Khoza Bazaar (Pty) Ltd ("Khoza Bazaar") is a retail company that owns and operates three large supermarkets in the South of Johannesburg. Where they come from Their founder is Jackson Khoza who opened the first retail store in 2009 in the South of Johannesburg, when he purchased the Covan Trading Store. Khoza's brother and sister, Marvin and Claire assisted him with the purchase. Khoza ran the supermarket with a focus on product availability, low prices and friendly customer service. By 2012, Khoza Bazaar had develop a reputation as the supermarket of choice in its area and the business had become very profitable. The business had also become cash positive because sales were on a cash only basis and suppliers expected payment on 30 days. In 2015, Marvin and Claire joined the business full time and the siblings began an expansion programme, opening two further stores in Soweto and Lenasia. The new stores followed the same formula to the letter and, in due course, became profitable enterprises. In 2017, the company expanded into the purchase and sale of affordable, good quality furniture. The furniture section was added to all three stores. Role players in Khoza Bazaar Jackson Khoza - CEO of Khoza Bazaar Marvin Khoza - COO of Khoza Bazaar Claire Khoza- CFO of Khoza Bazaar Busi Mboniswa - Financial manager of Khoza Bazaar Bradley Hayden - Financial Accountant of Khoza Bazaar Head office management The head office of Khoza Bazaar is situated on a piece of land owned by Khoza Bazaar in Glenvista. The head office is fully occupied by Khoza Bazaar and the accounting function of all three stores are managed by the head office accounting team under the leadership of Claire Khoza, the CFO. Warehouse Also situated on the piece of land in Glenvista is a large warehouse. The head office purchases the inventory for the three stores centrally where it is then stored in the warehouse. From the warehouse the inventory is distributed to the three stores based on their inventory levels and requirements. Khoza Bazaar owns several delivery vehicles to distribute the inventory as and when it is required at the stores. With the central warehouse and distribution facility, Khoza Bazaar is able to negotiate favourable prices and terms on the food and furniture items that they sell. It is Khoza Bazaar's policy to pay their suppliers within 30 days (unless the supplier offers early pay discounts). All food items are sold for cash at their stores, while Khoza Bazaar will offer credit to customers on the furniture sales after performing valid credit checks. Vacant Land On 5 June 2015, while expanding to Soweto and Lenasia, the company purchased a piece of land in Vanderbijlpark and planned to build a warehouse on it sometime in the future, if the company expand even further south to Vanderbijlpark and Vereeniging. The cost price of that piece of land was R5 000 000. Year end Khoza Bazaar has a 28 February year end. Value-added Tax You can ignore VAT for most of this assignment. Only in Task B (Part B Question 4) you will be required to answer a few short VAT questions. Financial statements of prior periods Attached is an extract from the financial statements of the previous period (28 February 2019): STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2019 Notes ASSETS Non-current assets Property, plant and equipment Intangible assets Financial asset at fair value through other comprehensive income Current assets Inventories Trade and other receivables Financial assets at fair value through profit or loss Cash and cash equivalents Total assets EQUITY AND LIABILITIES Total equity Share capital Retained earnings Revaluation surplus Mark-to-market reserve Total liabilities Non-current liabilities Long-term borrowings Current liabilities Trade and other payables Current portion of long-term borrowings Current tax payable Bank overdraft Total equity and liabilities 5 2019 R'000 521 000 500 000 11 000 10 000 399 500 170 000 500 10 500 218 500 920 500 489 900 300 000 172 900 15 000 2 000 430 600 250 000 180 600 103 000 10 000 47 600 20 000 920 500 2018 R'000 258 000 250 000 8 000 308 000 140 000 430 8 000 159 570 566 000 240 000 150 000 85 000 5 000 326 000 235 000 91 000 71 000 10 000 10 000 566 000 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 2019 Share capital Mark-to- Retained market earnings reserve R'000 Balance at 1 March 2017 Total comprehensive income Dividend paid Balance at 28 Feb 2018 Total income Share capital issued Dividend paid Balance at 28 Feb 2019 comprehensive Carrying amount at 1 March 2018 Gross carrying amount / cost Accumulated depreciation Depreciation for the year Revaluation Additions R'000 150 000 5. Property, plant and equipment Replacements. Scrapping of assets Carrying amount at 28 February 2019 Gross amount/cost Accumulated depreciation 150 000 carrying 150 000 300 000 EXTRACT OF THE NOTES TO THE FINANCIAL STATEMENTS Land 150 000 150 000 10 000 105 000 Revaluation surplus 265 000 265 000 R'000 5 000 5 000 10 000 15 000 Vehicles 50 000 80 000 (30 000) (38 000) 163 000 20 000 (5 000) 2 000 190 000 255 000 (65 000) 2 000 Office equipment 50 000 75 000 (25 000) (5 000) 45 000 75 000 (30 000) R'000 43 000 51 500 (9 500) 85 000 102 500 (14 600) 172 900 Total 250 000 305 000 (55 000) (43 000) 10 000 268 000 20 000 (5 000) 500 000 595 000 (95 000) Integrated assignment (Accounting 200 & Taxation 200) Task A (26 MARKS) The philosophy of Khoza Bazaar (Pty) Ltd is to offer competitive prices, good value and a complete one-stop shopping experience. Their mission is to become the shopping destination of choice for customers in the lower to middle economic sector. Their vision is to expand and open. up more stores in Gauteng and in other provinces within the next 3 years. In order to fulfill their mission to provide competitive prices, they are expanding their product range to also provide House brand canned foods. It is their intention to manufacture these products themselves. You are a newly qualified CA and have been appointed to the finance department of Khoza Bazaar (Pty) Ltd as the assistant financial accountant. At a finance department meeting at the beginning of 2019, Jackson Khoza introduced everyone to the mission and vision of the company. At the meeting he provided the following information regarding the manufacturing of canned products: . . The company will start to manufacture three lines of canned products in the current reporting period (2020) - canned mixed fruit, canned mixed vegetables and canned tomato and onions. Some of the raw materials are not available in South Africa and will have to be imported. Khoza Bazaar will have to lease a machine that will be used in the canning process for the three different lines. A section of the warehouse that is not currently being utilised and will be converted into factory space for the canning process. The manufacturing of canned products as well as opening more stores and expanding into Gauteng and other provinces will require significant capital and Khoza Bazaar is looking for innovative ways to fund these visions. At the meeting, Jackson Khoza asked you to assist him with the following a few matters. Part A (Accounting) 1. Considering the expansion initiatives of Khoza Bazaar and the funding that will be needed, suggest ways in which Khoza Bazaar can obtain surplus funds. In your response, consider the impact that each one of your suggested ways will have on the financial statements in the short and long term. (8) 2. Jackson Khoza is concerned that as a leadership team, they might not be considering all the necessary aspects regarding their idea to manufacture their own range of canned products. He asks you to assist him by providing him with operational, financial and tax- related considerations that they can reflect on before starting with the manufacturing. (10) Part B (Taxation) 1. For each of the funding methods you have suggested in 1 above, shortly explain all the possible taxation effects and consequences. Type your answer at the appropriate question in Taxation 200 BB. (8)