling to survive. Bultainment is a company operating in Potchefstroom situated in the student area providing a save, controlled environment for students to party. Their main source of income is the selling of liquor to students. Bultainment has a 28 February year end and AK auditors performed the audit for the current year and found no irregularities. The following is a very short summary of the Statement of financial positions items as at 29 February 2020. The financial statements were prepared in accordance to International Financial Reporting Standards ("IFRS"). R ASSETS Property, plant and equipment Inventory 5 250 000 320 000 46 000 Cash LIABILITIES Loan - SBF bank Trade creditors Bank overdraft 3 500 000 366 000 110 000 The property, plant and equipment consist mainly of the building that Bultainment operates from which they just bought before the current year end for Rs 100 000. The remaining assets consists of fridges, tables, chairs, counters and glasses. The purchase of the building was financed with a loan from SBF bank and the approval of the loan was based on the past 5 years financial statements and a future cash flow projections. Since the preparation of the 2020 financial statements the Covid-19 pandemic occurred and a national lockdown was imposed from 28 March 2020 resulting in the restriction on the movement and gathering of people and a prohibition on the sale of liquor. Furthermore, the university indicated that all learning for the academic year will be conducted via an online platform and that the return of students to campus is not compulsory when lockdown measures eases. Bultainment maxed out all their cash and is currently unable to pay salaries and trade creditors. Bultainment has no income as the lockdown restrictions prohibits the sale of liquor and the gathering of more than 50 people. SBF bank is in the process of repossessing the building as Bultainment is unable to pay the loan instalments. 2. Murano (Pty) Ltd ("Murano") The financial director of Murano contacted the audit partner with regards to assistance with the correction of an accounting error. During the preparation of Murano's draft financial statements for 29 February 2020 the financial director of the company discovered that the accountant incorrectly did not capitalise borrowing cost on the factory premises. The entity commenced with the construction of its new factory premises on 1 October 2017 and the construction was financed by specific loans. All the construction activities were completed by 1 May 2018 on which date the factory premises were brought into use. The factory has a useful life of 20 years and depreciation is written of on the straight-line basis. SARS indicated that the tax assessments for 2018 and 2019 will not be reopen. SARS will allow the pre- production interest as a deduction against the taxable income of the 2020 financial year. The financial director provided the detail of the borrowing costs incurred during the financial years ending 28 February 2018 and 2019. 2019 2018 R R Total borrowing cost incurred during the year 166 788 240 455 Borrowing cost incurred during capitalisation period 85 000 210 000 Interest earned on surplus funds invested during capitalisation 0 25 500 period Extract of amounts from the draft 2020 financial statements as prepared by the financial director before the error was detected. The amounts for 2019 and 2018 are the amounts as published in the financial statements. 2020 2019 2018 R R R 2 851 455 1 850 777 2 245 123 Total comprehensive income for the year Dividends paid Retained earnings as at 28 February 0 (200 000) 19 452 919 (300 000) 16 801 464 15 250 687 REQUIRED: MARKS Total Sub- total (a) 6 Advise the directors of Bultainment (Pty) Ltd on the appropriateness of the 29 February 2020 financial statements by applying your IFRS knowledge. Communication skills - Logical argument. 1 7 16 (b) Prepare the statement of changes in equity (only the retained earnings column) of Murano (Pty) Ltd for 29 February 2020 after adjusting the amounts for the correction of the error and disclose the note for the correction of the error in accordance with IFRS. Communication skills - Layout TOTAL MARKS QUESTION 4 1 17 24