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GAAP: Graded Questions Financial reporting environment
Chapter 1
Financial reporting environment
Question Key issues

1.1 - Multiple choice questions
1.2 - Meaning of IFRS, standards, interpretations.
1.3 - Compliance with IFRS
1.4 - Benefits of accounting standards
1.5 - Development of an IFRS standard
1.6 - IFRS Foundation governance
1.7 Doodle / Poodle Par value and no-par value shares / CCs
1.8 - Differential reporting: IFRSs for SMEs
1.9 - Legal backing for accounting standards

1.10 - Harmonisation and convergence
Chapter 1 1
Question 1.1
a.
The International Accounting Standards Board is responsible for:
a) Providing guidance on issues arising from the application and interpretation of IFRS.
b) Dealing with issues arising from an IFRS, which are not specifically covered by the IFRS.
c) The development and publication of IFRSs and approving interpretations of IFRSs
developed by the IFRS Interpretations Committee.
d) Monitoring and governing the activities of the IFRS Foundation.
b.
A draft accounting standard published by the International Accounting Standards Board

(IASB) is referred to as:
a) A standard
b) A discussion paper
c) A working paper
d) An exposure draft
e) An interpretation
Question 1.2
The IFRS Foundation is a not-for-profit, public interest organisation established to develop a

single set of high-quality, understandable, enforceable and globally accepted accounting
standards - IFRS Standards - and to promote and facilitate adoption of the standards.
(http://www.ifrs.org/about-us/who-we-are/)
Required:
a) Explain the meaning of the terPµ,)56¶
b) ([SODLQWKHPHDQLQJRIWKHWHUPµVWDQGDUGV¶
c) ([SODLQWKHPHDQLQJRIWKHWHUPµLQWHUSUHWDWLRQV¶
Question 1.3
³$QHQWLW\ZKRVHILQDQFLDOVWDWHPHQWVFRPSO\ZLWK,)56VVKDOOPDNHDQH[SOLFLWDQGXQUHVHUYHG
statement of such compliance in the notes. An entity shall not describe financial statements as
FRPSO\LQJZLWK,)56VXQOHVVWKH\FRPSO\ZLWKDOOWKHUHTXLUHPHQWVRI,)56V´,$6SDUDJUDSK
16).
Required:
a) What does compliance with IFRSs mean?
b) Why would a company comply with IFRS?
c) Briefly describe the extent of compliance with IFRS around the world.
You may wish to access the publication ‘Pocket Guide to IFRS Standards: the global financial
reporting language’ (https://www.iasplus.com/en/publications/global/ifrs-in-your-pocket/2021)
2 Chapter 1
Question 1.4
The Group of 20 (G20) and other major international organisations, as well as very many
governments, business associations, investors and members of the accountancy profession,
support the goal of a single set of high quality, global accounting standards.
Required:
Discuss the benefits of a single set of high quality, global accounting standards.
You may wish to access the IFRS webiste ‘Why global accounting standards?’
https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/)
Question 1.5
³7KH GXH SURFHVV UHTXLUHPHQWV DUH EXLOW RQ WKH SULQFLSOHV RI WUDQVSDUHQF\ IXOO DQG IDLU
consultation - considering the perspectives of those affected by IFRSs globally - and
DFFRXQWDELOLW\´'XH3URFHVV+DQGERRN,)56)RXQGDWLRQ
Required:
List and describe each of the steps in the development of an IFRS standard.
Your answer should consider the agenda consultation, the research programme, the standard
setting programme and the maintenance programme.
Question 1.6
The IFRS Foundation has a three-tier governance structure, based on an independent

standard-setting Board of experts governed and overseen by Trustees from around the world
who in turn are accountable to a monitoring board of public authorities.
(http://www.ifrs.org/about-us/our-structure/)
Required:
a) List, and briefly discuss the objectives of the IFRS Foundation.
b) Describe the role of each of the following in standard setting process
x The IFRS Foundation
x The International Accounting Standards Board (IASB)
x The IFRS Foundation Trustees
x The IFRS Interpretations Committee
x The IFRS Foundation Monitoring Board
Question 1.7
Bertie is a first year student assigned to work on two clients, Doodle (Pty) Limited and Poodle
CC, two small entities both owned by Ms Jasmine. On starting work, he sends you, the
manager, an email querying two issues:
x Doodle (Pty) Limited has par value shares in issue. Is this permissible in terms of the
Companies Act?
x Is Poodle CC permitted to exist as a close corporation or should it convert to a company?
Required:
Prepare a response to the two queries.
Chapter 1 3
Question 1.8
The Companies Act 2008 has effectively given legal backing for differential reporting by
allowing the use of both IFRSs and IFRSs for SMEs.
Required:
a) What is differential reporting and briefly explain its purpose.
b) What is a small and medium sized entity?
c) How has the IFRSs for Small and Medium-sized Entities (SMEs) benefited the companies
it applies to and explain the inter-relationship with other IFRSs?
Question 1.9
The objective of the IFRS Foundation is to develop, in the public interest, a single set of high
quality, understandable, enforceable and globally accepted financial reporting standards that
help investors and other market participants make economic decisions.
(https://www.ifrs.org/regulators/)
However, the IASB cannot enforce the use of its standards because each country follows its
own local regulations for the preparation and reporting of financial statements.
Required:
Discuss the legal backing for accounting standards in South Africa, providing a brief history of
legal backing and the impact the Companies Act 2008 has had on legal backing.
Question 1.10
Developing global standards requires close consultation between the IASB and the national
standard-setters and interested parties from all interested countries. In this regard, two terms
are commonly used: harmonisation and convergence.
:KHUHDVµKDUPRQLVDWLRQ¶ ZDVSUHYLRXVO\WKHEX]]ZRUGµFRQYHUJHQFH¶ is now the new focus.
Required:
Discuss what you understand by harmonisation and convergence, and the difference between
the two.
4 Chapter 1
GAAP: Graded Questions The Conceptual Framework for Financial Reporting
Chapter 2
The Conceptual Framework for Financial Reporting
Question Key issues

2.2 - Objective of financial reporting
2.3 - Usefulness of financial information
2.4 - Financial statements and the reporting entity
2.5 - Asset and liability definitions
2.6 - Recognition criteria
2.7 Grippo Recognition criteria: discussion
2.8 Kay Elements of the financial statements: Journal and discussion
2.9 Crusty Bakery Elements of the financial statements: Journal and discussion
2.10 Wheat Elements of the financial statements and recognition criteria:
Discussion
2.11 Independent Elements of the financial statements: Dividends: Journal and
discussion
2.12 Foodie Advertising costs: Discussion
Chapter 2 5
Question 2.1
a.
The Conceptual Framework is an IFRS and can override any specific IFRS.
a) True
b) False
b.
Considering the fundamental qualitative characteristics of useful information in accordance with

the IASB Conceptual Framework
1. A faithful representation of an irrelevant information would not help users make good
decisions.
2. An unfaithful representation of relevant information would not help users make good
decisions.
a) 1 is true and 2 is false

b) 1 is false and 2 is true
c) 1 and 2 are both true
d) 1 and 2 are both false
c.
According to the IASB Conceptual Framework definition of an asset
1. An asset is considered as a physical object

2. An asset is considered as a set of rights
a) 1 only is true
b) 2 only is true
c) 1 and 2 are both true
d) 1 and 2 are both false
d.
A liability is defined in the IASB Conceptual Framework as
a) A present obligation arising from a future event, the settlement of which is expected to result
in an outflow of future economic benefits from the entity.
b) A present obligation of the entity to transfer an economic resource as a result of past events.
c) A future obligation arising from a past event, the settlement of which is expected to result
in an outflow of future economic benefits from the entity.
d) A present obligation arising from a past event, the settlement of which is expected to result
in an inflow of future economic benefits to the entity.
e) A future obligation of the entity to transfer an economic resource as a result of past events.
e.
According to The Conceptual Framework, prudence
1. is the exercise of caution when making decisions under conditions of uncertainty

2. means that assets and income are not overstated and that liabilities and expenses are not
understated
3. does not allow for the understatement of assets or income or the overstatement of liabilities
or expenses
6 Chapter 2
a) 1 only is correct
b) 1 and 2 are correct
c) 1 and 3 are correct
d) 1, 2 and 3 are correct
e) 2 and 3 are correct
Question 2.2
Chapter 1 of the Conceptual Framework describes the objective of financial reporting, the
information needed to achieve that objective and the users of financial reports.
Required:
Briefly discuss the information needed by users to meet the objective of financial reporting.
Question 2.3
Chapter 2 of the Conceptual Framework clarifies what makes financial information useful, that
is, information must be both relevant and must faithfully represent the substance of financial
information.
Required:
Briefly discuss the significance of prudence, substance over form and measurement uncertainty
on the usefulness of financial information.
Question 2.4
Chapter 3 of the Conceptual Framework describes the objective and scope of financial
statements and provides a description of the reporting entity.
Required:
Briefly describe the scope of financial statements and define a reporting entity, in terms of the
Conceptual Framework.
Question 2.5
The focus of the definition of an asset in the Conceptual Framework is on the existence of a
right that has the potential to produce economic benefits rather than on an expected inflow of
economic benefits.
Similarly, the focus of the definition of a liability in the Conceptual Framework is on the existence
of an obligation to require the transfer of economic benefits, rather than on an expected outflow
of economic benefits.
Required:
Discuss the implications of the existence of a right or obligation on the recognition of an asset
or liability.
Question 2.6
The recognition criteria for the elements of financial statements in the Conceptual Framework
refer explicitly to the qualitative characteristics of useful information.
Chapter 2 7
Required:
Explain what is meant by recognition and discuss in detail the criteria to be met for recognition
of an asset, liability, income and expense.
Question 2.7
Part A
Grippo Limited purchased a property at a cost C1 500 000 on 1 February 20X7. The property
is situated in the centre of a popular urban area, where properties are bought and sold on a
regular basis. Based on current market valuations and recent sales of similar properties, an
estate agent has estimated the fair value of the property at 31 December 20X9 at C2 000 000.
Required:
Discuss briefly, with reference to the recognition criteria of the Conceptual Framework, how the
property should be measured in the financial statements at 31 December 20X9, to provide the
most useful information to users.
Part B
Grippo Limited purchased a property at a cost C1 500 000 on 1 February 20X7. The property
is situated in a remote rural area, with few similar properties and limited property transactions.
The directors estimate the fair value of the property at 31 December 20X9 at C2 000 000.
Required:
Discuss briefly, with reference to the recognition criteria of the Conceptual Framework, how the
property should be measured in the financial statements at 31 December 20X9, to provide the
most useful information to users.
Question 2.8
Kay Limited publishes magazines. On 1 September 20X5, it paid C1 200 for an insurance
policy for a 12-month period, from 1 September 20X5 to 31 August 20X6. On 1 September
20X6, it paid C1 500 for an insurance policy for a 12-month period, from 1 September 20X6 to
31 August 20X7.
The financial year end of Kay Limited is 31 December.
Required:
a) Prepare the journal entry to be recognised on payment of the cash to the insurance
company on 1 September 20X5.
b) Calculate the amount of the expense to be recognised in respect of the insurance policy for
the year ended 31 December 20X5 and explain why this is recognised as an expense.
c) Calculate the amount of the asset or liability to be recognised on the statement of financial
position in relation to the insurance policy at 31 December 20X5 and explain why this is
recognised as an asset or liability.
d) Calculate the amount of the expense to be recognised in respect of the insurance policy for
the year ended 31 December 20X6.
Justify your answers to (b) and (c) using the Conceptual Framework.
8 Chapter 2
Question 2.9
The Crusty Bakery is a small business in Umhlanga, a town in South Africa, which makes a
range of breads and cakes that it sells to coffee shops in and around Umhlanga. The business
rents a building in Umhlanga Business Park from a landlord under a short-term lease at a cost
of C20 000 per month.
Part of the building is sublet by The Crusty Bakery to The Coffee Cup, an artisanal coffee outlet,
for C3 000 per month under a short-term lease. Subletting part of the building has been
successful in encouraging customers to come and buy cakes to have with their coffee.
Consider the following four unrelated scenarios relating to The Crusty Bakery rental
agreements during December 20X5:
A-1 Rent of C20 000, owed to the landlord for rent of the building during December 20X5,
was still payable at the end of December 20X5.
A-2 Paid cash of C60 000 on 20 December 20X5 to the landlord in respect of rent for the
building for the period from 1 January 20X6 to 31 March 20X6.
B-1 Rent of C3 000, due from the tenant (The Coffee Cup) for rent of part of the building
during December 20X5, was still receivable at the end of December 20X5.
B-2 Received cash of C9 000 at the end of December 20X5 from The Coffee Cup in respect
of rent for the sub-lease of part of the building from 1 January 20X6 to 31 March 20X6.
Required:
For each of the scenarios listed above, and assuming the recognition criteria are met:
a) Indicate the journal entry to be recorded for each transaction.
b) Explain, with reference to the relevant definitions in the Conceptual Framework, whether
the transaction results in an asset, liability, income or expense being recognised in the
financial statements of The Crusty Bakery for the year ended 31 December 20X5.
Question 2.10
Wheat Limited is a diversified company listed on the JSE. The financial reporting team is
preparing the financial statements for the year ended 31 August 20X7.
The following issues need to be considered:

1. The accounts receivable on the trial balance at 31 August amount to C50 million. Included
in this balance is an amount of C5 million owed by Regal Airways, which was declared
bankrupt in the early hours of the morning of 30 August 20X7.
2. The company has incurred costs of C2 million for staff training during the year ended
31 August 20X7. The HR director believes that Wheat plc will benefit from this training for
the next three years and suggests that the amount be capitalised and amortised over three
years.
3. Wheat plc entered into a contract with Jumbo Equipment Limited on 1 March 20X7 to lease
equipment (as a lessee) for a period of five years. The cash price and fair value of the
equipment is C3 million. Ownership of the equipment remains with Jumbo Equipment
Limited.
4. 2Q-XO\;DYLVLWRUWR:KHDW/LPLWHG¶s office park slipped and injured herself on the
pathway and is suing the company for damages amounting to C500 000. Wheat Limited
has taken legal advice and is disputing the claim.
Chapter 2 9
Required:
Discuss the impact of each issue on the financial statements of Wheat plc for the year ended
31 August 20X7.
You must refer to the Conceptual Framework’s definitions and recognition criteria of the
elements of the financial statements.
Question 2.11
Independent Limited declared a final dividend of C0.15 per ordinary share on 15 April 20X4 in
respect of the financial year ended 31 March 20X4. The accountant, Mr Poll, has recorded the
dividend as an expense on the statement of comprehensive income for the year ended
31 March 20X4 and a liability on the statement of financial position at that date
The company has 1 000 000 ordinary shares in issue at 31 March 20X4.
The financial statements have not yet been finalised.
Required:
Discuss the recognition of the dividend declaration with reference to the Conceptual
Framework, providing an alternative treatment where appropriate.
A discussion of the recognition criteria is not required.
Question 2.12
Foodie Limited is a large retail business that sells gourmet food ingredients to an upper middle
class target market that is health conscious. As part of its aggressive expansion strategy, a
decision has been taken by the management team of the company to open a new store in
Ballito.
In order to gain market share in Ballito and achieve a strong opening the company decided to
engage the services of renowned advertising firm Sorrel & Draper Inc. On 1 September 20X3
the company paid C750 000 to Sorrell & Draper Inc. for the design and production of a large
canvas banner to be displayed on a billboard in the Ballito town centre. The banner was
delivered on 30 September 20X3. The banner will be on display from 1 October 20X3 until
31 January 20X4, at which point it will be taken down and will not be able to be used again as
it will be damaged from exposure to the weather.
In addition, Foodie Limited is required to pay a fee to the Ballito Municipality of C35 000 for
renting the space on the advertising board. The fee was paid on 25 September 20X3.
Required:
Discuss, in terms of the Conceptual Framework, how these two payments should be accounted
for in the financial statements of Foodie Limited for the year ended 30 September 20X3.
10 Chapter 2
GAAP: Graded Questions Presentation of financial statements
Chapter 3
Presentation of financial statements
Question Key issues

3.2 - Principles and terminology
3.3 - Fair presentation and compliance with IFRS
3.4 - Current v non-current assets and liabilities
3.5 Green Tea Liability: Classifications, option to refinance (before and after
reporting date)
3.6 Loads of Luggage Adjusting journal entries, Statement of profit or loss, Statement
of changes in equity, Note to profit from operations.
3.7 Abracadabra Statement of comprehensive income (expenses by function and
revaluation of land), Statement of financial position
(reclassification of loan) and Statement of changes in equity and
Notes (analysis of expenses by function and profit before tax)
3.8 St Andrews Statement of profit or loss (expenses by function), Statement of
changes in equity and Notes (statement of compliance, basis of
preparation, profit before tax and dividends declared after year
end)
3.9 Nordic Statement of profit or loss (expenses by function and write-
down of inventory), Statement of changes in equity, Statement
of financial position), Notes (statement of compliance, profit
before tax and dividends declared after year end)
Chapter 3 11
Question 3.1
a.
An entity that trades as an antique dealer buys inventory at a cost of C30 000 on 1 July 20X0.
Inventory costing C10 000 is expected to be sold during 20X1 and inventory costing C20 000
is expected to be sold during 20X2.
None of this inventory is sold during the year ended 31 December 20X0.
How will this inventory be classified on the statement of financial position at 31 December
20X0?
a) C10 000 as a current asset and C20 000 as a non-current asset

b) C30 000 as a current asset
c) C30 000 as a non-current asset
d) C20 000 as a current asset and C10 000 as a non-current asset
b.
Borrower Limited raises a loan of C100 000 during 20X1. The loan is to be repaid in two
instalments, C40 000 during 20X5 and C60 000 during 20X6. The reporting date of the
company is 31 December.
An agreement is signed on 5 January 20X5 to delay the repayment of the C40 000 instalment
to 20X6. The financial statements are published on 31 January 20X5.
The disclosure required in the financial statements at 31 December 20X4 is as follows:
a) Non-current liability of C100 000

b) Non-current liability of C100 000 and note disclosure about the refinancing agreement.
c) current liability of C40 000 and non-current liability of C100 000.
d) Current liability of C100 000
e) Current liability of C40 000 and non-current liability of C60 000 and note disclosure about
the refinancing agreement.
c.
According to IAS 1 Presentation of Financial Statements, which of the following should be

reported on the face of the statement of financial position rather than in the notes to the financial
statements?
1. The number of shares in issue

2. The classes of property, plant and equipment
3. The classification of assets as non-current and current
4. The composition of trade and other receivables into debtors, prepayments and accrued
income
a) 1 and 3
b) 2 only
c) 3 and 4
d) 2, 3 and 4
e) 3 only
12 Chapter 3
d.
Consider the following statements in relation to IAS 1, Presentation of Financial Statements:
1. Items that are material to users are presented separately.

2. Items that are immaterial to users are aggregated with other items.
3. There is no need to disclose information required by an IFRS if it is not material.
a) 1 only is true
b) 2 only is true
c) 3 only is true
d) 1 and 2 are true
e) 1, 2 and 3 are true
e.
At the end of the reporting period, an entity has a balance on trade accounts receivable of
C700 000 and a balance on the allowance for doubtful debts of C70 000. On the face of the
statement of financial position:
a) As off-setting is not permitted, the trade accounts receivable will be disclosed as C700 000
and the allowance for doubtful debts will be disclosed as a negative C70 000.
b) The trade accounts receivable will be disclosed within current assets as C700 000 and the
allowance for doubtful debts will be disclosed within current liabilities as C70 000.
c) The trade accounts receivable will be disclosed net of the allowance for doubtful debts at
an amount of C630 000.
d) There is no disclosure as trade accounts receivable are only required to be disclosed in the
notes to the financial statements.
Question 3.2
³«,$6 Presentation of Financial Statements prescribes the basis for presentation of general
purpose ILQDQFLDOVWDWHPHQWVWRHQVXUHFRPSDUDELOLW\ERWKZLWKWKHHQWLW\¶VILQDQFLDOVWDWHPHQWV
of previous periods and with the financial statements of other entities. It sets out the overall
requirements for the presentation of financial statements, guidelines for their structure and
minimum requirements for their content.´ (IAS 1.1)
Required:
a) State the objective of IAS 1 Presentation of Financial Statements.
b) List the 5 statements that make up a complete set of financial statements.
c) List 6 possible components RIµRWKHUFRPSUHKHQVLYHLQFRPH¶
d) List the general features of financial statements as outlined in IAS 1 Presentation of
Financial Statements.
e) Define and explain the difference between the terms profit or loss, other comprehensive
income and total comprehensive income.
Question 3.3
IAS 1 Presentation of Financial Statements VWDWHV WKDW ³ILQDQFLDO VWDWHPHQWV VKRXOG SUHVHQW
fairly the financial position, financial performance and cash flows of an entity. The application
of IFRSs, with additional disclosure when necessary, is presumed to result in financial
statements that achLHYHDIDLUSUHVHQWDWLRQ´IAS 1.15
Chapter 3 13
Required:
Discuss the issues relating to fair presentation and compliance with International Financial
Reporting Standards. Your answer should address the following:
x the requirements for fair presentation to be achieved,
x inappropriate accounting treatments, and
x where management believes that departure from a requirement in a statement is necessary.
Question 3.4
"Each entity shall present current and non-current assets, and current and non-current
liabilities, as separate classifications on the face of its statement of financial position . . . except
where a presentation based on liquidity provides information that is reliable and more relevant."
(IAS 1, paragraph 60)
Required:
a) List the criteria applied by IAS 1 in classifying assets as current or non-current.
b) List the criteria applied by IAS 1 in classifying liabilities as current or non-current.
c) Discuss what is meant by the operating cycle of a business.
d) State the classification of inventories that are not expected to be realised within twelve
months of the financial reporting date.
e) State the classification of accounts payable that are not expected to be settled within twelve
months of financial reporting date.
f) Discuss your answers to (d) and (e) above from the perspective of the users of financial
statements.
Question 3.5
An extract from the trial balance of Green Tea Limited at 30 September 20X7 is as follows:
Debit Credit
5% Borrowings 600 000
Bank overdraft 40 000
5% borrowings
Green Tea Limited raised the 5% borrowings on 1 January 20X4, repayable in three equal
annual instalments, commencing on 31 December 20X7.
On 25 September 20X7, the directors passed a resolution to negotiate with the bank to roll over
the repayment of the first instalment.
i) The agreement was signed with the bank on 25 September 20X7 to defer repayment of the
first instalment until 31 December 20X8.
ii) The agreement was signed with the bank on 3 October 20X7 to defer repayment of the first
instalment until 31 December 20X8
The financial statements were authorised for issue by the directors on 10 November 20X7.
Overdraft
Green Tea Limited has an overdraft facility of C50 000 with its bankers and it is anticipated that
the overdraft will be maintained over the long term. The overdraft is used for the purposes of
trading.
14 Chapter 3
Green Tea Limited distinguishes between current and non-FXUUHQWOLDELOLWLHVLQWKHFRPSDQ\¶V

financial statements.
Required:
a) Discuss, giving reasons, how the borrowings should be disclosed in the financial
statements of Green Tea Limited for the year ended 30 September 20X7 in accordance
with IAS 1, Presentation of financial statements, considering each of scenarios (i) and (ii)
separately.
b) Include relevant definitions in your answer
c) Discuss how the overdraft should be disclosed in the financial statements of Green Tea
Limited for the year ended 30 September 20X7 in accordance with IAS 1, Presentation of
financial statements.
d) Prepare an extract from the statement of financial position of Green Tea at 30 September
20X7, showing only the liabilities section, considering separately each of scenarios (i) and
(ii) relating to the borrowings.
Question 3.6
Loads of Luggage Limited is a national retailer of travel goods and accessories. The following
is the trial balance of the company for the year ended 31 December 20X3:
LOADS OF LUGGAGE LIMITED

TRIAL BALANCE AT 31 DECEMBER 20X3
Debit Credit
Sales 1 650 000
Rental income 50 000
Cost of sales 990 000
Depreciation 80 000
Salaries and wages 100 000
Other expenses 220 000
Interest income 40 000
Interest expense 22 000
Tax expense 65 200
Dividends 50 000
Property, plant and equipment: Carrying amount 1 200 000
Loans and other investments 500 000
Accounts receivable 528 000
Accounts payable 280 000
Rent income received in advance: 1 January 20X3 5 000
Internet expense payable: 1 January 20X3 3 000
Borrowings 550 000
Current tax payable 65 200
Share capital 500 000
Retained earnings: 1 January 20X3 732 000
Bank 120 000
1 697 590 1 697 590
The following additional information is relevant:

x The primary source of revenue is the sale of goods to customers.
x Loads of Luggage Limited also earns rental income from letting a small section of its
administration buildings to independent consultants. Rent income received in advance at
31 December 20X3 is C6 000.
x Internet expense payable at 31 December 20X3 is C4 000. Internet expenses are included
in other expenses on the trial balance.
Chapter 3 15
x The dividends of C50 000 on the trial balance relate to dividends declared on 12 February
20X3 in respect of the year ended 31 December 20X2. Dividends of C60 000 were declared
on 14 February 20X4 in respect of the year ended 31 December 20X3.
x The interest income was earned on loans and investments.
x The company classifies its expenses according to function. The functions identified are
sales, administration and distribution.
x Depreciation is allocated as follows:
- 60% on factory plant (used to make inventory); all of which has been sold.
- 10% on office computers (used for administration purposes).
- 30% on company cars (used by sales representatives)
x Salaries and wages are allocated 60% to the administration function and 40% to the
distribution function.
x Other expenses are allocated 70% to the administration function and 30% to the distribution
function.
x There are no components of other comprehensive income.
Required:
a) Process all adjusting journal entries required to finalise the financial statements for the year
ended 31 December 20X3.
Closing transfer entries are not required.
Ignore deferred tax.
b) Prepare a statement of profit or loss of Loads of Loads of Luggage Limited for the year
ended 31 December 20X3 using the function method, in conformity with International
Financial Reporting Standards.
Comparatives are not required.
Ignore deferred tax.
c) Prepare a statement of changes in equity of Loads of Loads of Luggage Limited for the
year ended 31 December 20X3 in conformity with International Financial Reporting
Standards.
d) 3UHSDUHWKHQRWHWRµSURILWIURPRSHUDWLRQV¶.
Question 3.7
Abracadabra Limited is a company retailing in oriental spices. The bookkeeper has prepared
the following draft trial balance at 28 February 20X9:
ABRACADABRA LIMITED
TRIAL BALANCE AT 28 FEBRUARY 20X9
Debit Credit
Land 80 000
Equipment (Carrying amount) 40 000
Vehicles (Carrying amount) 30 000
Inventories 129 000
Bank 3 000
Electricity and water prepaid ± 1/3/20X8 1 000
Cost of sales expense 142 500
Depreciation expense 100 000
Salaries and wages expense 250 000
Electricity and water expense 25 000
Rates expense 10 000
16 Chapter 3
Income tax expense 6 000

Revenue from sales 600 000
Retained earnings ± 1/3/20X8 100 250
Revaluation surplus on land ± 1/3/20X8 2 500
Long-term loan 52 750
Salaries and wages payable ± 1/3/20X8 2 000
976 000 976 000
The following additional information has not yet been taken into account:
x The company classifies its expenses according to function. The functions identified are
sales, administration, distribution and operations.
x Salaries and wages are to be split between administration, distribution and operations
on a 37,5:25:37,5 basis. Advances of C500 have been paid to employees in respect of
WKHIROORZLQJ\HDU¶VZDJHV
x Rates should be allocated between administration, distribution and operations on the
basis of floor area used: the administration department uses 25% of the floor area, the
distribution department 15% and the operations departments the balance.
x Electricity and water should be allocated between administration and operations on a
3:1 basis. Electricity of C2 000 is unpaid at 28/2/20X9
x Depreciation comprises depreciation on office equipment (30%) and depreciation on
vehicles (70%). The office equipment is used equally by operations and administration.
Depreciation on vehicles constitutes 80% depreciation on delivery vans and 20%
depreciation RQGLUHFWRUV¶FRPSDQ\YHKLFOHVFRQVLGHUHGWREHDQRSHUDWLRQVH[SHQVH.
x The fair value of the land at 28 February 20X9 is assessed by an independent valuer to be
C130 000. There are no tax consequences relating to this revaluation surplus.
x The long-term loan agreement includes a clause whereby Abracadabra Limited undertakes
to maintain its current ratio at 3,5:1 or higher. If the current ratio drops below 3,5:1, half of
the balance owing becomes repayable immediately. For the purpose of calculating this
current ratio, a possible reclassification of the long-term loan is excluded therefrom.
x There is no other movement in other comprehensive income during the year other than that
which is evident from the information provided.
Required:
a) Prepare the statement of comprehensive income and the statement of changes in equity
for the year ended 28 February 20X9 and the statement of financial position at that date in
accordance with IAS 1 Presentation of Financial Statements.
b) 3UHSDUHWKHµSURILWEHIRUHWD[¶QRWH
Ignore comparatives.
Question 3.8
St Andrews Limited is a retailer listed on the Johannesburg 6HFXULWLHV([FKDQJH¶V$OW;/LVWLQJ

The company has outlets in major cities and also operates a large online delivery service.
The trial balance of the company at 28 February 20X6 is shown below:
Chapter 3 17
ST ANDREWS LIMITED
TRIAL BALANCE AT 28 FEBRUARY 20X6
Debit Credit
Ordinary share capital 4 000 000
Retained earnings 1 250 000
Dividends 100 000
Land - cost 140 000
Buildings - cost 8 000 000
Buildings - accumulated depreciation 1 440 000
Equipment - cost 500 000
Equipment - accumulated depreciation 200 000
Long term borrowings 1 100 000
Inventory 258 000
Bank 129 000
Sales 10 500 000
Cost of sales 7 500 000
Depreciation - buildings 160 000
Depreciation - equipment 100 000
Salaries and wages 1 212 000
Telephone 25 000
Electricity 55 000
Packaging 30 000
Postage 20 000
Finance costs 140 000
18 631 000 18 631 000
The following information is relevant:

x The authorised share capital comprises 10 000 000 ordinary shares of no par value.
2 000 000 shares were issued at C0,50 on 30 November 20X5. At 28 February 20X6 there
are 5 000 000 shares in issue.
x The company classifies its expenses according to the function method and has identified
two significant functions ± distribution (incorporating a large warehouse used to despatch
online orders and supply goods to the retail outlets) and administration (incorporating the
head office).
x The land and buildings comprise a large complex containing both the warehouse and
the head office. The building is 3 200 square metres in area, of which 1 800 square
metres are used for the warehouse (used to store goods prior to despatch) and the
remaining 1 400 square metres is used as the company head office
x The equipment consists of items used in the warehouse as well as equipment used in
the head office. 40% of the equipment is used in the warehouse and 60% is used in
the head office.
x C642 000 of the salaries and wages relates to the employees hired in the warehouse
and C570 000 relates to employees working in the head office.
x Telephone expenses of C25 000 were paid during the year. At 28 February 20X6, a
further C2 000 was unpaid in respect of the February account. 70% relates to the
warehouse 30% relates to the head office.
x Electricity expenses of C55 000 were paid during the year. C4 000 of this amount
relates to an advance payment in respect of March 20X6. 75% was incurred in the
warehouse and 25% was incurred in the head office.
x The packaging and postage expenses relate to the distribution of online orders.
x Dividends of C100 000 were declared on 18 March 20X5 in respect of the year ended
28 February 20X5. Dividends of C150 000 were declared on 15 March 20X6 in respect of
the year ended 28 February 20X6.
18 Chapter 3
x The income tax expense for the year ended 28 February 20X6 is C353 220. This expense
has not yet been recorded.
Required:
a) Prepare the statement of comprehensive income of St Andrews Limited for the year ended
28 February 20X6 in conformity with International Financial Reporting Standards and using
the function method.
b) Prepare the statement of changes in equity of St Andrews Limited for the year ended
28 February 20X6 in conformity with International Financial Reporting Standards.
c) In so far as information is available, prepare the following notes to the financial statements
for the year ended 28 February 20X6 in conformity with International Financial Reporting
Standards:
x Statement of compliance,
x Basis of preparation,
x Profit before tax, and
x Dividends.
Question 3.9
Nordic Limited is a company that sells a range of thermal and fleece clothing to retailers around
the country. The company is listed on the Johannesburg Stock Exchange. You have been
provided with the draft trial balance at 31 March 20X9, together with some additional information
The draft trial balance of Nordic Limited at 31 March 20X9 is as follows:
NORDIC LIMITED
TRIAL BALANCE AT 31 MARCH 20X9
Debit Credit
Equipment and fittings 750 000
Equipment and fittings ± accumulated depreciation 150 000
Inventory 2 200 000
Bank 330 000
Borrowings 900 000
Sales 12 100 000
Packing expense 300 000
Road transport costs 232 000
Stationary expense 490 000
Staff canteen expenses 213 000
Cleaning expenses 110 000
Depreciation - equipment and fittings 75 000
Salaries 700 000
Bad debts 10 000
Donations 50 000
Profit on the sale of equipment and fittings 400 000
Dividends 40 000
16 050 000 16 050 000
Additional information
x The ordinary share capital consists of 2 000 000 shares of 0,50c par value.
x The net realisable value of the inventory at the reporting date was estimated at C2 080 000.
Chapter 3 19
x The borrowings represent a loan of C900 000, repayable in three equal annual instalments.
The first instalment is due to be paid on 30 September 20X9. The existing loan agreement
provides Nordic Limited with the option to refinance the first instalment for a further seven
months and the directors exercised this option before the end of the current reporting
period.
x Nordic Limited classifies expenses according to their function. The financial director
categorises the functions of the business into three areas, namely sales, distribution and
administration.
x The distribution department specially wraps all items in a protective wrapping before the
items are shipped. The goods are transported by an independent road transport entity to
the retailers.
x The administrative department issue stationery, provide refreshments and are responsible
for the cleaning of the head office.
x The depreciation expense is allocated C50 000 to distribution and C25 000 to
administration. The salaries are allocated C250 000 to distribution and C450 000 to
administration. The bad debts are a distribution expense and the donations are an
administration expense.
x The profit on sale of equipment and fittings relates to equipment used in the administration
function.
x The income tax expense has been correctly calculated at C180 000.
x The dividend of C40 000 shown on the trial balance represents the final dividend in respect
of the year ended 31 March 20X8, declared on 20 April 20X8. A final dividend of C50 000
in respect of the year ended 31 March 20X9 was declared on 15 April 20X9. No interim
dividends were declared.
x The financial statements have not yet been authorised for issue.
Required:
a) Prepare the statement of profit or loss of Nordic Limited for the year ended 31 March 20X9
in conformity with International Financial Reporting Standards.
b) Prepare the statement of changes in equity of Nordic Limited for the year ended 31 March
20X9 in conformity with International Financial Reporting Standards.
c) Prepare the statement financial position of Nordic Limited at 31 March 20X9 in conformity
with International Financial Reporting Standards
d) Prepare the following notes to the financial statements of Nordic Limited for the year ended
31 March 20X9 in conformity with International Financial Reporting Standards:
- The statement of compliance note.
- The note supporting profit before tax
- The dividend note
Comparatives are not required
20 Chapter 3
GAAP: Graded Questions Revenue from contracts with customers
Chapter 4
Revenue from contracts with customers
Question Key issues
4.1 Short questions Core concepts:

Part A: Definitions and overview of the process
Part B: Identifying the contract (step 1)
Part C: Determining the transaction price (step 3)
Part D: Allocating the transaction price (step 4)
Part E: Satisfying performance obligations (step 5)
4.2 Orchard Calculating the transaction price involving:

- settlement discounts
- rebates
- financing components
4.3 Spry TP: involving a settlement discount (settlement discount is forfeited)

PO: satisfied at a point in time
4.4 Grey Dog Comparison of terms: receivable, contract asset and contract liability
Recognition of the asset: receivable or contract asset
Timing of recognition of revenue and the related asset:
- cancellable contract versus
- non-cancellable contract
4.5 Space Part A: Contract is cancellable

- Variable consideration: discount ± granted versus not granted
Part B: Contract is non-cancellable
- Variable consideration: discount ± granted versus not granted
4.6 Bob Construction Part A: Variable consideration

Part B: Significant financing component
4.7 Macrobyte Collectability issues and expected credit losses
4.8 Matthew a) Identification of performance obligations

b) Bill and hold sale (insignificant)
c) Bill and hold sale (significant) resulting in contract modification
4.9 Alphabet Contract involves services over a 3-year period

Part A: Services considered to be three separate POs (no SASPs are
available)
Part B: Services considered to be one single PO (satisfied over time)
4.10 Boutique Sale of goods involving:

- a service-type warranty,
- an assurance-type warranty and
- a right of return
Continued on the next page…
Chapter 4 21
Question .H\LVVXHVFRQWLQXHG«
4.11 The Red Radish TP: involves volume rebates, advance payments and arrear payments
4.12 Marleybone TP: allocation of a discounted TP to POs in a bundle
4.13 Fitness Contract involves two fees (joining and membership), a financing benefit and
renewal option
Option to renew provides customer with services similar to original contract
4.14 Gold Part A:

TP: involving variable consideration (a rebate)
PO: satisfied over time
Refund liability
Part B:
TP: involving variable consideration ( a rebate): Variable
consideration changes
PO: satisfied over time
Refund liability
4.15 Coolio Refund liability, sale with right of return and journals for actual returns
4.16 TeraDrive Identification of performance obligations

Allocation of TP and discount based on stand-alone prices
4.17 Tech-People Advance payment

Allocation of transaction price to multiple performance obligations
4.18 Wacol Store Part A: Customer loyalty programme ± issue of points

Part B: Customer loyalty programme ± redemption of points
4.19 BlackRock Multiple performance obligations involving goods and services
4.20 Caravan Instalment sale transaction with significant financing component
22 Chapter 4
Question 4.1
Part A ± General aspects of IFRS 15

a) Briefly explaLQWKHGLIIHUHQFHEHWZHHQµUHYHQXH¶DQGµLQFRPH¶.
b) Consider the following statement: If a retailer enters into a sales contract with a customer,
where the customer meets the definition of a customer, the revenue from this contract will
be recognised and measured in terms of IFRS 15.
Indicate whether this statement is true or false and briefly justify your answer.
c) IFRS 15 provides a 5-step process to follow when recognising and measuring revenue.
List the 5-steps.
d) Which step in the 5-step process helps us pinpoint the moment when revenue should be
recognised. Briefly explain this step.
e) Briefly explain the difference between the terms µcontract asset¶ and µreceivableV¶.
Part B ± Identifying the contract

f) Consider the following statement: A customer is defined as a party that has contracted
with the entity to obtain goods or services in exchange for consideration.
g) Fill in the missing words: A contract is defined as an agreement between
_________________ that creates ________ rights and obligations
h) Provide the journal entry we would need to process if we received cash from a customer
as a result of a transaction that did not yet meet the definition of a contract, and briefly
explain your answer.
i) List all criteria that must be met before we can conclude a µcontract¶ exists in terms of IFRS 15.
Part C ± Determining the transaction price

j) Consider the following statement: The transaction price is defined as the amount of
consideration the entity expects to receive in exchange for transferring goods or services to
a customer, excluding amounts collected on behalf of third parties.
k) An entity signs a contract that stipulates a price of C80 000. However, the entity expects
that, based on WKHFXVWRPHU¶VFUHGLWhistory at contract inception, C25 000 of the contract
price will not be recovered.
Calculate the transaction price and briefly explain your answer.
l) Identify when we would have to 'constrain an estimate' and briefly explain this process.
m) Briefly describe the two-step process involved in calculating the amount of the variable
consideration to be included in the transaction price.
n) Under what circumstances would we conclude that a contract contains a 'financing component'.
o) Briefly explain the circumstances under which a financing component would affect the
determination of the transaction price.
p) Briefly explain how the financial impact of a financing component in a contract is
calculated and recognised.
q) When calculating the cash price of a transaction, we must calculate the present value of
the consideration to which the entity expects to be entitled, discounted at an appropriate
rate. Briefly explain how to determine an appropriate discount rate.
Chapter 4 23
Part D ± Allocating the transaction price

r) Briefly explain what is meant by µDOORFDWLQJ a transaction price¶.
s) Briefly describe how one allocates a transaction price that does not include variable
consideration or an inherent discount.
t) Briefly explain how to allocate the transaction to an item which has been sold before but
is now sold as part of a bundle.
u) Briefly explain how to allocate the transaction price to an item which is sold as part of a
bundle but has not been sold on its own before.
Part E ± Satisfying the performance obligations

v) Define the term 'performance obligation' in terms of IFRS 15.
w) List the two main classifications we use to identify performance obligations.
x) When recognising revenue, what class of performance obligation requires us to measure
the entity's 'progress towards complete satisfaction of a performance obligation'?
y) List the two methods of measuring progress and give an example of each.
z) Briefly explain the difference between the two methods of measuring progress.
Required:
Answer the above short questions.
Question 4.2
On 1 January 20X3, Orchard Limited signed four separate sales contracts with four different
customers, details of which, determined at contract inception, are presented below:
Customer A Customer B Customer C Customer D

Contract price C350 000 C350 000 C350 000 C350 000
Early settlement discount Note 1 10% N/A N/A N/A
Rebate Note 2 N/A C140 000 N/A N/A
Goods delivered 01/01/20X3 01/01/20X3 01/01/20X3 01/01/20X3
Payment due 31/01/20X3 31/01/20X3 30/06/20X3 31/12/20X4
Note 1. Orchard expects that customer A will pay within the required settlement period of
30 days and will thus qualify for the settlement discount.
Note 2. Customer B was offered a rebate, dependent on certain conditions being met. This
rebate is considered to be a price reduction. Orchard expects that customer B will
comply meet these conditions and thus that the rebate will be granted.
The appropriate discount rate, determined at contract inception, is 10%.
Required:
a) With regard to the contract with customer A, calculate the transaction price, provide the
journal/s and briefly explain your answer.
b) With regard to the contract with customer B, calculate the transaction price, provide the
journal/s and briefly explain your answer.
c) With regard to the contract with customer C, calculate the transaction price, provide the
journal/s and briefly explain your answer, assuming:
i) The effect of financing is considered to be insignificant;
ii) The effect of financing is considered to be significant.
24 Chapter 4
d) With regard to the contract with customer D, calculate the transaction price, provide the
journal/s and briefly explain your answer, assuming:
i) The effect of financing is considered to be insignificant;
ii) The effect of financing is considered to be significant.
Ignore loss allowances.
Question 4.3
Spry Limited entered into a sale agreement with Power Limited on 3 March 20X3:
x The terms of the agreement were that Spry will:
supply 3 300 light fittings to Power in exchange for C330 000;
grant a 10% early settlement discount for full payment received before 3 May 20X3.
x On 3 March 20X3, Spry Limited fully anticipated that the customer would pay within the
required period and thus that the customer would qualify for the discount offered.
x Spry Limited:
delivered the light fittings to Power Limited on 5 April 20X3; and
received the payment due from Power Limited on 31 May 20X3.
Required:
a) 8VLQJ 6SU\ /LPLWHG¶V JHQHUDO MRXUQDO SUHSDUH DOO MRXUQDOV QHFHVVDU\ IRU WKH \HDU HQGHG
31 December 20X3. Ignore tax.
b) Provide a brief explanation to support your journals.
Question 4.4
On 10 January 20X2, Grey Dog Limited signed a contract to supply a customer with 1 000 baskets.
The contract stipulated:

x a selling price of C300 per unit; and
x a due date for full and final settlement of 10 February 20X2.
Although Grey Dog Limited delivered all baskets to the customer on 31 March 20X2, the customer
had not yet made any payments by 30 June 20X2, being *UH\'RJ¶V financial year end.
Required:
a) Define WKH WHUPV µFRQWUDFW DVVHW¶ µUHFHLYDEOH¶ DQG µFRQWUDFW OLDELOLW\¶ DQG identify the
essential difference between each of these terms.
b) List the steps to be followed before revenue may be recognised in terms of
IFRS 15 Revenue from contracts with customers and apply them to the widget contract.
c) Show all necessary journals, together with a brief explanation as to how Grey Dog Limited
should account for the information above, assuming:
i) the contract is cancellable.
ii) the contract is non-cancellable.
Ignore loss allowances
Chapter 4 25
Question 4.5
Part A
Space Limited signed a sales agreement with a customer on 1 May 20X1, the terms of which
are as follows:
x Space Limited will supply 32 000 widgets to the customer;
x The contract price is C1 per widget;
x The total contract price is due and payable by the customer on 18 May 20X1.
The customer requested a 10% discount when signing the contract. However, the sales
representative who was assisting the customer did not have the necessary authority to grant
the discount but managed to convince the customer to sign the contract anyway and assured
him that he would speak to his manager to try to secure the requested discount.
At contract inception, it was considered likely that the customer would be granted the discount.
The batch of widgets was delivered to the customer on 31 May 20X1 and the customer
settled his balance on 4 July 20X1.
The contract is cancellable.
Required:
Prepare all journals relevant to the information provided above assuming that on 4 July 20X1:
a) A decision was made to grant the discount.
b) A decision was made to not grant the discount.
Part B
Use the same information as that provided in part A with the exception that the contract is
non-cancellable.
Required:
Prepare all journals relevant to the information provided above assuming that on 4 July 20X1:
a) A decision was made to grant the discount.
b) A decision was made to not grant the discount.
Question 4.6
Part A
Bob Construction entered into an agreement with Animania Properties for the construction of a
shopping centre in Johannesburg for C24 000 000. The pertinent details of the agreement follow:
Description:
Contract price C24 000 000
Completion period 36 months
Early completion period 24 months
Early completion incentive C2 400 000
Payment terms Monthly progress payments Note 1
26 Chapter 4
Note 1: At contract inception, and after finalising the construction schedule, Bob Construction
believes there is a 95% chance the construction will be completed in 24 months and that the
company will qualify for the entire bonus amount.
Required:
Discuss how Bob Construction should calculate the transaction price of the contract with
Animania Property Holdings.
Part B
Bob Construction had a significant store of construction machinery standing idle, which it
decided to sell. It managed to sell machinery for C2 880 000 to Goofy Property Holdings in
January 20X6. Goofy Property Holdings will pay for this machinery in 3 equal instalments,
SD\DEOHDQQXDOO\LQDUUHDUV7KHPDFKLQHU\¶VFDVKVHOOLQJSULFHZDV& 250 000 .
Required:
a) Discuss how Bob Construction should calculate and allocate the transaction price from
the contract with Goofy Property Holdings for the year ended 31 December 20X6.
b) Prepare the journal entries to account for the contract with Goofy Property Holdings for
the year ended 31 December 20X6 and briefly discuss the principles behind the journals
Question 4.7
Macrobyte Limited finalised a cancellable contract with a customer. The contract:

x was signed on 1 February 20X3, and
x required Macrobyte to supply the customer with 550 000 widgets at C1 each.
The customer:
x took delivery (control passed at the same point in time) on 28 February 20X3. On this
date, Macrobyte estimated that the lifetime expected credit losses were equal to 50% of
the transaction price, and that the probability of default was 50%.
x went into provisional liquidation on 15 March 20X3, on which date Macrobyte received a
letter confirming this fact and stating that the customer will be able to pay a maximum of
40% of the transaction price. On this date, Macrobyte estimated that the loss allowance
relating to the receivable would be equal to 60% of the contract price.
x finally made a payment of C165 000, on 5 August 20X3, with the remainder of the
balance due being considered to be unrecoverable.
Required:
Using Macrobyte Limited¶s general journal, prepare all journal entries to account for the above
information for the financial year ended 30 September 20X3.
Question 4.8
Matthew Limited manufactures specialised plant and equipment for various customers. On
15 October 20X0, Matthew Limited entered into an agreement with Luke to design and
construct a unique plumbing system, which Luke will then be installing into a unique off-grid
property commonly called an µearthship¶. The contract meets all the necessary requirements
WR EH FRQVLGHUHG D µFRQWUDFW ZLWK D FXVWRPHU¶ LQ WHUPV RI ,)56 Revenue from contracts
with customers. The contract price was set at C1 540 000.
Chapter 4 27
The following is a summary of events:

x 1 December 20X0 ± design phase complete
x 2 January 20X1 ± manufacturing complete
x 3 January 20X1 ± inspection by the council reveals that the plumbing system does not meet
strict health and safety specifications. Matthew Limited commences work to rectify issues
identified on the same date.
x 8 January 20X1 ± follow-up inspection reveals that the system now meets the health and
safety specifications. On the same date, Matthew Limited signs the paperwork transferring
legal title. All amounts due were settled on this date.
Due to delays in the construction of the plumbing system, Luke requested Matthew Limited
retain the plumbing system for a few more days as Luke was now working on another part of
the earthship with the result that it was now currently inconvenient to take delivery.
x Matthew Limited has agreed to store the system in a secure storage area on its premises.
x This storage area is dedicated to storing completed products awaiting customer collection.
x Matthew Limited normally charges monthly storage fees of C10 000, but since Luke is a
long-standing and valuable customer, it agreed to waive these fees.
Required:
a) Determine (with appropriate discussion) the number of performance obligations in the
original agreement between Matthew Limited and Luke.
b) Explain, using the 5-step process in IFRS 15, how Matthew Limited should account for
this contract in its financial statements for the year ended 28 February 20X1.
c) Explain how your answer to (b) would change if Luke requested Matthew Limited to store
the plant for a 6-month period ending 30 June 20X1 (i.e. not just for a few days).
Question 4.9
Part A
On 1 January 20X8, Alphabet signed a contract with a customer, Mr Jones, agreeing to

provide services over a 3-year period at a contract price of C48 000, payable in advance.
x The estimated costs of providing the annual services are as follows:
Estimated cost (C)
Year 1 12 000
Year 2 18 000
Year 3 27 000
x Alphabet considers a reasonable mark-up on cost, for all performance obligations, to be 20%.
x Additional information:
All services are performed at year-end.
The effect of any financing benefit is considered insignificant.
The three annual services are three separate performance obligations.
Required:
Show the journals that would need to be processed by Alphabet for the year ended
31 December 20X8 and 31 December 20X9, to account for the three-year service contract.
28 Chapter 4
Part B
Alphabet entered into a contract with Mr Smith, agreeing to provide car maintenance services
over a 3-year period, for a fee of C48 000.
Each chronological service has been carefully designed to attend to different aspects of the
vehicle engine as it ages and thus it is imperative that the services are performed timeously
and in the correct sequence. The annual costs involved are summarised below:
Estimated cost (C)
Year 1 12 000
Year 2 18 000
Year 3 27 000
Assume that the effect of any financing benefit is considered to be insignificant.
Required:
a) Determine (with relevant discussions) whether the three annual services are separate
performance obligations.
b) Provide the journals that Alphabet must process for the year ended 31 December 20X8 in
order to account for the three-year maintenance contract referred to above.
Question 4.10
Part A
Boutique Limited, a small retailer, sold an item to a customer:

x The selling price of C75 000 was received on 1 January 20X1, being the same date that
the customer took delivery.
x Boutique received this money in its current account, which bears interest of 3,5% per
annum. The money remained in this account for the entire year.
x This item cost C21 750, measured using a weighted average cost formula.
Boutique sold this item with a 9-month warranty:

x The terms of the warranty are such that in the event that the item is found to be defective,
the item may be returned to Boutique in exchange for C75 000 plus 2% interest. The
warranty expires on 1 October 20X1.
x This is the first time Boutique Limited has entered into a transaction with a warranty, and
thus Boutique has no past experience on which to assess the probability of return.
x The goods had not yet been returned on the date the warranty expired.
Required:
Prepare the journal entries to record this transaction for the year ended 31 December 20X1 in
terms of the relevant International Financial Reporting Standards.
Part B
Use the information provided in Part A except for the information regarding the 9-month
warranty. Instead of the product being sold with a 9-month warranty, it is sold with a 9-month
right of return, details of which are as follows:
Chapter 4 29
x The goods sold may be returned for exchange with any other product or for a full refund.
x As this is the first time Boutique Limited has entered into a transaction with a right of
return, they have no past experience on which to assess the probability of return.
x The right of return expired on 1 October 20X1 without any goods having been returned.
Required:
Part C
Use the information provided in Part A except for the information regarding the 9-month
warranty. Also ignore Part B. Instead of the product being sold with a 9-month warranty or
right of return, the product is sold with a 1-year warranty, that it normally sells separately for
C12 500. In terms of this warranty, if the product becomes defective after its sale, Boutique
will replace it. The warranty expires after 1 year from the date of the transaction.
Required:
Question 4.11
The Red Radish sells standard flower arrangements to hotel chains in the East London area.
The company has been in business for many years, with a large client base and has never
had any problems supplying customer orders. The Red Radish has spare capacity and thus
wishes to encourage an increase in sales volume. In this regard, it operates a rebate system
for major clients, where selling prices per flower arrangement are cheaper based on the
annual volumes ordered, as follows:
x 0 ± 250 000 arrangements per year are sold for C3 each.
x 250 001 ± 499 999 arrangements per year are sold for C2.88 each
x 500 000+ arrangements per year are sold for C2.70 per unit
During June 20X4, it received orders from three of its major clients: Mykonos Hotel ordered
92 000 flower arrangements7UHNNHU¶VHideout ordered 49 500 flower arrangements and the
Spring Apartments ordered 17 250 flower arrangements. Their expected annual orders are
1 112 500, 490 000 and 237 900 flower arrangements, respectively.
The Red Radish invoices its clients on delivery of the flower arrangements and expects to receive
cash from its customers on the same day. However, Spring Apartments paid a total of C800 000
in June 20X4 (this was a payment to cover both its June 20X4 orders and a significantly large
order it plans to place during the next few weeks) and Mykonos Hotel was granted 30 days credit
on the orders it placed in June 20X4.
Assume any financing component is insignificant.
Required:
Prepare 7KH5HG5DGLVK¶V journal entries for June 20X4.
30 Chapter 4
Question 4.12
Part A
The Marleybone Company, a publishing company, owns many book titles that are sold across the
country. The selling price of each of its titles is based on readily available selling prices.
Its most popular titles, and the related stand-alone selling price for each, are as follows:
x Sports books, which sell for C50 each on average.
x Entertainment books, which sell for C36 each on average.
x E-books, which are not sold on their own.
x Cooking books, which sell for C24 each on average.
x History books, which sell for C28 on average.
In order to boost sales, Marleybone offers two types of bundles:

x an afternoon braai bundle (i.e. containing sports and entertainment books) that retails for C78; and
x the winter bundle (i.e. containing the cooking and history books) that retails for C42.
At the beginning of the year, the company introduced a third bundle, giving customers the chance
to buy a bundle of all the books titles for C126.
x This offer, marketed as the new year’s resolutions bundle, also includes one-PRQWK¶VDFFHVV
to a variety of e-books.
x E-books are a new offering by Marleybone and have not been sold before.
x The company estimates the cost of providing access to the e-books online is C6 per reader.
x A 16% profit mark-up on cost is considered appropriate.
Required:
a) Show how the transaction price for the afternoon braai bundle, the winter bundle and the new
\HDU¶VUHVROXWLRQVbundle should be allocated.
b) Briefly explain how the prices of each of the three bundle prices are allocated.
Part B
Use the same information as provided in Part A, together with the following:
During January 20X9, a total of 200 QHZ\HDU¶VUHsolutions bundles were sold, all for cash. All the
items within the bundle, with the exception of the sports books and the e-books, had been posted
to the customers by 31 January 20X9.
x The sports books are only published every 4 months with the next edition due to be published
on 10 April 20X9 and thus the 100 customers who purchased the QHZ \HDU¶V UHVROXWLRQV
bundle in January 20X9 will receive their sport books in April 20X9.
x The e-books are provided for a period of two months from the date on which the QHZ\HDU¶V
resolutions bundle was purchased.
Customers purchased their e-books at various stages during January.
It was estimated that, on average, 60% of the promised access to the e-books had been
provided by 31 January 20X9.
Required:
Prepare the journal entry to account for the receipt from the sale of 100 new year¶VUHVROXWLRQV
bundles during the financial year ended 31 January 20X9.
Chapter 4 31
Question 4.13
Fitness Limited began operations in 20X7. The company operates nine gyms around the
country (one in each province). The gyms are specifically designed to meet the fitness needs
of busy women and offer a trademarked µ-PLQXWHZRUNRXWIRUZRPHQ¶
Until recently, the company charged members per workout at C10 a workout. However, in
20X8, due to the growing demand, a membership scheme was introduced.
Details of the new membership scheme are as follows:
x New members are charged a non-refundable once-off joining fee of C100 and an annual
membership fee of C1 500 per member.
x Both the joining fee and the annual membership fee are paid upfront by members.
x The membership period is from 1 January to 31 December each year.
x The membership fee remains the same regardless of what time of year the member joins.
x In exchange, members get unlimited use of the gym facilities during the period ending
31 December. The cost of providing access to a member is estimated at C720 per annum.
x Members are given the option to renew their contracts for another year. The last day for
paying for renewal of memberships is 31 January. Members who renew by the due date
are able to pay 80% of the membership fees for the year.
Fitness Limited sold 300 memberships countrywide during 20X8 (spread across 9 branches).
It is anticipated that 55% of the members will renew their membership before 31 January and
qualify for the reduced membership fees.
The following amounts were received for the year ended 31 December 20X8:
Joining fees received C30 000

Annual membership fee income C450 000
Income from non-members C200 000
The accountant of Fitness Limited is inexperienced but overconfident and, instead of seeking advice,
has gone ahead and recognised all joining and membership fees as revenue on receipt.
Required:
Discuss, with reasons, the appropriateness of the recognition and measurement of joining
fees and membership fees adopted by Fitness Limited, in terms of IFRS 15 Revenue from
contracts with customers. Your answer should address each of the following:
a) An introduction briefly explaining whether or not the recognition of the receipt of the
joining fees and membership fees as revenue on the date of receipt was correct.
b) Determining the transaction price together with a brief explanation.
c) Identification of the performance obligation/s in the contract, with a brief explanation.
d) Allocation of the transaction price to the performance obligation/s, with a brief explanation.
e) The journals that will be processed for the years ended 31 December 20X8 and 20X9.
(Source: SAICA QE 2010 paper 1 question 3: Adapted)
Question 4.14
Gold Limited entered into two separate service contracts with two customers, the contracts
are detailed overleaf.
32 Chapter 4
Description Customer A Customer B

Contract inception 1 January 20X6 1 January 20X6
Contract price (at inception) C200 000 C600 000
Rebate (price reduction) C80 000 Various options
Note 1 and 2 Note 3 and 4
Service duration Two-month period Three-month period
Services provided January and February January and February
Amounts paid as at 28 February 20X6 C140 000 -
Note 2
Note 1: Qualification for this rebate depends on customer A providing an environmental

certificate before 28 February 20X6. Gold Limited expected customer A to provide
the certificate in a timely fashion. However, the customer had not presented the
certificate by 28 February 20X6.
Note 2: This payment was received from the customer in part-payment on 5 February 20X6.
Note 3: Gold Limited offered customer B a rebate depending on its BEE rating. To prove this
rating, customer B needs to produce a BEE certificate within a certain period of
time. The prescribed rebates are as follows:
BEE Contribution Rebates (C)

Level 1 240 000
Level 2 180 000
Level 3 and below 0
At contract inception, Gold expected that customer B would provide (before

20 February 20X6) a BEE certificate proving a level 1 contribution.
Note 4: Customer B presented the necessary documentation on 18 February 20X6 (before
the deadline had expired). Upon an analysis thereof, it was determined that
customer B was actually a level 2 contributor.
Required:
Show the journals that Gold Limited must process relating to the information presented above
(relating to the transactions with both customers A and B) for the 28 February 20X6 financial
year. Provide an explanation of your journals with specific reference to IFRS 15 Revenue
from contracts with customers
Question 4.15
Coolio Traders sold inventory on 1 March 20X9 to Sisqo Ltd for C307 800 (including VAT).
x This customer must pay for the inventory 24 months after delivery.
x The product is sold subject to a right of return up to 3 months after the date of sale.
x Coolio estimates that 5% of goods sold will be returned for a full refund.
x The inventory had a cost of C135 000 (excluding VAT).
x It is expected that the cost to recover the returned stock (including an allowance for loss of
value) is 6% of the original cost of the stock.
x The appropriate discount rate is an effective 8% per annum and the VAT rate is 14%. All
parties are classified aVµYHQGRUV¶IRU9$7SXUSRVHV
Required:
a) Prepare the journal entries for Coolio Traders to account for the sale of the inventory to
the customer and provide brief explanations for all journals.
Chapter 4 33
b) Prepare the journal entries for Coolio Traders to account for the return of the inventory on
the assumption that the customer returns -
i. nothing within the 90-day period.
ii. 5% of the goods within the 90-day period.
iii. 3% of the goods within the 90-day period.
iv. 7% of the goods within the 90-day period.
Question 4.16
TeraDrive is a wholesale supplier of computer hard drives. TeraDrive sold some hard drives
to the American branch of an international, blue chip company called SolidState. TeraDrive
and SolidState are long standing business partners and for that reason should SolidState
require hard drives, they are procured exclusively from TeraDrive.
TeraDrive and SolidState entered the following agreement:

x Contract date: 22 December 20X7
x Contract price: C2 million
x Contract obligations:
- supply of hard drives;
- installation of the hard drives at the American branch of SolidState; and
- providing maintenance services for three years whereby TeraDrive will be expected
to provide backup whenever needed.
The three-year maintenance programme is very popular with all TeraDrive customers.
The stand-alone prices of the various contract components were as follows: the hard drives are
C320 000, the installation process is C840 000 and the 3-year maintenance is C1 320 000.
Delivery and installation information:

x The American branch took delivery of the hard-drives on 28 December 20X7 but were
unable to use them until the installation team arrived at their offices to install them.
x The installation team arrived and completed the installation on 9 January 20X8
The contract price (C2 000 000) was payable by SolidState in instalments as follows:
x half the total contract price (C1 000 000) was to be paid on 28 December 20X7 (this
payment was received on due date);
x the balance of the contract price is due in two equal annual instalments:
one on 31 December 20X8 and
one on 31 December 20X9.
x TeraDrive offers the option to pay in instalments to all its customers.
The contract does not contain a significant financing component.
Required:
a) Define the terms µperformance obligation¶ and µdistinct¶ as described in IFRS 15 Revenue
from contracts with customers.
b) Briefly explain the application of steps 2 to 4 of revenue recognition per IFRS 15 Revenue
from contracts with customers to the SolidState contract.
c) Prepare the journals for TeraDrive for the years ended 31 December 20X7 and 20X8.
34 Chapter 4
Question 4.17
Tech-People Limited (TP) creates customised IT solutions under contract for consumer and
corporate markets. Normal contractual terms require a 35% deposit to be paid on signing of
the contract with the remaining 65% payable on completion thereof. If the contract is
cancelled by either party, TP Limited is entitled to compensation based on its costs incurred
to date plus 20%, which it considers to be a reasonable profit margin.
TP is in the middle of the financial year ending 31 March 20X7. One of the projects TP
entered into entails the creation of customised call-centre software for Mango Limited. The
two parties signed the contract on 1 September 20X6 at a contract price of C1 800 000.
TP expects that a discount of C120 000 will be granted to Mango, but the decision as to
whether or not to grant this discount is entirely up to TP and is a decision that will be made on
contract completion.
The customisation of the software involves completing the following six modules:
Module Time Spent Software usability at
(hours) the end of each phase
1: Welcoming of customer and fact finding 84 Unusable
2: Software trouble shooting 84 Unusable
3: User training 84 Unusable
4: Frequently asked questions 140 Unusable
5: Logging of unresolved helpdesk queries 84 Unusable
6: Feedback from call centre to customer 84 Usable
Total hours* 560 -
*The average cost of the programmers is C1 800 per hour.
7KHFXVWRPHULVXQDEOHWRµJROLYH¶ZLWKWKHVRIWZDUHXQWLOPRGXOHKDVEHHQFRPSOHWHG All
other costs relating to the project are known.
At 31 March 20X7, TP Limited had completed the first 5 modules (using 476 hours). All these
modules, with the exception of module 5, were accepted and signed off by the customer:
PRGXOHLVQRW\HWLQOLQHZLWKDOOWKHFXVWRPHU¶Vspecifications. TP Limited conceded this and
agreed to re-work this module at no additional cost to Mango Limited.
Required:
a) Determine the number of performance obligations in the contract between Tech-People
Limited and Mango Limited in terms of IFRS 15 Revenue from contracts with customers.
Support your answer with a discussion.
b) Determine, with appropriate discussion, the transaction price of the Mango contract.
c) Prepare the journals showing how the deposit and the revenue from services from the
Mango Limited project should be recognised and measured in the financial records of
Tech-People Limited for the year ended 31 March 20X7.
Question 4.18
Part A
Wacol Store has recently launched a customer loyalty programme that rewards a customer
with one customer loyalty point for every C30 of purchases. Each point is redeemable for a
C3 in value for purchases of Wacol products.
Chapter 4 35
The loyalty programme is optional (customers need to register to join it) and free to join.
However, not all customers choose to take advantage of the programme.
During January, customers who took part in the loyalty programme purchased products for
C450 000, thus earning the promised number of points.
Wacol Store expects 95% of the points to be redeemed. The entity estimates a stand-alone
selling price of C3 per point.
Required:
Briefly explain how Wacol Store should account for the customer loyalty programme and
provide the necessary journal entries to account for the transactions.
Part B
During February, 3 000 customer loyalty points were redeemed, and on the date of this
redemption, Wacol Store had revised its estimate of the total number of points that would be
redeemed to 98%.
Required:
Provide the journal to account for this redemption.
Question 4.19
The BlackRock Company successfully tendered for a government contract to supply and
maintain air-conditioning units for all state-owned buildings in the city. The terms of the
agreement are as follows:
x The government will place a non-cancellable order for 80 air-conditioning units with
BlackRock on 1 October 20X4.
x BlackRock will acquire each unit from a supplier for C6 600 per unit and deliver them to
the government on 30 December 20X4, supplied at C15 000 per unit. The air-conditioning
units were fitted on 3 January 20X5
x The initial fitment of the unit and the maintenance services for 2 years will be provided
free to the government.
The costs of the fitment are currently C900 per unit and the initial maintenance costs are
currently C2 916 per unit per annum.
The maintenance costs are increased at 3% per annum at the end of each year.
It is the accepted industry practice to apply an 18% profit margin on similar services.
x The selling price will be settled in full on 30 June 20X5. No interest will be charged on
the transaction. (Assume the financing component is insignificant).
Required:
a) Discuss, with reference to IFRS 15, how BlackRock Company should calculate and
allocate the transaction price for the contract to supply the air-conditioning units.
b) Prepare the journals to account for the contract with the government in the financial
statements of BlackRock for the year ended 31 December 20X4 and 31 December 20X5.
36 Chapter 4
Question 4.20
Caravan Limited entered into a sale of ten caravans to Outdoors Limited, a national vehicle
retailer, at a selling price of C87 500 per caravan. The normal cash selling price per caravan
is C102 375 (based on cost price plus a 30% mark-up) but a trade discount of C14 875 per
caravan was given since Outdoors Limited is a regular customer and generally buys in bulk.
The sale agreement was signed on 1 March 20X5, and the caravans were transported by
truck to Outdoors Limited on the same day. The transport costs and related transport
insurance are to be paid for by Outdoors Limited.
The sale agreement involves instalments (based on interest of 15% per annum) as follows:
x 1 March 20X5 ± C175 000 (received on 1 March 20X5)
x 28 February 20X6 ± C350 000
x 28 February 20X7 ± C523 250
Caravan Limited uses a perpetual inventory system.
Required:
Prepare all related journal entries in the general journal of Caravan Limited for the year ended
31 December 20X5 and 31 December 20X6.
Chapter 4 37
GAAP: Graded Questions Taxation: various types and current income taxation
Chapter 5
Taxation:
Various types and current income taxation
Question Key issues
5.2 Aye, Bee and Calculation of accounting and tax implications on sale of plant
Cee
5.3 - VAT, employees tax: Discussion
5.4 Whisky VAT, employees tax: Journals and calculation
5.5 Pilaf Effect of the estimation of current normal tax and the provisional payment system;
under-provision versus overpayment
5.6 Almond Conceptual Framework and IAS 12: Current tax for the current year and under-
provision of prior year
5.7 Misty Ridge Provisional payments, tax assessments, under-provision versus overpayment
5.8 Cats and Current tax (permanent difference)

Cuddles - non-taxable income: dividend income
Dividends tax
5.9 Plum Current tax: taxable profit:
- temporary differences: none
- non-taxable income: dividend income only
Current tax: under/ over provision
Dividends declared with dividends tax
5.10 Big Blue Current tax: taxable profit: calculation:

- non-taxable income: capital profit and dividend income
- non-deductible expenses: fines
Sale of asset above cost: non-depreciable and non-deductible
5.11 The Roasting Current tax: taxable profit: calculation (permanent differences and temporary
House differences):
- non-deductible expenses: donation
- non-taxable income: exempt capital gain
- temporary differences: depreciation, impairments, profit on sale, accruals
Sale of asset above cost: depreciable and deductible
Sale of asset below cost: depreciable and deductible
38 Chapter 5
Question 5.1
a.
With reference to IAS 12, Income Taxes, taxable profit is defined as
a) the profit for a period determined in accordance with the rules established by the taxation
authorities, upon which the current tax is determined
b) the profit for a period determined in accordance with the rules established by the taxation
authorities, upon which the tax expense is determined
c) the profit for a period determined in accordance with IFRS upon which income taxes are payable
d) the profit for a period determined in accordance with the rules established by IFRS, upon which
the tax expense is determined
The following information relates to questions b, c and d
Entity A has a profit before tax of C100 000, included in which are the following items:
x Traffic fines of C1 000; and
x Dividend income of C5 000.
The tax authorities:

x do not allow the deduction of traffic fines;
x do not tax the dividend income; and
x levy corporation tax at 28%.
There is no further information that affects the tax for the period.
b.
(QWLW\$¶VWD[DEOHSURILWDQGFXUUHQWWD[SD\DEOHLV
a) C96 000 taxable profit and C26 880 current tax payable.
b) C104 000 taxable profit and C29 120 current tax payable.
c) C100 000 taxable profit and C28 000 current tax payable.
c.
(QWLW\$¶VWD[H[SHQVHZLOOEH
a) C29 120.
b) C28 000.
c) C26 880.
d) C100 000.
d.
When preparing the tax rate reconciliation, the applicable tax rate and the effective tax rate will be:
a) Applicable tax rate = 28%; Effective tax rate = 29.12%.

b) Applicable tax rate = 28%; Effective tax rate = 26.88%.
c) Applicable tax rate = 26.88%; Effective tax rate = 28%.
d) Applicable tax rate = 29.12%; Effective tax rate = 28%.
Chapter 5 39
e.
An entity provided C100 000 for current income tax expense when preparing the financial statements
for the year ended 31 December 20X8. The amount owing to the tax authorities for the 20X8 year was
assessed during 20X9 at C95 000.
Income tax expense of C120 000 was provided for the year ended 31 December 20X9.
The amount of the income tax expense reported on the statement of profit or loss for the year ended
31 December 20X9 amounts to:
a) C115 000
b) C120 000
c) C125 000
Question 5.2
The following are three independent scenarios:
Part A
Aye Limited sold its plant for C240 000, when its carrying amount was C160 000. It had originally cost
C220 000. The base cost equalled its cost price.
Required:
a) Calculate the profit on sale of the plant, identifying the capital and non-capital portions.
b) Calculate the taxable capital gain, at an inclusion rate of 80%.
Part B
Bee Limited sells a vehicle on 31 December 20X2 for C220 000. The vehicle was originally purchased
on 1 January 20X1 at a cost of C300 000. The accumulated depreciation at 31 December 20X2 is
C200 000. The wear and tear allowances that have been claimed on the vehicle up to the date of sale
amounted to 150 000.
Required:
Calculate the profit on sale and the taxable recoupment.
Part C
Cee Limited sells a vehicle on 31 December 20X2 for C120 000. The vehicle was originally purchased
on 1 January 20X1 at a cost of 300 000. The accumulated depreciation at 31 December 20X2 is
C200 000. The wear and tear allowances that have been claimed on the vehicle up to the date of sale
are C150 000.
Required:
Calculate the loss on sale and the scrapping allowance.
Question 5.3
The following statements refer to the South African tax system:

a) VAT paid on purchases that are subsequently sold or intended to be sold, may always be claimed
back from the tax authority.
40 Chapter 5
b) VAT must always be charged on goods sold.

c) (PSOR\HHV¶WD[LVDWD[LQFXUUHGE\WKHFRPSDQ\
d) (PSOR\HHV¶WD[IRUWKH\HDULVVKRZQDVSDUWRIWKHWD[H[SHQVHLQWhe statement of comprehensive
income of the company.
e) 6DODULHVDQGZDJHVDUHVKRZQQHWRIHPSOR\HHV¶WD[LQWKHVWDWHPHQWRIFRPSUHKHQVLYHLQFRPH
f) VAT for the year is shown as part of the tax expense in the statement of comprehensive income of
the company.
g) Inventories and cost of sales are always recorded net of VAT.
h) Dividends tax withheld on a dividend declaration is a tax on the company, and as such, the dividends
WD[ZLWKKHOGIRUPVSDUWRIWKHHQWLW\¶VWD[H[SHQVH
i) The dividend declared by an entity is shown net of the dividends tax in the statement of changes in
equity.
j) Dividends tax will become payable when dividends are declared.
Required:
State whether the above are true or false and briefly justify your answer.
Question 5.4
Whisky Limited is registered as a vendor for VAT purposes. The following were the asset and liability
balances at 31 December 20X8:
WHISKY LIMITED
(EXTRACT FROM) TRIAL BALANCE AT 31 DECEMBER 20X8
Debit Credit
Vehicles: Cost 150 000
Vehicles: Accumulated depreciation 30 000
Employees tax payable 9 000
VAT input/output account 3 000
Bank account 195 000
Inventories 120 000
Trade receivables 120 000
Trade payables 30 000
During January20X9, Whisky Limited entered into the following transactions:
Date Transaction
Jan 2 Purchased inventories on credit from Pencil Limited, a non-VAT vendor at a list price of C300 000.
Jan 5 Purchased inventories from Lighter Limited, a VAT vendor. The cash price invoiced was C49 500
Jan 7 Sold inventories on credit to High Limited (a non-vendor) with an invoice value of C1 200. The cost
of the inventories sold was C450
Jan 8 Sold inventories invoiced at C18 000 to Low Limited (a VAT vendor). Low Limited paid in cash. The
cost of inventories sold was C10 500.
Jan 12 Paid electricity and water: C630 (includes VAT of 14%)
Jan 14 Paid telephone of C285 (includes VAT of 14%)
Jan 15 Purchased a single cab truck for C8 550 in cash from a vendor. The truck does not meet the definition
RIDµPRWRUFDU¶SURYLGHGLQWKH9$7OHJLVODWLRQDQGWKXVWKH9$7SDLGPD\EHFODLPHGIURPWKHWD[
authorities.
Jan 17 Purchased a double cab truck from a vendor for C180 000, financed through the trader. The truck
PHHWVWKHGHILQLWLRQRIDµPRWRUFDU¶SURYLGHGLQWKH9$7OHJLVODWLRQDQGWKXVWKH9$7SDLGPD\ not
be claimed back from the tax authorities.
Jan 25 Paid salaries of C12 000 in cash. (PSOR\HHV¶WD[RZLQJWRWKHWD[DXWKRULWLHVDs a result came to
C3 000. VAT is not levied on salaries
Jan 26 Paid C7 500 employees tax
Jan 27 Received a VAT refund of C 7500
Jan 29 Dividend income of C18 000 was received. VAT is not levied on dividends and the dividend income
was exempt from both dividends tax and income tax.
Jan 31 Dividends of C27 000 were declared during the month. VAT is not levied on dividends but dividends
tax was levied at 15% of the dividends declared
Chapter 5 41
VAT of 14% is levied by entities classified as VAT-vendors, (the total invoiced price includes VAT unless
otherwise indicated).
There are no components of other comprehensive income.
Required:
Journalise the above transactions.
Question 5.5
Two directors of Pilaf Limited were overheard discussing something their accountant had said:
³, GRQ¶W XQGHUVWDQG DQ\ RI WKLV %HUW MXVW WROG PH WKDW ZH XQGHUSURYLGHG ODVW \HDU¶V WD[ ± which, as I
understand it, means we owe more than we thought ± a liability to be sure! But yet I just read our most
recent statement of financial position and it clearly shows that we had a current income tax receivable last
year ± DQDVVHW,FDQ
WXQGHUVWDQGZKDWKH
VWDONLQJDERXW´
Required:
Explain how the above situation could have arisen and how the under-provision should be accounted for.
Your answer should cover the timing of tax payments for provisional taxpayers.
Question 5.6
Almond Limited has a new and inexperienced financial accountant who insists that an estimate of
current income corporate tax should not be processed in its financial statements for the year ended
31 December 20X3. His reasoning is that the official 20X3 tax assessment has not yet arrived and he
believes that it is only once this official assessment has been received that the amount will be known
and a liability can be recognised.
Current income WD[KDVQRW\HWEHHQSURFHVVHGLQ:DOQXW/LPLWHG¶VFXUUHQW;Iinancial statements.

The auditors are therefore requesting that Walnut Limited include the following in the 20X3 financial
statements:
x Current income tax of C80 000 in respect of 20X3;
x An under-provision of current income tax relating to 20X2 of C7 000.
Required:
a) Explain by way of a discussion of the relevant definitions and recognition criteria whether or not the
current income tax liability and related tax expense of C80 000 should be recognised.
You are not required to discuss the under-provision of prior year current tax of C7 000.
b) Provide all relevant tax-related journal entries that you believe should be processed by Walnut
Limited in order to finalise its financial statements for the year ended 31 December 20X3.
Closing transfer entries are not required.
Question 5.7
Misty Ridge Limited commenced business on 1 January 20X1.
Misty Ridge is registered for provisional tax. The first provisional payment is due exactly half way through
the financial year or earlier and the second on or before the last day of the year.
The following information has been provided for your perusal:
42 Chapter 5
C
First year
30 June 20X1 Provisional payment 26 000
31 December 20X1 Provisional payment 28 000
31 December 20X1 Provided for taxation 56 000
16 April 20X2 Amount of assessed income tax on taxable profit 56 000
16 May 20X2 Paid assessment
Second year
19 May 20X3 Amount of assessed income tax on taxable profit 59 500
19 June 20X3 Paid assessment
Third year
18 April 20X4 Amount of assessed income tax on taxable profit 64 800
18 May 20X4 Paid assessment
Fourth year
Required:
a) Prepare the current tax liability/ asset and income tax expense ledger accounts for the four years
31 December 20X1 to 20X4.
b) Show the relevant disclosure in the annual financial statements of Misty Ridge Limited for the four
years ended 31 December 20X1 to 20X4 in respect of the above transactions.
Accounting policy notes are not required.
Question 5.8
Cats and Cuddles Limited is an online pet accessory store with a difference. Customers can place an
order online for a personalised pet accessory of their choice, and the company will design the pet
accessory to the FXVWRPHUV¶VSHFLILFDWLRQVDQGFRQYHQLHQWO\GHOLYHUthe goods ordered WRFXVWRPHUV¶
desired location. The company is well established and has experienced profitable years through
aggressive marketing campaigns at pet expos and through social media. This has allowed the company
to accumulate retained earnings of C2 325 000 since inception until 1 January 20X5, being the
beginning of the current year.
The majority shareholder of the company, Ms Doodle contributed C3 000 to form the company a few
years ago. The company performed well in the current year, having achieved a profit before tax of
C450 000 and a dividend of C150 000 was declared to Ms Doodle at year-end.
The income tax rate is 30% and the dividends tax rate is 15%.
There were no permanent or temporary differences during 20X5 and no components of other
comprehensive income.
Required:
a) Show the journal entry to record the current income tax and dividend for the year ended
31 December 20X5.
Chapter 5 43
b) Prepare an extract from the statement of comprehensive income of Cats and Cuddles Limited for
c) Prepare an extract from the statement of changes in equity of Cats and Cuddles Limited for the year
d) Prepare an extract from the current liabilities section of the statement of financial position of Cats
and Cuddles Limited at 31 December 20X5.
Question 5.9
The following was extracted from the accounting records of Plum Limited at 31 May 20X6:
C
Profit before tax 115 000 Cr
Dividends paid ± 30 November 20X5 15 000 Dr
Current tax payable/ receivable: income tax (comprising provisional tax payments 43 000 Dr
only)
Current tax payable: dividends tax 2 250 Cr
Additional information:
x Included in the profit before tax are dividends received of C8 000, operating expenses of C40 000
and interest paid of C2 000.
x The company declared a final dividend of C10 000 on 31 May 20X6.
x Income tax expense for the year has not yet been calculated. Assume all income (other than the
dividends received) included in profit for the year to be taxable and all expenses to be deductible.
The corporate tax rate is 28% on taxable profits.
x Income tax expense of C25 000 was provided when preparing the financial statements for the year
ended 31 May 20X5. The amount owing to the tax authorities for the 20X5 year was assessed
during 20X6 and amounts to C26 500.
x Dividends tax is levied at a rate of 15% on dividends declared
Required:
a) Prepare all the journals relating to current tax and the dividends declared on 31 May 20X6 for the
year ended 31 May 20X6.
b) Prepare the statement of comprehensive income of Plum Limited for the year ended 31 May 20X6
(starting with the gross profit).
c) Prepare, in as much detail as possible, the statement of financial position of Plum Limited at 31 May
20X6.
d) Prepare the income tax expense note for inclusion in the financial statements of Plum Limited for
the year ended 31 May 20X6.
Question 5.10
The following information has been provided in respect of Big Blue Limited, a company that began
operations in 20X2:
x Profit before tax amounts to C300 000 in 20X3 and C280 000 in 20X2.
x An amount of C87 000 was provided for current income tax expense for the 20X2 year . The income
tax on the taxable profit for 20X2, according to the official assessment that arrived during 20X3,
amounted to C77 300.
44 Chapter 5
x The balance owing to the tax authority for current tax per the statement of financial position at
31 December 20X2 was C5 000.
x The payments made to the tax authority during 20X3 in respect of income tax amounted to a total
of C80 000 (including the provisional payments for 20X3 and any top-up/ refund in respect of 20X2).
x During the 20X3 year, the company earned dividend income of C5 000 (non-taxable) and incurred
a fine of C500 (non-deductible for tax purposes). There was no dividend income nor fines during
the 20X2 year.
x A capital profit of C26 000 arose on the sale of land during 20X3. This profit equals the capital gain
in terms of the tax legislation. No such profits or gains arose in 20X2.
x Dividends of C30 000 were declared during 20X3. No dividends were declared during 20X2.
x The rate of income tax is 30% on taxable profits. The capital gains inclusion rate is 50%. The
company has no assessed capital loss brought forward. The income tax rate and the capital gains
inclusion rate have both remained unchanged since 20X2.
x Dividends tax is levied at 15% on dividends declared
Required:
Prepare, in accordance with the International Financial Reporting Standards, and to the extent that
information is available:
a) all tax-related journals for the year ended 31 December 20X2 and 31 December 20X3.
b) the income tax expense note for inclusion in the financial statements of Big Blue Limited for the
year ended 31 December 20X3.
c) the statement of financial position of Big Blue Limited at 31 December 20X3.
Comparative figures are required.
Question 5.11
The Roasting House Limited is a company that roasts and distributes top quality local coffee. The
following information relates to the year ending 31 December 20X8:
THE ROASTING HOUSE

EXRACT FROM TRIAL BALANCE AT 31 DECEMBER 20X8
20X8 20X7
Note Dr Cr Dr Cr
Depreciation on vehicles and equipment 1 342 000 N/A
Profit on sale of equipment 2 ? N/A
Profit on sale of vehicles 3 54 000 N/A
Impairment of equipment 36 000 N/A
Donations 4 144 000 N/A
Income received in advance 9 900 16 020
Expenses paid in advance 30 600 32 400
Accrued expenses 7 200 19 800
Current tax payable: income tax 5, 6 ? 20 430
The profit before tax for the current year has been correctly calculated at C963 000.
The following notes support the trial balance:

1) Total wear and tear on both vehicles and equipment for the year of assessment is C306 000.
2) An item of equipment (not the item impaired) was sold during the year. The depreciation on this
equipment is included in the C342 000 depreciation above. The capital profit realised was
C216 000. It originally cost C180 000, had a carrying amount of C144 000 and a tax base of
C162 000 on the date of sale.
Chapter 5 45
3) The profit on sale of vehicles relates to a vehicle that was sold for C414 000 and had originally cost
C1440 000. Total capital allowances claimed to date on the vehicle are C720 000 (up to and
including the 20X8 financial period).
4) Of the donations of C144 000, C54 000 are not deductible and C90 000 are deductible for tax
purposes.
5) The 20X7 tax assessment reflected an assessed tax on taxable profit of C421 200. The current
income tax expense provided in 20X7 was C406 200.
6) The first provisional tax payment was made on 31 March 20X8 on an estimated taxable income of
C1 080 000. The second provisional tax payment was made on 31 December 20X8 on an
estimated taxable income of C729 000. The C20 430 owing to the tax authorities at the beginning
of the year was paid on 28 February 20X8.
7) The corporate income tax rate is 30%. Capital gains are taxed at an inclusion rate of 50%. The
company has no assessed capital loss brought forward.
8) There are no differences between accounting profit and taxable profit other than those evident from
the information above.
Required:
a) Calculate the current income tax for the year ended 31 December 20X8.
b) Prepare all the journals relating to current tax for the year ended 31 December 20X8.
46 Chapter 5
GAAP: Graded Questions Taxation: Deferred taxation
Chapter 6
Taxation:
Deferred taxation
Question Key issues
6.2 Walnut Basic calculation of current tax and deferred tax, journals, SOCI disclosure
(Temporary difference :PPE)
6.3 Stem Basic calculation of current tax and deferred tax, journals, SOCI disclosure,
tax note and rate reconciliation (Permanent difference: exempt income,
temporary difference: PPE)
6.4 Look -Current tax: Taxable profit: calculation

- Deferred tax: calculation( PPE, temporary difference: expenses prepaid
only)
- Sale of asset above cost: non-depreciable and non-deductible
6.5 Parmesan - Conceptual understanding of DT through discussion of the carrying

amount and tax base
6.6 Fish - Current and deferred tax: calculation

- Temporary differences: PPE, income received in advance, income
receivable
6.7 Wood Current tax: and deferred tax calculation

- Permanent differences: exempt div income, non-deductible donation
- Temporary differences: PPE, income received in advance, expenses
prepaid
6.8 Bed - Current tax: Taxable profit: calculation (temporary differences only)
- Deferred tax: calculation (PPE)
A: Sale of asset below cost: depreciable and deductible
B: Sale of the asset above cost: depreciable and deductible
6.9 Universal Current tax: Taxable profit: calculation

Fitness - Temporary differences
- Exempt temporary differences: depreciable but non-deductible asset
- Exempt income and non-deductible expenses
Deferred tax: calculation
- PPE (including exempt temporary difference)
- Accruals
6.10 Sweatshop - Current tax: Taxable profit: calculation (temporary differences only)
- Deferred tax: calculation (PPE)
A: No rate change
B: Rate change
6.11 Foundit Conceptual Framework and IAS 12: Deferred tax asset (income received in
advance): Recognition and measurement
Chapter 6 47
6.12 Jabulani Current tax: Taxable profit / loss: calculation

- Temporary differences
- Exempt temporary differences: depreciable but non-deductible asset
- Exempt income
Deferred tax: calculation
- PPE (including exempt temporary differences)
- Research
- Accruals
- Tax loss
Deferred tax asset: recognised
6.13 Reflection - Current tax: Taxable profit / loss: calculation (temporary differences and
exempt income)
- Deferred tax: calculation (PPE, tax loss)
- Deferred tax assets: not recognised
6.14 Stalk - Taxable profit / loss: calculation

- Deferred tax: calculation (Tax loss)
- Deferred tax assets: recognised, not recognised, recognised
48 Chapter 6
Question 6.1
a.
A taxable temporary difference arises when
a) The tax base of an asset exceeds its carrying amount

b) The carrying amount of an asset exceeds its tax base
c) Economic benefits flow from the entity in the form of tax payments in the current period
b.
A deductible temporary difference arises when
1. The tax base of an asset exceeds its carrying amount

2. The carrying amount of an asset exceeds its tax base
3. The cost of the asset is deductible against future economic benefits
a) 1 and 3
b) 1 only
c) 2 only
d) 2 and 3
e) 3 only
c.
A machine is purchased on 1 April 20X0 at a cost of C1 000. For the year ending 31 March 20X1, the
depreciation expense amounts to C200 and tax allowances amount to C300. The tax rate is 28%.
The temporary difference and deferred tax implications are:
a) Deductible temporary difference of C100 and a deferred tax liability of C28

b) Taxable temporary difference of C100 and a deferred tax liability of C28
c) Deductible temporary difference of C700 and a deferred tax asset of C196
d) Taxable temporary difference of C100 and a deferred tax asset of C28
e) Taxable temporary difference of C800 and a deferred tax liability of C224
d.
At the end of the current year, an entity has accrued expenses with a carrying amount of C1 000. The
accrued expenses are deductible when incurred.
The tax rate is 28%.
The tax base of the accrued expenses, the temporary difference and the deferred tax at the end of the
current year amount to:
a) Tax base is C0. Deductible temporary difference of C1 000. Deferred tax asset of C280.
b) Tax base is C0. No temporary difference. No deferred tax.
c) Tax base is C0. Taxable temporary difference of C1 000. Deferred tax liability of C280.
d) Tax base is C1 000. No temporary difference. No deferred tax.
e) Tax base is C1 000. Taxable temporary difference of C1 000. Deferred tax liability of C280.
Chapter 6 49
e.
At the end of the current year, an entity has borrowings with a carrying amount of C1 000. There are
no tax consequences when the loan is repaid.
The tax rate is 28%.
The tax base of the loan, the temporary difference and the deferred tax at the end of the current year
amount to:
a) Tax base is C0. Deductible temporary difference of C1 000. Deferred tax asset of C280.
b) Tax base is C0. No temporary difference. No deferred tax.
c) Tax base is C0. Taxable temporary difference of C1 000. Deferred tax liability of C280.
d) Tax base is C1 000. No temporary difference. No deferred tax.
e) Tax base is C1 000. Taxable temporary difference of C1 000. Deferred tax liability of C280.
Question 6.2
Walnut Limited has a depreciable non-current asset that cost C300 at the beginning of the 20X4.
Depreciation expense for the year ended 31 December 20X4 is C100 and the tax allowance granted
by the tax authorities is C80.
The profit before tax for the year ended 31 December 20X4 is correctly calculated at C1 000.
Tax rate is 30%.
Required
a) Prepare a deferred tax computation and identify (i) the amount of the temporary difference and
whether is it a taxable or deductible temporary difference ? (ii) the amount of the deferred tax and
whether it is a deferred tax asset or liability?
b) Provide the journal entry to record the deferred tax movement for the year.
c) Prepare a current tax computation
d) Provide the journal entry to record the current tax for the year.
e) 3UHSDUHDQH[WUDFWIURPWKHVWDWHPHQWRIFRPSUHKHQVLYHLQFRPHIRUWKH\HDUVWDUWLQJZLWKµSURILW
EHIRUHWD[¶
Question 6.3
Stem Limited has a profit before tax of C800 000 for the year ended 31 December 20X6.
The profit before tax has been calculated after taking into account the following items:
x Dividend income of C60 000. The dividend income is exempt from income tax.
x Depreciation on plant of C40 000. A tax deduction of C50 000 is allowed by the tax authority for the
current year. The plant cost C200 000 on 2 January 20X5.
Income tax of C180 000 was provided for the year ended 31 December 20X5. During the 20X6 year, the
income tax for the 20X5 year was assessed by the tax authority at C170 000. The income tax rate is 28%.
Required:
a) Prepare a deferred tax computation.
b) Prepare a current tax computation.
50 Chapter 6
c) Prepare an extract from the statement of comprehensive income for Stem Limited for the year ended
31 December 20X6VWDUWLQJZLWKµSURILWEHIRUHWD[¶
d) Prepare the note to taxation for Stem Limited for the year ended 31 December 20X6.
Question 6.4
Look Limited purchased land on 1 March 20X0 at a cost of C250 000. The land is not depreciated and
no deductions have been allowed for tax purposes.
The land was sold during the year ended 28 February 20X3 for C300 000. The base cost of the land is
C250 000.
The following information is also relevant to the tax computation:
x Expenses prepaid amount to C40 000 at 28 February 20X3 and C0 at 28 February 20X2. These
expenses are allowed as a deduction for tax purposes when paid.
x A donation of C30 000 was made during the year. The donation is not allowed as a deduction for tax
purposes. There are no other differences between accounting profit and taxable profit other than
those evident from the information given. The income tax rate is 30% and the inclusion rate of the
capital gain in taxable profits is 50%
The profit before tax of Look Limited for the year ended 28 February 20X3 is correctly calculated at
C100 000.
Required:
a) Calculate the current tax and deferred taxation for 20X1.
b) Show the journal entries relating to tax in the 20X1 year.
c) Show the ledger accounts for current and deferred tax for the 20X1 year.
d) Prepare extracts from the statement of comprehensive income for the year ended 28 February 20X1.
e) Prepare extracts from the statement of financial position as at 28 February 20X1.
f) Prepare the income tax expense note.
Comparatives are not required for (d), (e) and (f).
Question 6.5
Part A
The accountant of Parmesan Limited is in the process of preparing the financial statements for the year
ended 28 February 20X5.
The carrying amounts of selected assets and liabilities are shown below:
Year ended 28 February

20X5 20X4
Property, plant & equipment 120 000 145 000
Rent received in advance (5 000) (2 000)
Interest income receivable 20 000 0
The related tax details are as follows:

x Tax base of property, plant & equipment at 28/02/20X4 was C115 000.
x Wear & tear is C30 000 per annum.
Chapter 6 51
x Rent received in advance is taxable in the year it is received.

x Interest income receivable is taxed in the year the interest is earned.
x The income tax rate is 30%.
Required:
Prepare the journal entries to account for deferred tax in the financial statements of Parmesan Limited for
Part B
The following three statements relate to IAS 12, Income Taxes
1. The principal issue is how to account for current and future tax consequences of the recovery of
assets and liabilities in the Statement of Financial Position.
2. The tax base of an asset is:
- the amount that will be deductible for tax purposes against any taxable economic benefits that
will flow to an entity when it recovers the carrying amount of the asset.
- If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying
amount.
3. The tax base of a liability is:
- its carrying amount, less any amount that will be deductible for tax purposes in respect of that
liability in future periods.
- In the case of revenue received in advance, the tax base of the resulting liability is the carrying
amount, less any amount of revenue that will not be taxable in future periods.
Required:
Considering the three statements above, for each of the assets and liabilities mentioned in Part A,
explain the conceptual meaning of the carrying amount and tax base and how this gives rise to a
temporary difference and to deferred tax.
Question 6.6
Fish Limited is a company operating in the food industry. The following information has been presented
to you:
FISH LIMITED
EXTRACT FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
20X3 20X2
C C
Property, plant and equipment ? 355 000
Expenses prepaid (this is allowed as a deduction for tax purposes in 20X3) 10 000 0
Revenue received in advance (taxable in the year of receipt) 28 000 15 000
x The tax base of the property, plant and equipment balance at 31 December 20X2 was C290 000.
x During 20X3 depreciation was C35 000 and wear and tear allowed was C25 000. There was no
other movement of property, plant and equipment during 20X3.
x Profit before tax is C300 000.
x Dividend income of C5 000 was earned during 20X3.
x There are no other temporary or non-temporary differences other than those evident from the
information provided.
x The corporate income tax rate is 30%.
52 Chapter 6
Required:
a) Calculate the deferred income tax balance at 31 December 20X2 and 31 December 20X3.
b) Calculate the current income tax for the year ended 31 December 20X3.
c) Journalise the current and deferred income tax adjustments for the year ended 31 December 20X3.
d) Prepare the deferred tax note to the statement of financial position at 31 December 20X3 in
accordance with International Financial Reporting Standards.
Question 6.7
Wood Limited commenced trading on 1 January 20X1. It has profit before tax of C250 000 for the year
ended 31 December 20X1. When calculating this figure, the following information was correctly
accounted for:
x An amount of C24 000 received in advance in respect of goods and services to be provided in
20X2 (taxable in the current year).
x Interest income of C7 000 is receivable (taxable in the current year).
x Telephone payment of C5 000 is due for 20X1 but has not yet been paid (deductible for tax purposes
in the current year).
x The rent for January 20X2 of C10 000 has been paid in advance (deductible for tax purposes in the
current year).
x Dividend income of C12 000 was earned during 20X1 (not taxable).
x A donation of C8 000 was paid during 20X1 (not deductible for tax purposes).
x Depreciation of C40 000 was expensed during the year. The tax authority has calculated wear and
tear to be C25 000. This was the only movement in property, plant and equipment during the year.
The applicable tax rate is 30% on taxable profits. There are no other differences between accounting
profit and taxable profit other than those apparent from the above information.
Required:
a) Provide the current tax and deferred tax journals for the year ended 31 December 20X1.
b) Show how taxation is disclosed in the statement of comprehensive income and income tax expense
note for the year ended 31 December 20X1 in accordance with International Financial Reporting
Standards.
Question 6.8
Part A
Bed Limited bought a manufacturing plant for C500 000 on 1 January 20X2. It was available for use
on the same day. The plant had a useful life of 5 years, a residual value of nil and is depreciated using
the straight line basis.
Other relevant information is as follows:
x The profit before taxation in 20X5 was C150 000 (20X4: C120 000).
x The tax authorities allow wear and tear on the following basis:
- 50% of the cost in the first year
- 30% of the cost in the second year
- 20% of the cost in the third year
Chapter 6 53
x The tax rate remained constant at 40% from 20X2 to 20X5.

x 7KHFRPSDQ\¶VILQDQFLDO\HDUHQGVRQ'HFHPEHU
x There are no other differences between accounting profit and taxable profit other than those evident
from the information given.
x The plant was sold for C100 000 on 31 December 20X5.
Required:
a) Calculate deferred tax using the balance sheet approach for 20X2 to 20X5.
b) Calculate the taxable profit and current income tax expense for 20X4 and 20X5.
c) Journalise the deferred tax adjustments for each of the years 20X2 to 20X5 and the current tax for
20X4 and 20X5.
d) Disclose the relevant information, with comparatives, in the financial statements of Bed Limited for
the year ended 31 December 20X5 in accordance with International Financial Reporting Standards.
Part B
Indicate how your answer to (a), (b), (c) and (d) of Part A would change if:
x the plant was sold for C550 000 on 31 December 20X5;
x the capital gains inclusion rate is 50%.
Question 6.9
Universal Fitness Limited is a company that operates a chain of gyms in Gauteng. The trial balance of
Universal Fitness Limited at 31 December 20X2 is as follows:
UNIVERSAL FITNESS LIMITED

Debit Credit
Ordinary share capital 200 000
Deferred tax (31/12/X1) 66 525
Unearned income 63 750
Profit before dividend income and interest expense 2 410 000
Dividends income 15 000
Land at cost 2 470 000
Administration buildings (at carrying amount) 1 600 000
Equipment (at carrying amount) 630 000
Prepaid expenses 25 000
Current tax asset/ liability 102 000
Dividends 30 000
5 312 000 5 312 000

x Profit before dividend income and interest expense has been correctly calculated and includes the
GHSUHFLDWLRQRQERWKWKHDGPLQLVWUDWLRQEXLOGLQJDQGWKHHTXLSPHQWDVZHOODVDGRQDWLRQWRµ6DYH
WKH3HQJXLQ)XQG¶RI&7KHµ6DYHWKH3HQJXLQ)XQG¶LV not a recognised charity in terms of
the Income Tax Act.
x $WD[DOORZDQFHLVQRWJUDQWHGRQWKHFRPSDQ\¶VDGPLQLVWUDWLRQEXLOGLQJV7KHGHSUHFLDWLRQIRUWKH
year ended 31 December 20X2 amounts to C120 000.
54 Chapter 6
x The tax base of the equipment at 31 December 20X2 is C364 000. For the year ending
31 December 20X2, depreciation on equipment amounts to C170 000 and the tax allowance
amounts to C188 000.
x The unearned income is taxed in the year of receipt and the prepaid expenses are deductible in the
year of payment.
x The deferred tax balance at 31 December 20X1 comprises a taxable temporary difference on the
equipment of C248 000 and a deductible temporary difference on the unearned income of C26 250.
x The tax assessment for the 20X1 year was received during 20X2 and showed that the amount of
the assessed tax on taxable profit was C5 000 less than the amount provided for current income
tax in the previous year.
Required:
a) Prepare the journal entries to be processed at the end of the year to account for the current tax,
deferred tax and the overprovision.
b) Prepare all the notes relating to tax expense and deferred tax in accordance with International
Financial Reporting Standards.
Accounting policies are not required.
Question 6.10
The information given below is in respect of Sweatshop Limited, a manufacturing company:

x Sweatshop Limited owned two manufacturing plants: one had been purchased on 1 January 20X1
for C200 000 and the company then built a second plant at a cost of C500 000. The first plant was
put into operation on 1 January 20X1 (the same day of acquisition), whereas the second plant was
completed on 30 June 20X1 but only became available for use on 1 January 20X2, on which date
it was brought into production.
x Depreciation is provided at 20% per annum on the straight-line basis to nil residual values. The tax
authorities grant a wear and tear allowance on the full cost of plant over four years, apportioned
from the date on which it was brought into use.
x The company earned profits before taxation and before depreciation of C200 000 in all three years.
x The opening balance on the deferred tax account in the statement of financial position was zero on
1/1/20X1.
Part A:
The income tax rate remained at 35% for all years affected:
Part B:
The income tax rate is 40% in 20X1, 45% in 20X2 and 35% in 20X3.
Required (For both parts A and B):

a) Calculate the current income taxation for the years ending 31 December 20X1, 20X2 and 20X3.
b) Journalise the entries for current tax and deferred tax for each of the years ended 31 December
20X1, 20X2 and 20X3.
Chapter 6 55
c) Calculate the deferred tax asset/ liability balances and movements using the balance sheet
approach (comparing the carrying amounts and tax base of the machines).
d) Prepare extracts from the statement of comprehensive income for the years ended
31 December 20X1, 20X2 and 20X3 in accordance with International Financial Reporting
Standards.
e) Prepare extracts from the statement of financial position of Sweatshop Limited at
Standards.
f) Prepare the notes to taxation expense and deferred tax of Sweatshop Limited at
Standards.
Question 6.11
Foundit Limited is a profitable retailer of yachts and related parts. It has recently appointed a new
managing director who has very little accounting experience. You are the company accountant and
you are currently finalising the financial records for the year ended 31 December 20X8 in preparation
for the annual audit.
The new managing director has just reviewed your draft financial statements in which a deferred tax
asset of C450 000 was raised on the receipt of C1 500 000 from a customer on 1 December 20X8.
This customer had ordered a replacement sail for his private yacht on this date but since the sail was
not available in stock, you recognised this amount as a liability, income received in advance. The tax
authorities will tax the C1 500 000 on receipt, in the 20X8 tax assessment.
The managing director approaches you, querying the deferred tax asset, assuming that this is a pre-
payment of tax.
The sail, which had had to be specially imported, is scheduled for delivery in January 20X9 and will be
available for collection by the customer by the end of January 20X9.
The income tax rate is 30%.
Required:
As the accountant of Foundit /LPLWHGGUDIWDPHPRUDQGXPWRWKHFRPSDQ\¶VPDQDJLQJGLUHFWRULQZKLFK
you justify why the deferred tax asset should be recognised in the financial statements. Your
memorandum must:
a) Briefly compare the meaning of a deferred tax asset with that of a current tax asset;
b) Include a brief description of how a deferred tax balance is calculated using the balance sheet
approach;
c) ,QFOXGHDEULHIH[SODQDWLRQRIZKDWHOHPHQWWKHFDUU\LQJDPRXQWRIµLQFRPHUHFHLYHGLQDGYDQFH¶
represents with reference to the relevant definition in the Conceptual Framework for Financial
Reporting;
d) ,QFOXGHDEULHIH[SODQDWLRQRIZKDWWKHWD[EDVHRIµLQFRPHUHFHLYHGLQDGYDQFH¶UHSUHVHQWVZLWK
reference to IAS 12 Income Taxes;
e) ,GHQWLI\ WKH W\SH RI WHPSRUDU\ GLIIHUHQFH FDXVHG E\ WKH µLQFRPH UHFHLYHG LQ DGYDQFH¶ DW
31 December 20X8, calculate the amount thereof and include a brief explanation as to what element
this temporary difference represents; and
56 Chapter 6
f) Include a brief explanation justifying the inclusion of the deferred tax asset exists in the financial
statements at 31 December 20X8 by referring to the relevant definition and recognition criteria
provided in the Conceptual Framework for Financial Reporting.
Question 6.12
Jabulani Limited began operations on 1 January 20X1. The following information has been provided:
x Plant costing C800 000 was purchased on 1 April 20X2. It was installed and available for use from
1 July 20X2. Costs of installation amounted to C400 000. Depreciation is provided over 10 years
to an estimated residual value of C100 000, using the straight-line method.
x Land was purchased for C2 000 000 on 1 January 20X1. This land is not depreciated.
x The building was constructed at a total cost of C700 000, was available for use on 1 April 20X3 and
brought into use on 1 July 20X3. It is depreciated to an estimated nil residual value over 7 years on
the straight-line method.
x Research costs of C600 000 were incurred during 20X3 (research costs of C400 000 were incurred
in 20X2; there were no research costs incurred in 20X1).
x Income received in advance at 31 December 20X3 was C800 000 (year-end balances for 20X2:
C300 000 and 20X1: C1 200 000).
x A tax loss (i.e. an assessed loss) of C800 000 was incurred during the tax year ended
31 December 20X1.
x Profit before tax was C900 000 in the financial year ended 31 December 20X3
(20X2: C800 000). These profit figures are correctly calculated.
x Dividend income of C200 000 was earned in 20X3 (20X2: C300 000).
x It was considered probable, at the end of every year since incorporation, that sufficient future profits
would be available to fully utilise any deferred tax assets.

x grant a deduction for tax purposes equal to 20% of the cost of plant per annum (purchase price and
installation costs), not apportioned for part of a year;
x do not allow any deductions relating to the cost of the land or the building;
x allow the deduction of research costs incurred over 4 years, straight-line (not apportioned for part
of a year);
x tax income when earned or received, whichever occurs first;
x allow tax losses to be carried forward and set-off against taxable profits in future years;
x levy corporate income tax at a rate of 30% (20X2: 40%).
Required:
a) Calculate the current income tax expense for the years ended 31 December 20X2 and
31 December 20X3.
b) Calculate, using the balance sheet approach, the deferred tax balance for each category of
temporary difference at 31 December 20X2 and 31 December 20X3 indicating clearly whether the
balance represents an asset or liability.
c) Provide the income tax expense note for inclusion in the annual financial statements for the year
ended 31 December 20X3, in accordance with International Financial Reporting Standards.
Chapter 6 57
Question 6.13
Reflection Limited is a listed company manufacturing mirrors. The financial results for the year ending
20X3 are:
x Profit before tax is C30 000 in 20X3 (20X2: C20 000 and 20X1: C14 000)
x Dividend income received during the year was C10 000 (20X2: C10 000 and 20X1: C10 000)
x Information relating to property, plant and equipment:
20X3 20X2 20X1 20X0

Carrying amount 36 000 48 000 64 000 70 000
Tax base 30 000 50 000 70 000 90 000
x There is insufficient evidence for Reflection Limited to realise deferred tax assets.
x The tax rate is constant at 30%
Required:
a) Prepare the current income tax and deferred income tax calculations.
b) Prepare the tax-related journals for the years ended 31 December 20X1, 20X2 and 20X3.
c) Prepare the income tax expense and deferred tax note for the years ended 31 December 20X1,
20X2 and 20X3.
Question 6.14
Stalk Limited is a listed company packaging and distributing tea. The following information relates to
the years ending 31 December 20X1, 20X2 and 20X3:
20X3 20X2 20X1

(Profit) / loss before tax 20 000 10 000 (10 000)
x Included in the profit / loss figures above is dividend income received of C20 000 in each of the
20X3, 20X2 and 20X1 financial years.
x An assessed loss of C100 000 is carried forward from 20X0.
x Sufficient appropriate evidence was available to recognise deferred tax assets in 20X1. In 20X2,
however, it did not appear probable that the tax loss would be able to be utilised. In 20X3 evidence
was once again available to recognise deferred tax assets in full.
x There are no other temporary differences and no other items of exempt income or items of non-
deductible expenses other than those evident from the information given.
x The tax rate is constant at 30%.
Required:
a) Prepare the current income tax and deferred income tax calculations.
b) Prepare the tax-related journals for the years ended 31 December 20X1, 20X2 and 20X3.
c) Prepare the income tax expense and deferred tax note for the years ended 31 December 20X1,
20X2 and 20X3.
58 Chapter 6
GAAP: Graded Questions Property, plant and equipment: cost model
Chapter 7
Property, plant and equipment: cost model
Question Key issues
7.2 - Core concepts:

- Part A: Initial costs and other various concepts
- Part B: Depreciation
- Part C: Impairments in the context of the cost model
7.3 Collingwood Core concepts: no impairments

- residual value
- subsequent costs (replacements and major inspection)
- depreciation (idle time)
7.4 Kershaw Cost model: no impairments

- Basic disclosure (accounting policies and notes)
7.5 Noah Cost model: no impairments

- Initial costs:
- Internal manufacture: wastage, administration, etc
- Exchange of assets
- Depreciation
7.6 Huge Cost model: no impairments

- Initial costs (including sale of products made during testing)
- Residual value (identification)
- Change in estimate (residual value, reallocation method)
- Depreciation (delayed start and portion of a year)
7.7 Ancient Waters Cost model: no impairments

- Initial cost: significant parts and various related costs
- Depreciation: significant parts (delay and idle time)
7.8 Large Cost model: no impairments

- Initial costs (significant parts including major inspection)
- Derecognition of parts not previously identified
- Depreciation of significant parts
7.9 Patrol Cost model: no impairments

- Internal manufacture (costs and depreciation)
- Initial cost (testing, depreciation of other assets)
- Depreciation (capitalisation thereof)
- Includes VAT
7.10 Seal Cost model: no impairments

- Initial cost (provision for dismantling)
- Depreciation (straight line)
- Missing information (work backwards to cost)
7.11 Shark Cost model:

- Initial costs: significant parts (no major inspection on initial recognition)
- Depreciation: significant parts (units of production and straight-line)
- Subsequent cost: major inspection (recognition, impairment &
derecognition)
Chapter 7 59
Question Key issues contLQXHG«
7.12 Cheetsum Cost model:

- Initial cost: significant parts and a dismantling provision
- Impairment: recoverable amount given for the asset as a whole
- Derecognition and replacement of parts
- Provision for dismantling costs: unwinding of discount
7.13 Berry Cost model:

- Initial cost: significant parts, repairs, transport costs and major inspection
- Depreciation: significant parts
- Derecognition: major inspection
Part A: No impairments
Part B: Impairment loss and reversal of impairment loss
7.14 ,N\¶V3UDZQV Cost model:

- Initial costs: delivery, protective treatment, marketing
- Residual value: basic calculation
- Recoverable amount: selection only ± no detailed calculation
- Impairment and Insurance proceeds
7.15 Raingo Cost model:

- Impairment loss and reversal of impairment loss
- Pledged as security
- Future contractual commitments
Part A: Ignoring tax
Part B: With tax
Further questions on this topic can be found in:

x Chapter 6 – involving deferred tax
x Chapter 11 – involving impairment losses
x Chapter A – Integrated questions (after Chapter 15)
x Chapter B – Integrated questions (after Chapter 28).
Chapters A and B are the chapters involving questions that integrate a number of topics.
60 Chapter 7
Question 7.1
a.
Which of the following item/s do not meet the definition of 'property, plant and equipment'
according to IAS 16 Property, plant and Equipment?
1. Vehicles rented out by a car-hire company.
2. Computers used for administration purposes.
3. Equipment used in the factory for less than one year.
4. Machinery used in a factory for more than one year.
5. A patent necessary for manufacturing.
a) 1 and 2
b) 1, 2 and 3
c) 2 and 4
d) 3 and 5
e) 1 and 5
b.
An entity incurred C100 000 as the cost of day-to-day servicing of an item of plant during
20X1. Amounts exceeding C50 000 are considered to be material.
Due to the materiality of the amount, the C100 000 must be capitalised.
a) True
b) False
c.
Consider the following statements in relation to IAS 16, Property plant and equipment:
1. If an item of property, plant and equipment which has been recognised as an asset
needs regular major inspections, the cost of each inspection is added to the carrying
amount of the asset when it occurs.
2. If an item of property, plant and equipment which has been recognised as an asset
needs regular major inspections, the cost of each inspection is expensed in the
statement of profit or loss when it occurs.
3. Any remaining carrying amount of the cost of the previous inspection is derecognised.
4. Any remaining carrying amount of the cost of the previous inspection is added to the
carrying amount of the new inspection.
a) 1, 2 and 4
b) 1, 3, and 4
c) 1 and 3
d) 1
e) 1, 2, 3 and 4
d.
The requirements of IAS 16 in relation to depreciation include:

1. Depreciation begins when the asset is capable of operating in the manner intended by
management.
2. Depreciation begins when the asset is purchased.
3. Depreciation ceases during periods when the asset is idle.
4. Depreciation does not cease during periods when the asset is idle.
Chapter 7 61
a) Only 1 is true
b) Only 2 and 3 are true
c) Only 1 and 4 are true
d) Only 1 and 3 are true
e.
Sit-on-Top offers bus tours along the Jurassic Coast. It purchased a bus on 2 January 20X4
for C170 000. The bus has a total estimated useful life of 5 years. At 31 December 20X5, the
end of the 20X5 financial year,
x Similar busses that are new are selling for C175 000;
x Similar busses that are 1 year old are selling for C100 000;
x Similar busses that are 5 years old are selling for C40 000;
x Similar busses that are 4 years old are selling for C65 000.
For purposes of estimating depreciation for the year ended 31 December 20X5, the residual
value of the bus is:
a) C100 000.
b) C175 000.
c) C45 000.
d) C40 000.
e) C170 000.
Question 7.2
Part A
a) The directly attributable costs that should be included in the cost of an item of property,
plant and equipment are only those costs that are necessary in order to get the asset to a
location and condition that enables it to be used.
b) It can happen that the initial cost of acquiring an item of property, plant and equipment
could include certain estimated future costs.
c) It is possible to use one measurement model for one class of property, plant and equipment
and another measurement model for another class of property, plant and equipment.
d) Items that meet the definition of property, plant and equipment will always be recognised
and presented as non-current assets in the statement of financial position.
e) An item of property, plant and equipment is always initially measured at cost.
f) An item of property, plant and equipment, the acquisition of which is to be paid in
instalments, is initially measured at its cost, being the sum of these future instalments.
Required:
Indicate whether the above statements are true or false. If false, provide a brief explanation
Part B
a) The term 'useful life', which reflects WKH DVVHW¶V µeconomic life¶ (i.e. its total potential life
from the perspective of the market), is used in the measurement of depreciation.
b) $Q DVVHW¶V UHVLGXDO YDOXH only needs to be estimated if the asset is being depreciated
using either the straight-line method or units of production method because these
methods involve depreciating the depreciable amount, which is calculated as cost less
residual value, whereas the diminishing balance method simply involves depreciating the
opening carrying amount.
62 Chapter 7
c) Depreciation on an item of property, plant and equipment ceases during periods in which
the asset is standing idle.
d) If an item of property, plant and equipment is derecognised, depreciation on this item will cease
on the date of derecognition.
e) Depreciation on an item of property, plant and equipment starts when the asset is first
brought into use.
f) IAS 16 requires that the total depreciation expense per class of property plant and
equipment be presented in the financial statements.
g) The three methods of depreciation listed in IAS 16, (straight-line, diminishing balance and
unit of production method) are not all based on the useful life of the asset: the straight-line
and diminishing balance are based on the useful life but the units of production method is
based on the units of output.
h) Depreciation on the diminishing balance method is the allocDWLRQ RI DQ DVVHW¶V GHSUHFLDEOH
amount, calculated as cost less recoverable amount, over its estimated useful life.
Required:
Part C
a) It is possible for an item of property, plant and equipment to have a carrying amount that
exceeds its recoverable amount and yet not be impaired.
b) Items of property, plant and equipment must be tested for impairment at the end of every year.
c) The recoverable amount does not need to be calculated at the end of every year.
d) The recoverable amount reflects the lower of the value in use and fair value less costs of disposal.
e) A non-depreciable item of property, plant and equipment with a cost of C1 000 000 is impaired,
for the first time, at the end of year 1 by C100 000.
At the end of year 2, its recoverable amount exceeds its closing carrying amount by C250 000.
Thus, the impairment loss reversed in year 2 will be C250 000.
f) A depreciable item of property, plant and equipment has a cost of C1 000 000 at the
beginning of year 1 and is depreciated to a nil residual value over 5 years.
It is impaired at the end of year 1 (for the first time) by C100 000.
At the end of year 2, its recoverable amount exceeds its closing carrying amount by C250 000.
Thus, the impairment loss reversed in year 2 will be C100 000.
Required:
Question 7.3
The managing director and financial director are reviewing schedules supporting the draft
financial statements of Collingwood Limited for the year ended 30 June 20X6.
a.
MD: ³,VHHWKDWWKHSURGXFWLRQHQJLQHHUVHVWLPDWHWKDWZHZLOOEHDEOHWRVHOO3ODQW$
for an amount of C100 DWWKH HQG RI LWVXVHIXO OLIH LQ WZR \HDUV¶ WLPH :K\
have you used a residual value of C70 000 in the calculation of depreFLDWLRQ"´
Chapter 7 63
FD: ³3ODQW$KDVDQHVWLPDWHGXVHIXOOLIHRIILYH\HDUVDQGZHKDYHXVHGWKHLWHPIRU
three years. We recently sold a similar item, Plant B, which we had used for five
years, for an amount of C70 ´
MD: ³7KDW LV totally irrelevant ± our production engineers, who know this plant
intimately, estimate that we will receive C100 DWWKHHQGRILWVXVHIXOOLIH´
b.
MD: ³:HUHSODFHGWKHH[LVWLQJYHQWLODWLRQV\VWHPLQWKHIDFWRUy with a new system at a

cost of C240 000 ± why has the cost been included as an asset on the statement
of financial position and not expensed in the statement of comprehensive
LQFRPH"´
FD: ³,WPHHWVWKHUHFRJQLWLRQFULWHULDRISURSHUW\SODQWDQGHTXLSPent, per ,$6´
MD: ³+XK" :H have not enhanced the system, all we have done is to maintain the
H[LVWLQJOHYHORIYHQWLODWLRQLQWKHIDFWRU\´
c.
MD: ³'R \RX UHFDOO WKH QHZ FRPSXWHULVHG FRPSRQHQW ZKLFK ZH SXUFKDVHG DW WKH
beginning of our financial year? We only started using it on 1 September 20X5
but I see that depreciation haVEHHQWDNHQLQWRDFFRXQWIURP$XJXVW;´
FD: ³,WZDVDYDLODEOHIRUXVHIURP$XJXVW´
MD: ³<HV EXW ZH RQO\DFWLYDWHG LW RQ 6HSWHPEHU ,W ZDV QRW XVHG GXULQJ $XJXVt.
How can you allocate deprecLDWLRQRQDQLWHPWKDWKDV\HWWREHXVHG"´
d.
MD: ³7KH LQGHSHQGHQW YDOXHU WKDW ZH KLUHG VDLG KH XVHG WKH PDUNHW DSSURDFK WR
measure the fair value of our property. He explained to me that the inputs used
constitute observable prices for similar property in an active market which are
currently trading at C8 000 000. The statement of financial position at the end of
last year showed the property at a cost of C5 000 000 with accumulated
depreciation of C2 000 ´
FD: ³$QGVR"´
MD: ³:HOO \RX KDYH GHpreciated the property by C50 000 during the current year.
+RZFDQ\RXGRWKLVZKHQWKHYDOXHKDVLQFUHDVHG"´
e.
MD: ³, DP YHU\ SOHDVHG ZLWK WKH QHZ FRUSRUDWH MHW WKDW ZH SXUFKDVHG , MXVW GRQ¶W
understand your schedule that shows an inspection cost of C750 000 as part of the
asset cost. All I remember seeing is an invoice for the total purchase cost of
C3 500 DQGWKHDLUFUDIWLVRQO\GXHIRULWVQH[WLQVSHFWLRQLQWKUHH\HDUV¶WLPH´
FD: ³& 000 is the current market price of an inspection for a three-year-old DLUFUDIW´.
MD: ³:KDW"We bought an aircraft for C3 500 000 and that¶s what I expect to see in
our books. I don¶t want to hear any further argument on the matter´
Required:
Identify the issue in each of the dialogues and explain, with reference to IAS 16, the correct
accounting treatment in each case.
64 Chapter 7
Question 7.4
The following is an extract from the trial balance of Kershaw Limited for the year ended
30 June 20X4:
KERSHAW LIMITED
EXTRACT FROM TRIAL BALANCE AT 30 JUNE 20X4
Debit Credit
Land (Plot 20 Melrose Estate) acquired 1/1/20X2, at cost 80 000
Office buildings available for use on 30/6/20X4, at cost 50 000
Fixtures and fittings, at cost 60 000
Accumulated depreciation of fixtures and fittings at 1/7/20X3 10 000
Depreciation on the fixtures and fittings is calculated at 10% per annum, on the reducing balance
basis. Buildings are depreciated at 2% per annum, on the straight line basis. No depreciation is
calculated on land.
All residual values are assessed to be zero, having remained unchanged since acquisition.
Required:
Prepare the property, plant and equipment note to the financial statements for the year ended
30 June 20X4.
Accounting policies are required.
Question 7.5
Noah Limited presented you with the following balances from its trial balance at 31 December 20X0
(both balances have been classified as µproperty, plant and equipment¶):
Ship: carrying amount (Note 1) C853 650
Crane: carrying amount (Note 2) C542 000
Note 1:
x This ship is a unique vessel, manufactured by Noah during the current financial year.
x Included in its cost are the following:
- C712 000 for inventory, including C14 000 for inventory that had to be scrapped
- C106 500 in direct labour costs, of which C6 000 is in respect of idle time
- C95 000 for allocated overheads, half of which are administrative overheads
- C35 000 that was spent on training staff on all aspects of running the ship, including
navigation, safety protocols during storm seasons and loading and off-loading cargo.
x The ship was ready for use on 1 May 20X0 but was only brought into use from 1 July 20X0.
x The estimated useful life of the ship is 5 years with no residual value and the economic
benefits are expected to flow evenly throughout its useful life.
Note 2:
x Noah WRRNDGYDQWDJHRIDVXSSOLHU¶Vgovernment-sponsored promotion and exchanged its
crane (which was already 2 years old) for a newer model on 31 December 20X0.
x On the date of exchange, the carrying amount of the old crane given up was C542 000,
although Noah believed it could have been sold for C550 000, while the fair value of the new
replacement crane was C750 000.
Chapter 7 65
Noah¶s is concerned his accountant has been unable to keep his µhead above water¶ with
regard to the numerous changes to the International Financial Reporting Standards. He has,
thus, asked for your opinion regarding the measurement of the above assets.
Required:
In a letter to Noah, prepare a detailed overview of how, in terms of IAS 16 Property, plant and
equipment, the above assets should be measured.
Ignore tax.
Question 7.6
Huge Limited specialises in performing administrative tasks for other companies. At

31 December 20X9 (reporting date), the following details are available to you:
Machine:
x A machine was purchased for C298 000 in cash on 1 February 20X9 but needed to be
installed before it could be used. The installation cost C10 000 and was also paid in cash.
x The machine was in a condition ready for use in the manner intended by management on
1 May 20X9. It was, however, not until 1 June 20X9 that it was brought into use. This is
because the directors had an old machine they wished to use until its pistons seized.
x The machine was not used during September 20X9 due to a safety issue that needed to
be investigated.
x This new machine has an estimated useful life of 3 years and a residual value of C44 000.
Plant:
x Plant was purchased on 1 January 20X7 at a cost of C756 000.
x The plant needed to be tested to ensure that the buns it produces were safe to eat before
it could be put into production: the cost of testing was C40 500. The buns were sold to
staff (who all survived) for C4 500.
x Its estimated useful life at acquisition was 5 years and its residual value was C36 000.
x At year-end, the accountant ascertained that similar items of plant 5 years old were
currently selling for C63 000, but his projections suggest that he would be able to sell this
plant for C150 000 at the end of its useful life, the present value thereof being C50 000.
The accountant believes that the residual value of C36 000 should be changed but is not
sure whether to use C63 000, C150 000 or C50 000 as the new residual value.
The company uses the re-allocation method to account for changes in estimates.
All amounts include VAT at 15%. Huge Limited is not a µvendor¶ for VAT purposes and thus
may not claim back any VAT paid.
Required:
Prepare all related journal entries in Huge LiPLWHG¶V JHQHUDO MRXUQDO IRU WKH \HDU HQGHG
31 December 20X9.
Question 7.7
Ancient Waters Limited is a company involved in bottling spring water. The company purchased a
bottling plant on 2 January 20X2.
The plant is made up of three significant components, the cost of which is presented overleaf:
66 Chapter 7
Cost price Residual value Expected useful

Description of component:
C C life
Engine 1 500 000 500 000 5 years
Conveyor belt and fittings 2 000 000 0 8 years
Outer structure 800 000 50 000 3 years
Other costs incurred in relation to the bottling plant are as follows:

Description of cost: C Transaction date
Delivery and installation 750 000 5 January 20X2
Staff training 60 000 16 January 20X2
Testing to ensure plant fully operational before start of production 33 000 19 January 20X2
Launch party 210 000 21 January 20X2
Initial operating loss 45 000 March 20X2
Other information:
x The plant was available for use in production on 1 February 20X2, although production
only began on 1 March 20X2.
x The plant was temporarily idle during December 20X2 when the factory closed for its
annual holiday period.
x The company uses the straight-line method when depreciating its bottling plant (not
apportioned for part of a month).
x $OOµRWKHUFRVWV¶DUHincurred evenly across the three significant components of the bottling
plant (i.e. where appropriate, a third of the cost is allocated to each component).
x The only other asset owned by Ancient Waters Limited is land used for parking purposes,
which was purchased on 5 December 20X0 for C4 000 000. The land is not depreciated.
Required:
a) Show all related journal entries relating to the bottling plant for the year ended
31 December 20X2 and 20X3. Round to the nearest C1.
Ignore tax.
b) 'LVFORVHWKHµSURSHUW\SODQWDQGHTXLSPHQW¶QRWHLQWKHILQDQFLDOVWDWHPHQWVRI$QFLHQW Waters for
Ignore tax.
Comparatives are required.
Question 7.8
Large Limited is a highly lucrative business, which has decided to buy special vehicles for use
by its two directors. In this regard, it invested in:
x an Italian supercar for the managing director, and
x a Tomahawk helicopter for the financial director.
Details of these assets are presented below.
Italian Supercar,
x This vehicle was purchased on 1 July 20X8 for C405 000:
x This vehicle has an estimated useful life of 4 years with a nil residual value.
x On 28 February 20X9, the tyres of the car were replaced at a cost of C36 000 (useful life:
2 years) purely for aesthetic reasons.
The vehicle was not considered to be impaired in any way.
Chapter 7 67
At acquisition, these original tyres were valued at C18 000, with a useful life of 4 years,
even though they were not a separately identified part. The original tyres have been
converted into a series of swings for a local orphanage.
x The costs of servicing the car for the year amounted to C50 000.
Tomahawk Helicopter
x This helicopter was purchased on 1 July 20X5 for C1 200 000.
x The directors identified the following separate parts, which have costs that are considered
to be significant relative to the total cost:
- The motor was valued at C320 000 with an estimated useful life of 5 years and a
residual value of C24 000.
- The body was valued at C640 000 with an estimated useful life of 10 years and a
residual value of zero.
- Interior fittings were valued at C80 000 with an estimated useful life of 10 years with
no residual value.
- The remainder of the value was allocated to the inspection cost, which must be
performed every three years as a condition of purchase.
The second inspection was performed on 1 July 20X8 i.e. the beginning of the
current financial year at a cost of C192 000.
Required:
Prepare the following journals for Large Limited for the year ended 30 June 20X9:
a) All transactions relating to the Italian supercar.
b) All transactions relating to the Helicopter.
Ignore tax.
Question 7.9
Patrol Limited constructed its own speciall\GHVLJQHGµDVSKDOWPL[LQJSODQW¶'HWDLOVRIUHODWHG

costs incurred are as follows:
x Raw materials were purchased on 1 August 20X2 at a cost of C747 500 (including 15% VAT),
of which only 20% was used during December 20X2 in the construction of the plant.
x In order to comply with safety regulations, the plant had to undergo extensive testing on
31 March 20X3, which cost the company C29 900 (including 15% VAT).
x Company-owned machinery was used in the construction of the plant for 3 months during
the year. The depreciation of this machinery amounted to C260 000 for the entire year
ended 30 June 20X3.
x Labour costs incurred for the year (to 30 June 20X3) was C390 000:
- 80% thereof was incurred on building roads
- 20% thereof was incurred in constructing the plant.
There was a labour strike while constructing the plant, during which labourers did not pitch
for work, but were paid. Roughly 5% of the labour costs referred to above reflected labour
costs during which no construction took place.
x The plant was first brought into use on a contract that started on 1 May 20X3, although it
was available for use from 1 April 20X3.
x The plant is to be depreciated using the straight-line method over its expected useful life
of 5 years and could currently be sold for C300 000 but is expected to be sold for C65 000
at the end of its 5-year life. A similar plant, which had already been used for 5 years,
recently realised C9 100. The plant is not impaired. These selling prices do not include VAT.
68 Chapter 7
Required:
a) Journalise all related transactions for the year ended 30 June 20X3.
b) Disclose the plant LQ WKH µSURSHUW\ SODQW DQG HTXLSPHQW¶ QRWH and the separately
disclosable itePµGHSUHFLDWLRQ¶LQWKHQRWHVWRWKHILQDQFLDOVWDWHPHQWVRIPatrol Limited for
the year ended 30 June 20X3. Comparatives are not required.
Ignore income taxes.
Question 7.10
Seal Limited owns one item of property, plant and equipment, a medical waste disposal plant
that was purchased on 1 July 20X3. The plant must be dismantled at the end of its useful life.
The expected future dismantling costs amounted to C2 000 000 on date of acquisition. An
appropriate discount rate is 10%.
The physical plant has no parts with costs considered significant relative to the total cost thereof.
x Depreciation on the plant was C2 800 000 in 20X4, being the depreciation on the total
cost of the plant, correctly calculated.
x The plant has a total estimated useful life of 5 years and an estimated residual value of nil
(estimated on date of purchase). Depreciation is estimated using the straight-line method.
There were no sales and no other purchases of property, plant and equipment during 20X4.
Required:
Journalise the above information for the year ended 31 December 20X4.
Ignore tax.
Question 7.11
Shark Limited is a national carrier of fresh produce. Due to the high incidence of road accidents,
the government introduced legislation that requires all long distance vehicles to undergo major
roadworthiness inspections every two years. The details of one such vehicle include the following:
x The truck was purchased on 1 October 20X8 for C320 000. The following significant parts
were identified:
- Its engine was allocated a cost of C210 000 and had an expected lifespan of 300 000 km
after which, it is expected to have no residual value.
- Its chassis was allocated a cost of C110 000 and had an estimated residual value of nil
and a useful life of 5 years.
x The first major inspection was performed on 31 December 20X8, the day before the
legislation became effective, at a cost of C40 000.
x The truck travelled 40 000 km during 20X8 and 97 000 km during 20X9.
x On 1 July 20X9, the directors of Shark put the truck through an urgent major roadworthiness
inspection for the safety of its employees. This inspection was not legally required but the
decision was made due to a local media report where the inspectors who had performed the
previous inspection were implicated in a fraud involving the issuance of fake inspection
certificates. This inspection cost C72 000.
Required:
Prepare all journals relating to the truck for the years ended 31 December 20X8 and 20X9.
Ignore tax
Chapter 7 69
Question 7.12
Cheetsum Limited is a large multi-national manufacturing concern. The management accountant

presented you with the following spreadsheet showing costs incurred during the construction of a
plant between 1 January 20X1 and 31 May 20X1. The plant began operating on 1 June 20X1.
Capital Budget: Manufacture of the Plant C

Materials Note 1 1 200 000
Direct labour Note 2 1 600 000
Allocated manufacturing expenses 130 000
Specialised foundation Note 3 1 500 000
Machine lining Note 4 40 000
Provision for dismantling costs Note 5 ?
Note 1:
x The materials are made up of externally purchased material, costing C800 000, and material
purchased from an internal division for C400 000. The divisional mark-up included in this
transaction was 25% on cost.
Note 2:
x Direct labour includes an amount of C100 000 for wages that were paid to the workers while waiting for
the specialised foundation to harden.
Note 3:
x The specialised foundation has a useful life of 10 years after which it could be reduced to rubble, which
represented a residual value of C100 000.
Note 4:
x The machine lining that had originally cost C40 000 had to be replaced on 31 December 20X1 due to
excessive wear and tear. It had been expected that the lining would last 4 years.
x The new lining cost C60 000 and had a revised useful life of only 2 years.
Note 5:
x The plant must be dismantled at the end of its useful life (20 years), and a provision for this cost must
be recognised. The expected cost of dismantling after 20 years is C6 000 000 and the present value
thereof (using an appropriate discount rate of 10% p.a.) is C891 862.
The plant had an estimated residual value of nil. At reporting date, the marketing director
informed the board that the demand for the SODQW¶V SURGXFW has decreased dramatically. An
impairment test was performed, which resulted in the calculation of the recoverable amount of
C5 000 000.
Required:
Using the general journal, provide all journals to record the above transactions in the books of
Cheetsum Limited for its year ended 31 December 20X1.
Question 7.13
PART A
Berry Limited manufactures small kitchen appliances. On 2 January 20X4, Berry purchased
equipment from a competitor who was downsizing. The equipment was purchased at a cost of
C55 500, payable within 30 days.
The equipment is required to have a major inspection every three years, on 31 December. The
last major inspection was performed on 31 December 20X2 at a cost of C3 000 and the carrying
amount of this inspection is included in the cost of C55 500.
70 Chapter 7
Berry paid cash of C1 500 to a road transport contractor for delivery costs. While the
equipment was being assembled, it was damaged, costing the company an additional C200
for repairs. The repair, performed on the 2 January 20X4, did not constitute a replacement or
renewal of a major component.
The equipment was delivered on 2 January 20X4 and was in a condition ready for use on that
day. It was, however, only brought into use on 1 February 20X4.
Berry measures its equipment using the cost model and provides for depreciation at 10% per
annum on the straight-line method. The residual value at the date of acquisition was
estimated to be C5 000.
At 31 December 20X5, the next major inspection was performed at a cost of C3 300, paid in cash.
Required:
a) Provide the journal entries in the accounting records of Berry Limited to account for the
costs relating to the acquisition of equipment in January 20X4.
You are not required to provide any other journal entries for the year ended 31 December 20X4.
b) Provide all journal entries in the accounting records of Berry Limited that relate to the
equipment for the year ended 31 December 20X5.
Ignore tax.
PART B
During the year ending 31 December 20X7, the market was flooded with cheap imported
kitchen appliances. As a result, management was concerned that their market share might
be eroded, and thus performed an impairment test on the equipment. The estimated value in
use was C28 000 and the estimated fair value less costs to sell was C25 500. The residual
value and useful life were unchanged.
Required:
a) Briefly discuss the objective of the test for impairment.
b) Calculate, using the criteria in IAS 36 Impairment of Assets, whether the equipment is
impaired at 31 December 20X7, and if so, provide the journal entry to record the
impairment in the accounting records.
Ignore tax.
Question 7.14
,N\¶V3UDwns Ltd is a company that recently expanded and now delivers its prawns to coastal
restaurants from its main shop in Durban. Three vans were acquired for purposes of
facilitating this expansion. The following report has been compiled by the bookkeeper who is
not quite sure how to deal with all the related transactions and events:
Information pertaining to the initial costs in acquiring the three delivery vans:
x Three vans were purchased on 1 July 20X8 in order to help reach the new delivery points.
Total cost C600 000 (C200 000 per van).
x Cost of transporting the vans from the manufacturer in Gauteng was C70 000 in total.
x The once-off cost of galvanising the vans in Durban was C90 000.
Galvanising provides protection against rust, (necessary since Durban is a coastal city).
x The cost of repainting the vans in company colours to promote the new delivery business
was C30 000.
Chapter 7 71
Information pertaining to the depreciation of the vans:

x The company uses the cost model to measure its assets.
x The vans have a useful life of 4 years.
x All assets are depreciated on the straight-line basis unless another method is justifiable.
x The residual value of each delivery van is currently estimated to be C45 000, before
considering related selling costs of C5 000 per van.
Information relating to a freak hailstorm at the end of the financial year:
x A freak hailstorm hit the coast on 31 December 20X8 and, as the vans had been
purchased so recently, no protective parking had yet been built for them.
x The vans were exposed to the elements during the storm and were badly damaged, resulting in
the fair value less cost of disposal dropping to C80 000 (i.e. the market value of each van
dropped to C100 000, before taking into account the expected selling costs of C20 000 per van).
x Management has calculated the remaining value in use of each van to be C150 000, (this
has been calculated by adding the present value of the net cash flows from use of
C120 000 to the present value of the net proceeds from sale of C30 000).
Information relating to the trade-in of the old delivery vans and purchase of the new vans:
x On 3 January 20X9, the insurance company paid out C120 000 per van to settle the
damages caused by the hailstorm.
x After intensive board meetings DQG GLVFXVVLRQV DPRQJVW WKH PDQDJHPHQW RI ,N\¶V
Prawns, it was decided that the old, damaged vehicles would be traded-in on three new
vans, and the insurance money would be used to pay the balance owed on this purchase.
x The trade-in value for the three damaged vans combined was established to be C300 000.
x Three new delivery vans were purchased for C660 000, and management decided to
depreciate these over three years to a nil residual value.
Required:
a) With regards to the first set of delivery vans, calculate the total amount at which they should
initially be measured, and their subsequent measurement up to 31 December 20X8.
b) Show all journals relating to the above information up to 31 December 20X9.
Question 7.15
Part A
Raingo Limited applies the cost model to its property, plant and equipment. An item of plant
was purchased on 1 January 20X1 at a cost of C100 000.
x 'HWDLOVRIWKHSODQWV¶VHVWLPated recoverable amount are as follows:
C
31/12/20X1: 70 000
31/12/20X2: 65 000
31/12/20X3: 30 000
x All residual values are assessed to be zero and this has remained unchanged since
acquisition.
x Depreciation is provided using the straight-line method over its useful life.
x The estimated useful life of the plant is 5 years.
72 Chapter 7
x The GURSLQWKHSODQW¶VYDOXe at the end of 20X3 was due to damage caused during a riot
on the factory premises in 20X3. Similar damage was caused during a similar riot in
20X1. The damage incurred during the 20X1 riots was repaired in 20X2.
x The company has pledged the plant as security for a loan. Details of the loan will be provided
in note 6 of the notes to the financial statements for the year ended 31 December 20X3.
x During 20X3 the company directors signed a contract involving the construction of an
additional item of plant to be completed by April 20X4 at an expected cost to the company
of C500 000. Since construction had not yet begun at year-end, a liability for this amount
has not yet been recognised.
Required:
a) Show the journals for each of the years ended 31 December 20X1, 20X2 and 20X3.
b) Disclose the above in the notes to the financial statements for the year ended
31 December 20X3 in accordance with International Financial Reporting Standards.
Ignore tax.
Part B
Using all the above information, assume the following additional information:
x The tax authorities:
- allow a deduction for tax purposes of 20% of the cost of the asset per annum;
- levy corporate income tax at 30%.
x There are no differences between accounting profit and taxable profit other than those
mentioned above.
Required:
a) Show the journal entries for each of the three years ended 31 December 20X3.
b) Disclose the above in the notes to the financial statements for the year ended
Accounting policies are not required
Chapter 7 73
GAAP: Graded Questions Property, plant and equipment: revaluation model
Chapter 8
Property, plant and equipment: revaluation model
Question Key issues
8.1 Short questions Core concepts ± the basics

8.2 Short questions Core concepts ± revaluation of depreciable assets
8.3 Launch Revaluation basics: Discussion
8.4 Apollo Revaluation of land: increase
Tax effects: non-depreciable and non-deductible: revaluation above cost:
A: intention to keep
B: intention to sell
8.5 Comic Revaluation of land: increase and decrease: Journals
A: Ignoring deferred tax
B: Including deferred tax
8.6 James Revaluation of land: increase and decrease: Disclosure and brief explanation
A: Ignoring deferred tax
B: Including deferred tax
8.7 Running Tap Revaluation model with Impairment: Discussion and comparison of terms
(recoverable amount residual value, net realisable value)
8.8 Coffee Culture Revaluation of land: with recoverable amounts (effect of disposal costs)
8.9 Curious Short questions introducing revaluation model versus cost model
8.10 Lemon Revaluation of depreciable asset:
Gross replacement method versus net replacement method
No tax
8.11 Maroon Revaluation model (revaluation increase after initial recognition, followed by
revaluation decrease, followed by revaluation increase);
No impairments and no tax
8.12 Trickery Revaluation model: (revaluation increase then a decrease ± but asset not impaired)
A: With tax (intention to keep)
B: No tax
8.13 Higgins Revaluation model: increase (net replacement method)
Tax effects: depreciable and deductible: revaluation above cost
Part A: Intention to keep
Part B: Intention to sell
8.14 Lightenlove Revaluation model: GRVM (revaluation increase)

Deferred tax effect of revaluation above cost:
Revaluation of depreciable and deductible asset - intention to sell,
Revaluation of depreciable and non-deductible asset - intention to sell
Revaluation of non-depreciable, non-deductible asset - intention to keep
8.15 Values Revaluation model: NRVM (revaluation decrease with impairment, increase
with reversal of impairment and revaluation surplus): With tax
Further questions incorporating this topic with other topics can be found in:
x Chapter A (after Chapter 15) and
x Chapter B (after Chapter 28).
Chapters A and B are the chapters that include ‘Integrated Questions’ (questions that combine different IFRSs)
74 Chapter 8
Question 8.1
a.
There are 2 models to choose from when subsequently measuring property, plant and
equipment in terms of IAS 16, namely, the cost model and the fair value model.
a) True
b) False
b.
Items of property plant and equipment that are measured under the revaluation model, must
be revalued to fair value on an annual basis.
a) True
b) False
c.
Consider the following statements in relation to IAS 16, Property plant and equipment:
1. The cost model is required to be used for all items of property, plant & equipment.
2. The revaluation model is required to be used for all items of property, plant and equipment.
3. An entity can use the cost model for some properties and the revaluation model for other
properties.
4. An entity can use the cost model for its plant and equipment and the revaluation model for
its properties.
a) 1 only is correct
b) 2 only is correct
c) Both 3 and 4 are correct
d) 3 only is correct
e) 4 only is correct
d.
When a company adopts the revaluation method in relation to an item of property, plant and
equipment, it is no longer necessary to charge depreciation in relation to that item.
a) True
b) False
e.
A machine is purchased on 1 January 20X1 at a cost of £200 000. Depreciation is provided

on a straight-line basis at 20% per annum with a nil residual value.
On 31 December 20X2, the asset is revalued to a fair value of £180 000. Ignore tax.
The journal/s to record the revaluation using the net replacement value model is:
a) Dr Machine accumulated depreciation 80 000 & Cr Machine cost 80 000

and
Dr Machine cost 60 000 & Cr Revaluation surplus 60 000
b) Dr Machine accumulated depreciation 80 000 & Cr Machine cost 80 000

and
Chapter 8 75
c) Dr Machine accumulated depreciation 120 000 & Cr Machine cost 120 000
and
d) Dr Machine cost 80 000 & Cr Revaluation surplus 80,000
e) Dr Machine accumulated depreciation 40 000 & Cr Machine cost 40 000

and
f.
When a class of property, plant and equipment is measured under the revaluation model, the
entity will also need to disclose the carrying amount of that class of assets measured using
the cost model.
a) True
b) False
g.
When applying the revaluation model, any increase in the carrying amount will be credited to
the revaluation surplus account, and since this account is presented in other comprehensive
income, this upward revaluation will not affect profit or loss. .
a) True
b) False
h.
Even when using the revaluation model, the asset must always be initially measured at its cost.
a) True
b) False
i.
The revaluation surplus balance, which is included in equity, must be transferred to retained
earnings upon disposal of the asset.
a) True
b) False
j.
Irrespective of whether an item of property, plant and equipment is measured under the cost
model or the revaluation model, it must be tested for impairment.
a) True
b) False
k.
,IDQDVVHW¶VFDUU\LQJDPRXQWLVGHFUHDVHGDVDUHVXOWRI a revaluation, this decrease shall be

recognised in profit or loss, except to the extent that it reduces a credit balance in the
revaluation surplus account (other comprehensive income/equity).
a) True
b) False
76 Chapter 8
l.
An entity using the cost model is allowed to change to the revaluation model, where this change is a
change in accounting policy.
a) True
b) False
m.
Land may be subsequently measured using either the cost model or the revaluation model.
a) True
b) False
n.
If a non-depreciable asset is revalued, deferred tax is not recognised on any temporary

difference that arises as a result of the revaluation, as it is exempted from deferred tax in
terms of IAS 12.
a) True
b) False
o.
Save-the-Rhino purchased land on 1 July 20X0 at a cost of C300 000. The company applies
the revaluation model to land and assessments of fair value take place every two years.
On 31 December 20X2 the land was revalued to its fair value of C350 000. On 31 December 20X4
the land was revalued again to its fair value of C400 000. On 31 December 20X6 the land had
a value in use of C270 000 and a fair value less costs of disposal of C285 000, where the
costs to sell were negligible.
The fair value adjustment for the year ended 31 December 20X6 is disclosed as follows:
a) C50 000 as decrease in other comprehensive income and C65 000 as an expense in
profit or loss.
b) C50 000 as decrease in other comprehensive income and C80 000 as an expense in
profit or loss.
c) C115 000 as an expense in profit or loss
d) C100 000 as decrease in other comprehensive income and C15 000 as an impairment
loss expense in profit or loss.
e) C100 000 as decrease in other comprehensive income and C15 000 as a revaluation
expense in profit or loss.
Question 8.2
a.
Identify whether the following statement is true or false, and if false, justify your answer:
The two measurement models allowed under IAS 16 Property, plant and equipment are the
net replacement value method (also known as the elimination method) and the gross
replacement value method (proportional restatement method).
Chapter 8 77
b.
Identify whether the following statement is true or false, and if false, justify your answer:
When UHPHDVXULQJ DQ DVVHW¶V FDUU\LQJ DPRXQW WR UHIOHFW IDLU YDOXH, using the revaluation
model, we must first eliminate any accumulated depreciation against the DVVHW¶V gross
carrying amount account (i.e. cost).
c.
Select the most correct answer/s:
Plant, purchased at a cost of C220 000 on 1 January 20X1 and depreciated to a nil residual
value over 5 years, is revalued to C330 000 at 31 December 20X2.
The revaluation surplus will be credited with ______________ (C110 000 / C198 000/
C154 000/ none of these are correct).
d.
value over 5 years, and which had not previously been revalued and has never been
considered to be impaired, is revalued to a fair value of C165 000 at 31 December 20X2.
The ________ (revaluation surplus/ revaluation income/ revaluation expense/ impairment

loss/ impairment loss reversed) will be __________ (debited/ credited) with
______________ (C11 000 / C55 000 / C33 000/ none of these are correct).
e.
value over 5 years, which had not previously been revalued and has never been considered
to be impaired, is revalued to a fair value of C88 000 at 31 December 20X2.

______________ (C1320 000 / C88 000/ C44 000 /none of these are correct).
f.
Plant, purchased at a cost of C220 000 on 1 January 20X1, is depreciated to a nil residual value
over 5 years. It was previously revalued to C198 000 on 31 December 20X1. The plant, which is
not considered to be impaired, is revalued to a fair value of C88 000 at 31 December 20X2. The
revaluation surplus is transferred to retained earnings over the life of the asset.

______________, and the ________ (revaluation surplus/ revaluation income/ revaluation
expense/ impairment loss/ impairment loss reversed) will be __________ (debited/ credited)
with ______________.
78 Chapter 8
Question 8.3
A student, studying accounting at Launch College, is battling to understand the revaluation

model in IAS 16 Property plant and equipment. He has sent you the following queries:
Query 1: How does the revaluation model differ from the cost model?
Query 2: What requirements, if any, must be met before we may use the revaluation model?
Query 3: In times of increasing fair values, could the use of the revaluation model help a
company to improve its profit before tax?
Query 4: Can a company apply the revaluation model to some of its properties, but choose to
use the cost model for other properties that have dropped in value? And is it
possible to use the revaluation model for selected properties, while using the cost
model for plant and vehicles?
Query 5: When using the revaluation model, how often will we have to perform valuations?
Would performing a revaluation once every 3 years be sufficient?
Query 6: When using the revaluation model, how does one account for a revaluation
adjustment relating to land if its fair value drops below cost?
Required:
Provide a brief UHVSRQVHWKDWDGGUHVVHVHDFKRIWKHVWXGHQW¶VTXHULHV
Question 8.4
Apollo Limited uses the revaluation model to measure land. It owns several properties and has
recently purchased a plot of land on which it intends to build a factory. The relevant details are:
x Purchase price (1 January 20X4): C105 600
x Fair value (31 December 20X4): C116 160

x levy income tax at 30% on taxable profits.
x do not allow the cost of land as a tax-deduction when calculating taxable profits.
x include 80% of capital gains in taxable profits (the capital gain is calculated on a base cost
equal to the purchase price).
The deferred tax balance was zero before the revaluation of the land.
Required:
Show the deferred tax journal relating to the land, assuming that:
a) the entity intends to recover the carrying amount of the land through use.
b) the entity intends to recover the carrying amount of the land through sale.
Question 8.5
Part A
Comic Limited owns a single plot of land, which it measures using the revaluation model. It
determines the fair value of land every two years. Details of its land are as follows:
C
Purchase price (1 January 20X1) 2 000 000
Fair values
31 December 20X3 3 800 000
31 December 20X5 1 160 000
31 December 20X7 2 800 000
Chapter 8 79
Required:
Prepare the journal entries to account for the land for the years ending 31 December 20X1 to
31 December 20X7.
Ignore deferred tax implications.
Part B
Use the same information given in Part A, together with the following information:
x The tax authorities levy income tax at 30% of taxable profits.
x Capital gains are included in taxable profits using a capital gains inclusion rate of 80%.
x The cost of land is not deductible in the calculation of taxable profits.
x Comic Limited intends to keep the land.
Required:
a) Prepare all journal entries relating to land for the years ending 31 December 20X1 to
31 December 20X7.
b) Briefly explain the deferred tax implications when revaluing land.
Question 8.6
Part A
James Limited is currently drafting its financial statements for the year ended 31 December 20X6.
You are responsible for preparing the disclosure relating to property, plant and equipment. Below is
the information relating to land, the only class of asset owned by James.
It is the policy of the company to measure land on the revaluation model, and the fair value is
determined every 2 years. All valuations are carried out by L Lane (VA)SA, an independent valuer.
Land in Umhlanga Rocks

x On the 1 January 20X5, James purchased two hectares of land in Umhlanga Rocks, for
C5 000 000.
x On 31 December 20X6, the land was revalued for the first time to its fair value of C10 500 000.
Land in the Durban CBD

x This piece of land was purchased many years ago for C5 500 000. On 31 December 20X4,
the land was revalued to its fair value of C8 000 000.
x During 20X6, due to falling property prices in the area, the value of the land had decreased
considerably. On 31 December 20X6, the fair value of the land was deemed to be C4 000 000.
Other information
x Before taking the above revaluations into account, the profit for the year ended
31 December 20X6 was calculated as C5 700 000 (20X5: C3 700 000).
x No other revaluations other than those referred to above have ever been processed.
x The opening retained earnings at 1 January 20X5 was C19 400 000. The share capital is
constituted by ordinary shares of C3 000 000 (unchanged for many years).
x There are no other equity accounts other than those evident from the information provided.
x There KDVEHHQQRRWKHUPRYHPHQWLQWKHFRPSRQHQWVRIµRWKHUFRPSUHKHQVLYHLQFRPH¶
other than movements that may be evident from the information provided.
80 Chapter 8
Required:
Disclose the above in James Limited¶V financial statements for the year ended 31 December 20X6,
in accordance with International Financial Reporting Standards.
Accounting policies are required
Ignore tax.
Part B
Use the same information given in Part A, together with the following information:
x The tax authorities levy income tax at 30% of taxable profits.
x Capital gains are included in taxable profits using a capital gains inclusion rate of 80%.
x The cost of land is not deductible in the calculation of taxable profits.
x The profits for the year have been stated after tax.
x James Limited intends to keep the land.
x There are no permanent or temporary differences, other than those evident.
Required:
Disclose the above in the financial statements of James Limited for the year ended
31 December 20X6, in accordance with International Financial Reporting Standards.
Accounting policies are required
Question 8.7
You are the auditor of a large bathroom supplies company called The Running Tap Limited, which
has a December year-end. Its accountant qualified in the United States, and is thus not completely
familiar with IFRS. He has approached you regarding two issues that need clarification before the
current financial statements for the year ended 31 December 20X0 may be finalised.
All the non-current assets were revalued during the current year. For this reason, no
impairment tests were performed on any assets during the year.
Required:
a) Discuss whether you agree or disagree with the decision not to perform impairment tests.
b) Although the accountant does not believe that he has to perform any impairment testing,
he has requested that you explain what this would involve were it necessary for him to
perform an impairment test.
c) Explain to the accountant the meaning and use of the following three terms: recoverable
amount, residual value and net realisable value. Your answer should include an explanation as
to how each of these amounts are used, and how they would be calculated.
Question 8.8
Coffee Culture owns a plot of land:

x The land had been purchased on 15 June 20X4 for C825 000
x The land is held under the revaluation model and is not depreciated.
x Fair values were measured as at the following dates:
31 December 20X4: C825 000;
31 December 20X5: C792 000.
x There was no evidence of impairment of the land at 31 December 20X4, and thus the
recoverable amount on this date was not calculated, but that the recoverable amount was
calculated at 31 December 20X5 (see the three separate scenarios in the µrequired¶).
Chapter 8 81
Required:
Process all journals for the years ended 31 December 20X4 and 20X5 assuming each of the
following scenarios when calculating the recoverable amount at 31 December 20X5:
a) When determining the recoverable amount at 31 December 20X5, costs of disposal costs
were considered to be immaterial and the value in use is C808 500.
b) When determining the recoverable amount at 31 December 20X5, costs of disposal costs
were considered to be immaterial and the value in use is C775 500.
c) When determining the recoverable amount at 31 December 20X5, costs of disposal costs
were estimated to be C11 000 and the value in use is C775 500.
Question 8.9
Curious Limited has a year end of 31 December. The accountant would like you to explain
and/or calculate the following:
a.
Terms
Explain the difference between the cost model and the revaluation model, and what the
terms actually refer to.
b.
Revaluation model - increase in value; ignoring tax

Plant cost C100 000 on 1/1/20X1. Depreciation is provided at 20% per annum on the
straight-line basis. The fair value is C90 000 at 1/1/20X2. The residual value is assessed
to be zero and this has remained unchanged since acquisition. The company wishes to
apply the net replacement value method and to transfer the realised portion of the
revaluation surplus to retained earnings annually.
i. Calculate and journalise the change in value of the plant.
ii. Calculate and journalise the depreciation of the plant for 20X2.
iii. Calculate and journalise the amount of the transfer from the revaluation surplus to
retained earnings and explain why the company makes this transfer.
c.
Revaluation model - increase in value; with tax

Same information as in (b) above, except that there is a tax allowance of 20% per annum
on the straight-line method and that the applicable tax rate is 30%.
d.
Revaluation model - decrease in value; ignoring tax

straight-line basis. The fair value is C70 000 at 1/1/20X2. The residual value is assessed
to be zero and this has remained unchanged since acquisition.
The company wishes to apply the net replacement value method and to transfer the
realised portion of the revaluation surplus to retained earnings annually.
82 Chapter 8
e.
Revaluation model - decrease in value; with tax
Same information as in (d) above, except that there is a tax allowance of 20% per annum
on the straight-line method and that the applicable tax rate is 30%. Show all journals.
f.
Revaluation model ± impairment; ignoring tax
straight-line basis. The recoverable amount is C70 000 at 1/1/20X2.
The residual value is assessed to be zero and this has remained unchanged since
acquisition. The company transfers the realised portion of the revaluation surplus to
retained earnings annually.
g.
Cost model - increase in value; ignoring tax
Same information as in (b) above, except that the company uses the cost model and the
recoverable amount is C90 000 at 31 December 20X1.
h.
Cost model - decrease in value; ignoring tax
Same information as in (f) above, except that the company uses the cost model and the
recoverable amount is C70 000 at 31 December 20X1.
i. Calculate and journalise the change in value.
The revaluation model is applied using the net replacement value method.
The entity intends to recover the carrying amount through use.
Question 8.10
Lemon Limited purchased a plant on 1 January 20X3 for C630 000, on credit. Depreciation is
provided over its useful life of 5 years to a nil residual value using the straight-line method.
x Measurement model: Revaluation model
x Depreciation:
Useful life: 5 years
Residual value: Nil
Method: Straight-line
The plant had a fair value of C504 000 on 1 January 20X5 and a fair value of C420 000,
measured at 1 January 20X6.
Lemon transfers the maximum amount from the realised portion of the revaluation surplus to
retained earnings over the useful life of the plant.
Required:
Prepare the journals for the plant for the years ended 31 December 20X3 to 20X6 assuming:
a) The gross replacement value method is used;
b) The net replacement value method is used.
Ignore tax.
Chapter 8 83
Question 8.11
Maroon Limited has plant that cost C100 000 on 1/1/20X1. Depreciation is provided over the
useful life of 5 years on a straight-line basis to a nil residual value.
The company uses the revaluation model for subsequent measurement of its property, plant
and equipment and accounts for revaluations on the net replacement value method. The fair
values listed below were measured using the cost approach.
x The fair value, as determined by an independent valuer, at 1/1/20X2 amounts to C120 000
The company transfers the maximum amount possible from the revaluation surplus to
retained earnings on an annual basis.
Impairment testing at the end of each year found that the recoverable amounts were higher
than carrying amounts.
Required:
Journalise the transactions for the years ended 31 December 20X2, 20X3 and 20X4.
Ignore tax.
Question 8.12
Trickery Limited is a manufacturing entity that operates throughout the world and is dual-
listed on both the JSE Ltd and London Stock Exchange.
The company purchased an item of plant on 1 July 20X5. It was installed and available for
use in the manner intended by management on the same day.
The cost of the plant was C900 000. It has an estimated useful life of four years and a nil
residual value.
Trickery Limited uses the revaluation model for the measurement of its property, plant and
equipment and, due to the nature of its operations, the company has a policy of revaluing its
property, plant and equipment on an annual basis. The net replacement value method is used.
The fair value of the plant was estimated using discounted cash flows by an independent
valuer at 30 June 20X6 and 30 June 20X7 as shown in the following table. The useful life and
residual value remained unchanged.
Date Fair value
30 June 20X6 C825 000
30 June 20X7 C400 000
The company transfers the revaluation surplus to retained earnings as the asset is used.
The profit before tax has been correctly calculated at C300 000 for the year ended 30 June 20X7.
There were no indicators of impairment at any stage during the year.
Part A
The company¶VWD[H[SHQVHIRUWKH\HDUHQGHG-XQH;FRUUHFWO\FDOFXODWHG is C87 000,
84 Chapter 8
Required:
a) Prepare journal entries relating to plant for the financial year ended 30 June 20X6.
Ignore journals relating to the deferred tax effect of the revaluation.
b) Prepare relevant extracts from the:
x Statement of comprehensive income for the period ended 30 June 20X7;
x Statement of changes in equity for the period ended 30 June 20X7; and
x Statement of financial position at 30 June 20X7.
c) Prepare relevant extracts from the notes to the financial statements of Trickery Limited at 30 June 20X7.
The accounting policy for property, plant and equipment is required.
The statement of compliance and basis of preparation notes are not required.
Tax and deferred tax notes are not required.
Part B
Tax-related information includes the following:

x The corporate income tax rate is 29% and has not changed since the plant was purchased.
x The tax authority allows the deduction of the plant's cost by way of an annual tax allowance
calculated at 25% per annum on cost.
There are no other temporary or non-temporary differences other than those apparent from the
information given . Trickery Limited intends to keep this plant.
Required:
a) Prepare all journals relating to plant for the financial year ended 30 June 20X6.
b) Prepare relevant extracts from the:
x Statement of comprehensive income for the period ended 30 June 20X7;
x Statement of changes in equity for the period ended 30 June 20X7; and
x Statement of financial position at 30 June 20X7.
c) Prepare relevant extracts from the notes to the financial statements of Trickery Limited at 30
June 20X7.
The accounting policy notes for property, plant and equipment and deferred tax are required.
The statement of compliance and basis of preparation notes are not required.
Question 8.13
Higgins Limited operates in the woodwork industry and requires many items of plant to operate
its business.
One of these plants has the following characteristics:

x Cost: C200 000 (this is also the base cost for capital gains tax purposes)
x Fair value C220 000 (this is the first revaluation)
x Carrying amount and tax base: C120 000 (on date of revaluation)
The deferred tax balance was zero before the revaluation of the asset.
The income tax rate is 30% and the capital gains inclusion rate is 80%.
Chapter 8 85
Required:
Show the deferred tax journal, assuming:
a) the entity intends to recover the carrying amount of the plant through use.
b) the entity intends to recover the carrying amount of the plant through sale.
Question 8.14
Lightenlove Limited previously measured its property, plant and equipment using the cost
model but, in 20X3, changed its accounting policy to the use of the revaluation model instead.
7KHFRPSDQ\¶VSURSHUW\SODQWDQGHTXLSPHQWconsists of the following:

x Plant;
x Office building; and
x Land.
The land consists of two plots:

x Erf 167 in Durban Beach Street (5 100 m2 in extent): vacant but used as a parking lot,
x Erf 300 in Durban Hill Street (5 100 m2 in extent): vacant.
The necessary valuations, which were done by Sipho Ndlovu, an independent valuer and a
member of the Institute of Valuers, and which were prepared as at 31 December 20X3, are
presented below:
Plant C3 000 000
Office building C4 100 000
Land (2 vacant plots) C2 000 000 (C1 000 000 per plot)
All three fair values were measured based on an active market.

Valuations will be performed annually hereinafter.
None of these assets have ever been impaired in the past.
7KHDVVHWV¶FDUU\LQJDPRXQWVDW 31 December 20X2 (under the cost model) were as follows:

Plant C2 100 000
Office building C2 200 000
Land (2 vacant plots) C1 500 000 (C750 000 per plot)
The plant:
x was purchased on 1 January 20X1 at a cost of C2 600 000;
x is depreciated at 10% per annum; and
x has a residual value of C100 000 (unchanged).
The office building:

x originally cost C3 100 000 (the portion of the cost that is attributable to the land on which
it is built is considered immaterial);
x is depreciated at 5% per annum; and
x has a residual value of C100 000 (unchanged).
Land is not depreciated.
Revaluations are recorded using the gross replacement value method. Transfers of the
realised portion of the revaluation surplus to retained earnings are to be made annually.
There was no other movement of property, plant and equipment during 20X3.
86 Chapter 8
7KHFRPSDQ\¶Vintention is to:
x sell the plant;
x keep the vacant plot of land that is currently used as a parking lot (Erf 167) but sell the
other vacant plot of land (Erf 300); and
x sell the office building.
7KHFULWHULDIRUUHFRJQLWLRQDVDµQRQ-FXUUHQWDVVHWKHOGIRUVDOH¶ZHUHQRWPHWIRUDQ\DVVHW
There are no differences between taxable and accounting profit other than those evident from
the information provided.
Information relating to the local tax legislation:

x Corporate income tax is levied on taxable profits at 30% (unchanged for many years).
x The inclusion rate for capital gains is 80%.
x The tax authorities do not allow deductions for either the buildings or land.
x The tax authorities allow a 10% capital allowance on the purchase price of plant.
x The base cost of both land and buildings equals cost whereas the base cost of plant is
C2 800 000.
Required:
a) Show the calculation of the deferred tax balances at 31 December 20X2 and
31 December 20X3, using the balance sheet approach. Show all workings and indicate
whether each balance is a debit or credit to the deferred tax account.
b) Provide the journal entries relating to plant for the year ended 31 December 20X3.
c) Present the following line items in the statement of financial position at 31 December 20X3
in accordance with International Financial Reporting Standards:
x Property, plant and equipment
x Deferred tax.
d) Disclose the office building in the property, plant and equipment note for the year ended
31 December 20X3, in accordance with International Financial Reporting Standards and
the Companies Act of 2008.
Question 8.15
Values Limited uses the revaluation model and has a policy of revaluing its assets to fair
values on a two-yearly cycle using the net replacement value method.
x Plant was purchased on 1 May 20X5 at a cost of C450 000.
x Depreciation is provided on the straight-OLQHPHWKRGRYHUWKHSODQW¶VHVWLPDWHGXVHIXOOLIH
It has a useful life of five years with no residual value.
x Values Limited intends to recover the carrying amount of their plant through use.
x At 31 December 20X6, its recoverable amount was C220 000.
x At 31 December 20X8:
The plant was revalued, by an independent valuer, to a fair value of C190 000, where
the fair value was measured using the cost approach in an active market, using
µOHYHO ¶LQSXWVSHU,)56Fair value measurement.
The recoverable amount was C205 000.
Chapter 8 87
x At no stage was there a change in the SODQW¶V expected useful life, residual value or
method of depreciation.
x Any UHYDOXDWLRQVXUSOXVLVWUDQVIHUUHGWRUHWDLQHGHDUQLQJVRYHUWKHDVVHW¶VUHPDLQLQJXVHIXOOLIH
Profit before tax has been correctly calculated at C800 000 in 20X9 and C600 000 in 20X8.

x allow wear and tear to be deducted at 20% of the cost per annum, apportioned for time.
x levy income tax at 30% on taxable profits.
There are no other temporary or permanent differences other than those apparent from the
information given.
Required:
a) Journalise the above transactions from date of original purchase.
b) Prepare the statement of comprehensive income for the year ended 31 December 20X9
c) Prepare the statement of changes in equity for the year ended 31 December 20X9 in
d) Prepare the following notes for the year ended 31 December 20X9 in accordance with
International Financial Reporting Standards:
x Profit before taxation
x Taxation, deferred taxation and tax on comprehensive income
x Property, plant and equipment.
88 Chapter 8
GAAP: Graded Questions Intangible assets and purchased goodwill
Chapter 9
Intangible assets and Purchased Goodwill
Question Key issues
9.2 Apple, A: Market share: recognition

Banana, B: Patent & staff skills: recognition
Carrot C: Licence:
Measurement
Finite useful life
Pattern of consumption of future economic benefits
change in estimate: amortisation method
9.3 Energised Discussion: Purchased brand:

Measurement, including proposal to revalue and amortisation (useful life,
residual value)
Disclosure
9.4 Hoon Discussion: Permit recognition, measurement and disclosure with a finite life
9.5 Thirsty Discussion: Research and development: recognition and measurement
9.6 Farout Ledger accounts: Research and development: recognition, measurement

Expense or capitalise
Recoverable amounts
9.7 Drench Discussion: Brand: recognition and measurement
Purchased
Staff training
Legal fees
Amortisation
9.8 Luminous Discussion: Trademark, recognition, measurement and disclosure.

Indefinite useful life
9.9 Nosh Discussion: Trademark recognition and measurement.
a) Recognition (trademark or goodwill)
b) Initial measurement
c) Amortisation
d) Impairments and revaluations
9.10 Goo Critical analysis: Brand measurement

Purchased, renewable brand
Indefinite useful life and impairment testing
9.11 Yoyo Critical analysis: Brand: recognition and measurement
Purchased brand and internally generated brand
Indefinite useful life originally, but now considered finite
Impairment
Change in estimate and correction of errors
9.12 Orange Boost Discussion:

a) Purchased, renewable patent: recognition and measurement
b) Market share: recognition
Continued on the next page
Chapter 9 89
Question Key issues continXHG«
9.13 Wasp Comparative exercise: Purchased patent versus Research and development,
in context of:
a) Recognition
b) Amortisation and residual values (finite life; renewable)
c) Measurement models
d) Journals
9.14 Market-place Journals and disclosure:

Website costs recognition, measurement and disclosure.
Development costs
Amortisation and impairment
9.15 $ODVWDLU¶V Discussion: advertising catalogues: recognition and measurement

natural Part A. Catalogues received before year end, paid for before year end, to be
remedies used in a promotion after year end.
Part B. Catalogues received after year end, paid before year end, to be
used in a promotion after year end.
Chapters A and B are the chapters that include ‘Integrated Questions’ (questions that combine
different IFRSs).
90 Chapter 9
Question 9.1
a.
Consider the following statements relating to IAS 38 Intangible Assets:

1. Intangible assets are always initially measured at cost.
2. When measuring the fair value of intangible assets, it is always done in terms of an active market.
3. The two measurement models that may be used to subsequently measure intangible
assets include the cost model and the fair value model.
4. The revaluation model is generally considered to be impractical for the subsequent
measurement of intangible assets.
a) 1, 2, 3 and 4 are correct

b) 2, 3 and 4 are correct
d) 2 and 3 are correct
e) None of the above options (a-d) are correct
b.
Consider the following statements relating to issues regarding classification and recognition in
terms of IAS 38 Intangible Assets:
1. An intangible asset is any identifiable asset, other than monetary assets, that has no
physical substance.
2. Before an entity may recognise an intangible asset, it must have legally enforceable rights
over an item's expected future economic benefits.
3. Before an entity may recognise an intangible asset, it must have control over the asset.
4. An intangible asset acquired in a business combination will be expensed by the acquirer if
the definition of intangible asset is not met (e.g. the identifiability criteria is not met).
5. Internally generated customer lists, brands and goodwill may be capitalised.
a) 1 and 2 are correct

c) 1, 2 and 4 are correct
c.
Consider the following statements relating to issues regarding amortisation in terms of

IAS 38 Intangible Assets:
1. Not all intangible assets are amortised, as some have indefinite useful lives.
2. The residual value used when amortising an intangible asset is generally zero
3. All intangible assets must be amortised using the straight-line method
4. Intangible assets are amortised over thH DVVHW¶V HFRQRPLF useful life starting from the
date it is first available for use.
a) 1, 2 and 4 are correct

Chapter 9 91
d.
An entity invests C500 000 in staff training costs once every three years. Management
believed that the training gives employees a competitive advantage.
The correct accounting treatment for these costs are
a) Capitalise the training costs as an intangible asset, amortise it over three years and then
derecognise it when the next training costs are incurred.
b) Recognise as an expense in the period when incurred.
e.
Mango Limited purchased a leading chutney brand from a competitor on 1 October 20X8 for
C450 000. The brand has an estimated useful life of 25 years and zero residual value. In
orGHU WR PDLQWDLQ WKH EUDQG¶V SUHPLXP PDUNHW position, Mango Limited have incurred
marketing costs of C50 000 from 1 October 20X8 to 28 February 20X9, the end of the
financial year.
What amount is recognised as an intangible asset on the statement of financial position of

Mango Limited at 28 February 20X9?
a) C432 000
b) C482 000
c) C492 500
d) C500 000
e) C442 500
f.
Consider the following statements relating to research and development expenditure in terms
of IAS 38 Intangible Assets:
1. If the requirements of the standard for the capitalisation of development expenditure are
met, an entity has the choice to either capitalise or expense the development expenditure
2. Capitalised development expenditure must be amortised over a period not exceeding ten
years.
3. Research expenditure, other than capital expenditure on research facilities, must be
expensed as incurred.
4. Capitalised development expenditure must be reported on the statement of financial
position, as a non-current asset and within intangible assets.

e) 4 only is correct
g.
An entity has recognised development costs of a new drug as an intangible asset at a cost of
C1 million.
The estimated useful life is twenty years and the head of medical research believes that the
formula will realise C250 000 at the end of its useful life.
No third party has committed to purchase the intangible asset and there is no active market.
92 Chapter 9
In accounting for this intangible asset:
a) The amortisation period is twenty years, the residual value is assumed to be zero and the
amortisation period is reviewed annually.
b) The amortisation period is twenty years, the residual value is assumed to be zero and the
amortisation period cannot be changed.
c) The amortisation period is twenty years, the residual value is C250 000 and the
amortisation period is reviewed annually.
d) The amortisation period is twenty years, the residual value is C250 000 and the
amortisation period cannot be changed.
e) It is not amortised and is tested annually for impairment.
h.
Intangible assets with an indefinite useful life:
a) Should be amortised over 40 years.

b) Should be recorded at cost indefinitely.
c) Should not be amortised and should be tested for impairment at least annually.
d) Should not be amortised and should be tested for impairment only when there are
indicators of impairment.
e) Should be revalued every year and the fair value adjustment included in profit or loss.
Question 9.2
The following scenarios are unrelated.
Part A
Apple Limited is a successful engineering business. Over the past few years, the company
has achieved a market share for its products of 30%. At a recent board meeting, the directors
suggested recognising their µmarket share¶ as an intangible asset.
Required:
Briefly discuss whether the market share can be recognised as an intangible asset in terms of
IAS 38 Intangible Assets.
A discussion of the recognition criteria is not required.
Part B
Banana Limited is a company in the IT industry. The success of the company is built around
software which it has developed internally, and over which a patent has been registered, as
well as the skills of the staff that operate the software. Staff members are required to give
RQHPRQWK¶VQRWice of their resignation.
Required:
Briefly discuss whether the patent and the staff skills can be recognised as intangible assets
in terms of IAS 38 Intangible Assets.
A discussion of the identifiability criteria is not required.
Part C
Carrot Limited manages and operates toll roads on major national routes throughout the
country. The company purchased a licence to operate a toll road in the Eastern Cape
seventeen years ago, for an amount of C10 000 000, this right being correctly recognised as
an intangible asset on the date of purchase.
Chapter 9 93
It was expected that the toll road would be in use for twenty years and the economic benefits
will flow to the entity evenly over this period.
The estimated toll road usage is 1 000 000 cars per year. At the time, there were no plans to
construct alternative routes in the area. There is no active market for toll road licences.
During the current year, the government announced plans to construct a bridge that would
significantly reduce usage of the toll road. Construction began days later.
The directors estimated that the economic benefits flowing to the entity would decrease each year
over the remaining three years of the licence: the estimated toll road usage is expected to drop to
800 000 cars, 600 000 cars and 400 000 cars, respectively.
The right to operate the toll road was correctly recognised as an intangible asset upon purchase
seventeen years ago.
Required:
To discuss the accounting issues relating to the measurement of the licence for the toll road
over its economic life.
Question 9.3
Energised Limited has owned the Mola Tonic brand name for many years, this purchased
EUDQG QDPH KDYLQJ EHHQ WKH PDLQVWD\ RI WKH FRPSDQ\¶V EXVLQHVV The brand is currently
recorded in the financial statements at a nil carrying amount (being its original cost of
C40 million less accumulated amortisation of C40 million).
The directors of the company estimate that the current value of the brand is in excess of
C100 million and wish to revalue the brand accordingly.
Required:
Discuss how to measure and disclose the brand name in the financial statements of
Energised Limited in terms of IAS 38 Intangible assets.
Question 9.4
Hoon Limited is a bustling and growing company involved in the transport industry:
x Hoon operates the largest fleet of buses in the city and surrounding suburbs.
x The company was informed, on 2 January 20X9, that it had been successful in its
application for a special µairport permit¶ that gives its bus drivers the exclusive right to
transport passengers to and from the international airport. The government sited security
reasons to justify restricting access to the airport in this way. This permit will mean that
Hoon will be transporting vastly higher numbers of passengers than before, thereby
increasing profitability. The cost of the permit was C1 000 000.
x Only one permit is issuable by the provincial government at any one time, and the terms
and conditions prevent Hoon from selling this permit to another company.
x The permit is valid for a period of 5 years, following which it will be up to the provincial
government to decide who will be able to purchase the next 5-year permit. Although Hoon
will definitely apply to have the permit renewed after the expiry of this current 5-year
permit, it is not yet certain or probable that it would be successful in such a bid.
The financial director expensed the cost of the permit in the year it was received. The
managing director believes that the cost of the permit should be capitalised.
94 Chapter 9
Required:
Discuss the recognition, measurement and disclosure of the µairport permit¶ in the financial
statements of Hoon Limited for the year ended 31 December 20X9 in terms of the
International Financial Reporting Standards.
Question 9.5
Over the past two years, Thirsty Limited¶s research and development department has been working
on the design of a revolutionary type of soft drink can, that has a re-sealable top which allows the
can to be sealed after opening. The proposed research was announced in January 20X1, upon
which a loan to finance this project, of C5 million, was immediately obtained.
x The associated costs and activities for the year ended 31 May 20X2 are shown below:
01 June 20X1 ± 31 July 20X1: C20 000 per month were spent on market surveys
designed to establish whether consumers would want a reusable can. The market
surveys proved there was a market for the can amongst consumers.
01 August 20X1 ± 30 September 20X1: C200 000 was spent on the evaluation of a
number of alternative prototypes and designs.
End of September 20X1: a design was chosen and the engineers produced a plan
that indicated it was technically possible to the prototype called the µSoak can¶.
01 October 20X1 ± 31 January 20X2: C1 100 000 was spent on the design and
construction of a pilot manufacturing plant. This plant was not capable of operating
on a scale economically feasible for commercial production.
01 February 20X2 ± 31 May 20X2: C600 000 was spent on testing the pilot plant ±
this process is not yet complete.
x Thirsty Limited has applied to register a patent over the successful µSoak can¶.
Required:
Discuss, with reference to IAS 38 Intangible Assets, the correct accounting treatment for all
the costs incurred in relation to the Soak can for the year ended 31 May 20X2. (Use the
definitions of ‘research’ and ‘development’ in your answer).
Question 9.6
Farout Limited is attempting to produce a new toothpaste that will feature tiny gold stars
embedded in the paste. The following relates to the research and development thereof.
The following costs were all paid for in cash:

Year C Comments
1 50 000 Research
2 30 000 Development: not all criteria necessary for capitalisation were met
3 40 000 Development: all criteria necessary for capitalisation were met
4 20 000 Development: all criteria necessary for capitalisation were met
5 10 000 Development: not all criteria necessary for capitalisation were met
Recoverable amounts are calculated as follows:

Year C
3 50 000
4 50 000
5 55 000
Required:
Post the above transactions to the general ledger accounts of Farout Limited.
Chapter 9 95
Question 9.7
Drench Limited is a company involved in the hair industry supplying products to some of the
most expensive hair salons around the world. In a bid to expand its market, it acquired a well-
known brand, Droplets, on 1 January 20X5, for an amount of C2 500 000. The salons will
now have the exclusive right to market this product to its customers.
x This purchase price was paid in full on 1 January 20X5.
x The Drench Limited hair stylists had to be sent on extensive training before they could use and
sell the Droplet range of hair products. The training took place in Italy during January 20X5. The
training manuals cost C80 000 and the accommodation and transport cost C120 000.
x Further to this, an amount of C175 000 was spent on legal fees regarding the drafting of the
purchase agreement and to register the transfer of ownership. The legal fees were paid on
1 January 20X5.
x The use and sale of the Droplet range began on 15 February 20X5.
x The Droplet brand has an estimated useful life of ten years.
x The accountant believes that the brand will probably be able to be sold at the end of its
useful life for C150 000 (present value of C25 000).
Required:
IAS 38 Intangible Assets, defines an intangible asset DVµDQLGHQWLILDEOHQRQ-monetary asset
without physical subVWDQFH¶With reference to IAS 38 Intangible assets, explain:
a) whether the Droplet brand can be recognised as an intangible asset; and
b) how to measure the Droplet brand in Drench LiPLWHG¶V financial statements for the year
ended 31 March 20X5.
Question 9.8
Luminous Limited owns a well-known fashion trademark called Purple Square, purchased
from a competitor for an amount of C10 million. The trademark has an indefinite useful life.
Required:
Discuss how to account for the trademark in the financial statements of Luminous Limited in
terms of IAS 38 Intangible assets.
Question 9.9
You are the auditor of Nosh Limited, a small fast-food company. You have been asked to
advise Nosh on how to deal with the following transaction:
In order to facilitate expansion, Nosh purchased 100% of another successful food company.
The purchase negotiations were settled during the year as follows:
x The total purchase price for the business amounted to C40 000.
x The net identifiable tangible assets acquired were stipulated in the purchase agreement
at their fair value of C19 500.
Although the purchase agreement stipulated that Nosh also acquired the legal rights to a
trademark for a period of 22 years, no value was attached thereto. The reason is that the
trademark was internally generated by the seller and was thus not recognised in the seller's
financial statements, despite it having been a most profitable trademark for many years.
96 Chapter 9
Initial Recognition: Nosh intends to record the purchased trademark in its financial
statements at C20 500, calculated as follows:
C
Purchase price 40 000
Less fair value of net identifiable tangible assets 19 500
Trademark 20 500
Amortisation: Nosh is unsure whether or not to amortise the trademark since it believes that
the trademark is so profitable that it has an indefinite useful life.
Impairment testing and revaluing to fair values: Nosh intends to revalue the trademark
annually using the revaluation model.
Required:
Discuss the proposed accounting treatment of the trademark in the financial statements of
Nosh Limited. Your discussion should be set out under the following sub-headings:
a) Definitions and recognition criteria relevant to the acquisition of the trademark
b) Initial measurement
c) Amortisation
d) Impairment testing and revaluing to fair values.
Question 9.10
Goo LimiWHGRZQVDEUDQGµJREEOHUV¶WRZKLFKOHJDOULJKWVIRUD-year period were purchased on

1 January 20X1, for C500 000, renewable for a further 5 years at a further cost of C1 000 000. The
µJREEOHUV¶EUDQGLVUHIOHFWHGLQWKHstatement of financial position at its carrying amount of C500 000.
A review of past figures makes it clear that tKH SURILWV IURP WKH EUDQG µJREEOHUV¶ are diminishing
dramatically. At the time of the purchase, it was estimated that this brand would render annual profits
of C80 000 and at that time, it appeared so successful that its useful life appeared to be indefinite.
The budgeted profit figures presented at the end of the 20X2 financial period indicated a slight
(immaterial) dip in future expected profits but, taken together with the latest budgeted profits
presented at a directors meeting on 29 December 20X3, make it clear that these annual profits of
C80 000 are on a downward spiral.
These latest budgeted figures show the present value of the future total estimated net cash
inflow of C200 000 over the remaining legal life. Goo Limited has the option to dispose of this
brand to a local businessman who has recently (December 20X3) offered to purchase it for
C220 000. The only selling costs that are expected will be C2 000 in legal fees. The current
financial year ends on 31 December 20X3
Required:
Critically analyVH WKH PHDVXUHPHQW RI WKH µJREEOHUV¶ EUDQG in the financial statements of
Goo Limited.
Question 9.11
<R\RKDVIRUPDQ\\HDUVPDQXIDFWXUHGD\RJKXUWGULQNFDOOHGµ<RJ-1RJ¶7KLVEUDQGQDPH
was originally acquired 10 years ago from a competitor company. The cost of this acquisition
was C800 000, and was duly capitalised. No amortisation had been processed against this
brand name because, as the accountant explained, the brand was already 25 years old at the
time of acquisition and, at that time, there was no indication that demand for this drink was
diminishing.
Chapter 9 97
However, sales of Yog-Nog have been falling in recent years. The marketing department,
after much research into the related consumer behaviour, has concluded that the fall in sales
is related to the outdated brand name and packaging. The conclusion was accepted as
plausible and thus, during late December 20X9, the drink was re-launched DV µ<RJL-<LSSL¶,
together with a more modern and eco-friendly packaging. It cost C450 000 to re-launch the
drink. Due to the relaunch, internal projections now indicate an expected increase in sales,
and thus the cost of the launch was capitalised as a Yogi-Yippi brand name.
7KHSUHYLRXVEUDQGQDPHµ<RJ-1RJ¶ZLWKa carrying amount of C800 000, was expensed in

full in the current year ended 31 December 20X9.
Required:
Critically analyse the above issue, explaining whether the treatment is correct or incorrect and
justifying your advice with reference to International Financial Reporting Standards.
Question 9.12
Orange Boost Limited is involved in the energy and sports market. It produces:
x WKHµ*R)XUWKHU¶HQHUJ\GULQk (under patent); and
x WKHµ+DQJ-,Q¶HQHUJ\EDUGHYHORSed in-house).
‘Go Further’ energy drink
7KHSDWHQWIRUWKHµ*R)XUWKHU¶energy drink was purchased during January 20X5 for C814 000. This
cost was capitalised. In terms of the patent agreement, the legal rights were for a period of seven
years, renewable for a further three years at a cost of C1 000 0000. During June 20X6 Orange
Boost obtained the ULJKWVIRUµ*R)XUWKHU¶WREHWKH official sports drink at all endurance sport events
in the country for the next five years, commencing from 1 January 20X7.
Orange Boost has amortised this patent over a period of ten years with a residual value of
C100 000. At 31 December 20X8, WKHµ*o FuUWKHU¶SDWent was recognised in the Statement of
Financial Position at C528 400. A review of past sales figures for µ*R)XUWKHU¶HQHUJ\GULQNV
indicated a steady average annual increase of 25%, year-on-year.
‘Hang-In’ energy bars
The µ+DQJ-IQ¶ energy bars are specifically aimed at endurance athletes. Over the last thirty
years, Orange Boost has achieved a market share for these bars of 50% and is known to be
popular amongst high-profile professional athletes. OrDQJH %RRVW¶V competitive edge with
regard to the energy bars is due to the fact that these bars contain very small quantities of
preservatives and are based on organic and naturopathic principles. Recently, a local actuary
measured the value of having cornered 50% of the market at C1 000 000 and the directors
want to know if and how they may capitalise this.
2UDQJH%RRVW/LPLWHG¶VUHSRUWLQJSHULRGHnds on 31 December.
Required:
a) 'LVFXVVWKHDFFRXQWLQJWUHDWPHQWRIWKHµ*R)XUWKHU¶SDWHQWLQWKHILQDQFial statements of
Orange Boost Limited. Structure your answer as follows:
i) Initial recognition and initial measurement
ii) Residual value
iii) Useful life and amortisation
iv) Impairment testing
b) 'LVFXVV WKH SURSRVHGFDSLWDOLVDWLRQRI 2UDQJH %RRVW /LPLWHG¶VPDUNHWVKDre in relation to the
identifiability criterion of the intangible asset definition in terms of IAS 38 Intangible Assets.
98 Chapter 9
Question 9.13
Wasp Limited is a company that operates in diversified markets. It has been in existence for
many years and has two brands.
x 7KH EUDQG FDOOHG µ6WLQJ¶ was acquired on 1 April 20X6 for C2 000 000. The life of the
µ6WLQJ¶EUDQGLVH[Sected to be ten years.
x 7KHFRPSDQ\KDVH[SHQGHGDYDVWDPRXQWRIUHVRXUFHVLQGHYHORSLQJDEUDQGFDOOHGµ%XUQ¶
including extensive advertising campaigns. A further amount of C300 000 was incurred during
the current (20X6) financial year. The life of the µ%XUQ¶EUDQGLVH[SHFWHGWREHWZHQW\\HDUV
x There is no active market for either brand. The financial year end of Wasp is 31 December.
Required:
Briefly compare aspects of the recognition and measurement of each of the two brands, Sting
and Burn. Your answer should consider the following:
a) Recognition: the Sting Brand versus the Burn Brand
b) Measurement: residual value for purposes of amortising the Sting Brand and Burn Brand.
c) Measurement models: Sting Brand versus Burn Brand.
d) Journals: show the journals (for both brands) for the year ended 31 December 20X6.
Question 9.14
The Marketplace is an online business selling a wide range of kitchen products. Its website is
hosted on its own server, which is situated on their property in a building used to store
inventory that is ready for despatching to customers.
The Marketplace operates two main divisions:

x a marketing division that purely markets the business and its product lines and
x a sales division that manages the delivery of products to customers and debt collection.
0DUNHWSODFH¶V website is divided along similar lines into:

x an area that showcases the various products (marketing); and
x an area that deals with receiving orders (sales).
After a cyber-attack on 31 March 20X6, the company¶s website was badly affected. When
Sally, from IT, tried accessing the FRPSDQ\¶Vwebsite, she found it to be completely corrupted
and was unable to recover any information off the website.
A new website had to be urgently created. This took place between 1 April and 30 June 20X6.
The costs incurred during this period (all paid in cash) amounted to C414 000 and included
5 separate payments, details of which are as follows:
x Payment for the feasibility study (is online business still feasible?): C69 000
The allocation of this cost to the two areas of the website is as follows:
Sales: C46 000
Marketing: C23 000
x Payment for the customer preference study (what would customers prefer to see and use
on the website): C80 500
Sales: C34 500
Marketing: C46 000
x Payment for the new licences (to operate on the web): C23 000
Sales: C11 500
Marketing: C11 500
Chapter 9 99
x Payment for the coPSXWHUVSHFLDOLVWV¶IHHVIRUGHVLJQLQJWKHZHEVLWHV&218 500

Sales: C115 000
Marketing: 103 500
x Payment for the upgrade fees (this occurred on 31 December 20X6 and will be necessary
every 6 months thereafter): C40 000
Sales: C20 000
Marketing: 20 000
The new web design will not be able to be sold due to its unique nature. The cost of the new
website is considered to be material.
This new and improved website was available for use from 1 July 20X6. Management
estimates that it will need to be entirely redesigned after 5 years.
The previous website:

x was amortised over a total useful life of 3 years to a nil residual value; and
x had a carrying amount of C115 000 at the beginning of the year at which point it had a 2-
year remaining useful life.
Required:
a) Show all journals that would have been processed for the year ended 31 December 20X6.
b) Disclose the intangible assets note at 31 December 20X6, in accordance with
Question 9.15
Part A
$ODVWDLU¶V1DWXUDO5HPHGLHVUHWDLOVKHDOWKSURGXFWs, including vitamins and supplements.

x It ordered 12 000 catalogues from a printer, at a cost of C2 each, to advertise its products.
x The amount owing to the printer was settled 30 days from receipt of the catalogues.
x These catalogues were received from the printers on 1 September 20X8 and are to be
distributed to customers evenly from 1 September 20X8 to 30 November 20X8, as a
promotional activity for the holiday season.
Required:
Discuss the recognition and measurement of the cost of the catalogues in the financial
statements of AlaVWDLU¶V1DWXral Remedies for the year ended 30 September 20X8, in terms of
IAS 38 Intangible Assets.
Part B
Use the same information as that provided in Part A, except:
x the amount owing to the printer was paid in advance on 15 August 20X8, when the order
was placed.
x AlDVWDLU¶V1DWXUDORemedies Limited has a financial year end of 31 August 20X8.
Required:
Discuss the recognition and measurement of the cost of the catalogues in the financial
VWDWHPHQWV RI $ODVWDLU¶V 1atural Remedies for the year ended 31 August 20X8, in terms of
IAS 38 Intangible assets.
100 Chapter 9
GAAP: Graded Questions Investment properties
Chapter 10
Investment properties
Question Key issues
10.2 Green Tree Change in use: investment property to owner occupied property
10.3 Mountain Change in use: Investment property to owner occupied property

Properties Sale of investment property: with and without development
10.4 Charlies Spot Fair values unavailable at acquisition, comparing:

property under construction and property not under construction
10.5 Victoria Three properties:

Property Group x Classification and measurement:
Property, plant & equipment: Cost model
Investment property: Subsequent expenditure; fair value model
x Investment property: fair value unavailable
10.6 Gary Investment property: fair value model

-Joint use
-Ancillary Services
-Transfers out of investment property
10.7 Angazi Recognition and measurement

Measurement models: pros and cons
Property held as a right-of-use asset: sub-let
Joint use (separable)
10.8 Edwardes Change in use: owner occupied property to investment property

Investment property: fair value model
Property, plant and equipment: revaluation model (NRVM)
10.9 Cloudy Investment property: fair value model

Property, plant and equipment: cost model
Implications of use of property on recognition and measurement
Change in use
Joint use
10.10 Owlface Two properties:

- Investment property: fair value model
- Property, plant and equipment: cost model
Change in use: investment property to owner occupied property
Impairment and derecognition
10.11 Snake Change in use: various

- Investment property: fair value model
- Property, plant and equipment: cost model
Fair value:
- Indeterminable on acquisition
- Determinable subsequent to acquisition
10.12 Sun Republic Investment property: fair value model

Deferred tax: intention to sell
Chapters A and B are the Integrated Questions chapters.
Chapter 10 101
Question 10.1
a.
Abba Limited purchased an investment property on 1 January 20X1, for C500 000. It incurs the
following costs upon purchase:
x transfer duty of C50 000
x start-up costs of C10 000, which were necessary to bring the property to the condition
necessary for it to be used to earn rental income
x improvements to building totalling C70 000
x repairs to damage caused by builders who were doing the improvements, of C30 000.
The amount at which the building is initially measured is:
a) C660 000
b) C630 000
c) C570 000
d) C510 000
e) None of the options (a-d) are correct
b.
Consider the following statements in context of IAS 40 Investment property:
1. Investment property includes plant and machinery from which rental income is earned or
which is held for capital appreciation.
2. Land held for undetermined use would qualify as investment property.
3. Buildings owned and leased to a third party under a finance lease would qualify as
investment property.
4. Property occupied by employees who pay rent at market rates would qualify as
investment property.

c) 1, 2, 3 and 4 are correct
c.
Consider the following three properties in context of IAS 40 Investment property:
1. A property is held by Adam, a lessee, as a right-of-use asset. Adam uses the property to
earn rental income. The lease is accounted for by the lessor a finance lease, on the basis
that ownership of the property will transfer to Adam at the end of the lease.
2. A property is held by Eve, a lessee, as a right-of-use asset. Eve uses the property to earn
rental income, The lease is accounted for by the lessor an operating lease, on the basis
that ownership of the property will not transfer to Eve at the end of the lease.
3. A property is held by Cain, a lessee, but where Cain expenses the property rentals in
terms of the recognition exemption allowed in IFRS 16 (i.e. Cain does not account for the
property as a right-of-use asset). Cain uses the property to earn rental income. The lease
is accounted for by the lessor an operating lease, on the basis that ownership of the
property will not transfer to Cain at the end of the lease.
102 Chapter 10
a) Adam, Eve and Cain should account for their properties as investment properties.
b) Only Adam and Eve should account for their properties as investment properties.
c) Only Adam should account for his property as an investment property.
d) Only Eve should account for her property as an investment property.
d.

1. Investment property may be measured in terms of either the cost model or fair value
model, where this choice is an accounting policy choice.
2. When measuring investment property using the cost model, we must always depreciate
the asset and test it for impairments in terms of IAS 36 Impairment of assets.
3. The subsequent measurement models are selected on a property-by-property basis, i.e. some
investment properties can be measured using the cost model despite others being measured
using the fair value model.
4. When the fair value model is applied, all investment property must be measured at fair
value, regardless of whether the fair value is reliably measurable on a continuing basis.
a) Statement 1, 2 and 3 are correct.

b) Statement 1 and 2 are correct.
c) Statement 1 and 3 are correct.
d) Statement 2 and 4 are correct.
e.
Consider the following statements in context of IAS 40 Investment property and identify the
correct option:
a) If a portion of a property meets the definition of investment property and the remaining
portion is owner-occupied, the entire property is accounted for as investment property.
b) If a portion of a property meets the definition of investment property and the remaining portion
is owner-occupied, the entire property is accounted for as property, plant and equipment.
c) If a portion of a property meets the definition of investment property and the remaining
portion is owner-occupied, the portion that meets the definition of investment property is
accounted for as investment property and the remaining portion of the property is
accounted for as property, plant and equipment.
d) If a portion of a property meets the definition of investment property and the remaining
portion is owner-occupied, the entire property is accounted for as investment property on
condition that the owner-occupied portion is insignificant.
e) None of the statements are correct.
f.

P Limited is the parent of S Limited. P Limited leases a property under an operating lease to
S Limited. S Limited uses the property as its head-office. P Limited will account for this
property as investment property but S Limited and the P & S Group would account for it as
property, plant and equipment.
a) This statement is correct.

b) This statement is incorrect.
Chapter 10 103
g.
Transfers into and out of investment property may only occur when management intentions
have changed regarding the intended use of the property, such that the definition of
investment property will no longer be met, or the definition will be met when it previously had
not been met.
a) This statement is correct.
b) This statement is incorrect.
Question 10.2
Green Tree Limited acquired a property on 1 January 20X8 at a cost of C4.2 million. It was
immediately leased out as an investment property for a period of 1½ years until 30 June 20X9. On
1 July 20X9 the company took occupation of the property as its administrative headquarters.
The fair values of the property were determined as follows:

x On 31/12/20X8: C4 500 000
x On 01/07/20X9: C5 200 000
x On 31/12/20X9: C5 300 000
The accounting policy of the company is to depreciate buildings at 4% per annum on the
straight-line basis. The company adopts the cost model for property, plant and equipment and
the fair value model for investment properties.
Required
a) Prepare DQ H[WUDFW IURP WKH QRWHV WR WKH ILQDQFLDO VWDWHPHQWV VKRZLQJ WKH µVWDWHPHQW RI
FRPSOLDQFH¶ DQG µEDVLV RI SUHSDUDWLRQ¶ QRWHV DV ZHOO DV WKH DFFRXQWLQJ SROLF\ QRWHV IRU
µSURSHUW\SODQWDQGHTXLSPHQW¶DQGIRUµLQYHVWPHQWSURSHUW\¶
b) Prepare an extract from the profit before tax note for the year ended 31 December 20X9.
c) Prepare an extract from the statement of financial position at 31 December 20X9.
Supporting notes are not required.
Comparatives are required
Question 10.3
Mountain Properties Limited is a property development company. You have been approached
by the newly-appointed financial accountant, Mr Peak, for advice on IAS 40 Investment
property. Mr Peak has provided you with the following list of issues relating to the investment
properties that had occurred during the year:
Issue 1
2Q-XO\;DPDVVLYHODQGVOLGHGDPDJHGWKHSURSHUW\RQZKLFKWKHFRPSDQ\¶VKHDG-
office was situated. Its head-office was immediately relocated to its Himalaya property. The
Himalaya property was previously let to tenants under an operating lease. The fair value of
the Himalaya property was as follows:
C
31 December 20X6 21 420 000
31 July 20X7 21 840 000
As at 31 July 20X7:
x the land element of the property is C5 040 000; and
x the property had an estimated remaining useful life of 20 years.
104 Chapter 10
Issue 2
x On 30 November 20X7, Mountain decided that two investment properties should be sold:
Andes Property Fuji Property
Fair value: 31 December 20X6 C12 600 000 C16 800 000
Fair value: 30 November 20X7 C11 760 000 C17 220 000
x The Andes Property is to be sold after redevelopment.

Redevelopment of the Andes Property commenced on 30 November 20X7.
x The Fuji Property is to be sold without redevelopment.
Issue 3
During 20X7, two new investment properties were bought for a total of C71 400 000. Legal
and transfer fees were an extra C1 680 000.
x The company uses the cost model for property, plant and equipment and the fair value
model for investment properties. All properties measured under the cost model are
depreciated on the straight-OLQHEDVLVRYHUWKHDVVHW¶VXVHIXOOLIH
x The combined fair value of the investment properties is as follows:
C
31 December 20X6 420 000 000
31 December 20X7 525 000 000
Required:
a) Explain how issues 1, 2 and 3 should be accounted for in the financial statements of
Mountain Properties Limited for the year ended 31 December 20X7.
b) Calculate the fair value adjustment in respect of investment properties to be recognised in
profit or loss for the year ended 31 December 20X7.
Question 10.4
Charles Class, the CEO of a small property company called Charlies Spot Limited, purchased two
properties in a remote area called Een Boom Sonder Blare. He is currently seeking advice on how
to classify and measure the properties for the financial year ending 31 December 20X2.
The details of the properties (both purchased on 1 January 20X2) are as follows:
x A block of flats, costing C500 000 (to lease out to tenants);
x An office-block, currently being constructed: costs to date are C100 000 (to be leased out to
tenants). This office block is expected to be completed on 31 October 20X3. Due to the
desperate shortage of office blocks in the surrounding area, Charles believes that a fair value for
this office block will be available immediately on (or shortly before) completion of construction.
No-one currently lives in Een Boom Sonder Blare and, therefore, fair values for both
properties are currently not reliably determinable: there are no comparable market
transactions and, until both the block of flats and office block are occupied, an alternative
reliable estimate is not possible (a reliable estimate based on discounted future cash flows
projections is not possible until both blocks are occupied).
Charles expects that, give or take a few months after the construction of the office block is
complete, the combined existence of these two properties will encourage developers to
construct more property in the area, in which case, the properties will become valuable and
fair values will become reliably determinable on a continuing basis.
Charles has indicated that he would want his properties to be measured at fair value.
Chapter 10 105
Required:
Write a letter to Charles explaining how his properties should be classified and measured in
the financial statements for the year ending 31 December 20X2.
Question 10.5
Victoria Property Group owns three properties. The financial accountant is in the process of
preparing the financial statements for the year ended 31 August 20X5 and has asked for your
help with accounting for the properties. In this regard, she furnished you with a Post-It note on
which she had scrawled all the relevant information:
PPE = COST MODEL, INVESTMENT PROP = FV MODEL

No impairment indicators found when assessed during the year.
If asset to be depreciated, use straight-line.
Rodeo Drive: Bought 1 Sept X4 @ C7 500 000. A portion was allocated
to value of the land, calculated at C825k. Used as our warehouse. At
year-end, other similar warehouses in the area @ the same size were
being sold for C9 240 000.
Estimated UL= 40 years. Residual value = nil
Jimmy Walk: Purchased 1 March 20X3 to rent out. Cost C11 220k.
Was disclosed @ FV of C16 830k in last year’s AFS.
This year, Victoria upgraded the property (more parking plus extra
rentable rooms) at a cost of C10 230k, resulting in a new municipal
valuation at year end of C31 020k (good indication of FV) and also
resulted in increased rent.
Estimated UL = 20 years Residual value = nil
Fifth Avenue: This was purchased 8 months ago, at a cost of
C13 860k, with the intention of capital appreciation. Very specialised
property though and seems impossible to measure FV. Currently
rented out to animal lobbyist group.
Estimated useful life = 40 years Residual value = C200 000
Required:
Outline, giving reasons, how Victoria Property Group should account for these properties in
the financial statements for the year ending 31 August 20X5.
Question 10.6
Gary Limited and its subsidiary, Fairvalue Limited, need help in accounting for their properties:
a) It owns a 6-storey block of flats: 3 storeys are occupied by Gary and used for administration
purposes and 3 storeys are vacant but are expected to be leased out in the near future.
b) It owns an office consisting of 10 rooms: 3 of the rooms are used as an office by Gary while the
other 7 rooms are rented out. Ancillary services provided to the rooms are not significant.
c) Fairvalue Limited, which is a subsidiary of Gary Limited, is a property dealer. Its property
sales have dropped recently and thus the directors of Fairvalue have decided to diversify
their business. One property that it owns, a block of flats, will now be refurbished and
leased out under an operating lease. Another one of their properties that was previously
held for sale, a town house, will now be held for capital appreciation. Fairvalue uses the
fair value model to measure its investment property.
106 Chapter 10
Required:
For the above properties, discuss how they should be classified and measured:
in the financial statements of Gary Limited for parts (a) and (b); and
in the financial statements of Fairvalue Limited for part (c).
Question 10.7
Angazi Limited owns an office park that it developed during the current reporting period. It is
also a lessee in a number of properties held under lease agreements, where these properties
have been subsequently sub-leased under one or more operating leases.
Angazi¶V KHDG RIILFH LV VLWXDWHG LQ WKH RIILFH SDUN LQ one of the stand-alone buildings. The
balance of the office park, consisting of two further stand-alone properties, is let to tenants
under non-cancellable operating leases.
The Chief Executive Officer of Angazi Limited has insisted that the financial manager
measures all their properties using the cost model per IAS 16 Property, Plant and Equipment
since he believes this model is the cheapest measurement model to implement (as fair values
will not be required) and would have the least impact on the financial statements.
Required:
Prepare a letter to the financial manager of Angazi Limited explaining how these properties
should be classified and PHDVXUHG DOVR LQGLFDWLQJ ZKHWKHU WKH &KLHI ([HFXWLYH 2IILFHU¶V
assumptions are correct.
Question 10.8
On 31 August 20X8, Edwardes Limited moved its manufacturing division out of the property
that it owned on a freehold basis and into larger leased premises. This freehold property,
consisting of land and a factory building, was immediately leased out to an unrelated party
under a non-cancellable ten-year operating lease.
The freehold property had originally cost C10 400 000 (purchased on 1 January 20X3), on
which date its total useful life was estimated to be 25 years and its residual value was
estimated to be nil.
The freehold property was revalued for the first time on 31 December 20X6:
x the land was revalued upwards by C1 million to reflect its fair value; and
x the factory building was impaired by C1,8 million.
Further revaluations were performed on 31 August 20X8 and 31 December 20X8.
The following details pertain to the freehold land and factory building:
Land Building (25-year useful life)
&¶ &¶
Cost 1 January 20X3 2 400 8 000
Carrying amount 31 December 20X7 3 400 4 686
Fair value at 31 August 20X8 4 000 7 500
Fair value at 31 December 20X8 4 180 7 900
Land and buildings that are classified as property, plant and equipment are measured under
the revaluation model, using the net replacement cost basis and are depreciated using the
straight-line basis. Investment properties are measured under the fair value model.
Chapter 10 107
Required:
Prepare the journal entries to record all the matters relating to the freehold land and factory
building, including its change of use, for the year ended 31 December 20X8. Ignore taxation.
Question 10.9
Cloudy Limited has its head-office building located in Gabon Street in Marrakesh. It also
owned a building nearby in Kalahari Avenue that it rented to Wealthy Limited, a reliable and
reputable tenant.
Cloudy uses the fair value model to measure its investment properties and the cost model to
measure its property, plant and equipment.
On 30 September 20X8, a volcanic eruption destroyed the building in Kalahari Avenue. In

order to retain Wealthy as a tenant, Cloudy offered to lease 70% of its head-office building
square-PHWHUDJH WR WKHP DV D µUHSODFHPHQW¶ XQGHUDQ RSHUDWLQJ OHDVH7KH RSHUDWLQJ OHDVH
commenced with immediate effect, on 1 October 20X8.
Details relating to the head-office building in Gabon Street are as follows:

x The building was purchased on 1 April 20X8 and was depreciated at 10% per annum to
an estimated residual value of nil.
x Fair values were determined on 30 September 20X8 and 31 March 20X9.
x The cost and fair value details are as follows:
Cost price: 01 April 20X8 C2 820 000
Fair value: 30 September 20X8 C3 760 000
Fair value: 31 March 20X9 C3 854 000
x It is not possible for the 70% portion of the building to be separately sold or leased out to
a third party under a finance lease.
Required:
Prepare a memorandum to the financial director of Cloudy Limited explaining how the building
in Gabon Street should be recognised and measured in the financial statements for the year
ended 31 March 20X9. Suggested journals should be included in your letter.
You may use a single account to record movements in the head office’s carrying amount.
Ignore tax.
Question 10.10
Owlface Limited owns two buildings:

x a head office building located in Johannesburg; and
x another office building located in Pretoria.
7KH RIILFH EXLOGLQJ ORFDWHG LQ -RKDQQHVEXUJ LV XVHG DV 2ZOIDFH /LPLWHG¶V KHDG RIILFH $
minor earthquake, on 30 June 20X5, destroyed this building. The building in Johannesburg
had been purchased on 1 January 20X5 for C1 200 000. The building has a total useful life of
10 years and a residual value of nil.
The property in Pretoria was leased under an operating lease to a tenant, Spider Limited. After the
earthquake, Owlface Limited urgently needed new premises for its head office. Since Spider Limited
was always late in paying their lease rentals, Owlface Limited decided to evict them and move its
head office to this building in Pretoria. This eviction and relocation was effective from 30 June 20X5.
108 Chapter 10
Additional information regarding the building in Pretoria:

x It was purchased on 1 January 20X5 for C500 000.
x On 30 June 20X5, its fair value was C950 000.
x There was no change in fair value at 31 December 20X5.
x The total useful life was estimated to be 10 years from date of purchase and the residual value
was estimated to be nil.
Owlface Limited uses:

x The cost model to measure its property, plant and equipment; and
x The fair value model for its investment properties.
Required:
a) Journalise the above in the books of Owlface Limited for the year ended 31 December 20X5.
Ignore tax.
b) 'HILQHµLQYHVWPHQWSURSHUW\¶DQGµRZQHU-RFFXSLHGSURSHUW\¶
c) Define fair value and explain how it is calculated.
Question 10.11
Snake Limited is in the construction industry. It constructs buildings for resale, for leasing and
for private use.
A building that Snake Limited had constructed in Cape Town (at a cost of C800 000), and which was
held for sale in the ordinary course of business, had been on the market for 2 years and was still not
sold. On 1 March 20X5 Snake Limited took it off the market and instead leased it to tenants.
Its fair value was C1 500 000 on 31 December 20X5 and C1 000 000 on 1 March 20X5.
The fair value of a building in Bloemfontein (which has always been leased to tenants) was
completed on 1 January 20X2 at a cost of C5 000 000. Its total estimated useful life was 10
years (this has remained unchanged). Its fair value has never previously been determinable,
but during 20X5, conditions changed and the fair value as at 31 December 20X5 was
measured at C9 800 000. Since a fair value is now available, the accountant wishes to either
measure the property under the fair value model from this point forward or estimate the
depreciation on the building using an estimated residual value of C1 000 000 (previously the
residual value was nil).
On 30 September 20X5, Snake Limited leased its old head office building in Durban to a tenant. The
original cost was C4 000 000 (acquired on 30 September 20X3), on which date the total useful life
was 10 years and its residual value was nil. The fair value was C3 700 000 on 31 December 20X5.
The fair value on 30 September 20X5 was equal to its carrying amount.
On 30 September 20X5, Snake Limited evicted the tenants from a building in Johannesburg
and moved its head office into the building. On this day, the fair value was C4 000 000, the
remaining useful life was 5 years and the residual value was C500 000. The fair value of this
building was C3 000 000 on 31 December 20X4.
The following additional information is relevant:

z All leases were operating leases.
z Rentals earned from the investment properties totalled C2 000 000.
z Rates paid totalled C1 000 000.
z Snake Limited applies the fair value model to its investment properties and the cost model
to its property, plant and equipment.
Chapter 10 109
Required:
'LVFORVH WKH LQYHVWPHQW SURSHUW\ QRWH DQG WKH SURILW EHIRUH WD[ QRWH LQ 6QDNH /LPLWHG¶V
financial statements for the year ended 31 December 20X5.
Ignore tax, comparatives and accounting policies.
Question 10.12
Sun Republic Limited owns The Palms, a building situated on the Durban beachfront.
x Sun Republic Limited purchased this building on 2 January 20X5 for C200 000 cash.
x There are no tenants in the building at present and Sun Republic Limited identified that
the building would be a prime investment as the area around The Palms was being
extensively developed.
x The business plan is that, once the surrounding area has been developed, this property
will probably attract a very high price, at which point it will be sold. The property does not
meet the criteria for classification as a non-current asset held for sale.
x The fair values of the building were as follows:
31 December 20X5 C250 000
x The tax authorities allow a deduction of 5% per annum on the cost of the building (not
apportioned for part of a year).
x The corporate income tax rate is 30%. Taxable capital gains are calculated by the tax
authorities at 50% of the capital gain. The base costs equalled the original cost price.
x The building, when purchased, was determined to have a useful live of ten years and a nil
residual value.
x Sun Republic Limited accounts for all investment property using the fair value model.
Required:
Prepare the journal entries to account for the building, using Sun Republic Limited's general
journal, for the year ended 31 December 20X5, 20X6 and 20X7.
110 Chapter 10
GAAP: Graded Questions Impairment of assets
Chapter 11
Impairment of assets
Question Key issues

11.2 Tartan Determining impairment losses and impairment loss reversals:
x Cost model and impairment testing
x Investment property and impairment testing
11.3 Rummy Impairment losses and Impairment loss reversals:
x Cost model ± scenario 1 and 2
x Revaluation model ± scenario 3, 4 and 5
11.4 Willie Wonker Whether the recoverable amount should be calculated:
x Previous calculation of recoverable amount is available
x External and internal indicators of impairment exist
x Intangible asset not yet available for use
11.5 Pinkie & the Recoverable amount calculation focusing on value in use calculation:
Brain x identifying the relevant cash flows
x calculating value in use (discount rate given)
x calculating recoverable amount
11.6 Contain-It Impairment loss and impairment loss reversal:
PPE: Revaluation model - Non-depreciable
11.7 Tuna Value in use calculation involving:
x an asset that generates foreign currency cash flows
11.8 - Part A: True / False - Core concepts:
Cash generating units (CGUs)
Part B: Short explanations ± Core concepts:
Allocation of impairments and impairment reversals to individual
assets within a CGU (no corporate assets)
11.9 Boom Impairment of cash generating units (CGUs):
Part A: Allocation of impairment loss to individual assets in a CGU (with no
corporate assets)
Part B: $OORFDWLRQRILPSDLUPHQWORVVWRYDULRXV&*8¶VZLWKFRUSRUDWHDVVHWV
11.10 Elna Impairment losses of a single CGU involving:
x goodwill
x scoped out assets
x recoverable amount for certain assets is known
11.11 Nicky Impairment of two CGUs:
x recoverable amounts for individual assets not known; but
x fair value less costs of disposal for certain assets is known.
Part A: with no corporate assets and with no goodwill
Part B: with corporate assets but with no goodwill
Part C: with corporate assets and with goodwill
11.12 Miss Fortune Reversal of impairment losses of a CGU involving:
x goodwill
x assets measured under the cost model and revaluation model
x recoverable amounts for certain assets are known
Further questions incorporating this topic with other topics can be found in
Chapter 11 111
Question 11.1
a.
Consider the following statements regarding µrecoverable amount¶ in context of IAS 36 Impairment of assets:
1. The recoverable amount is the greater of value in use and fair value.
2. The recoverable amount must be calculated annually.
3. When calculating recoverable amount, the costs of disposal that we take into account
should not include finance costs and income tax expense.
c) Only 3 is correct
b.
Consider the following statements regarding WKH FDOFXODWLRQ RI µUHFRYHUDEOH DPRXQW¶ in context of
IAS 36 Impairment of assets:
1. µValue in use¶ reflects the present value of the net cash flows from using the asset
whereas µfair value less cost of disposal¶ reflects the present value of the net cash flows
from selling the asset.
2. When calculating the value in use of an asset, we should never include cash flows that
are based on projections that exceed a 5-year period.
3. When calculating value in use, we must use a pre-tax discount rate.

c.
Consider the following statements regarding WKH FDOFXODWLRQ RI µUHFRYHUDEOH DPRXQW¶ in context of
IAS 36 Impairment of assets:
1. All assets are tested for impairment in terms of IAS 36 Impairment of assets.
2. If an asset is impaired, the decrease in carrying amount will be recognised as an
impairment loss in profit or loss.
3. If an asset is impaired, the decrease in carrying amount will be recognised as an impairment
loss in other comprehensive income if it is measured under the revaluation model.

d) Only 3 is correct
d.
The carrying amount of an asset is C50 000, the value in use is C45 000 and the fair value is
C30 000 and the cost of disposal is C10 000.
a) The recoverable amount will be C20 000 and the impairment loss C30 000
b) The recoverable amount will be C30 000 and the impairment loss C20 000
c) The recoverable amount will be C40 000 and the impairment loss C10 000
d) The recoverable amount will be C45 000 and the impairment loss C5 000
112 Chapter 11
e.
A non-depreciated asset has a cost of C100 000. At the end of 20X1, it has a recoverable
amount of C80 000. At the end of 20X2, its recoverable amount is C140 000.
a) At the end of 20X1, an impairment loss of C20 000 will be processed.
At the end of 20X2, an impairment loss reversal of C60 000 will be processed
b) At the end of 20X1, an impairment loss of C20 000 will be processed.
At the end of 20X2, an impairment loss reversal of C40 000 will be processed.
c) At the end of 20X1, an impairment loss of C20 000 will be processed.
At the end of 20X2, an impairment loss reversal of C20 000 will be processed.
d) No entries will be processed because the asset is a non-depreciable asset.
f.
A depreciable asset was purchased on 1 January 20X1 at a cost of C100 000. It is depreciated
over a 5-year useful life to a residual value of nil. At 31 December 20X1, it has a recoverable
amount of C72 000. At 31 December 20X2, its recoverable amount is C55 000.
a) At 31 December 20X1, an impairment loss of C8 000 will be processed.

At 31 December 20X2, a further impairment loss of C17 000 will be processed
b) At 31 December 20X1, an impairment loss of C3 000 will be processed.
c) At 31 December 20X1, an impairment loss of C8 000 will be processed.
At 31 December 20X2, an impairment loss reversal of C1 000 will be processed
d) At 31 December 20X1, an impairment loss of C8 000 will be processed.
At 31 December 20X2, no journal will be processed as the impairment may not be reversed.
g.
A depreciable asset was purchased on 1 January 20X1 at a cost of C100 000. It is depreciated
over a 5-year useful life to a residual value of nil. At 31 December 20X1, it has a recoverable
amount of C72 000. At 31 December 20X2, its recoverable amount is C70 000.
a) At 31 December 20X1, an impairment loss of C8 000 will be processed.

b) At 31 December 20X1, an impairment loss of C3 000 will be processed.
c) At 31 December 20X1, an impairment loss of C8 000 will be processed.
d) At 31 December 20X1, an impairment loss of C8 000 will be processed.
Question 11.2
On 15 August 20X2, Tartan Limited purchased land in a remote area of the Eastern Cape at a
cost of C150 000. The land is held for future development into a retirement village that would
render rental income, though this development will only take place when transport links to the
area are made available. The land is measured under the cost model and is not depreciated.
Chapter 11 113
At each reporting date, the directors estimated the ODQG¶Vfair value less costs of disposal and value
in use (based on the intention to keep it for future development). These estimates are as follows:
Reporting date Fair value less cost of disposal Value in use
C C
31/12/X2 165 000 195 000
31/12/X3 135 000 180 000
31/12/X4 120 000 135 000
31/12/X5 180 000 165 000
On 31 March 20X6 the government cancelled all plans to provide transport to the area. There
is no prospect of selling the land and there appears to be no potential alternative use for this
land. The cost to Tartan Limited of developing their own transport links exceeds the present
value of the expected net inflows from operating the retirement village.
Required
a) Briefly explain whether the newly acquired land is required to be tested for impairment in
terms of IAS 36 Impairment of assets.
b) State the amount at which the land should be recorded in the statement of financial
position at 31 December 20X2 to 31 December 20X5, inclusive.
c) Prepare any journal entries that are needed in relation to the land at each of the above
reporting dates.
d) Describe, giving reasons, how Tartan Ltd should account for the cancellation of the
transport plans on 31 March 20X6.
Question 11.3
Rummy Limited has been experiencing declining sales in the past year. It owns a single
factory plant. Imagine each of the follow five scenarios relating to the plant at 31 December
20X2 (all amounts reflected in the table are measurements as at 31 December 20X2):
Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Measurement model Cost Cost Revaluation Revaluation Revaluation
model model model model model
Actual carrying amount C23 000 C20 700 C27 600 C20 700 C20 700
Historical carrying amount C23 000 C23 000 C26 450 C23 000 C23 000
(depreciated cost)
Recoverable amount C18 400 C27 600 C23 000 C27 600 C27 600
Fair value C15 000 C15 000 C27 600 Unknown C24 150
Depreciated fair value C24 150
See note 1 See note 2
Note 1: In scenario 4, the actual carrying amount at 31 December 20X2 is currently less than its
depreciated fair value because it had been impaired in a prior year.
Note 2: In scenario 5, the actual carrying amount at 31 December 20X2 is currently less than its
depreciated fair value because it had been devalued in a prior year.
Required:
Provide the adjusting journals for each of the above scenarios.
Question 11.4
Willie Wonker, a famous sweet maker, is in a sticky situation; he knows all there is to know
about making delightful confectionaries but very little (nothing in fact) about IFRS. Willie is in
a quite a state as he wants to comply with IFRS but is struggling with working out if his assets
are impaired. Having just consumed his fourth Seriously Smart Sugar Sherbet he had a bright
idea and decided to call in an IFRS expert.
114 Chapter 11
Willie Wonker owns the following non-current assets:

x Jelly Bean Machine;
x Seriously Smart Sugar Sherbet Machine;
x Brain Boosting Bar Recipe; and
x Wonker Bar Chocolate Machine.
Jelly Bean Machine:
This machine was purchased many years ago (so many that Willie cannot remember ever
actually buying it) and has been happily producing delicious beans since that date.
At the end of the previous financial year, the accountant, Violet, who subsequently left due to
an incident with a bubble-gum machine, decided that the Jelly Bean Machine was so old it
had to be impaired. However, despite the recent rapid advancement in technology, upon
performing a detailed IFRS-compliant assessment at the end of the prior year, she
determined that its recoverable amount, being the value in use, was double that of its carrying
amount. As a result, no impairment was processed.
During the current year, the market interest rate for Jelly Bean production (which Violet originally
used to calculate the value in use) had remained the same. However, because it is now one year on
and thus the machine is older than when Violet performed her assessment, Willie is considering
calculating its recoverable amount and comparing it to the carrying amount.
Seriously Smart Sugar Sherbet Machine:
There was a recent dramatic drop in sales of Seriously Smart Sugar Sherbet, a product
historically sold in mass quantities. The drop in sales occurred after the Candy Cane Police
raised concerns that the sherbet made people less intelligent.
An urgent interdict, preventing Willie Wonker from selling the sherbet without each packet of
sherbet labelled with a health warning, was passed down by the High Candy Cane Court.
This case was a high-profile case and featured on the front page of almost every newspaper
at the time. The impact of this negative publicity had an immediate and profound effect on
sales of sherbet, evidenced by internal sales forecast data showing plummeting sales.
The damage to the brand name is considered to be so severe that it is unlikely that the sales
of sherbet will ever fully recover.
Willie is distraught as the demand, immediately before the High Candy Cane Courts urgent
interdict, had been expected to remain strong.
Brain-boosting Bar Recipe:
In a furious rage, Willie Wonker purchased the recipe for a Brain-Boosting Bar which he
hoped would replace the lost demand from the sherbet. Although not ready for immediate use
the recipe is sure to be a success.
Willie is currently registering the recipe in his own name. This is expected to be finalised
within the next financial year.
Wonker Choc Bar Machine:
As the financial year has been so hectic, Willie was unable to find any data for the Wonker
Choc Bar Machine. The only information that Willie has is shown below:
1HWDVVHWYDOXHRIWKHHQWLUHµ:LOOLH:RQNHU(PSLUH¶ C150 000 000

Market price per share 13.50
Chapter 11 115
The number of shares in issue, at the end of the current financial year, are 10 000 000. The
net asset value shown above was calculated before taking into account the total impairment
losses of C5 000 000 relating to the assets other than this machine. Willie would like to test
the Wonker Choc Bar Machine for impairment but is not sure how to go about it.
Required:
Explain whether the recoverable amount must be calculated for each of these assets.
Question 11.5
Pinkie and The Brain are currently planning world domination. However, an unexpected hiccup has
delayed the process. While Pinkie and The Brain were preparing the Laser Beam for use, their
accountant came rushing through, in quite a state, to inform them that, in order to comply with IFRS,
they will have to perform an impairment test on the Laser Beam, but that he did not know how to do
this test. Having previously received an award for their exceptional financial reporting in the past,
they agreed that they should always adhere to the IFRS requirements and thus dropped what they
were doing to help the accountant determine the recoverable amount of the Laser Beam.
The fair value less costs of disposal of the Laser Beam was easy to ascertain as there is an
active market, the Black Market, for these types of assets. The fair value less costs of
disposal was determined to be C165 000 000.
The value in use, however, is proving to be more difficult to estimate. The following items were
available, but Pinkie and The Brain are unsure which ones to include in the value in use calculation:
20X7 20X8 20X9

C C C
Cash inflows directly attributable to the Laser Beam 60 000 000 60 000 000 60 000 000
Depreciation (1 000 000) (1 000 000) (1 000 000)
Necessary maintenance expense to operate the Laser Beam (2 000 000) (2 000 000) (2 000 000)
Salaries of admin staff (2 500 000) (2 500 000) (2 500 000)
Sale of Laser Beam in 20X9 - - 50 000 000
Alterations planned in 20X7 to enhance the Laser Beam (5 000 000) - -
Additional inflows from the alteration - 10 000 000 10 000 000
Pinkie and The Brain have correctly determined that a pre-tax discount rate of 13% is appropriate.
Required:
a) Briefly outline what cash flows should be included in the value in use calculation.
b) Determine the value in use of the Laser Beam at the financial year end 20X6, briefly explaining
why each of the abovementioned items are included or excluded from this calculation.
c) Calculate the recoverable amount of the Laser Beam at the financial year end 20X6.
Question 11.6
Contain-it Limited offers safe and easily accessible container-based storage for its customers
on a piece of land situated between Durban and Umhlanga. The land was bought on the date
RIWKHFRPSDQ\¶VLQFRUSRUDWLRQ-Dnuary 20X6) for C800 000. The land is measured under
the revaluation model and is not depreciated.
A year later, due to an influx of people and immense property development in the area, both
the value of the land and the profitability of the company increased. An independent valuer
measured the land's fair value at C1 080 000 as at 31 December 20X6. The next revaluation
is scheduled for 31 December 20X9.
116 Chapter 11
Until 20X7, there had been no previous indications of an impairment, but during the course of 20X7,
other storage companies moved into the area and reduced Contain-it Limited's profitability. The
reduced profit projections were considered to be an indication of an impairment and thus the land's
recoverable amount was calculated at 31 December 20X7 using the following information:
x the fair value and cost of disposal are estimated at C600 000 and C75 000, respectively;
x the value in use was C500 000.
Required:
Show the journal entries that would be processed from 1 January 20X6 to the year ended
31 December 20X8 assuming that the following amounts apply at 31 December 20X8:
a) fair value of C780 000, costs of disposal of C0 and value in use of C700 000.
b) fair value of C840 000, costs of disposal of C0 and value in use of C700 000.
Ignore tax.
Question 11.7
Tuna Limited is based in the United States (functional currency: $). Its current financial reporting date
is 31 December 20X1. Tuna owns a plant located and used in South Africa (currency: R).
Tuna expects to use this plant for a further two years after which it will be sold. This
expectation is reflected in the following forecast of the net cash flows from this plant over
these remaining two years:
20X1 20X2 20X3
Net cash inflows from usage R150 000 R80 000
Net cash inflow from disposal - R10 000
Expected average spot rates R8.0: $1 R9.0: $1
Expected closing spot rates R8.2: $1 R9.1: $1
Actual closing spot rates R8.5: $1
The relevant post-tax discount rate for South Africa based on risks in South Africa is 7% (pre-
tax discount rate: 10%) whereas the relevant post-tax discount rate for the United States
based on the risks in the United States is 8% (pre-tax discount rate: 9%).
7KHSODQW¶VIDLUYDOXHOHVVFRVWVRIGLVSRVDODW'HFHPEHU;KDVEHHQHVWLPDWHd at $20 000.
7KH SODQW¶V FDUU\LQJ DPRXQW DW 'HFHPEHU ; PHDVXUHG XVLQJ WKH FRVW PRGHO DQG EHIRUH
considering the information above, is $30 000.
Required:
a) &DOFXODWHWKHSODQW¶VYDOXHLQXVHWR7XQD/LPLWHGDVDW'HFHPEHU;
b) Process the necessary journal/s at 31 December 20X1, or explain why no journals are required.
Question 11.8
Part A
a) A cash generating unit is an identifiable group of assets that assist the company in
generating cash flows.
b) Some cash-generating units include assets that are excluded from the scope of IAS 36.
However, when assessing whether or not the cash-generating unit (CGU) is impaired, the
FDOFXODWLRQ RI WKH &*8¶V FDUU\LQJ DPRXQW PXVW LQFOXGH WKHVH µVFRSHG RXW¶ DVVHWV LI WKH\
were included in the calculation of the recoverable amount.
Chapter 11 117
c) We should always try to calculate the recoverable amount for each individual asset. The
only time we will be unable to calculate the recoverable amount for an individual asset is
when that asset does not generate cash inflows from continuing use that are largely
independent of those from other assets, in which case we must find out which cash
generating unit it belongs to, and include the asset when calculating the recoverable
amount of the cash generating unit instead.
d) A corporate asset is an asset, other than goodwill, that contributes to more than one cash
generating unit.
e) If a cash generating unit includes goodwill, and is found to be impaired, then the impairment is
first allocated against the goodwill and any excess impairment thereafter is allocated on a pro-
rata basis to the carrying amount of all other assets in the CGU.
Required:
Indicate whether the above statements are true or false and briefly justify your answer.
Part B
An accountant has asked for help in understanding certain aspects of IAS 36 Impairment of
assets. In this regard, you have been asked the following questions:
a) How are impairment losses allocated to the individual assets within a cash generating unit,
where the cash generating unit contains goodwill but no corporate assets.
b) How are impairment loss reversals allocated to the individual assets within a cash generating
unit, where the cash generating unit contains goodwill but no corporate assets.
Required:
Provide brief explanations to the short questions posed above.
Question 11.9
Part A
Boom Limited has a cash generating unit, made up of the following assets and liabilities.
Assets Carrying amounts Recoverable amount
C C
Plant A 189 000 unknown
Plant B 105 000 unknown
Machinery 21 000 unknown
Total carrying amount of CGU 315 000 252 000
Required:
Calculate how much of the impairment loss must be allocated to each of the items in the
cash-generating unit.
Ignore tax.
Part B
Bang Limited has 3 cash generating units (CGU-A, CGU-B and CGU-C) and 2 corporate assets: a
head office building and a research centre. The research centre is only used by CGU-A and CGU-B,
but all three CGUs benefit from the head office building.
The corporate assets are allocated to the CGUs, where appropriate, based on their relative
carrying amounts.
118 Chapter 11
Carrying amounts Recoverable amounts

C C
CGU ± A (excluding corporate assets) 840 000 630 000
CGU ± B (excluding corporate assets) 1 260 000 1 050 000
CGU ± C (excluding corporate assets) 420 000 315 000
2 520 000 1 995 000
Head office building 630 000
Research centre 126 000
Total carrying amount 3 276 000
Required:
Calculate the impairment loss relevant to each of the cash-generating units.
Ignore tax.
Question 11.10
Elna Limited has a division that is considered to be a cash-generating unit for purposes of
IAS 36 Impairment of assets. Its recoverable amount at 31 December 20X7 is C130 000.
The carrying amount of the cash-generating unit is C181 000 at 31 December 20X7,
constituted by the following individual carrying amounts as at this date:
x Goodwill (purchased goodwill): C20 000
x Investment property (measured under the cost model): C81 000
x Inventory: C20 000
x Equipment (measured under the cost model): C60 000.
The recoverable amounts at 31 December 20X7 for the goodwill and investment property could not
be estimated on an individual basis, but the recoverable amount for equipment was estimated to be
C40 000. In accordance with IAS 2 Inventory, the net realisable value of the inventory was C15 000.
Required:
Calculate whether the cash-generating unit is impaired and process any necessary journal/s.
Ignore tax.
Question 11.11
Part A
Nicky Limited has two divisions:

x a Durban-based division, manufacturing a well-known brand: 'Hassle-Free' computers, and
x a Cape Town-based division, manufacturing a well-known brand: 'Trendy Designs' clothing.
Each of these divisions (the computer division and the clothing division) operates as a cash
generating unit (CGU). The following are the carrying amounts of the assets within each of the
CGUs as at 31 December 20X9, after depreciation had been processed:
Assets Computer division (CGU) Clothing division (CGU)
C C
Equipment 800 000 900 000
Furniture 600 000 500 000
Investment property 1 200 000 1 000 000
Vehicles 400 000 -
3 000 000 2 400 000
All the assets are measured under the cost model.
Chapter 11 119
Due to the recent recession, the recoverable amounts of each of the cash-generating units needed
to be calculated, the recession being an indication of possible impairments. The recoverable amount
of each cash generating unit at 31 December 20X9 was determined as follows:
x the computer division recoverable amount: C2 800 000; and
x the clothing division recoverable amount: C2 175 000.
The furniture's fair value less costs of disposal at 31 December 20X9 was determinable:
x furniture in the computer division: C500 000; and
x furniture in the clothing division: C400 000.
Required:
Prepare the necessary journals for the year ended 31 December 20X9. Ignore tax.
Part B
Use the information provided in Part A together with the following additional information.
x 7KHDGPLQLVWUDWLRQRIWKHWZRGLYLVLRQVWDNHVSODFHLQ1LNN\/LPLWHG¶VKHDGRIILFH
x The following are the carrying amounts of the head office's assets (i.e. corporate assets)
as at 31 December 20X9, after depreciation had been processed:
Head office
Corporate assets C
Equipment 100 000
Investment property 800 000
Vehicles 100 000
1 000 000
x All the assets are measured under the cost model.

x The vehicles owned by the head office only benefit the clothing division.
x The remaining head office assets can be reasonably and consistently allocated to each
cash-generating unit.
Required:
Prepare the necessary journals for the year ended 31 December 20X9. Ignore tax.
Part C
Use the information provided in Part A and Part B together with the following information.
x Nicky Limited had acquired the divisions by purchasing them from another entity.
x The purchase consideration exceeded the fair value of the net assets by C450 000.
Required:
Prepare the necessary journals for the year ended 31 December 20X9.
Ignore tax.
Question 11.12
Miss Fortune, a notorious gambler and venture capitalist, purchased what appeared to be a
lucrative business venture. However, due to an unexpected legislative restriction imposed by
the courts during 20X5, the profits from this business began to drop. As a direct result, this
business, a cash generating unit (CGU) per IAS 36 Impairment of assets, was impaired for
the first time to C1 350 000 on 31 December 20X5.
120 Chapter 11
The details of the carrying amounts for each of the individual assets before and after this
impairment are shown below:
Carrying amount before Carrying amount after
impairment impairment
C C
Goodwill 180 000 0
Investment property 360 000 342 000
Plant 540 000 432 000
Furniture 720 000 576 000
1 800 000 1 350 000
All the assets in the cash-generating unit were measured using the cost model with the
exception of the plant, which was measured using the revaluation model.
The plant was originally purchased on 1 January 20X2 for C810 000. It was depreciated on
the straight-line basis over 10 years to a nil residual value.
This plant was revalued on 1 January 20X5, (its first revaluation), to its fair value of C630 000
on that date. Revaluations are accounted for on the net replacement value method (i.e. the
elimination method referred to in IAS 16.35(b)) and the related revaluation surplus will be
transferred to retained earnings on disposal of the plant.
At 1 January 20X6, the variables of depreciation for each of the depreciable assets in the
cash-generating unit were:
x Investment property: 5 years remaining useful life, straight-line to a nil residual value;
x Plant: 6 years remaining useful life, straight-line to a nil residual value;
x Furniture: 4 years remaining useful life, straight-line to a nil residual value.
During 20X6, business took a turn for the better, with the courts lifting the legislative restriction that
had been imposed in 20X5. The recoverable amount of the business was determined to be
C1 620 000 on 31 December 20X6.
Although the recoverable amounts at 31 December 20X6 for some of the assets in the cash-
generating unit could not be determined on an individual basis, the recoverable amounts for each
of the following assets were able to be estimated:
x Investment property: C396 000; and
x Plant: C432 000.
7KHSODQW¶VUHFRYHUDEOHDPRXQWRI& 000 was calculated as its fair value less costs to sell
where its fair value was C450 000 and its selling costs were C18 000.
Required:
Journalise the impairment reversals at 31 December 20X6.
Ignore tax.
Chapter 11 121
GAAP: Graded Questions Non-current assets held for sale and discontinued operations
Chapter 12
Non-current assets held for sale and
discontinued operations
Question Key issues
Part A Individual non-current assets held for sale

12.2 Soldier Non-current asset held for sale reclassified from PPE under the cost model and
subsequent measurement (no tax)
12.3 Escape PPE reclassified to NCAHFS
- Prior measurement under the cost model
- PPE: impairment reversal before reclassification
- NCAHFS: impairment on reclassification and impairment after
reclassification
A: Without tax
B: With tax
12.4 Removal PPE reclassified to NCAHFS
- Prior measurement under the cost model
- PPE: impairment before reclassification
- NCAHFS: no adjustment on reclassification but impairment reversal after
reclassification
A: Without tax
B: With tax
12.5 Tossout PPE reclassified to NCAHFS
- Prior measurement under the revaluation model
- PPE: revaluation before reclassification
- NCAHFS: impairment on reclassification and impairment reversal after
reclassification (with limitations)
A: Without tax
B: With tax
12.6 Cutaway PPE reclassified to NCAHFS
- Prior measurement under the revaluation model (not previously impaired)
- PPE: revaluation before reclassification
- NCAHFS: impairment on reclassification and further impairment after
reclassification
A: Without tax
B: With tax
Continued on the next page …
122 Chapter 12
4XHVWLRQVFRQWLQXHG« Key issues
Part B Disposal groups held for sale

12.8 Lookatyar Measurement of a disposal group held for sale: initial and subsequent impairment
Allocation of impairment: includes scoped-out assets
12.9 Prakesh Initial impairment of disposal group held for sale and subsequent impairment
reversal: includes
- Goodwill; and
- Scoped-out assets
12.10 Coconuts Allocation of the impairment of a disposal group that includes:
- Goodwill; and
- Scoped-out assets (inventory and investment property under the fair value model)
12.11 Dough Allocation of the impairment of a disposal group on initial classification and on
subsequent measurement where the disposal group includes:
- Scoped-out assets
12.12 Luke Miller Allocation of the impairment of a disposal group on initial
classification and allocation of impairment reversal on subsequent
measurement where the disposal group includes:
- Goodwill; and
- Scoped-out assets (investment property under the fair value model)
Part C Discontinued operations

12.14 Conifer Identification of date from which discontinued operation is disclosed
Discontinued operation is a disposal group
No measurement adjustments
Tax effects ignored
12.15 Dorothy Identification of date from which disclosure as a discontinued operation is required
Discontinued operation is a disposal group
Measurement adjustments: on discontinuation and afterwards
Tax effects: current and deferred
12.16 Big Nic Disposal group and discontinued operation: sale of division as a single transaction
Measurement adjustments:
- On discontinuation: None
- After discontinuation: impairment of disposal group resulting in adjustments to
carrying amounts of assets both inside and outside the scope of the
measurement requirements of IFRS 5
12.17 Ithemba Comparison: discontinued operation and disposal group
Recreation Discontinued operation is not a disposal group
Measurement adjustments: on discontinuation and afterwards
Important note: Please assume in all questions that, unless otherwise stated, the estimated costs to
sell equal the estimated disposal costs.
Further questions incorporating this topic with other topics can be found in
Chapter 12 123
Part A Individual non-current assets held for sale
Question 12.1
a.
1. A µQRQ-FXUUHQWDVVHW¶Ls simply an asset that is not a current asset.

2. A µnon-current asset held for sale¶ is a non-current asset that is expected to be disposed of within
the next year.
3. A µnon-current asset held for sale¶ is a non-current asset that is expected to be sold in the next year.
4. A µnon-current asset held for sale¶ will have a carrying amount that will be recovered solely
through sale of the asset rather than the use thereof.
a) Only 1 is correct
b) Only 2 is correct
c) Only 2 and 3 are correct
d) Only 1 and 4 are correct
b.
A non-current asset that is expected to be sold but is not expected to be sold within a year from
reporting date, may not be classified as µheld for sale¶.
a) True
b) False
c.
A plant with a carrying amount of C192 000 (cost: C240 000) on 30 June 20X2 is to be immediately
FODVVLILHG DV KHOG IRU VDOH 2Q GDWH RI UHFODVVLILFDWLRQ DV µKHOG IRU VDOH¶ WKLV SODQW ZKLFK ZDV
measured under the cost model and which had never before been impaired, had a value in use of
C144 000, a fair value of C180 000 and expected selling costs of C6 000.
a) On 30 June 20X2, the plant¶s carrying amount will be C144 000 after recognising an impairment
(in terms of IAS 36 Impairment of assets) of C48 000
b) On 30 June 20X2, the plant¶s carrying amount will be C180 000 after recognising an impairment
c) On 30 June 20X2, the plant¶s carrying amount will be C174 000 after recognising an impairment
d) On 30 June 20X2, the plant¶s carrying amount will be C174 000 after recognising an impairment
(in terms of IFRS 5) of C18 000
e) None of the options (a-d) are correct.
d.
Non-current assets held for sale are not depreciated.

a) True
b) False
e.
A non-current asset that was previously classified as held for sale but no longer meets the criteria to
be classified as held for sale is to be measured at the lower of its current carrying amount in terms of
IFRS 5 and its recoverable amount calculated on the date that the criteria cease to be met.
Depreciation on the asset would resume from this date.
a) True
b) False
124 Chapter 12
f.
A non-current asset that is expected to be abandoned must QRWEHFODVVLILHGDVµKHOGIor VDOH¶

a) True
b) False
g.
An impairment of a non-current asset held for sale, where the impairment is in terms of IFRS 5, must
always be expensed in profit or loss. This applies even if the non-current asset held for sale was
previously measured under the revaluation model and for which there was a revaluation surplus
balance on date of reclassification to µheld for sale¶.
a) True
b) False
h.
a) Investment property is never classified as a µnon-current asset held for sale¶.

b) Investment property may be classified as a µnon-current asset held for sale¶ but it would not be
measured in terms of IFRS 5.
c) Investment property may be classified as a µnon-current asset held for sale¶ in which case it must
be measured in terms of IFRS 5.
d) Investment property may be classified as a µnon-current asset held for sale¶ in which case it must
be measured in terms of IFRS 5 if the property had previously been measured under the cost
model, but would not be measured in terms of IFRS 5 if the property had previously been
measured in terms of the fair value model.
e) Investment property may be classified as a µnon-current asset held for sale¶ in which case it would
need to be measured in terms of IFRS 5 if the property had previously been measured under the
fair value model, but would not be measured in terms of IFRS 5 if the property had previously
been measured in terms of the cost value model.
Question 12.2
Soldier Limited purchased a highly specialised machine for C1 440 000 on 1 July 20X1. This machine
was measured under the cost model with depreciation calculated on the straight-line basis over a
useful life of 6 years to a nil residual value. This machine was damaged in a flash flood on 1 April
20X4 but was still operational. The values immediately after the damage were as follows:
1 April 20X4: C
Fair value 672 000
Costs to sell 36 000
Value in use 702 000
Management held a meeting on 20 April 20X4 to discuss the possibility that this asset should be sold.
The reasons for the suggestion involved the damage incurred during the flood and considerations
regarding future alternative product lines for which the machine would no longer be required. This
meeting did not reach a conclusion since management could not agree upon a suitable selling price.
A subsequent meeting was held on 1 July 20X4 where management reached agreement on the
selling price and a task team was immediately appointed to find a suitable buyer. The values
immediately after the meeting on 1 July 20X4 were as follows:
1 July 20X4: C
Fair value 672 000
Costs to sell 48 000
Value in use 480 000
Chapter 12 125
Initially there seemed to be no response to the marketing of the machine at its fair value of C672 000,
but a few weeks before year end saw a sudden frenzy of offers from a number of different parties.
The highest bid was received on 30 December 20X4 of C768 000.
If the company accepts this offer, the selling costs would only be C24 000, being the legal fees to
draft the sale agreement, as this offer was made directly to the company instead of through the sales
agents and would thus not involve any sales commission.
Required:
Discuss how the machine must EHUHFRJQLVHGDQGPHDVXUHGLQ6ROGLHU/LPLWHG¶VILQDQFLDOVWDWHPHQWV
for the year ended 31 December 20X4 (include the necessary journals to support your answer).
Question 12.3
Part A Ignoring tax effects
Escape Limited owns only two items of property, plant and equipment, being a plot of land and a
plant, both of which are measured using the cost model.
x The land was purchased for C1 000 000 on 1 January 20X1. Land is not depreciated.
x The plant was purchased for C1 000 000 on 1 January 20X6. The plant is depreciated at 20% per
annum, on the straight-line basis to a nil residual value. These variables of depreciation have
remained unchanged since date of purchase.
Escape Limited used to manufacture compasses but with the advent of global positioning technology,
it decided to cease the manufacture of compasses and begin manufacturing GPS devices instead.
The directors have decided to sell the plant, which can only be used in the manufacture of
compasses. This decision was made on 1 April 20X8, on which date all criteria necessary for
reclassification as a non-current asset held for sale were met.
The following values related to this plant over the years since its purchase:
31 December 20X7: Fair value C250 000
Costs to sell C50 000
Value in use C270 000
1 April 20X8: Fair value C225 000

All impairments and/ or impairment reversals are considered material.
Required:
a) Show all journal entries relevant to the plant in the general journal for all years affected.
b) 'LVFORVH WKH HIIHFW RQ (VFDSH /LPLWHG¶V VWDWHPHnt of financial position, related notes and profit
before tax note for the year ended 31 December 20X8.
Accounting policies are not required. Ignore tax.
Part B Including tax effects
Use the same information provided in Part A but assume the following tax-related information:
x The tax authorities allow a wear and tear deduction of 25% of cost (not apportioned).
126 Chapter 12
Required:
a) Show all journal entries relevant to the plant in the general journal for all years affected.
b) DisclRVH WKH HIIHFW RQ (VFDSH /LPLWHG¶V VWDWHPHQW RI ILQancial position, related notes and profit
Tax and accounting policy notes are not required.
Question 12.4
Removal Limited owns a machine (the AinChint Model) that it had purchased for C800 000 on
1 January 20X6. This machine has always been measured under the cost model where depreciation
was provided at 20% per annum to a nil residual value using the straight-line method. None of the
variables of depreciation have ever changed.
1HZ WHFKQRORJ\ KDV UHFHQWO\ FRPH DERXW ZKLFK FRXOG LQFUHDVH 5HPRYDO /LPLWHG¶V RXWSXW
substantially. The new technology is included in the latest machine called the Zappemout Model. The
excited factory manager presented the amazing abilities of this new technology at the directors
meeting held on 1 April 20X8 and then the accountant presented the following amounts relevant to
the AinChint Model:
31 December 20X6: Recoverable amount C700 000
31 December 20X7: Recoverable amount C300 000
1 April 20X8: Fair value C250 000


After considering all information, a unanimous decision was taken at this meeting to dispose of the
AinChint Model, which was considered materially impaired, and to acquire the Zappemout Model without
delay. All criteria necessary for reclassification as a non-current asset held for sale were met on this date.
Required:
a) Prepare all related journal entries in the general journal for all years affected.
b) 'LVFORVHWKHHIIHFWRQ5HPRYDO/LPLWHG¶VVWDWHPHQWRf financial position, related notes and profit
Assume the following information regarding tax:

Required:
a) Prepare all related journal entries in the general journal for all years affected.
b) 'LVFORVHWKHHIIHFWRQ5HPRYDO/LPLWHG¶VVWDWHPHQWRIILQDQFLDOSRVLWLRQUHODWHGQRtes and profit
Tax and accounting policies notes are not required.
Chapter 12 127
Question 12.5
Tossout Limited owns only one item of property, plant and equipment being plant, which it has always
carried under the revaluation model, details of which follow:
Cost (1 January 20X1) C500 000
Depreciation 20% pa straight-line to a nil residual value
Fair value (1 January 20X2) C800 000
Tossout Limited always uses the net replacement method to account for changes in fair value.
On 1 April 20X3, the company decided to sell the plant. All the criteria necessary for reclassification
as a non-current asset held for sale were met on this date.
The following information was relevant on 1 April 20X3:

Fair value C500 000
There was no indication that this asset was impaired.
At 31 December 20X3 (the comSDQ\¶V\HDU-end) the following information was relevant:

Fair value C700 000
7KHFRPSDQ\¶VSROLF\LVWRUHYHUVHDQ\UHYDOXDWLRQVXUSOXVRQGLVSRVDORIWKHUelated asset.
Any difference between the carrying amount and fair value immediately before classification as non-
current asset held for sale, and any impairment and / or impairment reversals are considered material.
Required:
a) Show all journal entries relevant to the above information.
b) Disclose the effect on the statement of financial position, related notes and profit before tax note
for the year ended 31 December 20X3.
Assume the following information regarding tax:

x The tax authorities allow a wear and tear deduction of 25% per annum based on the cost of the
plant (not apportioned for part of a year).
Required:
Notes relating to tax and accounting policies are not required.
Question 12.6
Cutaway Limited owns only one item of property, plant and equipment being plant, which it has
always carried under the revaluation model, details of which are provided overleaf:
128 Chapter 12
Cost (1 January 20X1) C500 000

Fair value (1 January 20X2) C800 000
Depreciation 20% pa straight-line to a nil residual value
Cutaway Limited uses the net replacement method to account for changes in fair value.
On 1 April 20X3, the company decided to sell the plant. All the criteria necessary for reclassification
as a non-current asset held for sale were met on this date. The following information was relevant on
this date:
Fair value C650 000
Costs to sell/ Costs to dispose C50 000
There was no evidence that this asset was impaired.
At 31 DecembeU;WKHFRPSDQ\¶V\ear-end) the following information was relevant:

Fair value C500 000
The policy is to reverse the revaluation surplus on the eventual disposal of the related asset.
Required:
The situation is the same as in Part A. Assume the following information regarding tax:
x The plant has a base cost of C530 000.
x Capital gains are included in taxable income at 80% and are taxed at 30%.
Required:
Notes relating to tax are not required.
Part B Disposal groups held for sale
Question 12.7
a.
A disposal group is simply a group of non-current assets that are to be disposed of.
a) True
b) False
b.
Non-current assets held for sale arHFDUULHGDWWKHORZHURIWKHDVVHW¶VFDUU\ing amount and fair value
less disposal costs. This treatment is the same for a disposal group held for sale.
a) True
b) False
Chapter 12 129
c.
Each of the items in the disposal group must be measured to the lower of its carrying amount and fair
value less costs to sell.
a) True
b) False
d.
If a disposal group is impaired, the impairment loss will be allocated to all assets in the disposal group
in proportion to their relative carrying amounts before the adjustment.
a) True
b) False
e.
The classification, measurement and presentation principles in IFRS 5 Non-current assets held for
sale and discontinued operations are not always applied to every asset that qualifies as a non-current
asset held for sale.
a) True
b) False
f.
Current assets may be subject to the requirements of IFRS 5 Non-current assets held for sale and
discontinued operations.
a) True
b) False
g.
The impairment of a non-current asset held for sale, where the asset had previously been measured
to a fair value in terms of the revaluation model is first recognised as a revaluation decrease (i.e.
debited to the revaluation surplus, equity) until the revaluation surplus has a nil balance and
thereafter, the impairment is recognised in profit or loss.
a) True
b) False
h.
A cash-generating unit that meets the criteria to be classified as held for sale is the same as a
disposal group held for sale.
a) True
b) False
Question 12.8
/RRNDW\DU /LPLWHG LV D PDQXIDFWXUHU DQG UHWDLOHU RI FKLOGUHQ¶V WR\V It is split into the following 2
divisions:
x Manufacturing; and
x Retail.
The company was once renowned for its innovative designs. Recent years, however, have seen
profits slump due to the inability of Lookatyar Limited to keep up with technological advances in the
toy industry. As a result, the board has taken the decision to dispose of the manufacturing division
and source toys from a South Korean manufacturer.
130 Chapter 12
The resolution to sell the manufacturing division was passed on 1 October 20X4. All criteria to be
classified as held for sale was met on this date. The manufacturing division consisted of the following
assets: a factory building, machinery and investment property. The following values apply to the
manufacturing division during 20X4:
PPE: Factory building PPE: Machinery Investment property

C C C
1 October 20X4
Carrying amount 3 240 000 675 000 2 376 000
Cost 4 050 000 810 000 2 376 000*
Accumulated depreciation (810 000) (135 000) -
Fair value 3 078 000 607 500 2 308 500

Costs to sell 40 500 27 000 0
Value in use 3 510 000 702 000 N/A
31 December 20X4
Fair value 2 673 000 513 000 2 011 500
Costs to sell 54 000 18 900 35 000
*No fair value adjustment has yet been processed for the current year.
x Neither the buildings nor the machinery had been impaired before 1 October 20X4.
x Costs to sell can be assumed to equal costs of disposal.
x It is the accounting policy of Lookatyar to measure all property, plant and equipment under the
cost model and measure investment property under the fair value model.
Required:
Prepare all journals to record the reclassification and re-measurement of the manufacturing division
Question 12.9
Prakesh Limited is a construction company operating in the southern African region. Over the years, it
has profited from numerous international donations designed to develop the region. However, due to
political unrest in some of the countries, the board of directors has decided to divest from certain cash
JHQHUDWLQJXQLWV&*8¶VRSHUDWLQJLQsub- Saharan Africa. One such CGU operated in Zimbabwe.
7KHFDUU\LQJDPRXQWVRQ-DQXDU\;RIWKH=LPEDEZH&*8¶VRQO\DVVHWVZHUHDVIollows (there
were no liabilities):
C
Bob Cat Earth Removal Machinery Note 1 200 000
Nachtmusik Concrete Mixer Note 2 150 000
Singh Cement Mix Note 3 40 000
Goodwill Note 4 20 000
Note 1: Bob Cat Earth Removal Machinery
x The Bob Cat Earth Removal Machinery was purchased on 1 January 20X5 for C500 000.
x It has been accounted for using the cost model and depreciated over a useful life of
5 years to a nil residual value.
x It had never been necessary to test the machinery for impairments.
Note 2: Nachtmusik Concrete Mixer
x The Nachtmusik Concrete Mixer was purchased on 30 June 20X6 for C300 000.
x It is measured under the cost model and depreciated over 3 years to a nil residual value.
x It had never been necessary to test the mixer for impairments.
Note 3: Singh Cement Mix
x The inventory of Singh Cement Mix is accounted for in terms of IAS 2 Inventory.
Chapter 12 131
Note 4: Goodwill
x Goodwill arose a few years ago when Prakesh Limited acquired Amrit Limited, a medium
sized company operating in Zimbabwe.
x The goodwill had never been impaired.
On 30 June 20X8, the Zimbabwean CGU met all criteria to be classified as µKHOG for VDOH¶LQWHUPVRI
IFRS 5, on which date all operating activities ceased.
The fair values less costs to sell and net realisable values were as follows:
30/06/X8 31/12/X8
Inventory (cost) 50 000 50 000
Inventory (net realisable values) 28 000 55 000
Zimbabwean CGU (fair value less costs to sell) 200 000 320 000
Required:
Provide the journal entries for the above transactions for the year ended 31 December 20X8.
Question 12.10
Coconuts Limited was incorporated in 20X1. The company has built a good reputation and specialises
in providing refreshments at corporate events throughout South Africa.
x Coconuts was interested in expanding their line of business to include supporting social events,
such as those that involve hosting international music artists. The financial director of Coconuts
suggested acquiring Jellyfish Limited, a company that specialises in such social events and it was
a matter of months before Jellyfish was acquired, as a wholly-owned subsidiary.
x The entire Jellyfish operation was physically moved to the Coconuts Limited head office and the
only property owned by Jellyfish was then leased out to a third party.
x During a meeting on 1 August 20X2, the Coconut directors reached an agreement in principle,
that certain aspects of the social events operation ZDV GDPDJLQJ &RFRQXW¶V SURILWV. After many
lengthy meetings, a resolution to dispose of the group of assets and liabilities relating to these
FHUWDLQ DVSHFWV RI WKH µVRFLDO HYHQWV¶ RSHUDWLRQV ZDV ILQDOO\ UHDFKHG on 1 October 20X2. All
criteria for classification as held for sale were met on this date.
Immediately before the assets and liabilities were classified as µKHOGIRUVDOH¶WKH\ZHUHUH-measured (and
impaired where necessary) in terms of their own relevant standards to the following carrying amounts:
x Investment property (IAS 40) measured using the fair value model ± C276 000
x Investment property (IAS 40) measured using the cost model ± C184 000
x Inventory (IAS 2) ± C322 000
x Plant (IAS 16) measured using the cost model ± C690 000
x Purchased goodwill ± C115 000
x Trade payables ± C69 000
On the date that the group of net assets met all criteria for classification (1 October 20X2):
x The recoverable amounts were not able to be determined for any of the assets other than the
investment property measured in terms of the cost model, which was C184 000, and the plant,
which was C690 000.
x The net realisable value of inventory was C345 000 on this date.
x The fair value of the group of net assets was C1 403 000 and the related estimated costs to sell
were C92 000.
Required:
Journalise the reclassification and measurement of the disposal group on 1 October 20X2.
132 Chapter 12
Question 12.11
Dough Limited is involved in the production of plastic car parts that it supplies to Japanese and
German motor manufacturers.
Due to the economic recession prevalent in 20X4, one of Dough /LPLWHG¶VFustomers announced that
it would be discontinuing the production of all its vehicles, effective 1 January 20X5.
In an attempt to avoid potential losses, the board of directors of Dough Limited resolved to dispose of
the asset group that had been modified specifically for the manufacturer, in a single transaction. All
FULWHULDIRUUHFODVVLILFDWLRQDV³KHOGIRUVDOH´ZHUHPHWRQ December 20X4.
All of the assets were bought on 1 July 20X2 and have never been impaired. The details relating to
the various carrying amounts at 1 July 20X4 are provided in the table below:
Measurement Cost Depreciation rate/ Residual Carrying

model useful life value amount
Investment property Fair value 55 000 N/A N/A 88 000
Furniture Cost 110 000 10 years 0 88 000
Equipment Cost 220 000 20 years 0 198 000
The following values were determined for each of the assets on date of reclassification to non-current
assets held for sale (31 December 20X4):
Value in use Fair value Costs to sell

Investment property 66 000 77 000 5 500
Furniture 99 000 77 000 5 500
Equipment 231 000 187 000 16 500
Disposal group as a whole 320 000 6 500
During June 20X5, a smaller manufacturing company submits to Dough Limited an offer to purchase
the group of assets.
x The settlement price is agreed upon on 30 June 20X5 and is set at C300 000.
x This settlement price is considered to be a fair market price.
x Dough Limited has estimated that the cost to dispose of the assets would be C3 000.
x On this date, the investment property has an individual fair value of C75 900.
x The sale agreement is expected to be concluded and signed during July 20X5.
Required:
Provide all relevant journal entries for the year ended 30 June 20X5.
Question 12.12
Luke Miller is the newly appointed accountant of SOS Limited. On his first day, he found the following
memorandum on his desk from Betsy Great, the previous financial accountant.
Hi Luke,
As you are already aware, management has decided to dispose of a few of our assets to Opportunist
Limited. It’s a pity we did not get an opportunity to discuss the disposal before I left but here is some of
the relevant information to get you going:
x The decision to sell the group of assets (investment property, plant and purchased goodwill) was
taken on 30 September 20X0. I looked carefully at IFRS 5 and have concluded that all necessary
conditions for reclassification were met on this date.
Chapter 12 133
x Immediately prior to the reclassification on 30 September 20X0, the assets were correctly measured at:
x Investment property: fair value of C60 000
x Plant: depreciated cost: C100 000
x Goodwill: C30 000.
x At year-end, 31 December 20X0:
x Investment property: fair value of C150 000
x Plant: depreciated cost: C80 000.
x It has never been necessary to impair the plant.
The fair value less costs to sell of the disposal group as a whole was estimated as follows:
x 30 September 20X0: C140 000
x 31 December 20X0: C300 000.
I have not passed any journal entries nor has the trial balance been updated. Genevieve (the secretary on
the second floor) will have all the valuation records if you wish to see them.
I leave this in your very capable hands (the directors want to make sure everything is done right before
the auditors arrive).
Regards,
Betsy Great
Luke, immediately daunted by the unexpected challenge, has come to you for your assistance due to
his limited experience with IFRS 5.
Required:
Assist Luke Miller by providing him with the journal entries and relevant workings in order to account
for the above for the year ended 31 December 20X0.
Part C Discontinued operations
Question 12.13
a.
a) A discontinued operation is defined as a component of an entity that has either been disposed of
or has been classified as held for sale.
b) A discontinued operation is defined as a component of an entity that has been disposed of.
c) A discontinued operation is defined as a component of an entity that has been classified as held
for sale.
d) A discontinued operation is defined as a component of an entity that has either been disposed of
or has been classified as held for sale or is a subsidiary that has either been disposed of or has
been classified as held for sale.
e) None of the statements (a-d) are correct.
b.
1. A discontinued operation affects the presentation of the statement of comprehensive income in

that we are required to present a single line-item reflecting the profit (or loss) for the period from
the discontinued operation. The analysis of this line item may be presented either on the face of
the statement of comprehensive income or in the notes thereto.
134 Chapter 12
2. A discontinued operation does not affect the presentation of the statement of cash flows or notes
thereto.
3. A discontinued operation does not affect the presentation of the statement of financial position or
notes thereto.
4. A discontinued operation is presented in the statement of financial position as a single line item
representing its net assets. This line-item is then analysed in more detail in the notes to the
statement of financial position.
a) Only 1 and 4 are correct

b) 1, 2, 3 and 4 are correct
d) Only 2, 3 and 4 are correct
c.
If an operation met the definition of a discontinued operation during the reporting period (i.e. not on
the first or last day thereof), then:
a) the line-item µprofit or loss from discontinued operation¶ will only include the income and expenses
from the discontinued operation from the date the definition was met (the operation¶s income and
expenses arising before this date will be included with the entity¶s other income and expenses).
b) the line-item µprofit or loss from discontinued operation¶ will include the income and expenses from
the discontinued operation from the first day of the year in which the definition was met (prior year
disclosures will not be affected).
c) the line-item µprofit or loss from discontinued operation¶ will include the discontinued operation¶s
income and expenses for the entire reporting period, irrespective of what date the definition was
met, and the prior period figures will need to be re-presented as if the operation had been a
discontinued operation in that prior period/s.
d) None of the options (a-c) are correct
d.
a) The IFRS 5 measurement and disclosure requirements relating to discontinued operations are the
same as those that apply to non-current assets and disposal groups held for sale.
b) The IFRS 5 measurement requirements relating to discontinued operations are the same as those
that apply to non-current assets and disposal groups held for sale, but the disclosure
requirements differ.
c) The IFRS 5 disclosure requirements relating to discontinued operations are the same as those
that apply to non-current assets and disposal groups held for sale, but the measurements differ.
d) None of the options (a-c) are correct.
e.
A disposal group that is to be abandoned will be presented as a discontinued operation from the date
on which it meets the definition of held for sale.
a) True
b) False
Question 12.14
Conifer Limited is a company that manufactures both soccer balls and hosepipes. The company has
two divisions: the soccer ball division and the hosepipe division.
Chapter 12 135
The following is an extract from the current trial balance at 31 December 20X7 that is relevant to the
soccer ball division:
x Income and expense items C
- Revenue 123 750

- Cost of sales 49 500
- Other expenses 89 100
- Finance costs 0 4 455
- Income tax expense 0 2 475
x Assets
- Inventory 19 800
- Accounts receivable 4 125
- Equipment (cost C45 000) 55 935
x Liabilities
- Bank overdraft 0 24 750
- Accounts payable 74 250
x During 20X6, management identified a downward trend in the profitability of the soccer ball
diviVLRQ 7KLV GLYLVLRQ¶V SURILWV GHWHUiorated even further in 20X7. A number of meetings were
held to discuss the way forward.
x On 1 October 20X7, it was proposed that the soccer ball division be sold. Numerous lengthy
debates followed this proposal and finally, on 15 December 20X7, the proposal to sell the division
was agreed upon and this decision was documented in WKH PLQXWHV RI WKH GLUHFWRUV¶ ERDUG
meeting.
x The formal plan of sale, which detailed all relevant aspects and involved an aggressive approach
that would have the division sold within between 5 and 7 months, was presented and agreed
upon at this same meeting.
x A suitable buyer was identified in early January 20X8 and negotiations during February 20X8
culminated in the signing of a sale agreement on 23 March 20X8, effective from 1 May 20X8. The
agreement involved thHEX\HUWDNLQJRYHUDOOWKHGLYLVLRQ¶V assets and liabilities, including any contracts
outstanding on effective date. There is no indication that this signed contract will fail to be executed.
x The carrying amounts of all assets and liabilities are considered to reflect their fair values.
x The financial statements at 31 December 20X7 are due to be presented to the board on
2 April 20X8 for approval.
Required:
a) Identify the year in which the soccer ball division meets the definition of a discontinued operation,
providing a full discussion of the relevant definitions to support your answer.
b) Discuss how a discontinued operation could affect the presentation and disclosure of information
LQDQHQWLW\¶VILQDQFLDOVWDWHPHQWV
c) Disclose the above information in the notes to the financial statements of Conifer Limited for the
year ended 31 December 20X7 in conformity with International Financial Reporting Standards.
Assume that the entity does not include any detail in the statements when this detail can be
included in the notes instead. Comparatives are not required.
Question 12.15
Dorothy Limited currently has two divisions: a manufacturing and distribution division. On 30 August 20X1,
senior management decided to sell the distribution division as studies found that it would be more
cost effective to outsource the distribution of the inventory that is manufactured by the company.
136 Chapter 12
A formal plan outlining how the division would be disposed of was presented to and agreed upon by the
board of directors on 1 October 20X1. A team was immediately appointed to manage the disposal of the
division. By the close of business, this team had already prepared an advertisement for the sale of the
division. All parties agreed that the sale would be complete within nine months. It is expected that the team
tasked with managing the disposal of the division will be paid commission of C2 300.
Negotiations with a buyer began on 20 December 20X1 to sell the entire distribution division for C126 500.
During discussions with the potential buyer, it was agreed that all assets and liabilities reflected in the trial
balance (see extract below) were a fair reflection of their values with no impairments considered necessary,
with the exception of the following items each of which was considered overstated by C2 875:
x accounts receivable was considered overstated due to a loss allowance for expected credit losses
that had not yet been accounted for, and
x inventory was considered overstated due to items on hand that had been damaged in a recent
storm on 29 December 20X1 and no adjustments had yet been processed for this.
The sales contract was signed on 28 February 20X2, and was effective on 4 April 20X2.
The directors offered retrenchment packages totalling C11 500 to various employees due to the
discontinuance of the distribution division. The offer is legally binding and will be paid on 4 April 20X2,
when ownership of the division will be transferred. These expenses are not allowed as a tax
deduction as they are directly related to the decision to discontinue the operation and therefore are
not in the production of income.
None of the costs mentioned above were included in the trial balance at 31 December 20X1. The following is
an extract of balances relating to the distribution and manufacturing divisions at 31 December 20X1:
Distribution Manufacturing
Credit balances C C
Revenue (172 500) (7 500 000)
Plant: accumulated depreciation (103 500) (2 000 000)
Accounts payable (16 675) (600 000)
Debit balances:
Plant: cost 207 000 7 000 000
Deferred tax asset/ liability: 1 January 20X1 0 0
Deferred tax asset/ liability: 31 December 20X1 0 0
Accounts receivable 17 250 875 000
Inventory 28 750 1 125 000
Cost of sales 115 000 2 250 000
Other expenses 51 175 750 000
Income tax expense ± current tax ? 1 350 000
Income tax expense ± deferred tax ? 0
Plant is depreciated at 10% per annum on the straight-line basis to nil residual values. Depreciation
on the plant of C20 700 for the entire financial year has been LQFOXGHG LQ WKH µotKHU H[SHQVHV¶ OLQH
LWHPLQWKHGLVWULEXWLRQGLYLVLRQ¶Vtrial balance.
Tax-related information:
x Wear and tear is allowed as a tax deduction, calculated at 10% per annum on the cost price. This
allowance is apportioned for part of a year in the event that the asset is sold.
x Expenses that are in the production of income are allowed as tax deductions in the year that the
expenses are incurred, unless the expenses relate to provisions, in which case the expenses are
allowed as tax deductions in the year that the expenses are paid.
x Income tax is levied at 30% on taxable profits.
x There are no differences between accounting profit and taxable profit other than those evident
from the information provided.
Chapter 12 137
General information:
x There were no measurement adjustments required other than those that are evident from the
Required:
a) Identify, with reasons, the date at which the division would be classifieGDVµKHOGIRUVDOH¶
b) Explain whether the division should be presented as a discontinued operation.
c) Prepare the statement of comprehensive income of Dorothy Limited for the year ended
31 December 20X1 and disclose the note to the discontinued operation, the disposal group held
for sale and tax in accordance with International Financial Reporting Standards.
Question 12.16
Big Nic Limited owns many divisions across the country, some of which are involved in the manufacture
of stationery for office use and some of which are involved in the manufacture of cosmetics.
The profits earned by one of the divisions that specialises in the manufacture of anti-ageing cosmetics
have been dropping steadily ever since the economy went into decline following a world-wide slump
in the stock markets.
After reaching agreement that the economic slow-down was not expected to end any time soon, the
directors of Big Nic Limited agreed that the anti-ageing cosmetics division should be closed, signing a
formal plan for the disposal of the cosmetics division on 01 December 20X4. This decision was
announced publicly immediately after the meeting.
x It was agreed that the sale of the division as a whole would not render the greatest profits and thus it
was agreed that the division should be sold off in a piecemeal fashion.
x All the criteria necessary for classification as held for sale were met on the date that the agreement
was signed, at which point none of the assets in the cosmetics division were considered impaired in
terms of either IAS 36 Impairment of assets or IFRS 5 Non-current assets held for sale and
The draft extract of the trial balance of this cosmetics division at 31 December 20X4 is on the next page:
C
Building: carrying amount on 31 December 20X4 Note 1 671 000

Machinery: carrying amount on 31 December 20X4 Note 2 and Note 3 74 800
Inventory Note 3 140 800
Accounts receivable Note 3 94 600
Current tax payable Note 3 48 576
Accounts payable Note 3 68 640
Revenue 2 596 000
Other expenses Note 4 2 434 080
Disposal account Note 1 924 000
Note 1. On 15 December ; WKH GLYLVLRQ¶V EXLOGLQJ ZDV VROG IRU & 3D\PHQW IRU WKH
building was deposited in the bank and credited to a disposal account on this date. This
was the only entry processed for the sale of the building.
The building had been depreciated on the straight-line method over a useful life of ten years
to a nil residual value. The building had been purchased for C1 320 000 on 1 January 20X0.
138 Chapter 12
Note 2. Machinery is depreciated on the straight-line method over a useful life of ten years to a nil
residual value. The machinery had been purchased for C105 600 on 1 January 20X2.
Note 3. All remaining assets are expected to be sold by 1 July 20X5. Similarly, all accounts
payable are expected to be paid by 1 July 20X5.
The remaining assets have the following fair values at 31 December 20X4, although no
entries have yet been processed for this information:
x Machinery:
- Value in use: C110 000
- Fair value less costs to sell: C70 400
x Inventory
- Net realisable value: C129 800
x Accounts receivable:
- Cash expected to be received: C87 120
Note 4. Other expenses includes depreciation.
Other information:
x Retrenchment packages of an estimated C198 000 will have to be paid to employees who will lose
their jobs as a result of the termination of the cosmetics division.
It is expected that these packages will be paid to the employees in the first half of 20X5 after the
amount is finalised through negotiations with the trade unions.
These expected costs have not been recognised in the trial balance above.
Tax related information:

The taxation authorities:
x allow the deduction of the full cost of all non-current assets at a rate of 10% per annum (not
apportioned for part of a year).
x allow the deduction of inventory write-downs and doubtful debts adjustments in the year in which the
adjustment was made in the financial records.
x allow the deduction of the cost of retrenchment packages in the year in which they are paid.
x levy income tax at 30%.
There are no differences between accounting profit and taxable profit other than those evident from
the information provided.
Required:
a) Prepare the followLQJ IRU LQFOXVLRQ LQ %LJ 1LF /LPLWHG¶s financial statements for the year ended
31 December 20X4 in terms of International Financial Reporting Standards:
- the statement of comprehensive income (showing the analysis of discontinued operations on
the face thereof);
- the accounting policy notes for assets held for sale and for discontinued operations;
- the income tax expense note; and
- the discontinuing operations note.
Comparative figures are not required.
b) Explain to what extent your answer may have changed had the building been classified as an
investment property (i.e. had been accounted for as investment property) and not as an owner-
occupied property (i.e. had not been accounted for as property, plant and equipment).
Chapter 12 139
Question 12.17
Ithemba Recreation Limited currently operates in two divisions:

x Camping division: this division manufactures camping equipment;
x Cycling division: this division manufactures bicycles and related equipment.
On 30 September 20X4, the directors of Ithemba Recreation Limited drew up a formal plan to dispose
of the camping division since they wished to concentrate their resources on the more profitable
cycling division. They agreed that the disposal would take place on a piecemeal basis. The camping
division met the requirements for classification as held for sale on this same date, at which point all
necessary measurement adjustments were processed.
7KHFDPSLQJGLYLVLRQ¶VRQO\QRQ-current asset was machinery, purchased on 1 January 20X2 for C200 000:
x Machinery is depreciated at 10% per annum on the straight-line basis.
x The following values were estimated for machinery as at 30 September 20X4:
- value in use of C180 000; and
- fair value less cost to sell of C142 000.
On 29 December 20X4 all the machinery in the camping division was sold to Mr. Holte for C168 000
cash. This sale has not yet been processed by Ithemba Recreation Limited.
The carrying amount and tax base of the machinery equalled each other at 1 January 20X4.
Depreciation has been calculated correctly and included in µother expenses¶ at 31 December 20X4.
The directors of Ithemba Recreation have estimated that the disposal of the entire camping division
would be completed within the first half of 20X5.
An assessment of the value of the remaining assets within the camping division at 31 December 20X4
revealed the following:
C
Accounts receivable at 31 December 20X4 (expected cash flow) 156 000
Inventory at 31 December 20X4 (net realisable value) 33 000
All accounts payable balances at 31 December 20X4 will be paid by Ithemba Recreation in January 20X5.
The following summarised draft trial balance was extracted from the books of Ithemba at
31 December 20X4 immediately prior to processing year-end adjustments.
Information relating to the

Total camping division included
in the total
20X4 20X3 20X4 20X3
C C C C
Share capital 600 000 600 000
Retained earnings 509 895 171 885
Revenue 3 282 000 2 334 000 582 000 601 200
Accounts payable 67 500 75 000 30 000 37 500
4 459 395 3 180 885
Machinery at carrying amount: 31 December 1 019 760 720 000 142 000 160 000
Inventory 263 685 156 000 42 000 81 000
Accounts receivable 168 000 192 000 168 000 192 000
Cash 229 650 116 895
Cost of sales 2 100 000 1 400 000 420 000 350 000
Other expenses 498 300 279 700 78 300 29 200
Dividends paid 180 000 120 000
Income tax expense ? 196 290 ? ?
4 459 395 3 180 885
140 Chapter 12
Information about the camping division:

The other expenses of C78 300 (20X3: C29 200) in the trial balance of the camping division include
the following:
20X4 20X3
C C
Redundancy packages paid to employees 24 000 -
Impairment losses for credit risk (i.e. bad debts) 12 000

x Taxation is levied at a rate of 30%.
x The machinery¶s cost is deductible for tax purposes at 10% p.a. (not apportioned).
x The adjustments to inventory and accounts receivable and the redundancy costs are all deductible
for tax purposes in the year in which they were incurred.
x No tax is levied on the dividends paid.
Other information:
x No temporary differences have ever arisen within the cycling division.
x There are no differences between accounting profit and taxable profit other than those evident
from the information provided.
Required:
a) Discuss whether the camping division can be classified and presented as:
i) a discontinued operation
ii) a disposal group held for sale
b) Prepare the following for Ithemba Recreation Limited¶VILQDQFLDl year ended 31 December 20X4,
in compliance with International Financial Reporting Standards: the statement of financial position,
statement of comprehensive income, statement of changes in equity, discontinued operation note,
income tax expense note and related accounting policies note
Chapter 12 141
GAAP: Graded Questions Inventories
Chapter 13
Inventories
Question Key issues

13.2 Shine Disclosure: accounting policies and basic notes
13.3 Scotty & Pug Cost: Settlement discounts
13.4 Financial Inventory cost: net realisable value write-downs and reversals thereof,
Fitness conversion costs, imported stock
13.5 Lavita Manufacturing overhead costs ± fixed only:
- Application rate
- Under-absorption
- Portion of fixed overheads that are capitalised versus expensed
13.6 Junior Manufacturing costs involving fixed & variable costs
- Application rate
- Comparison of over- and under-absorption
Complete inventory cycle: manufacture to sale
13.7 ToyCars A: Perpetual ± FIFO versus WA
B: Periodic system ± FIFO versus WA
C: Perpetual versus Periodic ± Stock losses
13.8 Cadcon Manufacturing accounts
FIFO versus WA
13.9 Cheesecake Net realisable value of raw material: basic calculations and write-downs
13.10 Tesla Net realisable value involving:
- Firm orders
- Events after reporting period
13.11 Bikini Excessive costs, consultant fees, fixed cost application rate, lower of cost
and net realisable value: discussion
13.12 Woody Manufacturing costs involving fixed & variable costs
- Under-absorption
- Allocation of costs between manufacturing and non-manufacturing
13.13 Padfoot Manufacturing costs involving fixed & variable costs
- Under-absorption
- Allocation of costs between manufacturing and non-manufacturing
- Allocation of costs between fixed and variable
Net realisable values and write-downs
Imported raw materials
13.14 Chunky Non-manufacturing costs and manufacturing costs (fixed and variable)
- Application rate
- Under-absorption
Net realisable value and write-downs,
Including events after reporting period
Inventory pledged as security
13.15 Kudu Manufacturing costs involving fixed & variable costs
- Under-absorption
- Application rate
Net realisable values and write-downs
Pledged as security
142 Chapter 13
Question 13.1
a.
1. Inventory is measured at the lower of cost and net realisable value, where the latter is a
market-based measure.
2. Inventory is measured at the lower of cost and net realisable value, where the latter is an
entity-specific measure.
3. Net realisable value is measured at the fair value achievable on the open market.
4. Net realisable value is measured at the selling price in the ordinary course of business
less costs to bring the goods into a saleable condition and less costs to sell.
5. Net realisable value is measured at the selling price, in the ordinary course of business,
for the goods in their current condition, less selling costs.
a) Statements 1 and 4 are correct

b) Statements 1, 3 and 4 are correct
c) Statements 1 and 5 are correct
d) Statements 2 and 4 are correct
b.
X Limited entered into the following inventory-related transactions, listed in date order:
x 01 March 20X5: Opening balance: 80 units, all bought on 28 February 20X5 at C50 each
x 10 March 20X5: 40 units, bought at C70 each
x 15 March 20X5: 160 units, bought at C80 each
x 21 March 20X5: 140 units sold
1. Using the first-in-first-out method, the cost of sales for the month ended 31 March 20X5
will be C8 400 and the inventory closing balance on 31 March 20X5 will be C11 200.
2. Using the first-in-first-out method, the cost of sales for the month ended 31 March 20X5
3. Using the weighted average method, the cost of sales for the month ended 31 March 20X5
4. Using the weighted average method, the cost of sales for the month ended 31 March 20X5
a) Statements 1 and 3 are correct

b) Statements 2 and 3 are correct
c) Statements 1 and 4 are correct
d) Statements 2 and 4 are correct
c.
Depreciation on a machine that is used exclusively to manufacture inventories is always

capitalised to the inventory account.
a) True
b) False
Chapter 13 143
d.
A contract for revenue from services of C100 000 is partially complete and, due to the
contractual terms and conditions, none of the revenue from the partially complete contract may
yet be recognised. The costs of providing the services during the current year is C40 000.
The following journal should be processed:
Debit Credit
Wage expense (P/L) 40 000
Bank 40 000
Cost of services provided expensed
a) True
b) False
e.
Pharmacy Limited¶s manufacturing process requires such a complex raw material catalogue
system that dedicated administrators need to be employed in the factory to run it. These
administrative staff are paid C45 000 per month.
Pharmacy must capitalise these administrative staff salaries to inventory.
a) True
b) False
f.
Dairy Limited manufactures specialist cheeses. As part of the production process, the cheese
is required to be stored for a year in order to fully mature. As the company does not have the
necessary space, the cheese is stored in a rented warehouse, for which the company pays
C500 000 per annum.
Dairy must expense this rental cost.
a) True
b) False
Question 13.2
Shine Limited, a proudly South African clothing manufacturer and distributor, sources all its raw
materials locally. It specialises in the production of luxury leather jackets for women, supplying
them directly to individuals as well as to retail stores, such as EBGARDS and other online-based
platforms such as Sprek. Sales to retailers are on consignment and sales to individuals are on a
cash basis only.
The following matters came to your attention:

x Shine uses a computerised perpetual inventory costing system based on a program that
charges out the oldest inventory first. This program was introduced 4 years ago and is
running smoothly. For costing and control purposes the variable costing system is used but,
for financial reporting purposes, manufacturing overheads are absorbed on the basis of
actual production for the year.
x The selling price (excluding VAT) per jacket is C6 900 for a sale to an individual, and C6 000
per jacket if the sale is to a retailer. 7KHMDFNHW¶Vcost price is C3 600.
x A total of 480 jackets were sold on consignment to retail stores during the year ended
31 December 20X5. The retail stores sold 180 of these jackets by 31 December 20X5.
144 Chapter 13
x The company operates a just-in-time inventory management system, and thus normally
holds no inventory at the beginning or end of a year. However, finished goods on hand in the
warehouse at 31 December 20X5, comprised 120 unsold jackets.
x During the year, Shine experienced a slow decline in the demand for their clothing. Urgent
research revealed that the decline was due to a new fashion designer store that was offering
top quality products at a far lower price. A careful analysis estimating the price at which the
remaining jackets could be sold, given the existence of this new competition, led to the
accountant realising that the closing inventory of jackets must be written-down by C100 000.
x The company's main business is the sale of its jackets. However, it derives other income
from delivery services, rental income from sub-letting a portion of its warehouse, and sales
from a non-profit-making canteen run for the benefit of the staff.
The financial manager has prepared the following draft accounting policy notes for inclusion in
Shine /LPLWHG¶VDQQXDOILQDQFLDOVWDWHPHQWV
2. Accounting policies
2.1 Measurement bases
The financial statements have been prepared on the historical cost basis.
2.2 Inventory
Inventory is measured at the lower of cost and net realisable value.
Required:
a) Redraft the accounting policy notes to comply with IAS 1 Presentation of Financial
Statements and IAS 2 Inventories
b) State what further information would be disclosed in the notes to the financial statements in
respect of the items dealt with in the above accounting policy notes.
c) Prepare the inventory asset note(s) disclosure in compliance with IAS 2 Inventories.
Question 13.3
Part A
Scotty Limited uses the perpetual inventory system. Scotty purchased goods from Terrier Limited:
Purchase Price C66 000
Trade Discount (Scotty is a valued customer of Terrier) 10%
Settlement Discount (if Scotty settles within 30 days) 5% on amount owed
Required:
a) Prepare the journal entries to record the purchase of goods in the books of Scotty Limited.
b) Prepare the journal entries to record the payment made to Terrier Limited, assuming the
payment is made within 30 days.
c) Prepare the journal entries to record the payment made to Terrier Limited, assuming the
payment is made after 30 days.
Part B
Pug Limited uses the perpetual inventory system. Pug sold inventory on account to P Ryan.
The details are as follows:
Selling Price C960
Gross Profit Margin 20% on gross sales (i.e. before discount)
Settlement Discount (if P Ryan settles his account 5%
within 20 days of purchase)
Chapter 13 145
Required:
a) Prepare the journal entries to record the sale of inventory in the records of Pug Limited.
b) Prepare the journal entries to record the payment received from P Ryan, assuming that
payment was received within 20 days of the sale.
c) Prepare the journal entries to record the payment received from P Ryan, if he settled his
account after 20 days of the sale?
Question 13.4
You have started your owQEXVLQHVVFDOOHG³)LQDQFLDO)LWQHVV/LPLWHG´DQHQWLW\WKDWSURYLGHV

advice on how to comply with the International Financial Reporting Standards. Business is
booming and your latest client is Perfect Plastics Limited (a manufacturer and retailer of
various plastic products). You are known as an expert on IAS 2 Inventories. Peter Parker, the
financial manager at Perfect Plastics, needs help accounting for certain costs and has sent
you an email, an extract of which follows:
Hi
We are finalising our financial statements for our reporting period ended 31 December 20X2
and I need a better understanding of accounting for certain costs associated with our inventories.
Query 1: Plastic buckets purchased from China:
We purchase plastic buckets from China to resell in South Africa, rather than manufacture
them ourselves. We purchase the goods from our &KLQHVH VXSSOLHU RQ D ³IUHH on boarG´
basis. As these buckets are imported, we have to pay import duties and transport costs to our
warehouse. The Customs Department will refund 100% of the import duties as soon we
submit our claim forms. The terms of the purchase agreement include a settlement discount
of 5% if we pay within 60 days, and a rebate of 3% to assist us with selling costs. I am not
sure how to measure inventory that we import from overseas.
Query 2: Plastic cutlery manufactured by Perfect Plastics Limited
We manufacture plastic cutlery that is poSXODUIRUSLFQLFV,¶PQRWVXUHDERXWWKHDFFRXQWLQJ

treatment of the costs associated with the manufacture of inventory. I have listed the costs
that I think should be recorded as inventory below:
x Labour costs of factory workers who manufacture the cutlery.
x Salaries to personnel in Human Resources whose responsibilities include the payment of
the wages to the factory workers.
x During the year, there was a strike by employees for higher wages. As a result, we had to hire
inexperienced casual labour, and additional costs were incurred when they accidentally
jammed the machines. Also, our actual production was less than expected.
x Fixed annual rent expense for the storeroom where we store the plastic pellets used to
manufacture the cutlery.
x Fixed annual rent expense for the factory.
x :H¶YH EHHQ KDYLQJ WURXEOH VHOOLQJ VRPH RI WKH plastic cutlery and so organised a major
advertising campaign, at great expense, to promote the product in time for the summer holiday.
4XHU\3ODVWLF³%roc´ shoes sold by Perfect Plastics Limited
:HVHOOSODVWLFVKRHVFDOOHG³%URFV´7KHVHVKRHVZHUH very popular in the past, and then we

received news that our competitor was releasing a new range of shoes that were superior to
ours. AV D UHVXOW WKH ³%URcs´ on hand at 31 December 20X1 were written down to a net
realisable value of C75 per pair (original cost was C105 per pair).
146 Chapter 13
However, very early in 20X2, it was discovered that the shoes manufactured by our
competitor were extremely uncomfortable. Bad news for them - but good news for us! We
have now determined, that the net realisable value, at 31 December 20X2, is C120 per pair!
Regards
Peter Parker
Required:
a) Discuss, with reasons and with reference to IAS 2 Inventories, the appropriate
measurement of inventory in query number (1) and query number (2) above.
b) Process the journal entries (per pair of shoes) that would have been required for query
number (3) for the years ended 31 December 20X1 and 31 December 20X2.
UKZN, 2011 test, adapted
Question 13.5
Lavita Limited was incorporated on 1 January 20X5. The resident accountant has provided
you with the following information regarding its manufacturing facility:
x The factory is managed by a supervisor, earning an annual salary of C144 000.
x The factory involves a single plant, which was purchased in 20X4 for C72 000, but which
was first available for use on 2 January 20X5. Depreciation is calculated using the
straight-line method over the plant's expected useful life of 15 years to a nil residual value.
x There are no other fixed manufacturing costs other than those referred to above.
x Information relevant to the first period (8 months) of operation was as follows:
Budgeted (units) Actual (units)
Sales 27 000 18 000
Production 36 000 21 600
Required:
In respect of Lavita Limited's year ended 31 August 20X5:
a) Calculate the application rate to be used when allocating fixed manufacturing costs to
inventory at year end.
b) Calculate the fixed manufacturing costs included in the inventory closing balance.
c) Calculate the total amount of fixed manufacturing costs expensed during the period.
Question 13.6
Junior Limited manufactures tinned baby food. Junior Limited is in its first year of operations and
has estimated that a normal annual production level is 50 000 tins. Junior produced 30 000 tins
during its first year of operations ended 31 December 20X1. The annual stock count at
31 December 20X1 found 500 tins of finished goods. There is no other inventory on hand at
year-end other than these finished goods:
The following information relates to the manufacturing costs incurred during 20X1:
x Direct materials purchased C4 per unit
x Direct labour C3 per unit
x Variable overheads C2 per unit
x Fixed overheads C30 000 (annual)
Chapter 13 147
Required:
a) Using the information given above:
i) Calculate the portion of the fixed manufacturing costs still in inventory at 31 December 20X1.
ii) Calculate the portion of the fixed manufacturing costs capitalised to inventory during 20X1.
iii) Calculate the value of inventory at 31 December 20X1.
iv) Calculate the portion of the fixed manufacturing costs that were expensed during 20X1.
v) Show all journals possible. Assume that all transactions/ events were processed as
single transactions and that, where applicable, amounts were paid in cash.
vi) Calculate the amount at which cost of inventories expense will be disclosed in the
income statement for the year ended 31 December 20X1.
b) Assuming that actual annual production totalled 60 000 units (instead of 30 000 units):
i) Calculate the portion of the fixed manufacturing costs still in the inventory asset account at
31 December 20X1.
ii) Calculate the portion of the fixed manufacturing costs capitalised to inventory during 20X1.
iii) Calculate the value of inventory at 31 December 20X1.
iv) Calculate the portion of the fixed manufacturing costs that were expensed during 20X1.
v) Show all journals possible. Assume that all transactions/ events were processed as
single transactions and that, where applicable, amounts were paid in cash.
vi) Calculate the amount at which cost of inventories expense will be disclosed in the
income statement for the year ended 31 December 20X1.
Ignore tax.
Question 13.7
ToyCars Industries is a wholesaler that distributes boxes of toy cars to local shops. The
company has a 31 December financial year-end. The inventory transactions that occurred
during January 20X5 are shown below:
January Purchase descriptions January Sales descriptions

1 220 boxes at C220 10 220 boxes at C286
31 330 boxes at C308
Additional related information includes:

x All purchases and sales were for cash.
x All cost prices and selling prices referred to above are shown net of a 10% cash discount.
x There was no opening inventory in January 20X5.
x The monthly stock count revealed that there were 330 boxes on hand at 31 January 20X5.
Part A
Use the information provided and assume:

x The company uses the perpetual system to account for inventory movements.
Required:
Prepare all the inventory-related ledger accounts for month January 20X5 assuming that:
a) the FIFO formula is used.
b) the WA formula is used
148 Chapter 13
Part B
Use the information provided and assume:

x The company uses the periodic system to account for inventory movements.
Required:
Prepare all the inventory-related ledger accounts for month January 20X5 assuming that:
a) the FIFO formula is used.
b) the WA formula is used.
Part C
Use the information provided except assume that the:

x monthly stock count on 31 January 20X5 revealed 300 boxes on hand (i.e. not 330 boxes).
Required:
Discuss the accounting implications for the information revealed by the stock count for the
month ended 31 January 20X5 assuming that:
a) a perpetual inventory costing system is used.
b) a periodic inventory costing system is used.
Question 13.8
You are the accountant for Cadcon, a chocolate manufacturer, and are currently preparing the
inventory accounts for March 20X8. In preparation, you have obtained the following information:
Balances on 1 March 20X8:
x Raw Materials (4 125 kilograms) C5 500
x Work-in-Progress C9 625
x Finished Goods (825 units) C 8 250
Raw Materials:
x Purchased during March 20X8 (11 000 kilograms) C11 000
x Used during March 20X8 (7 150 kilograms) ?
Wages:
x Incurred during March 20X8 C27 500
x Incurred as follows:
- Factory workers 80%
- Cleaning staff in the factory 6%
- Cleaning staff in the head office 4%
- Administrative workers in the head office 10%
Other conversion costs:

x Electricity (Electricity considered a variable cost and paid in cash) C17 050
x Depreciation (considered a variable cost) C13 750
- Relating to machinery used in the factory 80%
(This machine was idle for 30% of the time)
- Relating to equipment used by head office 20%
x Rent of factory building for March 20X8 (paid in cash) C11 000
x Budgeted normal production for March 20X8 (units) 5 500
x Units put into production in March 20X8 5 775
x Cost of units completed during March 20X8 (4 950 units) C44 550
x Percentage of all finished goods sold during March 20X8 80%
Chapter 13 149
Required:
Show the ledger accounts for raw materials, work-in-progress and finished goods using the
perpetual system and assuming that:
a) the first-in-first-out formula is used.
b) the weighted average formula is used.
Question 13.9
Cheesecake Limited produces cheesecakes for the local market. At its financial year ended
30 September 20X5, it had raw materials of C320 000 on hand. It is expected that the cost to
convert the raw materials into finished cheesecakes is C80 000.
Required:
Calculate the net realisable value of the raw materials and journalise the write-down, if any,
assuming that, once converted into the finished cheesecakes, the total inventory of cheese
cakes would have a:
a) sales value of C480 000, where related selling costs would be C40 000.
b) sales value of C400 000, where related selling costs would be C40 000.
Question 13.10
Tesla Limited is a company that is a retailer of all manner of electrical and electronic goods.
The merchandise that was on hand at 31 December 20X4 is presented below.
x Transformers: The company has 500 transformers in stock, each with a cost of C11 000
and a net realisable value of C13 400.
x Generators: There were 3 600 generators in stock, each with a cost of C18 000 and a net
realisable value of C16 400.
x Insulators: There were 1 500 insulators in stock, each with a cost of C17 000 and a net
realisable value of C14 000.
x Solar panels: There were 4 400 solar panels in stock, each with a cost of C12 800 and a
net realisable value of C16 000.
x Wind turbines: There were 2 000 wind turbines in stock, each with a cost of C30 000 and
a net realisable value of C27 000.
The expected costs to complete and the expected selling costs were nil for all these products.
In order to boost sales, Tesla began an intensive marketing drive in December 20X4,
advertising all merchandise at a discount of 5% from January 20X5. The accountant did not
consider these advertised prices when calculating the abovementioned net realisable values.
Shortly before year-end, Tesla Limited received an order for 400 wind turbines to be delivered
to a new wind farm in Cape Town. The order is considered to be a firm commitment from the
farm and the purchase agreement has set the selling price per turbine at C37 000. Selling
costs on this contract total C640 000. The customer requires that these items be painted in
their own company colours. The expected repainting costs per turbine are C4 000.
Shortly after year-end, Tesla Limited experienced a strong windstorm that destroyed 10% of
the transformers that were in stock at year-end.
Required:
Calculate the inventory balance that would be presented in the statement of financial position
at 31 December 20X4.
150 Chapter 13
Question 13.11
Bikini Limited, an audit client of your firm, has approached you with the following queries
regarding inventory:
a) Fabric included in year-end inventory includes fabric being shipped from USA on FOB terms
(i.e. risks and rewards are transferred on date of shipment from the foreign harbour).
x Delivery costs associated with this special fabric are excessive (C50 000 more than
normal delivery costs), but the fabric is required urgently for seamless production.
Can this C50 000 be included in the inventory value at year-end?
b) The company used a consultant to design new swimming shorts (a completely new product
with which the company has no experience), at a total cost of C30 000.
x This was a once-off order for a large surf store chain.
x The shorts were complete by year-end at a total production cost of C500 000.
&DQWKHFRQVXOWDQW¶VIHHVEHLQFOXGHd in the inventory valuation?
c) During the year, the company produced 85 000 bikinis and sold 75 000 bikinis.
x Normal production is 100 000 bikinis per annum.
x Variable costs are C30 per unit, and annual fixed manufacturing overheads are C700 000.
Prepare journal entries to record inventory and cost of sales for the year.
c) Fabric X, used in production of the bikinis, is valued at C40 per metre.

x Fabric X can only be sold at C35 per metre.
x Finished bikinis are expected to sell for C100 and cost C37 to produce.
At what value should Fabric X be recognised in the financial statements?
Required:
Respond briefly to each of your client¶s queries.
Question 13.12
Woody Limited manufactures toy wheelbarrows for young children. The following information
relates to its inventory for the year ended 31 December 20X3.
Quantity Details C
Beginning of the year:
- Raw materials 17 000 kg C6.80/ kg ?
- Work-in-progress 0 0
- Finished goods 34 000 units
During the year:
- Raw materials purchases ? C6.80/ kg 2 720 000
- Raw materials usage 170 000 kg ? ?
- Rent incurred 680 000
(75% used by the factory and 25% by the head office)
- Direct factory wages incurred 850 000
- Office telephone incurred 34 000
- Electricity incurred (each wheelbarrow manufactured C0.2/ kilowatt 25 500
requires 0.5 kilowatts of electricity)
- Year-end party for factory staff 13 600
Chapter 13 151
x 170 000 wheelbarrows were started during the year. Of these, 90% were completed during the
year and the remaining 10% were effectively complete at year-end, merely requiring the drying
process to be finalised. This drying process does not involve any further costs.
x 70% of finished goods that were available for sale during the year remained unsold at
31 December 20X3.
x Annual fixed manufacturing costs incurred are C510 000 and a normal annual production
level is 510 000 units.
x The cost per finished wheelbarrow in the current year is the same as the cost per finished
wheelbarrow in the prior year.
x All amounts incurred were paid for in cash.
Required:
Prepare journal entries to reflect the information presented above.
Question 13.13
Padfoot Limited manufactures dog food. 20X5 is PadfooW¶V ILUVW \HDr of operations. The following
information is available:
Financial information for the year ended 20X5 C
Raw material purchased (marked price including 15% VAT) 610 307.30
Trade discount received (calculated on marked price excluding VAT) 8%
Settlement discounts offered on purchases of raw materials 4 200
Settlement discounts received on purchases of raw materials 3 200
Variable costs (30% admin; 70% manufacturing) 100 000
Rent and insurance (see below) 200 000
Salaries and wages (see below) 500 000
Packing materials purchased (see below) 685 000
Other fixed costs (65% manufacturing; 35% administration) 285 000
x Rent and insurance for the entire 20X5 year was paid in full on 3 January 20X5. The total
cost of rent and insurance (C200 000) has been analysed as follows:
Factory C140 000
Storage of work-in-progress while food cools before colourants added C30 000
Shop where dog food is sold to the public C30 000
x Salaries and wages comprise 55% manufacturing, 15% administration, and 30% sales
department salaries. Manufacturing salaries vary with production levels, whereas the
administration and sales department salaries are fixed.
x Packing materials relate to the individual re-sealable bags in which dog food is placed for
sale. These materials may only be imported from the USA due to their specialised nature.
- The accountant erroneously converted the dollar amount on the FOB date (free on
board) instead of the DDP (delivery duty paid) date.
- Risks and rewards of ownership were transferred on the date the inventory arrived in
the Durban harbour (goods were delivered on a DDP basis).
- This was the first (and only) purchase of the packing materials during the year.
- Spot rates were as follows:
x Order date $1: C6
x Date goods were loaded in USA harbour FOB date $1: C7
x Date of arrival in Durban harbour DDP date $1: C9
152 Chapter 13
x Other relevant information for the year:

- 75% of packing materials were used
- 20% of raw materials were on hand at year end
- There was no work-in-progress at year end
- 80% of the finished goods produced were sold during the year.
x Normal production levels are estimated to be 18 000 units per annum. These 18 000
units were expected to be produced evenly over the 12-month period. The actual number
of units produced during the year was 15 500 units.
x During November, Padfoot experienced the unfortunate incident of being held up by
armed thieves, during which 1 550 units of finished products were stolen.
x Padfoot Limited is a VAT vendor. All amounts exclude VAT unless otherwise indicated.
x A single entry to adjust for any over- or under-absorption of fixed manufacturing
overheads is processed at year-end.
Required:
a) Calculate the carrying amount of each category of inventory at 31 December 20X5.
b) Calculate the value at which the finished goods should be measured on the statement of
financial position as at 31 December 20X5, as well as the amount of any write down (if
required) assuming that:
x on 31 December 20X5, a flood damaged most of the finished goods on hand;
x expenditure to restore the goods to saleable condition is expected to be C90 000;
x an advertising campaign for the clearance sale will cost approximately C15 000; and
x the dog food may then be saleable, but at a discounted price of C200 000.
c) Prepare the journals to reflect the information provided in (b) above.
d) Disclose the inventory note in the notes to the financial statements for the period ended
31 December 20X5 after taking into account the information in (b) above.
Question 13.14
Chunky Limited is a company that specialises in the manufacture of residential built-in air
conditioners. Chunky Limited is in its first year of operations and has 750 units of finished goods
on hand at its financial year ended 31 December 20X1 (there was no stock of either raw material
or work-in-progress on this date).
Chunky Limited has recently hired an accountant who is familiar with neither the manufacturing
industry nor how to account for fixed overheads and has thus allocated all fixed overhead costs
incurred during the year to a suspense account. You are given the following information:
Units C
Inventory of finished products: 31 December 20X1 750 3 750
- conversion costs: direct labour and indirect costs (C3 per unit) 2 250
- direct materials (C2 per unit) 1 500
Fixed manufacturing overheads suspense account 30 000
Budgeted Actual
Units Units
Sales (12 months) 30 000 36 750
Production (12 months) 60 000 37 500
The 750 units on hand at year-end were sold for a net amount of C4 500 after year-end but
before approval of the financial statements. This is considered to be a normal selling price.
Chapter 13 153
Required:
a) Calculate the amount at which finished goods will be disclosed in the statement of
financial position for the first year of operations. Show all your workings.
b) Calculate at what value inventories would be shown on the face of the statement of
financial position for the first year of operations, assuming that:
x the company also had work-in-progress on hand at year-end with a cost of C352 500
(correctly calculated);
x the work-in-progress requires another C18 000 costs to be incurred in order to be
completed;
x the product made by the company is fast becoming obsolete; and
x the company plans to complete the work in progress and sell it at a discounted mark-up
of only 15% on cost (below the usual mark-up) and expects to incur selling costs
estimated at C63 000 (finished goods on hand at year-end will be sold at normal prices).
Show all your workings.
c) Assuming that the company also has raw materials of C30 000 at year-end, which had all
been offered as security for a loan, show the disclosure of inventory in the statement of
financial position, as well as the inventory note and the profit before tax note.
Question 13.15
Kudu Limited produces South African-styled gifts, all pre-packaged in designer leather boxes.
x At 31 December 20X3, its inventory comprised the following:
Consumables: C0
Raw materials: C100 000
Work-in-progress: C250 000
Finished goods: C150 000.
x The bookkeeper has summarised the following costs incurred during the year ended
31 December 20X4:
Raw materials were purchased for C1 020 000, before taking into account the trade
discount of C20 000 and the cash discount of C30 000 that were received.
The cost of having the raw materials delivered was C100 000.
Consumables of C800 000 were paid for during the year. Of this, 37,5% related to
packaging materials used for the designer leather boxes and the balance related to
the packaging used to prevent breakages during delivery of the gifts to customers.
Wages of C3 000 000 were paid, 60% of which related to the factory workers and 40%
related to head-office cleaning staff.
Salaries paid to head office management totalled C300 000.
Salaries to sales representatives ± all variable with the number of units sold by the
representative ± totalled C400 000.
The annual rent and insurance was C800 000, C100 000 of which related to storage of raw
materials prior to production and the rest related to the factory production processes.
Costs of delivering completed gifts to customers were C50 000.
Other variable costs of C1 000 000 were incurred, 60% of which related to the factory
and 40% related to the head-office.
Depreciation of C800 000 was incurred on the plant and depreciation of C200 000 was
incurred on office equipment (all housed at head-office). Depreciation is a fixed cost.
x Kudu Limited produced 200 000 leather-boxed gifts of biltong, which was 80% of the normal
production level expected during the year ended 31 December 20X4.
154 Chapter 13
x At 31 December 20X4:
- 100% of all consumables purchased during the year had been used
- 70% of all raw materials had been used
- 80% of all work-in-progress had been completed
- 90% of all finished goods had been sold.
Required:
a) Journalise the above. You may assume that each cost / transaction was a single transaction
and that where relevant, the amount was paid in cash.
b) Soon after 31 December 20X4, the directors decided to cease the production of leather-
boxed gifts and produce shoes instead.
- It has been decided that the raw materials on hand at 31 December 20X4 will be sold
as is for C300 000. The selling costs thereof are expected to be C50 000.
- The work-in-progress on hand at year-end will be completed at an expected cost of
C100 000 and is expected to sell for C700 000 (selling costs are expected to be C20 000).
- The finished goods will sell for C1 300 000 and will result in selling costs of C80 000.
Calculate the value at which inventories should be measured at year-end and show any
journal entries that may be necessary
c) Prepare the financial statements of Kudu Limited for the year ended 31 December 20X4 in
accordance with International Financial Reporting Standards, assuming further that C150 000
of the finished goods have been offered as security for a loan.
Ignore tax.
Chapter 13 155
GAAP: Graded Questions Borrowing costs
Chapter 14
Borrowing costs
Question Key issues

14.2 Mali Specific loan:
Costs incurred on specific dates,
Interest compounded annually,
Loan raised before construction began,
Investment of surplus funds,
Construction completed before year-end
14.3 Squash Specific loan (two loans):
Costs incurred evenly over period,
Partial repayment of loan at year-end
Construction complete before year-end
14.4 Circuses Specific loan:
Loan raised when construction began,
Construction incomplete at year end,
Delays in construction:
a) Temporary delay in construction
b) Extended delay in construction
14.5 Dragon Specific loan:
Costs incurred evenly,
Construction complete before year-end,
Asset brought into use in the following year after it was available for use,
Deferred tax effects
14.6 Bafana General loan:
Construction incomplete at year-end
14.7 Rugby General loan:
Costs incurred evenly over time,
Interest compounded every four months,
Construction incomplete at year-end
14.8 Comodo General loan (more than 1):
Interest incurred is given,
Loans raised before construction began,
Construction incomplete at year end
Continued on the next page «
156 Chapter 14
Question Key issues

14.9 Yoodle General loan (more than 1):
Cost incurred evenly over time,
Construction complete after two years,
Temporary delay in construction
14.10 Wayout General overdraft and specific loan (two loans):
Construction costs incurred on specific dates,
Interest compounded quarterly,
Loan raised after construction began,
Construction complete before year-end
Chapter 14 157
Question 14.1
a.
A company financed the construction of a plant through an issue of shares. The dividends
declared on these shares may not be capitalised to the cost of the plant.
a) True.
b) False.
b.
On 1 March 20X1, Light Limited began the construction of a new factory plant, a qualifying
asset. On the same day, it raised a specific loan. Capitalisation of the borrowing costs on this
loan began immediately since all criteria for capitalisation were met. However, construction
activities stopped for the entirety of June 20X1 due to cash flow problems.
a) The borrowing costs during June 20X1 should be capitalized.
b) The borrowing costs during June 20X1 should be expensed.
c.
A loan of C100 000 was raised specifically for the construction of a plant, which met the
definition of a qualifying asset. The loan was used to acquire the necessary raw materials
and pay the related labour costs necessary for the construction of this asset. A further loan of
C20 000 had to then be raised to buy an extra 3 tons of material X, because the original load
of material X (also having cost C20 000) was completely destroyed in a freak storm.
a) The borrowing costs on both loans would be capitalised.
b) The borrowing costs on both loans would be expensed.
c) The borrowing costs on the loan of C100 000 will be capitalised whereas the borrowing
costs on the loan of C20 000 will be expensed.
d) The borrowing costs on the loan of C100 000 will be expensed whereas the borrowing
costs on the loan of C20 000 will be capitalised.
d.
Consider the following statements in context of IAS 23 Borrowing costs:
1. Borrowing costs may never be capitalised to the acquisition of financial assets.
2. Borrowing costs that are directly attributable to the construction of investment property
must always be expensed.
3. Borrowing costs that are directly attributable to the construction of inventory must always
be expensed.
a) Only statement 1 is correct.
b) Only statement 2 is correct.
c) Only statement 3 is correct.
d) More than one of the three statements are correct.
e) All three statements are incorrect.
e.
Min Limited constructed a building during 20X4, details of which are as follows:
x Min Limited secured a loan to finance the construction of a building (a qualifying asset)
on 5 January 20X4 and began incurring interest on the loan from 1 February 20X4 when
the loan funds became available.
x Min Limited purchased the first batch of raw materials (sand, cement and bricks) on
10 February 20X4.
x The construction of the building began on 20 February 20X4.
158 Chapter 14
The date on which capitalisation of borrowing costs should commence (i.e. the commencement
date), is:
a) 5 January 20X4
b) 1 February 20X4
c) 10 February 20X4
d) 20 February 20X4
f.
Max Limited was constructing a building during 20X4. A spreadsheet of outstanding work as
at 30 September 20X4 was drafted by the project manager. The date on which each of these
outstanding tasks was completed was then filled onto this spreadsheet. The completed
spreadsheet was presented to you as follows:
Outstanding work as at 30 September 20X4: Date completed:

x Construction of the roof on the east wing 05 November 20X4
x Plumbing on all floors still to be installed 08 December 20X4
x Final documentation to be submitted for filing with the municipality. 12 December 20X4
x Painting of the interior and exterior of the building. 22 December 20X4
The date on which capitalisation of borrowing costs should cease (i.e. the cessation date) is:
a) 05 November 20X4
b) 08 December 20X4
c) 12 December 20X4
d) 22 December 20X4
g.
Arnica Limited is constructing an amusement park on the beachfront. Construction of the

park had to be suspended thrice, details of which are as follows:
Reasons for periods during which construction was Date suspended: Date resumed:
suspended:
First period of suspension of construction – period A 02 February 20X4 05 March 20X4
x Construction was delayed for almost 1 month because
the cement work involved in the construction of the
various foundations had to cure before construction
could commence.
Second period of suspension of construction – period B 20 March 20X4 15 June 20X4
x Construction was delayed for almost 2 months after a
minor earthquake on 20 March 20X4 caused certain
tectonic plates to tilt in a way that caused underground
water to pool. This water had to be drained from the
construction site before construction could continue.
Third period of suspension of construction – period C 05 September 20X4 27 October 20X4
x Construction was delayed for almost 2 months due to
the anticipated seasonal monsoons during most of
September and October 20X4.
a) The capitalisation of borrowing costs should cease during all three periods A, B and C.
b) The capitalisation of borrowing costs should not cease during any of the three periods.
c) The capitalisation of borrowing costs should cease during period B only.
d) The capitalisation of borrowing costs should cease during periods A and C only.
Chapter 14 159
Question 14.2
Mali Limited is submitting a tender to the government to supply goods to municipalities

throughout the Kwa-Zulu Natal province. In order to meet one of the tender¶s µpreferred
conditions¶, thus increasing the likelihood that the tender will be successful, Mali needs a
storage warehouse that will prevent spoilage of the goods before they are despatched to the
municipalities. Mali has thus begun construction of this new building (a qualifying asset) .
The pertinent financing details of the construction of the building are as follows:
x The construction was financed by a loan of C2 280 000 from Cash Limited.
x The loan was raised on 1 January 20X6 specifically to fund the construction of the building.
x Since Mali Limited is a fairly new company with no credit rating at all, the loan bears a
hefty interest rate of 30% per annum. Mali made no capital repayments during the year.
x Surplus funds were invested and earned interest at 24% per annum.
x All interest is compounded annually.
The construction began on 1 February 20X6. Construction costs incurred during 20X6 were
paid for on the first day of each of the following months:
x Progress payment in February: C600 000
x Progress payment in July: C720 000
x Progress payment in November: C960 000
The construction of the building ended on 1 December 20X6 on which date it became ready
for use as a warehouse, and on which day the tender proposal was immediately submitted.
Mali was awarded the tender on 1 January 20X7, upon which it immediately brought the
building into use. Depreciation on the building is based on a useful life of 12 years, a nil
residual value and the straight-line method.
Required:
a) Calculate the borrowing costs to be capitalised during the year ended 31 December 20X5.
b) Calculate the depreciation for the year ended 31 December 20X5.
c) Calculate the carrying amount of the building at 31 December 20X5.
d) Show all the interest related journal entries for the year ended 31 December 20X5.
Question 14.3
You are a recently employed accountant of Squash Limited. The company had decided to
construct a more energy-efficient factory to minimise its carbon footprint. The construction of
the factory began on 1 March 20X5 and was finalised on 31 August 20X5. The construction
resulted in costs of C300 000, paid on 31 March 20X5, C100 000 paid on 30 April 20X5 and
C220 000 paid on 31 July 20X5.
In order to finance this project, an external financing consultant suggested obtaining finance
from Green Bank (a foreign bank) and Peace Bank (a local bank), which Squash duly did.
x A $62 500 foreign loan was raised on 1 January 20X5 from Green Bank at 10% interest. The
exchange rates were as follows:
x 1 January 20X5 C8,00: $1 Spot exchange rates
x 1 March 20X5 C9,00: $1 Spot exchange rates
x 31 August 20X5 C10,00: $1 Spot exchange rates
x 31 December 20X5 C11,00: $1 Spot exchange rates
x 1 January ± 28 February 20X5 C6,00: $1 Average exchange rates
x 1 March ± 31 August 20X5 C9,20: $1 Average exchange rates
x 1 September ± 31 December 20X5 C9,50: $1 Average exchange rates
The interest rate on 1 January 20X5 that would have been available on a local loan of
C500 000 (i.e. equivalent to the foreign loan of $62 500) was 18%.
160 Chapter 14
x A second loan of C400 000 was raised on 1 June 20X5 from a local bank, Peace Bank, at
an interest rate of 15%. Unfortunately, due to a breach of contract, Squash Limited was
forced to repay C100 000 of the Peace Bank loan (capital portion) on 31 July 20X5.
Interest on both loans is compounded annually. Any surplus funds from the loans are invested
in a 6% per annum interest-bearing account.
Required:
Prepare all the related journal entries for the year ended 31 December 20X5.
Ignore tax.
Question 14.4
Part A
Circuses Unlimited began construction of a building to be used as a training academy for

aspiring gymnasts. Construction began on 1 July 20X5 and was still incomplete at year-end.
Construction was forced to temporarily cease between 30 July and 25 August 20X5 in order
for the concrete foundations to cure (this is a necessary part of the building process).
In preparation to fund the construction, a loan of C4 000 000 was secured with Ref Bank on
15 March 20X5. These funds were remitted to Circuses on 1 July 20X5 and were immediately
invested in a cash call account with the same bank. The loan incurs interest at 15% per annum and
the call account pays 9% per annum, all interest being compounded annually on 31 December.
Three progress payments of C1 000 000 each were made: on 1 July 20X5, 1 January 20X6
and 1 March 20X6.
Required:
Show the interest-related journal entries for the year ended 30 June 20X6.
Part B
Circuses Unlimited plans to construct a building to be used as a training academy for aspiring
gymnasts. In preparation to fund the construction, a loan of C4 000 000 was secured with Ref Bank
on 15 March 20X5. These funds were remitted to Circuses on 1 July 20X5 and were immediately
invested in a cash call account with the same bank. The loan incurs interest at 15% per annum and
the call account pays 9% per annum, all interest being compounded annually on 31 December.
Construction has not yet been able to begin due to the building pODQVIDLOLQJWRPHHWORFDODXWKRULW\¶s
basic building regulations. The plans were re-submitted and it is expected that the local authority will
give the necessary permission to begin construction in early August 20X6.
Required:
Briefly explain how to calculate the amount of borrowing costs that should be capitalised to the
building cost account, if any, in the year ended 30 June 20X6.
Question 14.5
Dragon Limited owns two items of property, plant and equipment: building and equipment.
The building, which met the definition of a qualifying asset in terms of IAS 23, was
constructed during the financial year-ended 31 December 20X5.
Chapter 14 161
Construction began on 1 March 20X5 and ended 31 August 20X5, during which period,
construction costs of C574 000 were incurred. Although the building was available for use on
1 September 20X5, it was only brought into use on 31 January 20X6. This building will be
depreciated to a nil residual value at 10% per annum on the straight-line method.
The construction of the building was financed by way of a bank loan of C700 000. This loan
was raised specifically to fund the construction of a building.
The loan funds were received on 1 January 20X5. No repayments were made on this loan
during 20X5. The loan attracted interest of 10% per annum, compounded annually on
31 December. No other interest was incurred in 20X5 other than the interest on this loan.
Surplus loan funds were invested in a fixed deposit between 1 July and 30 September 20X5.
This earned interest income of C12 600. Total interest income earned during 20X5 was
C42 000 (i.e. including the C12 600 interest earned on the investment of surplus funds).
The equipment¶s carrying amount was C518 000 at 31 December 20X5 (31 December 20X4: C588 000).
There have been no disposals, purchases or other movements in property, plant and
equipment other than those that are evident from the information provided.

x deduct interest as it is incurred unless it relates to the construction of an asset, in which
case it is accumulated and deducted in the year in which the asset is brought into use;
x deduct a building allowance of 5% per annum (not apportioned for part of a year);
x levy income tax at 30% of taxable profits.
There are no other temporary differences other than those evident from the information above.
Required:
a) Show all related journal entries for the year-ended 31 December 20X5.
b) Provide the following disclosure in Dragon /LPLWHG¶V ILQDQFLDO VWDWHPHQWV IRU WKH year-
ended 31 December 20X5 in as much detail as is possible:
x Property, plant and equipment note
x Deferred tax asset/ liability note
x Finance charges note
x Profit before tax note
x Statement of comprehensive income
x Statement of financial position.
Question 14.6
Bafana Limited began constructing a new office block, a qualifying asset, on 1 January 20X4.
x The company has various loans at its disposal, currently used for many other projects,
from which surplus loan funds will be used to finance the construction of the office block.
x The average balance outstanding on these general loans was C30 000 000 during 20X4.
x The total interest incurred on general loans was C3 900 000 for the year ended
31 December 20X4 (interest is compounded annually).
The accountant provided a schedule detailing the construction costs paid during 20X4, and
where HDFKRIWKHPRQWK¶Vpayments was made in advance on the first day of that month.
This schedule appears on the next page «
162 Chapter 14
Date of payment Construction costs

C
1 January 20X4 450 000
1 April 20X4 300 000
1 July 20X4 375 000
1 September 20X4 225 000
1 October 20X4 300 000
The office block was still under construction at 31 December 20X4.
Required:
a) Calculate the amount of borrowing costs that may be capitalised to the office block during
b) Calculate the depreciation for the year ended 31 December 20X4.
c) Calculate the carrying amount of the office block as at 31 December 20X4.
d) Provide the journals related to the interest expense and capitalisation of interest for the
Question 14.7
Rugby Limited began the construction of a new stadium on 1 January 20X5. This stadium, which is a
qualifying asset in terms of IAS 23, was still under construction at 31 December 20X5.
Payments made relating to the construction were made evenly during 20X5 as follows:
Construction payments paid evenly over the following periods: C
1 January 20X5 ± 30 April 20X5 600 000
1 May 20X5 ± 31 August 20X5 300 000
1 September 20X5 ± 31 December 20X5 900 000
The construction was financed by general borrowings within the company. General loans
outstanding at any one time during 20X5 averaged C20 000 000. The interest expense incurred on
these loans during 20X5 was C2 600 000. The financier compounds interest every 4 months.
Required:
a) Calculate the amount of borrowing costs that should be capitalised to the stadium during
the year-ended 31 December 20X5.
b) Calculate the depreciation for the year-ended 31 December 20X5.
c) Calculate the carrying amount of the stadium at 31 December 20X5.
d) Provide the journals related to the interest expense and capitalisation of interest for the
Question 14.8
Comodo Limited began the construction of a building, a qualifying asset, on 1 June 20X5.
The building was not complete at 31 December 20X5.
The construction costs were incurred as follows:

Construction costs paid for on the following dates: C
On 1 June 20X5 150 000
On 1 October 20X5 300 000
On 1 November 20X5 300 000
These costs were funded from general borrowings. Details relating to these borrowings are
provided on the next page:
Chapter 14 163
Details relating to all borrowings Balance Interest

owing incurred
C C
Loan from Chibbing Bank ± borrowings at 31 December 20X5* 300 000 24 000
Loan from Lubbing Bank ± borrowings at 31 December 20X5* 1 050 000 105 000
Bank overdraft: average balance during 20X5 510 000 63 000
1 860 000 192 000
* Both loans were in existence throughout the year. No additional amounts had been raised
and no repayments had been made during the year.
Required:
Show the related journal entries during the year ended 31 December 20X5.
Ignore tax.
Question 14.9
Yoodle Limited is constructing a factory building for its own use. At 31 December 20X4, a
total of C450 000 had already been capitalised to the cost of this building.
x Cash flow was becoming problematic near the end of December 20X4 and thus, in order
to have sufficient available resources, Yoodle raised an additional loan of C400 000,
costing interest of 15% per annum (these funds became available from 1 January 20X5).
This loan is to be used for a variety of purposes (it has not been raised specifically for the
building costs). Interest on this loan is compounded annually.
x Yoodle Limited had an existing general loan at 1 January 20X5 of C800 000, costing
interest of 10% per annum. Interest on this loan is compounded annually.
x There are no other loans. No repayments on either loan were made during 20X5 or 20X6.
x Interest income was earned on the investment of funds from the general loans that were
surplus to requirements. Interest income earned was as follows:
Year-ended 31 December 20X5 C45 000
Year-ended 31 December 20X6 C92 000
x The following construction costs were incurred in 20X5 (paid evenly during each month):
C per month
01 January ± 31 July (7 months) 70 000
01 August ± 30 November (4 months) 40 000
01 ± 31 December (1 month) 90 000
x No further construction costs were paid for during 20X6 although the builders completed
the laying of the concrete slab around the base of the building on 3 January 20X6. This
VODEUHTXLUHGURXJKO\ZHHNVWRµFXUH¶ZLWKWKHUHVXOWWKDWWKHEXLOGLQJZDVQRWDYDLODEOH
for use until 1 February 20X6.
x Whilst the factory equipment should have been installed on or around 1 February 20X6,
the contractors involved in the installation were delayed on a previous unrelated job, with
the result that the equipment was only installed in the last week of February and thus the
factory building was only brought into use on 1 March 20X6.
x The building is expected to have a useful life of 10 years and a nil residual value. The
straight-line method of depreciation is considered to be appropriate.
Required:
a) Show the journal entries related to the above information in the books of Yoodle Limited
for the year-ended 31 December 20X5 and 20X6.
b) Provide as much disclosure as is possible for the year-ended 31 December 20X6.
Ignore tax.
164 Chapter 14
Question 14.10
Wayout Limited embarked on the construction of one of thHZRUOG¶s first rotating buildings on
1 January 20X1. The contract price is C400 000 000. Construction costs were paid as follows:
- 2 January 20X1 100 000 000
- 1 April 20X1 50 000 000
- 1 July 20X1 80 000 000
- 1 October 20X1 200 000 000
x The construction, which was complete on 1 November 20X1, was financed as follows:
x An overdraft facility limited to C160 000 000:
- the facility is used by the company for various company costs;
- the interest incurred on the overdraft during 20X1 was C24 million during which
the average overdraft balance was C150 000 000;
- Interest is compounded on a quarterly basis.
x Two loans raised specifically for this project:
- C250 000 000 raised on 1 July 20X1 with the Bank of Oz at 10% per year; and
- C50 000 000 raised on 1 October 20X1 with the Bank of Wizardry at 8% pa.
Interest is compounded on a quarterly basis
x Surplus funds were invested from 1 July to 30 September 20X1, earning interest at 5% p.a.
Required:
Provide all journal entries relating to interest for the year ended 31 December 20X1.
Ignore tax.
Chapter 14 165
GAAP: Graded Questions Government grants and assistance
Chapter 15
Government grants and assistance
Question Key issues

15.2 Rugs Galore Grant to subsidise expenses, comparing:
- recognition as income; versus
- recognition as a reduction in expenses
15.3 Anthony Grant of asset:
- recorded at fair value; versus
- recorded at nominal amount
Government assistance.
15.4 Amazambane Grant to subsidise asset and for immediate financial support:
- recognition as income; versus
- recognition as a reduction of asset
15.5 Blot Grant to subsidise asset, comparing:
- recognised as income; versus
- recognised as reduction of asset.
Repayment of grant (change in estimate).
15.6 Shrek Journals: grant to subsidise a non-depreciable asset, comparing:
- secondary condition leads to future expenses (non-
measurable);
- secondary condition leads to future expenses (measurable);
- secondary condition leads to future asset (depreciable).
15.7 Snowy Low interest loan
Forgiven amounts
Capitalisation of borrowing costs (IAS 23)
15.8 Lavender Journals and tax disclosure: Tax effects of a grant to subsidise a
non-monetary asset, comparing:
- grant is taxable; versus
- grant is exempt from tax
Further questions incorporating this topic with other topics may be found in Chapter A
(after Chapter 15) and in Chapter B (after Chapter 28). Chapters A and B are the
Integrated Questions chapters.
166 Chapter 15
Question 15.1
a.
Consider the following statements:

1. TKHWHUPµJRYHUQPHQWDVVLVWDQFH¶is defined as being the resources provided to an entity
by µgovernment¶.
2. All µgovernment assistance¶ must be recognised in the financial statement if the amounts
are material.
3. There is a choice between two methods of accounting for government grants: the capital
approach and the income approach.
4. Government assistance is a form of government grant that is not recognised in the
financial statements but is simply disclosed in the financial statements instead.
a) Only 1, 2 and 3 are correct

b) Only 1, 3 and 4 are correct
b.
A government grant received in the form of cash to be used to subsidise future expenses: .
a) must be recognised immediately as µJRYHUQPHQWJUDQWLQFRPH¶, within profit or loss.
b) must be recognised immediately as a µJRYHUQPHQWloan¶, a liability account.
c) must be recognised initially as a µdeferred grant income¶, a liability account, after which it
must be recognised as µgrant income¶ as and when the future expenses are incurred and
any other terms and conditions to the grant are met.
d) must be recognised initially as a µdeferred grant income¶, an asset account, after which it
will be recognised as grant income as and when the future expenses are incurred and
any other terms and conditions to the grant are met.
e) none of the options (a-d) are correct
c.
A cash grant received as immediate financial support, where all terms and conditions have
been met, must be presented as a separate line-item on the face of the statement of
a) True.
b) False.
d.
A grant of a depreciable asset (e.g. a plant) is recorded by recognising the asset (debit) and
recognising grant income (credit).
a) True.
b) False.
e.
A grant of a non-monetary, non-depreciable asset (e.g. land) is recorded by recognising the asset
(debit) and recognising grant income (credit) when the related terms and conditions are met.
a) True.
b) False.
Chapter 15 167
Question 15.2
Rugs Galore Limited is a company that manufactures carpeting. Rugs Galore is a labour-
intensive business. As an incentive for Rugs Galore to continue promoting employment rather
than investing in machinery, the government granted it a cash sum of C150 000. This grant
was received on 1 January 20X6 and was to be used to subsidise 20% of future wages.
Rugs Galore complied, during the previous financial year (20X5), with all the pre-conditions to
be awarded this grant. The only condition that remained on 1 January 20X6 is to incur future
wages. Wages were then incurred and paid as follows:
x 31 December 20X6: C200 000
x 31 December 20X7: C250 000
x 31 December 20X8: C400 000
Required:
Show all journals in the general journal of Rugs Galore Limited, for the years ended
31 December 20X6 to 20X8, assuming that the accounting policy is to:
a) recognise this grant as grant income;
b) recognise such government grants as an adjustment to expenses.
Ignore tax.
Question 15.3
Anthony Limited wanted to start manufacturing guns and weapons, a business that requires a
government licence. Anthony was astounded when the licence application, which cost
C35 000, was awarded on 31 December 20X8, only a week after submitting the application.
x The fair value of the licence is reliably determined to be C630 000 (gun manufacturing
licences are sought after and easily transferable).
x The application fee of C35 000 was paid on 31 December 20X8.
x The licence must be renewed every 5 years.
Over and above the licence, the company was also given free advice, by officials from the
government military department, on the manufacture and marketing of weapons. This
DVVLVWDQFHZDVJLYHQEHFDXVHRIWKHFRPSDQ\¶VH[FHOOHQW%((UDWLQJDgovernment imposed
set of criteria that companies in that country are encouraged to abide by).
Required
a) Show the journal entries for the year ended 30 June 20X9 assuming that Anthony Limited
measures the licence at its fair value.
b) Show the journal entries for the year ended 30 June 20X9 assuming that Anthony Limited
measures the licence at its nominal amount.
c) Provide the necessaU\GLVFORVXUHUHODWLQJWRWKHIUHHJRYHUQPHQWDGYLFHLQ$QWKRQ\/LPLWHG¶V
accounting records.
Ignore tax.
Question 15.4
Amazambane Limited is a company that farms corn. Amazambane is a relatively new

company in the agricultural industry. Amazambane was awarded a government grant of
C500 000 on 1 January 20X5, the details of which are as follows:
x C300 000 is to assist with the purchase of a new harvester;
x C200 000 is for immediate financial support and is not associated with any future costs.
168 Chapter 15
All conditions attaching to the grant were already met. Later that day, the harvester was
acquired for C900 000. The harvester has a useful life of 5 years. Harvesters that are already
5 years old are currently selling for C50 000 as scrap metal.
Required:
a) Show the general journal entries for the years ended 31 December 20X5 to 20X9 using
the direct method (recognised as grant income).
b) Show the general journal entries for the years ended 31 December 20X5 to 20X9 using
the indirect method (recognised as a reduction of the related costs).
Ignore tax.
Question 15.5
Blot Limited is a newly formed company that is considering entering the ink business. Blot
plans to manufacture ink and sell it to printing businesses. Due to the scarcity of businesses
in this sector, Blot Limited was awarded a government grant to purchase the machinery it
needed to start operations.
x The grant was awarded to Blot Limited on 1 January 20X6 for an amount of C250 000
and is conditional upon Blot manufacturing ink for an unbroken period of 3 years. Should
Blot cease manufacturing before the end of the 3-year period, the grant will have to be
repaid in full.
x Blot purchased the requisite machinery on 1 January 20X6 for C500 000. The machinery
is expected to have a useful life of 4 years and a nil residual value.
x Due to unforeseen circumstances, Blot had to stop manufacturing ink on 1 January 20X8,
but intends to continue on 1 January 20X9.
Required:
a) Show the general journal entries for the years ended 31 December 20X6 to 20X9 using
the direct method (recognised as grant income).
b) Show the general journal entries for the years ended 31 December 20X6 to 20X9 using
the indirect method (recognised as a reduction of the related costs).
Ignore tax.
Question 15.6
On 1 January 20X1, Shrek Limited received C900 000 cash from the government of Farfaraway.
The cash is to be used by Shrek to buy a swamp from one of its government officials.
x Shrek purchased the swamp from the official, with ownership of the swamp transferring
LQWR6KUHN¶VQDPHRQ$SULO; and on which date settlement of the full purchase price
of C200 000 was made.
x Shrek has received many grants in the past and has always credited them, where
possible, to the related non-monetary asset.
Part A
Assume that the grant came with a secondary condition that required Shrek to employ ten
government officials (a list of their names has been given to Shrek) from 1 January 20X1 for a
minimum period of 3 years. Their salaries will have to be in-line with company policy and be
subject to normal increases applicable to any other person employed by Shrek.
Required:
3URYLGHDOOHQWULHVLQ6KUHN/LPLWHG¶VJHQHUDOMRXUQDOIRUWKH\HDUHQGHG'ecember 20X1.
Chapter 15 169
Part B
Assume that the grant came with a secondary condition that required Shrek to drain the
swamp and clear it of all plant-life before 31 December 20X2.
x At 31 December 20X1, Shrek had estimated that the total cost of drainage would be
C70 000 and the total cost of removing all plant life would be C130 000. By this date,
Shrek had already incurred C40 000 in draining costs and C50 000 in removal costs.
x At 31 December 20X2, Shrek had incurred a total of C200 000 in draining costs and
C100 000 in removal costs and had now satisfied the secondary condition.
Required:
Provide all entries in Shrek¶VJHQHUDOMRXUQDOIRUWKHyears ended 31 December 20X1 and 20X2.
Part C
Assume that the grant came with a secondary condition that required Shrek to build a small
castle in a cornHURIWKHVZDPSWRKRXVH6KUHN¶VHPSOR\HHV
x The castle was complete on 31 March 20X2 at a total cost of C100 000 (paid in full on this date).
x The castle was available for use immediately, is expected to have a nil residual value and
has a useful life of 10 years.
Required:
3URYLGH DOO HQWULHV LQ 6KUHN /LPLWHG¶V JHQHUDO MRXUQDO IRU WKH \HDUV HQGHG 31 December 20X1 and 31
December 20X2.
Ignore tax.
Question 15.7
Snowy Limited is a South African manufacturer of marshmallows. Keen on improving its

ecological footprint, the South African government was offering loans to qualifying companies
in order to facilitate SURGXFWLRQ RI µJUHHQ SRZHU¶ 6QRZ\ /LPLWHG DSSOLHG IRU, and was duly
granted, one of these government loans on the basis that it was currently constructing a
building that was completely self-sufficient in terms of power.
The government loan granted to Snowy was for a sum of C700 000 and was effective from
1 March 20X1. The market interest rate on loans of this magnitude is 14%. The conditions of
the government loan were set out in a contract, an extract of which is shown below:
Clause 1: The loan is conditional upon: Not applicable

Clause 2: The loan is to be repaid on expiry of a two-year period from the date the loan is
granted: refer clause 4.
Clause 3: Interest of 7% will be charged on the loan, compounded annually and payable
only on expiry of the loan: refer clause 4 and clause 5.
Clause 4: The entire capital together with accrued interest for the two-year period is due
and payable on 28 February 20X3 as a µbullet payment¶: refer clause 5 and 6.
Clause 5: Should the company have in its employ 100 or more local workers on
28 February 20X2, the government agrees to write-off a sum equal to C140 000
(forgiven) against the capital balance owing, effective from this date and from
which date interest shall be calculated on the reduced capital balance.
Clause 6: 6KRXOG WKH FRPSDQ\¶V %(( UDWLQJ UHDFK /HYHO FRPSOLDnce) at
28 February 20X3, the government agrees to write-off a further sum (forgiven)
against the capital balance owing, effective from this date, this sum being C420 000.
170 Chapter 15
x Snowy Limited had in its employ 162 local workers as at 28 February 20X2 and had
reached the required Level 4 BEE rating on 28 February 20X3.
x The building meets the definition of a qualifying asset in terms of IAS 23 Borrowing costs
and thus interest incurred on the construction thereof is capitalised as part of the costs of
construction. The building was still under construction at 28 February 20X3.
x The loan was fully utilised from the date that it was granted and thus there were no
surplus funds to be invested at any stage during the period of the loan.
Required:
Show all journals that Snowy Limited would process for the years ended 28 February 20X2
and 20X3 assuming that its policy is to recognise grants directly as grant income.
Ignore tax.
Question 15.8
The government granted C114 000 in cash to Lavender Limited on 1 July 20X0. A condition
of this grant was that it be used to purchase a specific plant. Where government grants are
related to non-monetary assets, Lavender¶VDFFRXQWLQJSROLF\LVWRcredit the grant directly to
the related non-monetary asset.
Lavender purchased the specified plant on 1 August 20X0 for C570 000. It was delivered on
the same day but needed to be installed before it could be used.
The installation was fairly technical, and the only person qualified to perform it happened to
be on an extended sabbatical. However, he installed the plant immediately upon his return,
which enabled the plant to be used from 1 October 20X0. Strike action during October 20X0
resulted in the plant only being brought into use on 1 November 20X0.
Depreciation is provided on this plant on the straight-line basis over its expected useful life of
6 years to a nil residual value.
Lavender Limited made a profit before tax of C1 520 000 for the year ended 30 June 20X1.
This profit has been correctly calculated after taking into account all adjustments necessary
as a result of this grant.

x Income tax is levied at 30% on taxable profits.
x There are no temporary differences, exempt income or non-deductible expenses other
than those evident from the information provided.
Required:
Show the tax journal entries and tax expense note for the year ended 30 June 20X1, assuming:
a) The tax authorities:
- tax the receipt of the grant as income in the year of receipt; and
- allow the deduction of 20% of the cost of the plant per year, apportioned for periods of
less than a year.
b) The tax authorities:
- do not tax the receipt of the grant; and
- allow the deduction of 20% of the cost of the plant per year, apportioned for periods of
less than a year.
Chapter 15 171
GAAP: Graded Questions Integrated questions: chapters 1 - 15
Appendix A
Integrated questions: chapters 1 - 15
Question Key issues
A.1 Sailloft IAS 1: Presentation of financial statements

IAS 16: Property, plant and equipment
IAS 36: Impairments
A.2 Lights & IAS 1: Presentation of financial statements

Action IAS 12: Current and deferred tax
A.3 Motsi IAS 16: PPE: Revaluation model

IAS 40: Investment property
A.4 Murky Ether IAS 1: Presentation

IAS 16: PPE: Cost model
IAS 38: Intangible assets: Cost model
IAS 2: Inventory
A.5 Mocca IAS 1: Presentation of financial statements

IAS 10: Declaration of dividends after reporting period
IAS 12: Taxation: Current tax: calculation involving capital gains
IAS 16: PPE: Sale of depreciable asset: above cost / Revaluation of
non-depreciable asset
IAS 32: Share issue
A.6 Pink IAS 1: Presentation of financial statements

IAS 16: PPE: Purchase and revaluation (net replacement value method)
IAS 12: Taxation: Current and deferred tax affected by:
x revaluation of depreciable and deductible asset:
- revaluation above cost (intention to keep); and then
- devaluation below cost (no impairment)
x accruals
A.7 Cooper IAS 8: Change in estimated useful life of plant

IAS 12: Deferred tax and rate change
IAS 16: Revaluation of depreciable asset (gross replacement value
method)
A.8 Siphiwe IAS 16: PPE: Revaluation (gross replacement value method)
IAS 12: Deferred tax, involving:
x exempt temporary differences and
x PPE: revalued above cost: depreciable, non-deductible and
intention to sell
x tax loss: deferred tax asset recognised, used, written-down
IAS 8: Change in estimated useful life of building
A.9 Sandile IAS 12: Current tax: calculation

IAS 12: Deferred tax: calculation involving PPE that is depreciable
IAS 16: Cost model involving a self-constructed plant
IAS 23: Borrowing costs
A: Deductible plant involving borrowing costs
B: Non-deductible building involving borrowing costs
A.10 Phuza Grant package including a low interest loan, self-constructed asset
(IAS 16), capitalisation of borrowing costs (IAS 23), impairment of
assets (IAS 36) and tax effects (IAS 12)
172 Appendix A
Question A.1
Sail Loft Limited is a manufacturer and distributor of sails that are used by professional and
recreational windsurfers. The draft trial balance of the company for the year ended 31 March
20X5 is as follows:
SAIL LOFT LIMITED

DRAFT TRIAL BALANCE AT 31 MARCH 20X5
Debit Credit
Retained earnings 565 000
Land: Cost 2 000 000
Equipment and machinery: Cost 800 000
Equipment and machinery: Accumulated depreciation (31/03/X4) 272 000
Motor vehicles: Cost 440 000
Motor vehicles: Accumulated depreciation (31/03/X4) 220 000
Inventory 890 000
Cash and bank 591 000
Borrowings 2 240 000
Sales 3 650 000
Salaries expense 362 000
Litigation costs 150 000
Bad debts expense 25 000
Advertising expense 40 000
Repairs and maintenance 12 000
Fuel expense 33 000
Other costs 110 000
Dividends declared 50 000
8 051 000 8 051 000
x The ordinary share capital consists of 1 600 000 shares issued at C0,50.
x C200 000 of the borrowings are repayable on 30 September 20X5.
x Sail Loft Limited classifies expenses according to their function. Management categorise
the functions of the business into the areas of sales, administration and distribution.
- Salaries of C222 000 relate to the administrative function and C140 000 to the
distribution function.
- The bad debts, advertising and litigation costs relate to the administration function.
- The repairs and maintenance and the fuel relate to the distribution function.
- The other costs are all individually not material and relate C65 000 to administration
and C45 000 to distribution.
x The land is being held with the intention of building a new head office.
x The equipment and machinery are used in the production of inventory and were acquired
at a cost of C680 000. Additional equipment and machinery was purchased on 1 April 20X4
at a cost of C120 000. Depreciation is recognised on the straight line basis over five years
with no residual value.
x The motor vehicles are all delivery vehicles used to deliver goods to customers and cost
C440 000. Depreciation is recognised on the straight line basis over four years with no
residual value.
x On 31 March 20X5, management performed an impairment test on the vehicles after news
broke of an emissions testing scandal. The fair value was estimated at C45 000 with
C5 000 associated selling costs and the value in use was calculated to be C60 000.
Appendix A 173
x Interest of C8 000 for March 20X5 has not yet been paid.
x An amount of C12 000 of the advertising expense included on the trial balance has been
paid in advance in respect of the following period.
x The income tax expense has been correctly calculated at C64 800 and has not yet been
processed or paid.
x The final dividend for the year ended 31 March 20X4 of C50 000 was declared on 18 April
20X4. The final dividend for the year ended 31 March 20X5 of C60 000 was declared on
15 April 20X5. No interim dividends were declared.
x The financial statements have not yet been authorised for issue.
Required:
a) Prepare the statement of comprehensive income of Sail Loft Limited for the year ended
31 March 20X5 in accordance with International Financial Reporting Standards.
b) Prepare the current assets and current liabilities sections only of the statement of financial
position at 31 March 20X5 in accordance with International Financial Reporting Standards.
c) Prepare the statement of changes in equity of Sail Loft Limited for the year ended
31 March 20X5 in accordance with International Financial Reporting Standards.
d) Prepare the following notes to the financial statements of Sail Loft Limited for the year
ended 31 March 20X5 in accordance with International Financial Reporting Standards.
- Statement of compliance
- Basis of preparation
- Profit before tax
- Land, motor vehicles, equipment and machinery
- Trade and other receivables and payables
- Dividends.
Ignore comparatives for required a) to d).
Question A.2
Lights & Action plc is a small company listed on the Johannesburg Stock Exchange. It produces
and films advertisements for TV.
The trial balance of the company at 31 March 20X6 and 31 March 20X5 is as follows:
LIGHTS & ACTION LIMITED

TRIAL BALANCE AT 31 MARCH
20X6 20X5
Dr Cr Dr Cr
Equipment 250 000 275 000
Bank 54 000 50 000
Borrowings 86 000 93 000
Deferred tax 14 000 7 000
Accounts payable 13 000 10 000
Taxation payable 19 000 14 000
Deferred income 25 000 17 000
366 000 366 000 370 000 370 000
174 Appendix A
The summarised ledger accounts for taxation payable and deferred tax are shown below:
TAXATION PAYABLE
Description C Description C
Bank 14 000 Balance 14 000
Balance c/d 19 000 Taxation expense 19 000
33 000 33 000
Balance b/d 19 000
DEFERRED TAX
Bank Balance 7 000
Balance c/d 14 000 Taxation expense 7 000
14 000 14 000
Balance b/d 14 000
x The only source of cash receipts is from customers.

x A portion of the agreed fee for the production of an advertisement is required to be paid
by customers in advance. An amount of C108 000 was received as advance payments
during the year ended 31 March 20X6.
x Once the filming of the advertisement is complete, customers have three months to
settle the balance owing by them. An amount of C120 000 was received during the
year ended 31 March 20X6 from debtors in settlement of amounts owing by them for
services provided on credit.
x Lights & Action plc classify all of their expenses (other than interest) as ‘operating expenses’
for disclosure purposes.
x Interest expense of C4 000 was incurred and paid during the year ended 31 March 20X6.
x The tax rate is 20% and there are no permanent differences.
x A dividend of C134 000 was declared on 15 May 20X5 in respect of the year ended
31 March 20X5. A dividend of C140 000 was declared on 15 May 20X6 in respect of the
year ended 31 March 20X6.
x There are 120 000 ordinary shares of 50p par value in issue at 31 March 20X6. 20 000
ordinary shares were issued at par value on 30 November 20X5.
Required
a) Prepare a statement of changes in equity of Lights & Action for the year ended 31 March
20X6, deriving the profit for the year as a balancing figure.
b) Prepare a statement of profit or loss of Lights & Action plc for the year ended 31 March
20X6, deriving the operating expenses as a balancing figure.
c) Prepare the dividend note for inclusion in the financial statements for the year ended
31 March 20X6.
d) Describe the nature of the temporary difference arising during the year ended 31 March
20X6 as evidenced by the deferred tax ledger account.
Question A.3
Motsi Limited purchased a property on 1 April 20X7 to use as a distribution warehouse. The
cost of the property was C1 000 000 and was paid for in cash. On acquisition the financial
director attributed C250 000 to the cost of the land and C750 000 to the cost of the building.
Appendix A 175
The company’s accounting policy is to use the revaluation model for property and to depreciate
buildings at 2% per annum on the straight-line method. The residual value of the building is
estimated at C150 000. Revaluations are accounted for on the net replacement value method.
Over the next eighteen months, regeneration of the area resulted in property prices increasing
and on 31 December 20X8, the property was valued by a professional valuer at C1 200 000,
all attributable to the increase in the value of the land.
For some time, the directors of Motsi Limited have been considering a very favourable proposal
made by Oti Limited to rent the property referred above on a long-term basis. They agreed to
this at the December 20X8 board meeting and Oti Limited will take occupation of the property
from 1 January 20X9.
The fair value of the property at 31 December 20X9 was assessed by a professional valuer at
C1 300 000.
Required:
a) Prepare all the journal entries relating to the property for the years ending 31 December
20X7 and 20X8.
b) Prepare all the journal entries relating to the property for the year ending 31 December
20X9.
c) Briefly discuss the future accounting treatment of the revaluation surplus recognised at
31 December 20X8.
Ignore tax
Question A.4
The accountant of Murky Ether Limited has extracted the following balances, together with
working notes, for inclusion as separate line-items on the face of the statement of financial
position at 30 April 20X5:
Working note C
Land – carrying amount 1 638 000
Plant – carrying amount 2 175 000
Patent – carrying amount 3 50 000
Inventory 4 575 700
Accounts receivable 5 472 700
Allowance for doubtful debts 5 9 200
Ordinary share capital - 26 400
Retained earnings - 1 477 800
8% debenture liability - 50 000
Accounts payable 6 294 600
Bank overdraft - 18 400
Dividends payable - 30 000
Working notes
1. The company’s land was purchased on 1 April 20X0 for C638 000 and is measured using
the cost model.
2. The balance on the plant’s accumulated depreciation account at 30 April 20X4 was
C50 000. The plant’s depreciation expense in the current year was C25 000. Depreciation
is provided on the straight-line basis, at 10% p.a. to a nil residual value. Plant is measured
using the cost model.
3. The carrying amount of patent at 30 April 20X4 amounted to C60 000. The patent has an
estimated finite useful life of ten years and there is no commitment from a third party to
purchase it.
176 Appendix A
4. Inventory at year end consists of raw materials of C196 400, work-in-progress of C177 300
and finished goods of C202 000. Inventory is valued at the lower of cost and net realisable
value. The cost is measured using the FIFO basis.
5. Accounts receivable includes an amount of C50 000 owing by the managing director.
6. Accounts payable consists of accruals of C75 000, current tax payable of C27 520 and
trade payables of C192 080.
Required:
a) Prepare the non-current assets, current assets and current liabilities sections of the
statement of financial position for Murky Ether Limited at 30 April 20X5 in compliance with
b) Prepare the relevant notes to the financial statements to support the non-current assets,
current assets and current liabilities sections of the statement of financial position for Murky
Ether Limited at 30 April 20X5 in compliance with International Financial Reporting
Standards.
Accounting policy notes should be provided in respect of the statement of compliance, basis
of preparation, property, plant & equipment and inventory.
Question A.5
The managing director and financial director of Mocca Limited are discussing the preparation
of the company’s financial statements over a cup of coffee. Mocca Limited is involved in the
distribution of a range of wireless home accessories. The year end of the company is
28 February.
MD: “So what is the bottom line?”

FD: “I have not done the tax computation yet, but I can tell you that the profit before tax
amounts to C1 960 000 – and that takes into account all items of income and expense.
And our profits less distributions from start of business to the end of last year amount
to C2 850 000, so we are doing pretty well!”
MD: “I know that we have issued a further 500 000 ordinary shares during the year. Why
does your draft statement of changes in equity reflect C1 000 000?”
FD: “Our shares have no par value and we issued the new shares at a price of C2 each.”
MD: “How many more shares can we issue?”
FD: “We have now issued 3 000 000 shares at an issue price of C2 each from our
authorised share capital of 15 000 000 shares. We thus have 12 000 000 shares
available for issue.”
MD: “That vacant land that we purchased a while ago was a good buy!”
FD: “Yes, we bought it for C1 400 000 just over a year ago and in accordance with our
policy of measuring property using the revaluation model, the valuation from The
Institute of Valuers at the end of February 20X8 showed a value fair of C1 900 000. ”
MD: “We must get going on constructing that new office building!”
MD: “Sorry, I have spilt coffee over this schedule of capital profits and capital gains – it was
confusing to me even without the coffee spill!”
FD: “OK, let’s try and see what we can read. . .”
Appendix A 177
Accounting Tax
Cost of 600 000 600 000
Equipment SP is 660 000
CA / TB 360 000 360 000
SP
Capi
FD: “Oh: that’s bad! I’ll try to read it later . . .”

MD: “What ever happened to that litigation against us?”
FD: “We settled out of court at a cost of C180 000. I have expensed it in the current year
– and the entire amount is deductible for tax purposes!”
MD: “I see that you have omitted the dividend declaration from the statement of changes
in equity. Don’t forget to include it – we plan to authorise the financial statements for
issue next week on 25 April 20X8 and we declared the dividend on 10 April 20X8.”
FD: “At least I got the amount correct . . . I hope . . . the dividend was seven cents per
share.”
FD: “You will be very happy to know that our company is fully compliant with IFRS.”
MD: “Never mind that IFRS stuff, all we ever seem to do is to make payments to the
taxation authorities. What are the current tax rates? Didn’t the Minister announce a
reduction?”
FD: “No, the 20X8 rates are still the same as the 20X7 rates: current income tax rate is
29% and the CGT inclusion rate is 50%.”
Required:
In so far as information is available,
a) Prepare a statement of comprehensive income of Mocca Limited for the year ended
28 February 20X8, in accordance with International Financial Reporting Standards.
b) Prepare a statement of changes in equity of Mocca Limited for the year ended
28 February 20X8, in accordance with International Financial Reporting Standards.
c) Prepare the following notes to the financial statements in accordance with International
Financial Reporting Standards
x Statement of compliance and accounting policy for basis of preparation
x Share capital, profit before tax, income tax expense and dividends
Ignore deferred tax and comparatives.
Question A.6
Part A
Pink Limited offers a bespoke suit and shirt making service. Extracts from the trial balance of
the company for the financial years ended 31 May 20X8 and 20X9 are show below:
178 Appendix A
PINK LIMITED
TRIAL BALANCE EXTRACTS
31 May 20X9 31 May 20X8
Note Dr/ (Cr) Dr/ (Cr)
Share capital (1 000 000) (1 000 000)
Retained earnings: 1 June 1 (320 000) (274 000)
Equipment 2 750 000 1 275 000
Deferred tax ? (50 960)
Current tax payable: income tax 5 (38 844) (19 948)
Revenue received in advance 3 (60 000) (21 000)
Expenses prepaid 4 7 000 8 000
Inventory 398 000 400 000
Accounts payable (65 000) (40 000)
Bank overdraft (41 020) (10 000)
Revenue from sales 3 (1 510 000) (1 900 700)
Dividend income (80 000) (55 000)
Depreciation on equipment 1 ? 270 000
Other expenses 6 38 000 70 200

x The profit before tax has been correctly calculated at C1 670 000 for the year ended 31 May
20X9.
x The company purchased the equipment on 1 June 20X7. It was installed and available for
use in the manner intended by management on the same day. The cost of the equipment
was C1 350 000. It has an estimated useful life of five years and no residual value. The
tax authority allows a tax allowance of 20% per annum on the straight line basis.
x Pink Limited uses the revaluation model for the measurement of its equipment and due to
the nature of its operations the company has a policy of revaluing its equipment on an
annual basis. The net replacement value method is used to account for the change. The
company transfers the revaluation surplus to retained earnings as the asset is used.
x The fair value of the equipment, estimated using discounted cash flows by an independent
valuer amounted to C1 275 000 at 31 May 20X8 and C750 000 at 31 May 20X9. The useful
life and residual value of the equipment has remained unchanged. There were no
indicators of impairment at any stage during the year. The company’s intention has always
been to keep the asset.
x Revenue received in advance at year end relates to deposits received from customers with
regards to customised orders for suits and shirts. Revenue received in advance is taxed in
the year that it is received.
x Expenses prepaid at year end relate to normal office expenses. Expenses prepaid are
deductible in the year that they are paid.
x Provisional tax payments made during the year ended 31 May 20X8 amounted to
C279 000. The note to income tax for the year ended 31 May 20X8 was as follows:
Income tax expense C

Current 298 948
Deferred 50 960
Income tax expense per statement of comprehensive income 349 908
The tax assessment for the year ended 31 May 20X8 was received during March 20X9 and
reflected an assessed tax of C312 040. The amount owing was paid in March 20X9.
Appendix A 179
Provisional tax payments made during the year ended 31 May 20X9 amounted to C450 000.
The current tax payable for the year ended 31 May 20X9 has been correctly calculated at
an amount of C488 844.
x Included in other expenses is an amount of C7 120 which is not tax-deductible.
x The company income tax rate is 28% for both years.
x There are no other components of other comprehensive income other than those outlined
above.
Required:
a) Provide the journal entries relating to the equipment for the years ended 31 May 20X8 and
31 May 20X9.
Ignore the entry relating to the purchase of the equipment.
b) Prepare an extract from the statement of comprehensive income of Pink Limited for the
year ended 31 May 20X9 in conformity with International Financial Reporting Standards.
Start with the ‘profit before tax’ line item.
c) Prepare an extract from the statement of changes in equity of Pink Limited for the year
ended 31 May 20X9, showing only the revaluation surplus and retained earnings columns,
in conformity with International Financial Reporting Standards.
d) Prepare the following notes to the financial statements of Pink Limited for the year ended
31 May 20X9 in conformity with International Financial Reporting Standards.
x Profit before tax
x Income tax expense
x Equipment
x Deferred tax asset / liability
x Tax on other comprehensive income
Comparative figures and accounting policies are not required.
Part B
The managing director of Pink Limited made the following comment when reviewing the
financial statements for the year ended 31 May 20X8:
“I see that revaluation of equipment is shown under the heading of ‘other comprehensive
income’. Surely this is incorrect – a revaluation can’t result in income as nothing has been
sold?’
Required:
Provide an answer to the managing director’s question.
Question A.7
Cooper Limited is a company that distributes accessories for the range of Mini cars.
The following is an extract from the trial balance of the company for the years ended
31 December 20X7, 20X8 and 20X9:
COOPER LIMITED
TRIAL BALANCE AT 31 DECEMBER
20X9 20X8 20X7
C C C
Profit before taxation 2 400 000 1 300 000 1 100 000
Prepaid expenses 20 000 15 000 0
Accrued expenses 32 000 24 000 0
180 Appendix A
The profit before taxation has been correctly calculated and takes into account the effect of all
the transactions described below.
The company purchased its only item of plant on 1 January 20X6 at a cost of C400 000. The
estimated useful life of the plant is 10 years with no residual value. The tax authorities allow a
tax allowance of 20% per annum on the straight line basis. The company’s intention has always
been to keep the plant.
On 31 December 20X8, the plant was revalued by an independent valuer to a fair value of
C480 000. The useful life and residual value remained unchanged. The policy of the company
relating to revaluations is to use the gross replacement value method and to transfer the
revaluation surplus to retained earnings on sale of the asset.
During 20X9 the estimated useful life of the plant was reassessed from a total of 10 years to a
total of 15 years. The change in the estimated useful life is applied from the beginning of the
20X9 year. The residual value remained unchanged.
The financial accountant has correctly prepared the following computation relating to the plant:
CA TB
Plant C C
01/01/X6 Cost 400 000 400 000
31/12/X7 Depreciation / tax allowance (80 000) (160 000)
31/12/X7 Balance 320 000 240 000
The company has operated from rented premises for a number of years and on
1 January 20X6 purchased a property at a cost of C4 000 000. The financial accountant
estimated that C1 000 000 of the cost was attributable to the land and that C3 000 000 of the
cost was attributable to the building. The land is not depreciated. The estimated useful life of
the building is 20 years with no residual value.
The tax authorities agreed with the company’s allocation of the cost. The base cost of the
building was determined to be C3 100 000. The tax authorities do not allow any tax allowances
on the land or on the building.
Towards the end of 20X9, the directors realised that the property was not suitable for their
needs and it was sold on 31 December 20X9 for an amount of C5 000 000. It was estimated
that C1 000 000 of the selling price was attributable to the land and that C4 000 000 of the
selling price was attributable to the building.
The financial accountant has correctly prepared the following computation relating to the
property:
CA TB
Building C C
01/01/X6 Cost 3 000 000 ?
31/12/X7 Depreciation/ tax allowance (300 000) ?
Balance 2 700 000 ?
Land
01/01/X6 Cost 1 000 000 ?
31/12/X7 Depreciation/ tax allowance - ?
Balance 1 000 000 ?
The corporate tax rate was 29% for the year ended 31 December 20X8. The Minister of Finance
announced a change in the corporate tax rate to 28% at the end of August 20X9, effective for
years ending on or after 30 September 20X9. The inclusion rate for CGT is 50%.
Appendix A 181
The tax authorities

x allow the deduction of prepaid expenses in the year when the payment is made
x allow the deduction of accrued expenses in the year of accrual
Required:
a) In so far as information has been provided, prepare a statement of comprehensive income
of Cooper Limited for the year ended 31 December 20X9, in conformity with International
Financial Reporting Accounting Standards.
b) Prepare all the relevant notes to the financial statements of Cooper Limited for the year
ended 31 December 20X2, inconformity with International Financial Reporting Standards.
Accounting policies and the basis of preparation note are not required.
For the Property, plant and equipment note, disclosure of the property is not required, i.e.
limit your disclosure to the plant only.
Question A.8
Siphiwe Limited is a newly established company in the information technology service industry.
Information regarding Siphiwe Limited’s property, plant and equipment:
Siphiwe Limited’s policy is to measure all classes of property, plant and equipment on the
revaluation model, to account for revaluations using the gross replacement value method and
to transfer any revaluation surplus to retained earnings over the remaining life of the underlying
asset. Details of Siphiwe Limited’s only class of property, plant and equipment, being a building,
are as follows:
x The building was purchased on 1 July 20X7 for C1 100 000 (including transfer duty of
C100 000), paid directly to the lawyer dealing with the conveyancing. The cost of the land
on which it was built is considered to be immaterial and therefore no portion of the purchase
consideration was allocated to land.
x The building became available for use on 1 October 20X7 and is being used exclusively as
the company’s head office.
x The building was valued by an independent valuer at 31 December 20X7 to its fair value of
C1 484 500, which was calculated using level one inputs using the market approach on this
date. The next valuation is due to be performed on 31 December 20X9.
x The total useful life of the building was originally expected to be 10 years. From
1 January 20X8, however, the remaining useful life was re-estimated to be 20 years. The
residual value was nil and the method of depreciation was straight-line (both unchanged
since date of purchase). The company uses the reallocation method to account for changes
in estimates.
x The building has never been impaired.
x At the end of the 20X7 financial year, the company’s intention was to sell the building. The
company was still actively looking for a buyer at 31 December 20X8. The criteria to be
classified as held for sale had, however, not been met at any stage.
x The base cost of the building for the purposes of calculating any taxable capital gain is
C1 200 000.
Information regarding its tax loss:

x Siphiwe Limited made a tax loss (assessed loss) of C5 000 000 in the tax year ended
31 December 20X7. There was no tax loss brought forward from years before 20X7.
182 Appendix A
x Siphiwe Limited made a taxable profit for the year ended 31 December 20X8 of C4 000 000,
calculated before taking into consideration the tax loss carried forward from 2007.
x At 31 December 20X7, management was of the opinion that there would be sufficient future
taxable profits against which the unused tax loss could be utilised. At 31 December 20X8,
however, management was of the opinion that no future taxable profits would be earned in
future against which the tax loss could be utilised.
x The tax authorities:
- levy corporate income tax at 40% (unchanged for many years);
- apply a capital gains inclusion rate of 50%;
- do not allow any tax deductions relating to the cost of the building;
- allow tax losses to be carried forward to future years where they may be deducted
against taxable profits.
x There are no other differences between accounting profit and taxable profit other than those
evident from the information given.
Required:
Show all the journal entries in the accounting records of Siphiwe Limited for the years ended
31 December 20X7 and 31 December 20X8 that are possible from the information provided.
Question A.9
Part A:
Sandile Limited earned a profit before tax of C3 000 000 in the year ended 31 December 20X8,
before taking into account the depreciation on the item of property, plant and equipment below.
Sandile Limited owned only one item of property, plant and equipment, being a plant which it
constructed between 2 January 20X8 and 30 June 20X8.
x The construction costs totalled C1 000 000.
x Sandile Limited incurred borrowing costs of C500 000 during this period of construction
which were correctly capitalised to the plant in terms of IAS 23 Borrowing Costs.
x The plant was available for use from 1 July 20X8.
x Depreciation on this plant is provided on the straight-line basis over the estimated 10 year
useful life to a nil residual value.

x allow a deduction of 20% per annum of the cost of the plant (excluding the borrowing costs),
not apportioned for part of a year;
x allow a deduction of borrowing costs in the year that the underlying asset is first available
for use in the production of income
x levy corporate income tax at 30%.
There are no other differences between accounting profit and taxable profit other than those
evident from the information given.
There are no items of other comprehensive income.
Part B
Same information as in Part A, except that the item of property, plant and equipment is a
building and the cost is not allowed as a deduction for the purpose of calculation of taxable
profit.
Appendix A 183
Required:
a) Prepare all the journal entries relating to tax in the accounting records of Sandile Limited
for the year ended 31 December 20X8 in compliance with International Financial Reporting
Standards.
b) Prepare the income tax expense note for inclusion in Sandile Limited’s financial statements
for the year ended 31 December 20X8 in compliance with International Financial Reporting
Standards.
Question A.10
Phuza Limited was unable to secure financing from a bank for the construction of a desalination
plant at the Tugela River mouth. On 1 January 20X7 the government offered to assist
Phuza Limited by giving the company a package to the value of C1 200 000.
This package consists of the following:

x a C200 000 grant for the general expenditure over the next 2 years,
x a C100 000 grant to cover past expenses incurred by the company,
x a C400 000 grant to be used to pay for the construction of the plant, and
x a further C500 000 specific loan at 10% interest repayable in 2 years’ time, for additional
construction costs of the plant. Interest is compounded annually on 31 December. The
prevailing market interest rate is 10%.
The construction of the plant began on 2 January 20X7 and was complete on 31 December 20X7, at
a cost of C2 000 000. Due to administrative problems, the constructed plant only began production of
fresh water on 1 March 20X8. The plant has an expected useful life of 10 years and a nil residual
value.
In the afternoon of 31 December 20X8, the plant was flooded due to a severe storm. As a result,
the plant’s recoverable amount was calculated and determined to be C800 000.
The interest on the loan for both 20X7 and 20X8 was paid on 31 December 20X8 together with
the repayment of the loan principal.
The company accounting policy is to measure plant using the cost model and to recognise
grants as a credit to the related expense and assets.
The desalination plant is a qualifying asset in terms of IAS 23.

x allow the deduction of all capitalised borrowing costs in the first year of use;
x allow an annual wear and tear allowance on the cost of the plant (excluding the borrowing
costs) of 20%;
x tax government grants in the year they are received;
x levy corporate income tax at 30%.
Required:
a) Based on the above information, prepare all the journal entries in the accounting records of
Phuza Limited for the financial years ended 31 December 20X7, 20X8 and 20X9.
b) Draft the property, plant and equipment note for the year ended 31 December 20X8, in
accordance with International Financial Reporting Standards, assuming Phuza Limited had
no other property, plant and equipment.
184 Appendix A
GAAP: Graded Questions Leases: lessee accounting
Chapter 16
Leases: lessee accounting
Question Key issues

16.2 Dark & White Identified asset, substitution rights

16.3 Hello Ability to direct the use of an identified asset
16.4 Big Red Ability to direct the use of an identified asset, protective rights
16.5 Point to Point Identification of short-term lease exemption
16.6 Teach Identification of low value lease exemption
16.7 Build Lease components
16.8 Food for All Lease term
16.9 Villa Residual value guarantee
16.10 Abey Low value lease exemption, journal entries
16.11 Cow Low value lease exemption, journal entries, financial statements, current
tax and deferred tax
16.12 Tree Tops Comparing the recognition of right of use asset and lease liability with the
low value lease exemption.
16.13 Eagle Recognition of right of use asset and lease liability, residual value
guarantee, journals, extract from financial statements, lease note
16.14 Devon Coach Recognition of right of use asset and lease liability, purchase option,
Tours journals, extract from financial statements, lease note
16.15 Circle Recognition of right of use asset and lease liability, financial year does
not correspond with lease contract, extract from financial statements,
lease note
16.16 Roasted Recognition of right of use asset and lease liability, reassessment of
Bean lease term, journals, lease note
16.17 Chirp Recognition of right of use asset and lease liability, variable lease
payments, current tax and deferred tax, journals, extract from financial
statements, lease note
Chapter 16 185
Question 16.1
a.
A customer enters into a five-year contract with an aviation company for the exclusive use of a
corporate jet. The contract details the exterior and interior specifications. The aviation
company is permitted to use an alternative jet, but this would be uneconomical because of the
cost of customising the aircraft. The customer decides where the jet will fly, and which
passengers will use it. The crew supplied by aviation company.
Does the contract contain a lease?
a) Yes
b) No
b.
A car manufacturer enters into a contract with a shipping company to transport cars from
Southampton to Cape Town. The contract specifies a particular ship and the cars to be
transported, which use the full capacity of the ship .The shipping company operates and
maintains the ship. The car manufacturer is not able to make changes to the destination or to
the cargo once the contract is signed.
Does the contract contain a lease?
a) Yes
b) No
c.
On 1 January 20X6, a company entered into a three-year lease for the use of office printers.
The lease contract requires an advance payment of C400 on 1 January 20X6 and three annual
instalments of C600 in arrear on 31 December 20X6, 20X7 and 20X8.
The lease qualifies for the low-value lease exemption.
For the year ended 31 December 20X6, the financial statements of the lessee will report the
following:
a) Lease expense of C733 and a lease prepaid of C267

b) Lease expense of C600 and a lease prepaid of C400
c) Lease expense of C733 and a lease accrual of C267
d) Lease expense of 600 and a lease accrual of C400
e) Lease expense of C1 000 and no lease prepaid or lease accrued
d.
A company leased a motor vehicle on 1 July 20X1 for a period of two years. The contract
contains a lease. Instalments of C14 160 are payable in arrears on 30 June 20X2 and 30
June 20X3.
The present value of the lease instalments on 1 July 20X1 is C23 930 and the implicit interest
rate is 12%.
Working to the nearest whole number, the lease liability will be disclosed on the statement of
financial position at 30 June 20X2 as a
186 Chapter 16
a) Current liability of C14 160

b) Non-current liability of C14 160
c) Current liability of C12 642
d) Non-current liability of C12 642
e) Current liability of C11 125
e.
In terms of IFRS 16, Leases, a right-of-use asset is depreciated over the:
a) 6KRUWHURIWKHOHDVHWHUPDQGWKHDVVHW¶VXVHIXOOLIH
b) /RQJHURIWKHOHDVHWHUPDQGWKHDVVHW¶VXVHIXOOLIH
c) Entre lease term.
d) Useful life of the asset.
Question 16.2
Part A
Dark & White Limited is a manufacturer of luxury chocolates. The entity enters into a three year
contract with Wheels Limited, a road transport company, for the use of ten vehicles to deliver
orders of customer chocolates around the country.
The model and capacity of the vehicles are specified in the contract and the vehicles are painted
in the corporate colours of Dark & White Limited. Dark & White Limited provides its own drivers.
7KHYHKLFOHVDUHSDUNHGDW'DUN :KLWH¶VIDFWRU\ZKHQQRWLQXVH and can be used for storage

or to transport goods of other manufacturers. Wheels Limited cannot take back a vehicle during
the contract period. If a particular vehicle needs servicing or repair, Wheels Limited is required
to substitute a vehicle of the same type.
Required:
Discuss, with reference to IFRS 16 Leases, whether the arrangement contains a lease.
Part B
Dark & White Limited is a manufacturer of luxury chocolates. The entity enters into a three year
contract with Wheels Limited, a road transport company, for the use of ten vehicles to deliver
orders of customer chocolates around the country.
The model and capacity of the vehicles are specified in the contract. Wheels Limited provides
drivers for the vehicles and can also transport goods of other customers if there is spare
capacity in the vehicles.
:KHHOV/LPLWHGKDVDGHSRWLQWKHVDPHDUHDDV'DUN :KLWH/LPLWHG¶VFKRFRODWHIDFWRU\DQG
WKHYHKLFOHVDUHSDUNHGDW:KHHOV/LPLWHG¶VSUHPLVHVZKHQQRWLQXVHWheels Limited has a
large pool of similar vehicles that could be used to fulfil the requirements of the contract. The
cost associated with substituting the vehicles used by Dark & White Limited with other similar
vehicles are minimal for Wheels Limited.
Required:
Chapter 16 187
Question 16.3
Part A
Hello Limited is a telecommunications company, providing internet and data services to its
customers. Its engineers have been investigating ways to improve customer service and have
taken a decision to create their own privately owned fibre optic network.
Hello Limited enters into a twenty year contract with Interdata Limited, a telecommunications
company, for the right to use 100 out of 1 000 strands of fibre within the undersea cable
connecting the United Kingdom and Europe with South Africa.
Hello Limited has control of the use of the 100 strands of fibre within the cable and decides the
type and quantity of data that will be transported. It is also responsible for the technical
connections to its equipment.
Interdata Limited is responsible for the repairs and maintenance to the undersea cable. It can
substitute the strands only for purposes of repair and maintenance.
Required:
Part B
Hello Limited is a telecommunications company, providing internet and data services to its
customers. Its engineers have been investigating ways to improve customer service and have
taken a decision to obtain the right to use a specified amount of bandwidth capacity within an
existing fibre optic network .
Hello Limited enters into a twenty year contract with Interdata Limited, a telecommunications
company for the right to use a specific amount of bandwidth capacity within the undersea cable
connecting the United Kingdom and Europe with South Africa. The specified amount is
equivalent to Hello Limited having the full capacity of 100 strands of fibre within a 1 000 strand
cable.
Interdata Limited makes decisions about which strands are used to transport Hello /LPLWHG¶V
data and is responsible for the technical connections to its equipment.
Required:
Question 16.4
Part A
Big Red Limited is a producer of apples. It enters into a contract with Freight Limited, a shipping
company, for the transport of apples from Cape Town to Southampton on a specific ship.
Freight Limited does not have substitution rights.
The contract specifies the quantity, grade and packaging of the apples to be transported as well
as the dates of departure and arrival. The apples will occupy substantially all of the capacity of
the ship.
Freight Limited operates and maintains the ship and is responsible for the safe transport of the
apples and other cargo on board. Big Red Limited is not permitted to hire another operator for
the ship or to operate the ship itself.
188 Chapter 16
Required:
Part B
Big Red Limited is a producer of apples. It enters into a contract with Freight Limited, a shipping
company, for the transport of apples for a three year period on a specific ship. Freight Limited
does not have substitution rights.
Big Red decides on the quantity, grade and packaging of apples to be transported, the dates
of travel and also the departure and arrival ports. It is also permitted to use spare capacity to
transport produce from neighbouring farms.
Freight Limited operates and maintains the ship and is responsible for its safe passage. It can
restrict the ship from sailing into waters at high risk of piracy and can restrict the carrying of
unsuitable cargo.
Required:
Question 16.5
Point to Point Limited provides a service transporting passengers to and from the airport to
hotels in the city and surrounding areas.
It enters into a contract with Bus Limited for the lease of five 25 seater buses for a period of
three years. The lease payments are constant over the lease term.
The market for airport transfers is constantly changing and Point to Point Limited may need to
use smaller 15 seater buses or larger 40 seater buses, depending on whether other modes of
transport become available or not. As such, the contract allows Point to Point Limited to cancel
the lease at the end of the first year or at the end of the second year without any penalty.
Required:
Discuss, in terms of IFRS 16 Leases, how Point to Point Limited should account for this lease
contract.
Question 16.6
Teach Limited is a private educational institution. It enters into a contract with Copy Limited for
the lease of twenty-one printers for a period of three years.
One of the printers is a high specification printer that can cope with high volumes and can email
scanned documents to recipients. It has a current retail price of C20 000. The other 20 printers
are desk models for use in individual offices and each has a current retail price of C2 000.
The make and model of the printers is specified in the contract and although Copy Limited has
substitution rights, it is not economically viable to do so.
Required:
Discuss, in terms of IFRS 16 Leases, how Teach Limited should account for this lease contract.
Chapter 16 189
Question 16.7
Build Limited enters into a contract with Bull Limited for the lease of heavy-duty construction
equipment. The duration of the lease is for one year.
Bull Limited undertakes to insure the equipment and to maintain it by having it serviced every
month. The contract stipulates that the payments are C24 000 for the year, of which C4 000
relates to the annual insurance and C7 200 relates to the provision of the monthly services.
Similar insurance provided by third parties would normally cost C4 000 per year and the cost
for the monthly services would normally be C10 000 per year.
Build Limited elects the short-term lease exemption for this contract.
Part A
The stand-alone price of the equipment is not available.
Part B
The price to lease similar equipment for a year (without the insurance and additional services)
is C20 000.
Required:
a) Discuss briefly the identification of the components in this lease contract in terms of IFRS
16 Leases.
b) For each of Part A and Part B, calculate the amount to allocate to the lease and non-lease
components.
c) For Part A, provide the journal entries in the accounting records of Build Limited.
Question 16.8
Part A
Food for All Limited operates a chain of supermarkets around the country. It enters into a
contract with Prop Limited for the lease of a warehouse in a location chosen by Food for All
Limited for its proximity to some of its retail outlets and access to the road transport network. It
cannot be substituted by Prop Limited.
The initial lease term is for three years, at a rental of C50 000 per month which is in accordance
with current market rates. It is non-cancellable. Food for All Limited has the option to extend
the lease for a further three year non-cancellable term at the same rental.
Market rentals for similar warehouses in the same area are expected to increase by 10% over
the six year period. Over the next ten years, Food for All Limited intends to expand its retail
outlets in the surrounding areas and the government has announced plans to further improve
the road network.
Required:
Discuss, in terms of IFRS 16 Leases, the length of the lease term that Food for All should use
in accounting for this contract.
Part B
Food for All Limited operates a chain of supermarkets around the country. It enters into a
contract with Prop Limited for the lease of a warehouse in a location chosen by Food for All
190 Chapter 16
Limited for its proximity to some of its retail outlets and access to the road transport network. It
cannot be substituted by Prop Limited.
The initial lease term is for three years, at a rental of C50 000 per month which is in accordance
with current market rates. It is non-cancellable. Food for All Limited has the option to extend
the lease for a further three year non-cancellable term at a rental of C55 000 per month.
Food for All Limited is considering the future of its retail outlets in the surrounding areas as
some of the stores are not performing well.
Required:
Discuss, in terms of IFRS 16 Leases, the length of the lease term that Food for All should use
in accounting for this contract.
Question 16.9
Villa Limited entered into a contract with Motor Holdings Limited for the lease of five luxury
motor cars for use by its directors. The lease term is for five years and is non-cancellable.
The contract stipulates a residual value guarantee ± if the fair value of the cars at the end of
the lease term is below C100 000 in total, Villa Limited is required to pay the difference between
C100 000 and the fair value of the cars to the lessor.
At the inception of the lease, Villa Limited expects the fair value of the cars at the end of the
lease term will be C80 000.
Required:
Discuss, in terms of IFRS 16 Leases, the amount that Villa Limited is to include in the calculation
of the present value of future lease payments in respect of the residual value guarantee.
Question 16.10
Abey Limited entered into a contract with Data Pro Limited for the lease of twenty-four laptop
computers. The contract was entered into on 1 April 20X1 for a two year period. Each item is
of low value and Abey Limited applies the low value exemption of IFRS 16 Leases. The benefit
derived for Abey Limited from the lease agreement is constant over the lease period.
The following amounts are payable to Data Pro Limited per the lease agreement:
x From 1/4/20X1 ± 31/03/20X2: C2 000 per month
x From 01/04/20X2 ± 31/03/20X3: C3 000 per month
Abey Limited has a 31 December year-end.
Required:
Prepare the journal entries in the accounting records of Abey Limited for the years ended
31 December 20X1, 20X2 and 20X3.
Ignore taxation
Question 16.11
Cow Limited is a firm operating in the advertising industry. It entered into a contract with Funky
Furniture Limited for the lease of furniture for 100 work stations. This includes a desk, chair
and side table for each work station. Each item is of low value and Cow Limited applies the
Chapter 16 191
low value exemption of IFRS 16 Leases. The benefit derived for Cow Limited from the lease
agreement remains constant over the lease period.
The lease period is for eight years, commencing on 1 January 20X2. Cow Limited has won a
large contract spanning 20X3 to 20X5 and thus will be hiring more staff who will need work
space. The lease payments have been structured to assist Cow Limited with its cash flows,
and are payable in advance as follows:
Year C
20X2 10 000 per annum
20X3 ± 20X5 25 000 per annum
20X6 0
20X7 ± 20X9 10 000 per annum
&RZ/LPLWHG¶VSURILWEHIRUHWD[LV& 000 in 20X2 (after correctly accounting for the lease).

The tax authority account has a debit balance of C112 000 before recognising the income tax
expense for the current year.
The income tax rate is 30%. The tax authorities allow the deduction of lease payments in the
year the payment is made. There are no other temporary differences other than those evident
from the information provided. Cow Limited satisfies the requirements to raise deferred tax
assets.
Required:
a) Prepare the journal entries in the accounting records of Cow Limited for the year ended
31 December 20X2.
b) Prepare extracts from the statement of comprehensive income of Cow Limited for the year
ended 31 December 20X2 and from the statement of financial position for the year ended
on that date.
c) Prepare the lease and income tax expense notes to the financial statements of Cow Limited
Question 16.12
Tree Tops Limited is a small listed company, operating a portfolio of care homes. Tree Tops
Limited entered into a contract with Slumber Limited for the lease of 100 hospital-style beds.
Each bed is considered to be an identified underlying asset.
The commencement date of the lease is 1 April 20X5. The lease agreement is for a period of
three years and requires total lease payments in arrear as follows:
Date C
31/03/X6 20 000
31/03/X7 22 000
31/03/X8 24 000
The estimated useful life of the beds is three years with no residual value.
Tree Top Limited¶V LQFUHPHQWDO ERUURZLQJ UDWH LV 7KH following present value table is
provided:
192 Chapter 16
PV factor
Present value of C1 in one year, discounted at 10% 0.9091
Present value of C1 in two years, discounted at 10% 0.8264
Present value of C1 in three years, discounted at 10% 0.7513
Present value of annuity in arrear of C1 for three years, discounted at 10% 2.4868
The financial year end of Tree Tops Limited is 31 March.
Part A
Assume that the contract contains a lease and the IFRS 16 Leases single lease model is
applied.
Required:
a) Calculate the amount to recognise as the initial lease liability.
b) Prepare an amortisation table, showing clearly the instalments, the interest and the balance
on the lease liability for each of the years ending 31 March 20X6, 20X7, and 20X8.
c) Prepare all the relevant journal entries in relation to the lease contract in the accounting
records of Tree Tops Limited for the year ended 31 March 20X6 only.
d) Prepare an extract from the statement of financial position at 31 March 20X6 showing the
disclosure of the right of use asset and the lease liability.
Ignore tax and deferred tax.
Round your calculations to the nearest whole number.
Part B
Assume that the low value asset exemption of IFRS 16 Leases is applied.
Required:
a) Explain briefly on what grounds Tree Tops Limited can apply the low value asset exemption.
b) Prepare the journal entries in relation to the lease contract in the accounting records of Tree
Tops Limited for the years ending 31 March 20X6, 20X7 and 20X8.
Question 16.13
Eagle Limited has a factory situated away from established commuter routes and provides bus
transport for its employees from the city centre to the factory.
Eagle Limited entered into a contract with BigFin Limited for the lease of a bus. The model and
size of the bus is stated in the contract and BigFin Limited does not have substitution rights.
The commencement date of the lease is 1 April 20X5 The lease agreement is for a period of
four years and requires four lease payments in advance of C110 000. The first payment is due
on 1 April 20X5 and the remaining three payments on 1 April 20X6, 1 April 20X7 and 1 April
20X8.
The contract stipulates a residual value guarantee of C80 000. At the inception of the lease,
Eagle Limited expects that the fair value of the bus at the end of the lease term will be C42 500.
The estimated useful life of the bus is six years.
(DJOH/LPLWHG¶VLQFUHPHQWDOERUURZLQJUDWHLV7KHIROORZLQJSUHVHQWYDOXHWDEOHLVSrovided:
Chapter 16 193
PV factor
Present value of annuity in arrear of C1 for three years, discounted at 7% 2,62431
Present value of C1 in four years, discounted at 7% 0,76289
The financial year end of Eagle Limited is 31 March.
Required
a) Prepare the journal entries in the accounting records of Eagle Limited for the year ended
31 March 20X6 (the first year of the contract) and 31 March 20X9 (the last year of the
contract).
b) Prepare an extract from the statement of financial position of Eagle Limited at
31 March 20X6 showing the disclosure of the non-current assets, non-current liabilities and
current liabilities, in accordance with International Financial Reporting Standards.
c) Prepare the lease note to support the disclosure of the lease in the financial statements of
Eagle Limited for the year ended 31 March 20X6, in accordance with International Financial
Reporting Standards.
Round your calculations to the nearest whole number
Question 16.14
Devon Coach Tours Limited entered into a contract with Bus Manufacturers Limited for the
lease of two buses. The model and size of buses are stated in the contract and Bus
Manufacturers does not have substitution rights.
The commencement date of the lease is 1 July 20X0 and the duration of the lease is for five
years. It is non-cancellable. Five lease payments of C135 000 are to be made annually, in
arrear, the first being made on 30 June 20X1.
The lease agreement gives the lessee the option to purchase the buses at the end of
the fifth year for C10 000. Devon Coach Tours Limited intends to take up this option.
The interest rate implicit in the agreement is 12%. The following present value table is provided:
PV factor
Present value of annuity in arrears of C1 for five years, discounted at 12% 3,6048
Present value of annuity in arrears of C1 for four years, discounted at 12% 3,0375
Present value of annuity in arrears of C1 for three years, discounted at 12% 2,4018
Present value of annuity in arrears of C1 for two years, discounted at 12% 1,6901
Present value of C1 in five years, discounted at 12% 0,5674
The fair value of the buses at the inception of the lease is C492 322.
The estimated useful life of the buses is eight years, with an estimated residual value of C7 000.
The buses are to be depreciated on a straight-line basis.
Required:
a) Prove that the rate of interest implicit in the lease is 12%.
b) Prepare the journal entries to account for the lease in the accounting records of Devon
Coach Tours Limited for the year ending 30 June 20X1.
c) Prepare an extract from the statement of financial position of Devon Coach Tours Limited
at 30 June 20X2 showing the disclosure of the non-current assets, non-current liabilities
and current liabilities
194 Chapter 16
d) Prepare the lease note to support the disclosure of the lease in the financial statements of
Devon Coach Tours Limited for the year ended 30 June 20X2, in accordance with
Round your calculations to the nearest whole number.
Ignore tax.
Question 16.15
Circle Limited is committed to achieving a net zero emission from its factory and thus decided
to replace a significant item of plant with one that is more environmentally friendly. The
acquisition was financed by entering into a contract with Planet Limited for the lease of an item
of plant. The plant is specified in the contract and Planet Limited does not have substitution
rights.
The commencement date of the lease is 2 January 20X1 and the duration of the lease contract
is for four years. Lease payments are required to be made as follows:
x C10 000 in advance on 2 January 20X1
x C13 200 on 31 December 20X1
Circle Limited paid C2 000 to its legal advisors in relation to the lease contract. This was paid
on 2 January 20X1.
The plant has an estimated useful life of eight years and no residual value. There is no option
to purchase the plant.
&LUFOH /LPLWHG¶V LQFUHPHQWDO ERUURZLQJ UDWH LV 7KH IROORZLQJ SUHVHQW YDOXH WDEOH LV
provided:
PV factor
Present value of C1 in one year, discounted at 10% 0,9091
Present value of C1 in two years, discounted at 10% 0,8264
Present value of C1 in three years, discounted at 10% 0,7513
Present value of C1 in four years, discounted at 10% 0,6830
The financial year end of Circle Limited is 30 June.
Required
a) Prepare an extract from the statement of financial position of Circle Limited at 30 June 20X2
showing the disclosure of the non-current assets, non-current liabilities and current
liabilities, in accordance with International Financial Reporting Standards.
b) Prepare the lease note to support the disclosure of the lease in the financial statements of
Circle Limited for the year ended 30 June 20X2, in accordance with International Financial
Comparatives are required for both (a) and (b)
Round your calculations to the nearest whole number
Chapter 16 195
Question 16.16
Roasted Bean Limited enters into a contract with Properties for Africa Limited for the lease of
retail space for a new speciality coffee shop. The retail space is specified and the lessor cannot
require Roasted Bean Limited to move to a different retail space. Roasted Bean Limited also
makes all decisions relating to the retail space.
The commencement date of the lease is 1 January 20X1 and the lease term is for five years.
The lease payments are C5 000 per year, payable in advance. The contract contains an option
for Roasted Bean Limited to extend the contract for a further five years with lease payments of
C6 000 per year, payable in advance. These rentals are at market rates. Commission and
legal fees of C850 were incurred by Roasted Beans Limited and paid for in cash at the inception
of the lease
The speciality coffee shop is of a new format that is not yet tested in the local market or by
Roasted Bean Limited. The shop fittings and decorations provided by the lessor are expected
to have reached the end of their useful lives at the end of the fifth year.
At the inception of the lease, management of Roasted Bean Limited are unable to determine
the interest rate implicit in the lease. The incremental borrowing rate at the inception of the
lease is 4%.
After three years, at 31 December 20X3, it is apparent that the new format has not been
successful and management takes the decision to change the format of the coffee shop. This
will result in significant costs that Roasted Bean Limited will need to incur to change the fittings
and decoration to a more traditional format and to one that is being used successfully in the
HQWLW\¶VRWKHUUHWDLOFRIIHHVKRSV
The incremental borrowing rate at 31 December 20X3 is 3%.
Required:
a) Determine, with reasons, the lease term that Roasted Bean Limited should use when
measuring the lease liability at the inception of the lease and whether this will change with
the new circumstances at 31 December 20X3.
b) Prepare the journal entries in the accounting records of Roasted Bean Limited for the years
ending 31 December 20X1, 20X2 and 20X3.
You will need a financial calculator to answer this question.
Question 16.17
Chirp Limited is the largest seller of bird food in the country. Chirp Limited enters into a contract
for the lease of a machine with Pack Limited that will automate the entire packaging process.
The lease is non-cancellable, Chirp Limited will make all decisions on how to use the machine
and Pack Limited does not have substitution rights.
The contract is entered into on 1 January 20X3 for a period of four years and requires Chirp
Limited to pay lease rentals of C200 754 annually, in advance. In addition to the fixed
payments, Chirp Limited is required to pay a variable payment equal to 1% of units processed
by the machine each year.
The machine has a cash cost and fair value of C700 000 on 1 January 20X3. It has an
estimated useful life of four years with no residual value.
&KLUS/LPLWHG¶VSURILWEHIRUHWD[LVFRUUHFWO\FDOFXODWHGDW& 000 in 20X3. The only interest

incurred by Tweet Limited relates to this lease. 3 500 000 units were processed by the machine
during 20X3.
196 Chapter 16
The tax authorities allow a deduction from taxable profits of the lease payments in respect of
leased assets. There are no other differences between accounting profit and taxable profit
other than those evident from the information provided. Tweet Limited satisfies the
requirements to recognise deferred tax assets. The current tax rate is 30% and there is a debit
balance on the tax authority account of C200 000 before accounting for tax for the current year.
The interest rate implicit in the lease is 10%.
Required:
a) Prepare the journal entries for the year ended 31 December 20X3 in relation to the above
lease agreement.
b) Prepare an extract from the statement of comprehensive income of Chirp Limited for the
c) Prepare an extract from the statement of financial position of Chirp Limited at 31 December
20X3.
d) Prepare the lease note to the financial statements of Chirp Limited for year ended
31 December 20X3.
The accounting policy note is required. The deferred tax note is not required.
Ignore VAT.
Chapter 16 197
GAAP: Graded Questions Leases: lessor accounting
Chapter 17
Leases: lessor accounting
Question Key issues

17.1 - Core concepts
17.2 Equipment Operating / finance lease classification

Solutions
17.3 Sleepless Operating lease, instalments in arrear with annual increase, transfer from
PP&E to IP, journals
17.4 Eton Operating lease, instalments in arrears and irregular, initial indirect costs,
VAT
17.5 Big Cranes Finance lease, OHVVRU¶VLQLWLDOGLUHFWFRVWVJURVVYQHWUHFHLYDEOHMRXUQDOV
17.6 Big Vans Finance lease: Lessor manufacturer / lessor purchases asset
17.7 Mediworld Finance lease, lease payments include maintenance costs, purchase
option, gross v net receivable, journals
178 Bus Body Finance lease, manufacturer / dealer, guaranteed residual, journals, note
disclosure
17.9 Nightlife Finance lease, guaranteed residual, current and deferred tax
17.10 Property Lease of land and buildings
198 Chapter 17
Question 17.1
a) State and briefly describe the two lease classification options available to lessors.
b) Describe briefly what is meant by risks and rewards related to the ownership of an
underlying asset.
c) What examples are provided in IFRS 16 Leases, that normally lead to a lease being
classified as a finance lease?
d) What indicators of situations are provided in IFRS 16 Leases, that could lead to a lease
being classified as a finance lease?
e) State briefly how a lessor recognises and measures a finance lease at the commencement
date.
f) Define and explain WKHFRPSRQHQWVRIWKHOHVVRU¶V µQHWLQYHVWPHQWLQWKHOHDVH¶
Question 17.2
Part A
Equipment Solutions Limited enters into a non-cancellable lease contract with Paul Limited, a
chain of bakeries. The contract requires Equipment Solutions Limited to lease baking
equipment to Paul Limited for a period of four years at an annual rental of C23 660 per annum,
payable in arrears.
The fair value of the baking equipment is C75 000 and it has an estimated useful life of ten
years. This type of baking equipment is commonly used by bakeries.
The contract has no provisions allowing Paul Limited to purchase the equipment or to extend
the lease.
The interest rate implicit in the lease is 10%. The PV factor of an annuity in arrears of C1 for
four years, discounted at 10% is 3,169865.
Required:
Discuss, in terms of IFRS 16 Leases, whether this contract should be classified as an operating
or finance lease in the accounting records of Equipment Solutions.
Part B
Equipment Solutions Limited enters into a non-cancellable lease contract with Paul Limited, a
chain of bakeries. The contract requires Equipment Solutions Limited to lease baking
equipment to Paul Limited for a period of four years at an annual rental of C23 660 per annum,
payable in arrears.
The fair value of the baking equipment is C75 000 and it has an estimated useful life of four
years. The baking equipment has been specifically designed for Paul Limited.
The contract has no provisions allowing Paul Limited to purchase the equipment or to extend
the lease.
The interest rate implicit in the lease is 10%. The PV factor of an annuity in arrears of C1 for
four years, discounted at 10% is 3,169865.
Required:
Discuss, in terms of IFRS 16 Leases, whether this contract should be classified as an operating
or finance lease in the accounting records of Equipment Solutions.
Chapter 17 199
Question 17.3
On 1 January 20X0, Sleepless Limited purchased two factory buildings, one in Dozey Road
and one in Wakey Road, for C2 250 000 each. Both factory buildings were initially to be used
to manufacture beds for sale to retail stores. The buildings are not specialised and could be
used for a variety of manufacturing processes. The estimated useful life of each building is
fifteen years with no residual value.
Sleepless Limited lost a major customer effective 1 January 20X5 and, as a result, had factory
space surplus to their requirements. Sleepless Limited entered into a contract to lease the
factory building in Wakey Road to a tenant, with a commencement date of 1 January 20X5.
The lease term is for five years.
The rental payments are C100 000 per year, payable annually in arrears and are to increase
by 20% per year over the lease term. The building will revert to Sleepless Limited at the end
of the contract.
Sleepless Limited holds all investment property under the cost model.
Required:
a) Discuss briefly whether Sleepless Limited should classify this lease contract as a finance
lease or operating lease.
b) Record the journal entries in the accounting records of Sleepless Limited in respect of the
factory building in Wakey Road for the years ended 31 December 20X5, 20X6, 20X7, 20X8
and 20X9.
Ignore tax.
Question 17.4
Eton Limited is a manufacturer of bulldozers, which it leases to customers for a three year
period, after which the lessee is offered a new bulldozer and the original bulldozer is then leased
to the next customer at reduced rates.
Each bulldozer has a useful life of 12 years and a residual value of nil.
Eton Limited entered into a lease contract to lease a bulldozer to Build Limited with a
commencement date of 1 January 20X1. The manufacture of the leased bulldozer was
completed on 29 December 20X0 at a cost of C600 000 (excluding VAT). The lease required
three annual arrear instalments, including VAT:
x 31 December 20X1 C62 700

In negotiating the lease, Eton Limited incurred initial direct costs of C8 550 (including VAT),
incurred and paid on 1 January 20X1.
Eton Limited is a vendor for VAT purposes.
Required:
a) Calculate the rental income that will be recognised each year.
b) Provide all related journal entries in the accounting records of Eton Limited for the financial
year ending 31 December 20X1.
200 Chapter 17
Question 17.5
Big Cranes Limited, a specialised leasing company, enters into a lease contract with Build
Limited for the lease of a construction crane for a period of three years. The commencement
date of the lease is 1 July 20X4. The lease is non-cancellable and the residual value of the
crane at the end of the lease is expected to be negligible.
The cost of the crane to Big Cranes Limited is C270 000 and the accumulated depreciation at
30 June 20X4 is C120 000.
The lease rentals are C60 317 per year, payable annually in arrear. Big Cranes Limited incurs
commissions and legal fees of C7 500 in setting up the contract.
The interest rate implicit in the lease is 7,275%. The PV factor of an annuity in arrears of C1 for
three years, discounted at 7,275% is 2,6112.
Required:
a) Calculate the gross investment in the lease, the net investment in the lease and the
unearned finance income.
b) Prepare the journal entry in the accounting records of Big Cranes Limited showing the gross
receivable and unearned finance income.
c) Prepare the journal entry in the accounting records of Big Cranes Limited showing the net
receivable.
Question 17.6
Big Vans Limited entered into a lease contract with Super Foods Limited for the lease of a
refrigerated delivery van on 1 January 20X1. The lease instalment amounts to C6 000 annually
in arrears for the duration of the three year lease term. The lease is non-cancellable.
The interest rate implicit in the lease is 4,48%.
Part A
Big Vans Limited is a manufacturer of delivery vans. The van in respect of this lease was
manufactured at cost of C12 000. The company uses the gross method for recording and
disclosing the lease in their accounts.
Required:
a) Determine the gross investment in the lease, the net investment in the lease and the
unearned finance income.
b) Prepare the journal entries in the accounting records of Big Vans Limited for the year ended
31 December 20X1.
Ignore tax.
Part B
Big Vans Limited is a finance house and purchases the vehicle on 1 January 20X1 at a cost of
C16 500. The company uses the net method for recording and disclosing the lease in their
accounts.
Required:
a) Determine the gross investment in the lease, the net investment in the lease and the total
of the unearned finance income.
Chapter 17 201
b) Prepare the journal entries in the accounting records of Big Vans Limited for the year ended
31 December 20X1.
Ignore tax.
Question 17.7
Mediworld Limited, a specialised leasing company, enters into a lease contract with Image
Clinics Limited on 1 July 20X5 for the lease of specialised radiology equipment. The contract
stipulates that the lease is for five years and is non-cancellable.
The equipment was purchased by Mediworld Limited on 1 July 20X5 for C497 996, which is
also the fair value at the commencement of the lease. The equipment has an estimated useful
life of six years and an estimated residual value of C90 000. The equipment is depreciated on
a straight-line basis.
The lease agreement has a purchase option that gives the lessee the option to purchase the
equipment at the end of the fifth year for C20 000.
Five lease payments of C150 000 are to be made annually, in arrear, the first being made on
30 June 20X6. Each payment of C150 000 includes C15 000 for the maintenance of the
equipment, borne by the lessor.
The interest rate implicit in the agreement is 12%. The following present value table is provided:
PV factor
Annuity in arrears of C1 for five years, discounted at 12% 3,6048
Present value of C1 in five years, discounted at 12% 0,5674
Required:
a) Prove that the rate of interest implicit in the lease is 12%.
b) Prepare the journal entries in the accounting records of Mediworld Limited for the years
ending 30 June 20X6 and 30 June 20X7, recording the gross receivable and the unearned
finance income.
c) Prepare the journal entries in the accounting records of Mediworld Limited for the years
ending 30 June 20X6 and 30 June 20X7, recording the net receivable.
Ignore tax.
Question 17.8
Bus Body Limited is a dealer in buses used for inner-city transport. Bus Body Limited entered
into a contract for the lease of a bus to City Buses Limited and purchased the bus for C250 000
on 1 January 20X1. The bus has a cash sale price of C320 000.
The bus was delivered to City Buses Limited on the same day, the start of the lease term. It
has an estimated useful life of five years and an estimated residual value of C50 000,
guaranteed by City Buses Limited.
Lease instalments of C100 000 are received annually in arrears on 31 December for the five
years of the lease term.
202 Chapter 17
The interest rate implicit in the agreement is 19,8863%. The following present value table is
provided:
PV factor
Annuity in arrears of C1 for four years, discounted at 19,8863% 2,59432
Present value of C1 in 5 years, discounted at 19,8863% 0,40378
Required:
a) Prove that the implicit interest rate is 19,8863%.
b) Calculate the gross investment in the lease, the net investment in the lease and the amount
of the finance income.
c) Prepare the journal entries in the accounting records of Bus Body Limited for the year ended
31 December 20X1, using the gross method.
d) Provide an extract from the statement of financial position of Bus Body Limited at
31 December 20X1 showing the finance lease receivable.
e) Provide the disclosure relating to the lease in the notes to the financial statements of Bus
Body Limited.
Ignore tax.
Question 17.9
Nightlife Limited is a company involved in the entertainment industry. It recently imported a

range of new lighting equipment costing C400 000 that was delivered on 1 January 20X6.
Prior to the equipment being delivered, the loss of a major contract led Nightlife Limited to
realise that the equipment was surplus to its needs and thus it entered into a contract with DHP
Entertainment Limited to lease the equipment for a lease term of three years from 1 January
20X6.
DHP Limited is to pay lease rentals of C150 000 annually in advance and guarantees a residual
value of C20 000 at the end of the contract, on 31 December 20X8.
The interest rate implicit in the contract is 17,08204%.
The estimated useful life of the equipment is three years and this is the same period over which
the tax authority allows the equipment to be written off for tax purposes. The tax authority taxes
lease instalments when received. The current tax rate is 30% and there is no transaction tax
(no VAT).
The profit before tax, taking into account all the relevant information above, has been correctly
calculated as follows:
Year ended C
31/12/20X6 242 705
31/12/20X7 244 377
31/12/20X8 212 918
Required:
Provide the journal entries in the records of Nightlife Limited for the years ended 31 December
20X6, 20X7 and 20X8 recording the gross receivable and unearned finance income.
Chapter 17 203
Question 17.10
Property Limited has a portfolio of properties that it leases out to retail tenants. On 1 January
20X3, Property Limited entered into a lease agreement with Wholesome Foods Limited, a
national chain of health food stores to lease a property for a period of 25 years. Details of the
property on 1 January 20X3 are as follows:
Land Building Total

C C C
Cost 300 000 1 500 000 1 800 000
Accumulated depreciation - (300 000) (300 000)
Carrying amount 300 000 1 200 000 1 500 000
The land has an indefinite useful life and the building has an estimated useful life of 40 years.
At the commencement date of the lease, the fair value of the leasehold interest in the land is
C432 000 and the fair value of the leasehold interest in the building is C1 296 000.
The lease instalments are C300 000 per annum, receivable in advance.
The interest rate implicit in the lease is 10%. The following present value table is provided:
PV factor
Present value of C1 in 25 years, discounted at 10% 0.092295
Present value of annuity in arrear of C1 for 25 years, discounted at 10% 9.077040
Present value of annuity in advance of C1 for 25 years, discounted at 10% 9.984744
Required
Prepare the journal entries in the accounting records of Property Limited for the year ended
31 December 20X3.
204 Chapter 17
GAAP: Graded Questions Provisions, contingencies and events after the
reporting period
Chapter 18
Provisions, contingencies and
events after the reporting period
Question Key issues

18.2 Steam Away Legislation, identification of obligating event
18.3 Fizz Future costs to service plant compared with future
environmental cleaning costs
18.4 Oven Major inspections: past and future
18.5 Park Hospital Future disposal costs, penalties and legal claims; provisions,
contingent liabilities, events after the reporting period
18.6 Flyaway Tours Provision for compensation payments: 3 scenarios:
- Legal obligation (legislation)
- Constructive obligation (common practice)
- Obligating events (public announcement)
18.7 Nemo Decommissioning costs, liabilities, provisions
18.8 Toddy Events after reporting period: 4 scenarios:
- Audit invoice
- Insolvent debtor
- Share price drop
- Share issue
18.9 Moo Events after reporting period: 4 scenarios:
- Possible further litigation
- Estimated settlement costs
- Contaminated product
- Possible returns
18.10 Curls Contingent liability and events after the reporting period
Chapter 18 205
reporting period
Question 18.1
a.
Which of the following statements are correct?
1. A provision is a liability for which the amount is estimated.

2. A provision is not recognised on the statement of financial position.
a) 1 only
b) 2 only
c) Both 1 and 2 are correct
d) Both 1 and 2 are incorrect
b.
Which of the following does not create a constructive obligation under IAS 37?
a) Established pattern of past practice

b) Legislation
c) Published policies
d) A current statement
c.
A provision is the same as an accrual.
a) True
b) False
d.
Which of the following statements are correct?
1. Obligations arising from past events that exist LQGHSHQGHQWO\ RI DQ HQWLW\¶V IXWXUH DFWLRQV DUH
recognised as provisions
2. Obligations arising from past events that an entity can avoid by its future actions are recognised as
provisions
3. Costs relating to past environmental damage are an example of an obligation that exists
LQGHSHQGHQWO\RIDQHQWLW\¶VIXWXUHDFWLRQV
4. Costs relating to the fitting of partitions for a smoking section in a restaurant that is required by law
DUHDQH[DPSOHRIDQREOLJDWLRQWKDWH[LVWVLQGHSHQGHQWO\RIDQHQWLW\¶VIXWXUHDFWLRQV
a) 2, 3 and 4 are correct

c) 1 only is correct
e) 2 and 3 are correct
e.
Grandi plc is a retailer of fashionable sports clothing. The trial balance at 31 December 20X1, the end
of its financial year shows closing inventory at a cost of C100 000. The financial statements are
authorised for issue on 15 February 20X2.
206 Chapter 18
reporting period
a) If the inventory is sold for C80 000 before 15 February 20X2, in the 20X1 financial statements,
C20 000 is recognised in cost of sales and the inventory will be reported on the statement of
financial position at C80 000.
b) If the inventory is sold for C80 000 after 15 February 20X2, in the 20X1 financial statements,
C20 000 is recognised in cost of sales and the inventory will be reported on the statement of
financial position at C80 000.
c) If the inventory is sold for C80 000 before 15 February 20X2, in the 20X1 financial statements,
C20 000 is recognised in other comprehensive income and the inventory will be reported on the
statement of financial position at C80 000.
d) If the inventory is sold for C120 000 before 15 February 20X2, in the 20X1 financial statements,
C20 000 is recognised in other comprehensive income and the inventory will be reported on the
statement of financial position at C120 000.
Question 18.2
Steam Away Limited operates luxury train journeys around South Africa in authentic steam trains. Its
target market is mainly retired tourists who seek nostalgic train travel.
Due to the pressure from environmentalists, the Environmental Agency of South Africa have put forward
to parliament an amendment to the National Environmental Air Quality Act. This amendment requires
all steam trains in South Africa to have smoke reduction filters fitted to the steam engines.
The new legislation was accepted and announced to all steam train owners on 31 October 20X2. It
required all steam trains owners to have these smoke reduction filters fitted by 31 October 20X3. If
these new filters were not fitted, a fine may be imposed based on the size of the steam engine.
The board of directors of Steam Away Limited took a decision not to fit these new filters as they believed
that their steam engines were currently environmentally friendly enough. A year ago the company hired
an assessor to assess the engines and WKHUHSRUWLQGLFDWHGWKDWWKHHQJLQHVZHUH³UXQQLQJVPRRWKO\´
DQG SURGXFHG ³RQO\ PRGHUDWH OHYHOV RI VPRNH SROOXWLRQ GHVSLWH WKHUH EHLQJ QR ILOWHUV ILWWHG´ 7KH
directors are therefore of the opinion that the engines need not be fitted with smoke reduction filters
and are simply ignoring the amendment to the Act.
Steam Away Limited has a 31 December year end.
Required:
a) Discuss whether Steam Away Limited has a present obligation from a past obligating event at
31 December 20X2 with reference to International Financial Reporting Standards.
b) Discuss whether Steam Away Limited has a present obligation from a past obligating event at
31 December 20X3 with reference to International Financial Reporting Standards.
Question 18.3
Fizz plc is a company that produces carbon dioxide for the beverage industry. On 1 January 20X1 the
company purchased specialised plant and machinery for use in the production process at a cost of
C500 000.
The financial director is in the process of finalising the financial statements for the year ended
31 December 20X1 and has the following issues:
Servicing of moving components
The plant and machinery has moving components that need to be serviced on an annual basis.
Chapter 18 207
reporting period
The production director has obtained quotes that estimate that the annual cost of servicing the
components will amount to C60 000. He has thus authorised the following accounting entry to be
processed each month:
Dr Cr
Servicing costs (E) 5 000
Provision for servicing costs (L) 5 000
Monthly provision of servicing costs
The production director argues that the balance in the provision for servicing costs account of C60 000
should be recognised as a liability on the statement of financial position at 31 December 20X1 to cover
the estimated C60 000 servicing cost in January 20X2.
Environmental cleaning costs
Waste produced by the new plant and machinery contaminates the land surrounding the factory. The
company has a published policy of cleaning up any contamination caused by its production process.
The production director has obtained quotes that estimate that the annual cost cleaning the land will
amount to C48 000. He has thus authorised the following accounting entry to be processed each
month:
Dr Cr
Environmental cleaning costs (E) 4 000
Provision for environmental cleaning costs (L) 4 000
Monthly provision of environmental cleaning costs
The production director also argues that the balance in the provision for environmental cleaning costs
account of C48 000 should be recognised as a liability on the statement of financial position at 31
December 20X1 to cover the estimated C48 000 cleaning cost in January 20X2. .
Required
Discuss and justify, with reference to International Financial Reporting Standards,
x whether a provision for servicing costs of C60 000 should be recognised as a liability in the financial
statements at 31 December 20X1, and
x whether a provision for environmental cleaning costs of C48 000 should be recognised as a liability
in the financial statements at 31 December 20X1.
Question 18.4
Oven plc is a large event catering business. The company has a 31 December year-end.
Second-hand commercial cooking equipment was purchased on 1 April 20X4 at a total cost of
C100 000. The cost includes an amount paid for the physical equipment as well as an amount paid for
an inspection performed on 1 September 20X3. The inspection had cost C20 000 and when the
equipment was purchased, it had already operated for 750 hours since that previous inspection.
On acquisition, the accountant processed the following journal entry:
Dr Cr
01/04/X4 Equipment: Cost 100 000
Cash 100 000
Purchase of cooking equipment and previous major inspection
The equipment is depreciated on a straight-line basis over its estimated useful life of 10 years to a nil
residual value. For safety reasons, the equipment is required to be inspected after every 3 000 hours
208 Chapter 18
reporting period
of use. From 1 April 20X4 to 31 December 20X4, the equipment operated for 1 500 hours. The
depreciation expense for the current year has not yet been journalised.
Taking into account inflation, the accountant of Oven plc expects that the next inspection will cost
C22 000. The accountant wants to recognise a provision for this amount in the financial statements for
the current year ending on 31 December 20X4, since the inspection may very well be necessary in
20X5.
Required:
a) Discuss how the previous inspection should be recognised in the financial statements of Oven plc
Justify your answer using the principles of IAS16, Property, plant & equipment.
b) Prepare a schedule showing the cost, accumulated depreciation and carrying amount of the
significant parts of the equipment at 31 December 20X4 and prepare all the journal entries relating
to the equipment for the year ended 31 December 20X4
Narrations are required.
c) Discuss whether the future inspection should be recognised as a provision in the financial
statements of Oven plc for the year ended 31 December 20X4.
Justify your answer using the principles of IAS37, Provisions, contingent liabilities and contingent
assets.
Question 18.5
Park Hospital Limited is a private hospital group operating five hospitals in the Cape Town area. The
following information relates to the year ended 31 December 20X6. The financial statements were
approved for issue on 15 February 20X7.
Medical waste:
x In terms of environmental legislation Park Hospitals Limited is required to dispose of all medical
waste generated by the hospitals in a socially responsible manner, within two weeks of generation,
failing which penalties may be levied. The company has the necessary permit to dispose of medical
waste by incineration on the site of their hospital in Cape Town.
x In terms of their permit Park Hospitals Limited is allowed to dispose of 120 tons of medical waste
per annum from 1 January to 31 December. The hospitals generate an average of 10 tons of
medical waste per month evenly. On 25 November 20X6 the furnace used to incinerate medical
waste malfunctioned and could not be repaired. A replacement furnace was commissioned
immediately but will only be completed and installed on 31 January 20X7 at a cost of C1 500 000.
A deposit of C500 000 was paid on 15 December 20X6.
x Due to the malfunction of the furnace Park Hospitals Limited has 12 tons of un-disposed medical
waste on hand at 31 December 20X6. Management has obtained a quote from Waste Incinerators
to dispose of the waste on hand during the first week of January 20X7 at an estimated cost of
C10 000 per ton.
x On 25 January 20X7 Park Hospitals Limited received notification from the Environmental Agency
that a penalty amounting to C125 000 would be levied as a result of not disposing of waste within
the prescribed period at 31 December 20X6. Management has decided not to raise an objection to
this penalty.
Legal claim:
x On 15 October 20X6, a visitor to the clinic, Mr Downe, the Chief Executive Officer of a large
company, slipped on a wet floor in the clinic foyer while on his way to visit his ill mother. As a result
of his fall, he sustained multiple fractures to his left leg and right arm and was immobilised for 4
Chapter 18 209
reporting period
months. On 1 December 20X6 Mr Downe filed a lawsuit against the hospital for negligence,
claiming damages for the injuries sustained and loss of income suffered as a result of his fall.
x At 31 December 20X6 the Park Hospitals Limited attorneys have reported that it is highly probable
WKDW0U'RZQH¶VFODLPZLOOEHVXFFHVVIXODJDLQVWWKHFRPSDQ\+RZHYHUWKH\DUHXQFHUWDLQKRZ
much would be awarded in damages as past rulings of this nature have been inconsistent. The
directors have applied their minds to the amount of damages likely to be awarded and have decided
that there is not enough information at the present to make a reasonable estimate. The attorneys
will gain a better understanding of the possible amount of damages after the first court proceedings
to be held on 1 March 20X7.
Required:
a) Discuss how the cost of the un-disposed medical waste on hand at 31 December 20X6 and the
penalty should be recognised and measured in the financial statements of Park Hospitals Limited
for the year ended 31 December 20X6 in accordance with International Financial Reporting
Standards.
b) Discuss how the legal claim should be recognised, measured and disclosed in the financial
statements of Park Hospitals Limited for the year ended 31 December 20X6 in accordance with
Question 18.6
Flyaway Tours Limited is a tour operator providing package holidays to destinations all over the world.
The company enter into contracts with a number of airlines to enable their customers to fly to their
desired destinations.. On 24 December 20X8 the cabin crew of one of the airlines contracted to
Flyaway Tours began a prolonged strike. As a result customers were unable to reach their holiday
destinations and their holiday packages were cancelled..
Flyaway Tours /LPLWHG¶V\HDUHQGLV31 December, and its financial statements are authorised for issue
on 15 February each year.
Part A
x The South African Consumer Protection Act requires tour operators to compensate their customers
for amounts paid for holidays that are subsequently cancelled.
x Flyaway Tours /LPLWHG¶V ODZ\HUV KDYH HVWLPDWHG WKDW WKH FRPSDQ\ ZLOO EH REOLJHG WR SD\
C2 000 000 in compensation under the relevant statute, but the amount will only be confirmed when
the company receives notice from the National Consumer Commission in March 20X9.
Part B
x There is no law requiring Flyaway Tours Limited to pay compensation, but it is common practice for
tour operators to compensate passengers when their flights are cancelled.
x A typical pay-out for a similar cancellation is C2 000 000 compensation to the affected passengers.
Part C
x There is no law or common industry practice which might require Flyaway Tours Limited to pay
compensation to passengers whose flights have been cancelled. Media reports have, however, led
to public interest in the stranded passengers, and many groups have expressed outrage at Flyaway
7RXUV¶ lack of Christmas spirit in not assisting its customers.
x As a result, the managing director of Flyaway Tours made a public announcement on 15 January
20X9, in which he stated that the company would pay compensation to those affected by the
cancelled flights.7KHFRPSDQ\¶VDFFRXQWDQWVKDYHHVWLPDWHGWKDWVXFKFRPSHQVDWLRQSD\PHQWV
will cost the company C2 000 000.
210 Chapter 18
reporting period
Required:
For each scenario, discuss whether a provision should be recognised in respect of the compensation
in the financial statements of Flyaway Tours Limited for the year ended 31 December 20X8, in
Question 18.7
Nemo Limited owns land along the coast of South Africa in an area that has been designated to be of
natural beauty and should thus be conserved.. The company recently obtained approval for a
desalination plant to operate on the site for a period of five years. The approval is in terms of a licence
granted by the government. The Minister of Environmental Affairs approved the licence due to the
extreme drought conditions that were being experienced in the coastal regions resulting in severe water
shortages..
The plant was purchased on 1 October 20X0 for C1 500 000. Installation costs of C263 220 were
incurred and paid over the months of October, November and December of 20X0. The plant and
machinery was in a condition necessary to be capable of operating in the manner intended by
management on 1 January 20X1.
The plant and machinery has an estimated useful life of five years with no residual value. In terms of
the licence, Nemo Limited is obliged to dismantle the desalination plant and restore the area at the end
of its useful life. Future decommissioning costs are expected to be C180 000. The company uses a
discount rate of 10% to calculate the present value of the decommissioning costs.
The financial accountant prepared the following schedule reflecting the unwinding of the discounted
decommissioning costs:
Years to
Date decommissioning date 10% discount factor PV
01/01/X1 5 0,621 111 780
31/12/X1 4 0,683 122 940
31/12/X2 3 0,751 135 180
31/12/X3 2 0,826 148 680
31/12/X4 1 0,909 163 620
31/12/X5 0 1,000 180 000
Required:
a) Discuss the appropriate accounting treatment for the future decommissioning costs. Your answer
should refer to the Conceptual Framework and to the relevant International Financial Reporting
Standards.
b) Prepare all the journal entries relating to the above transactions that would have been processed
in the accounting records of Nemo Limited for the years ended 31 December 20X0 and
31 December 20X1.
c) Prepare the relevant extracts from the statement of comprehensive income of Nemo Limited for the
year ended 31 December 20X2 and from the statement of financial position at 31 December 20X2.
Notes to the financial statements (including accounting policies) are required in respect of provisions
only.
Chapter 18 211
reporting period
Question 18.8
7RGG\ /LPLWHG¶V ILQDQFLDO VWDWHPHQWV IRU WKH \HDU HQGHG 'HFHPEHU ; KDYH QRW \HW EHHQ
authorised for issue. The directors are expecting to authorise the release of these financial statements
on 5 May 20X4. The following issues, which have not yet been considered, require your attention:
a) Receipt of the invoice for audit work
An invoice from the auditors for C100 000 was received on 15 March 20X4 in respect of the audit
RI7RGG\/LPLWHG¶VILQDQFLDOVWDWHPHQWVIRUWKH\HDUHQGHG December 20X3.
The invoice stated that the audit work was completed as follows:
x 80% of the audit work was performed before 31 December 20X3; and
x 20% of the audit work was completed during January 20X4.
Toddy Limited has not provided for any part of these audit fees at 31 December 20X3.
b) Insolvent debtor
Vandalism during December 20X3 resulted in the complete destruction of a neighbouring
FRPSDQ\¶V ZDUHKRXVH OHDGLQJ WR WKDW FRPSDQ\ ILOLQJ IRU LQVROYHQF\ LQ -DQXDU\ ; 7KLV
neighbouring company was RQH RI 7RGG\ /LPLWHG¶V GHEWRUV RZLQJ 7RGG\ /LPLWHG & 000 at
31 December 20X3.
The full balance owing by this debtor is included in the statement of financial position as at
31 December 20X3.
The liquidators announced in January 20X4 that C0.20 per C1 would be paid upon liquidation.
c) Drop in value of investment in shares
Toddy Limited owns 100 000 shares in a listed company. At 31 December 20X3 the market price
of each of these shares was C5.
During March 20X4, war broke out and resulted in the share price dropping dramatically to C2 per
share.
The investment in shares as at 31 December 20X3 has not been adjusted for the drop in share
price.
d) Issue of shares
Toddy Limited will be issuing 500 000 shares at C1 each on 10 May 20X4.
$OODPRXQWVDUHPDWHULDOEXWQRQHRIWKH LVVXHVPHQWLRQHGDERYHKDYHFDXVHGWKHUHWREHDµJRLQJ
FRQFHUQ¶SUREOHP
Required:
With reference to the treatment of each of the four issues in the financial statements of Toddy Limited
for the year ended 31 December 20X3:
i. Identify whether the event is termed an adjusting or non-adjusting event after reporting period, or
neither.
ii. Briefly explain the reasoning for your answer to part (i) above.
iii. Provide the required adjusting journal entries, where appropriate, or state whether or not any related
information would need to be disclosed in the abovementioned financial statements.
Ignore taxation.
Question 18.9
Moo Limited processes and packages a variety of milk, cream and cheese. The company has a
31 December year end.
212 Chapter 18
reporting period
Moo Limited purchased 1 000 litres of unpasteurised milk on 1 October 20X2 for C5 000, half of which
had been used in the production of long-life milk during October 20X2 and sold to supermarkets during
October and November of 20X2. The remaining 500 litres was frozen for future use.
On 1 December 20X2, a consumer suffered serious food poisoning and alleged that it was caused by
the long-life milk produced by Moo Limited. This consumer took legal action against Moo Limited over
the poisoning. Moo Limited is not insured against the potential losses that may result from claims of
this nature.
Due to public interest, the case went to court almost immediately. Indications during the court
proceedings, held in late December 20X2 were that Moo Limited was probably responsible for the
poisoning and would probably be found guilty. It was found that the long-life milk was poisoned because
the milk used in its manufacture had been contaminated. At 31 December 20X2 it was too soon to be
able to reliably estimate the settlement costs.
Due to the negative publicity arising from the court case, Moo Limited decided not to plead against the
inevitable µJXLOW\¶ YHUGLFW DQG WR ZLOOLQJO\ SD\ DOO FRVWV LQ WKH LQWHUHVWV RI VDOYDJLQJ D SRVLWLYH SXEOLF
image.
The financial director is finalising the financial statements for the year ended 31 December 20X2 and
the board plan to authorise the financial statements for issue by mid-February 20X3. The following
events relating to the case are relevant and need to be considered:
a) Warnings by the lawyers:

Moo Limited has been unable to keep the case out of the media and their lawyers warned in
December 20X2 that as soon as the verdict was published in the media, more similar cases will
probably be brought against Moo Limited by other aggrieved customers, although it was impossible
to estimate the number of cases or their financial impact.
b) Estimated settlement costs:

'XULQJ -DQXDU\ ; 0RR /LPLWHG¶V ODZ\HUV REWDLQHG IXUWKHU LQIRUPDWLRQ WKDW HQDEOHG WKHP WR
estimate that the court would award the plaintiff C250 000 whereas an out-of-court settlement would
probably be C220 000.
c) Findings of specialists:
Specialists hired by Moo Limited in January 20X3, but before publishing the financial statements,
confirmed that all of the 500 litres of unpasteurised milk held in cold storage at year-end is also
contaminated and must be destroyed.
d) Possible returns:
By the time the financial statements were authorised for issue on 15 February 20X3, no further
containers of long-life milk had been returned. It seems that there is only a remote chance that
there would be any returns at this late stage.
$OODPRXQWVDUHPDWHULDOEXWQRQHRIWKH LVVXHVPHQWLRQHGDERYHKDYHFDXVHGWKHUHWREHDµJRLQJ
FRQFHUQ¶SUREOHP
Required:
Discuss, how, if at all, the events described in (a), (b), (c) and (d) should be recognised, measured and
disclosed in the financial statements of Moo Limited for the year ended 31 December 20X2 with
reference to International Financial Reporting Standards.
Your answer should include relevant definitions from IAS 10 Events after the Reporting Period and IAS
37 Provisions, Contingent Liabilities and Contingent Assets.
Ignore taxation.
Chapter 18 213
reporting period
Question 18.10
Curls plc is a manufacturer of hair shampoo and conditioner. The company was taken to court and
sued for defamation when it publicly accused a rival manufacturer of undercover activities.
Curls plc has a 31 December year end. The financial director prepares draft financial statements by
the end of December for consideration by the board of directors and then prepares final financial
statements for approval by the board towards the end of February.
The draft financial statements were prepared during the last week of December 20X3. At that time the
lawyers of Curls plc advised that it was unlikely that the case will be lost. However, it was estimated
that settlement costs and legal fees of C100 000 may be incurred if the court case was lost.
On 5 February 20X4, the court ruled against Curls plc. The company is required to pay C125 000
FRPSHQVDWLRQWRWKHSODLQWLIIDVZHOODVSD\DOORIWKHSODLQWLII¶VOHJDOIHHVZKLFKDPounted to C10 000.
The final financial statements were prepared during the last week of February 20X4, to be ready for
authorisation for issue on 28 February 20X4.
Required:
a) Discuss how the above information is recognised, measured and disclosed in the draft financial
statements of Curls plc for the year ended 31 December 20X3.
b) Discuss how the above information is recognised, measured and disclosed in the final financial
statements of Curls plc for the year ended 31 December 20X3.
214 Chapter 18
GAAP: Graded Questions Employee benefits
Chapter 19
Employee benefits
Question Key issues
19.2 Ask Core concepts: across the entire IAS 19, excluding defined benefit plans
19.3 Pharmaco Short-term employee benefit: Short-term compensated absences: Obligation for leave pay:
- Vacation leave: accumulating but non-vesting
- Maternity leave
19.4 Thomas Tank Short-term employee benefit: Short-term compensated absences:

- Obligation for leave pay - accumulating but non-vesting
19.5 Book Employee benefit expense:

- Salary and bonuses
- Employee contributions (UIF, Pension, Medical aid),
- Employees tax
- Leave is accumulating (for one year) but non-vesting
19.6 Tiff Short-term employee benefit: Short-term compensated absences: Obligation for leave pay
- Leave is accumulating and vesting
- Leave is accumulating (for one year) but non-vesting
- Leave is non-cumulative and non-vesting
19.7 Futon Short-term employee benefit: Profit sharing: Obligation to pay bonuses
19.8 Arno Termination benefits recognition
19.9 Red Roofs Termination benefits recognition and measurement
19.10 Tigger Employee benefit expense:

- Short-term employee benefit: Short-term compensated absences
- Short-term employee benefit: Bonuses
x Chapter A (after Chapter 15) and Chapter B (after Chapter 28).
Chapter 19 215
Question 19.1
a.
The essential difference between termination benefits and all other categories of employee benefits is
that termination benefits do not relate to services provided by the employee.
a) True
b) False
b.
Short-term employee benefits differ from all other employee benefits in one way: they are payable
within 12 months from reporting date whereas other employee benefits are payable after 12 months
from reporting date.
a) True
b) False
c.
A retrenchment package offered to employees, payable within 3 months of year-end, meets the definition of a
short-term benefit since a short-WHUP HPSOR\HH EHQHILW LV GHILQHG DV DQ HPSOR\HH EHQHILW µH[SHFWHG WR EH
settled wholly before twelve months after the end of the annual reporting period in which the employees
UHQGHUWKHUHODWHGVHUYLFH¶
a) True
b) False
d.
An employee is a member of a defined contribution fund to which their employer company makes monthly
contributions. 6LQFHWKLVLVDµGHILQHGIXQG¶LWPHDQVWKHHPSOR\HH¶VIXWXUHLQFRPHLVVHFXUH
a) True
b) False
e.
A company has decided to terminate the services of a group of employees. These employees will
receive a lump sum payment as part of their employment termination. This payment must be
recognised as a post-employment benefit liability since it will be paid to them after their employment.
a) True
b) False
f.
If a defined benefit plan is reflected as an asset in the statement of financial position, this asset
balance represents the surplus on the defined benefit plan.
a) True
b) False
g.
Adjustments affecting the measurement of the net defined benefit plan asset/ liability balance in the
statement of financial position are recognised in profit or loss.
a) True
b) False
216 Chapter 19
Question 19.2
0U %HZLOGHUHG ZDV UHFHQWO\ DSSRLQWHG DV WKH QHZ DFFRXQWDQW DW $VN /LPLWHG :KLOVW $VN /LPLWHG¶V +5
department were explaining the various policies, procedures and forms of benefits provided to its employees,
Mr Bewildered found himself becoming more and more confused over how the company is supposed to
account for all of it. Mr Bewildered is a family friend and since he knows you are currently studying financial
accounting, he has approached you for help, sending you the following email (see overleaf):
To: Joe Soap

From: V Bewildered
Subject: $SSOLFDWLRQRI,$6WR$VN/LPLWHG¶VHPSOR\HHEHQHILWVWUXFWXUH
Hi
You may have heard that I have recently been appointed as the accountant of Ask Limited. It is all
very exciting. However, during my introduction to the company, the compensation policies were
explained to me, and I suddenly realised how out of date I am with regard to my knowledge of IFRSs.
Frankly, I have no idea how these employee compensation policies would be accounted for! Please
could you help me by telling me if my understanding of the following issues is right or wrong?
I have many questions, but off the top of my head, could you please confirm if I am right in my
understanding of the following issues:
a) If an employee was to die in an accident at work and, in terms of a company life insurance policy, a
payment is then made to his/her family (where this family member is not an employee of our company),
that payment will not be accounted for as an employee benefit expense by Ask Limited.
b) The company will be providing our employees with free medical check-ups at the company clinic
once a month due to the potentially hazardous work environment. These benefits will be
expensed as incurred and will be presented as part of the employee benefit expense.
c) Any leave earned by the employees that vests at the end of the next financial year is a long-term
employee benefit since it is settled in the next financial period.
d) All our employees receive accumulating annual leave, the equivalent of 22 working days per year.
$V,XQGHUVWDQGLWEHFDXVHWKLVOHDYHLVWHUPHGµDFFXPXODWLQJ¶OHDYHDQ\OHDYHQRWWDNHQDWWKH
end of the next financial year will have to be paid out in cash.
e) Ask Limited runs a profit-sharing scheme. The terms of the scheme require participating employees to
own a minimum number of shares in Ask Limited and entitle these employees to be paid a bonus under
the scheme, calculated on profit after tax. The correct method to account for the profit-sharing scheme at
year-end would be:
Debit Credit
Profit share drawings (Equity) xxx
Bonuses payable (L) xxx
Suggested journal providing for the profit share
The terms of the abovementioned profit-sharing scheme, in which all the other executives will
participate, requires that in order to receive the bonus, they must remain in the employ of the
company for a further year after the end of the financial year in which the profit share is allocated
to the employee. It seems to me that the obligation to pay these profit-sharing bonuses should be
recognised and measured based on the probable number of employees who will receive them.
f) All the employees are members of a defined contribution fund to which the company will
contribute. The plan is unfunded. My understanding is that Ask Limited will be required to fund
any short-fall there may be in the fund.
g) I was chatting to the lady in the Human Resources department and it seems that our company
has committed itself to providing one of the employees with a benefit that I know would be
FODVVLILHGDVDQµother long-WHUPHPSOR\HHEHQHILW¶. However, I have never accounted for one of
these before. Apparently accounting for these is a nightmare ± as complex as accounting for
defined benefit plans! Am I right?
Chapter 19 217
h) If Ask Limited decides to terminate the services of any employee due to worsening economic
conditions, the terminated employee will receive a retrenchment package, paid as a lump sum
payment within 3 months of year-end.
However, I cannot figure out whether such a lump sum payout would be accounted for as a post-
employment benefit, since it would be paid to him after his employment, or as a short-term
employment benefit on the basis that a short-term employee benefit is defined as an employee
EHQHILWµH[SHcted to be settled wholly before twelve months after the end of the annual reporting
SHULRGLQZKLFKWKHHPSOR\HHVUHQGHUWKHUHODWHGVHUYLFH¶:KLFKRQHLVLW"
Yours sincerely,
V Bewildered
Required:
Write an email to Mr Bewildered, stating whether his understanding of how to account for the different
types of compensation is true or false, and a brief explanation as to why.
Question 19.3
Pharmaco Limited is a listed company that creates and patents ground-breaking new drugs. In order
to encourage the rapid innovation, which is key in the pharmaceuticals industry, Pharmaco provides
its researchers with a number of benefits above industry norm.
The following tables relates to employees for the year ended 30 June 20X6:
Employee Category Gross salary per year Number of employees Number of female
(including female employees
employees)
Directors C455 000 10 8
Researchers C234 000 72 26
Lab assistants C143 000 33 Note 21
Note: Of the 33 laboratory assistants, 7 assistants are expected to resign with effect from 1 July 20X6
(3 of whom are female). No other employees are expected to resign.
Employee Category Maximum leave Maximum leave allowed Leave taken in current
allowed per year (days) to carry forward (days) year earned in current
year (days)
Directors 22 17 4
Researchers 24 15 13
Lab assistants 18 13 12
Leave pay
x The company policy is that all leave is accumulating for 1 year but is non-vesting and the leave
that may be carried forward is subject to maximum limits.
x Past experience suggests that only 50% of the directors will use the past leave due to them, while
researchers and laboratory assistants still employed in the 20X7 financial year will use 90%.
Maternity leave
In order to encourage the job satisfaction and productivity of female employees, female employees
are allowed 90 days of fully paid maternity leave per annum. This leave is non-accumulating and is
unable to be paid out in cash if not taken.
Assume a 365-day year and a 5-day working week.
Required:
Prepare all the journals that would need to be processed by Pharmaco Limited in order to account for
the information above for the year ended 30 June 20X6.
218 Chapter 19
Question 19.4
Thomas Tank Limited offers luxury train tours across the country. Thomas Tank employs 10 train
drivers, 5 managers and 3 directors.
These luxury tours range between 5 and 14 days and thus, to be able to attract train drivers, Thomas
Tank offers the train drivers an average salary of C307 500 per annum and 60 days leave per year.
By contrast, managers and directors only receive 25 days and 15 days of leave per year respectively.
The salaries earned by managers and directors, however, provide that they are adequately
compensated in comparison to drivers who receive more leave days. Managers earn an average
salary of C530 000 per annum and directors an average salary of C1 250 000 per annum.
The employment contracts of all employees of Thomas Tank provide that leave may be carried
forward for one period and is non-vesting. All employees are required to work 5 days per week with
365 days in the current year.
On 31 December 20X0, the following information was available:
x Average unused days per employee at 31 December 20X0:
- Drivers: 8 days
- Managers: 6 days
- Directors: 4 days
x Average number of days per employee expected to be taken in 20X1 (i.e. the next financial year)
IURPWKHµXQXVHG¶GD\VSHUHPSOR\HHDW'HFHPEHU;
- Drivers: 4 days
- Managers: 2 days
- Directors: 1 day
x Number of employees expected to leave in 20X1 (i.e. the next financial year)
- Drivers: 2
- Managers: 1
- Directors: 0
You may assume that the employees who are expected to resign, will resign very early in 20X1 and
will thus not take any leave in 20X1. Therefore, the average number of days leave that will be taken
in 20X1 (referred to above) has been calculated based on only those employees who are expected to
remain employed in 20X1.
Required:
a) Determine the leave-pay liability that would need to be recognised for each category of employee.
b) Prepare the journal entry/entries that would be necessary to account for paid vacation leave for
the year ended 31 December 20X0 (you may assume that there was a nil balance in the leave
pay liability account prior to processing this entry).
Question 19.5
Book Limited is a company involved in retailing. Sheryl is of its sales representatives.
7KHIROORZLQJDUHWKHGHWDLOVRI6KHU\O¶VDQQXDOVDODU\SDFNDJHIRUWKH\HDUHQGHG8 February 20X8:

C
Gross Salary 240 000
UIF contributions (contributions by employee) (6 000)
Pension Fund contributions (contributions by employee) (25 000)
(PSOR\HH¶VWD[ (43 000)
Workers Union Subscription (contributions by employee) (1 000)
Medical Aid contributions (contributions by employee) (9 000)
Salary owing to employee 156 000
Chapter 19 219
x $V D VDOHV UHSUHVHQWDWLYH 6KHU\O¶V HPSOR\PHQW FRQWUDFW entitles her to a bonus of 12% of the
gross profit of all sales contracts she secured during each year.
During her 5-year employment, she has secured sales contracts of C6 500 000 (cost:
C5 400 000) while the value of sales contracts that she secured during the current year ended
28 February 20X8 is C2 200 000 (cost: C1 900 000).
x 7KHEXVLQHVVPDWFKHV6KHU\O¶VPHGLFDODLG contributions on a 1:1 basis and paid C15 000 to the
SHQVLRQIXQGIRU6KHU\O¶VEHQHILW
x All deductions from gross salary are paid over to the relevant body the day after the salary is incurred.
x Sheryl is entitled to the normal 15 days annual leave, which accumulates for one year only, after
which it is forfeited. Unused leave is not paid out upon resignation/ retirement/ retrenchment.
x Sheryl tells you that for the last 3 years she has been working on so many deadlines that she has
been unable to utilise all her annual leave.
She gave you the following summary of her unused leave at 28 February 20X8:
Unused leave during the year ended 28 February 20X6: 5 days
x She explained that she planned to use all the outstanding leave due to her in April 20X8.
x As expected, Sheryl took leave in April 20X8, using up the maximum amount of past leave that
was due and allowed to her.
x Sheryl also fell pregnant during the year ended 28 February 20X8. As a result, she took 60 days
maternity leave due to her in terms of the employment policies of the company.
x Her monthly salary for the year ended 28 February 20X9 remained unchanged from her salary for
x Her tax was assessed to be C43 000 for year ended 28 February 20X8 (the tax authorities posted
KHU WD[ DVVHVVPHQW WR WKH FRPSDQ\¶V DGGUHVV DQG WKLV ZDV GXO\ UHFHLYHG RQ April 20X8).
(PSOR\HH¶VWD[ZDVWKHRQO\WD[SDLGE\6KHU\O
x The appropriate discount rate is 12%.
x Assume 365 days a year and a 5-day working week.
Required
a) Identify the four categories of employee benefits per IAS 19 Employee benefits, explain in your
own words the meaning of each and then, by a process of elimination, identify which category/ies
of employee benefits best describe the employee benefits evident in the information presented.
b) Prepare the journal entries to account for Sheryl¶VHPSOR\PHQWLQWKHUHFRUGVRIWKHBook Limited
for the year ended 28 February 20X8.
Note: Process the salary journal for the year as one entry and not 12 separate monthly entries.
Do the same for the cash payment to the employee and relevant authorities.
c) Prepare the journals for the utilisation of leave as well as any salary expense (but not employer
contributions) for April 20X8. Round all amounts to the nearest currency unit.
Question 19.6
Tiff Limited has a 31 December year end. Employees work a 5-day week and are entitled to 20 paid
working days of vacation per annum. There are 365 days in the current year ended 20X6.
220 Chapter 19
Employee statistics are as follows:

x Number of employees 50 000
x Average annual salary: 20X5 C100 000
x Unused leave 31/12/20X5 10 days
x Leave taken in the year ended 31/12/20X6: 14 days
S1&S2: on average, 9 earned in 20X6, 5 earned in 20X5
S3: all earned in 20X6
x Leave expected to be taken during the year ended 31/12/20X7: 15 days
S1&S2: on average, 12 days earned in 20X7, 3 days earned in 20X6
S3: all days earned in 20X7
x No employees left or joined the company in the past 2 years.
x Salaries increased by 20% from 1/1/20X6.
x Past estimates show that management is able to correctly forecast the number of vacation days
that will be used in the following financial year.
Required:
Determine the amount of the leave pay liability at 31 December 20X6, and provide the related journal
for the year ended 31 December 20X6 for each of the following unrelated scenarios, and assuming
that the balance in this leave-pay liability account was nil prior to the journal entry being processed:
a) Scenario 1: leave accumulates and vests indefinitely.
b) Scenario 2: leave accumulates for one year after it accrues but is non-vesting.
c) Scenario 3: leave does not accumulate and is non-vesting.
Question 19.7
)XWRQ /LPLWHG LV D FRPSDQ\ LQYROYHG LQ WKH UHWDLOLQJ RI VOHHSHU FRXFKHV )XWRQ /LPLWHG¶V VWDII
complement comprised of 40 sales representatives during 20X3.
x Each year the sales representatives are given a gross profit target to meet. If the sales
representatives surpass the target, 20% of the amount above the target is distributed to them as a
bonus. The only conditions are that the sales representatives must remain employed for the entire
year in which the profit was attained and remain with Futon Limited until the end of the financial
year after the year in which the profit was attained.
x The target for the year ended 31 December 20X3 was a gross profit of C1 000 000. The sales
representatives achieved a gross profit double this target.
x Of those sales representatives that were in the employ of Futon Limited on 1 January 20X3, 10%
resigned in 20X3 and a further 10% are expected to resign in 20X4..
Required:
a) Calculate the liability that needs to be recognised at 31 December 20X3.
b) Journalise the recognition of the liability.
c) Provide the journals entries at 31 December 20X4 to account for the payment if 5 sales staff
members actually left during 20X4, all of whom had worked for Futon Limited for at least 2 years
as at 31 December 20X3 (the 20X3 liability was considered appropriate).
Question 19.8
Arno Limited is a small company involved in the construction industry. Although Arno Limited has not
yet developed a detailed formal plan to restructure the business, an internal management decision
was taken in early December 20X4 to begin the process of downsizing its operations.
Chapter 19 221
x As a result of this decision, Arno offered retrenchment packages on 15 December 20X4 to three
of its employees (A, B and C). The offer of these retrenchment packages is legally binding on the
entity for 6 months from the date of offer, after which the offer expires.
x Shortly before the end of December, a fourth employee (D) approached management and
requested a retrenchment package.
x $W$UQR/LPLWHG¶VILQDQFLDO\HDUHQGHG December 20X4:
only one of the three employees (A) had accepted the retrenchment package, while
the remaining two employees (B and C) were still considering their options, and
the entity had agreed to retrench the fourth employee (D).
Required:
Explain whether termination benefits should be recognised for the retrenchment packages.
Question 19.9
Red Roofs Limited is a roof repair company in KZN. The company has a policy of paying employees
certain standard packages on retirement date and of paying a slightly smaller package on resignation
date. Packages are also payable in the event of retrenchment. The current financial year ends on
31 December 20X6.
The ongoing drought, expected to continue into 20X7, means that roof leaks are less likely to be
identified and homeowners are less likely to repair their roofs. The company has been struggling and,
as a result, the company decided to retrench 3 employees. The company has outstanding projects
which will be completed 2 months after the current year-end and the expertise of the current
employees will be necessary to complete these projects. Should an employee elect to leave on
31 December 20X6, they will receive a retrenchment package of C300 000. Should the employee
elect to leave on 28 February 20X7, they will receive a retrenchment package of C350 000.
During 20X6, one employee resigned. The package paid to the employee who resigned was
C100 000. Of the 3 retrenched employees: 1 agreed to leave on 31 December 20X6 and 2 agreed to
leave on 28 February 20X7.
Required:
a) Explain whether the following packages qualify for recognition as termination benefits:
i) Packages payable on retirement date; and
ii) Packages payable on resignation date.
b) Briefly explain what type of employee benefit the three retrenchment packages represent and
briefly explain, with calculations, the measurement thereof at 31 December 20X6.
Question 19.10
Tigger Limited is a company that is involved in the tourism industry. Tigger Limited specialises in overnight
game drives. The directors of Tigger Limited believe that the most important asset in any company is the
employees of the company. As such they offer a number of benefits to their employees.
Vacation leave:
x All staff members are entitled to 20 days of paid leave annually.
x This leave can accumulate indefinitely, but it is forfeited when an employee leaves the company.
The leave may never be converted to cash.
222 Chapter 19
x In total, there are a total of 320 leave days outstanding at 31 December 20X6, which were earned
in the current year.
x However, 10 staff members will be leaving on 2 January 20X7. Their leave details are as follows:
- On 31 December 20X5: a total of 20 days of leave was due to them.
- On 31 December 20X6: a total of 40 days of leave due to them.
Bonuses:
x Every year Tigger Limited pays out 10% of their profit to its employees. The profit is shared
amongst the number of employees employed at year-end.
x The only condition is the employee had to be employed at Tigger Limited for the entire year. If an
employee is not employed for the entire year, he forfeits his share of the profit. The forfeited profit
is not distributed amongst the other employees.
x Employees are very loyal to the company with employees spending a minimum of 5 years with
the company.
x On 26 July 20X6, Tigger Limited hired 5 new employees. No employees left during the current year.
x The profit for the year ended 31 December 20X6 was C5 000 000.
General:
x At year end Tigger Limited had a total staff complement of 80 employees
x The average annual salary is C250 000.
x There are 250 working days in a year.
Required:
Calculate the amount that will be charged to staff costs (employee benefit expense) in the statement
of comprehensive income.
Chapter 19 223
GAAP: Graded Questions Foreign currency transactions
Chapter 20
Foreign currency transactions
Question Key issues

20.2 JKB Breweries Differences between functional currency and presentation currency
20.3 Inzwebeli Import (DAT):
- Inventory
- Settlement: after year-end
20.4 Elimnandi Import (FOB):
- Property, plant and equipment
- Settlement: before year-end
20.5 Ghost Export (CIF):
- Inventory
- Receipt of settlement in instalments: before and after year end
20.6 Champagne Foreign loan liability:
- Accrual of interest
- Settlement: partial repayment of capital and payment of interest
20.7 Buffet Foreign loan asset:
- Accrual of interest
- Settlement: partial receipt of loan capital
20.8 Candy Mountain Non-monetary items:
- Item held in foreign currency
- Impairment
Please note: Further questions on this topic can be found in chapter B: Integrated questions 1 - 28
Chapter B is one of the two chapters that include ‘Integrated Questions’ (questions that combine
different IFRSs).
224 Chapter 20
Question 20.1
a.
Consider the following statements in relation to IAS 21 The effects of changes in foreign
exchange rates:
1. Functional currency LV GHILQHG DV µthe currency of the primary economic environment in
which WKHHQWLW\RSHUDWHV¶.
2. Foreign currency is defined as a currency other than the functional currency of the entity and
Presentation currency is the currency in which the financial statements are presented.
3. Functional currency is defined as the currency in which the financial statements are presented.
4. Presentation currency is the currency in which the financial statements are presented and
should be the entity¶s functional currency.
5. Local currency LVGHILQHGDVµthe currency of the primary economic environment in which the entity
RSHUDWHV¶ and foreign currency is defined as µa currency other than the local currency of the entity¶.

b) Only 3 and 4 are correct
c) Only 3, 4 and 5 are correct
b.
The transaction date:

1. is the date on which the transaction first qualifies for recognition in accordance with IFRSs.
2. is not included in IAS 21¶s list of definitions but is described in the standard.
3. is the date when risks and rewards of ownership transfer from the seller to the buyer.
4. is the date when delivery of the goods and/or services takes place.

c.
A foreign currency transaction:

a) is a transaction that is denominated in or requires settlement in a foreign currency.
b) is a transaction that requires settlement in a foreign currency.
c) is a transaction that is both denominated in and requires settlement in a foreign currency.
d) is simply a transaction that is denominated in a foreign currency.
e) Is none of the above.
d.
Consider the following statements in relation to IAS 21 The effects of changes in foreign
exchange rates:
1. The term exchange rate is defined as µthe ratio of exchange for two currencies¶.
2. The spot exchange rate is the exchange rate for immediate delivery.
3. The closing rate is the spot exchange rate at the reporting date.
4. The closing rate is the exchange rate for immediate delivery.
5. The closing rate is the exchange rate at the close of day.
Chapter 20 225

e.
A machine was purchased for FC1000, on credit, when the exchange rate was LC5: FC1. The
supplier of the machine was paid, before year-end, where the payment in foreign currency
was based on an exchange rate of LC6: FC1.
a) The entity will record the acquisition of the machine at LC5 000 and a foreign exchange
gain of LC1 000.
b) The entity will record the acquisition of the machine at LC5 000 and a foreign exchange
loss of LC1 000.
c) The entity will record the acquisition of the machine at LC6 000 and no foreign exchange
gain or loss.
d) The entity will record the acquisition of the machine at LC6 000 and a foreign exchange
loss of LC1 000.
f.
1. If goods are purchased RQDµFDUULDJHLQVXUDQFHDQGIUHLJKW¶EDVLV&,), the transaction

is recorded on date the goods are loaded for transport.
2. If goods are purchased RQDµFDUULDJHLQVXUDQFHDQGIUHLJKW¶basis (CIF), the transaction
is recorded on date the goods are delivered.
3. If goods are purchased on a µIUHHRQERDUG¶EDVLV)2%, the transaction is recorded on
date the goods are loaded for transport.
4. If goods are purchased on a µIUHHRQERDUG¶EDVLV)2B), the transaction is recorded on
date the goods are delivered.

g.
An entity does not freely choose its functional currency; however, it may choose any currency
in which to present its financial statements.
a) True
b) False
Question 20.2
JKB Breweries (³JKB´) is a company that manufactures and supplies beers to South Africa.
The brewery is situated in Newlands, South Africa, since it provides excellent access to water,
water being one of the most important ingredients in beer. The barley used in the production
of beer is also produced by local farmers.
In recent years JKB experienced excellent growth, and during the 20X6 financial year the
board of directors decided to list JKB on the London Stock Exchange.
226 Chapter 20
The regulators of the London Stock Exchange require financial statements to be presented in
Pounds (£). Currently, JKB presents their financial statements in Rands (South African Rands).
The current financial director has not had any experience with foreign currency translations
and is not at all familiar with the requirements of IAS 21 The effects of changes in foreign
exchange rates. He is unsure how to go about presenting the financial statements in order to
comply with the regulators. He has also requested your help in understanding the terms used
in IAS 21 such as µIXQFWLRQDO FXUUHQF\¶DQGµSUHVHQWDWLRQFXUUHQcy¶
Required:
Draft a letter to the director in which you explain:
x the meaning of the terms µfunctional currency¶ and µpresentation currency¶ and
x how to present the financial statements such that they comply with the regulations of the
London Stock Exchange.
Question 20.3
Inzwebeli Limited is a South African company involved in private investigation and the supply
of related products.
x Inzwebeli imported a large batch of advanced monitoring devices from an American
company, at a total invoice price of USD 100 000.
x The advanced monitoring devices:
were ordered from the American company on 25 March 20X5,
were shipped on 15 July 20X5, and
arrived and were unloaded in South Africa on 25 July 20X5.
x The devices were shipped on a delivery at terminal basis (DAT).
x The advanced monitoring devices are to be sold via one of its retail outlets.
x On 31 December 20X5, 80% of the advanced monitoring devices had been sold (at a
mark-up of 20% on cost).
x Inzwebeli paid the American company on 2 February 20X6.
x Inzwebeli has a 31 December year end.
Spot Rate
Date SA Rand: US Dollars
25 March 20X5 7,00: 1
15 July 20X5 7,20: 1
25 July 20X5 7,60: 1
31 December 20X5 7,10: 1
2 February 20X6 6,90: 1
Required:
Show all related journal entries in the books of Inzwebeli Limited for its years ended
31 December 20X5 and 20X6.
Ignore tax.
Question 20.4
Elimnandi Limited, a South African company that manufactures perfumes, bought 16 new
fragrance-testing machines for use in its laboratory in Johannesburg. The machines were
imported from Estelle Lord Limited, a company based in France (currency of euro¶s: ¼) that
produces equipment for companies in the perfume industry.
Chapter 20 227
Details relating to the purchase of these machines are as follows:

x The machines were ordered on 25 April 20X9.
x The machines were shipped on 15 June 20X9.
x The machines arrived in South Africa on 1 September 20X9.
x 7KHWRWDOLQYRLFHSULFHZDV¼ 000, invoiced on a free on board basis (FOB).
x Elimnandi paid the French supplier on 30 September 20X9.
The machines needed to be installed before they could be put into operation:
x Installation was completed by Inandout Limited on 25 September 20X9.
x Inandout Limited furnished the company with an invoice for R60 000.
x The machines were available for use on 1 October 20X9 but due to labour unrest, these
were only brought into use on 31 October 20X9.
The machines have a residual value of R50 000, a useful life of 8 years and the appropriate
method of depreciation is straight-line.
Elimnandi's functional and presentation currency is the Rand (R).

Spot Rate
Date SA Rand (R): Euro (¼
25 April 20X9 13,50:1
15 June 20X9 13,75:1
01 September 20X9 13,80:1
31 October 20X9 14,40:1
Required:
Show all journals in the books of Elimnandi Limited for the year ended 31 December 20X9.
Ignore tax.
Question 20.5
Ghost Limited is an American company that sells sheets. Ghost Limited sold a batch of
sheets to a British company for GBP 50 000.
The order from the British company was received on 25 March 20X5, the sheets were loaded
on 15 July 20X5 and were unloaded in Great Britain on 25 July 20X5. The sheets were
loaded on a 'customs, insurance and freight' basis (CIF).
The sheets (which Ghost Limited had in stock at the time of the order) cost the American
company USD 20 000.
Ghost Limited's functional and presentation currency is the dollar ($). Related exchange rates
are as follows:
Spot Rate
Date US Dollars: GB Pounds
25 March 20X5 2,00: 1
15 July 20X5 2,20: 1
25 July 20X5 2,50: 1
31 October 20X5 2,65: 1
31 December 20X5 2,40: 1
31 January 20X6 2,90: 1
The British company paid Ghost Limited as follows:

z GBP 25 000 on 31 October 20X5
z GBP 25 000 on 31 January 20X6
228 Chapter 20
Required:
Show all related journals in the books of Ghost Limited for its years ended 31 December 20X5
and 20X6.
Ignore tax.
Question 20.6
Champagne Limited is a bottling company operating in Spain. Champagne's functional

FXUUHQF\LVWKH(XUR¼
On 10 December 20X6, the directors were extremely excited about news of a wine-growing
industry in various regions in Thailand. After many fact-finding missions to Thailand and
numerous meetings with stakeholders in the industry, Champagne Limited approached
various banks in Thailand for a loan to fund the construction of a bottling plant that could
service this new wine-growing industry. The currency in Thailand is the Thai Baht (THB).
Thai Bank offered the lowest rates out of all the banks approached, agreeing to charge an
interest rate of 8%, albeit on a lower loan amount than Champagne had originally hoped for.
The following details relate to the loan agreement signed by Champagne:

x The loan principal of THB 48 000 000 was received by Champagne on 1 March 20X7, and
is repayable over 50 years
x Interest is calculated at 8% on the outstanding loan balance
x Instalments on the loan are payable annually in arrears, on 28 February. The repayments
are calculated to include THB 960 000 in part-repayment of principal plus the interest
accrued on the preceding 12 months.
The following exchange rates may be needed:

Exchange Rate
Date Euros 1: Baht
01 March 20X7 1: 40,0
31 December 20X7 1: 30,0
28 February 20X8 1: 37,5
31 December 20X8 1: 39,0
Average for 1 March 20X7 to 31 December 20X7 1: 35,0
Average for 1 January 20X8 to 28 February 20X8 1: 30
Average for 1 March 20X8 to 31 December 20X8 1: 36,0
Required:
Prepare the necessary journals entries in Champagne Limited's general journal for its year
ended 31 December 20X7 and 31 December 20X8.
Ignore tax.
Question 20.7
On 1 January 20X8, Buffet Limited (a South African company) granted a loan of C$20 000 to
Nimrod Limited, a company operating in Canada.
x This loan is repayable over 8 years, with annual payments in arrears of C$3 000 each
(which includes both capital and interest).
x Interest is calculated at an effective rate of 4,24% p.a. and is compounded annually.
Chapter 20 229
The following spot and average exchange rates were obtained from a financial institution:
Date or period R1: C$

1 January 20X8 0,20
30 June 20X8 0,17
31 December 20X8 0,22
30 June 20X9 0,24
Average 1/1/20X8 to 30/06/20X8 0,19
Average 1/7/20X8 to 31/12/20X8 0,21
Average 1/1/20X9 to 30/06/20X9 0,22
Required:
Prepare journal entries to record the above information in the books of Buffet Limited for the
years ended 30 June 20X8 and 30 June 20X9.
Ignore tax.
Question 20.8
Charlie is a director of Candy Mountain Limited, incorporated in a country called Localland,

where the currency is LC.
x The company purchased a machine, called the Candy Mountain machine, many years
ago from a foreign country called Foreignland, where the currency is FC. This machine:
was purchased for FC70 000.
is based permanently in Foreignland.
x Although the machine is situated in Foreignland, the operations of the business are managed by
Charlie from Localland. Charlie uses the Localland currency, LC, when determining the prices at
which all Candy Mountain products are sold and when paying the staff employed by Candy
Mountain in Foreignland.
x According to the 31 December 20X5 trial balance of the foreign Candy Mountain operation,
the accumulated depreciation on this machine is FC20 000.
x At 31 December 20X5, one of the Candy Mountain employees noticed that the Candy
Mountain machine was water-damaged after a tropical storm, indicating a possible
impairment.
x Experts were rushed in to determine the extent of the storm damage. The following year-
end values were determined:
fair value less costs of disposal: FC48 000; and
value in use: FC52 000.
x The exchange rate on the date that Charlie originally purchased the Candy Mountain
machine was LC13 for each FC1. At 31 December 20X5, the current financial year-end,
the exchange rate was LC11 for each FC1.
Required:
Calculate the amount by which the Candy Mountain machine needs to be impaired, if at all.
Ignore tax.
230 Chapter 20
GAAP: Graded Questions Financial instruments ± general principles
Chapter 21
Financial instruments ± general principles
Question Key issues

Part A: Financial assets ± basics
Part B: Financial liabilities ± basics
Part C: Financial assets ± impairments
Part D: Reclassifications
21.2 Jabulani Financial assets (various): classification and measurement
21.3 Spirit Financial assets: classification and measurement

Amortised cost (AC)
Fair value through other comprehensive income (FVOCI)
21.4 Biscuit/ Milk Compulsory redeemable debentures, as:

Part A: Financial liabilities (perspective of issuer)
Part B: Financial assets (perspective investor)
21.5 Flighty Financial assets (various): classification and measurement, including

expected credit losses
21.6 Hunter Financial assets (government gilts): at amortised cost

Part A: Ignoring expected credit losses
Part B: With expected credit losses
21.7 Zebrule Financial assets (bonds) - journals

Part A: business model to realise gains through trade
Part B: business model to hold to collect
Part C: Reclassification from FVPL to AC
Part D: Impairment ± expected credit losses
21.8 Melbourne Financial assets (compulsory redeemable preference shares):

at amortised cost (AC)
at fair value through profit or loss (FVPL)
at fair value through other comprehensive income (FVOCI-debt)
Discussion, Journals and Disclosure
21.9 Games Financial assets - journals

Amortised cost (AC),
FV through profit or loss (FVPL)
FV through other comprehensive income (FVOCI)
Day-one gain or loss
Continued on the next page ...
Chapter 21 231
Question continued Key issues

...
21.10 Choule Measurement of expected credit losses ± discussion and journals

Part A: 12-month credit losses
Part B: Significant increase in credit risk
Part C: Credit-impaired financial asset
21.11 Mpofana Various financial assets, together with related expected credit losses ±
discussion and journals
21.12 Rose Financial asset with significant increase in credit risk ± journals
21.13 Sulky Financial asset: expected credit losses (becomes credit-impaired and
change in lifetime expected credit losses)
21.14 Sunny Financial asset with significant increase in credit risk and partial
recovery ± journals
21.15 Barrie Financial liabilities: classification:

at amortised cost (AC)
at fair value through profit or loss (FVPL)
21.16 Algae Financial liabilities: convertible instruments ± journals
21.17 Beverage Financial liabilities at amortised cost ± journals

Compound financial instruments ± discussion
Financial liabilities at FVPL ± journals
21.18 Tree Capital Interest rate swap ± journals
21.19 Madiba Reclassification of financial assets

- From FVPL to AC ± journals
- From FVPL to FVOCI ± journals
Expected credit losses
21.20 Blues Financial risks and mitigation of risks ± discussion
232 Chapter 21
Question 21.1
Part A: Financial assets ± basic
a.
In terms of the definition, there are three categories of µfinancial assets¶: cash, investments in equity
instruments of other entities, and contractual rights to receive cash or another financial asset.
a) True
b) False
b.
Prepaid expenses are financial assets.

a) True
b) False
c.
Financial assets are always initially measured at the acquisition price, irrespective of fair
value on the date of acquisition.
a) True
b) False
d.
Investments in convertible debentures will be classified as subsequently measured at

amortised cost, if the business model of the entity is to hold convertible debentures until
maturity, and the cash flows of the debentures are solely payments of the principal and
interest on the principal.
a) True
b) False
e.
Investments in equity instruments and investments in debt instruments that are classified as
µfair value through other comprehensive income¶ are accounted for in exactly the same way
as each other.
a) True
b) False
f.
An entity has several µlease receivables¶, all of which have been accounted for in terms of
IFRS 16 Leases. Since the entity has accounted for these in terms of IFRS 16 Leases, it
means that IFRS 9 Financial instruments will have no impact on them.
a) True
b) False
Part B: Financial liabilities ± basic
a.
In terms of the definition, there are two categories of µfinancial liabilities¶:

x contractual obligations to deliver cash or another financial asset, and
x non-derivative contracts that may require the entity to deliver a variable number of the
entity¶s own equity instruments.
a) True
b) False
Chapter 21 233
b.
A contract that the entity must settle by issuing a fixed number of its own equity instruments
will be recognised as a financial liability.
a) True
b) False
c.
Transaction costs are expensed in the case of financial liabilities classified as subsequently
measured at amortised cost.
a) True
b) False
d.
Foreign exchange gains and losses on financial liabilities (other than those used in hedges) may
need to be recognised in profit or loss depending on whether certain criteria are met.
a) True
b) False
Part C: Financial assets ± impairments

a.
When applying the impairment requirements of IFRS 9, the first step is to identify whether a
financial asset may be impaired. If there are indications of impairment, we must process an
impairment loss.
a) True
b) False
b.
Expected credit losses are recognised for all financial assets irrespective of how the financial
asset is classified.
a) True
b) False
c.
When considering whether to impair a financial asset, an entity only evaluates events that
have occurred during the current financial year.
a) True
b) False
d.
Trade receivables are always impaired using the simplified approach.

a) True
b) False
Part D: Reclassifications
a.
A change in intention is sufficient to result in the reclassification of a financial asset.

a) True
b) False
234 Chapter 21
b.
An entity is able to reclassify its investments in ordinary shares from FVOCI-equity to FVPL
two years after the acquisition date.
a) True
b) False
c.
The reclassification of a financial asset is accounted for from the date the entity changes its
business model for managing the financial asset.
a) True
b) False
d.
Financial liabilities classified at fair value through profit or loss may be reclassified to
amortised cost if the liability had been designated at fair value through profit or loss.
a) True
b) False
Question 21.2
Jabulani Limited is an investment entity with a diversified portfolio of investments.
7KH FRPSDQ\¶V ILQDQFLDO GLUHFWRU KDV SURYLGHG \RX ZLWK the following list of its investments
acquired during the year and the costs of acquiring each:
x unlisted shares: C2 640 000, plus a further C33 000 in transaction costs
x listed shares: C2 137 520, including transaction fees of C25 520
x government bonds: C1 160 500, after transaction fees of C16 500
x convertible debentures: C4 928 000, excluding further transaction fees of C194 920
x subsidiary company: C16 830 000 excluding the further transaction fees of C1 786 400
x corporate bonds: C6 877 200 excluding transaction fees of C200 860.
The listed shares are traded actively, the government bonds are held to maturity and the
corporate bonds are held for trading purposes.
Assume that the fair value is equal to the acquisition price in all cases.
Required:
Discuss, in detail, the classification and initial measurement of the investments Jabulani made
in the scenario above.
Ignore expected credit losses.
Question 21.3
Spirit Limited is a manufacturer of electrical appliances. Due to a slow-down in the economy,

Spirit does not have viable business opportunities to invest in and, for this reason, excess
cash is to be invested in two different portfolios, instead:
x government bonds and
x equity instruments.
Details of these portfolios are provided on the next page«
Chapter 21 235
Portfolio 1: Government bonds
This portfolio is held to earn contractual cash flows where the contractual cash flows comprise
a return of the principal amount and interest on the principal.
Purchase price on acquisition date (1 January 20X3) 780 000

Transaction costs (1 January 20X3) 60 000
Maturity date 31/12/20X7
Coupon payment (payable in arrears on 31 December annually) 45 000
Redemption amount 900 000
All related cash flows took place on the due date. Assume that the acquisition price was equal
to the fair value on 1 January 20X3.
Portfolio 2: Equity Instruments
The second portfolio consists of investments in equity instruments and is held to collect
dividend income. The investments do not result in control or significant influence.
x Management would prefer to disclose the movements in fair value in other comprehensive
income since these investments are not indicative of the performance of the entity.
x At the beginning of the financial year, 1 January 20X7 the investments had a collective
fair value of C 1 200 000 and by 31 December 20X7 it had risen to C 1 320 000.
x Dividends declared and received during the current financial year amounted to C144 000.
x No investments were sold in the current year.
x There is no evidence of an accounting mismatch arising due to either portfolio.
Required:
a) Discuss fully how management should classify and measure each of the two investment
portfolios in terms of IFRS 9 Financial instruments.
b) Provide the journals to account for both portfolios for the year ended 31 December 20X7.
Question 21.4
Part A
On 2 January 20X4, Biscuit Limited issued 20 000 debentures, the details of which are as follows:
Face value C1 000
Discount on face value C200
Years in issue 4
Premium on compulsory redemption 10%
Coupon rate (per annum, in arrears) 15%
Effective interest rate 25.23262%
These debentures were classified at amortised cost.

All related cash flows took place on due date.
Biscuit has a 31 December financial year-end.
Required
Prepare journals for Biscuit to record the financial instrument over its four-year life.
236 Chapter 21
Part B
Assuming the same information from Part A above.
Milk Limited, an unrelated third party, acquired 80% of the debentures issued by Biscuit on
2 January 20X4 for the discounted price.
x Transaction costs of C32 000 were incurred and paid by Milk.
x As Milk¶V intention is to collect contractual cash flows, the debentures have been
classified at amortised cost.
On acquisition:
x the lifetime expected credit losses on the debentures were C17 000 and
x the 12-month expected credit losses were C5 000.
Milk did not consider the investment to be credit-impaired on acquisition date. The total
expected credit losses at each subsequent reporting date were as follows:
Date Lifetime expected credit losses 12-month expected credit losses
31 December 20X4 C19 000 C6 000
31 December 20X5 C16 000 C4 000
31 December 20X6 C18 000 C5 500
In all years, Milk assessed that the credit risk was low, and did not significantly increase.
Required
Prepare the journal entries to account for the debentures in the financial statements of Milk
Limited over their four-year life
Ignore tax
Question 21.5
Flighty Limited entered into the following transactions during the year ended 30 June 20X9:
Transaction Fair value

Investments
date on transaction date
Purchase of ordinary shares in Tiny Limited Note 1 01/01/20X9 C240 000
Fair value of ordinary shares at year-end 30/06/20X9 C270 000
Issue of 10% redeemable preference shares at face value. Non- 31/12/20X8 C1 200 000
discretionary dividends are payable annually in arrears. Note 2
Purchase of debentures redeemable in 5 years (acquired at a 01/09/20X8 C205 800

discount of 2% off the face value of C210 000). Note 3
Purchase of 100 crude oil futures: Margin deposit paid. 01/05/20X9 C88 000
Oil will be purchased at an index level of 2 250 on
31 August 20X9. Note 4
Purchase of 22 SAFEX call options: Margin deposit paid. Note 5 01/02/20X9 C33 000
Note 1: Ordinary shares acquired

x Shares in Tiny Limited are held as a long-term investment. Transaction costs of C2 400 were
incurred on acquisition.
x The company has elected not to present fair value changes through other comprehensive income.
Chapter 21 237
Note 2: Preference shares issued

x The preference shares are redeemable at the option of Flighty Limited. However, if the
share price falls lower than C22, the preference shares become redeemable immediately.
x Flighty¶s share price has never fallen below C26.
Note 3: Debentures acquired
x The debentures are held to collect contractual cash flows.
x Debentures will be redeemed at a premium of 4%.
x Coupon rate of 11% p.a. is payable bi-annually in arrears on 28 February and 31 August.
x The effective interest rate is 12,1502% p.a.
x The 12-month expected credit losses on purchase date were C500. On 30 June 20X9,
the 12-month expected credit losses had increased to C650.
x The lifetime expected credit losses on acquisition date were C750. On 30 June 20X9, the
lifetime expected credit losses had increased to C900.
x The asset was not credit-impaired on initial recognition, and there was no significant
increase in the credit risk at reporting date.
Note 4: Crude oil futures

x Gains or losses are directly transferred to the company¶Vbank account on a daily basis.
x The index level increased to 2 430 by 30 June 20X9.
x Futures are traded in multiples of 10.
Note 5: SAFEX call options
x These call options allow the company to purchase the index at 19 800 points on 30 June 20X9.
x The option was exercised on maturity.
x The index level was 20 020 on exercise date.
All related cash flows took place on due date.
Required:
Prepare all necessary journal entries to record the above transactions in Flighty Limited¶s
books for the financial year ended 30 June 20X9.
Ignore tax.
Question 21.6
Part A
On 1 January 20X9, Hunter Limited purchased government gilts for C270 000.
x The face value is C300 000 and the coupon interest is 8% p.a., payable bi-annually.
x The gilts are redeemable at face value in 3 years.
x The effective interest rate is 6,0359% bi-annually or 12,0718% per annum.
x The company had the intention to hold the gilts to collect contractual cash flows and the
return constituted capital and interest, but due to unexpected cash flow requirements, gilts
with a face value of C180 000 were sold for C170 000 on 1 July 20X9. A market-related
interest rate on the date of sale was 10,6% per annum.
x All related cash flows took place on due date.
Required:
Prepare journal entries to record the government gilts in the accounting records for the year
Ignore expected credit losses and ignore tax
238 Chapter 21
Part B
Use the same information as above, but now consider the following:
x The government gilts were not credit-impaired on purchase.
x On purchase, the 12-month expected credit losses were C22 000. This was unchanged at
year-end, before considering the sale of 60% of the gilts.
x Credit risk of the government gilts has not increased significantly since initial recognition.
Required:
Prepare journal entries to record the government gilts in the accounting records for the year
Ignore tax.
Question 21.7
Part A
Zebrule Limited is a company specialising in the manufacture of tyres. Due to a difficult

economic forecast, Zebrule has not invested in expansionary projects, but has chosen to
invest surplus cash on hand in cash deposits until conditions improve.
The company invested in bonds issued by Wagonwheel Limited. These bonds are listed on
the Johannesburg Securities Exchange. Zebrule acquired 2 200 bonds at C1 188 each (equal
to their face value) on 1 January 20X0. These bonds will be redeemed on 31 December 20X3,
together with a premium of 12% on the face value. Until then, the bonds will pay interest at
13% on face value, receivable on 31 December each year.
From date of acquisition, the bonds were managed with the intention of realising gains
through sale. These bonds traded frequently, and the quoted market values represent fair
value, listed below:
Date Market price per bond
Required:
Provide all necessary journal entries required to appropriately account for the above
information in the books of Zebrule Limited, in accordance with International Financial
Ignore taxation
Part B
Use the same information as that provided under Part A but assume that the investment was
not managed with the intention of realising gains through sales, but rather, it was managed
with the objective of collecting contractual cash flows from date of initial recognition over the
full term of the bonds.
Required:
information in accordance with International Financial Reporting Standards.
Ignore taxation
Chapter 21 239
Part C
Use the same information as that provided under Part A but assume that the investment was
designated at fair value through profit or loss but then management decided to change the
business model relating to the investment:
During a meeting on 30 November 20X0, management concluded that the better-than-

expected returns on the bonds, relative to returns available on other similar investments,
meant that the bonds should rather be held to maturity in order to earn the contractual cash
flows, comprising both the return of the principal and interest. The new business model
became effective immediately. The market value on 30 November 20X0 was C1 100. The
change in business model resulted in the bonds being reclassified.
Required:
information in accordance with International Financial Reporting Standards.
Ignore taxation
Part D
Assume the same information in Part A, except that it was always management¶s intention to
hold the bonds until maturity and collect the contractual cash flows. Zebrule estimates the
following with regards to the expected credit losses:
Date of estimation Probability of Probability of Percentage of

default over default over gross carrying
12 months lifetime amount lost
01 January 20X0 0.50% 0.75% 20%
31 December 20X0 0.60% 0.78% 20%
31 December 20X1 0.65% 0.82% 20%
31 December 20X2 0.80% 0.97% 20%
At each reporting date, the management of Zebrule assessed the credit risk to be low, with no
significant increases in the credit risk.
Management¶s intentions regarding the investment in the bonds did not change for the entire
investment period.
Required:
Provide the journal entries in Zebrule¶s accounts to appropriately account for the bonds in
accordance with IFRS 9 Financial instruments.
Ignore taxation
Question 21.8
On 1 January 20X5, Melbourne Limited acquired 924 000 redeemable Violin Limited
preference shares for C20 328 000.
x These preference shares had no par value.
x The shares pay mandatory annual dividends of C2 032 800, on 31 December.
x The shares are mandatorily redeemable on 31 December 20X9 at a premium of 20%.
x The effective interest rate has been correctly determined to be 13.081314%.
Melbourne earned µother profit¶ of C1 025 000 in each year (i.e. before considering any
income related to the preference shares). Dividends are payable annually on 31 December.
Due to administrative issues, Melbourne only received the dividend on 5 January each year,
apart from the final dividend, which was paid with the capital amount on 31 December 20X9.
240 Chapter 21
The ex-dividend market values of the preference shares were as follows:

Date Market price (ex-div)
31 December 20X5 C23.20
Required:
a) Discuss the various classifications that Melbourne Limited could use when accounting for
its investment in Violin /LPLWHG¶VSUHIHUHQFHVKDUHV and how the classification would affect
the measurement thereof.
b) Assuming the preference shares are classified at amortised cost, show all related entries, using
Melbourne¶s general journal, for the years ended 31 December 20X5 to 20X9 (inclusive).
c) Assuming the preference shares are classified at fair value through profit or loss,
i) show all related journal entries, using Melbourne¶s general journal, for the years
ended 31 December 20X5 to 20X9 (inclusive).
ii) prepare Melbourne's statement of comprehensive income for the year ended
d) Assuming the preference shares are classified at fair value through other comprehensive
income, show all related journal entries, using Melbourne¶VJHQHUDOMRXUQDO, for the years
ended 31 December 20X5 to 20X9 (inclusive).
Ignore tax.
Question 21.9
Games Limited purchased the following instruments on 2 January 20X7:

Blackjack Limited Poker (Pty) Limited Roulette Limited
Type of instrument 10% Bonds Ordinary shares Ordinary shares
Purchase price C40 per bond C37.50 Note 1 C75
Quantity 15 000 bonds 6 000 ordinary shares 20 000 ordinary shares
Fair value (02/01/20X7) C46 per bond C33 per share (1) C77.50 per share
Fair value (31/12/20X7) C50.50 per bond C40 per share C84 per share
Brokerage fees (settled) - C1 per share C1 750
Interest/ dividends received - Note 2 - Note 3 C1 per share Note 4
Classification Fair value through P/L Fair value through P/L Fair value through OCI
Level on fair value hierarchy Level 1 (listed bonds) Level 3 (unlisted shares) Level 1 (listed shares)
Note 1. The investmHQWLQ3RNHU/LPLWHG¶VRUGLQDU\VKDUHVZDVPDGHDW&,50 per share despite

a lower fair value of C33 per share. This is because the fair value of C33, determined by a
consultancy, did not reflect the synergy that this investment was expected to generate.
The fair value is determined using a discounted cash flow analysis.
Note 2. Interest on the bonds was received on due date, 31 December.
Note 3. Poker did not declare any dividends.
Note 4. Roulette declared dividends of C1 per share on 20 December 20X7. Games received
these on 30 December 20X7.
Required:
Using Game¶s general journal, provide all the necessary journal entries to account for the
above instruments for the year ended 31 December 20X7.
Chapter 21 241
Question 21.10
Choule Limited is a financier with a 31 December financial year-end. All transaction fees that
were incurred on each new approved loan were settled immediately.
Part A
Choule Limited provided a loan of C6 000 000 to Stadium Limited on 2 January 20X1. The
repayment terms stipulated that annual arrear interest payments of 12% will be charged until
the repayment date of 31 December 20X5. Transactions fees of C57 200 were incurred to
settle the deal.
On 2 January 20X1, the 12-month and lifetime expected credit losses were 3.6% and 20%,
respectively, calculated on the original loan amount provided. The assessment of credit risk at
each reporting date thereafter suggested that no adjustment to the loss allowance was
required. Stadium Limited has never defaulted on its loans.
Stadium made all contractual payments to Choule on due date.
Required:
a) Discuss how Choule Limited should measure the expected credit losses for this loan for
the financial period ended 31 December 20X1.
b) Prepare the journal entries that would be processed by Choule Limited for the years
ended 31 December 20X1, 20X2 and 20X3.
Part B
Choule Limited issued a loan to Boots Limited of C1 440 000 on 2 January 20X1.
x Redemption date (of the principal) was set at 31 December 20X5.
x The loan contract required interest payments of 15% annually in arrears.
x Transaction fees to conclude the contract were C10 400.
On 2 January 20X1, the 12-month and lifetime expected credit losses were 3,5% and 15% of
the gross carrying amount of the loan provided respectively. There was no objective evidence
that Boots Limited was credit-impaired on date of origination of the loan.
There was no change in the credit risk at 31 December 20X1 and 31 December 20X2 (i.e. the
12-month expected credit loss and lifetime expected credit loss were still assessed at 3,5%
and 12%, respectively).
During the financial period ended 31 December 20X3, Boots Limited started experiencing
economic hardships and, as a result, it notified Choule Limited that it would not be able to
repay the loan in full on 31 December 20X5.
x The terms of the loan were re-negotiated and Boots Limited agreed to repay the loan on
31 December 20X7 (i.e. 2 years later than originally expected).
x The interest rate was amended to 11% per annum.
x These renegotiated terms were concluded in 20X3 and became effective from 1 January 20X4.
x The directors of Choule Limited concluded that this amendment to the loan terms
indicated a significant increase in credit risk, but that the loan was not yet considered to
be credit-impaired.
Despite Boots cash flow problems, all cash flows per the original contract were received on
due date in 20X1, 20X1 and 20X3.
242 Chapter 21
Required:
a) Discuss how Choule Limited should measure the expected credit losses relating to the
loan made to Boots Limited for the financial period ended 31 December 20X1.
ended 31 December 20X1, 20X2 and 20X3
Part C
Choule Limited granted a loan of C2 000 000, on 2 January 20X1.

x This loan was granted to a high-risk client, Coach Limited (i.e. this client was considered
to be credit-impaired on inception of the loan contract).
x The loan was set to be repaid on 31 December 20X5.
x The interest rate was set at a high 22% per annum due to the high-risk involved in the
transaction.
x Transaction fees of C18 400 were incurred to conclude the arrangement.
On 2 January 20X1, the lifetime credit shortfall was expected to be a single default of
C900 000 on 31 December 20X5. The assessment of Coach¶s credit risk on initial recognition
of the loan remained unchanged at each subsequent reporting date.
All contractual cash flows were received on due date (31 December).
Required:
a) Discuss how Choule Limited should measure the expected credit losses relating to the
loan to Coach Limited for the financial period ended 31 December 20X1.
ended 31 December 20X1, 20X2 and 20X3.
Question 21.11
Mpofana Limited invested in four financial assets on 1 January 20X1, details of which are
presented in the table below. The accountant, Alan, is unsure of how to account for these
investments in terms of IFRS 9 and has thus collated all the information he has at his disposal.
Alan is aware that IFRS 9 also requires the recognition of expected credit losses on acquisition but
is not sure whether this applies to all investments or only some. As a result, he has calculated the
expected credit losses as at 31 December 20X1 for each of the assets, with the exception of
ordinary shares, which he was not sure how to deal with at all (see below).
Purchase 12-month expected Lifetime expected

Investment type costs credit losses credit losses
Investment in unlisted non-redeemable C520 000 C3 196 C8 900
preference shares
Investment in redeemable preference shares C350 000 C11 120 C23 250
Investment in government bonds C2 240 000 C68 000 C196 000
Investment in ordinary shares C2 812 000 C48 000 C135 000
All purchase costs were considered to reflect fair values at the date of acquisition. A
transaction cost of a further 1% was incurred on each of the purchase prices reflected in the
table above. All the transaction costs were paid in cash.
x There is no accounting mismatch arising from the investments and none of the
investments experienced a significant increase in credit risk since initial recognition.
Chapter 21 243
x The non-redeemable preference shares pay dividends at 10% per annum (based on
the purchase price), considered to be a market-related return.
Mpofana has no intention to trade these shares.
The estimated 12-month expected credit losses on date of initial recognition was C3 000.
All dividends were received on due date (31 December).
x The redeemable preference shares pay non-discretionary dividends at 15% per annum
(based on the purchase price), considered to be a market-related return.
Mpofana intends to hold these shares until maturity when the principal sum will be returned.
All dividends were received on due date (31 December).
The shares are not considered to be credit impaired on initial recognition.
x The government bonds earn interest at 10% per annum (based on the purchase price),
considered to be a mark-related return and are held purely with the intention of trading.
Interest earned on these bonds is received on 31 December.
x The investment in ordinary shares is held for capital appreciation.
The fair values of each of the investments at year-end, 31 December 20X1, have been
measured as follows:
C
Investment in unlisted non-redeemable preference shares 560 000
Investment in redeemable preference shares 360 000
Investment in government bonds 2 300 000
Investment in ordinary shares 2 500 000
At 31 December 20X1, Mpofana received a dividend of C12 000 from its investment in ordinary shares.
Required:
Briefly explain how each of the investments must be measured in the financial statements of
Mpofana Limited and show the journal entries where possible.
Question 21.12
Rose Limited purchased 100 000 debentures that were issued by Daisy Limited on
1 January 20X5.
x The debentures were purchased at C5 each.
x The debentures offer a 10% fixed rate of interest payable annually on 31 December.
x The debentures will be redeemed at a premium of C1 each on 31 December 20X9.
x The effective interest rate is 13.0813%.
x The debentures were not considered to be credit-impaired at acquisition.
x The debentures were held to collect contractual cash flows.
x No accounting mismatch arose due to the debentures.
During the year ended 31 December 20X7, Daisy Limited found itself in severe financial
difficulties and decided to put itself under voluntary curatorship.
x As a result, it notified Rose that in order to prevent liquidation, the interest due for the
year ended 31 December 20X7 would be paid in full but thereafter, only a percentage of
the remaining interest and principal would be paid.
x As a result of this notification, Rose determined that there has been a significant increase
in the credit risk of the bonds and the financial asset is now credit-impaired.
244 Chapter 21
x The accountant estimated that the expected credit losses were as follows:
12-month Lifetime
Date expected credit losses expected credit losses
01 January 20X5 C3 900 C37 000
31 December 20X5 C3 900 C37 000
31 December 20X6 C13 800 C51 500
31 December 20X7 C39 000 C178 000
All contractual cash flows were received on due date (31 December).
Required:
Prepare all related jRXUQDOV LQ 5RVH /LPLWHG¶V JHQHUDO MRXUQDO IRU WKe years ended
31 December 20X5, 20X6 and 20X7, assuming the debentures were held at amortised cost.
Question 21.13
Sulky Limited bought a listed bond, issued by Crusader Limited, for C694 640 on
1 January 20X6.
x The bond is redeemable at C720 000 (being its nominal value of C640 000 plus a
premium of C80 000) on 31 December 20X9.
x Interest is receivable based on a coupon rate of 10% of the nominal value per annum,
receivable annually on 31 December each year.
x The effective interest rate on this bond was calculated at inception to be 10% per annum.
x On initial recognition, the bond was not considered to be credit impaired.
Crusader Limited was put under voluntary curatorship on 31 December 20X7. Although the
currenW \HDU¶V FRXSRQ LQWHUHVW ZDV UHFHLYed, the future interest cash flows (contractual cash
flows) were no longer considered probable. A guarantee was obtained that C698 219 would
be returned on 31 December 20X9. The investment was considered credit-impaired on this
date (31 December 20X7).
At 31 December 20X8, Crusader¶V ILQDQFLDOSRVition deteriorated further and expected to be

able to pay the nominal value of C640 000, and interest of C16 000 on 31 December 20X9.
The bond part of any portfolio is managed by Mr Timid, who was in charge of long-term
investment outlooks, and who managed the bonds to collect contractual cash flows. The
return on the bond compensated the holder for credit risk and the time value of money.
An analysis of the expected credit losses on the Crusader bonds were as follows ±
12-month Lifetime
Date expected credit losses expected credit losses
01 January 20X6 C16 875 C50 000
31 December 20X6 C21 800 C71 500
31 December 20X7 C38 500 C129 075
31 December 20X8 C28 575 C180 363
All contractual cash flows were received on due date (31 December) to 31 December 20X7,
inclusive. No cash flows were received during 20X8.
Required:
Journalise the related entries in the books of Sulky Limited for each of the years ended 31
December 20X6, 20X7 and 20X8.
Chapter 21 245
Question 21.14
Sunny Limited bought listed bonds, issued by Moon Limited on 1 January 20X5, for
C1 519 530. The details of the Moon Limited bonds:
x Nominal value: C1 400 000
x Redemption date: 31 December 20X8
x Redemption amount: C1 575 000 (including a C175 000 premium).
x Interest rate (coupon rate): of 10% of the nominal value per annum in arrears.
x Effective interest rate: 10%.
The bonds are held within a portfolio that is managed with the objective of collecting both
contractual cash flows and cash flows from selling the assets. At initial purchase, coupon
payments are expected to be received on 31 December every year.
Below is a summary of the DVVHVVPHQWRI0RRQ/LPLWHG¶V financial health and ability to settle

bond payments:
Financial year Financial health Expected Coupon payments Expected Redemption
31 December 20X6 Weak C0 (i.e. for the remainder of the term) C1 575 000
31 December 20X7 Recovering C35 000 (in 20X8) C1 575 000
The investment was considered to be credit-impaired on both 31 December 20X6 and also on
31 December 20X7.
All contractual cash flows were received on due date (31 December) to 31 December 20X6,
inclusive. No cash flows were received during 20X7.
An analysis of the fair values and expected credit losses for these listed bonds is presented below:
Fair value 12-month Lifetime
expected credit expected credit
Date losses losses
01 January 20X5 C1 519 530 C26 250 C134 400
31 December 20X5 C1 580 000 C23 600 C123 000
31 December 20X6 C1 200 000 C96 000 C242 980
31 December 20X7 C1 280 000 C57 150 C235 458
Required:
Provide journal entries to account for the bonds in Moon Limited in the years ended
31 December 20X5, 20X6 and 20X7.
Question 21.15
Barrie Limited is a company incorporated in Neverland. Over the years, Barrie Limited has
issued a variety of debt instruments in order to fund its expansion into Neverland:
x Barrie issued 100 000 10% debentures on 1 October 20X1 to Maine Limited. These have
a face value of C1 and were issued at a discount of 5%.
The debentures are redeemable at a premium of 7% on 30 September 20X5. The
debentures have an effective interest rate of 13,12608% p.a.
The debentures are not held for trading and were not designated at fair value through
profit or loss. Interest is payable bi-annually on 31 March and 30 September each year.
x Barrie issued 80 000 unsecured 12% debentures of C2 each, on 1 January 20X3, to Wendy.
These debentures were issued at a price of C2. These debentures will be redeemed
at C2 per debenture on 31 December 20Y2 (10 years from date of issue). The
debentures have been issued at an effective interest rate of 11.48029%.
The debentures were not designated at fair value through profit or loss on initial
recognition and were measured at amortised cost instead.
246 Chapter 21
x Barrie issued 1 million debentures to Darling Limited on 2 January 20X5.

These debentures have a deemed value of C5 each for purposes of calculating the
interest payment (at a coupon rate of 10%) but were issued at C4 each.
The debentures will be redeemed, on 31 December 20X9, at C6.23 each.
The effective interest rate is 19.992737%.
These debentures were designated at fair value through profit or loss on initial
recognition to avoid an accounting mismatch.
Due to all the extra debt, BaUULH /LPLWHG¶V FUHGLW UDting deteriorated from AAA+ at 1 January
20X5, to A- on 31 December 20X5.
The market interest rates relevant to debentures that are similar to the debentures issued to
Darling Limited, are summarised below:
01/01/X5 31/12/X5
AAA+ 20% 15%
A- 23% 18%
Barrie Limited has a 31 December financial year-end.
All contractual cash flows occurred on due date.
Required:
a) Prepare all the journal entries that would be processed during the period 1 October 20X1
to 31 December 20X2 to account for the debentures issued to Maime Limited.
b) Provide all the journal entries that would be processed during the year ended
31 December 20X5 that relate to the debentures issued to Darling Limited.
c) 3URYLGH %DUULH /LPLWHG¶V statement of comprehensive income and statement of financial
position for its financial year ended 31 December 20X5. Comparatives are required.
Question 21.16
Algae Limited is a company that is involved in the retail of sporting goods. Due to the massive
increase in demand for the merchandise sold by Algae Limited, it was necessary to build a
shopping mall that specialised in the sale of sporting goods.
To raise the required capital, Algae Limited issued 600 000 debentures on 1 January 20X1 at
a price of C12 per debenture.
x The debentures offer a coupon rate of 15% on the face value of C10. The coupon interest
payments have always been made on due date.
x The debentures are compulsorily convertible into ordinary shares on a µ1 for 1¶ basis on
31 December 20X4.
x The debentures were not designated at fair value through profit and or loss on initial recognition.
x An appropriate discount rate for debentures of this nature is 16%.
Required:
Journalise the entries required to account for the above information for the years ended
31 December 20X1 to 20X4.
Question 21.17
In order to fund their expansion into new markets, Beverage Limited issued, on 1 January 20X4,
the following shares:
x 200 000 10% cumulative, redeemable preference shares, at C3,50 each.
Chapter 21 247
The preference shares must be redeemed on 31 December 20X7 at a premium of C0,50 per share.
The effective rate of interest paid is calculated to be 12,94787715%. The dividends on these
preference shares are non-discretionary. They are paid on 31 December of each year.
There are a total of 200 000 authorised preference shares (unchanged since incorporation).
Half of the authorised preference shares have been issued.
Beverage Limited has a 31 December year-end.
Required:
a) Prepare all journal entries relating to the preference shares from the date of issue to the date of
redemption, assuming that the preference shares are designated at amortised cost.
b) Briefly explain how you would recognise the issue of the preference shares if the
preference shares were redeemable at the option of the shareholder and the preference
dividends remain non-discretionary.
c) Journalise the redeemable preference shares if the preference shares were designated at fair
value through profit or loss and the fair values, immediately after payment of the dividends, are:
x 31 December 20X4 = C3,80 per share
x 31 December 20X7 = C4 per share
The changes in fair values were not due to changes in WKHOLDELOLW\¶V µFredit-risk¶
Question 21.18
Tree Capital Limited provides funding to small and medium sized enterprises. Tree Capital
offers funding at a variable rate linked to the Johannesburg Interbank Average Rate (JIBAR).
JIBAR is the rate at which South African banks buy and sell money. This creates a natural
hedge as Tree &DSLWDO¶VERUURZing rate is linked to its lending rate.
The entiW\¶V lending policy requires that, in periods where interest rates are expected to
decrease, the entity will enter into interest rate swaps so as to fix the interest income
receivable on loan assets.
x Tree Capital provided a loan of C1 300 000 to Farmland Limited on 30 November 20X7,
at a lending rate of 1-month JIBAR plus 1%.
Interest is payable monthly in arrears.
The principal of C1 300 000 is payable in 3 years.
After consultations with a leading economist in December 20X7, it is expected that 1-
month JIBAR will decrease in the financial year ended 31 December 20X8 and 20X9.
x Tree Capital entered into a two-year interest rate swap with TUV Bank, effective on
1 January 20X8, to receive a fixed interest rate of 6.5% and pay variable interest rate of
1-month JIBAR plus 1%.
The swap is settled on an annual basis.
The entity has not elected to apply the hedging provisions of IFRS 9.
The 1-month JIBAR (presented as an annualised rate) during 20X8 was as follows:
Date 1-month JIBAR (%)
November 20X7 6.5
December 20X7 6.0
1 January 20X8 to 30 June 20X8 5.5
1 July 20X8 to 31 December 20X8 5.0
Note: JIBAR is quoted as a nominal annualised rate, thus to convert the rates quoted above
to a monthly rate, you will simply divide by 12.
248 Chapter 21
Required:
Prepare all related journal entries in Tree CapitDO¶V JHQHUDO MRXUQDO IRU WKH \HDUV HQGHG
31 December 20X7 and 31 December 20X8.
Question 21.19
Madiba Limited acquired 250 000 10% listed preference shares on 1 January 20X4 at C2,40 each.
x The preference shares will be redeemed at C3 per share on the 31 December 20X8 and
dividends thereon are non-discretionary. These dividends are always paid on 31 December.
x Madiba Limited classified the preference shares as financial assets at fair value through
profit and loss. On 30 June 20X6, the company decided to change its business model
relating to the preference share investment.
The new business model became effective on 31 August 20X6.
The effect of the change resulted in the reclassification of the asset (please see the
required for the details of the reclassification).
x The fair value of the preference shares was:
C2,60 on 1 January 20X6
C2,85 on 30 June 20X6
C3,10 on 31 August 20X6
C2,92 on 1 January 20X7
C3,10 on 31 December 20X7.
x Madiba has correctly accounted for the preference shares in terms of IFRS 9 for the 20X4
and 20X5 years.
x Credit risk has not increased significantly since initial recognition and the asset was not
credit impaired at any point.
x The 12-month expected losses were estimated as follows:
Date 12-month expected credit loss
C
1 January 20X4 2 200
31 December 20X5 3 000
30 June 20X6 3 500
1 January 20X7 2 750
31 December 20X7 2 700
Required:
Prepare all related journal entries in Madiba /LPLWHG¶V JHQHUDO MRXUnal for the years ended
31 December 20X6 and 20X7 under the following scenarios:
a) The preference shares were reclassified from fair value through profit or loss to amortised cost.
b) The preference shares were reclassified from fair value through profit or loss to fair value
through other comprehensive income.
Ignore tax.
Question 21.20
Blues Limited, a South African company (currency: C), manufactures specialised musical
instruments. Since Blues Limited was incorporated in the current year it was unable to raise a
loan from a large bank and was forced to finance the purchase of factory machinery through:
z The issue of debentures to the value of C500 000 (at a 10% fixed rate); and
z A loan of C1 000 000 (at a variable rate of prime plus 15%) from Shark Limited, a small lender.
Chapter 21 249
Both the factory machinery and the raw materials used in the manufacture of the musical
instruments are supplied by Country Limited, an American company.
The musical instruments manufactured are sold in both Durban (South Africa) and London
(Great Britain), although the majority of the customers are Londoners.
Blues Limited offers all its cuVWRPHUVGD\V¶FUHGLW
An extract of Blues /LPLWHG¶V7ULDO%Dlance as at 31 December 20X5 is as follows:
Trial Balance (Extract) Debit Credit
Foreign creditor: Country Limited (US Dollars: 125 000) 900 000
Foreign debtors: various (GB Pounds: 30 000) 300 000
Inventory 600 000
Debentures 500 000
Loan: Shark Limited 1 000 000
Sales: local 50 000
Sales: foreign 700 000
Required:
a) List the financial risks listed in IFRS 7 to which an entity can be exposed.
b) Discuss the various financial risks to which Blues is currently exposed. Your answer
should include the definition of each risk discussed.
c) Discuss how Blues may limit their exposure to these risks.
250 Chapter 21
GAAP: Graded Questions Financial instruments - hedge accounting
Chapter 22
Financial Instruments ± Hedge Accounting
Question Key issues

22.2 Growthpoint Import (FOB): inventory: Repayment after year-end
A: With no FEC
B: With an FEC: where the hedge of a transaction = FVH
22.3 Tubbie Import (DAT): Non-financial asset (Inventory):
- hedge of a highly probable forecast transaction (CFH) and
- hedge of a recognised asset (FVH)
Includes disclosure
22.4 Shaggy Import (DDP): Non-financial asset (PPE): Hedge of a highly probable forecast
transaction (CFH) and recognised asset (FVH) and:
Part A: hedge of the firm commitment is a CFH
Part B: hedge of the firm commitment is a FVH
22.5 Katerina Import (FOB): Non-financial asset (PPE):
- hedge of a highly probable forecast transaction (CFH), and
- hedge of a recognised asset (FVH).
Includes disclosure
22.6 Pendragon Export (DAT): Financial asset (Debtor): Includes a firm commitment
- hedge of a firm commitment (CFH), and
- hedge of a recognised asset/liability (FVH).
Part A: Hedge accounting is not discontinued
Part B: Hedge accounting is discontinued
22.7 Koala Import (DDP): Non-financial asset (PPE): Includes a firm commitment
- hedge of a highly probable forecast transaction (CFH),
- hedge of a firm commitment (CFH), and
- hedge of a recognised asset or liability (FVH).
Part A: Cash flow hedge does not contain an ineffective portion
Part B: Cash flow hedge does contain an ineffective portion
Includes disclosure
22.8 Tiger Import (DAT): Non-financial asset (PPE): Includes a firm commitment
- hedge of a firm commitment (FVH),
FEC matures after settlement date.
22.9 Bert Import: Non-financial asset (Inventory):
Expiry and renewal of FEC (roll-forward).
- Part A: Hedge accounting is not discontinued
- Part B: Hedge accounting is discontinued
22.10 Ahava Import (FOB): Non-financial asset (Inventory): Includes a firm commitment
- hedge of a highly probable forecast transaction (CFH), and
Parts (a) and (b): journals and disclosure
- hedge of a firm commitment (CFH),
Part (c): journals only
- hedge of a firm commitment (FVH)
Chapter 22 251
Question 22.1
a.
1. If we have hedged a transaction and the criteria for hedge accounting are met, we must
account for the hedge in terms IFRS 9 Financial instruments.
2. Hedge accounting may be applied to any hedging relationship if it is between an eligible
hedged item and a hedging instrument.
3. The application of hedge accounting is entirely voluntary.
4. We may only cease hedge accounting if certain criteria are met.
a) Only 1 is correct
b.
When accounting for an forward exchange contract that has been entered into in order to hedge
against the risks associated with a firm commitment, the forward exchange contract is called
the hedging instrument and the firm commitment is called the hedged item.
a) True
b) False
c.
When accounting for a hedge as a cash flow hedge, we have the choice of processing a basis
adjustment or reclassification adjustment.
a) True
b) False
d.
A hedge of a highly probable forecast transaction:

a) must be accounted for as a cash flow hedge.
b) may be accounted for as a cash flow hedge or fair value hedge.
c) must be accounted for as a fair value hedge.
d) must be accounted for as a fair value hedge in the event that the hedge is to manage
foreign currency risk, failing which it is accounted for as a cash flow hedge.
e) none of the options (a-d) are correct.
e.
a) When accounting for a cash flow hedge, any gains or losses are immediately recognised
in profit or loss.
b) When accounting for a cash flow hedge, any gains or losses are immediately recognised
in other comprehensive income and then transferred directly to equity, either on
transaction date or when the hedged item is derecognised.
c) When accounting for a cash flow hedge, any gains or losses are first recognised in other
comprehensive income and then reclassified to profit or loss when the non-financial asset
affects profit or loss.
d) When accounting for a cash flow hedge, any gains or losses are first recognised in other
comprehensive income and then, in the case of a non-financial asset, they are transferred from
other comprehensive income to the cost of the non-financial asset on transaction date.
252 Chapter 22
f.
The gain or loss on a hedging instrument that has accumulated in the cash flow hedge reserve
account would be reversed out of the cash flow hedge reserve using a reclassification
adjustment in the event that the hedge had involved a highly probable forecast transaction that
had now resulted in the recognition of a non-financial asset or liability.
a) True
b) False
Question 22.2
Part A
Growthpoint Limited is based in Japan and has a functional currency of yen (¥). It acquired a
helicopter from a Russian company, which operated in roubles (RUB). The helicopter was
invoiced at RUB360 000. Growthpoint ordered the helicopter on 1 July 20X4. The helicopter
was then shipped on 1 October 20X4 and arrived on 24 November 20X4. The shipping terms
were 'customs, insurance and freight' (CIF). Growthpoint paid the Russian company in full on
1 March 20X5. The date on which the helicopter became available for use was 30 November
20X4. It has a useful life of 10 years and a nil residual value.
The relevant exchange rates are presented on the next page:

Date Spot ¥ : RUB
01 July 20X4 1,70: 1
01 October 20X4 1,75: 1
24 November 20X4 1,78: 1
30 November 20X4 1,80: 1
31 December 20X4 1,85: 1
01 March 20X5 1,90: 1
Assume all requirements for hedge accounting were met throughout the hedging relationship
and that any ineffective portion in the cash flow hedge was considered to be immaterial.
Required:
Using Growthpoint Limited's general journal, show all journals that would have been processed
for both its years ended 31 December 20X4 and 20X5.
Ignore VAT, tax and the effects of discounting.
Part B
Use the same information as that provided in Part A together with the following:
On 1 October 20X4, in order to hedge against the related foreign currency risks, Growthpoint
signed a forward exchange contract for the exchange of RUB360 000. The contract will expire
on 1 March 20X5. The hedge will be accounted for as a fair value hedge.
The relevant exchange rates are as follows:

Date Spot ¥ : RUB FEC expiring on 1 March 20X5
01 July 20X4 1,70: 1 2,00: 1
01 October 20X4 1,75: 1 1,80: 1
24 November 20X4 1,78: 1 1,75: 1
30 November 20X4 1,80: 1 1,60: 1
31 December 20X4 1,85: 1 2,10: 1
01 March 20X5 1,90: 1 N/A
Chapter 22 253
Required:
Using Growthpoint Limited's general journal, show all journals that would have been processed
for both its years ended 31 December 20X4 and 20X5.
Question 22.3
Tubbie Limited planned to purchase inventory from a foreign supplier for $270 000. This
transaction was considered to be highly probable and thus Tubbie Limited entered into a
forward exchange contract to hedge against the foreign currency risks. The FEC was signed
on 30 November 20X5 and will expire on 1 April 20X6.
The chronological sequence of events that followed is listed on the next page:
x Inventory was ordered on 8 December 20X5 (this is not a firm commitment).
x The inventory was loaded on board the ship on 15 December 20X5.
x This inventory was shipped on a 'delivery at terminal' basis (DAT).
x The inventory arrived and was unloaded in the Port Elizabeth Harbour (South Africa) on
1 February 20X6.
x Tubbie Limited paid the foreign creditor in full on 1 April 20X6.
This entire batch of imported inventory has since been sold:

x 70% of the inventory was sold on 1 July 20X6 for R3 200 000; and
x 30% of the inventory was sold on 5 August 20X6 for R1 600 000
The hedge of the recognised asset or liability must be accounted for as a fair value hedge.
Tubbie Limited's functional currency is the Rand (R). Exchange rates were as follows:
Spot FEC expiring on 1 April 20X6

Date SA Rand: Dollar SA Rand: Dollar
30 November 20X5 14,02: 1 14,06: 1
08 December 20X5 14,16: 1 14,26: 1
15 December 20X5 14,11: 1 14,24: 1
31 December 20X5 14,09: 1 14,22: 1
01 February 20X6 14,19: 1 14,24: 1
01 April 20X6 14,26: 1 N/A
Required:
a) 8VLQJ 7XEELH /LPLWHG¶V JHQHUDO MRXUQDO SUHSDUH DOO UHODWHG journals for the years ended
31 December 20X5 and 20X6.
b) 'LVFORVH WKH DERYH LQIRUPDWLRQ LQ WKH IROORZLQJ H[WUDFWV RI 7XEELH /LPLWHG¶V ILQDQFLDO
statements for the year ended 31 December 20X6 only:
x Statement of comprehensive income;
x Statement of changes in equity;
x Notes to the financial statements: just the note for the 'cash flow hedge reserve'.
254 Chapter 22
Question 22.4
Shaggy Limited is a retailer of various common household goods, operating in South Africa.
6RXWK$IULFD¶VFXUUHQF\LVWKH5DQG5, which is DOVR6KDJJ\¶V functional currency.
Business was expanding rapidly and, as a result, Shaggy Limited needed new and more
sophisticated computer equipment in order to enhance the running of its accounting system.
The financial director began negotiating a contract with a German company, Fred Limited, for
the development of specialised computer equipment:
x Negotiations began on 1 September 20X5, from which point onwards the forecast import
became considered µhighly probable¶.
x Agreement on the terms of the contract was only reached on 30 September 20X5:
x The computer equipment would be developed by Fred Limited;
x The installation of this equipment would be performed by South African technicians;
x The purchase price of this new equipment (uninstalled) would be ¼ 000; and
x This agreement is considered a firm commitment.
x The computer equipment was shipped on a 'delivery duty paid' basis (DDP):
x it was loaded on board on 1 February 20X6;
x it arrived at the local harbour on 27 March 20X6; and
x the relevant customs clearance certificates were obtained on 31 March 20X6; and
x it was transported to Shaggy /LPLWHG¶VKHDGRIILFHRQ$SULO;
Soon after this highly unique and complex computer equipment had arrived at the office, it
became obvious that the local technicians did not have the necessary skills to install it.
Arrangements were immediately made with Fred Limited to have a team of their own
technicians sent to South Africa.
The technicians flew over the very next day and had completed the installation by 30 April 20X6.
Shaggy was invoiced on 30 April 20X6 for the iQVWDOODWLRQRI¼ 000 and was required to pay the
local accommodation costs for the technicians of R70 000 (both bills were paid on 31 May 20X6).
This equipment is expected to have a useful life of 5 years and a nil residual value. Depreciation
using the straight-line method is considered to be appropriate.
With concerns over the generally significant fluctuations in the µRand: Euro¶ exchange rate,
Shaggy Limited entered into a forward exchange contract IRU¼ to hedge this foreign
exchange risk as soon as the terms of the contract were agreed upon (i.e. 30 September 20X5).
This forward exchange contract expires on 30 June 20X6.
Shaggy Limited settled the orLJLQDO¼payable to Fred Limited on 30 June 20X6.

Spot rate FEC (expiring on 30 June 20X6)
Date
¼:R ¼:R
1 September 20X5 1 : 8,00 1 : 8,10
30 September 20X5 1 : 7,50 1 : 7,45
1 February 20X6 1 : 7,19 1 : 7,21
28 February 20X6 1 : 7,20 1 : 7,22
27 March 20X6 1 : 7,38 1 : 7,40
31 March 20X6 1 : 7,40 1 : 7,43
2 April 20X6 1 : 8,24 1 : 8,32
30 April 20X6 1 : 8,10 1 : 8,13
31 May 20X6 1 : 7,90 1 : 7,95
30 June 20X6 1 : 7,60 N/A
Chapter 22 255
Required:
Prepare the related journal entries in the books of Shaggy Limited for the years ended
28 February 20X6 and 20X7 assuming that:
a) the hedge of the firm commitment is accounted for as a cash flow hedge and the hedge of
the recognised asset or liability is accounted for as a fair value hedge.
b) the hedge of the firm commitment is accounted for as a fair value hedge and the hedge of
the recognised asset or liability is accounted for as a fair value hedge.
Question 22.5
Katerina Limited (Katerina) is a South African company with a functional currency of the Rand
(R) and a financial year-end of 28 February. In order to update their production line, Katerina
ordered a manufacturing machine from a foreign supplier.
The machine was ordered on 3 February 20X5 (not a firm commitment). On 10 February 20X5
WKH PDFKLQH ZDV VKLSSHG IUHH RQ ERDUG 7KH PDFKLQH DUULYHG DW .DWHULQD¶V IDFWRU\ RQ
1 March 20X5 and it was immediately available for use.
The machinery cost $2 200 000. Katerina settled the foreign debtor on 31 March 20X5. In order
to hedge against adverse effects of changes in the exchange rate, Katerina entered into a 2-
month forward exchange contract for the full amount of $2 200 000 on 3 February 20X5. The
hedge is a hedge of a highly probable forecast transaction (cash flow hedge).
The machine is depreciated at 10% per annum (straight line), with a residual value of R0.
The following exchange rates are relevant:

Spot rates Forward rates *
Date
R: $ 1 R: $ 1
03 February 20X5 R10,00 R10,25
10 February 20X5 R10,80 R11,00
28 February 20X5 R12,00 R12,10
01 March 20X5 R12,05 R12,50
31 March 20X5 R13,80 N/A
* exchange rates for contracts expiring on 31 March 20X5
and that any ineffective portion in the cash flow hedge was considered immaterial.
Required:
a) Provide the journal entries to account for the import of the machine for the year ended
28 February 20X5.
b) Provide an extract of the statement of comprehensive income and the statement of financial
position for the year ended 28 February 20X5, to the extent possible.
Question 22.6
Part A
Pendragon Limited, a South African manufacturer of self-driving vehicles, secured a contract

on 13 September 20X4 to sell the first self-driving vehicle to Merlin Limited, an Italian company.
256 Chapter 22
This contract is considered to be a firm commitment because the contract is non-cancellable.

x 7KHVHOOLQJSULFHZDVVHWDW¼ 000.
x The self-driving vehicle, which cost Pendragon R2 475 000 to manufacture, was shipped
on a delivery at terminal basis (DAT) on 5 January 20X5.
x The self-driving vehicle arrived in Italy on 5 February 20X5 and there were no offloading delays.
To hedge against movements in the cash flows of the firm commitment transaction and to hedge
against movements in the fair value of the recognised asset or liability, Pendragon entered into
the following transaction:
x Instrument: forward exchange contract
x Commencement date: 30 September 20X4
x $PRXQW¼ 000
x Expiration (settlement date) date:1 March 20X5
x )RUZDUGUDWH5¼
The relevant exchange rates:

Date Spot rates Forward rates on an FEC*
5¼ 5¼
13 September 20X4 14,70 14,65
30 September 20X4 15,00 14,80
31 December 20X4 16,10 15,90
05 January 20X5 16,51 16,30
05 February 20X5 16,70 16,50
01 March 20X5 15,50 N/A
* expiring on 1 March 20X5
Required:
3UHSDUHDOOUHOHYDQWMRXUQDOHQWULHVWRUHFRUGWKHWUDQVDFWLRQLQ3HQGUDJRQ/LPLWHG¶VERRNVIRU
the years ended 31 December 20X4 and 20X5.
Part B
For the purposes of this part, consider the following alternate relevant exchange rates:
Date Spot rates Forward rates on an FEC*
5¼ 5¼
15 January 20X5 16.60 16.40
* expiring on 1 March 20X5
Required:
a) Briefly explain how the journals would change if, on 5 January 20X5, Pendragon decided it
would prefer not to continue hedge accounting.
b) Briefly explain how the journals would change if, on 15 January 20X5, the qualifying criteria
ceased to be met, but the forecast transaction was still expected.
c) Provide the journal entries necessary to account for part (b), assuming hedge accounting
was discontinued on 15 January 20X5.
Chapter 22 257
Question 22.7
Part A
Koala Limited, is an Australian company (functional currency: Australian Dollars: A$). Koala intends to
import a piece of equipment (forecast transaction). At the same time as this proposed importation
became highly probable, Koala entered into a forward exchange contract (FEC) to hedge against the
possible adverse effects of changes in the exchange rates.
A 6-month FEC was entered into on 1 December 20X5 (expiring on 31 May 20X6) in anticipation
of the highly probable future transaction to import equipment that costs R675 000 from a South
African Company called Cato Limited. Koala Limited signed the contract of purchase (Koala
entered into a firm commitment) on 1 February 20X6. Koala Limited settled their account with
Cato Limited on 31 May 20X6.
The equipment was shipped on a DDP (Delivery Duty Paid) basis and was released by customs
on 15 February 20X6. The equipment was immediately available for use and was depreciated
from this date on the straight-line basis over its useful life of 10 years to its residual value of nil.

Date Spot Forward rates on FECs*
A$: Rand A$: Rand
01 December 20X5 10.10: 1 10.12: 1
31 December 20X5 10.19: 1 10.21: 1
01 February 20X6 10.00: 1 10.05: 1
15 February 20X6 9.99: 1 10.01: 1
31 May 20X6 9.96: 1 N/A
* expiring on 31 May 20X6
Koala accounted for the hedge of the firm commitment as a cash flow hedge while the hedge of
the recognised asset or liability was accounted for as a fair value hedge.
Required:
a) Prepare the journal entries to account for the import of the equipment in the books of Koala
Limited for the years ending 31 December 20X5, 20X6 and 20X7.
b) Disclose the above in the statement of comprehensive income of Koala Limited for the year
ended 31 December 20X7 together with the other comprehensive income note.
Provide an additional comparative for the 20X5 financial year.
Part B
Assume the information from part A applies, with the exception that:
x ƚŚĞĞǆĐŚĂŶŐĞƌĂƚĞƐŽŶϯϭĞĐĞŵďĞƌϮϬyϱĚŝĨĨĞƌĞĚĂŶĚ
x ĂŶǇŝŶĞĨĨĞĐƚŝǀĞƉŽƌƚŝŽŶŝŶƚŚĞĐĂƐŚĨůŽǁŚĞĚŐĞǁĂƐĐŽŶƐŝĚĞƌĞĚƚŽďĞŵĂƚĞƌŝĂů͗
Date Spot Forward rates on FECs*
A$: Rand A$: Rand
31 December 20X5 10.16: 1 10.21: 1
258 Chapter 22
Required:
a) Explain the effect of the different spot rate on the journal/s for 31 December 20X5.
b) Provide the revised journal entry/ies on 31 December 20X5.
Question 22.8
Tiger Limited intended purchasing plant from Eagle Limited, a company in America. The plant
would be used in the manufacture of inventory. Tiger uses the Rand as both its functional and
presentation currency.
The following events took place, listed in chronological order:

x 28 February 20X8: Tiger Limited entered into a 12-month forward contract, at which point
the intended import was considered to be a highly probable forecast transaction.
x 1 July 20X8: The plant to the value of $320 000 was ordered (a firm commitment).
x 22 July 20X8: The plant was shipped (on a delivery at terminal basis).
x 1 September 20X8: The plant arrived at the Durban harbour.
x 2 September 20X8: The plant was available for use.
x 30 November 20X8: The plant was put into operation.
x 31 January 20X9: The foreign creditor was paid in full.
The plant is depreciated on the straight-line basis at 10% per annum to a nil residual value.
The forward exchange contract was entered into in order to hedge against movements in the
cash flows of the highly probable forecast transaction and to hedge against movements in the
fair value of the firm commitment and the recognised asset or liability.
Details of exchange rates are as follows ($1=R?):

12 months 8 months 6 months 2 months 1 month
Date Spot
forward forward forward forward forward
28 February 20X8 12,5 12,9 12,8 12,7 12,6 12,50
01 July 20X8 13,0 13,4 13,3 13,2 13,1 13,00
22 July 20X8 12,9 13,3 13,2 13,1 13,0 12,80
01 September 20X8 12,6 13,0 12,9 12,8 12,7 12,60
31 December 20X8 13,5 13,9 13,8 13,7 13,6 13,40
31 January 20X9 13,4 13,8 13,7 13,6 13,5 13,45
28 February 20X9 13,6 14,0 13,9 13,8 13,7 13,30
Required:
a) Calculate the amount at which the machine would be measured on transaction date.
b) Journalise all aspects of the acquisition and subsequent measurement of the plant for the
years ending 31 December 20X8 and 20X9.
Question 22.9
Part A
Bert Limited imports certain consumables for the use in constructing buildings in their ordinary
business activities. In order to complete a particular contract, Bert, on 31 March 20X6, placed an order
with a foreign supplier for consumables to the value of $10 000.
Chapter 22 259
x ĞƌƚŝƐĂďůĞ͕ĂƚĂŶǇƚŝŵĞ͕ƚŽĐĂŶĐĞůƚŚĞĐŽŶƚƌĂĐƚǁŝƚŚƚŚĞĨŽƌĞŝŐŶƐƵƉƉůŝĞƌ;ŶŽƚĂĨŝƌŵĐŽŵŵŝƚŵĞŶƚͿ͘EŽŶĞŽĨ
ƚŚĞĐŽŶƐƵŵĂďůĞƐǁĞƌĞƵƐĞĚďǇǇĞĂƌͲĞŶĚ͘
x dŽŚĞĚŐĞŽƵƚƚŚĞĨŽƌĞŝŐŶĞǆĐŚĂŶŐĞƌŝƐŬ͕Ğƌƚ>ŝŵŝƚĞĚŝŵŵĞĚŝĂƚĞůǇƚŽŽŬŽƵƚĂϯͲŵŽŶƚŚĨŽƌǁĂƌĚĐŽǀĞƌ
ĐŽŶƚƌĂĐƚ;&Ϳ͘
x dŚĞĂĐĐŽƵŶƚǁŝƚŚƚŚĞĨŽƌĞŝŐŶƐƵƉƉůŝĞƌŝƐŽŶůǇƚŽďĞƐĞƚƚůĞĚŽŶϯϭƵŐƵƐƚϮϬyϲ͘
x ƵĞƚŽƚŚĞŝŶŝƚŝĂůƵŶĂǀĂŝůĂďŝůŝƚǇŽĨϱͲŵŽŶƚŚ&͕ĞƌƚŚĂĚƚŽƌĞƉůĂĐĞƚŚĞϯͲŵŽŶƚŚ&ǁŝƚŚĂŶŽƚŚĞƌ
ϮͲŵŽŶƚŚĨŽƌǁĂƌĚĐŽǀĞƌĐŽŶƚƌĂĐƚŽŶϯϬ:ƵŶĞϮϬyϲ;ŝ͘Ğ͘ǁŚĞŶƚŚĞŝŶŝƚŝĂů&ĞǆƉŝƌĞĚͿ͘
x Ğƌƚ͚ůŽĐŬĞĚͲŝŶ͛ĂƚZϭϯ͕ϰϯ͗ΨϭŽŶƚŚĞŝŶŝƚŝĂů&ĂŶĚĂƚZϭϯ͕ϲϮ͗ΨϭŽŶƚŚĞƌĞƉůĂĐĞŵĞŶƚ&͘
x dŚĞ ĐŽŶƐƵŵĂďůĞƐ ǁĞƌĞ ĚĞůŝǀĞƌĞĚ ƚŽ Ğƌƚ >ŝŵŝƚĞĚ ŽŶ ϯϭ DĂǇ ϮϬyϲ ;ƚŚĞ ĚĂƚĞ ŽŶ ǁŚŝĐŚ ƚŚĞ
ƚƌĂŶƐĂĐƚŝŽŶŝƐƚŽďĞƌĞĐŽŐŶŝƐĞĚͿĂŶĚƚŚĞĨŽƌĞŝŐŶĐƌĞĚŝƚŽƌǁĂƐƐĞƚƚůĞĚŽŶĚƵĞĚĂƚĞ͘
x dŚĞƌĞůĞǀĂŶƚƌĂƚĞƐĂƌĞĂƐĨŽůůŽǁƐ͗
Spot rate (R:$1) Forward rate (R:$1)
31 March 20X6 13,40 13,43 Note 1
31 May 20X6 13,45 13,48 Note 1
30 June 20X6 13,60 13,62 Note 2
31 August 20X6 13,70 N/A
1. Expiring on 30 June 20X6
2. Expiring on 31 August 20X6
Required:
3UHSDUH DOO RI %HUW /LPLWHG¶V MRXUQDO HQWULHV WR DFFRXQW IRU WKH SXUFKDVH DQG VXEVHTXHQW
settlement for the year ended 31 December 20X6.
Part B
Assume all the information in Part A is relevant, except, when the replacement FCC is entered
into, the hedging requirements are no longer met (hedge accounting cannot be applied).
Required:
Prepare all of Bert /LPLWHG¶V MRXUQDO HQWULHV WR DFFRXQW IRU WKH SXUFKDVH DQG VXEVHTXHQW
settlement for the year ended 31 December 20X6.
Question 22.10
Ahava Limited operates in South Africa as a retailer of audio-visual equipment. Its presentation
and functional currency is the Rand (R).
Lighting technology has taken a massive leap, with the introduction of smart LEDs (light emitting
diodes). Ahava Limited sought to bring smart LEDs to the South African market and thus planned
to purchase smart LEDs from Genius Limited, a company whose functional currency is the
Botswana Pula (BWP). The quantity that would be purchased will be invoiced at BWP 4 200 000.
In anticipation of the highly probable smart LED purchase transaction, and in order to hedge against
the exposure to currency fluctuations, Ahava entered into a forward exchange contract (FEC).
x The FEC covered the full expected invoice amount of BWP 4 200 000 and was entered into
on 5 December 20X5. The FEC will expire on 30 June 20X6.
Ahava placed the order for the smart LEDS with Genius on 31 January 20X6 (a firm
commitment).
x The LEDs were loaded free on board on 31 March 20X6.
x The LEDs arrived on 30 April 20X6.
260 Chapter 22
x Ahava paid Genius on 30 June 20X6.

x On 31 December 20X6, its financial year end, only 40% of the LEDs remained unsold
(LEDs are sold at a mark-up of 30% on cost).
The relevant exchange rates:

Exchange rates on: Spot rate Forward rates on FEC*
Date Rand: BWP Rand: BWP
05 December 20X5 1,01: 1 1,21: 1
31 December 20X5 1,91: 1 1,12: 1
31 January 20X6 1,00: 1 1,50: 1
31 March 20X6 0,99: 1 1,10: 1
30 April 20X6 2,00: 1 2,50: 1
30 June 20X6 0,69: 1 N/A
* expiring on 30 June 20X6
The hedge of the firm commitment must be accounted for as a cash flow hedge and the hedge
of the recognised asset or liability must be accounted for as a fair value hedge.
Required:
a) Provide all the journals that would have been processed by Ahava Limited during the years
ended 31 December 20X5 and 31 December 20X6.
b) Provide Ahava /LPLWHG¶VVWDWHPHQWRIFRPSUHKHQVLYHLQFRPHWKHVWDWHPHQWRIFKDQJHVLQ
equity (only the cash flow hedge column), the profit before tax note and the other
comprehensive income note for the year ended 31 December 20X6.
c) Provide all the journals that would have been processed by Ahava Limited during the years
ended 31 December 20X5 and 31 December 20X6, assuming that the hedge of the firm
commitment was accounted for as a fair value hedge.
Chapter 22 261
GAAP: Graded Questions Share capital: Equity instruments and financial liabilities
Chapter 23
Share Capital: Equity instruments
and financial liabilities
Question Key issues

23.1 - Core questions
23.2 Baba Start-up of business involving preliminary costs; share issue costs;
receipt of funds from interested applicants; issue of shares and refund of
non-allocated funds
23.3 Jungle S46: requirements for a distribution and s4: Solvency and liquidity
requirements
23.4 Coolworths Share buy-back
- buy back shares at market price that equals the average issue price
- buy back shares at market price that exceeds the average issue price
- buy back shares at market price that is less than the average issue
price
23.5 Icy Ordinary shares: share issues: rights issue and then a capitalisation
issue
23.6 Perseverance Application of Conceptual Framework definitions
Redemption of preference shares: - redemption is compulsory;
redemption at a premium
23.7 Get Well Ordinary shares:
- share issues: issue for value and then a capitalisation issue
Redemption of preference shares:
- redemption at the option of the entity
23.8 Lion Ordinary shares and preference shares (non-redeemable)
- share issue: normal issue and a capitalisation issue
- share issue costs
23.9 uShaka Redemption of preference shares:
- redemption is compulsory; redemption at a premium
- financing through issue of ordinary shares and balance from issue of
debentures
23.10 DPD Redemption of preference shares:
- redemption at the option of the shareholders; redemption at a premium
- financing through issue of debentures and the rest through an issue of
ordinary shares
Tax calculation involving dividends and premium on a preference share
liability
23.11 Tandoori Redemption of preference shares:
- redemption at the option of the company - redemption at a premium
- financing through issue of debentures and the rest through an issue of
ordinary shares
262 Chapter 23
Question 23.1
a) Define an equity instrument.

b) Name two classes of shares that a company may issue and briefly explain the difference
between them.
c) Describe how to recognise an issue of ordinary shares and the related dividend declarations.
d) An issue of ordinary shares is always recognised in the same way as an issue of preference
shares. True or false? Briefly justify your answer.
e) The holder of a cumulative preference share is entitled to a distribution every year. True or
False? Briefly justify your answer.
f) IFRSs prohibit the existence of par value shares. True or false? Briefly justify your answer.
g) Identify four different ways in which a company could increase its number of issued shares.
h) Explain in what way a share consolidation and a share buy-back are similar and explain what
each involves.
i) Section 4 of the Companies Act No. 71 of 2008 refers to a solvency and liquidity test: briefly
outline what this test involves.
j) Briefly compare the accounting treatment of share issue costs with the accounting treatment
of preliminary costs.
Required:
Provide brief answers to each of the questions posed above.
Question 23.2
Baba Limited is a newly incorporated company with 100 000 authorised ordinary shares of no
par value.
x Legal costs (start-up / preliminary costs) of C10 000 were paid on 2 March 20X4.
x The company has four directors, each of whom bought, for cash, 2 000 ordinary shares at
the initial issue price of C10 per share. This issue took place on 4 March 20X4 and resulted
in share issues costs of C1 000.
x On 1 April 20X4, the directors published a prospectus with an invitation to the public to
apply for shares in the company. This invitation offered 50 000 ordinary shares at C12 per
share and expired on 31 May 20X4. Applications for 75 000 ordinary shares had been
received by 31 May 20X4. The full value per share application was received into a trust
fund which was then transferred to the company on 3 June 20X4.
x After due consideration, the board of directors decided to limit the allotment to the original
offer of 50 000 shares and refunded the surplus cash received. The allotment and refund
took place on 5 June 20X4. Share issue costs totalling C6 000 were paid on the same date.
x The total comprehensive income for the year ended 28 February 20X5 has been correctly
calculated as C100 000.
Required:
a) Prepare the journal entries relating to the share transactions for the year ended 28 February
20X5.
b) Prepare the statement of changes in equity of Board Limited for the year ended 28 February
20X5.
Chapter 23 263
Question 23.3
Mr Bear, a director of Jungle Limited, is contemplating how much to distribute as a dividend to the
ordinary shareholders for the year ended 31 December 20X4, and has approached you for advice.
The trial balance of the company at that date is as follows:
JUNGLE LIMITED
Debit Credit
Property, plant and equipment 600 000
Inventory 150 000
Bank 50 000
Retained loss: 1 January 20X4 800 000
Profit for the period: 20X4 200 000
Loan 900 000
1 700 000 1 700 000
The property, plant and equipment is measured under the cost model. The fair value has been
measured at C1 800 000 in terms of IFRS 13 Fair value measurement. All other assets and
liabilities are fairly valued.
Required:
Explain, with reasons, whether Jungle Limited may declare an ordinary dividend and what Mr Bear
must do to ensure that the company is not contravening the Companies Act No. 71 of 2008.
Question 23.4
Coolworths Limited has 4 200 authorised unissued ordinary no par value shares and 1 800 issued
ordinary no par value shares (issued over a number of years at varying issue prices). The total
balance on the share capital account for this class of shares is C3 600.
Coolworths directors are considering buying back 600 ordinary shares on 30 June 20X4.
Scenario 1: where the market price is C2 per share;
Required:
For each the three scenarios above,
a) Journalise the share buy-back; and
b) Prepare the statement of changes in equity and the ordinary share capital note for the year
Question 23.5
Icy Limited had 300 000 ordinary shares in issue on 1 January 20X5. During the year ended
31 December 20X5 the following share transactions took place:
x A rights issue on 1 April 20X5:
- 50 000 ordinary shares were offered to existing shareholders;
- The issue price per share was C5 when the market price per share was C8;
264 Chapter 23
- All 50 000 shares offered were taken up on this day.

x A capitalisation issue on 1 December 20X5:
- Three ordinary shares were issued for every ten shares in issue,
- The current market price per share was C7.
x A share split on 15 December 20X5
- Each ordinary share in issue was split into three ordinary shares,
- Current market price per share was R6.90.
x Share issue costs of C30 000 were incurred and paid during 20X5.
Required:
Journalise the above transactions for the year ended 31 December 20X5.
Question 23.6
You are a new member of the financial reporting team at Perseverance Limited, charged with
the responsibility of ensuring that the equity and liabilities section of the statement of financial
position is fairly presented.

x 100 000 ordinary shares were issued on 1 January 20X1 at C1 each.
x 300 000 redeemable preference shares with a coupon rate of 10% were issued on
1 January 20X3 at C1 each. These shares are compulsorily redeemable on
31 December 20X5 at a premium of C0,10 per share. The effective interest rate is
12,937%.
x The preference dividends are declared and paid on 31 December each year and are non-
discretionary.
x 7KHGLUHFWRUVDUHVDWLVILHGWKDWWKHFRPSDQ\¶VDVVHWVIDLUO\YDOXHGH[FHHGLWVOLDELOLWLHVDQG
that the company will be able to pay its debts as they become due.
x All amounts are considered to be material.
Required:
a) Using the Conceptual Framework definitions of the elements of the financial statements,
discuss whether the issue of the preference shares on 1 January 20X3 should be
recognised as equity or as a liability.
b) Using the Conceptual Framework definitions of the elements of the financial statements,
discuss whether the redemption of the preference shares on 31 December 20X5 should be
recognised as an expense.
c) Provide the journal entries to account for the preference shares for the years ending
31 December 20X3, 20X4 and 20X5. Assume the preference shares are financial liabilities
classified at amortised cost.
Ignore tax.
Question 23.7
Get Well Hospital Limited is a specialised private hospital in the Pretoria DUHD7KHFRPSDQ\¶V
financial year ends on 31 December 20X4.
At 31 December 20X3, an extract its statement of financial position and notes relating to equity
is as follows:
Chapter 23 265
GET WELL HOSPITAL LIMITED

AT 31 DECEMBER 20X3
Note 20X3
Share capital and reserves C
Preference share capital 5 360 000
GET WELL HOSPITAL LIMITED

EXTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 20X3
20X3
4. Ordinary share capital
Authorised Quantity
Ordinary shares of no par value 600 000
Issued
Number of shares in issue at the beginning of the year 450 000
Number of shares issued during the year 0
Number of shares in issue at the end of the year 450 000
5. Redeemable preference shares

Authorised
12% redeemable preference shares of no par value 240 000
Issued Quantity
Number of shares in issue at the beginning of the year 240 000

Shares redeemed during the year (0)
Number of shares in issue at the end of the year 240 000
The preference shares are redeemable on 30 June 20X4 at a premium of 5%, at the option of Get Well
Hospital Limited.
The following information relates to shares of the company:

x The preference shares are redeemable at the option of the company. On 30 June 20X4, Get
Well Hospital Limited decided to exercise that option. The redemption was partially financed
by a rights issue of 1 ordinary share for every 5 ordinary shares held, made on 30 June 20X4
at their market value of C4 each. All shares offered in terms of the rights issue were taken
up.
x On 30 September 20X4 a capitalisation issue of 1 share for every 3 shares held was made
out of the retained earnings at the market price of C1,50 per share.
x A preference dividend of C19 200 was paid on 30 June 20X4.
Total comprehensive income for the year ended 31 December 20X4 is C192 000. There are no
components of other comprehensive income.
The directors are satisfied that the FRPSDQ\¶V assets, fairly valued exceed its liabilities and that
the company will be able to pay its debts as they become due.
Required:
a) Prepare all journal entries to account for the information relating to the year ended
31 December 20X4 presented above.
b) Prepare the statement of changes in equity of Get Well Hospital Limited for the year ended
266 Chapter 23
Question 23.8
Lion Limited manufactures spare parts for use in the automotive industry. The following
information relates to its equity for the years ended 31 March 20X3 and 20X2:
x Equity balances extracted from the statement of financial position at 31 March 20X1:
- Ordinary share capital C1 800 000
- 12% Non-cumulative preference share capital C800 000
- Revaluation surplus C300 000
- Retained earnings C10 000 000
x Profit for the current year ended 31 March 20X3 amounts to C1 500 000 (20X2: C900 000).
x The only item of other comprehensive income that arose during the 20X3 financial year end
was a revaluation surplus of C110 000, net of tax. There was no other movement in the
revaluation surplus over the two years ended 31 March 20X3.
x Information regarding the ordinary share capital:
- The authorised shares capital has remained unchanged since incorporation at
5 000 000 shares.
- The ordinary share capital in issue at 1 April 20X1 consisted of 2 000 000 shares of no
par value.
- On 1 July 20X1, 400 000 additional ordinary shares were issued at C1,80 per share.
The share issue costs for this issue were C20 000. These costs are non-deductible for
tax purposes.
- On 31 December 20X2, the directors authorised a capitalisation issue of one share for
every four shares held at the current market price of C1.
- An ordinary dividend of C0,05 per share was declared on 28 February 20X3. No
dividend was declared in the 20X2 financial year.
x Information regarding the preference share capital:
- The preference share capital in issue at 1 April 20X1 consisted of 200 000 non-
redeemable 12% preference shares of no par value. All the authorised preference
shares have been issued.
- The discretionary preference dividends were paid on 10 October in both years.
x The directors are satisfied that the FRPSDQ\¶V assets, fairly valued exceed its liabilities and
Required:
a) Prepare all journal entries relating to the years ended 31 March 20X2 and 20X3.
b) Prepare Lion the changes in equity of Lion Limited for the year ended 31 March 20X3 in
c) Prepare the share capital note for inclusion in the notes to the financial statements of Lion
Limited for the year ended 31 March 20X3 in accordance with International Financial
Question 23.9
UShaka Limited was incorporated on 1 January 20X0 with an authorised share capital of 310 000
no par value ordinary shares and 50 000 10% redeemable preference shares of no-par value
(subject to compulsory redemption on 31 December 20X5 at a premium of C0,20 per share).
x On 2 January 20X0 all the preference shares were issued at C2 each and 300 000 ordinary
shares were issued for C300 000.
Chapter 23 267
x UShaka Limited¶s financial year end is 31 December. Preference dividends are paid annually
on 31 December.
x On 31 December 20X5 the directors resolved the following with regard to the redemption of
the preference shares:
- The preference shares are to be redeemed at a premium of C0,20 per share as
authorised by the memorandum of incorporation.
- The redemption of the preference shares (together with the preference dividends due for
20X5) will be partially financed by the issue of the remaining authorised ordinary shares
for an amount of C24 000 (the required number of shares were subscribed for and
allotted). The balance of the funds needed to finance the redemption will be obtained
from the issue of 10% debentures of C10 each. The balance of C20 000 in the bank
account is not to be used to finance the redemption.
x The directors are satisfied that the FRPSDQ\¶V assets, fairly valued exceed its liabilities and
Required:
Prepare the journal entries (including cash transactions) to record the transactions in the
accounting records of UShaka Limited for the year ended 31 December 20X5.
Question 23.10
The following is an extract from the trial balance and notes to the financial statements of DPD
Limited at 31 December 20X6, EHIRUHFRQVLGHULQJDQ\RIWKHLQIRUPDWLRQIURPWKHVKDUHKROGHUV¶
meeting on 31 December 20X6:
DPD LIMITED
(EXTRACT FROM) TRIAL BALANCE
AT 31 DECEMBER 20X6
Debit Credit
Ordinary share capital (1 000 000 shares) 1 000 000
12% redeemable, cumulative preference shares (187 500 shares) 393 750
Bank overdraft 75 000
Sales 740 000
Operating expenses 200 000
Interest income 5 000
DPD LIMITED
EXTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS
20X6
4. Ordinary share capital
Authorised Quantity
Ordinary shares of no par value 2 500 000
5. Redeemable preference shares
Authorised Quantity
12% redeemable preference shares of no par value 250 000
The preference shares were issued on 1 January 20X2 at C2, and are redeemable at the option of the
shareholders on 31 December 20X6 at a premium of C0,10. The dividends on these preference shares
are non-discretionary.
268 Chapter 23
([WUDFWIURPPLQXWHVRIVKDUHKROGHUV¶PHHWLQJRQ'HFHPEHU;
x All the shareholders elected to have their preference shares redeemed on this date at C2,10
per share. The redemption is to be financed as follows:
- 250 debentures of C250 each.
- As many ordinary shares at an issue price of C1,25 each as are necessary to have
sufficient cash for the redemption.
- 7KHGLUHFWRUVDUHVDWLVILHGWKDWWKHFRPSDQ\¶VDVVHWVIDLUO\YDOXHGH[FHHGLWVOLDELOLWLHV
and that the company will be able to pay its debts as they become due.
- The dividends on the preference shares are to be paid by extending the existing bank overdraft.
- Share issue costs amount to C22 500. These costs are non-deductible and are paid by
extending the bank overdraft.
x There are no other movements in the accounting records other than those evident from the
information provided above.
x There are no items of other comprehensive income.
x The tax rate is 28%. The dividends on the preference shares and the accrual of the
premium are not tax deductible.
Required:
a) Prepare the statement of changes in equity for the year ending 31 December 20X6.
b) Prepare the equity and liabilities section of the statement of financial position at
31 December 20X6.
c) Prepare the accounting policies and notes relevant to the ordinary share capital and
preference shares.
Comparative figures are only required for the statement of financial position.
You will need a financial calculator to answer this question
Question 23.11
Tandoori Limited has an authorised share capital of 300 000 ordinary shares of no par value
and 100 000 redeemable preference shares of no par value. Its issued share capital consists
of 200 000 ordinary shares issued for a total of C215 000 and 100 000 16% redeemable
preference shares issued at C1. In terms of the Memorandum of Incorporation of the company,
the preference shares are redeemable at a premium of 3% of the issue price at the option of
the company any time after 1 April 20X3.
The preference shares were redeemed at a premium of 3% of the issue price on 30 June 20X5.
All dividends due had been paid on 29 June 20X5. The dividends on preference shares were
discretionary.
In order to finance the redemption, on 30 June 20X5 the company issued 30 000 C1 debentures at
a discount of 2% and the minimum number of ordinary shares required at C1,25.
7KHGLUHFWRUVDUHVDWLVILHG WKDWWKHFRPSDQ\¶VDVVHWVIDLUO\YDOXHG H[FHHG LWV OLDELOLWLHs and

Retained earnings at 30 June 20X4 amounted to 60 000. The profit for the year ending 30 June
20X5 has been correctly calculated as C80 000.
Required:
Show the relevant extracts from the statement of financial position, statement of changes in equity
and notes thereto at 30 June 20X5 in terms of International Financial Reporting Standards.
Chapter 23 269
GAAP: Graded Questions Earnings per share
Chapter 24
Earnings per share
Question Key issues

Section A: Basic and Headline Earnings per share
24.2 Cleopatra Restatement of comparative earnings per share
Items included in basic earnings
8VHIXOQHVVRIµHDUQLQJVSHUVKDUH¶UHODWLYHWRµSURILW¶DQGµGLYLGHQGVSHUVKDUH¶
24.3 Mpho Earnings per share: basic
Share movements: issue at market price
Preference shares: non-redeemable, non-cumulative, non-participating
Dividends per share
24.4 Yash Part A: Earnings per share: basic
Part B: Earnings per share: basic and headline
Share movements: issue at market price, capitalisation issue
Preference shares: non-redeemable, cumulative and non-cumulative, non-
participating
Dividends per share
24.5 Near Part A: Earnings per share: basic
Part B: Earnings per share: basic and headline
Share movements: capitalisation issue
24.6 Lulama Earnings per share: basic
Share movements: share split
Dividends per share
24.7 Mnqobi Earnings per share: basic
Share movements: rights issue
Preference shares: non-redeemable, non-cumulative, participating and non-
participating
Dividends per share
Section B: Basic, Headline and Diluted Earnings per share

24.9 Seronda Earnings per share: basic and diluted
Share movements: none
Potential shares: convertible debentures
24.10 Laser Part A: Earnings per share: basic and diluted
Part B: Earnings per share: basic, diluted and headline
Share movements: issue at market price
Potential shares: options
24.11 Chipchop Part A: Earnings per share: basic and diluted
Part B: Earnings per share: basic, diluted and headline
Share movements: rights issue, issue at market price
Potential shares: options, convertible preference shares
24.12 Cousins Earnings per share: basic and diluted
Share movements: issue at market price, capitalisation issue, share buy-back
Potential shares: options, contingent shares, convertible preference shares,
convertible debentures
Preference shares:
- non-redeemable, non-cumulative and participating;
- redeemable/ convertible, cumulative and non-participating
Please note: Further questions on this topic can be found in Appendix B: Integrated questions 1 - 28
270 Chapter 24
Section A: Basic and headline earnings per share
Question 24.1
a) Basic earnings per ordinary share may be presented on the face of the statement of
comprehensive income, in the statement of changes in equity or in the notes to the financial
statements.
Indicate whether this statement is true or false. If it is false, briefly explain why it is false.
b) Earnings per share does not have to be presented in the separate financial statements of
a company that does not have its ordinary shares or potential ordinary shares traded in a
public market (e.g. the Johannesburg Stock Exchange) or that is not in the process of filing
the necessary documents for the purpose of issuing its ordinary shares in a public market.
c) A company had profit after tax of C800 000 and a fixed preference dividend of C100 000
(based on the relevant coupon rate) for the financial year ended 31 December 20X1. There
were 250 000 ordinary shares in issue and 200 000 preference shares in issue throughout
this year. The preference shares are non-participating.
Calculate the basic earnings per ordinary share.
d) During the financial year ended 31 December 20X1, a company had profit after tax of
C1 100 000 and a fixed preference dividend of C200 000 (based on the relevant coupon
rate). It had 250 000 ordinary shares and 200 000 preference shares in issue throughout
this year. The preference shares participate WRWKHH[WHQWRIǩRIWKHRUGLQDU\VKDUHV
Calculate the basic earnings per ordinary share.
e) If a company has ordinary shares and participating preference shares, it must present basic
earnings per ordinary share and basic earnings per participating preference share.
f) A company had 132 000 ordinary shares in issue on 1 January 20X2. On 1 April 20X2, it
issued 50 000 ordinary shares at market price and then on 1 September 20X2, it issued
another 48 000 ordinary shares at market price. The basic earnings for the financial year
ended 31 December 20X2 was correctly calculated to be C330 000.
Calculate the basic earnings per share.
g) A company had 350 000 ordinary shares in issue on 1 January 20X2.
On 1 April 20X2, it issued 50 000 shares at market price.
On 1 June 20X2, it issued 2 shares for every 5 shares held in terms of a rights issue.
On 1 September 20X2, it performed a share split in which 5 shares became 7 shares.
Calculate the number of shares issued in terms of the rights issue and in terms of the share
split and calculate the total number of shares in issue at 31 December 20X2.
h) A company had 132 000 ordinary shares in issue throughout the year ended
31 December 20X1. On 1 April 20X2, it issued 50 000 shares in terms of a capitalisation
issue. The basic earnings were correctly calculated as follows:
x for the financial year ended 31 December 20X2: C330 000 and
x for the financial year ended 31 December 20X1: C250 000.
Calculate the basic earnings per share for the years ended 31 December 20X1 and 20X2.
i) A company had 700 000 ordinary shares in issue on 1 January 20X2.
On 1 April 20X2, it issued 100 000 ordinary shares at C2 per share, in terms of a rights
issue. The fair value per share was C2,80 immediately before the issue of these shares.
The basic earnings for the financial year ended 31 December 20X2: C300 000.
Calculate the basic earnings per share for the year ended 31 December 20X2.
Question 24.2
You have recently been appointed the accountant of Cleopatra Pet Products Limited. Your first
assignment was to draw up the financial statements of the company for the year ended
30 September 20X4. This you have done, including earnings and dividends per share.
Chapter 24 271
The Managing Director, instead of praising you for your technical expertise as you expected,
ZDQWVWRNQRZZK\\RXFKDQJHGODVW\HDU¶VQXPEHURIVKDUHVZKHQFDOFXODWLQJWKHHDUQLQJV
per share for the comparative statement of comprehensive income. He points out that last
\HDU¶VVWDWHPHQWRIILQDQFLDOSRVLWLRQUHIOHFWVRQO\000 ordinary shares and that the 200 000
shares that you have reflected have only been in issue since half-way through the current year.
Furthermore, he wants to know why you included the profit of C80 000 made on the sale of
investments during the year. He believes that this should be excluded.
Required:
a) ([SODLQ WR WKH PDQDJLQJ GLUHFWRU DOO WKH FLUFXPVWDQFHV XQGHU ZKLFK WKH SUHYLRXV \HDU¶V
comparative figures for basic earnings per share should be restated. Give reasons why the
restatement is necessary in each case.
b) Explain why the profit on the sale of investments was included in the amount of earnings
used for the basic earnings per share calculation.
c) Explain why the earnings per share figure is a better indicator of performance than:
a. dividends per share; and
b. profit after tax.
Question 24.3
The following information relates to Mpho Limited for the year ended 31 December 20X1:
x Mpho Limited earned a profit for the year of C100 000 in 20X1 (20X0: C80 000).
x Mpho Limited declared dividends in 20X1 and 20X0 as follows:
20X1 20X0
C C
Preference dividend declared on 31 December 5 000 5 000
Ordinary dividend declared on 31 December 10 000 6 000
x The balances in the share capital accounts at 1 January 20X0 were as follows:
- Ordinary shares: C200 000 (all the ordinary shares were issued at C0,20 per share).
- Non-cumulative, non-redeemable 10% preference shares: C50 000 (all the preference
shares were issued at C1 per share). The dividends on these preference shares are
discretionary.
x An issue of 500 000 ordinary shares took place on 31 March 20X1 at an issue price of
C0,20 per share.
x There was no other movement in the equity accounts other than the movements evident
from the information provided above.
Required:
Prepare extracts from the statement of comprehensive income and the statement of changes
in equity, as well as the earnings per share note and dividends per share note for inclusion in
the notes to the financial statements of Mpho Limited for the year ended 31 December 20X1,
Question 24.4
The following is the abridged statement of comprehensive income and statement of changes in
equity of Yash Limited for the year ended 30 September 20X3:
272 Chapter 24
YASH LIMITED
(EXTRACTS FROM) STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
20X3 20X2
C C
Profit for the period 475 000 (10 000)
Other comprehensive income 0 0
Total comprehensive income 475 000 (10 000)
YASH LIMITED
(EXTRACTS FROM) STATEMENT OF CHANGES IN EQUITY
Retained earnings
20X3 20X2
C C
Opening balance 940 000 950 000
Total comprehensive income/ (loss) 475 000 (10 000)
Capitalisation issue of ordinary shares (70 000) 0
Dividends paid - 30 September 20X3 (150 000) 0
Ordinary shares 105 000 0
9% preference shares 27 000 0
12% preference shares 18 000 0
Closing balance 1 195 000 940 000
Yash Limited was incorporated in 20X0. Details relating to its capital structure are as follows:
x 300 000 ordinary shares issued on incorporation at C1 each.
x 150 000 9% cumulative preference shares issued on incorporation at C1 each.
x 150 000 12% non-cumulative preference shares issued on incorporation at C1 each.
x 50 000 ordinary shares issued on 1 January 20X2 at a fair value of C1,50 each.
x A capitalisation issue on 15 June 20X3 of 1 ordinary share for every 5 ordinary shares held
on that date.
x Both classes of preference shares are non-redeemable and the dividends thereon are
discretionary.
The income tax rate for both years was 29%.
Part A
Required:
Show the disclosure of the earnings per share and dividends per share in the relevant extracts of
the financial statements of Yash Limited for the year ended 30 September 20X3, in accordance
with International Financial Reporting Standards.
Part B
Use the information provided above together with the following additional information:
The profit before tax in 20X2 includes:

x a profit on disposal of land of C60 000 (the tax on the capital gain is C10 150);
x an inventory write-down of C10 000 (tax deductible); and
x amortisation of a patent of C20 000 (tax deductible).
Chapter 24 273
The profit before tax in 20X3 includes:

x an impairment of goodwill of 30 000: the tax authorities do not allow deductions relating to
goodwill;
x a loss on sale of land of C40 000: this loss is a capital loss that may be deducted from future
capital gains in order to reduce future tax, but at the end of 20X3, the company did not expect
any future capital profits and therefore no deferred tax was provided on the capital loss of
C40 000; and
x an increase in the allowance for credit losses of C10 000: the tax authorities allow 20% of this
as a tax deduction when recognised as an allowance, but in full if and when the loss is
realised.
Required:
Show the disclosure of the earnings per share and dividends per share in the relevant extracts of
the financial statements of Yash Limited for the year ended 30 September 20X3, in accordance
with International Financial Reporting Standards and in accordance with Circular 1/2021 (i.e.
your notes must include headline earnings per share).
Question 24.5
The following information relates to Near Limited for the year ended 31 December 20X1:
NEAR LIMITED
(EXTRACT FROM) STATEMENT OF COMPREHENSIVE INCOME
20X1 20X0
C C
Profit before tax 503 000 403 000
Income tax expense (200 000) (180 000)
Profit for the period 303 000 223 000
x The balances in equity at 1 January 20X0 comprised:
Ͳ 1 000 000 ordinary shares issued at C0,49 per share;
Ͳ 10 000 10% non-cumulative non-redeemable preference shares issued at C3 each (the
dividends on these preference shares are discretionary);
Ͳ Retained earnings of C60 000.
x Dividends declared
- 20X0: C3 000 preference dividend and C30 000 ordinary dividend
- 20X1: C3 000 preference dividend and C30 000 ordinary dividend
x In terms of an agreement with the bank the company undertook to make a capitalisation
issue in order to capitalise excess reserves. A capitalisation issue, utilising retained
earnings of C100 000, took place on 1 July 20X1, and involved the issue of 1 share for
every 2 shares held on this date.
Part A
Required:
Prepare extracts of Near /LPLWHG¶VVWDWHPHQWRIFRPSUHKHQVLYHLQFRPHVWDWHPHQWRIFKDQJHV
in equity and its earnings per share note for the year ended 31 December 20X1 in terms of
274 Chapter 24
Part B
x The company had, for the first time, imported some of its inventory. A sudden collapse in
the value of the exchange rate resulted in a large foreign exchange loss of C100 000 on
the balance owing to the foreign creditor.
x Cash flow problems during 20X1 resulted in Near Limited being forced to dispose of land
at an auction. The net proceeds received on auction were C210 000 whereas the land had
cost the company C280 000. The land was measured at cost and was not depreciated.
The loss is a capital loss that may be deducted from future capital gains in order to reduce
future tax. At the end of 20X1, however, the company did not expect any future capital profits
and therefore no deferred tax was provided on the capital loss.
x During 20X1, the plant was revalued upwards by C200 000 in terms of the revaluation
model in IAS 16 Property, plant and equipment. This was recognised in other
x The deferred tax liability was increased by C30 000 as a result of the revaluation on plant.
Required:
Prepare extracts of Near /LPLWHG¶VVWDWHPHQWRIFRPSUHKHQVLYHLQFRPHVWDWHPHQWRIFKDQJHV
in equity and its earnings per share note for the year ended 31 December 20X1 in terms of
International Financial Reporting Standards and in accordance with Circular 1/2021 (i.e. your
notes must include headline earnings per share).
Question 24.6
The following information relates to Lulama Limited for the year ended 31 December 20X1:
x Lulama Limited earned a profit for the year of C250 000 in 20X1 (20X0: C280 000).
x Lulama Limited declared dividends in 20X1 and 20X0 as follows:
20X1 20X0
C C
Non-cumulative preference dividend declared on 31 December 3 000 3 000
Ordinary dividend declared on 31 December 10 000 12 000
x The balances in equity at 1 January 20X0 comprised:
- 100 000 ordinary shares issued at C1 each.
- 20 000 15% non-cumulative non-redeemable preference shares issued at C1 each.
The dividends on these preference shares are discretionary.
- Retained earnings of C120 000.
x There was a share split on 1/7/20X1 in which every 1 ordinary share became 2 shares.
x There was no other movement in the equity accounts other than the movements evident
from the information provided above.
Required:
Prepare extracts from the statement of comprehensive income and the statement of changes
in equity, as well as the earnings per share note and dividends per share note for inclusion in
the notes to the financial statements of Lulama Limited for the year ended 31 December 20X1,
Chapter 24 275
Question 24.7
MNQOBI LIMITED
EXTRACTS FROM PRE-ADJUSTMENT TRIAL BALANCE
AT 31 DECEMBER 20X1
20X1 20X0
Debit/(Credit) Debit/(Credit)
Profit after tax (320 000) (290 000)
Non-cumulative non-redeemable preference dividend paid ± 31/12 4 500 4 500
Non-cumulative non-redeemable participating preference dividend 4 000 4 000
paid ± 31/12 (excluding the participating dividend)
Ordinary dividend paid ± 31/12 10 000 0
The following information was extracted from the statement of financial position and related
notes:
x Issued share capital consists of: C
- Ordinary shares, issued at 0,70 per share: 1/1/20X1 700 000
- 5% non-cumulative, non-redeemable, non-participating preference shares, 90 000
issued at C1 each: 1/1/20X1. The dividends on these preference shares are
discretionary.
- 20% non-cumulative, non-redeemable, participating preference shares, 20 000
issued at C0,50 each: 1/1/20X1 (these shares participate to the extent of 2/5
of the ordinary dividend declared). The dividends on these preference
shares are discretionary.
x There was a rights issue on 30/9/20X1, in terms of which, each ordinary shareholder was
granted the right to purchase one share for every four shares held at C0,70. All the shares
offered were taken up on that day. The market price on this day was C1,40 per share.
Required:
a) Briefly explain the earnings per share and dividends per share disclosure requirements
relating to each of the three share types in issue and indicate where these line items should/
may be presented.
b) Prepare, in accordance with International Financial Reporting Standards, the earnings per
share note and dividends per share note for the year ended 31 December 20X1.
Section B: Basic, headline and diluted earnings per share
Question 24.8
a) Diluted earnings per ordinary share may be presented on the face of the statement of
comprehensive income, in the statement of changes in equity or in the notes to the financial
statements.
b) Diluted earnings per ordinary share and basic earnings per ordinary share must be
presented in the financial statements with equal prominence.
c) Diluted earnings per ordinary share may arise if ______________ ordinary shares exist.
)LOOLQWKHPLVVLQJZRUGDQGGHILQHµBBBBBBBBBBBBBBRUGLQDU\VKDUHV¶
d) Diluted earnings per ordinary share will always be less than basic earnings per ordinary
share.
276 Chapter 24
e) Give three examples of potential ordinary shares and briefly identify how these examples
could affect the earnings of the company.
f) Options are only taken into consideration in the calculation of diluted earnings per share
once they have vested.
g) A potential ordinary share is anti-dilutive if the issue of this share would result in an increase
in basic earnings per ordinary share.
h) 2SWLRQVWKDWDUHµRXWRIWKHPRQH\¶ are ignored when calculating diluted earnings per share.
i) 2SWLRQVWKDWDUHµLQWKHPRQH\¶ are always dilutive.
Question 24.9
Seronda Limited has a share capital comprising 200 000 authorised ordinary shares of no par
value, of which 100 000 are in issue. There were no movements in share capital during 20X5
and no dividends were declared during the year.
The company also has 500 convertible debentures in issue. These debentures may be
converted into ordinary shares in a ratio of 100 ordinary shares for every 1 debenture held, (at
the option of the debenture holder), on 31 December 20X8. Any debentures not converted at
this date will be redeemed.
The profit for the year ended 20X5 is C20 000, after taking into account finance charges of
C1 505 incurred on the debentures during 20X5.
Required:
Prepare an extract from the statement of comprehensive income of Seronda Limited for the
year ended 31 December 20X5, including the disclosure of basic and diluted earnings per
share, in accordance with the International Financial Reporting Standards.
Comparatives and notes to the financial statements are not required.
Question 24.10
'HWDLOVRI/DVHU/LPLWHG¶VVKDUHFDSLWDODQGSRWHQWLDOVKDUHFDSLWDOare as follows:
x At 1 January 20X4 there were 100 000 ordinary shares in issue, all of which were issued
at a fair value of C1,75 per share.
x On 30 November 20X4, 12 000 ordinary shares were issued at a fair value C2,00 per share.
There have been no other issues since 30 November 20X4.
x There are 25 000 options in issue entitling the option holder to 1 ordinary share at a strike
price of C2,00 per share (the average market price of an ordinary share for 20X5: C2,75).
x Laser Limited has a profit for the year ended 31 December 20X5 of C125 000 (20X4: loss
of C50 000).
x An interim ordinary dividend of C0,04 per share was declared and paid on the
30 June 20X5. On 15 December 20X5 a final ordinary dividend of C2 800 was declared.
Chapter 24 277
x No dividends were declared in 20X4 due to the loss made in 20X4.

x Corporate income tax is levied at 35%.
Part A
Required:
Prepare an extract from the statement of comprehensive income of Laser Limited for the year
ended 31 December 20X5, including the disclosure of basic and diluted earnings per share , in
accordance with the International Financial Reporting Standards.
Notes to the financial statements are not required.
Part B
Profit (or loss) for the year includes the following items:
x Profit on sale of plant (before tax): C25 000 (20X4: C25 000). This profit is fully taxable.
The plant was sold below cost.
x Amortisation of patent C5 000 (20X4: C0). The tax authorities do not allow deductions
relating to goodwill.
Required:
Prepare an extract from the statement of comprehensive income of Laser Limited for the year
ended 31 December 20X5, including the disclosure of basic and diluted earnings per share , in
accordance with the International Financial Reporting Standards and in accordance with
Circular 1/2021 (i.e. your notes must include headline earnings per share).
Question 24.11
The following relates to Chipchop Limited for the year ended 31 December 20X5:
x Profit for the year C200 000 (20X4: C135 000).
x 1 January 20X4: 250 000 ordinary shares were issued at C5,00 each.
x 30 September 20X4: there was a rights issue on a basis of 1 ordinary share issued for every
5 already held at a price of C6,00. The market value of the ordinary shares immediately
before the rights issue was C7,50 per share.
x 31 May 20X5: 50 000 ordinary shares were issued at price of C5 per share.
x There are 25 000 options in existence, each of which allows the holder to acquire four
shares at a strike price of C7,00 per share. The options have already vested but will only
expire in many years to come. The average market price per ordinary share for 20X4 and
20X5 was C8,00. These options were in existence throughout 20X4 and 20X5.
x Preference shares in issue are convertible (at the option of the preference shareholders)
into 50 000 ordinary shares on 31 December 20X7.
- If not converted, the preference shares will be redeemed on 31 December 20X7.
- Dividends of C1 000 are incurred annually on these preference shares (these have
been correctly accounted for as finance charges).
- The preference shares were in existence throughout 20X4 and 20X5.
x Income tax is levied at 30%.
278 Chapter 24
Part A:
Required:
a) Prepare an extract from the statement of comprehensive income of Chipchop Limited for
the year ended 31 December 20X5, including the disclosure of basic and diluted earnings
per share.
b) Prepare the earnings per share note for inclusion in the notes to the financial statements of
Chipchop Limited for the year ended 31 December 20X5.
Financial statements and notes must be in accordance with International Financial Reporting
Standards.
Part B:
x Profit for the year C200 000 (20X4: C135 000). This profit includes a profit on sale of plant
of (before tax) C30 000 (20X4: C0). The plant was sold below cost.
Required:
a) Prepare an extract from the statement of comprehensive income of Chipchop Limited for
the year ended 31 December 20X5, including the disclosure of basic and diluted earnings
per share.
Cousins Limited for the year ended 31 December 20X5.
Standards and in accordance with Circular 1/2021 (i.e. your notes must include headline
earnings per share)
Question 24.12
The following information is available for Cousins Limited at 31 December 20X8:
20X8 20X7 20X6

C C C
Profit for the year 650 000 550 000 400 000
Issued ordinary shares ? ? 683 750

10 000 12% participating preference shares 200 000 200 000 200 000
75 000 7% convertible preference shares 225 000 225 000 0
Options N/A N/A N/A
40 000 10% convertible debentures 16 000 0 0
x The ordinary shares were all issued at C1 each.
x The 12% participating preference shares were all issued at C20 each.
- The participating preference shares are non-redeemable and non-cumulative, and
participate to the extent of C1 for every C11 paid to ordinary shareholders.
x The 7% convertible preference shares were all issued at C3 each.
- The convertible preference shares (recognised as a liability) are cumulative and
convertible at the option of the preference shareholder into ordinary shares at a rate of
Chapter 24 279
three ordinary shares for every four convertible preference shares on

31 December 20X8.
- The preference dividend was declared in 20X8 together with the 20X7 preference
dividends (recognised as finance costs on the preference share liability).
- Finance costs deducted in arriving at profit after tax amount to C15 750.
x The 10% convertible debentures were all issued at C4 each.
- These debentures are convertible on 28 February 20X9 at the option of the debenture
holders into Cousins Limited ordinary shares at a rate of two ordinary shares for every
seven debentures.
- If not converted into ordinary shares they will be redeemed on 28 February 20X9.
x On 31 March 20X7, 50 000 ordinary shares were issued.
x On 1 May 20X7, 165 000 ordinary shares were issued in terms of a capitalisation of
reserves.
x The directors of Cousins Limited were offered 25 000 shares, contingently issuable upon
Cousins Limited generating total revenue of C50 million over five years. CouVLQV/LPLWHG¶V
revenue for the year ended 31 December 20X8 was C30 million (20X7: C30 million).
x On 1 January 20X8, options were issued offering the acquisition of 67 500 ordinary shares
in Cousins Limited after 1 January 20X9 at a strike price of C4 per share. The average
market price of the shares during 20X8 was C9 per share.
x On 30 September 20X8, Cousins Limited undertook a share buy-back of 200 000 ordinary
shares at C5 per share.
Required:
a) Prepare an extract from the statement of comprehensive income of Cousins Limited for the
year ended 31 December 20X8, including the disclosure of basic and diluted earnings per
share.
Cousins Limited for the year ended 31 December 20X8.
Standards.
280 Chapter 24
GAAP: Graded Questions Fair value measurement
Chapter 25
Fair value measurement
Question Key issues
25.2 - Missing words
25.3 Sleep-Easy Measurement of fair value in terms of the principal or most advantageous
markets
25.4 Shangri-La General understanding of the measurement of fair value in terms of the
principal or most advantageous markets
25.5 Ynos General understanding of the highest and best use principle and identifying
principal market
25.6 Chokwa General understanding of definitions and fundamental concepts, with

specific reference to principle and most advantageous markets
25.7 Snow White Fair value measurement: non-financial assets
25.9 Hansel Fair value measurement: ILQDQFLDOOLDELOLWLHVDQGDQHQWLW\¶VRZQ equity

instruments
25.8 Aliena Fair value measurement: financial assets (including fair value hierarchy)
25.10 Lindani Fair value hierarchy: assessment of the levels ± financial assets and
disclosure
Chapter 25 281
Question 25.1
a.
Fair value is defined as the price that would be paid to buy an asset or received to transfer a
liability in an orderly transaction between market participants at the measurement date.
a) True
b) False
b.
Fair value is an entity-specific measurement.

a) True
b) False
c.
IFRS 13 Fair value measurement must be applied when measuring and disclosing µIDLU YDOXH
OHVVFRVWVRIGLVSRVDO¶, being a term referred to in IAS 36 Impairment of assets.
a) True
b) False
d.
The fair value of an asset or liability must take into consideration the specific characteristics of
that asset or liability.
a) True
b) False
e.
Fair value is measured in terms of the most advantageous market unless a most advantageous
market does not exist, in which case we must measure the fair value in terms of the principal
market instead.
a) True
b) False
f.
The most advantageous market is defined as the market that maximises the amount that would
be received to sell the asset or minimises the amount that would be paid to transfer the liability,
after taking into account the transaction costs.
a) True
b) False
g.
$Q DVVHW¶V principal market is the market that offers the highest volume or activity relating to
that asset.
a) True
b) False
h.
Transport costs are considered to be a transaction cost.

a) True
b) False
282 Chapter 25
i.
Fair value measurements take into account transaction costs under certain circumstances.
a) True
b) False
j.
The transport costs that would be incurred to sell an asset must be taken into account when
measuring fair value.
a) True
b) False
k.
The highest and best use of an asset must be considered when measuring the fair value of any asset.
a) True
b) False
l.
The inputs used when applying a valuation technique are categorised into three different types.
These are identified as level 1, level 2 and level 3 inputs, where level 1 inputs are the most
reliable and level 3 being the least reliable.
a) True
b) False
Question 25.2
a) The measurement and the disclosure requirements of IFRS 13 Fair value measurement
__________ (do /do not) apply to the fair values used when applying, for example,
IAS 36 Impairment of assets and IFRS 16 Leases.
b) The most advantageous market is the market that would __________ (maximise/
minimise) the amount that would be __________ (paid/ received) to __________ (buy /
sell) an asset, after also taking into consideration _______________ (transport costs/
transaction costs/ both transport and transaction costs).
c) Transaction costs are __________ (always/ never/ sometimes) deducted from the market
price when measuring fair value in terms of the principal market.
d) Transaction costs are __________ (always/ never/ sometimes) deducted from the market
price when determining which market is the most advantageous market.
e) Transport costs are __________ (always/ never/ sometimes) deducted from the market
price when measuring fair value.
f) The highest and best use of a non-financial asset takes into account the use of the asset
that is __________, __________ and __________ .
g) IFRS 13 deals with the following three valuation techniques: __________, __________
and __________.
h) A valuation technique that uses a quoted price of an identical asset in an inactive market is
categorised as a Level __________ input.
Required:
Fill in the missing word/s in the sentences above.
Chapter 25 283
Question 25.3
Sleep-Easy, a large, family-owned business, manufactures and distributes mattresses across

South Africa. Sleep-Easy measures its manufacturing plant using the revaluation model in
terms of IAS 16 Property, Plant and Equipment and the new accountant is currently attempting
to measure the SODQW¶Vfair value for purposes of this revaluation.
The plant could be sold in either Cape Town or Bloemfontein:

x If the asset is sold in Cape Town, the selling price will be C21 600, the transport costs will
be C2 400 and the transaction costs would be C2 400.
x If the asset is sold in Bloemfontein, the selling price will be C20 000, the transport costs will
be C1 600 and the transaction costs would be C800.
Required:
Briefly explain how the fair value should be measured assuming that:
a) the market in Cape Town is the principal market;
b) the market in Bloemfontein is the principal market;
c) there is no principal market.
Question 25.4
Shangri-La Limited has developed what it believes to be a special compass which will ensure
that its user will never get lost, particularly in mountainous terrain. It does this by using a
special type of magnetic technology to calibrate the position of the compass. It sells these
compasses in two markets.
Presently Shangri-La can sell the compasses in the Kyrat market (for avid explorers) and the
Cape Explorer market (for local customers). The returns generated in each of these markets is
illustrated below:
Market Return
Cape Explorer C105
Kyrat C168
Shangri-La mainly trades in the Kyrat market, since this is the market that generates the highest
return, though higher transaction volumes occur in the Cape Explorer market due to wealthy retail
customers requiring specialised Christmas gifts for overly ambitious trail runners.
Required:
Identify the fair value and explain the reason for your answer.
Question 25.5
Ynos Limited manufactures and sells mobile devices on a wholesale basis to mobile retailers.
Presently, its best-selling device is the YS21, which functions as a tablet. This was one of the
first tablets to be introduced to the market and consequently it possesses exceptional brand
power, even today. As demand for the YS21 increased, Ynos purchased a new manufacturing
machine (in January 20X1) to enable it to meet the demand.
During 20X2 and 20X3, however, increased competition from a number of South American
PDQXIDFWXUHUVKDVJUDGXDOO\HURGHGWKH<6¶VPDUNHW share, and so Ynos has embarked on
a diversification programme. This will take the form of a reduction in production of the YS21
and the introduction of Serendipity, an advanced camera-smartphone that will compete in the
both the camera and smartphone markets.
284 Chapter 25
Due to the planned reduced production levels of YS21 tablets, management decided to sell the
original machine and keep the newer machine (purchased in January 20X1). The original
machine is currently not operating at optimal capacity, producing only 990 YS21 tablets per
month. Since the date management decided to sell the original machine, it met all criteria to be
classified as a non-current asset held for sale per IFRS 5 Non-current assets held for sale and
The fair value of the machine must be measured at the date on which it met the criteria to be
classified as µheld for sale¶. This date is 31 December 20X3. The accountant decided to use
the income approach to measure the fair value of this machine. She estimated the fair value at
C99 000, based on the current monthly production levels of 990 YS21s, but also estimated that
the fair value would be C118 800 if monthly production levels of 1 485 YS21s could be
achieved (1 485 units per month reflects the full utilisable capacity of the machine).
Required:
Briefly explain whether the DFFRXQWDQW¶V IDLU YDOXH PHDVXUHPHQW RI C99 000, at the current
reporting date of 31 December 20X3, is appropriate or not.
Question 25.6
Chokwa Safari Lodge recently entered into an agreement for a concession from the Kruger
National Park. This concession would allow Chokwa to build a luxury lodge and operate a
private game reserve for a 50-year period on a 12 000 hectare area of land to the west of the
Timbavati River.
Chokwa has correctly accounted for the concession per IAS 38 – Intangible Assets. It initially
measured it at its cost of C70 million. As part of the concession, Chokwa agreed to purchase a
private jet to transport its most frequent clients ± internationally recognisable and influential
people from government, business and entertainment.
The jet (Bateluer 1200) was purchased for C160 000 and Chokwa elected to revalue it to fair
value at the end of each year. The jet is sold in three different aircraft markets; Northern Africa,
East Asia and Western Europe.
In order to sell the jet, Chokwa would incur transportation costs to fly the jet to the relevant
market. A transaction fee is also normally charged in each of the three markets. The market
transaction fee is illustrated in the table below. DXH WR &KRNZD¶V UHODWLRnship with many
influential businesspeople, they can negotiate a 5% premium to the selling price.
Jet: Bateluer 1200 Northern Africa East Asia Western Europe

Selling price per jet C192 000 C160 000 C320 000
Average sales transactions per annum 100 100 80
Market entry fee C32 000 C32 000 C32 000
Transportation costs (for Chokwa) C32 000 C16 000 C16 000
Transaction fee (based on selling price) 10% 10% 10%
Due to heightened competition from East Asian aircraft manufacturers, sales of the Bateluer 1200
began decreasing in the East Asia market.
x During the current year, China issued a formal request to all countries in East Asia to stop
purchasing the Bateluer 1200 jet and purchase jets manufactured by Chinese aircraft
producers instead.
x Because of this, the East Asia market for the Bateluer 1200 has collapsed (the effect
thereof is reflected in the selling price in East Asia, quoted in the above table), leading to
speculation that the price for the jet could increase by around 50% based on their currently
depressed selling prices.
Chapter 25 285
Required:
Discuss ZKDW &KRNZD¶V measurement of the fair value of the Bateluer 1200 should be. Your
answer should include a detailed analysis of all three markets, indicating the principal market and
the most advantageous market as well as the final measurement of the fair value of the jet.
Question 25.7
After seWWOLQJGRZQZLWK3ULQFH&KDUPLQJ6QRZ:KLWHEHFDPHVRPHZKDWERUHGZLWKµKDSSLO\
ever afteU¶ and decided to sell off some of her possessions to fund a trip to Bali. Being a
princess, Snow White had countless items of jewellery but very little knowledge in what her
jewellery collection is worth. She decided that it would be best if she first determined the fair
value of her jewellery before she went ahead and sold her collection.
Upon examining her jewellery collection, Snow White identified a particular set of jewellery (i.e.
various items of jewellery that are intended to be worn together) that she wished to sell first.
This set includes the following items of jewellery:
x one pair of earrings,
x one necklace and
x one brooch.
This set was received as a gift when the market value, per item, was as follows:
Market Value
Pair of earrings C30 000
Necklace C75 000
Brooch C50 000
The kingdom of Happily Ever After has a vibrant market for jewellery which Snow White has
established is, in fact, the principal market for jewellery sales. Two primary buyers exist within
this principal market, namely the Seven Dwarves (their jewellery buying has increased
drastically since they began dating other dwarves) and the Queen.
The Queen primarily uses the jewellery that she buys to create malicious devices to ruin the
µKDSSLO\HYHUDIWHU¶GUHDPVRIRthers. This process is rather costly as it requires the Queen to
melt the jewellery and extract the raw components (gold and jewels), which are then sold to
Rumpelstiltskin, at a standard price of C120 000 per item (e.g. C120 000 for a pair of earrings
and C120 000 for a necklace etc), who uses them to concoct wicked tricks.
The Queen, having fallen out of grace with the kingdom after Prince Charming took control, is
financially dependent on her sale of raw components to Rumpelstiltskin to survive. If the
Queen bought the jewellery, she would typically pay the following per item:
Price
Necklace C90 000
Brooch C65 000
The queen would incur conversion costs as follows:

Conversion costs
Necklace C10 000
Brooch C70 000
As the 4XHHQKDVQRGHVLUHWRHYHUZHDUWKHSULQFHVV¶VMHZHOOHU\, if she were to transact with

the princess, she would buy the pieces on an individual basis.
286 Chapter 25
The Seven Dwarves, on the other hand, adore spoiling their newfound loves and avidly hunt
beautiful collections of jewellery to give as gifts. The Seven Dwarves believe that jewellery
should be purchased as a set wherever possible but are not averse to the idea of buying the
pieces individually. As the Seven Dwarves all buy simultaneously, they often negotiate bulk
discounts on their purchases, the prices for the jewellery are seen below:
Value as a set Price as part of a set Price as part of a set,

after bulk discount
Pair of earrings C50 000 C45 000
Necklace C80 000 C75 000
Brooch C75 000 C70 000
Price for a set C205 000 C190 000
Value in isolation (i.e. sold as Price in isolation Price in isolation,

individual items rather than as a set) after bulk discount
Pair of earrings C55 000 C50 000
Necklace C75 000 C70 000
Brooch C80 000 C75 000
Required:
Discuss, in detail, the fair value measurement of this particular set of jewellery.
Question 25.8
Hansel Limited is an unlisted company. The following two parts are unrelated.
Part A
Two years ago, it took out a loan from Gretel Bank with a face value of C1 700 000. None of
the capital on the loan has thus far been repaid. The loan presently has a discount of 5% due
to a highly competitive loan market following a decrease in interest rates by the Reserve Bank
earlier this year.
Part B
To finance a new bakery, Hansel elected to issue preference shares. These shares were separately
listed when they were sold 18 months ago, however due to a decline in the liquidity of these shares
they were recently de-listed. Two months ago, prior to de-listing, they were trading at C17 000 per
share. When they were delisted, their value had dropped to C13 600 per share.
Based on independent research, Witch Analysts Inc. have indicated that holders of these
preference shares have value of around C7 650 per share.
Required:
Discuss how Hansel Limited should measure the fair value of its loan liability and equity
preference shares.
Question 25.9
Aliena Limited functions as an asset management company, employing a variety of trading

techniques to unlock value for its clients. You are employed by the entity as a technical expert
on IFRSs, and assisting in the preparation of their current year¶s financial statements . At the
moment, there is one particular issue that is causing difficulties for management, and you have
been asked to provide an opinion on the matter.
Chapter 25 287
x The company had purchased 1 000 000 shares in Rook Limited on the advice of a
consultancy, Future Analysts. Rook Limited is a company listed on the local securities
exchange. The shares were purchased because they had, historically, been trading very
well, and the analysts at Future Analysts had convinced management, at the time of the
purchase, that the share would continue to do well into the future.
x At the current reporting date, the securities exchange showed that Rook Limited was trading
a bid price of C360 and an ask price of C300, with a bid-ask spread of C60.
x However, in the process of gathering information, you requested an opinion from an expert
at Reiters Inc. on the absorption capability of the market were Aliena Limited to sell its entire
holding. The expert responded by saying that he concluded that full absorption at current
securities prices would not be possible. Accordingly, the bid price was C330, the ask price
C270, and the bid-ask spread C60.
Required:
Explain, with reference to IFRS 13 Fair value measurement, how the fair value of this
investment in shares should be measured and identify whether the inputs into this calculation
would be considered level 1, level 2 or level 3 inputs.
Question 25.10
Lindani is a CA(SA) and forms part of the valuations team which forms part of the advisory,
rather than the assurance function, at Pinnacle Inc. Presently he is performing some work for a
client, JV Investments Limited, in helping them arrive at appropriate fair value measurements
per IFRS 13 Fair value measurement.
You are a first-year audit trainee and since you were in the office without any allocated work,
you were assigned to help Lindani with his valuations work. He sees that you have some
promise, so he has asked you to look at a number of different instruments and to assess how
best to go about valuing these. Further, he has asked that you consider the disclosure
requirements that JV Investments would need to comply with.
Details of the various instruments are presented in the table below:

Instrument type Description
Corporate bonds JV holds corporate bonds which are not actively traded in the South
African bond market. Bond yield-curves, volatility indicators and daily
price fluctuations are readily available.
Debentures A dual-instrument, issued by JV, with both an equity and liability
component, classified by JV as being held at fair value through other
comprehensive income. These debentures are actively traded on the JSE.
Ordinary shares Shares held in AP Limited, a company listed on the JSE. AP Limited
forms part of the Top40 index on the JSE.
Ordinary shares Shares held in a private company, Sentec. While financial information,
including their weighted average cost of capital is readily available, there
is no active market for their shares.
Ordinary shares Shares held in a dual-listed company SchlenterHoff Limited. The shares
are traded in Frankfurt, London and Johannesburg at differing prices
based on currency fluctuations.
Required:
Prepare a report for Lindani to explain what level within the fair value hierarchy each valuation
would be included, and briefly list the disclosure considerations of each.
288 Chapter 25
GAAP: Graded Questions Accounting policies, changes in accounting estimates and errors
Chapter 26
Accounting policies,
changes in accounting estimates and errors
Question Key issues

26.2 Mc Dreamy IAS 16: Property, plant and equipment
IAS 8: Change in estimate: residual value decreases: reallocation method
Part A: Residual value decreased
Part B: Residual value increased
Part C: Residual value increased above carrying amount
26.3 Scarlet IAS 16: Property, plant and equipment
IAS 8: Change in estimate: useful life
Part A: Reallocation method
Part B: Cumulative catch up method
26.4 Pinnacle IAS 16: Property, plant and equipment
IAS 8: Change in estimate: method: reallocation method
26.5 Honest IAS 12: Tax assessments were correct
IAS 8: Correction of error: depreciable asset expensed
26.6 Fields IAS 2: Inventory
IAS 12: Income taxation
IAS 8: Correction of error: inventory sold included in closing inventory
26.7 Winter IAS 38: Intangible assets
IAS 8: Correction of error: incorrect useful life
26.8 Hot IAS 2: Inventory measurement:
IAS 12: Tax assessments were incorrect and to be re-opened
IAS 8: Correction of error versus Change in accounting policy
Part A: Correction of error
Part B: Change in policy
26.9 Poseidon IAS 16: Property, plant and equipment
IAS 12: Tax assessments were correct
IAS 8: Correction of error: expense capitalised as a depreciable asset
IAS 8: Change in estimate: useful life and residual value: reallocation method
26.10 Cinnamon IAS 16: Property, plant and equipment
IAS 12: Tax assessments were incorrect but will be corrected in current year
IAS 8: Change in estimate: useful life: RAM
IAS 8: Correction of error (CY): expense capitalised as a depreciable asset
IAS 8: Correction of error (CY): PAYE recognised as revenue
Chapter 26 289
Question 26.1
a.
Accounting policies are defined as the principles and rules, as set out in the International Financial
Reporting Standards, that an entity applies in preparing and presenting its financial statements.
a) True
b) False
b.
Any change to an accounting estimate must be accounted for prospectively whereas any
change in accounting policy must be accounted for retrospectively.
a) True
b) False
c.
When accounting for a change in accounting policy retrospectively, we process adjustments
relating to all current and prior periods affected, including prior periods that will not be
presented as comparatives.
a) True
b) False
d.
When accounting for a change in accounting policy where retrospective application of the new
policy is technically required but is impracticable to achieve, the change in accounting policy
is accounted for prospectively instead.
a) True
b) False
e.
Entities are entitled to change any accounting policy, on condition the change is either required by
an IFRS or is a voluntary change that results in information that is relevant and more reliable.
a) True
b) False
f.
IAS 8 defines the term µDFFRXQWLQJSROLFLHV¶EXWGRHVQRWGHILQHWKHWHUPµDFFRXQWLQJHVWLPDWHV¶.
a) True
b) False
g.
A change in a measurement basis is accounted for as a change in estimate.
a) True
b) False
h.
If an error is found, it must be corrected, with the correcting adjustments processed retrospectively.
a) True
b) False
i.
An omission or misstatement is considered to be material if it, individually, could affect the
economic decisions made by the users of the financial statements.
a) True
b) False
290 Chapter 26
j.
The correction of a material prior year error will affect the measurement of deferred tax.
a) True
b) False
k.
A change from using the straight-line method to the reducing balance method when
calculating depreciation on property, plant and equipment is considered to be:
a) a change in accounting policy
b) a change in accounting estimate.
l.
A change from using the weighted average method to the first-in-first-out method of
measuring inventory movements is considered to be:
a) a change in accounting policy
b) a change in accounting estimate.
Question 26.2
Part A
Mc Dreamy Limited owns a surgical table and other miscellaneous surgery instruments.
Details thereof are as follows:
Cost C50 000
Purchase date 01/01/20X3
Variables of depreciation (inputs):
- Depreciation method Straight-line
- Estimated useful life (estimated on date of purchase) 10 years
- Residual value (estimated on date of purchase) C5 000
During 20X9, the estimated residual value decreased to C3 000. Mc Dreamy Limited uses the
reallocation method to record changes in accounting estimates.
Required:
a) 'LVFORVHWKHµFKDQJH LQHVWLPDWH¶QRWHDQGWKHVHSDUDWHO\GLVFORVDEOHLWHPGHSUHFLDWLRQ
for the year ended 31 December 20X9;
b) Provide the necessary journal entries assuming that depreciation had not yet been
processed in the financial records for 20X9;
c) Provide the necessary journal entries assuming that depreciation based on the old
estimate had already been processed in the financial records for 20X9.
Part B
Use the information provided in Part A except that the residual value increased to C7 500.
Required:
a) Disclose WKHµFKDQJHLQHVWLPDWH¶QRWHDQGWKHVHSDUDWHO\GLVFORVDEOHLWHPGHSUHFLDWLRQ
Chapter 26 291
Part C
Use the information from Part A except that the residual value increased to C25 000.
Required:
a) DiVFORVHWKHµFKDQJHLQHVWLPDWH¶QRWHDQGWKHVHSDUDWHO\GLVFORVDEOHLWHPGHSUHFLDWLRQ
Ignore tax.
Question 26.3
Part A
Ms Scarlet owns a printing company that prints classic pictures onto different materials, such
as board, canvas and fabric.
The company owns printing equipment, which was purchased on 1 April 20X1 at a cost of
C1 020 000. The equipment originally had an estimated useful life of 6 years and was
depreciated to a nil residual value on the straight-line basis.
On 1 April 20X3, the total useful life of the equipment was re-estimated to be 10 years.
Scarlet uses the re-allocation method to account for changes in accounting estimates.
The tax authorities use a 6-year period when calculating the µwear and tear allowance¶ on the
equipment and levy tax on taxable profits at 30%.
Required:
a) Show the depreciation journals necessary from the information provided, assuming:
i) Depreciation had not yet been processed for the year ended 31 March 20X4.
ii) Depreciation based on the old estimate had already been processed for the year
ended 31 March 20X4.
b) Show the related deferred tax journal for the year ended 31 March 20X4 assuming that
both depreciation and the tax for the year had already been processed.
c) Show how the above-mentioned information would be disclosed in the notes to the
financial statements of Scarlet Limited for the year ended 31 March 20X4.
Include both the ‘statement of compliance’ and the ‘accounting policy note for property,
plant and equipment’.
Part B
Use the same information as that provided in Part A except that Scarlet¶s company uses the
cumulative catch-up method to account for changes in estimate.
Required:
Repeat parts (a) ± (c) shown under Part A above.
292 Chapter 26
Question 26.4
Pinnacle Limited owns equipment that had been purchased for C200 000 on 1 January 20X1.
x This equipment has been depreciated at 20% per annum on the reducing balance method
but, during 20X4, management made the decision to change the method of depreciation to
the straight-line method instead.
x In this regard, management estimated the HTXLSPHQW¶Vremaining useful life to be 3 years
(calculated from 1 January 20X4) and that its residual value is C6 400.
x Pinnacle uses the re-allocation method to account for changes in accounting estimates.
The following statements were drafted for inclusion in 3LQQDFOH¶VILnancial statements for the
year ended 31 December 20X4, but before taking into account the decision to change the
method of depreciating equipment (i.e. journal entries processed had been based on the old
method of estimating depreciation).
PINNACLE LIMITED
STATEMENT OF COMPREHENSIVE INCOME (DRAFT)
20X4 20X3
C C
Revenue 320 000 260 000
Profit before depreciation 152 080 120 000
Depreciation ± equipment (20 480) (25 600)
Income tax expense: (52 640) (37 760)
- Current 44 832 32 000
- Deferred 7 808 5 760

Total comprehensive income 78 960 56 640
PINNACLE LIMITED
STATEMENT OF CHANGES IN EQUITY (DRAFT)
Share capital Retained earnings Total
C C C
Balance: 1 January 20X3 100 000 (16 000) 84 000
Dividends (4 000) (4 000)
Balance: 31 December 20X3 100 000 36 640 136 640
Dividends (6 000) (6 000)
Balance: 31 December 20X4 100 000 109 600 209 600
x The tax rate is 40% (this has remained constant since 20X1).
x The tax authority allows the deduction of the cost of equipment over 4 years: 40% in the
first year and 20% in each of the 3 years thereafter.
Required:
a) Prepare the journal entries that would be necessary to account for the change in
estimate in the financial year ended 31 December 20X4.
b) Prepare the follRZLQJ IRU LQFOXVLRQ LQ 3LQQDFOH /LPLWHG¶s financial statements for the year
ended 31 December 20X4, in compliance with International Financial Reporting Standards:
x statement of comprehensive income,
x statement of changes in equity, and
Chapter 26 293
x the following related notes:

profit before tax
change in accounting estimate
income taxation expense.
Question 26.5
Honest Limited is an engineering company. It purchased its only item of equipment on

2 January 20X1 at a cost of C100 000.
During the 20X2 financial year it was discovered that:

x The purchase of this equipment had been recorded as a repair expense.
x Depreciation on the equipment should have been provided at 10% per annum to a nil
residual value on the straight-line basis.
The profit before depreciation and repair expenses for the 20X1 financial year was C2 000 000.
The tax authorities allow a wear and tear allowance of 10% per annum on the cost of the
equipment, also on the straight-line basis. The correct information had been submitted to the
tax authorities for tax assessment purposes.
The corporate tax rate is 30% (unchanged for many years).
Required:
a) Prepare the correcting journal entries that are processed in the 20X2 year.
b) Prepare the correcting journal entries that would have been processed if the error was
discovered at the end of the 20X1 year.
c) Explain how your answer would have changed had the error made in 20X1 and
discovered in 20X2 affected the information submitted for tax assessment purposes (i.e.
the information submitted to the tax authorities was also incorrect) and that the tax
authorities would thus re-open all prior incorrect assessments and re-assess the company
Question 26.6
Field Limited¶s accountant discovered an error while preparing the financial statements for the year
ended 31 December 20X2: inventory that had been sold in 20X1, but which had not yet been
collected by the customer, had been included in the stock count at 31 December 20X1.
As a result, the cost of this inventory (C2 750), which now belonged to the customer, had been
included in the closing inventory at 31 December 20X1. The cost of this inventory is considered
to be material. Field uses the periodic system to account for inventory.
The following are the draft statements, before correcting the error, that were being prepared for
inclusion in Field¶VSXEOLVKHGannual financial report for the year ended 31 December 20X2:
FIELD LIMITED
STATEMENT OF CHANGES IN EQUITY (EXTRACT)
Share Retained Total
capital earnings equity
C C C
Balance ± 1 January 20X1 12 500 10 000 22 500
Total comprehensive income ± 20X1 7 000 7 000
Balance ± 31 December 20X1 12 500 17 000 29 500
Balance ± 31 December 20X2 12 500 23 125 35 625
294 Chapter 26
FIELD LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACT)
20X2 20X1
C C
Revenue 52 000 36 750
Cost of sales (34 000) (22 250)
Gross profit 18 000 14 500
Operating costs (9 250) (4 500)
Profit before taxation 8 750 10 000
x The corporate income tax rate has remained constant at 30%.
x All income is taxable, and all expenses are tax deductible.
Required:
Prepare the following for inclusion in Field Limited¶V DQQXDO ILQDQFLDO UHSRUW IRU WKH \HDU HQded
31 December 20X2 and in accordance with International Financial Reporting Standards:
x Statement of changes in equity.
Question 26.7
Winter Limited is a pharmaceutical company that manufactures pain medication. A few years ago,
it bought a patent from another pharmaceutical company, the details of which are as follows.
Patent:
Date of purchase 1 January 20X5
Cost C480 000
Expected finite useful life 20 years
Legal life 15 years (non-renewable)
Residual value nil
Tax Allowances Deduct the cost over a period of 10 years on a straight-line basis
The cost was recognised as an intangible asset and was amortised over its expected finite useful
life. However, during 20X8, the accountant discovered that the patent acquisition agreement had
given Winter the legal rights for a non-renewable period of only 15 years and thus that the
amortisation period used was inappropriate. The effect of this on profits is considered to be material.
The following is an extract of the draft statement of changes in equity for the year ended
31 December 20X8, before making any necessary adjustments.
WINTER LIMITED
STATEMENT OF CHANGES IN EQUITY
Retained
earnings
C
Balance: 1 January 20X7 640 000
Total comprehensive income: 20X7 216 000
Balance: 31 December 20X7 856 000
Balance: 31 December 20X8 1 152 000
Chapter 26 295
Other information:
x The corporate tax rate has remained 30% since inception of the company.
Required:
a) Show the correcting journal entries for the year ended 31 December 20X8.
b) Disclose the following in the financial statements of Winter Limited for the year ended
31 December 20X8 in accordance with International Financial Reporting Standards:
x Correction of error note;
x Statement of changes in equity
Question 26.8
Part A
Hot Limited has recently discovered that inventory has been incorrectly valued using the weighted
average method (WA) instead of the first-in-first-out method (FIFO) for the past four years.
x The error is considered to be material.
x The tax authorities will be re-opening the tax assessments for all year/s affected.
x Income tax is levied at 30%.
The effect of this error is as follows:
Year-end inventory balances 20X7 20X6 20X5 20X4

C C C C
WA method (did use) 15 000 14 000 12 000 10 000
FIFO method (should have used) 18 000 15 000 14 000 11 000
The draft financial statements before correcting this error are shown below.
HOT LIMITED
DRAFT STATEMENT OF COMPREHENSIVE INCOME
20X7 20X6
C C
Revenue 1 200 000 900 000
Cost of sales (420 000) (350 000)
Gross profit 780 000 550 000
Other costs (220 000) (200 000)
Profit for the year 324 800 213 500
Other comprehensive income for the year - -
Total comprehensive income for the year 324 800 213 500
HOT LIMITED
DRAFT STATEMENT OF CHANGES IN EQUITY
Retained
earnings
C
Balance: 1/1/20X6 67 500
Balance: 31/12/20X6 281 000
Balance: 31/12/20X7 605 800
296 Chapter 26
Required:
Prepare the statement of comprehensive income, statement of changes in equity, statement of
financial position, statement of compliance, accounting policy note for inventory and the
correction of error note for inclusion in Hot LiPLWHG¶V ILQDQFLDO VWDWHPHQWV IRU WKH \HDU HQGHG
31 December 20X7, in terms of International Financial Reporting Standards.
Part B
Use the information provided in part A, except that, instead of there being an error, the
accounting policy was changed from recording inventory movements using the weighted
average formula to using the first-in, first-out formula instead.
Required:
Prepare the statement of comprehensive income, statement of changes in equity, statement of
financial position, statement of compliance, accounting policy note for inventory and the change
in accounting policy note for inclusLRQLQ+RW /LPLWHG¶VILQDQFLDO VWDWHPHQWVIRUWKH\HDU HQGHG
31 December 20X7, in terms of International Financial Reporting Standards.
Question 26.9
Poseidon Limited is a company operating in the entertainment industry. The following draft
extracts of the statement of comprehensive income and statement of financial position have
been presented to you (see overleaf) together with additional information that has not yet
been taken into account in the preparation thereof.
POSEIDON LIMITED
DRAFT EXTRACTS FROM STATEMENT OF COMPREHENSIVE INCOME
20X3 20X2
C C
Other comprehensive income for the year - -
POSEIDON LIMITED
DRAFT EXTRACTS FROM STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER 20X3
20X3 20X2 20X1
C C C
Property, plant and equipment 1 217 000 1 391 500 1 566 000
- Machinery carrying amount 152 000 176 500 201 000
- Equipment carrying amount 1 065 000 1 215 000 1 365 000
Retained earnings ? ? 1 000 000
Deferred tax liability 140 000 150 000 170 000
Additional information regarding machinery and equipment:

x Machinery:
- During 20X3, the company changed the estimated residual value of its machinery
from C5 000 to C10 000 and changed the total expected useful life of machinery from
10 years to 15 years.
- The machinery had all been purchased on 1 January 20X0 at a cost of C250 000.
- Depreciation is provided on the straight-line method.
Chapter 26 297
x Equipment:
- During 20X3, it was discovered that the cost of an item of inventory sold on
1 July 20X1 (cost: C300 000), had been incorrectly debited to equipment.
- The taxable profit and tax base were correctly calculated in all years affected.
- The cost of equipment was otherwise C1 200 000, all having been purchased on
1 January 20X0.
- The company depreciates equipment at 10% per annum to nil residual values
(apportioned for part of a year where appropriate) using the straight-line basis.
Other information:
x The opening retained earnings as at 1 January 20X2 was C1 000 000. There were no
dividend declarations or transfers to or from retained earnings during 20X2 and 20X3.
x There was no other movement in property, plant and equipment other than that which is
evident from the information provided. Other than the incorrect debit, all movement in the
carrying amount of property, plant and equipment since date of purchase is depreciation.
x All amounts are considered material.
Required:
a) Calculate the effect of the change in estimate using the re-allocation method.
Detailed workings are required.
b) Disclose the following:
x the change in estimate note;
x the correction of error note;
x the statement of comprehensive income;
x the retained earnings in the statement of changes in equity; and
x the statement of financial position as at 31 December 20X3 in conformity with IFRSs.
c) Show all the journal entries that would need to be processed to effect:
x the change in accounting estimate; and
x the correction of the error.
Question 26.10
Cinnamon Limited is a company operating in the herbs and spices industry. The following
three items were identified during the audit of its financial statements for the current year
ended 31 December 20X3, no adjustments for which have yet been processed:
Item 1
x The bookkeeper erroneously credited revenue with Pay-as-you-earn (PAYE) of C250 000
owing to the tax authorities in 20X2.
x As a result, the current tax in 20X2 had been incorrectly estimated by the accountant and
the incorrect figures were submitted on the 20X2 tax returns.
x This error did not affect the salaries and wages expense, nor the amount paid to
employees. The tax authorities will be re-opening the tax assessment for 20X2.
Item 2
x A repair expense on 1 May 20X3 of C600 000 was capitalised as equipment. All other
equipment had been purchased on 1 July 20X1 at a cost of C1 200 000.
298 Chapter 26
x Depreciation on equipment is calculated at 15% per annum on the straight-line basis to nil
residual values.
x Wear and tear was then erroneously claimed on this 'equipment'. This then affected the
calculation of taxable profit and also the tax base. Equipment is used to manufacture
inventory. There was no inventory on hand at year end.
Item 3
x The total useful life of vehicles was changed from twelve years to six years.
x The method of depreciation remained the straight-line method and the residual value of
each vehicle remains nil.
x This decision was made in a management meeting in 20X3, but the accountant was not
informed.
x The entire fleet of vehicles was purchased on 1 April 20X0 at a cost of C360 000 and is
used for delivering goods to customers.
The draft financial statements relating to Cinnamon Limited are provided below:
CINNAMON LIMITED
DRAFT STATEMENT OF CHANGES IN EQUITY
Retained
earnings
C
Balance ± 1 January 20X2 1 080 000
Total comprehensive income ± 20X2 699 600
Balance ± 31 December 20X2 1 779 600
Total comprehensive income ± 20X3 829 200
Balance ± 31 December 20X3 2 608 800
CINNAMON LIMITED
DRAFT STATEMENT OF COMPREHENSIVE INCOME
20X3 20X2
C C
Revenue 4 572 000 3 120 000
Cost of sales (2 736 000) (1 392 000)
Gross profit 1 836 000 1 728 000
Other income 300 000 120 000
Other costs (1 068 000) (900 000)
Profit before taxation 1 068 000 948 000
Additional information: 20X3 20X2

C C
x 7KHOLQHLWHPµRWKHULQFRPH¶LQFOXGHVWKHIROORZLQJ
Profit on sale of building (exempt from tax: see note below) 180 000 0
Dividend income (exempt from tax) 120 000 120 000
Note: The capital gain on the sale of the building, as calculated in terms of the capital gains tax
legislation, was zero. There were no tax allowances allowed on the building.
Chapter 26 299
x 7KHOLQHLWHPµRWKHUFRVWV¶LQFOXGHVWKHIROORZLQJ
Depreciation on equipment (see above) 240 000 180 000
Depreciation on vehicles (see above) 30 000 30 000
Traffic fines (not tax deductible) 28 000 0
Directors remuneration 125 000 125 000
x The company uses the re-allocation method to adjust for changes in estimates.
x Wear and tear was granted by the tax authorities as follows:
equipment: 25% per annum straight-line (apportioned for part of a year);
vehicles: 25% per annum straight-line (not apportioned for parts of a year).
x The rate of income tax remained constant at 30%.
x There are no temporary differences, exempt income or non-deductible expenses other
than those indicated by the information presented.
x All amounts are considered to be material.
Required:
a) Prepare all the adjusting journal entries necessary to prepare the financial statements for
b) Prepare the statement of comprehensive income, statement of changes in equity and
related notes of Cinnamon Limited for the year ended 31 December 20X3 in accordance
300 Chapter 26
GAAP: Graded Questions Statement of cash flows
Chapter 27
Statement of cash flows
Question Key issues

27.2 Lux Direct and indirect method (operating activities section): Working
capital, depreciation on manufactured assets
27.3 Whoosh Full statement: Direct method
Operating activities: Indirect method
27.4 Hickory Direct method (Operating activities section): Plant purchased & sold;
Reconciliation between profit before tax and cash generated from
operations.
27.5 Mount Charm Direct method (operating activities section) , deferred tax
27.6 Shine Direct method, operating and financing activities sections
27.7 Ukudla Indirect method; Sale of plant and equipment, acquisition of land
27.8 Amanzi Direct method: Development costs, revaluation of land
27.9 Meadowvale Direct method: Capitalisation issue, redemption of redeemable
preference shares, revaluation of buildings, trade-in of machine,
impairment of goodwill
Chapter 27 301
Question 27.1
a.
The opening balance on accounts receivable is C100 000 and the closing balance is C120 000. Sales
for the period are C200 000 and there was a bad debts expense of C10 000 during the year.
The cash received from customers on a direct method statement of cash flows amounts to
a) C180 000
b) C220 000
c) C170 000
d) C190 000
e) C100 000
b.
The opening balance on inventory is C200 000 and the closing balance is C220 000. Cost of sales
for the period is C700 000.
The opening balance on accounts payable is C40 000 and the closing balance is C20 000.
The cash paid to suppliers on a direct method statement of cash flows is

a) C720 000
b) C740 000
c) C700 000
d) C680 000
e) C760 000
c.
When preparing a statement of cash flows using the indirect method, and calculating the cash flow
from operating activities, which of the following are deducted from profit?
1. Loss on disposal of non-current assets

2. Profit on disposal of non-current assets
3. Depreciation of non-current assets
4. Increase in accounts receivable
a) 4 only
b) 2 and 4
c) 1 and 3
d) 2 only
e) All of the above
d.
In the financial year ended 31 December 20X6, a business entity paid C200 000 to acquire new long
term investments and sold plant and equipment for C20 000. At the time of sale, the plant and
equipment sold had a carrying amount of C15 000 and there was a profit on disposal of C5 000.
The net cash flow from investing activities for the year ended 31 December 20X6 is?
a) C25 000 inflow
b) C20 000 inflow
c) C180 000 outflow
d) C180 000 inflow
e) C175 000 outflow
302 Chapter 27
e.
A business entity raised C250 000 from a share issue in August 20X6, part of which was used to
repay borrowings of C150 000.
The net cash flow from financing activities for the year ended 31 October 2016 is?
a) C250 000 inflow

b) C150 000 outflow
c) C100 000 outflow
d) C100 000 inflow
Question 27.2
Lux Limited is a manufacturer of a range of luxury soaps, shampoos and bath salts. The financial
director is preparing the statement of cash flows, which has always been prepared using the direct
method. The board of directors has discussed the possibility of using the indirect method and has
asked the financial director to prepare drafts using both methods.
An extract from the trial balance of Lux Limited at 31 March 20X3 is as follows:
LUX LIMITED
20X3 20X2
Debit Credit Debit Credit
Profit before tax 276 000
Inventory 161 000 146 000
Allowance for credit losses 5 000 4 000
Selling expenses prepaid 12 000 8 000
Bank 36 000 13 000
Administration expenses accrued 24 000 36 000
Interest accrued 8 000 7 000
The financial director has extracted the following information from the working notes to the financial
statements:
C
Calculation of profit before tax:
Revenue from sales 2 100 000
Cost of sales (1 435 000)
Administration expenses (227 000)
Selling expenses (150 0000)
Interest expense (12 0000)
Administrative expenses include:

Loss on disposal of plant & equipment 3 000
Amortisation of intangible assets 6 000
Selling expenses include:

Impairment loss on receivables (bad debt) 10 000
Lux Limited reports interest paid as a cash flow from operating activities.
Chapter 27 303
Required:
a) Prepare the operating activities section of the statement of cash flows of Lux Limited for the year
ended 31 March 20X3, using the direct method in accordance with IAS 7, Statement of Cash
Flows.
b) Prepare the operating activities section of the statement of cash flows of Lux Limited for the year
ended 31 March 20X3, using the indirect method in accordance with IAS 7, Statement of Cash
Flows.
Question 27.3
Whoosh Limited is the largest manufacturer of surfboards in the country.
The statement of comprehensive income and the trial balance of Whoosh Limited for the year ended
31 December 20X5 are shown below:
WHOSH LIMITED
STATEMENT OF COMPREHENSIVE INCOME
C
Sales 450 000
Cost of sales (300 000)
Gross profit 150 000
Operating expenses (39 000)
Selling expenses 15 000
Administration expenses 10 500
Loss on disposal of equipment 1 500
Depreciation 12 000
Income tax expense (44 400)
Profit for the period 66 600
WHOOSH LIMITED
TRIAL BALANCE AT 30 JUNE
20X5 20X4
Dr Cr Dr Cr
Equipment: Cost 150 000 133 500
Equipment: Accumulated depreciation 22 500 13 500
Inventories 90 000 60 000
Selling expenses paid in advance 1 800 2 250
Bank 54 900 13 500
Dividends 30 000 -
Loan 15 000 30 000
Administration expenses payable 1 200 750
Current tax payable 28 500 15 000
344 700 344 700 239 250 239 250

x Equipment costing C22 500 was purchased during the year when certain other equipment was
traded in as part of the purchase price.
x No shares were bought back during the year
304 Chapter 27
Required:
a) Prepare a statement of cash flows of Whoosh Limited for the year ended 31 December 20X5 using
the direct method.
b) Prepare a statement of cash flows of Whoosh Limited for the year ended 31 December 20X5 using
the indirect method, showing the operating activities section only.
Question 27.4
Hickory Limited manufactures clocks, which it sells to retailers around the country. The following
balances were extracted from its trial balance for the years ended 31 July 20X6 and 20X5 respectively:
HICKORY LIMITED
20X6 20X5
Dr Cr Dr Cr
Revenue 3 000 000 2 000 000
Cost of sales 2 000 000 1 300 000
Plant and equipment: Cost 500 000 450 000
Plant and equipment: Accumulated depreciation 50 000 45 000
Inventory 340 000 348 500
Allowance for credit losses 25 000 18 000
Expenses accrued 15 000 -
x New plant costing C90 000 was purchased during the year. Plant with a carrying amount of C10 000
was sold during the year at a profit of C5 000.
x The depreciation expense equals the tax allowances granted by the taxation authorities.
x There are no other temporary differences.
x The tax rate is 40%.
Required:
a) Prepare the operating activities section of the statement of cash flows for the year ended
31 July 20X6 using the direct method in accordance with IAS 7, Statement of Cash Flows.
b) Prepare a reconciliation between profit before tax and cash generated from operations.
Question 27.5
The financial director of Mt Charm Limited is in the process of preparing the statement of cash flows for
the year ended 30 June 20X5. She has prepared a set of working papers and notes, as set out below:
30/06/X5 30/06/X4 Remember the TB

Revenue for year Accounts receivable 845 000 720 000 shows a total debit
= C5 200 000 Allowance for credit losses 71 500 34 000 in respect of bad
debts of C55 500
30/06/X5 30/06/X4 Profit before tax =

Accounts payable 510 000 340 000 20X3 20X4 20X5
Inventory 305 000 210 000
C720 000 C590 000 C680 000
Chapter 27 305
We did not declare an

30/06/X5 30/06/X4
interim dividend during
Shareholders for ordinary dividend 35 000 30 000
the current year. The final
dividend of C35 000 was
declared on 25 June 20X5
I know that deferred tax is one of your hottest topics, but I have prepared the following schedule relating
to the plant and equipment that needs to be incorporated into the taxation calculation:
Carrying Tax base Temporary Deferred

amount difference tax
01/07/X2 Cost 800 000 800 000
600 000 320 000 280 000 81 200
500 000 160 000 340 000 98 600
30/06/X5 30/06/X4 Don’t forget the

Tax authority 125 175 190 000 corporate income
tax rate is 29%
There are no temporary or non-temporary differences other than those apparent from the above
information.
Required:
Prepare the operating activities section of the Statement of cash flows of Mt Charm Limited for the year
ended 30 June 20X5, using the direct method.
Notes and comparatives are not required.
Question 27.6
Shine Limited manufactures furniture oils products, which it sells to retailers around the country. The
following balances were extracted from its financial statements at 30 June 20X4:
SHINE LIMITED
AT 30 JUNE 20X4
20X4 20X3
C C
10% Redeemable preference shares - 64 716
Administration expenses accrued 2 000 -
Shareholders for dividends - 2 000
Inventory 111 500 131 500
Distribution expenses prepaid 3 000 2 000
Deferred tax asset 22 500 20 000
306 Chapter 27
SHINE LIMITED
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 JUNE 20X4
20X4
C
Profit for the year 33 741
Other comprehensive income 0
Total comprehensive income 33 741
x The profit before tax is stated after taking into account the following expenses:
C
Profit on sale of plant 3 000
Bad debts 1 500
Depreciation 15 000
Finance costs 15 784
x Inventory is sold at a mark-up of 110% on cost.

x The finance costs comprised interest on a mortgage loan and finance costs relating to the
preference shares.
x The preference shares are measured at amortised cost using an effective interest rate of 11.255%.
60 000 10% preference shares issued at C1 were subject to a compulsory redemption at a premium
of ? % on 30 June 20X4.
x Dividends were declared in the current year.
x No additional ordinary or preference shares were issued during the year.
Required:
Prepare the operating activities and financing activities sections only of the statement of cash flows of
Shine Limited for the year ended 30 June 20X4, using the direct method.
Notes are not required.
Question 27.7
Ukudla Limited is a company that prepares and distributes a range of healthy vegetarian meals in Kloof.
The financial director is in the process of preparing the financial statements for the year ended 31 March
20X3. He has prepared the statement of comprehensive income, the statement of changes in equity,
the assets and liabilities sections of the statement of financial position as well as some of the notes to
the financial statements.
UKUDLA LIMITED
FOR THE YEAR ENDED 31 MARCH 20X3
Notes C
Revenue 7 500 000
Cost of sales (4 500 000)
Gross profit 3 000 000
Administration expenses (800 000)
Distribution expenses (400 000)
Finance costs (12 000)
Profit for the period 1 268 000
Chapter 27 307
UKUDLA LIMITED
Share capital Retained earnings Total
C C C
Balance at 01/04/X2 3 900 000 2 200 000 6 100 000
Issue of share capital 1 500 000 1 500 000
Capitalisation issue 300 000 (300 000)
Profit for the period 1 268 000 1 268 000
Dividends (550 000) (550 000)
Balance at 31/03/X3 5 700 000 2 618 000 8 318 000
UKUDLA LIMITED
(EXTRACT FROM) STATEMENT OF FINANCIAL POSITION
20X3 20X2
Note C C
Non-current assets 9 080 000 7 250 000
Land & buildings 12 4 830 000 3 550 000
Plant & equipment 4 250 000 3 700 000
Current assets 1 608 000 1 542 000

Inventory 800 000 550 000
Bank 58 000 592 000
10 688 000 8 792 000
Non-current liabilities 1 150 000 1 650 000

Long-term borrowings 850 000 1 450 000
Deferred tax 300 000 200 000
Current liabilities 1 220 000 1 042 000

Dividends payable 350 000 300 000
2 370 000 2 692 000
UKUDLA LIMITED
(EXTRACT FROM) NOTES TO THE FINANCIAL STATEMENTS
C
2 Profit before tax has been computed after taking into
account the following:
Depreciation on buildings 120 000
Depreciation on plant and equipment 1 200 000
Loss on disposal of plant and equipment 485 000
Salaries and wages 320 000
Land & Plant &

12 Non-current assets
buildings Equipment
31/03/X2 Cost 4 200 000 5 400 000
Accumulated depreciation (650 000) (1 700 000)
Carrying amount 3 550 000 3 700 000
31/03/X3 Cost 5 600 000 6 700 000

Accumulated depreciation (770 000) (2 450 000)
Carrying amount 4 830 000 4 250 000
The financial director noted the following additional information relating to the non-current assets:
308 Chapter 27
x No land & buildings were disposed of during the year.

x Plant and equipment with a cost of C1 300 000 was disposed of during the year.
Required:
Prepare the statement of cash flows of Ukudla Limited for the year ended 31 March 20X3, in accordance
with IAS 7 Statement of cash flows, using the indirect method.
Question 27.8
The following financial statements relate to Amanzi Limited:
AMANZI LIMITED
DRAFT STATEMENT OF FINANCIAL POSITION
AT 30 JUNE 20Y0
20X9 20X8
C C
ASSETS
Property, plant and equipment 400 000 300 000
Intangible assets 105 000 50 000
Inventory 70 000 50 000
Trade accounts receivable 20 000 30 000
Bank 0 900
595 000 430 900
EQUITY AND LIABILITIES
Share capital and reserves 378 600 260 900
Deferred taxation 48 500 37 000
Debentures 68 000 60 000
Trade accounts payable 52 000 42 000
Shareholders for dividends 5 000 12 000
Bank overdraft 30 900 0
595 000 430 900
AMANZI LIMITED
20X9 20X8
C C
Revenue 1 750 000 1 990 000
Cost of sales (1 392 000) (1 791 000)
Gross profit 358 000 199 000
Other income
Profit on sale of machinery 8 000 0
Other expenses (240 000) (92 000)
Finance cost (20 000) (20 000)
Other comprehensive income 21 500 -
Items that may never be reclassified to
profit/loss
Revaluation surplus 21 500
Chapter 27 309
AMANZI LIMITED
Ordinary Revaluation Retained Total
share capital Surplus Earnings
C C C C
Balance - 1 July 20X8 100 000 0 98 000 198 000
Balance - 1 July 20X9 100 000 0 160 900 260 900
Total comprehensive income 21 500 66 200 87 700
Ordinary dividends (30 000) (30 000)
Ordinary share issue 60 000 60 000
Balance - 30 June 20Y0 160 000 21 500 197 100 378 600
x Included in profit before tax are the following:
Depreciation of plant C75 000
Depreciation of equipment C1 644
Amortisation of development costs ?
Development expense C20 000
x The company has been developing two new products (A and B) during the past few years. During
the first three months of the current year, development costs incurred on product A totalled C50 000.
This was the only amount incurred during the development phase of product A. Development of
product A ceased and commercial production began on 1 January 20X9. Future economic benefits
are expected to flow evenly from the sale of product A from the date on which commercial production
commenced for a period of 10 years. Development costs are paid in the year that they are incurred.
Only C30 000 of the cost incurred in 20X9 qualified for recognition as an asset.
x The effective interest rate equals the nominal interest rate for the debentures. The interest expense
in the statement of comprehensive income includes interest on the debentures and the bank
overdraft. All interest on the debentures was paid timeously.
x Plant with a carrying amount of C22 000 was sold at the beginning of the year. The company
purchased extra plant during the year in order to expand the business. The revaluation surplus
refers to land that was revalued on 1 July 20X8. No other purchases or sales of property, plant and
equipment took place during the current year.
x Land was revalued during the year by an independent valuer.
x The income tax rate is 28% and the CGT inclusion rate is 50%.
Required:
a) Prepare, in conformity with International Financial Reporting Standards, the statement of cash flows
of Amanzi Limited for the year ended 30 June 20X9, using the direct method.
Question 27.9
Meadowvale Manufacturers Limited commenced operations in June 20X1. Its summarised financial
statements for the year ended 30 September 20X7 were as follows:
310 Chapter 27
MEADOWVALE MANUFACTURERS LIMITED

STATEMENT OF FINANCIAL POSITION
AT 30 SEPTEMBER 20X7
20X7 20X6
ASSETS C000s C000s
Non-current assets 3 024 2 795
Land 2 600 2 405
Plant and machinery 360 246
Goodwill - 100
Listed investments 64 44
Current assets 2 855 1 363

Inventory 1 750 159
Bank 235 704
5 879 4 158
Capital and reserves 3 483,2 3 018
Ordinary shares issued at C1 822 572
400 000 10% redeemable preference shares issued at C1 400 500
Revaluation surplus 14,2 0
Non-current liabilities 975,8 180

Deferred tax 5,8 0
Current liabilities 1 420 960

Shareholders for dividend 150 180
5 879 4 158

C000
Revenue from sales 5 000
Income tax expense (800)
Profit for the period 725
Other comprehensive income
Items that may never be reclassified to profit/loss
- Revaluation of land and buildings 14,2
Total comprehensive income 739,2

EXTRACT FROM STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR 30 SEPTEMBER 20X7
Revaluation Retained
surplus earnings
C000 C000
Opening balance 0 1 946
Redemption of preference shares (4)
Capitalisation issue (125)
Total comprehensive income 20X7 14,2 725
Dividends - Ordinary (250)
- Preference (45)
Closing balance 14,2 2 247
Chapter 27 311
x Profit before tax was arrived at after taking the following into account:
Bad debts - C5 000
Depreciation on plant and machinery - C90 000
Interest expense - C99 000
Impairment of goodwill - C100 000
Dividend income - C18 000
Fair value gain on listed investment - C6 000
Profit on sale of land - C 50 000
Profit on sale of plant and machinery - C 4 000
Loss on trade in of plant and machinery - C 6 000
x On 31 March 20X7, 100 000 redeemable preference shares were redeemed at a premium of 4%.
The preference shares are redeemable at the option of the company.
x On 30 April 20X7, the company made a capitalisation issue of 125 000 ordinary shares, together
with a fresh issue of ordinary shares, at C1 per share.
x Land, with a carrying amount of C90 000, was sold at a profit of C50 000. The remaining land was
revalued during the year. There is no intention to sell the remaining land.
x There were no movements in the revaluation surplus other than those evident from the information
provided.
x The details of plant and machinery are:
20X7 20X6
Cost 590 000 426 000
Accumulated depreciation 230 000 180 000
Carrying amount 360 000 246 000
An item of plant, with a carrying amount of C140 000 was sold during the year at a profit of C4 000.
A machine that had originally cost C60 000 and that had been depreciated by C25 000 was traded
in at a loss of C6 000, in part payment of a new machine costing C100 000. The balance was paid
in cash.
x The listed investment is measured at fair value through profit or loss. There were no disposals of
listed investments during the year ended 30 September 20X7.
x In addition to settling the current tax payable balance at 30 September 20X6, two provisional
payments totalling C100 000 each were made during the year ended 30 September 20X7.
x There were no deferred tax adjustments during the year other than the deferred tax adjustment
arising from the revaluation of the land.
Required:
a) Prepare the statement of cash flows and notes thereto, on the direct method, for Meadowvale
Manufacturers Limited for the year ended 30 September 20X7, in conformity with IAS 7.
c) Comment on the cash management of the company on the basis of the statement of cash flows you
have prepared.
312 Chapter 27
GAAP: Graded Questions Financial analysis and interpretation
Chapter 28
Financial analysis and interpretation
Question Key issues

28.2 Seven Dwarfs Basic calculation of ratios
28.3 Big Juice Short term liquidity
28.4 Smart Gearing
28.5 Cupcake / Muffin Interpretation of ratios
28.6 Cake Stand Comprehensive analysis
28.7 Three companies Identification of industry from ratios
Chapter 28 313
Question 28.1
The following information relates to questions a and b
A company has the following amounts on its statement of financial position at 31 October 20X6:
C
Property, plant and equipment 8 422 000
Inventory 1 753 000
Trade receivables 2 875 000
Cash 372 000
Share capital 1 500 000
Trade payables 2 325 000
Expenses accrued 800 000
a.
The current ratio is:
a) 2.90 : 1
b) 1.60 : 1
c) 1.48 : 1
d) 1.08 : 1
b.
The quick / acid test ratio is:
a) 3.73 : 1
b) 1.60 : 1
c) 1.04 : 1
d) 0.70 : 1
The following information relates to questions c and d:
A company has the following amounts on its statement of profit or loss for the year ended
31 May 20X7 and its statement of financial position at 31 May 20X7:
C
Sales 9 875 000
Gross profit 3 455 000
Inventories 810 000
Trade receivables 317 800
Trade payables 393 150
c.
The inventory holding period is:
a) 30 days
b) 46 days
c) 72 days
d) 82 days
314 Chapter 28
d.
The accounts receivable collection period is:
a) 12 days
b) 18 days
c) 28 days
d) 14 days
e.
The following is the statement of changes in equity of a small listed company:

Share capital Retained profit Total
C C C
Balance at 01/01/X7 7 500 000 1 000 000 8 500 000
Profit for the period 4 500 000 4 500 000
Dividends (1 200 000) (1 200 000)
Balance at 31/12/X7 7 500 000 4 300 000 11 800 000
The issued ordinary share capital of C7 500 000 is made up of 30 000 000 ordinary shares of
25 cents each.
The dividend per share (DPS) for year ended 31 December 20X7 is:
a) 4c
b) 15c
c) 16c
d) 60c
f.
A listed company has an issued share capital of C5 000 000, made up of 50 million ordinary
shares of 10 cents each. The shares were trading at C2.00 each a year ago and the current
market price is C2.70. The profit for the current year is C15 000 000.
The current price/earnings (P/E) ratio is:
a) 0.11
b) 0.33
c) 6.67
d) 9.00
Question 28.2
The Seven Dwarfs Limted consists of a group of companies. The financial director requires
your assistance with calculating the following key ratios for the companies within the group for
the year ended 31 December 20X4:
a) Bashful Limited has a profit after tax of C300 000, ordinary share capital of C300 000 (20X3:
C200 000), reserves of C800 000 (20X3: C520 000) and preference share capital of
C200 000. The preference dividend was C20 000.
What is the return on equity?
Chapter 28 315
b) Sneezy Limited reported sales of C2,5 million, cost of sales of C1,5 million and equity of
C500 000.
What is the gross profit margin for the period.
c) Happy Limited has current assets and current liabilities at the end of 20X4 of C3 million and
C1,2 million respectively. Current assets include inventories of C900 000.
What is the current ratio and acid-test ratio at the end of 20X4.
d) Dopey Limited has inventory of C5 million at the end of 20X3 and C6 million at the end of
20X4. Sales for the 20X4 period are C20 million and the gross profit is C10 million.
What is the inventory holding period for the 20X4 year.
e) Grumpy Limited has trade receivables of C6 million (20X3: C3 million) and trade payables
of C8 million (20X3: C7 million) at the end of 20X4. Credit sales and credit purchases for
20X4 are C100 million and C70 million respectively.
What is WKHGHEWRUV¶collection period and the FUHGLWRUV¶SD\PHQWSHULRGIRU;
f) Sleepy Limited reported a low price/earnings ratio during 20X4.
In general, is a low price/earnings ratio viewed more favourably than a high price/earnings
ratio?
g) Doc Limited reported a profit after tax of C20 million in 20X4. The issued share capital
balance is C26 million at 31 December 20X4 and consists of shares which were all issued
at C1,30 each. The company has no preference share capital. A total dividend of C5 million
was paid during 20X4 and the market value of the company is C50 million at 31 December
20X4.
What is the earnings yield and dividend yield for the 20X4 year?
Required:
Calculate the above ratios for the financial director and answer any queries he may have.
Question 28.3
You are an investment adviser at Fin Choice and you are given the task of evaluating the
financial statements of Big Juice Limited, a relatively new player in the expanding health juice
market. There is fierce competition within the heath juice industry and not many barriers to
entry. Big Juice Limited is offering investors the opportunity to invest in the company as the
company wants to expand.
The following information has been extracted from the financial statements of Big Juice Limited
with corresponding industry averages:
Big Juice Limited Industry average

31/12/X8 31/12/X8
C C
Bank 200 000 300 000
Short-term investments 100 000 200 000
Accounts receivable ± closing 250 000 300 000
Accounts receivable ± opening 200 000 150 000
Expenses paid in advance 20 000 30 000
Closing inventory 20 000 30 000
Opening inventory 10 000 20 000
Accounts payable ± closing 120 000 150 000
Accounts payable ± opening 100 000 120 000
Expenses payable 50 000 70 000
Sales ± credit card 3 200 000 4 000 000
Sales ± cash 1 200 000 2 200 000
Cost of sales 1 400 000 3 000 000
316 Chapter 28
Required:
a) Calculate the following ratios for both Big Juice Limited and for the industry average:
i) Current ratio
ii) Acid-test ratio
iii) Debtors collection period
iv) Creditors payment period
v) Inventory on hand period
b) Prepare a report for the monthly clients¶ newsletter, consider the information provided and
your calculations in part (a).
Question 28.4
Smart Limited is about to embark on a phase of expansion and needs to raise C165 000. The
directors are considering whether to raise finance by issuing ordinary shares or by issuing
debentures (also known as loan notes or loan stock).
The summarised financial statements of Smart Limited, for each option are set out below:
SMART LIMITED
AT 31 DECEMBER 20X0
Option 1: Option 2:
Finance raised by Finance raised by
issue of shares issue of debentures
C C
ASSETS
Non-current assets 350 000 350 000
550 000 550 000
EQUITY
Share capital and reserves 540 000 375 000
C1 Ordinary shares 190 000 25 000
10% C1 Non-redeemable preference shares 100 000 100 000
LIABILITIES
Non-current liabilities
8% debentures - 165 000
Current liabilities
5% bank overdraft 10 000 10 000
550 000 550 000
Required:
a) Calculate the gearing ratio for each of the two financing alternatives.
b) If the profit before interest and dividends amounts to C25 000, calculate the earnings per
share for each of the two financing alternatives and advise whether the company should
fund its expansion by issuing shares or by issuing debentures.
c) If the profit before interest and dividends amounts to C200 000, calculate the earnings per
share for each of the two financing alternatives and advise whether the company should
fund its expansion by issuing shares or by issuing debentures.
Ignore tax.
Chapter 28 317
Question 28.5
Cupcake Limited and Muffin Limited are distributors of food to small supermarkets around the
country. They have both been successful over the past few years; each has its own unique
business model and operates in different ways.
The following analysis has been prepared for each company:
Cupcake Limited Muffin Limited

Average inventory holding period 58 days 26 days
Average collection period for accounts receivables 60 days 19 days
Average payment period for accounts payable 45 days 47 days
Gross profit % 40% 15%
Operating profit % 10% 10%
Return on investment (ROI) 18% 16%
Return on equity (ROE) 32% 22%
Required:
In so far as possible with the information given, describe the differences in the business models
adopted by each of the above companies. Your answer should focus on
a) Inventory holding period
b) Collection period for accounts receivables and payment period for accounts payable
c) Gross profit % and Operating profit %
d) Return on investment (ROI) and Return on equity (ROE)
Question 28.6
You have secured an internship as a financial journalist with a newspaper and one of your
tasks is to analyse the financial statements of small, newly listed companies.
The Cake Stand Limited is a company that bakes and distributes a range of cakes to coffee
shops and other food outlets. You have examined the financial statements of the company
and prepared the following extracts to aid with your analysis:
THE CAKE STAND LIMITED

SUMMARISED STATEMENT OF PROFIT OR LOSS
20X7 20X6
C C
Sales 2 000 000 1 800 000
Cost of sales (1 100 000) (1 080 000)
Gross profit 900 000 720 000
Operating expenses (617 500) (491 500)
Operating profit 282 500 228 500
Finance costs (12 500) (12 500)
Taxation (54 000) (43 200)
318 Chapter 28

AT 31 MARCH 20X7
20X7 20X6
C C
Non-current assets
Equipment 700 000 800 000
Current assets
Supplies 136 100 133 500
Bank 233 400 68 000
1 247 000 1 101 500
Equity 870 000 744 000
Borrowings 250 000 250 000
Current liabilities
1 247 000 1 101 500
There is no inventory as all baked items are either sold daily or donated to charity.

DIVIDEND AND SHARE INFORMATION
20X7 20X6
Dividend paid C90 000 C80 000

Number of ordinary shares in issue 1 200 000 1 200 000
Market price per share at end of year C2.54 C1.71

KEY RATIOS
20X6
i) Gross profit percentage 40%
ii) Earnings per share (EPS) C0.14
iii) Price: earnings (PE) ratio 12.2
iv) Dividend yield 3.9%
v) Return on capital employed 22.9%
vi) Current ratio 2,8 : 1
vii) Accounts receivable collection period 20 days
viii) Accounts payable payment period 36 days
ix) Gearing ratio 33.6%
x) Interest cover 18 times
Required:
a) Calculate the following ratios for the 20X7 year only:
i) Gross profit percentage
ii) Earnings per share (EPS)
iii) Price: earnings (PE) ratio
iv) Dividend yield
v) Return on capital employed
vi) Current ratio
vii) Accounts receivable collection period
viii) Accounts payable payment period
Chapter 28 319
ix) Gearing ratio

x) Interest cover
b) Briefly comment on each of the above ratios of The Cake Stand Limited.
Question 28.7

Below are financial statements for three unrelated companies. One company is an estate
agent, one is a supermarket chain and one is a car manufacturer.

STATEMENTS OF COMPREHENSIVE INCOME
A Ltd B Ltd C Ltd
C000 C000 C000
Sales 12 000 4 150 25 300
Cost of sales (3 170) (1 645) (14 600)
Gross profit 8 830 2 505 10 700
Operating expenses (8 480) (1 475) (8 900)
Operating profit 350 1 030 1 800
Finance costs (70) (74) (220)
Income tax expense (84) (287) (474)
STATEMENTS OF FINANCIAL POSITION

AT 31 MARCH 20X7
A Ltd B Ltd C Ltd
C000 C000 C000
ASSETS
Non-current assets
Property, plant and equipment 3 400 500 11 500
Current assets 1 250 293 4 580

Inventory 155 - 1 200
Cash 1 055 143 580
4 650 793 16 080

Capital and reserves 3 450 474 12 830
Retained earnings 3 750 374 13 630
Current liabilities
Accounts payable 1 200 319 2 250
4 650 793 16 080
The following key ratios have been correctly calculated for A Ltd:
Ratio 20X7
Operating profit margin 2,9%
Sales to total assets 2,6 times
Current ratio 1,04:1
Inventory holding period 18 days
Accounts receivable collection period 1 day

320 Chapter 28
You are required to:

a) Calculate the same key ratios for B Ltd and C Ltd
i) Operating profit margin
ii) Sales to total assets
iii) Current ratio
iv) Inventory holding period
v) Accounts receivable collection period
b) Considering each company in turn, discuss with reasons, which of A Ltd, B Ltd and C Ltd
is likely to be the estate agent, the supermarket chain and the car manufacturer.
You should use all five ratios in your discussion of each company.
Chapter 28 321
Chapter B
Integrated questions: chapters 1 - 28
Question Key issues
B.1 - Core concepts involving a mixture of IFRSs
B.2 Bread IAS 32: Ordinary shares: issue for value and capitalisation issue
IFRS 9: Preference shares (option of the company): redemption at a
premium
IFRS 9: Debentures: issued at a discount and redeemable at par, interest
payable semi-annually
IAS 10: Dividends declared after reporting date
B.3 Bodo IAS 32 & IFRS 9: Preference shares (compulsorily redeemable at a

premium): issue
IAS 12: Current tax and Deferred tax (Provision, Prepaid expense,
Patent, Investment property, PPE)
IAS 16: PPE: Revaluation Model: Land (non-depreciable and non-
deductible) and Buildings (depreciable and deductible)
IAS 38: Intangible asset: Patent: useful life and legal life (renewable at
insignificant cost)
IAS 40: Investment property: FV Model: Land (non-deductible) and
Buildings (deductible)
B.4 Knucklehead IAS 12: Deferred tax: calculation: comprehensive

IAS 16: Property, plant and equipment (exempt temporary differences)
IAS 38 & IFRS 3: Research and Goodwill (exempt temporary difference)
IFRS 16: Leases
IAS 37: Provision for warranties
B.5 Builder IAS 21: Non-monetary asset denominated in foreign currency

IAS 16: PPE: cost model in foreign currency
IAS 40: Investment property: cost model versus fair value model
IFRS 9: Financial asset: investment in debentures at AC
B.6 Aquila IFRS 5: Non-current assets held for sale and discontinued operations:
disposal group
IAS 36: Impairment due to VIU having dropped and FV-CoD being zero
due to abandonment
IAS 8: Policies, estimates and errors
B.7 Chocolate IFRS 16: Leases

IAS 12: Deferred tax: tax effects of VAT when definition of rental
agreement met
B.8 Notachance IFRS 16: Lessee

IAS 8: Correction of error - cash payments instead of straight-line
IAS 12: Deferred tax
B.9 Viking Conceptual Framework: Verifiability

IAS 8: Change in estimated useful life (PPE)
IAS 8: Correction of error: fraud
IAS 16: PPE: Cost model and an impairment
IFRS 15: Revenue
322 Chapter B
4XHVWLRQFRQWLQXHG« Key issues
B.10 Sowden IAS 16: PPE: Cost model

IAS 40: Investment property: Fair value model
IAS 8: Correction of error: Transfer from Investment Property to PPE did not
occur
IAS 12: Current and deferred tax: tax effects of error
B.11 Barker IAS 8: Correction of error: asset debited to liability account

IAS 12: Current tax: tax assessments were incorrect and to be re-opened
IAS 38: Development costs
IAS 36: Impairment of development asset
B.12 Fluff IAS 32: Preference shares: convertible (compulsory) - at amortised cost
IAS 32: Financial instruments: presentation
IFRS 9: Financial instruments
IAS 8: Correction of error (preference shares)
B.13 Menace Part A:

IAS 16: Cost model
IAS 37: Provision for dismantling costs
IAS 8: Change in estimate
Part B:
IAS 16: Revaluation model
IAS 37: Provision for dismantling costs
IAS 8: Change in estimate
B.14 Putu IAS 23: Borrowing costs (specific loans)

IAS 16: Property, plant and equipment (self-constructed, cost model)
IAS 12: Deferred tax (interest deducted when incurred and wear and tear
from date of use: interest capitalised and asset available for use but
there is depreciation because available for use although not brought
into use in current year)
IAS 8: Correction of error: borrowing costs were expensed now capitalised
B.15 Roo IAS 21: Import (DAT) of PPE

IAS 16: PPE (imported)
IFRS 9: Hedges of highly probable forecast transactions, firm commitments
and transactions
- Hedge of a HPFT = CFH (basis adj) and
- Hedge of a FC = CFH (basis adj) and
- Hedge of a T = FVH
IAS 8: Correction of error (reclassification adj used instead of basis adj)
and Change in accounting estimate (change in UL of PPE)
IAS 1: Presentation (particularly OCI section)
B.16 Hubbard IAS 33: Earnings per share:

Basic and headline;
Share movements: fair value issue, share split;
IAS 8: Correction of error (tax deduction not claimed)
B.17 Mail IAS 33: Earnings per share: Basic and diluted
Circ 04/2018: Headline earnings per share (shown as separate part)
Share movements: none
Potential shares: options and convertible debentures
Part A: Basic, diluted
Part B: Basic, diluted and headline
Chapter B 323
Question B.1
Part A
a) Briefly prove, using the µnew¶ liability definition in the 2018 Conceptual Framework,
whether a provision for legal costs is a liability.
b) Briefly prove, using the µnew¶ asset definition in the 2018 Conceptual Framework,
whether a 3-year contract to lease a vehicle (as a lessee), and where the vehicle has a
useful life of 10 years, should be recognised as a right-of-use asset.
c) Briefly prove, using the µnew¶ liability definition in the 2018 Conceptual Framework, whether a
3-year contract to lease a vehicle (as a lessee), should be recognised as a lease liability.
d) Briefly prove, in terms of the µnew¶ definitions in the 2018 Conceptual Framework,
whether an issue of compulsorily redeemable 10% preference shares with mandatory
preference dividends should be recognised as equity or a liability.
Part B
a) A change in the useful life of an asset is accounted for prospectively.
b) When measuring property, plant and equipment, a change from the cost model to the
revaluation model is accounted for as a change in accounting policy in terms of IAS 8.
c) When measuring intangible assets, a change from the cost model to the revaluation
model is accounted for as a change in accounting policy in terms of IAS 8.
d) When measuring investment property, a change from the cost model to the fair value
model is accounted for as a change in accounting policy in terms of IAS 8.
e) The total lease premium that a lessee pays on a recognised right-of-use asset will be
reflected in the financing activities section of the statement of cash flows.
f) When calculating the deferred tax on financial assets held for sale in the ordinary course
of business, the capital gains tax rate must be applied.
g) Investor Limited believes that it is highly probable that they will purchase shares in a
foreign country in the near future. Investor has taken out a forward exchange contract to
hedge against foreign exchange risk. On the date of purchase, Investor will use a basis
adjustment to release the cumulative gains or losses currently recognised in other
h) When impairing a contract asset, we follow the process outlined below:
x Identify if the asset may be impaired
x Calculate the recoverable amount
x Determine if the recoverable amount is lower than the carrying amount
x Recognise and measure an impairment loss if necessary.
i) At reporting date, the accountant recognised a µleave pay liability¶and related employee
benefit expense. The leave pay liability relates to leave that is owed to employees who
worked on the manufacture of inventory. This is the correct accounting treatment.
j) The measurement of a provision at reporting date must take into account all information
WKDWFRPHVWRPDQDJHPHQW¶VDWtention after reporting date (i.e. information that comes to
light between reporting date and when the financial statements are published).
k) Due to the level of measurement uncertainty involved, an obligation for leave pay is
accounted for as a µprovision¶ (debit employee benefit expense and credit provision).
Required:
Indicate whether each of the above statements is true or false and provide a brief explanation
to support your answer.
324 Chapter B
Part C
a) Constructor Limited is involved in a contract where the costs of completing the contract is
C50 000, while the revenue expected to be received from completing the contract is
C40 000. Should Builder not complete the contract, a penalty of C20 000 will be imposed
on the company. How should Builder Limited account for this contract?
b) As a consequence of restructuring its operations, ATZ Limited has to retrench ten
employees. As part of the retrenchment agreement, ATZ is providing severance benefits
to the affected employees. Given the details below, when should ATZ recognise the
termination benefit expense?
x ATZ concluded the retrenchment negotiations with employees on 30 June 20X4.
x At the meeting of the board of directors of ATZ on 15 January 20X4, it was decided
that the restructuring would occur, and the board resolved to begin planning for the
restructuring immediately.
x On 31 March 20X4, the board approved the detailed plan, and the chairman issued a
statement to all employees, as well as the local media, detailing the main features of
the restructuring plan. The restructuring commenced after this announcement.
c) The accountant of Lazy Limited is considering applying the revaluation model to all items
of property, plant and equipment, as he can then initially measure the assets at fair
value. By doing this, he can avoid the capitalisation of borrowing costs (in terms of
IAS 23 Borrowing costs ZKLFK KH GHHPV ³FRPSOLFDWHG DQG XQQHFHVVDU\´ ,V WKLV
acceptable in terms of International Financial Reporting Standards?
d) The accountant of Leased-It Limited is not familiar with the new standard on leases, and
how it may affect the presentation of the financial statements. Of particular concern is the
way lease payments will be presented on the statement of cash flows. The accountant
has come to you for guidance on this issue.
Required:
Provide brief responses to the issues posed above.
Question B.2
Bread Limited exports bread making machines and is listed on the stock exchange.
BREAD LIMITED
EXTRACT FROM TRIAL BALANCE AS AT 30 JUNE 20X9
Debit Credit
15% Redeemable preference share capital 200 000
Retained earnings ± 30/6/X8 335 500
14% Debentures - 30/6/X8 200 000
Debenture discount ± 30/6/X8 4 947
Share issue expenses 1 688
Profit before interest and taxation 265 750
Bank 160 250
Dividends paid - ordinary 12 500
- preference 15 000
Loan ± Investments Bank 120 000
Shareholders application account 168 750
Payments to preference shareholders 235 000
Interest paid on debentures 14 000
Interest paid on loan ± Investments Bank 13 000
Chapter B 325

x The authorised share capital of the company consists of:
- 500 000 ordinary shares with no par value.
- 500 000 redeemable preference shares with no par value.
x On 1 September 20X8 a capitalisation issue to ordinary shareholders was authorised on
the basis of 1 share for every 9 shares held. The amount of the capitalisation issue was
C50 000. On 30 June 20X8 225 000 ordinary shares were in issue.
x The redeemable preference shares were issued at C0,50 on 1 January 20X3. These
preference shares are redeemable at a premium of C0,05 per share at the option of the
company any time after 31 December 20X7. Management have classified these shares
as equity for reporting purposes. The directors resolved to redeem all of the preference
shares and pay the final dividend on 30 June 20X9. The funds for the redemption were
provided by issuing 75 000 ordinary shares on 30 June 20X9 for an amount of C168 750
and the balance was provided IURPWKHFRPSDQ\¶VEDQNaccount. The total cash paid to
the preference shareholdeUVKDVEHHQGHELWHGWR³3D\PHQWVWRSUHIHUHQFHVKDUHKROGHUV´
x Share issue expenses of C1 688 were incurred on the ordinary shares issued on
30 June 20X9 but have not yet been paid.
x The company issued 200 C1 000 14% debentures on 1 July 20X6 at 95% of their face value.
Interest is payable semi-annually in arrears on 1 January and 1 July. The debentures are secured
by a mortgage over land worth C300 000 and were issued at an effective interest rate of 15.918%
compounded semi-annually. The debentures are redeemable at par on 31 December 20X9.
x On 1 March 20X7 a loan of C150 000 was obtained from Investments Bank, which bears
interest at 13% p.a. payable annually in arrears on 28 February. The loan is repayable in
five equal annual instalments commencing 1 March 20X9.
x Taxation has been correctly calculated and accounted for.
x The directors declared a final ordinary dividend of C0,10 per share on 31 July 20X9. The
financial statements were authorised for issue on 5 August 20X9 by the board of directors.
Required:
To the extent the information allows, prepare the statement of comprehensive income, statement of
changes in equity and notes relating to the statement of financial position of Bread Limited for the
year ended 30 June 20X9, in terms of International Financial Reporting Standards.
Accounting policies, earnings per share, dividends per share and comparatives are not required.
Question B.3
Bodo Limited is a company that retails a range of sleek, modern kitchen appliances such as
kettles, toasters and microwaves.
The financial director has completed the majority of the financial statements for the year ended
30 June 20X9. He has however, not yet completed the tax notes and the cash flow statement. The
following information is available from the working papers prepared by the financial director:
For the year ended 30 June 20X9, the revenue from contracts with customers has been correctly
calculated at C10 800 000 and the profit before tax has been correctly calculated at C1 200 198.
x On 1 July 20X7 the company issued 100 000 12% redeemable preference shares for a
total consideration of C400 000. The preference shares are subject to compulsory
redemption by the company on 30 June 20Y2 at a premium of 4%. The effective interest
rate is 12, 622% per annum. The dividends, which are non-discretionary, have been paid
on 30 June each year.
326 Chapter B
x An extract from the trial balance of Bodo Limited, showing working capital items only, for
the years ended 30 June 20X9 and 20X8 is shown below:
20X9 20X8
Inventory 810 000 620 000
Accounts receivable 1 677 500 3 440 000
Prepaid expenses 110 000 72 000
Accrued expenses 61 000 103 000
Provision for warranty costs 154 000 100 000
Current tax payable: income tax 243 000 180 000
x The allowance for expected credit losses for the year ended 30 June 20X9 amounted to
C148 500 and has been correctly taken into account in the trial balance. The full amount
is deductible for tax purposes in the year incurred.
x Bodo Limited purchased a patent on 1 July 20X7 at a cost of C1 500 000. The useful life of the
patent is estimated at 12 years. However, the legal life of the patent is 10 years and the legal life
can be extended by a further 3 years at insignificant cost. The tax authorities allow a deduction
of 5% per annum on the cost of the patent, calculated on the straight-line basis.
x Bodo Limited owns two properties, one in Melrose and one in Oaklands. The Melrose
property is held for development as a retail store (currently, the property only consists of land)
and the Oaklands property is let out to tenants. The company uses the revaluation model to
measure owner-occupied property and the fair value model to measure investment property.
x The Melrose property was purchased on 1 July 20X6 at a cost of C8 000 000. The base
cost equals the purchase cost.
The land is not depreciated and there are no tax allowances. On 30 June 20X9, the land was
revalued up by C300 000. The company intends to recover the cost of the land through use.
x The Oaklands property was purchased on 1 July 20X7 at a cost of C5 500 000. The
property comprises a small suburban shopping centre and all the shops are let out to
tenants. Bodo Limited provides ancillary services such as cleaning and security. At the
date of purchase, the directors estimate that C1 000 000 of the cost was attributable to
the land and that C4 500 000 of the cost was attributable to the building. The base cost of
both the land and the building equals the purchase cost.
The fair value of the land was estimated at C1 000 000 on both 30 June 20X8 and on
30 June 20X9. There are no tax allowances granted on the land.
The fair value of the building is estimated at C4 350 000 on 30 June 20X8 and at
C4 600 000 on 30 June 20X9. The tax authorities allow a tax deduction of 5% per annum
on the cost of the building, calculated on the straight-line basis.
x There were no additions or disposals relating to either property during the period.
x On 15 July 20X9, the directors of Bodo Limited declared a final ordinary dividend of C0,12
per share for the year ended 30 June 20X9. On 15 July 20X8, the directors had declared
a final ordinary dividend of C0,10 per share for the year ended 30 June 20X8. The
number of issued ordinary shares has remained constant at 600 000.
x Other relevant tax implications are:
- Prepaid expenses are deductible for tax purposes in the year when paid.
- Accrued expenses are deductible for tax purposes in the year when incurred.
- The provision for warranty costs are deductible for tax purposes only when paid and
not when incurred.
- The dividend on the preference shares and the premium accrued are not allowed as a
deduction for tax purposes.
- The corporate tax rate is 28% and the inclusion rate for capital gains tax is 50%.
- There are no other differences between accounting profit and taxable profit other than
those evident from the information given.
Chapter B 327
Required:
a) Prepare the income tax expense note (including the tax rate reconciliation) and the
deferred taxation note for the financial statements of Bodo Limited for the year ended
30 June 20X9.
b) Prepare the cash flows from operating activities section of the cash flow statement of
Bodo Limited for the year ended 30 June 20X9.
c) Explain, with respect to IAS 12 Income Taxes, the meaning of the carrying amount, tax
base, temporary differences and deferred tax in relation to the Oaklands property and the
provision for warranty costs.
No comparatives are required.
Question B.4
The following information has been provided by the accountant of Knucklehead Limited, who
has asked you for help in calculating the deferred tax balance and adjustment for the year
ended 31 December 20X1:
(1) Plant:
x Plant A was purchased for C200 000 on 1 January 20X1.
x Plant B was purchased for C300 000 on 30 September 20X1.
x Both plants are depreciated to nil residual values at 10% per annum.
x The tax authorities allow wear and tear at 20% pa (apportioned for part of a year).
(2) Vehicles:
x The vehicles were purchased for C400 000 on 1 April 20X1.
x Vehicles are depreciated to nil residual values at 25% per annum.
x The tax authorities allow wear and tear at 10% p.a., not apportioned for part of a year.
(3) Land:
x The land was purchased for C800 000 on 1 October 20X1.
x Land is not depreciated.
x The tax authorities do not allow any deductions relating to the cost of the land.
(4) Buildings:
x The buildings were purchased for C900 000 on 1 October 20X1.
x Buildings are depreciated at 5% per annum to a C50 000 residual value.
x The tax authorities do not allow any deductions relating to the cost of the buildings.
(5) Goodwill:
x The goodwill arose when some of the assets listed above were purchased for
C700 000 from another company, when their individual fair values totalled C650 000.
x Goodwill is not amortised but was impaired by C20 000 at 31 December 20X1.
x The tax authorities do not allow any deductions relating to the cost of goodwill.
(6) Trade debtors:
x The trade debtors balance is C36 000 at 31 December 20X1.
x This was calculated after deducting a 10% credit loss allowance.
x The tax authorities allow the deduction of only 25% of this allowance.
(7) Inventories:
x The inventory balance is C80 000 at 31 December 20X1.
x This was calculated after a recording a write-down of C20 000.
x The tax authorities allow the deduction of only 75% of this write-down.
(8) Warranty provision:
x Goods are sold with a right of return, considered to be an assurance type warranty.
328 Chapter B
x A provision of C20 000 for expected cost of warranties was raised at 31 December 20X1.
x The tax authorities allow the deduction of the costs of the warranty if and when the
warranty is exercised and the costs of meeting the terms of the warranty are incurred.
(9) Machinery:
x All machinery was purchased on 1 January 20X1 under a 2-year lease agreement,
and UHFRJQLVHGXQGHU,)56¶VJHQHUDODSSURDch.
x Both lessee and lessor are VAT vendors. The tax authority classifies this lease as
PHHWLQJSDUWERIWKHµLQVWDOPHQWFUHGLWDJUHHPHQW¶GHfinition.
x The cash price, including 14% VAT, is C228 000.
x The implicit interest rate is 8.1338%. A deposit of C50 000 was due on 1 January 20X1,
after which instalments of C100 000 were due on 31 December 20X1 and 20X2.
x Machinery, (right-of-use asset) is depreciated over 5 years to a nil residual value.
x The tax authorities allow the deduction of the lease instalments (adjusted for VAT).
(10) Income receivable and income received in advance:
x Income is taxed on the earlier of the date of earning the income or receipt thereof.
x Income received in advance: C50 000 at 31 December 20X1.
x Income receivable: C40 000 at 31 December 20X1.
(11) Expenses payable and expenses prepaid:
x The tax authorities allow deductions of expenses when they are paid on condition
that they are less then C50 000 and relate to the first 6 months of the next year,
otherwise expenses are only allowed when incurred.
x Expenses prepaid: C35 000 at 31 December 20X1 (relating to rent for January 20X2).
x Expenses payable: C10 000 at 31 December 20X1.
(12) Research costs:
x Research costs of C1 000 000 were expensed during the year ended 31 December 20X1.
x The tax authorities allow the costs of research to be deducted at 20% p.a.
The income tax rate is 30%
Required:
a) Calculate the deferred tax balance at 31 December 20X1.
b) Provide the deferred tax adjustment (i.e. journal entry) for the year ended 31 December 20X1
assuming that the deferred tax balance at 31 December 20X0 was C55 000 (liability).
Question B.5
The managing director of Builders Limited is concerned that his accountant has not been
correctly applying the relevant IFRSs and has sent you the following email requesting clarity.
To: Accountingexpert@accountingisfun.com
From: Bob@thebuilders.com
Subject: IFRS advice
Dear Spud,
I am concerned that my accountant, who has been with our company for years, and who has
become a dear friend of mine, is not up-to-date on the implications of the latest IFRSs. This is
a great worry to me as we are hoping to have our company listed on the local securities
exchange in the near future, and our financial statements simply have to be fully compliant for
a successful listing. I wonder if you could take a moment to apply your mind to a few of the
issues and explain to me how they should be accounted for so that I am better equipped
when checking whether the accountant is managing the situation.
Chapter B 329
Issue # 1:
WH SXUFKDVHG D SLHFH RI ODQG LQ )UDQFH IRU ¼ RQ 0DUFh 20X1. Its fair value at
31 December 20X1, our financial year-HQGLV¼7KHODQGLVQRWGHSUHFLDWHG
The spot rates were as follows:
- ¼5RQ0DUFK;
- ¼ R15 at 31 December 20X1
- ¼&EHLQJWKHDYHUDJHVSRWUDWHGXULQJ;
Please explain the IFRS implications of this information and also show me the journals that
should have been processed in our books?
Issue #2:
On 1 January 20X0, we purchased 5% debentures that were issued by a company in
America. We purchased them for $250 000, which was considered to be their fair value at the
time. These debentures will be redeemed after 3 years at 110% of the issue price. Interest on
the debentures is payable annually on 31 December. The debentures were not considered to
be 'credit-impaired' on the date of acquisition, although the accountant has assured me that
we needed to account for a loss allowance account based on $25 000 at 3 December 20X0
and that this loss allowance had increased to $26 000 at 31 December 20X1.
The accountant has asked me to tell you that we intend to hold the investment within a
business model where the objective is achieved by holding financial assets to collect
contractual cash flows and selling financial asset, he said that you would understand.
The fair values of the debentures were as follows:
Date Fair values
1 January 20X0 $250 000
31 December 20X0 $255 000
31 December 20X1 $245 000
Date Exchange rates:: $1: Rx

Spot exchange rates
1 January 20X0 $1: R15,00
31 December 20X0 $1: R14,25
31 December 20X1 $1: R14,85
Average rates
31 December 20X0 $1: R14,50
31 December 20X1 $1: R14,60
Please may I ask you to draft a report explaining how to account for these issues, identifying
the relevant IFRSs that we would need to study? Also, please would you also include the
journals that should have been processed in our books?
Many thanks for your time Spud.
Regards
Bob
Required:
Draft a report, addressing each of the issues referred to in the email, in which you provide:
x the required journals; and
x explanations for these journals in terms of International Financial Reporting Standards.
Question B.6
Aquilla Limited is a company that has two segments: one that is involved in the manufacture of
medicines and one that manufactures pesticides. The year-end of the company is 31 December.
330 Chapter B
On 30 November 20X5, the only factory that manufactured pesticides suffered a devastating
fire. This factory, which produced only pesticides, was reported as a sepaUDWH µSHVWLFLGH
GLYLVLRQ¶IRUDFFRXQWLQJSXUSRVHVDQGZDVUHSRUWHGLQWKHµFKHPLFDOVHJPHQW¶7KLVSHVWLFLGH
factory owns two machines and a building.
Whilst one of the machines was destroyed to the point that it was not usable, the remaining
machine and the factory building managed to escape damage.
There was no inventory on hand on the date of the fire.
On 5 December 20X5, the directors decided to close this factory as soon as they had fulfilled
the orders that were currently in place. No new orders would be accepted. It was expected
that it would take, with only one available machine, roughly fifteen months from the date of the
fire to complete these orders. None of these existing orders were cancelled as a result of the
delay in manufacturing.
The machine that was destroyed is to be collected by informal street vendors who will sell the
machine as scrap metal. The machine that escaped damage will be used until all orders have
been fulfilled. The remaining useful life of the factory building and both the machines was
5 years as at 1 January 20X5.
The building and the undamaged machine are both of a specialised nature and are thus not
VDOHDEOH 7KH SODQ WR FORVH WKH IDFWRU\ UHSUHVHQWLQJ WKH µSHVWLFLGH GLYLVLRQ¶ WKXV LQYolves
abandoning both the building and the undamaged machine.
Required:
Prepare a comprehensive report to the board of directors explaining, in detail, all the
measurement and presentation issues that have arisen as a result of the decision to close the
pesticide segment.
Reference should be made to all relevant International Financial Reporting Standards.
Question B.7
On 1 January 20X5, Chocolate Limited entered, as a lessee, into a lease over a

manufacturing plant. The details of the lease are as follows:
Lease payments (paid on 31 December each year) C57 000 including VAT
Lease period 3 years
/HVVHH¶VLQFUHPHQWDOERUURZLQJUDWH 12,9%
All of the requirements of a lease have been met; the plant is an identified asset and
Chocolate has a right to control the use of the plant.
The interest rate implicit in the lease was not determinable.
As the lease contract stipulates that the plant must be returned to the lessor at the end of the
OHDVHWKLVOHDVHPHHWVWKHGHILQLWLRQRID³UHQWDODJUHHPHQW´Ds per the VAT Act. As such, the
tax authority allows Chocolate to claim a VAT input as the lease payments are made.
The corporate tax rate is 30% and the VAT rate is 14%.
Required:
Provide journal entries to account for the lease for the years ended 31 December 20X5 to
31 December 20X7.
Chapter B 331
Question B.8
On 1 January 20X5, Notachance Limited entered, as a lessee, into a lease over tablet
computers (used by sales representatives). The terms of the lease were as follows:
x Period: 5 years (from 1 January 20X5 to 31 December 20X9
x Lease instalments payable monthly in advance
- 20X5 and 20X6: C5 000 per month
- 20X7 and 20X8: C3 000 per month
- 20X9: C1 000 per month
This lease qualified as a low-value asset lease, DQG WKXV ZDV UHFRJQLVHG XVLQJ ,)56 ¶V
simplified approach. However, the financial statements had already been drafted when the
accountant realised that the lease rentals should have been aggregated and straight-lined over
the period of the lease (i.e. by dividing the total lease rentals over the total lease period in months),
whereas he had consistently been measuring the lease expense at the cash amount.
The following are the draft financial statements or extracts thereof:

NOTACHANCE LIMITED
20X9 20X8
C C
Revenue 820 000 720 000
Cost of inventory expense 300 000 220 000
Operating costs 150 000 170 000
Distribution costs 100 000 80 000
Finance costs 10 000 25 000
Income tax expense 98 000 75 000
NOTACHANCE LIMITED
AT 31 DECEMBER 20X9
20X9 20X8
C C
Prepayments 80 000 10 000
Deferred tax liability 70 000 22 000
At 31 December 20X7:
x The retained earnings had a balance of C1 300 000
x The deferred tax had an asset balance of C30 000
x The prepayments had a balance of C5 000.
The tax authorities allow the lease instalment as a tax deduction when paid. The income tax rate
is 30% (unchanged since 20X5 when the rate was 28%). The lease does not include VAT.
Required:
a) Process all necessary correcting journal entries for the year ended 31 December 20X9.
b) In so far as the information permits, prepare the statement of comprehensive income, statement
of changes in equity, statement of financial position and the correction of error note for inclusion
in the financial statements of Notachance Limited for the year ended 31 December 20X9.
332 Chapter B
Question B.9
Part A
Viking Limited is a small listed company that sells a range of arctic fleece clothing. The trial
balances at 31 December 20X8 and at 31 December 20X7 are shown below. The 20X7
columns reflect the final amounts used in the 20X7 published financial statements, whereas
the 20X8 columns reflect the draft amounts for the 20X8 year, before taking into account any
adjustments required from the information below.
VIKING LIMITED
TRIAL BALANCES AT 31 DECEMBER
20X8 20X7
Revenue 14 200 000 12 300 000
Cost of sales 10 500 000 9 000 000
Royalty income 2 100 000 1 700 000
Operating expenses 2 837 500 2 800 000
Retained earnings 10 084 000 8 500 000
Ordinary share capital 520 000 200 000
Property, plant and equipment: carrying 5 500 000 6 200 000
amount
Current assets 9 100 000 7 300 000
Current liabilities 1 863 000 3 216 000
28 667 000 28 667 000 25 616 000 25 616 000
x While preparing the 20X8 financial statements, the directors reassessed the useful life and
residual value of the equipment. All the equipment was purchased at a cost of C600 000 on
1 January 20X5 and is measured under the cost model. On acquisition, the useful life was
estimated at 10 years with a residual value of C50 000. This useful life and residual value
remained unchanged for the 20X5, 20X6 and 20X7 financial years. At the end of December
20X8, the original useful life was estimated at a total of 5 years with zero residual value.
x Depreciation for the current year has been correctly recorded based on the original
estimate of the life and residual value of the equipment. No entries have been processed
to account for the change in estimate. The allowance granted by the tax authorities is
10% per annum on the straight-line basis. The company uses the re-allocation method to
account for changes in estimate.
x During the year-end audit of the 20X8 financial statemHQWV WKH FRPSDQ\¶V DXGLWRUV
discovered that the sales manager and the financial manager had colluded in a fraud
spanning the years 20X5 to 20X8. The fraud involved the misappropriation of cash and a
corresponding understatement of cash sales. Sales were understated by the amounts of
C200 000 for 20X5, C300 000 for 20X6, C1 000 000 for 20X7 and C1 200 000 for 20X8.
x The two managers have admitted guilt and have agreed to an out of court settlement
whereby they will repay all of the misappropriated cash. They have provided security for
the amount due and the security is adequate. The amounts are considered to be material
and no entries have been processed to correct the fraud. The tax authorities will reopen
the tax assessments of previous years.
x The following are included in operating expenses:
20X8 20X7
C C
Profit on sale of property 120 000 -
Depreciation of equipment 55 000 55 000
Depreciation of plant 30 000 30 000
Impairment of plant - 80 000
Chapter B 333
x The company had 200 000 ordinary shares of µno par value¶ in issue on 31 December 20X7.
No share transactions occurred during the 20X7 year.
On 1 September 20X8, the company announced a rights issue, in terms of which each ordinary
shareholder was entitled to purchase one share for every five shares held at a price of C8 per
share. All the shares offered were taken up on 1 October 20X8. The market price on
1 October 20X8 was C10 per share.
x The company income tax rate is 28% for all periods under review.
Required:
a) Prepare the statement of comprehensive income of Viking Limited for the year ended
31 December 20X8, in conformity with International Financial Reporting Standards.
Disclosure of EPS on the face of the statement of comprehensive income is required.
b) Prepare the statement of changes in equity of Viking Limited for the year ended
31 December 20X8 in conformity with International Financial Reporting Standards.
c) Prepare the following notes to the financial statements of Viking Limited for the year
ended 31 December 20X8, in conformity with International Financial Reporting Standards:
x Profit before tax
x Change in accounting estimate
x Correction of error
x Earnings per share, ignoring headline earnings per share.
d) Prepare the earnings per share note, including disclosure of headline earnings per share.
Comparative figures are required for (a), (b) and (c).
Part B
The managing director of Viking Limited made the following comments when reviewing the
financial statements for the year ended 31 December 20X8:
a) ³, Kave heard about the concept of verifiability and I noticed the Conceptual Framework
covers this (Chapter 2, para 30 ± 32),UHDOO\GRQ¶WKDYHWLPHWRUHDGDOOWKLVEODther but
VXUHO\LI\RXFDQ¶WUHOLDEO\HVWLPDWHWKHXVHIXOOLIHRUUHVLGXDl value, how can the financial
statements be verifiable?´
b) ³,DPJODGWKDWZHXQFRYHUHGWKDWIUDXG,VHHWKDWWKHQRWHVWRWKHILQDQFLDOVWDWHPHQWV
have disclosed the effect of the error on the financial statements for 20X7. What about
20X8 ± the fraud occurred in WKHFXUUHQW\HDUDVZHOO"´
c) ³I have been looking at our headline earnings per share but am still a bit confused. I have
got as far as understanding that, when calculating headline earnings, we adjust for certain
re-measurements and not for others. But what I do not understand, is why this is. Can you
explain this to me?´
Required:
Provide VKRUWDQVZHUVWRWKHPDQDJLQJGLUHFWRU¶VTXHVWLRQV
Question B.10
Sowden Limited purchased a building in Church Street on 1 January 20X4 for C99 000 in
cash with the intention of earning rental income and capital appreciation. It was correctly
classified as an investment property. 7KHEXLOGLQJ¶VWRWDOXVHIXOOLIHIURPGDWHRISXUFKDVHLV
estimated to be 9 years and its residual value is estimated to be nil. Both variables of
depreciation have remained unchanged since acquisition.
334 Chapter B
Due to an economic downturn, Sowden Limited had never been able to find tenants and this
property has been vacant ever since acquisition. The managing director has not been
concerned since the property is in an upmarket area and he is convinced that once the
economy recovers, not only will there be significant capital appreciation, but there will be an
oversupply of tenants.
The fact that it was vacant subsequently turned out to be a blessing when Sowden /LPLWHG¶V
head office in a nearby village burnt down in December 20X4. The head-office personnel and
equipment were moved into the vacant building on 1 January 20X5.
Despite the fact that the building became owner-occupied from 1 January 20X5, the
accountant continued to measure it as investment property. This error was only discovered
on 1 February 20X8. The financial statements for the year ended 31 December 20X7 have
not yet been completed having had absolutely no entries at all processed relating to this
building during 20X7 or relating to the correction of this error.
The fair values of the building, as determined by the valuer, continued to climb as follows:
x 31 December 20X4: C132 000
x 31 December 20X5: C143 000
x 31 December 20X6: C159 500
x 31 December 20X7: C165 000
Sowden Limited measures:

x Investment properties using the fair value model (IAS 40); and
x Property, plant and equipment using the cost model (IAS 16).

x levy company income tax at 30%
x apply a capital gains inclusion rate of 30%
x allow the deduction of the cost of this building at 10% per annum.
The building has always been held within a business model whose objective it is to consume
substantially all of the economic benefits from the investment over time and thus the deferred
tax presumption in IAS 12.51C was rebutted when measuring deferred tax.
Required:
Provide all journal entries necessary to be processed in order to finalise Sowden /LPLWHG¶V
financial statements for the year ended 31 December 20X7 such that they are in accordance
Question B.11
Barker Limited, a manufacturer of glitzy dog kennels, has only one intangible asset, being the
cost of the development of a new material to be used in the manufacture of the dog kennels.
An error was discovered during tKHDXGLWRIWKHFRPSDQ\¶VILQDQFLDO\HDUHQGHG December 20X4:

a payment of C100 000, which was made on 1 July 20X1 for development costs incurred, had been
HUURQHRXVO\ GHELWHG WRWKH µFXUUHQW WD[SD\DEOHLQFRPH WD[¶DFFRXQW 6LQFHDOOWKH Friteria for the
capitalisation of these development costs had been met, this payment should have been debited to
WKHµGHYHORSPHQWDVVHWDFFRXQW¶LQVWHDG
The development of the material was completed by 31 December 20X1 and amortisation of
this account began on 1 January 20X2. The development asset is amortised over a period of
10 years to a nil residual value using the straight-line method.
Chapter B 335
The recoverable amount had to be calculated at 31 December 20X4 and was found to be
C500 000. No calculation of the recoverable amount had previously been necessary. No
impairment journal has yet been processed.
The tax authorities allow the deduction of development costs as they are incurred, and have
indicated that they will re-open the relevant tax assessments. The income tax rate is 30%.
Amortisation of the development asset had already been processed in 20X4 (i.e. before the
abovementioned error was discovered).
BARKER LIMITED
STATEMENT OF FINANCIAL POSITION (EXTRACTS)
AS AT 31 DECEMBER 20X4
20X4 20X3 20X2 20X1
Non-current assets C C C C
Intangible asset 476 000 544 000 612 000 680 000
Deferred tax: income tax 210 000 220 000 170 000 180 000
Current liabilities
Current tax payable: income tax 150 000 120 000 160 000 140 000
All amounts are considered material.
Required:
a) Prepare the correcting journal entries (all adjustments must be processed in 20X4 since it
is not possible for Barker Ltd to process entries in the prior year general journals).
b) Prepare, in accordance with IFRSs, the correction of material error note for inclusion in
the financial statements of Barker Limited for the year ended 31 December 20X4.
Question B.12
Fluff Limited required long-term capital to finance a variety of projects. It managed to raise
some of this capital through a bank loan but still needed further cash. Thus, on
1 September 20X6, Fluff Limited issued 400 000 preference shares. These shares were
issued at C5 each, have a coupon rate of 10% and will be converted into ordinary shares on
31 August 20Y1. The market interest rate for similar shares is 12%. The preference
dividends, calculated by applying the coupon rate to their deemed value of C5 each, are non-
discretionary and are payable on 31 August each year until conversion.
)OXII/LPLWHG¶VQHZDQGLQH[SHULHQFHGDFFRXQWDQWKDVSURFHVVHGWKHIROORZLQJMRXUQDOVsince the
issue in 20X6, but after chatting to a colleague at an accounting update seminar he has become
concerned that he may have made an error. The following journals were processed in the prior
years ended 31 August 20X7 and 31 August 20X8:
Debit Credit
1 September 20X6
Bank 2 000 000
Preference shares: Equity 2 000 000
Issue of redeemable preference shares
31 August 20X7
Preference dividends 200 000
Bank 200 000
Payment of preference dividends at 10% coupon rate
31 August 20X8
Preference dividends 200 000
Bank 200 000
Payment of preference dividends at 10% coupon rate
336 Chapter B
Required:
Write a letter to the accountant, in which you explain whether or not the issue of shares and
the payment of dividends in the prior years ended 31 August 20X7 and 20X8 have been
correctly recognised and measured. If you believe the journals were not correct, include in
the letter your proposed correcting journals to be processed in the 31 August 20X9 financial
year and, if relevant, any note disclosure relating to the error to be included in the financial
statements for the year ended 31 August 20X9.
Ignore tax
Question B.13
Menace Limited purchased a nuclear plant, the details of which are as follows:
Cash purchase price (1 January 20X1): C2 000 000
Depreciation straight-line to nil residual values: 5 years
The nuclear plant must be dismantled after 5 years, details of which are as follows:
Future decommissioning cost assessed on 1 January 20X1: C1 000 000
Discount rate: 10%
Part A
Menace Limited uses the cost model to measure items of plant. During 20X4, the expected
cost of decommissioning increased to C1 500 000.
Required:
a) Prepare the journal entries relating to the plant for the years 20X3 and 20X4.
b) Disclose the following in the notes to the financial statements of Menace Limited for the
year ended 31 December 20X4 in accordance with International Financial Reporting
Standards:
x provision for decommissioning costs,
x profit before tax: showing the finance charges and depreciation, and
x change in estimate.
Ignore tax
Part B
Assume the same as in Part A above, except that Menace Limited uses the revaluation model
to measure its items of plant. At 31 December 20X3, the plant was revalued upwards by
C400 000, and during 20X4, the expected cost of decommissioning increased to C1 500 000.
The company does not transfer the realised portion of any revaluation surplus to retained
earnings over the life of the plant.
Required:
a) Prepare the journal entries relating to the plant for the years 20X3 and 20X4.
b) Disclose the following in the notes to the financial statements of Menace Limited for the
year ended 31 December 20X4 in accordance with International Financial Reporting
Standards:
x provision for decommissioning costs,
x profit before tax: showing the finance charges and depreciation, and
x change in estimate.
Ignore tax
Chapter B 337
Question B.14
Putu Limited has been involved in the construction of its only two items of property, plant and
equipment, both of which are qualifying assets for purposes of IAS 23 Borrowing costs:
x a desalination plant and
x a power plant.
The following are the details relating to the construction of each asset:
Desalination Plant Power plant
(D-Plant) (P-Plant)
Construction cost C900 000 C800 000
Borrowing costs C120 000 C90 000
Investment income C21 000 C0
Commencement date 01 March 20X7 01 March 20X9
Cessation date 30 April 20X8 N/A
Additional information relating to the table above:

x The commencement date referred to above is the date on which all criteria for
capitalisation were met. The cessation date referred to above is the date on which
construction was complete.
x All construction costs listed above were incurred and paid evenly between
commencement date and cessation date.
x All borrowing costs listed above had been incurred on specific loans and had been
incurred evenly between commencement date and cessation date.
x The investment income earned from the investment of surplus loan funds during the
construction of the desalination plant was comprised of the following:
Interest income: C15 000, earned evenly between 1 December 20X7 and 31 May 20X8
Dividend income: C2 500 declared on 15 December 20X7 and C3 500 declared on
5 May 20X8.
x The desalination plant was put into operation on 1 May 20X8 and is measured under the
cost model, with depreciation provided over its estimated useful life of 10 years to a nil
residual value, using the straight-line method.
x All borrowing costs incurred in the construction of these assets have been expensed.
This is an error in terms of IAS 23 Borrowing costs. The company had already begun
drafting its statement of changes in equity:
PUTU LIMITED
STATEMENT OF CHANGES IN EQUITY (extracts)
Retained Total
earnings
C C
Balance - 1 January 20X8 480 000 xxx
Balance - 1 January 20X9 530 000 xxx
Balance - 31 December 20X9 560 000 xxx

x Interest incurred is allowed as a deduction in the calculation of taxable profits in the same
year in which it is incurred.
338 Chapter B
x The cost of both the desalination plant and the power plant will be allowed as a deduction
in the calculation of taxable profits at a rate of 20% of the cost per annum, with the first
such deduction being allowed in the year in which the asset first became available for use
(not apportioned for part of a year).
x Income tax at 30% is levied on taxable profits.
x The error in the accounting records did not result in an error in the figures submitted to
the tax authorities.
There are no other temporary differences other than those evident from the information above.
There were no disposals, purchases or other movements in property, plant and equipment
other than those evident from the information provided.
Required:
a) Using the general journal, show all journals that you believe are necessary based on the
information provided above.
b) Provide the following disclosure for inclusion in the financial statements for the year ended
31 December 20X9, in as much detail as is possible:
x Correction of error note
x Statement of changes in equity
Question B.15
In March 20X7, during the audit of the 20X6 financial records of Roo Limited, (an Australian
company), the auditors discovered that the accountant had made an error by using the
reclassification adjustment approach instead of the basis adjustment approach when accounting
for a hedge of a highly probable forecast transaction to acquire equipment. Unfortunately, the
accountant had been mistakenly under the impression that the previous IAS 39 principle, which
allowed the choice between using either the basis adjustment or reclassification adjustment
approach, still applied under the new IFRS 9 Financial instruments.
The details regarding this transaction are as follows:

x A forward exchange contract was entered into on the 30 November 20X4 in anticipation of
the forecast transaction to acquire equipment for R450 000 from a SA Company called
Muzi Limited. At this point, the forecast transaction was considered to be highly probable.
x This FEC will expire on 31 May 20X5.
x Roo Limited signed a contract (considered to be a firm commitment) with Muzi Limited on
31 January 20X5.
x The equipment was shipped on a delivery duty paid (DDP) basis and was released by
customs on the 14 February 20X5.
x The equipment was immediately available for use and was depreciated from this date on
the straight-line basis over its useful life of 10 years to its residual value of nil.
x Roo Limited paid Muzi Limited on 31 May 20X5.
x Exchange rates were as follows:
Date Spot FEC expiring on 31 May X5
$: Rand $: Rand
30 November 20X4 6.10: 1 6.12: 1
31 December 20X4 6.19: 1 6.21: 1
31 January 20X5 6.00: 1 6.05: 1
14 February 20X5 5.99: 1 6.01: 1
31 May 20X5 5.96: 1
Chapter B 339
During 20X6, the remaining useful life was changed to 5 years (calculated from 1 January 20X6).
The reallocation method is used to account for changes in estimates.
Roo Limited accounts for the hedge of the firm commitment as a cash flow hedge and the
hedge of the recognised asset as a fair value hedge.
The draft statement of comprehensive income and statement of changes in equity, before taking
into account either the change in estimate or correction of error, are presented below.
ROO LIMITED
STATEMENT OF COMPREHENSIVE INCOME (Extracts)
20X6 20X5 20X4
$ $ $
Profit for the year 280 000 160 500 100 000
Other comprehensive income
Items that may be reclassified to profit or loss
x Cash flow hedge reserve 4 950 (85 669) 0
- Gain/ (loss) recognised during the year IFRS 7.23(c) 0 (90 000) 40 500
- Reclassified to profit or loss IFRS 7.23(e) 4 950 4 331 0
Items that will not be reclassified to profit or loss - - -
Total comprehensive income 284 950 74 831 140 500
ROO LIMITED
Share Retained Cash flow Total
capital earnings hedge
reserve
$ $ $ $
Balance - 1 January 20X5 100 000 400 000 40 500 540 500
Total comprehensive income - 20X5 160 500 (85 669) 74 831
Balance - 1 January 20X6 100 000 560 500 (45 169) 615 331
Total comprehensive income ± 20X6 280 000 4 950 284 950
Balance - 31 December 20X6 100 000 840 500 (40 219) 900 281
Required:
a) Prepare the journal entries to account for the correction of error and change in estimate in
the books of Roo Limited for the year ended 31 December 20X6.
b) Provide the following disclosure for inclusion in the financial statements of Roo Limited for
the year ended 31 December 20X6, in as much detail as is possible:
x Correction of error note
x Change in accounting estimate note
x Statement of changes in equity.
Ignore tax.
Question B.16
+XEEDUG/LPLWHG¶VERRNNHHSHUhas drawn up the draft statement of comprehensive income and

the draft extracts of its statement of changes in equity for the year. These are presented on the
next page.
340 Chapter B
HUBBARD LIMITED
Retained earnings
20X6 20X5
C C
Opening balance 83 000 25 000
Ordinary dividends (10 000) (5 000)
Preference dividends (2 000) (2 000)
Closing balance 181 000 83 000
HUBBARD LIMITED
20X6 20X5
C C
Sales 500 000 400 000
Cost of sales (250 000) (200 000)
Gross profit 250 000 200 000
Other expenses (110 000) (103 000)
Profit on sale of plant (taxable) 7 000 0
Interest received 3 000 3 000
Income tax expense ± current (40 000) (35 000)
x Before the 20X6 financial statements were published, it was discovered that a deduction
of C10 000 had been omitted from the 20X5 current tax calculation. The effect of the
errors is material. All the information needed to report the correction of the error is
available without undue cost or effort.
x The company had operated with an ordinary share capital of C100 000 (200 000 shares
issued at C0,50 each) for a number of years.
On 31 March 20X5, 50 000 new shares were issued at C1.10 each.
On 1 January 20X6, the directors decided to split the share capital in such a way that one share
would become two shares. This was done in ordeUWRLPSURYHWKHVKDUHV¶PDUNHWDELOLW\
x The dividends paid to the ordinary shareholders were declared as follows:
20X6 20X5
31 December 4 000 -
30 June 6 000 5 000
10 000 5 000
x Hubbard has 20 000 preference shares in issue for many years. The preference shares
were issued at C20 000 and are non-redeemable, non-cumulative and preference
dividends are at Hubbard's discretion.
x There are no other forms of authorised or issued shares other than those evident from the
x The corporate tax rate for both years was 35%.
Chapter B 341
Required:
a) In so far as the information is available, prepare the statement of comprehensive income
and statement of changes in equity of Hubbard Limited for the year ended 30 June 20X6
in terms of International Financial Reporting Standards.
The only notes required are in respect of earnings per share and the correction of error.
b) Prepare the earnings per share note for the year ended 30 June 20X6 assuming
Hubbard Limited had to comply with both International Financial Reporting Standards and
Circular 02/2018 Headline earnings and explain where headline earnings per share may
be presented.
Question B.17
Part A
The financial director of Mail Limited is in the process of completing their financial statements
for the year ended 31 December 20X5. The financial statements are complete other than for:
x an adjustment necessary in relation to the plant (see below) and
x the calculation and disclosure of earnings per share.
Information relating to plant:

x 1HZWHFKQRORJ\ZDVUHOHDVHGGXULQJ;WKDWKDVDIIHFWHGWKHYDOXHRI0DLO/LPLWHG¶V
plant. At 31 December 20X5, the following information relates to the plant:
- carrying amount was C1 500 000;
- fair value less cost of disposal was estimated at C900 000; and
- value in use was estimated at C1 000 000.
x No adjustments have yet been made for the above information.
x The following is an extract of the draft financial statements, before taking into account
any adjustments that may be needed pursuant to the information provided above:
MAIL LIMITED
STATEMENT OF COMPREHENSIVE INCOME (EXTRACT)
20X5 20X4
&¶ &¶
MAIL LIMITED
NOTES TO THE FINANCIAL STATEMENTS (EXTRACT)
20X5 20X4
54. Profit before tax &¶ &¶
Profit before tax is stated after taking into account the following separately
disclosable items:
- Forex gain on cash flow hedge ± reclassified from OCI 300 600
- Loss on investment property 425 0
- Loss on fair value through profit or loss financial assets 900 1 000
- Depreciation of plant 100 120
- Research costs 200 180
- Profit on sale of land 30 0
342 Chapter B
The items in the profit before tax note are either fully deductible for tax purposes or fully
taxable with the exception of the profit on sale of land, which is entirely exempt from tax.
Information relating to equity and liabilities:
7KHIROORZLQJUHODWHVWR0DLO/LPLWHG¶VHTXLW\LQVWUXPHQWVDQGVHOHFWHGILQDQFLDOOLDELOLWLHV
x Authorised: 5 000 000 ordinary shares (no par value),
x Issued:
4 000 000 ordinary shares (no par value, issued at C0.50 each): these shares were
issued before 20X4.
1 200 000 debentures (face value of C3 each), earning interest at a coupon rate of
6.94445% and convertible into ordinary shares at a rate of 1 ordinary share for every
5 debentures held: these debentures were issued on 1 July 20X4.
5 000 options were granted to each of the four company directors on 3 January 20X5.
These options, which have vested, offer the shares at an exercise price of C7 and will
expire 31 December 20X9. The average market price during 20X5 was C9 per share.
x There have been no other movements in the above shares, debentures or options during
either 20X5 or 20X4 other than those apparent from the information above.
x There are no other issued or potential shares other than those reflected in the information
above.
The corporate tax rate was 30% throughout. There are no temporary differences other than
those apparent from the information provided.
Required:
Prepare the following, in accordance with International Financial Reporting Standards for
LQFOXVLRQLQ0DLO/LPLWHG¶VDQQXDOILQDQFLDOVWDWHPHQWVIRUWKH\HDUHQGHG December 20X5:
x the earnings per share figures to be presented in the statement of comprehensive income
x the earnings per share note.
Ignore headline earnings per share.
Part B:
Use the same information as above except that the company must not only comply with
International Financial Reporting Standards, but in order to list on the Johannesburg Stock
Exchange, it must also present headline earnings per share in terms of Circular 02/2018,
Required:
Prepare the following, in accordance with International Financial Reporting Standards and
Circular 02/2018 Headline earnings, for inFOXVLRQLQ0DLO/LPLWHG¶s annual financial statements
for the year ended 31 December 20X5:
x the earnings per share figures to be presented in the statement of comprehensive income
x the earnings per share note.
Chapter B 343
GAAP: Graded Questions Separate financial statements of a parent
Chapter 29
Separate financial statements of a parent
Question Key issues
29.1 P & various Identification of subsidiaries

companies
29.2 Plastic Pre- and post- acquisition dividends
29.3 Prior / Since Purchase of shares during the year; revaluation of non-
depreciable asset at acquisition; gain on acquisition; dividend
income; impairment of investment
29.4 Pasta / Sauce Purchase of shares during the year; revaluation of depreciable
asset at acquisition; goodwill; dividend income; impairment of
investment
344 Chapter 29
Question 29.1
The group structure the P Group is set out below:
P Limited
55% 100% 42% 35%

A Proprietary Limited B Limited S Limited R Limited
40% 20% 60%
30%
D Limited C Limited
(German company)
60%
E Limited

x P Limited owns 55% of the shares in A Proprietary Limited and has signed an agreement
with the other shareholder, relinquishing P Limited's voting power to them.
x P Limited owns 100% of the shares in B Limited.
x B Limited owns 60% of the shares in C Limited, a company registered in Germany.
x B Limited owns 20% of the shares in D Limited.
x C Limited owns 60% of the shares in E Limited.
x P Limited owns 42% of the shares in S Limited and can appoint 4 of the 7 directors. (All the
directors hold equal voting rights.)
x P Limited owns 35% of the shares in R Limited.
x S Limited owns 30% of the shares in R Limited.
One share equals one vote, unless otherwise specified.
Required:
State, giving reasons, which of the above companies are subsidiaries of P Limited and which
are not. Make reference to IFRS 10 Consolidated Financial Statements in your answer.
Question 29.2
While watching a test match at the Wanderers with a client, Mr Bag, the managing director of
the Plastic Limited group, discussed the following issue with you:
Plastic Limited group purchased a 100% share in Surgery Limited on 1 April 20X8. Two days
after this investment was acquired, Surgery Limited paid an interim dividend of C30 000 to their
shareholders. On 30 September 20X8, Surgery Limited declared a final dividend of C50 000.
Surgery Limited earned a profit for the period of C300 000, which was earned evenly throughout
the year. Mr Bag has heard about pre-acquisition and post-acquisition dividends, but does not
know what they are, or how to account for such dividends in Plastic /LPLWHG¶V ILQDQFLDO
statements.
Required:
a) Explain to Mr Bag what pre-acquisition and post-acquisition dividends are and how the
above dividends paid by Surgery Limited would be classified by Plastic Limited.
b) Discuss how Plastic Limited should account for pre-acquisition and post-acquisition
dividends in its separate financial statements, if Plastic Limited uses the cost method to
account for investments in subsidiaries.
Chapter 29 345
Question 29.3
Prior Limited bought all the shares in Since Limited cum div on 2 January 20X4 for C50 000
cash. All the assets and liabilities are fairly valued except for the land that has a fair value of
C24 000 above its cost. The company intends to recover the land through sale.
The land is currently being used to earn revenue from concerts and other outdoor events. All
profits are from rental activities. The rent is earned evenly throughout the year.
The summarised statement of financial position at 30 June 20X4 and an extract from the
statement of changes in equity for the years ending 30 June 20X4 and 30 June 20X5 are shown
below:
SINCE LIMITED
AT 30 JUNE 20X4
C
ASSETS
Land ± at cost 28 000
Payments in advance 1 000
Bank 3 000
32 000
Share capital ± authorised and issued 20 000 shares 20 000
32 000
SINCE LIMITED
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY
Retained
earnings
C
Balance at 30 June 20X3 8 000
Dividends paid (4 000)
- 03 January 20X4 1 000
- 30 June 20X4 3 000
Dividends paid (15 000)
- 02 January 20X5 5 000
- 30 June 20X5 10 000
Since Limited sold all of its land during June 20X5. The profit of C26 000 for the year ending
30 June 20X5 includes C8 000 from rental activities and C18 000 profit on the sale of land.
There are indications that the investment may be impaired as the land was a major asset of
Since Limited. The impairment is estimated at C1 500. Land is not depreciated.
Required:
Provide the journal entries in the accounting records of Prior Limited for the 20X4 and 20X5
financial years to record:
x the purchase of the shares
x the receipts of the dividends
x any other related matters.
Ignore tax.
346 Chapter 29
Question 29.4
Pasta Limited bought all the shares in Sauce Limited on 1 January 20X5 for an amount of
C1 460 000. The major asset of Sauce Limited is a piece of land on which Sauce Limited
operates a car park adjacent to a major tourist attraction. The issued share capital of Sauce
Limited at the date of acquisition amounts to C1 000 000. All the assets of Sauce Limited were
considered to be fairly valued except for the ticket equipment.
The accounting policy of Pasta Limited in relation to property, plant and equipment is to
measure property using the cost model and equipment using the revaluation model. Any
surplus on revaluation is transferred to retained earnings as the asset is used.
The property was purchased on 1 July 20X2 at a cost of C1 500 000. The property is not
depreciated and there are no tax allowances.
The equipment was considered to be worth C10 000 more than its carrying amount on the date
that Pasta Limited bought all the shares of Sauce Limited. On acquisition, to align the
accounting policies of Pasta Limited and Sauce Limited, the directors of Pasta instructed the
directors of Sauce to revalue the equipment. The useful life of the equipment was increased
by 1½ years. The equipment was purchased on 1 July 20X2 at a cost of C70 000. Sauce
accounts for depreciation on equipment on the straight-line basis over its useful life of 5 years,
with a nil residual value. The tax authorities allow the deduction of the cost at 25% pa on the
straight-line basis, apportioned for time. At 31 December 20X4, the equipment had a carrying
amount of C35 000 and a tax base of C26 250.
Both Pasta Limited and Sauce Limited have a June year end. Sauce Limited prepared interim
results for the six months from 1 July 20X4 to 31 December 20X4 as shown in the retained
earnings account below, together with the movements in retained earnings to 30 June 20X6.
Sauce Limited has correctly accounted for the revaluation of the equipment, as instructed by
Pasta Limited. Sauce Limited uses the net replacement method to account for the revaluation
of equipment.
RETAINED EARNINGS
31/12/X4 Income tax expense 25 000 01/07/X4 Balance 152 900
03/01/X5 Ordinary dividend 10 000 31/12/X4 Profit or loss 75 000
30/06/X5 Income tax expense 15 000 30/06/X5 Profit or loss 45 000
30/06/X5 Ordinary dividend 40 000 30/06/X5 Revaluation surplus ?
30/06/X5 Balance ?
? ?
30/06/X6 Special dividend 90 000 01/07/X5 Balance ?
30/06/X6 Balance ? 30/06/X6 Profit or loss 40 000
30/06/X6 Revaluation surplus ?
? ?
01/07/X6 Balance ?
Details of the breakdown of the profit for the year ended 30 June 20X6 of Sauce Limited is
shown in the profit or loss account below. The directors of Sauce Limited, in consultation with
the directors of Pasta Limited decided to sell the property at the end of June 20X6 for an amount
of C1 600 000. This decision was taken after the projected number of tourists did not
materialise. The directors declared a special dividend from the profit on sale of the property of
C90 000. No other ordinary dividends were declared during the year.
Chapter 29 347
PROFIT OR LOSS
30/06/X6 Operating expenses 90 000 30/06/X6 Parking fee income 30 000
30/06/X6 Retained earnings 40 000 30/06/X6 Profit on sale of 100 000
property
130 000 130 000
The directors of Pasta Limited considered the investment in Sauce Limited to be impaired at 30
June 20X6. The recoverable amount is assessed to be C1 400 000.
The company tax rate is 29%.
Required:
a) Prepare the journal entries in the accounting records of Pasta Limited to account for its
investment in Sauce Limited for the years ended 30 June 20X5 and 20X6.
b) Prepare the journal entries that would have been processed in the accounting records of
Sauce Limited relating to the property and the equipment (including depreciation, deferred
tax and transfers to retained earnings, where applicable) from 1 January 20X5 to 30 June 20X6.
Ignore capital gains tax.
348 Chapter 29
GAAP: Graded Questions Wholly owned subsidiaries
Chapter 30
Wholly owned subsidiaries
Question Key issues
30.1 Pelican / Seal Analysis of equity at acquisition; goodwill; elimination of at

acquisition accumulated depreciation; intercompany transactions
30.2 Pardon / Sorry Analysis of equity at acquisition, since acquisition to beginning of

current year; goodwill
30.3 Plane / Ship Revaluation of depreciable asset at acquisition and effect on

analysis of equity (at acquisition, since acquisition to beginning
of current year and current year); goodwill; intercompany
transactions
30.4 Production / Strike Revaluation of non-depreciable asset at acquisition; subsequent

sale of non-depreciable asset and transfer of profit to NDR;
goodwill; intercompany loan
30.5 Pepper / Salt Revaluation increase of non-depreciable asset recorded in

VXEVLGLDU\¶VUHFRUGVDWDFTXLVLWLRQDQGVXEVHTXHQWWR
acquisition); goodwill; intercompany transactions
Chapter 30 349
Question 30.1
Pelican Limited purchased all the shares in Seal Limited on 1 July 20X3.
The following are the statements of financial position at 30 June 20X4 as well as the statements
of comprehensive income and statements of changes in equity of the two companies for the
year ended 30 June 20X4.

AT 30 JUNE 20X4
Pelican Seal
Limited Limited
ASSETS C C
Non-current assets
Land, at cost 35 000 110 000
Furniture 4 200 1 400
- Cost 6 000 2 000
- Accumulated depreciation 1 800 600
Investment in Seal Limited 120 000 -
Loan to Seal Limited 10 000 -
Current assets
Inventories 80 000 -
Cash and cash equivalents 20 300 20 000
299 500 135 000

Equity
Loan from Pelican Limited - 10 000
Current liabilities
299 500 135 000
STATEMENTS OF COMPREHENSIVE INCOME

Pelican Seal
Limited Limited
C C
Gross profit 80 000 -
Rent income - 22 000
Interest on loan to Seal Limited 500 -
Other expenses
Property expenses - 12 000
Selling and administration expenses 25 000 -
Rent expense (paid to Seal Limited) 15 000 -
Depreciation of furniture 600 200
Audit fees and expenses 400 100
Interest on loan from Pelican Limited - 500
Other comprehensive income for the year 0 0
350 Chapter 30
EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY

Retained earnings
Pelican Seal
Limited Limited
C C
Balance at 1 July 20X3 40 000 10 000
Balance at 30 June 20X4 68 440 16 624
The land is not depreciated. All the assets of Seal Limited are considered to be fairly valued.
The corporate tax rate is 28%.
Required:
Prepare the consolidated statement of comprehensive income and statement of changes in
equity for the year ended 30 June 20X4 and the consolidated statement of financial position at
that date.
Question 30.2
Pardon Limited acquired a 100% interest in Sorry Limited on 1 January 20X1 for C125 000.
The directors considered the assets to be fairly valued on that date. On 1 January 20X1 the
retained earnings of Sorry Limited was C15 000.
The trial balances of the two companies on 31 December 20X5 were as follows:
TRIAL BALANCE
AT 31 DECEMBER 20X5
Pardon Limited Sorry Limited
C C
Share capital (C1 shares) 200 000 75 000
Retained earnings (01/01/X5) 71 000 45 000
Sales 64 000 55 000
Dividend income 5 000 -
379 000 195 000
Pardon Limited Sorry Limited

C C
Land and buildings, at carrying amount 60 000 45 000
Plant and equipment, at carrying amount 45 000 40 000
Investment in Sorry Limited 125 000 -
Cash 25 000 15 000
Cost of sales 34 000 35 000
Operating expenses 12 000 8 000
Taxation 3 000 2 000
Dividends 10 000 5 000
379 000 195 000
All the plant of Sorry Limited was purchased during the 20X1 financial year. The carrying
amount of goodwill is considered to be equal to its recoverable amount.
Chapter 30 351
Required:
Prepare a consolidated statement of comprehensive income and statement of changes in
equity for the year ended 31 December 20X5 and a consolidated statement of financial position
at that date.
Question 30.3
On 1 July 20X7 Plane Limited acquired all the shares in Ship Limited on which date all the
tangible assets and liabilities of Ship Limited were considered by Plane Limited to be fairly
valued except for plant and machinery which was valued at C8 000 more than carrying amount.
Ship Limited intends to recover the plant and machinery through use.
Ship Limited depreciates plant and machinery at 10% per annum to nil residual values.
The draft financial statements of the parent company and subsidiary company are as follows:

AT 30 JUNE 20X9
Plane Limited Ship Limited
ASSETS C C
Non-current assets
Land and buildings 83 000 42 800
Plant and machinery 94 500 42 000
- Cost 135 000 70 000
- Accumulated depreciation (40 500) (28 000)
Investments
- 50 000 shares in Ship Limited 89 000 -
- 10 000 10% debentures in Ship Ltd 10 000 -
Current assets
Cash and cash equivalents 1 100 900
353 700 145 700

Equity
10% debentures - 25 000
Current liabilities
353 700 145 700
EXTRACT FROM THE STATEMENTS OF COMPREHENSIVE INCOME

Plane Ship
Limited Limited
C C
Other comprehensive income for the year 0 0
352 Chapter 30
EXTRACTS FROM THE STATEMENTS OF CHANGES IN EQUITY

Retained earnings
Plane Ship
Limited Limited
C C
Balance at 30 June 20X8 37 000 28 000
Dividends (11 000) (10 000)
Balance at 30 June 20X9 52 850 33 500

x At 1 July 20X7 the retained earnings of Ship Limited was C25 000.
x Plane Limited agreed with the estimated life of the plant of Ship Limited.
x Plane Limited and Ship Limited have not made any purchases or sales of plant and
machinery since acquisition date.
x The tax rate is 40%.
x The recoverable amount of goodwill is considered to be equal to its carrying amount.
Required:
equity of the group for the year ended 30 June 20X9, and the consolidated statement of financial
position at that date.
Question 30.4
Production Limited acquired Strike Limited on 30 June 20X0. Strike Limited owned a piece of
prime land that Production Limited wanted for expansion.
At 30 June 20X0 the land had a fair value of C125 000. The land is to be recovered through
sale and is measured using the cost model by both Strike Limited and the consolidated group.
At 30 June 20X0 (the date of acquisition) the summarised statement of financial position of
Strike Limited was as follows:
STRIKE LIMITED
STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X0
20X0
ASSETS C
Non-current assets
Land 105 000
Current assets
Cash and cash equivalents 5 000
110 000
Equity
Long term loan 20 000
Current liabilities
110 000
Chapter 30 353
At 31 December 20X8 Strike Limited sold the land for C175 000. The after-tax profit on sale of
C60 200 is transferred to a non-distributable reserve. No dividends have been paid by the
subsidiary.
At 30 June 20X9 the statement of financial position of each company was as follows:
STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 20X9

Production Ltd Strike Ltd
ASSETS C C
Non-current assets
Land - 500 000
Plant and equipment 2 500 000 -
Investment in subsidiary 100 000 -
Loan to subsidiary 100 000 -
Current assets
Inventories 250 000 -
Accounts receivable 400 000 -
Cash and cash equivalents 150 000 5 000
3 500 000 505 000

Equity
Share capital 2 000 000 50 000
Non-distributable reserve - 60 200
Long term loan 600 000 245 000
Current liabilities
3 500 000 505 000

The corporate tax rate is 28% and the CGT inclusion rate is 50%.
Required:
Prepare the consolidated statement of financial position of Production Limited and its subsidiary
at 30 June 20X9.
Question 30.5
Pepper Limited bought all the shares in Salt Limited on 1 January 20X3 and paid C342 500 for
its investment. The retained earnings of Salt Limited at the date of acquisition amounted to
C80 000. All the assets were considered to be fairly valued except for the land. The land is
rented to a neighbouring restaurant to use as a parking lot. 6DOW¶V land was valued by an
independent valuer at C50 000 above its cost price of C90 000. Pepper uses the revaluation
model according to IAS 16 and accordingly, instructed Salt to also adopt the revaluation model
in its accounting records. Salt intends to recover the land through sale.
Pepper Limited purchased all of its plant and equipment on 1 January 20X2. The useful life is
estimated to be ten years with no residual value.
The trial balances of Pepper Limited and Salt Limited at 31 December 20X4 are as follows:
354 Chapter 30
TRIAL BALANCE
AT 31 DECEMBER 20X4
Pepper Limited Salt Limited
C C
Non-distributable reserve 51 600
Deferred tax 8 400
Loan from Pepper Limited 50 000
Accumulated depreciation 45 000
Dividends payable 40 000
778 642 514 785
Land 150 000
Plant and equipment 150 000
Investment in Salt Limited 342 500
Loan to Salt Limited 50 000
Dividend receivable 40 000
Cash 54 500 263 500
Dividends declared 50 000 40 000
Taxation 27 642 19 285
778 642 514 785
During the year ended 31 December 20X3, Salt Limited earned a profit before taxation of
C46 428. Taxation expense amounted to C13 928. Salt Limited declared a dividend of
C40 000 during December 20X3.
In accordance with its policy of the revaluation model, the land of Salt Limited was revalued
during December 20X4 to an amount of C150 000. Salt Limited earned a profit before taxation
of C64 285 during the year ended 31 December 20X4. Taxation expense amounted to
C19 285. Salt Limited declared a dividend of C40 000 during December 20X4. The dividend
has been correctly recorded in the accounting records of both companies.
The loan from Pepper Limited to Salt Limited was advanced on 1 July 20X4. Interest at 9% per
annum has been paid by Salt Limited to Pepper Limited and is correctly included in the profit
before taxation of both companies.
The corporate tax rate is 28% and the CGT inclusion rate is 50%.
The goodwill is considered to be worth its carrying amount.
Required:
a) Prepare the pro-forma consolidating journal entries for the year ended 31 December 20X4.
b) Prepare the consolidated statement of changes in equity of the group for the year ended
31 December 20X4.
c) Prepare the assets section of the consolidated statement of financial position of the group
at 31 December 20X4.
Chapter 30 355
GAAP: Graded Questions Partly owned subsidiaries
Chapter 31
Partly owned subsidiaries
Question Key issues
31.1 - Theory:
x Shortcomings of consolidated financial statements
x Non-controlling interests
31.2 Penguin / Seal Consolidated financial statements involving:

x Goodwill on acquisition;
x Parent had impaired its investment
x Remeasurement of non-depreciable asset;
x Remeasured non-depreciable asset is sold in current year;
x Intragroup dividends.
31.3 Pumpkin / Consolidated financial statements involving two subsidiaries:

Sesame / x Other comprehensive income in current year
Sunflower x Subsidiary 1:
Remeasurement of depreciable asset at acquisition
Remeasured depreciable asset is sold in current year
Intragroup dividends
x Subsidiary 2:
Revaluation surplus on acquisition
Further revaluation since acquisition
31.4 Petunia / Consolidated financial statements involving two subsidiaries:

Sweetpea / x Other comprehensive income in current year
Snapdragon x Subsidiary 1:
Revaluation surplus on acquisition
Further revaluation since acquisition
Sale of remeasured depreciable asset in current year
Sale of remeasured depreciable asset in prior year
x Subsidiary 2:
Remeasurement of depreciable asset at acquisition
Remeasured depreciable asset is sold in current year
31.5 Pie / Sky Consolidated financial statements involving one subsidiary:

x Other comprehensive income in current year
x Remeasurement at acquisition of:
depreciable asset; and
non-depreciable asset
x Subsequent sale of the remeasured depreciable asset in the
current year (and in prior year ± see part (e))
x Subsequent revaluation of the remeasured non - depreciable
asset in the current year
x Intragroup dividends
356 Chapter 31
Questions continued ... Key issues

31.6 Max / Lisa / Ape Consolidated financial statements involving two subsidiaries:
x Subsidiary 1:
Remeasurement of non-depreciable asset at
acquisition
Subsequent revaluation of the remeasured
non -depreciable asset
Intragroup transactions: dividends
Intragroup balances: unpaid dividends
Transfers from one equity account to another
x Subsidiary 2:
Subsidiary makes a loss since acquisition (before the
current year)
P impairs its investment in S since acquisition and
reverses the impairment in the current year
Intragroup transactions: interest
Intragroup balances: loans
31.7 Poland / Slovenia Consolidated financial statements involving:

x Remeasurement of depreciable but non-deductible asset at
acquisition
x Preference shares ± parent has invested in these shares
x Intragroup transactions:
Interest,
Dividends (ordinary and preference)
x Intragroup balances:
Loans
Debentures
Unpaid dividends
Preference shares (equity)
31.8 Phone / Skype Consolidated financial statements involving:

x Revaluation of depreciable asset at acquisition
x Subsequent revaluation of revalued depreciable asset in
the current year
x Preference shares ± parent has not invested in these
shares
x Intragroup transactions:
Interest,
Dividends (ordinary and preference)
x Intragroup balances:
Loans
Unpaid dividends
Preference shares (equity)
Chapter 31 357
Question 31.1
a) Discuss the shortcomings of consolidated financial statements.

b) Discuss the treatment of non-controlling interests where:
x goodwill is paid by the parent company on acquisition of 80% of the subsidiary's shares
x the parent company pays a premium on acquisition of 80% of the subsidiary due to plant
being undervalued in the subsidiary's books
x the subsidiary sells goods at a profit to the parent company which owns 70% of the
subsidiary's shares
x the subsidiary pays interest to the parent company (which owns 65% of the subsidiary) on
a loan made by the parent company to the subsidiary.
Question 31.2
Penguin Limited bought 80% of the shares in Seal Limited on 1 August 20X5 for C120 000.
The land of Seal Limited has a fair value of C145 000 at that date. The summarised statement
of financial position of Seal Limited at the date of acquisition was as follows:
SEAL LIMITED
SUMMARISED STATEMENT OF FINANCIAL POSITION
AT 1 AUGUST 20X5
C
130 000
Land, at cost 125 000

Net current assets 5 000
130 000
The trial balances of Penguin Limited and Seal Limited at 31 December 20X7 are shown below:
TRIAL BALANCES AT 31 DECEMBER 20X7

PENGUIN LIMITED SEAL LIMITED
DR CR Dr Cr
Land 220 000 -
Investment in Seal Limited 117 600 -
Current liabilities 32 000 27 060
Shareholders for dividend 9 000 3 000
Dividend income 16 000 -
Rental income 62 400 26 000
Profit on sale of land 17 000
Operating expenses 7 600 10 300
Impairment of investment 2 400 -
Dividends paid and declared 9 000 20 000
469 400 469 400 215 060 215 060
z Seal Limited sold its land on 30 September 20X7 for C142 000 and immediately paid the
full profit as a dividend. The final dividend was declared on 30 December 20X7. The land
is not depreciated.
358 Chapter 31
z The income tax expense has been correctly calculated. The corporate tax rate is 30% and
the CGT inclusion rate is 50%.
z The non-FRQWUROOLQJLQWHUHVWVDUHPHDVXUHGDWWKHLUSURSRUWLRQDWHVKDUHRIWKHDFTXLUHH¶V
identifiable assets.
z There are no components of other comprehensive income.
Required:
a) 3UHSDUHWKH OHGJHU DFFRXQWIRU WKHµ,QYHVWPHQW LQ6HDO Limited¶LQWKHOHGJHURI Penguin
Limited.
b) Prepare all the pro-forma consolidating journal entries to consolidate Penguin Limited and
its subsidiary Seal Limited at 31 December 20X7.
c) Prepare the consolidated statement of comprehensive income of Penguin Limited and its
subsidiary for the year ended 31 December 20X7.
Comparative figures and notes to the financial statements are not required.
Question 31.3
The Seed Group consists of the parent company, Pumpkin Limited and its subsidiary
companies, Sesame Limited and Sunflower Limited.
The following information is relevant to Sesame Limited:
Pumpkin Limited purchased 80% of the shares in Sesame Limited for C1 500 000 on
1 July 20X5. The investment was paid for in cash.
x The balance on retained earnings of Sesame Limited at the date of acquisition amounted
to C550 000.
x The fair value of the plant of Sesame Limited at the date of acquisition was assessed at
C2 140 000, while all other assets and liabilities were considered to be fairly valued. The
future benefits will be recovered through use of the asset.
x 7KHGLUHFWRUVRI3XPSNLQ/LPLWHGDJUHHGZLWK6HVDPH/LPLWHG¶VHVWLPDWHGXVHIXOOLIHRIWKH
plant.
x No entry was recorded in the accounting records of Sesame Limited in respect of the fair
value of the plant.
x The plant of Sesame Limited was purchased on 1 July 20X4 at a cost of C2 300 000.
x The plant is depreciated on a straight line basis over its estimated useful life of five years
with no residual value. This equates to the tax allowances granted by the taxation
authorities.
x This item of plant was sold on 30 June 20X8 for an amount of C500 000. The sale of the
plant has been correctly recognised in the financial statements of Sesame Limited. Sesame
Limited has placed an order for a new item of plant that will be delivered on 1 July 20X8.
The following information is relevant to Sunflower Limited:
Pumpkin Limited purchased 80% of the shares in Sunflower Limited for C516 800 on
1 July 20X6. The investment was paid for in cash.
x The balance on retained earnings of Sunflower Limited at the date of acquisition amounted
to C60 000.
Chapter 31 359
x The fair value of the land of Sunflower Limited at the date of acquisition was assessed at
C100 000 above its cost price of C500 000, while all other assets and liabilities were
considered to be fairly valued.
x The future benefits will be recovered through sale of the asset.
x Sunflower Limited recorded the fair value of the land in its accounting records.
x The land of Sunflower Limited was revalued again at 30 June 20X8 to a fair value of
C650 000.
x The land is not depreciated and there are no tax allowances.
The following information is relevant to the parent and both subsidiaries:

x The share capital has remained unchanged since incorporation.
x The non-FRQWUROOLQJLQWHUHVWVDUHPHDVXUHGDWWKHLUSURSRUWLRQDWHVKDUHRIWKHDFTXLUHH¶V
identifiable net assets.
x The recoverable amount of goodwill is the same as its carrying amount.
x The corporate tax rate is 28% and the CGT inclusion rate is 50%.
The following are the trial balances of the companies at 30 June 20X8:
Pumpkin Limited Sesame Limited Sunflower Limited

Dr Cr Dr Cr DR Cr
Share capital 1 000 000 1 000 000 500 000
Revaluation surplus 1 400 000 - 129 000
Retained earnings 3 405 000 930 000 72 500
Long term loan 1 500 000 900 000 50 000
Deferred tax - - 21 000
Acc dep - Buildings 1 250 000 - -
Acc dep - Plant 1 400 000 0 -
Profit before tax 2 887 500 300 000 65 000
Accounts payable 182 500 167 250 27 285
Shareholders for dividend 75 000 15 000 0
13 100 3 312 250 864 785
000
Land 1 417 000 - 650 000
Buildings 5 000 000 - -
Plant 2 950 000 - -
Inventory 84 705 107 988 -
Bank 508 805 2 027 462 110 585
Dividends receivable 12 000 - -
Investment in Sesame 1 500 000 - -
Limited
Investment in 516 800 - -
Sunflower Limited
Income tax expense 806 440 86 500 22 200
Dividends - interim 50 000 10 000 40 000
Dividends - final 75 000 15 000 0
13 100 000 3 312 250 864 785
Required:
a) Prepare an extract from the consolidated statement of comprehensive income of The Seed
Group for the year ended 30 June 20X8, in so far as the information is available.
b) Prepare the consolidated statement of changes in equity of The Seed Group for the year
ended 30 June 20X8.
360 Chapter 31
Question 31.4
The Garden Group consists of the parent company, Petunia Limited and its subsidiary
companies, Sweetpea Limited and Snapdragon Limited.
The following are the trial balances of the companies at 30 June 20X9:
Petunia Limited Sweetpea Limited Snapdragon Limited

Dr Cr Dr Cr Dr Cr
Share capital 1 000 000 500 000 100 000
Revaluation surplus 1 400 000 215 000 -
Retained earnings 3 405 000 72 500 73 000
Deferred tax - 35 000 -
Accumulated 1 250 000 - -
depreciation - Buildings
Profit before tax 2 887 500 65 000 168 000
Profit on sale of plant - - 28 000
Shareholders for dividend 75 000 40 000 -
10 200 000 989 785 477 200
Land 1 500 000 650 000 -
Buildings 5 500 000 - -
Inventory 230 000 30 000 88 000
Bank 1 021 710 155 585 100 520
Snapdragon Limited
Sweetpea Limited
Income tax expense 812 040 22 200 54 880
Dividends 125 000 40 000 -
10 200 000 989 785 477 200
The following information is relevant to Sweetpea Limited:

x Petunia Limited purchased 80% of the shares in Sweetpea Limited for C600 000 on
1 July 20X7. The investment was paid for in cash. The balance on retained earnings of
Sweetpea Limited at the date of acquisition amounted to C60 000.
x The fair value of the land of Sweetpea Limited at the date of acquisition was assessed at
C150 000 above its cost price of C400 000, while all other assets and liabilities were
considered to be fairly valued. The future benefits will be recovered through sale of the
asset. Petunia Limited uses the revaluation model to measure its property and thus
instructed Sweetpea Limited to change its accounting policy to the revaluation model.
Sweetpea recorded the fair value of the land in its accounting records at acquisition. The
land is not depreciated and there are no tax allowances.
x There was no change in the value of the land at 30 June 20X8. The land of Sweetpea
Limited was revalued at 30 June 20X9 to a fair value of C650 000.
x The directors of Sweetpea Limited declared a dividend of C40 000 on 30 June 20X9.
The following information is relevant to Snapdragon Limited:

x Petunia Limited purchased 75% of the shares in Snapdragon Limited on 1 July 20X6 for
C100 000. The investment was paid for in cash. The balance on retained earnings of
Snapdragon Limited at the date of acquisition amounted to C12 000.
x At acquisition date, all the identifiable assets and liabilities of Snapdragon Limited were
considered to be fairly valued, except for the plant. Snapdragon Limited purchased all of
its plant on 1 July 20X1 at a cost of C160 000. The plant is depreciated on a straight-line
Chapter 31 361
basis over its useful life of ten years to a zero residual value. The tax authorities grant a
tax allowance of 10% per annum on the straight line basis.
x The fair value of the plant on 1 July 20X6 was assessed at C120 000. The total useful life
and residual value remained unchanged. The future benefits will be recovered through the
use of the asset. No entry was recorded in the accounting records of Snapdragon Limited
in respect of the fair value of the plant.
x Snapdragon Limited sold all of its plant on 30 June 20X9 for an amount of C60 000. The
directors have contracted to purchase additional plant early in the new financial year.
The following information is relevant to the parent and both subsidiaries:

x The share capital has remained unchanged since incorporation.
x The recoverable amount of goodwill is the same as its carrying amount.
x The corporate tax rate is 28% and the CGT inclusion rate is 50%. Dividends tax has been
correctly calculated, paid and recorded by all three companies.
Required:
For parts a) to c), ignore comparatives.
a) Prepare the consolidated statement of comprehensive income of The Garden Group for the
year ended 30 June 20X9, in so far as the information is available.
b) Prepare the consolidated statement of changes in equity of The Garden Group for the year
ended 30 June 20X9.
The total column is not required.
c) Prepare an extract from the consolidated statement of financial position of the Garden
Group at 30 June 20X9, showing the non-current assets section only.
d) Prepare the pro-forma consolidating entries relating to the dividends of Sweetpea Limited
for the year ended 30 June 20X9.
e) Prepare the pro-forma consolidating entry at the beginning of the year relating to the plant
of Snapdragon for the year ended 30 June 20X10.
The relevant ‘at acquisition’ entries are correctly processed and are not required.
Question 31.5
Pie Limited bought 80% of the share capital of Sky Limited on 1 October 20X3 for C1 800 000.
The group is known as Pie in the Sky. The abridged trial balance of Sky Limited at the date of
acquisition appeared as follows:
SKY LIMITED
ABRIDGED TRIAL BALANCE AT 1 OCTOBER 20X3
Dr Cr
Long-term borrowings 300 000
Property 750 000
Equipment - cost 1 000 000
Current assets 254 000
Current liabilities 84 000
2 004 000 2 004 000
362 Chapter 31
At acquisition, the directors of Pie Limited placed a value of C950 000 on the property and
C750 000 on the equipment of Sky Limited. The property consists of vacant land that will be
used as owner-occupied property and is not depreciated. Sky Limited depreciates its
equipment at 10% per annum on the straight line basis with a zero residual value. The directors
of Pie Limited agree with the estimated useful life of the equipment. All other assets and
liabilities are considered to be fairly valued. No adjustments were made to the accounting
records of Sky Limited.
The trial balances of Pie Limited and Sky Limited at 30 September 20X5 are shown below:
TRIAL BALANCE AT 30 SEPTEMBER 20X5

PIE LIMITED SKY LIMITED
Dr Cr Dr Cr
Ordinary share capital 1 000 000 800 000
Revaluation surplus 250 000
Operating profit before tax 320 000 280 000
Dividend income 9 600 31 000
Property 1 000 000
Equipment - cost 800 000 -
Investment in Sky 1 800 000
Listed investments 350 000
Dividends 16 000 12 000
Dividends receivable 6 400
2 887 200 2 887 200 2 043 000 2 043 000
x On 31 March 20X5, Sky Limited revalued its property to a fair value of C1 000 000. The
company has always intended to keep the property.
x On 30 September 20X5, Sky Limited sold its equipment for C440 000. The operating profit
before tax of C280 000 includes the profit on the sale of the equipment. The directors of
Pie Limited are satisfied that the investment in Sky Limited is worth its carrying amount.
x The directors of Sky Limited declared an interim dividend of C4 000 on 25 March 20X5 and
paid this amount to shareholders during April 20X5. The directors declared a final dividend
of C8 000 on 25 September 20X5, payable during October 20X5.
x 7KHOLVWHGLQYHVWPHQWVRQ6N\/LPLWHG¶VWULDOEDODQFHDOOFRPSULVHPLQRULW\VKDUHKROGLQJV
x The income tax expense has been correctly calculated for both companies at the company
tax rate of 29%. The capital gains inclusion rate is 50%.
Required:
For parts c) and d), ignore comparatives.
a) Prepare all the pro-forma consolidation journal entries relating to the equipment of Sky
Limited for the year ended 30 September 20X5.
b) Prepare all the pro-forma consolidation adjusting entries relating to the dividends declared
by Sky Limited for the year ended 30 September 20X5.
c) Prepare the statement of comprehensive income of the Pie in the Sky group for the year
ended 30 September 20X5.
d) Prepare the statement of changes in equity of the Pie in the Sky group for the year ended
30 September 20X5.
Chapter 31 363
e) In so far as the information is available, prepare all the pro-forma consolidation journal
entries relating to the property and the equipment of Sky Limited for the year ended
30 September 20X6.
Question 31.6
The following balances were extracted from the records of Max Limited and its subsidiaries:
TRIAL BALANCES AT 31 OCTOBER 20X7

MAX LISA APE
LIMITED LIMITED LIMITED
Share capital 300 000 100 000 100 000
Revaluation surplus 17 200 12 900 -
Deferred tax 2 800 2 100
Asset replacement reserve - 6 000 -
Retained earnings / (accumulated loss) 30 000 16 000 (7 000)
Plant and equipment ± accumulated depreciation 50 000 33 000 -
Net operating profit 52 200 50 000 5 000
Long term liability 60 000 80 000 30 000
Bank overdraft 5 000 - 3 000
Shareholders for dividends 15 000 10 000 -
547 200 320 000 135 000
Land 130 000 125 000 130 000

Plant and equipment ± cost 180 000 130 000 -
Investment in subsidiaries - Shares in Lisa Limited 68 800
- Shares in Ape Limited 78 300
- 10% loan (Lisa) 20 000 - -
Inventories 9 000 9 000 -
Cash - 5 000 -
Interest paid 7 000 11 000 -
Transfer to asset replacement reserve - 6 000 -
Dividends declared 15 000 10 000 -
Income tax expense 18 000 12 000 -
547 200 320 000 135 000
x The revaluation surplus in both companies arose on 31 October 20X6 when the companies
revalued their respective land.
x The non-controlling interests are measured at their proportionate share of the DFTXLUHH¶V
x Investment in Lisa Limited: Max Limited purchased 60% of the shares in Lisa Limited in
20X4 for C68 800 when the only reserve in Lisa Limited was retained earnings of C5 000.
At acquisition, the fair value of the land was C10 000 above its carrying amount. All other
assets and liabilities were fairly valued. The interest due by Lisa Limited to Max Limited
had been paid by year end.
x Investment in Ape Limited: Max Limited purchased 80% of the shares in Ape Limited on
1 January 20X3 for C81 ZKHQ$SH/LPLWHG¶VUHWDLQHGHDUQLQJVZDV& 500. All assets
and liabilities were fairly valued.
An impairment in respect of the investment in Ape Limited amounting to C6 800 was
recognised at 31 October 20X6. A reversal of the impairment amounting to C4 000 was
recognised at 31 October 20X7.
364 Chapter 31

Required:

equity of Max Limited and its subsidiary companies for the year ended 31 October 20X7 and
the consolidated statement of financial position at that date in compliance with the requirements
of the Companies Act and International Financial Reporting Standards.
Comparatives and notes to the financial statements are not required.
Question 31.7
The following are the trial balances of Poland Limited and its subsidiary Slovenia Limited at 31
August 20X1:
TRIAL BALANCES AT 31 AUGUST 20X1

POLAND SLOVENIA
LIMITED LIMITED
Preference share capital (12% shares) - 50 000
Asset replacement reserve 35 000 10 000
Retained earnings - 1 September 20X0 40 000 24 000
Profit before tax, interest and dividend 57 300 31 000
Dividend income 6 900
Interest received 3 600 4 200
9% loan from Poland Limited - 40 000
14% debentures of C100 each 45 000 -
Shareholders for dividends - preference - 3 000
Shareholders for dividends - ordinary 15 000 6 000
361 700 272 000
Buildings 130 000 60 000
- Cost 325 000 400 000
- Accumulated depreciation (195 000) (340 000)
Shares in Slovenia Limited
75 000 ordinary shares 105 000 -
20 000 preference shares 20 000 -
9% loan to Slovenia Limited 40 000 -
300 debentures in Poland Limited - 30 000
Dividends receivable 5 700
Cash 23 320 156 920
Interest paid - debentures 6 300 -
Interest paid - loan Poland Limited - 3 600
Preference dividends - paid - 3 000
Preference dividends - declared - 3 000
Ordinary dividends - declared 15 000 6 000
361 700 272 000
x Poland Limited purchased its ordinary shares in Slovenia Limited, a property company with
an issued share capital of 100 000 ordinary shares and 50 000 preference shares, on
1 September 20W4 when its asset replacement reserve was C4 000 and retained earnings
C16 000.
x The fair value of the building of Slovenia Limited at acquisition was C20 000 above its
carrying amount of C200 000. Slovenia Limited provides for depreciation on this property
Chapter 31 365
at 5% per annum on the straight line basis. The property is an administration building and
no tax allowances are provided by the tax authorities.
x Poland Limited purchased its preference shares in Slovenia Limited on
1 September 20W7. The preference dividend has never been in arrears.
x Slovenia Limited purchased the debentures in Poland Limited on 1 September 20W9.
x Both companies declared their respective ordinary dividends on 31 August 20X1.
Required:
Prepare the consolidated statement of comprehensive income and consolidated statement of
changes in equity of Poland Limited and its subsidiary company for the year ended 31 August
20X1 and the consolidated statement of financial position at that date.
Question 31.8
Phone Limited bought 80% of the ordinary share capital of Skype Limited on 1 October 20X5
for C1 100 000. The group is known as Talk for Ever. Phone Limited does not own any of the
preference share capital of Skype Limited. The abridged trial balance of Skype Limited at 30
September 20X5 appeared as follows:
SKYPE LIMITED
ABRIDGED TRIAL BALANCE AT 30 SEPTEMBER 20X5
Dr Cr
8% Preference share capital 100 000
Equipment - cost 1 000 000
Current assets 724 000
Current liabilities 184 000
1 724 000 1 724 000
Phone Limited uses the revaluation model to measure its equipment and, at acquisition,
instructed Skype Limited to also use the revaluation model in its company accounting records.
7KHIDLUYDOXHRI6N\SH/LPLWHG¶VHTXLSPHQWZDVHVWLPDWHGDWC750 000, with no change in the
estimated useful life. Skype Limited recorded the revaluation in its accounting records on
1 October 20X5, using the net replacement value method. The revaluation surplus will be
transferred to retained earnings only on disposal of the asset.
Skype Limited depreciates the equipment over its useful life of ten years with a zero residual
value. The tax authority grants a tax allowance of 10% per annum.
All other assets and liabilities are considered to be fairly valued.
The trial balances of both companies at 30 September 20X7 are shown below:
366 Chapter 31
TRIAL BALANCES AT 30 SEPTEMBER 20X7

PHONE LIMITED SKYPE LIMITED
Dr Cr Dr Cr
Ordinary share capital 1 200 000 800 000
8% Preference share capital - 100 000
Revaluation surplus 213 000 177 500
Non-current borrowings - 180 000
Profit before interest expense and tax 383 600 289 600
Interest expense - 18 000
Property ± cost - 1 000 000
Property ± accumulated depreciation - 75 000
Equipment ± fair value 1 200 000 600 000
Equipment ± accumulated depreciation 0 0
Deferred taxation 65 250 58 000
Investment in Skype 1 100 000
Loan to Skype 120 000
Other investments - 120 000
Dividends - ordinary 20 000 16 000
Dividends - preference - 8 000
2 784 850 2 784 850 2 320 100 2 320 100

x Immediately after acquisition in October 20X5, Skype Limited declared and paid a dividend
of C50 000.
x The preference shares of Skype Limited are redeemable at the option of the company.
x 2Q 6HSWHPEHU ; WKH IDLU YDOXH RI 6N\SH /LPLWHG¶V HTXLSPHQW Zas estimated at
C600 000. The revaluation was recorded in the accounting records on that date and is
incorporated in the trial balance at 30 September 20X7.
x The property of Skype Limited as shown on the trial balance was purchased during the year
x 7KH UHYDOXDWLRQ UHVHUYH RQ 3KRQH /LPLWHG¶V WULDO EDODQFH DURVH IURP WKH UHYDOXDWLRQ RI
3KRQH/LPLWHG¶Vequipment at 30 September 20X5. On 30 September 20X7, the fair value
RI3KRQH/LPLWHG¶Vequipment was estimated to be equal to its carrying amount. The initial
revaluation was recorded in the accounting records on that date and is incorporated in the
trial balance at 30 September 20X7.
x The non-current borrowings of Skype Limited comprise:
- A loan from Phone Limited of C120 000, advanced on 1 October 20X5, at an interest
rate of 9% per annum.
- A loan from Investors Bank of C60 000, advanced on 1 October 20X6, at an interest
rate of 12% per annum.
x The directors of Skype Limited declared and paid the preference dividend for the year on
20 September 20X7. The directors declared an ordinary dividend of C16 000 on
25 September 20X7, payable during October 20X7. The dividend has been correctly
recorded in the accounting records of both companies.
Chapter 31 367
x The income tax expense has been correctly calculated for both companies at the company
tax rate of 29%.
Required:
a) Prepare all the journal entries in the accounting records of Skype Limited relating to the
equipment of Skype Limited, including tax consequences, for the year ended 30 September
20X7.
b) Prepare the at-acquisition, pro-forma consolidation adjusting entry relating to the ordinary
share capital of Skype Limited for the year ended 30 September 20X7.
c) Prepare the at-acquisition and current year pro-forma consolidation adjusting entries
relating to the preference share capital and preference dividends of Skype Limited for the
year ended 30 September 20X7.
d) Prepare the journal entry in the accounting records of Phone Limited and the pro-forma
consolidation adjusting entries relating to the ordinary dividends declared by Skype Limited
for the year ended 30 September 20X7.
e) Prepare the statement of comprehensive income of the Talk for Ever group for the year
f) Prepare the statement of changes in equity of the Talk for Ever group for the year ended
30 September 20X7.
Ignore comparatives for parts e) and f).
368 Chapter 31

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Question Key issues

1.9 - Legal backing for accounting standards

The International Accounting Standards Board is responsible for:

A draft accounting standard published by the International Accounting Standards Board

The IFRS Foundation is a not-for-profit, public interest organisation established to develop a

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Considering the fundamental qualitative characteristics of useful information in accordance with

a) 1 is true and 2 is false

According to the IASB Conceptual Framework definition of an asset

1. An asset is considered as a physical object

A liability is defined in the IASB Conceptual Framework as

According to The Conceptual Framework, prudence

1. is the exercise of caution when making decisions under conditions of uncertainty

The financial year end of Kay Limited is 31 December.

The following issues need to be considered:

The financial statements have not yet been finalised.

Question Key issues

a) C10 000 as a current asset and C20 000 as a non-current asset

The disclosure required in the financial statements at 31 December 20X4 is as follows:

a) Non-current liability of C100 000

According to IAS 1 Presentation of Financial Statements, which of the following should be

1. The number of shares in issue

Consider the following statements in relation to IAS 1, Presentation of Financial Statements:

1. Items that are material to users are presented separately.

Green Tea Limited distinguishes between current and non-FXUUHQWOLDELOLWLHVLQWKHFRPSDQ\¶V

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The following additional information is relevant:

Income tax expense 6 000

St Andrews Limited is a retailer listed on the Johannesburg 6HFXULWLHV([FKDQJH¶V$OW;/LVWLQJ

The trial balance of the company at 28 February 20X6 is shown below:

The following information is relevant:

The draft trial balance of Nordic Limited at 31 March 20X9 is as follows:

Question Key issues

4.1 Short questions Core concepts:

4.2 Orchard Calculating the transaction price involving:

4.3 Spry TP: involving a settlement discount (settlement discount is forfeited)

4.5 Space Part A: Contract is cancellable

4.6 Bob Construction Part A: Variable consideration

4.7 Macrobyte Collectability issues and expected credit losses

4.8 Matthew a) Identification of performance obligations

4.9 Alphabet Contract involves services over a 3-year period

4.10 Boutique Sale of goods involving:

Continued on the next page…

4.12 Marleybone TP: allocation of a discounted TP to POs in a bundle

4.14 Gold Part A:

4.16 TeraDrive Identification of performance obligations

4.17 Tech-People Advance payment

4.18 Wacol Store Part A: Customer loyalty programme ± issue of points

4.19 BlackRock Multiple performance obligations involving goods and services

4.20 Caravan Instalment sale transaction with significant financing component

Part A ± General aspects of IFRS 15

Part B ± Identifying the contract

Part C ± Determining the transaction price

Part D ± Allocating the transaction price

Part E ± Satisfying the performance obligations

Customer A Customer B Customer C Customer D

The appropriate discount rate, determined at contract inception, is 10%.

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