FAC3761/106/0/2022

Tutorial Letter 106/0/2022

International Financial Accounting

FAC3761

Year module

Department of Financial Accounting

IMPORTANT INFORMATION:
This tutorial letter contains important information about your module.
Please register on myUnisa, activate your myLife e-mail address and make sure
that you have regular access to the myUnisa module website, FAC3761-22-Y1,
as well as your e-tutor group site.

Note: This is an online module and, therefore, the study material is available
on myUnisa. However, in order to support you in your learning process,
you will also receive some study material in printed format.
 CONTENTS

Page

INTRODUCTION .................................................................................................................................... 3
LECTURERS AND CONTACT DETAILS .............................................................................................. 3
ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS ............................................................. 4

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 FAC3761/106

Dear Student

INTRODUCTION
In this tutorial letter we provide additional integrated questions and suggested solutions to further assist
you in preparing for test 3, test 4 and the examination. We suggest that you answer these integrated
questions under exam conditions. Once you have completed the integrated questions, you should
compare your answers with the suggested solutions. Your answers to these integrated questions
must not be submitted to Unisa. These integrated questions will indicate to you the standard required
of you in the examination and will help you to identify areas of weakness that you must pay attention to.

You will notice that some calculations are in brackets opposite certain items in the suggested solutions
dealing with company financial statements. These calculations are given for tuition purposes only and
do not form part of the statutory disclosure requirements.

LECTURERS AND CONTACT DETAILS

Please use only the following e-mail address for all communication with your lecturers:

FAC3761@unisa.ac.za

Please use only the following telephone numbers for communication with your lecturers:

Telephone
Lecturers Office
number
Ms R Horn Simon Radipere Building, 2-53 (012) 429 3287
Mr I Phaduli Simon Radipere Building, 2-46 (012) 429 3232

3
ADDITIONAL QUESTIONS AND SUGGESTED SOLUTIONS
This tutorial letter includes additional integrated Question 1 and Question 2 to assist in your
preparation for Test 3.
This tutorial letter further includes additional integrated Question 3 and Question 4 to assist in your
preparation for Test 4.
Note that the learning units examined in a test remains examinable for all subsequent tests and the final
year end examination. The questions in this tutorial letter therefore builds on all prior tutorial letters and
tests and prepares you for the upcoming tests and the examination. The integrated questions are
compiled as follows:

QUESTION SUBJECT MARKS

NO.

1 IAS 12, Income taxes; IAS 16, Property, plant and equipment; 40
IAS 40, Investment property and IFRS 15, Revenue from contracts
with customers.

2 IAS 12, Income taxes; IAS 16, Property, plant and equipment; 40
IAS 40, Investment property; IAS 38, Intangible assets and
IFRS 15, Revenue from contracts with customers.

3 IAS 12, Income taxes; IAS 16, Property, plant and equipment;
IAS 40, Investment property; IAS 38, Intangible assets; IFRS 15,
Revenue from contracts with customers; IAS 36, Impairment of
assets; IFRS 5, Non-current assets held for sale; IAS 37,
Provisions, contingent liabilities and contingent assets and IAS 8,
Accounting policies, changes in accounting estimates and errors.

4 IAS 12, Income taxes; IAS 16, Property, plant and equipment;
IAS 40, Investment property; IAS 38, Intangible assets; IFRS 15,
Revenue from contracts with customers; IAS 36, Impairment of
assets; IFRS 5, Non-current assets held for sale; IAS 37,
Provisions, contingent liabilities and contingent assets and IAS 8,
Accounting policies, changes in accounting estimates and errors.

The following abbreviations are used throughout the document:

CGT Capital gains tax
SARS South African Revenue Service
NCAHFS Non-current asset held for sale
IAS International Accounting Standard
SFP Statement of financial position
OCI Other comprehensive income
P/L Profit or loss
IFRS International Financial Reporting Standards
FOB Free on board

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 FAC3761/106

QUESTION 1 (40 marks)(72 minutes)

Verander Ltd is a large farming enterprise located in Mokopane, South Africa. Verander Ltd is the largest
producer of tomatoes, beetroot, and cabbages in the Southern African region. The company is listed on
the Johannesburg Stock Exchange (JSE) and has a 31 December year end.

1. The following information relates to the assets of Verander Ltd:

1.1. Property, Plant and Equipment note:

The intern bookkeeper of Verander Ltd presented you with the following property, plant and equipment
note to the annual financial statements of Verander Ltd for the year ended 31 December 2021. The
carrying amount, cost and accumulated depreciation amounts included in the note at the beginning of
the year was agreed to the closing amounts included in the annual financial statements for the year
ended 31 December 2020.

Note 1: Property, Plant and Equipment

Land Building Tractors
R R R
Cost 6 000 000 1 4 750 000 1 11 500 000 1
Accumulated depreciation (343 750)1 (296 875)4 (1 277 778)6
Carrying amount at the beginning of year 5 656 250 1 4 453 125 1 10 222 222 1
Revaluations 1 500 000 3
Disposals (3 400 000)7
Depreciation (275 000)2 (237 500)5 (1 916 667)8
Carrying amount at the end of the year 6 881 250 1 4 215 625 1 4 905 555 1
Gross carrying amount 7 500 000 1 4 750 000 1 8 100 000 1
Accumulated depreciation (618 750) (534 375) (3 194 445)

The intern bookkeeper also provided you with the following additional information in relation to the
preparation of the above property, plant and equipment note for the year ended 31 December 2021:

Land

Land was depreciated using the building’s estimated useful life and residual value and depreciation
commenced from 30 September 2019. The following calculations were provided:
1. [(6 000 000 – 500 000) / 20 X 1.25] = 343 750
2. [(6 000 000 – 500 000) / 20] = 275 000
3. (7 500 000 – 6 000 000) = 1 500 000

Building

The following calculations were provided:

4. ([(4 750 000 / 20) X 1.25] = 296 875
5. (4 750 000 / 20) = 237 500

Ploughing Tractors

The following calculations were provided:

6. [(11 500 000 X 1 200 / 9 000) X 10/12] = 1 277 778
7. 680 000 X 5 = 3 400 000
8. (11 500 000 X 1 500 / 9 000) = 1 916 667

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 QUESTION 1 (continued)
1.2. Property in Mookgophong

Verander Ltd acquired a property on 1 June 2019 at a cost price of R10 750 000 (land: R6 000 000;
building: R4 750 000) in Mookgophong. Management considers the land portion of the property to be
significant in relation to the total property. During June 2019, Verander Ltd paid an additional R250 000
in cash to customise the building and to ensure that it complies with set standards for good agricultural
practices.

The building was available for use, as intended by management on 30 June 2019 but Verander Ltd only
took occupation of the building on 30 September 2019. The building was estimated to have a useful life
of 20 years and a residual value of R500 000.

On 31 December 2021 an independent sworn appraiser, appointed by Verander Ltd, determined the fair
value of the land to be R7 500 000. The carrying value of the land did not differ materially from its fair
value on 31 December 2019 and 31 December 2020 respectively.

1.3. Ploughing tractors

On 28 February 2020, Verander Ltd acquired 10 ploughing tractors at a cost of R1 150 000 each. These
tractors were acquired to meet the increased demand of vegetables within the Southern African region.
At the acquisition date, the tractors had an estimated combined useful life of 9 000 kms and an
insignificant residual value. The tractors were available for use and brought into use on the acquisition
date.

During the 2021 financial year, the emergence of several young African farmers and border closures,
because of the Covid-19 pandemic led to a significant decrease in the demand for Verander Ltd’s
vegetables in Botswana, Malawi and Zambia. Consequently, Verander Ltd decided to sell 5 of its
ploughing tractors to generate additional cashflow for the business. Verander Ltd sold each tractor for
R680 000 on 31 December 2021. Management determined that the recoverable amount of each tractor
was greater than its carrying amount for the year ended 31 December 2021.

The tractors clocked a combined distance of 1 200 kms in 2020 and 1 500 kms in the 2021 financial
year. The kilometers were incurred evenly throughout the year by all the tractors.

2. The following information relates to specific revenue transactions of Verander Ltd:

2.1 Contract with Iponga Supermarket

On 1 March 2021, Verander Ltd entered into an agreement with Iponga Supermarket in Malawi to supply
cabbages at a price of R10 per cabbage. The agreement stipulated that if Iponga Supermarket buys
more than 100 000 cabbages in twelve months, the price is retrospectively reduced to R8,5 per cabbage.
At the time of the agreement and throughout the period when cabbage sales were made, it was expected
that Iponga Supermarket would qualify for the rebate.

On 31 December 2021, Iponga Supermarket had bought 85 000 cabbages, which was paid for in cash.
At year end Verander Ltd still estimated that the sales to Iponga Supermarket will exceed 100 000 by
28 February 2022.

2.2 Sale of tomatoes to Izwelethu

On 31 December 2021, Verander Ltd received a prepayment of R800 000 from Izwelethu Ltd for the
purchase of tomatoes. The tomatoes will be delivered to Izwelethu Ltd in two batches: one in
January 2022 and another in March 2022.

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 FAC3761/106

QUESTION 1 (continued)
2.3 Black Economic Empowerment deal with Kgotso Trading

On 1 September 2021, Verander Ltd entered a Black Economic Empowerment (BEE) deal with Kgotso
Trading wherein Verander Ltd would sell beetroot to the value of R6 000 000 to Kgotso Trading. The
contract stipulates that Verander Ltd makes a non-refundable payment of R1 250 000 to Kgotso Trading
at the inception of the contract. The upfront payment will assist Kgotso Trading in setting up its supply
chain and distribution networks. On 31 December 2021, Verander Ltd had sold beetroot to the value of
R2 800 000 to Kgotso Trading. At year end no payment had yet been received from Kgotso Trading for
the sales made during the year.

2.4 December promotional campaign

During December 2021, Verander Ltd ran a promotional campaign that offered its wholesale customers
a 15% discount on further vegetable purchases of R1 300 000 in January 2022. The 15% discount is
only available to customers who make vegetable purchases of R2 500 000 during December 2021. On
31 December 2021, four wholesale customers were eligible for the 15% discount voucher and each had
an outstanding balance of R2 500 000. Verander Ltd estimated that the four customers will redeem the
discount voucher in full.

3. Property in the Central Business District of Mokopane

Verander Ltd acquired a property in the Central Business District of Mokopane, on 1 June 2021 for
R3 500 000 (Land: R1 250 000; Building: R2 250 000). Verander Ltd decided to lease the property and
concluded lease agreements with various tenants. On request of the tenants, Verander Ltd modified the
building to improve access controls, prior to leasing it out. The modifications were completed on
1 August 2021 at a cost of R100 000. The modifications are considered capital of nature. Verander Ltd
earned rental income from 1 September 2021, of R323 000 per month and since acquisition of the
property incurred direct operating expenses of R189 000 per month in respect of the property. On
31 December 2021, an independent sworn appraiser determined the fair value of the property to be
R4 100 000 (Land: R1 350 000; Building: R2 750 000).

4. The following information relates to the accounting policies of Verander Ltd:

The following is an extract from the accounting policies of Verander Ltd:
 Owner-occupied land is accounted for using the revaluation model. It is the policy of the company
to realise any revaluation surplus upon disposal of the underlying asset to retained earnings. It is
company policy that revaluations will be made with sufficient regularity to ensure that carrying
amounts do not differ materially from which would be determined using fair values at the end of the
reporting period.
 Investment property is accounted for in accordance with the fair value model.
 Owner-occupied buildings and tractors are accounted for in accordance with the cost model.
 Depreciation on the buildings is provided for in accordance with the straight-line method over the
estimated useful lives of the assets.
 Depreciation on the tractors is provided for in accordance with the units of production method.

5. The following information relates to taxation:

 The South-African normal tax rate is 28%.
 Deferred tax is provided for on all temporary differences in accordance with the statement of financial
position approach. There are no other items causing temporary or exempt differences, except those
mentioned in the question. The company will have sufficient taxable profits and capital gains in the
future, against which any unused tax losses can be utilised.

6. Assumptions
 All amounts are material.
 Ignore the implications of Value-Added Tax (VAT).

7
QUESTION 1 (continued)
REQUIRED:

Marks
a) Critically discuss, with reasons, whether the property, plant, and equipment note was 17
correctly prepared by the intern bookkeeper of Verander Ltd for the financial year
ended 31 December 2021.

 Limit your discussion to the initial measurement, subsequent measurement,

derecognition and disclosure requirements for each class of asset.
 Discuss both correct and incorrect aspects of the accounting treatment and
disclosure requirements.
 Support all incorrect aspects of the accounting treatment and disclosure
requirements identified in the note with the correct accounting treatment or
disclosure requirement.
 Do not include calculations in your discussion.
 Do not discuss the casting and cross casting of the property, plant and equipment
note.

b) Prepare the general journal entries to recognise the revenue transactions in the 16
accounting records of Verander Ltd for the year ended 31 December 2021.

c) Disclose the following notes to the annual financial statements of Verander Ltd for the
year ended 31 December 2021:

 Deferred tax (relating to the revenue transactions only.) 4

Indicate in your note whether the deferred tax balance is a deferred tax asset or a
deferred tax liability.
Your deferred tax note does not have to include any qualitative disclosure.
Ignore comparative information.
 Profit before tax note (relating to investment property only) 3

Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Ignore comparative information
Show all calculations.
Journal dates and narrations are not required.
Round of all amounts to the nearest Rand.
40

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 FAC3761/106

SOLUTION QUESTION 1
a) Critical discussion: Property, plant and equipment note

The intern bookkeeper correctly performed a reconciliation of the carrying amount at the beginning and
end of the period for each class of asset.

Mookgophong property: Land

Correct / Incorrect Correct accounting treatment /

aspect disclosure requirement
Initial  Land was correctly measured at its
measurement initial purchase price of R6 000 000
on acquisition date.
Subsequent  The land portion of the Mookgophong  According to IAS 16.58, land has an
measurement property was incorrectly depreciated. unlimited useful life and is a non-
 The land was correctly revalued on depreciable asset.
31 December 2021 according to the
accounting policy of the company to
revalue land after its initial
recognition.
 The revaluation surplus of
R1 500 000 is correctly calculated
and disclosed.
Derecognition  Not applicable  Not applicable
Disclosure  The narrative disclosure information  The following narrative should be
requirements requirements for items stated at disclosed as part of the property,
revalued amounts as required by plant and equipment note:
IAS 16.77 was incorrectly not o The land was revalued by an
included in the note. independent sworn appraiser on
the 31 December 2021.
o The carrying amount of the land if
it was carried under the cost
model, could have amounted to
R6 000 000.

Mookgophong property: Building

Correct / Incorrect Correct accounting treatment /

aspect disclosure requirement
Initial  The building purchase price of
measurement R4 750 000 was correctly included
as part of the costs at initial
recognition.
 The R250 000 incurred to customise  The cost incurred to customise the
the building was incorrectly not Mookgophong building is directly
capitalised as part of the costs at attributable to getting the building to a
initial recognition. condition necessary for it to be
capable of operating as intended by
management and as a result should
be capitalised to the cost of the
building.

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 SOLUTION 1 (continued)
Mookgophong property: Building (continued)

Correct / Incorrect Correct accounting treatment /

aspect disclosure requirement
Subsequent  Due to the error at initial
measurement measurement of the building, the
accumulated depreciation and
current year depreciation amounts
are incorrect.
 The intern bookkeeper incorrectly  The building was available for use as
used 15 months (1.25 years) instead intended by management on the
of 18 months (1.5 years). 30 June 2019 and in accordance with
Depreciation on the building should IAS 16:55, depreciation of an asset
begin from 30 June 2019 instead of begins when the asset is available for
30 September 2019 which is the use.
date the building was brought into
use by Verander Ltd.
 The residual value amounting to  According to IAS 16.53 the
R500 000 of the building was depreciable amount of an asset is
incorrectly excluded from the determined after deducting its residual
depreciation calculation. value.
 The intern bookkeeper correctly
used the building useful life of
20 years in both the accumulated
depreciation and current year
depreciation calculations.
Derecognition  Not applicable  Not applicable
Disclosure  Not applicable  Not applicable
requirements

Ploughing tractors

Correct / Incorrect Correct accounting treatment /

aspect disclosure requirement
Initial  The tractors were correctly
measurement measured using their purchase price
(10 x R1 150 000) at initial
recognition.
Subsequent  The intern bookkeeper incorrectly  According to IAS 16.62 the units of
measurement apportioned the 2020 depreciation production method results in a charge
on the tractors by the number of based on the expected use or output.
months the tractors were in use by
Verander Ltd (in the year the tractors
were available for use).
 The initial cost of the ploughing
tractors was correctly used in the
calculation of both accumulated
depreciation and current year
depreciation amounts.

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 FAC3761/106

SOLUTION 1 (continued)
Ploughing tractors (continued)

Correct / Incorrect Correct accounting treatment /

aspect disclosure requirement
Subsequent  The accumulated depreciation and
measurement current year depreciation amounts
were correctly calculated using the
total kms travelled in the respective
years as a percentage of the total
kms.
Derecognition  The 5 tractors disposed of in the  The tractors should have been
current financial year was incorrectly derecognised using their carrying
derecognised using the proceeds amounts on the disposal date.
received amount.
Disclosure  Not applicable  Not applicable
requirements

Overall conclusion:

Due to all the mistakes made by the intern bookkeeper in the property, plant and equipment note, the
carrying amounts at year end of all assets in the note are incorrect.

b) Journal entries: Revenue transactions

Debit Credit
R R
Bank (SFP)1 850 000
Revenue (P/L)2 722 500
Refund liability (SFP)3 127 500
Recognition of sales of 85 000 cabbages considering the rebate for the
contract with Iponga Supermarket (information 2.1).
1. 85 000 x 10 = 850 000
2. 85 000 x 8,5 = 722 500
3. 85 000 x 1,5 = 127 500

Bank (SFP) 800 000

Contract liability / Income received in advance (SFP) 800 000
Recognition of contract liability for the sale of tomatoes that will be
delivered after year to Izwelethu Ltd (information 2.2).

Contract asset: prepayment (SFP) 1 250 000

Bank (SFP) 1 250 000
Recognition of non-refundable payment to Kgotso Trading (information
2.3).

Accounts receivable (SFP) 2 800 000

Revenue (P/L)4 2 216 667
Contract asset: prepayment (SFP)5 583 333
Recognition of percentage of accounts receivable and revenue based on
the reduced transaction price for the contract with Kgotso Trading
(information 2.3).
4. (6 000 000 – 1 250 000) x (2 800 000 / 6 000 000) = 2 216 667
5. 1 250 000 x (2 800 000 / 6 000 000) = 583 333

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 SOLUTION 1 (continued)

Debit Credit
R R
Accounts receivable (SFP)6 10 000 000
Revenue (P/L)7 9 276 438
Discount liability / Contract liability / Income received in advance
(SFP)8 723 562
Recognition of 15% future discount performance obligation and revenue
based on the stand-alone selling price for the December promotional
campaign (information 2.4).
6. 2 500 000 x (2 500 000 / 2 695 000)7.1 x 4 customers = 9 276 438
7. 2 500 000 x (195 000 / 2 695 000)7.1 x 4 customers = 723 562
7.1 Performance obligations Calculations Total
R
Vegetables stand-alone selling price 2 500 000 2 500 000
Discount voucher stand-alone selling price (1 300 000 X 15%) 195 000
2 695 000

c) Disclosure notes: Deferred tax and Profit before tax

Verander Ltd
Notes to the annual financial statements for the year ended 31 December 2021.

1. Deferred tax
R
Refund liability 35 700
Contract liability / Income received in advance (224 000 + 202 597) 426 597
Contract receivable / Prepayment (186 667)
Deferred tax asset 275 630

2. Profit before tax

R
Income
Fair value adjustment (4 100 000 – 3 600 000w4) 500 000
Rental income from investment property (323 000 x 4months) 1 292 000

Expenses
Direct operating expenses from investment property earning rental income
(189 000 x 7months) 1 323 000

Calculations: Deferred tax

Taxable / Deferred tax
(deductible) asset/
Carrying Tax temporary (liability)
@
amount base difference 28%
R R R R
Refund liability 127 500w1 –C1 (127 500) 35 700
Contract liability / Income received in 800 000w1 –C2 (800 000) 224 000
advance
Contract receivable / Prepayment 666 667w2 –C3 666 667 (186 667)
Discount / Contract liability / Income 723 562w3 –C4 (723 562) 202 597
received in advance

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 FAC3761/106

SOLUTION 1 (continued)
w1 85 000 x R1,5 = 127 500 (refer (b))
C1 Tax base of the refund liability = carrying amount (R127 500) less any amount that will be deductible
for tax purposes in future (R127 500 will be tax deductible when the amount is refunded to the
customer by way of a rebate)
C2 Tax base of income received in advance = carrying amount (R800 000) less any of the revenue that
will not be taxable in future periods (R800 000 is taxed in the current year and therefore not taxable
in future periods)
w2 1 250 000 – 583 333 = 666 667 (refer (b))
C3 Tax base of contract receivable = amount that will be deductible for tax purposes against any taxable
economic benefits when it recovers the carrying amount of the asset (The full prepayment of
R1 250 000 is deducted in the current year and therefore no amount related to the contract
receivable is deductible in future periods)
w3 Stand-alone selling prices:
Calculation of the total transaction price
R180 890,50 x 4 customers= R723 562 (refer (b))
C4 Tax base of income received in advance = carrying amount (R723 562) less any of the revenue that
will not be taxable in future periods (The full invoice amount of R2 500 000 is taxed in the current
financial year irrespective of the allocation thereof for accounting purposes)

Calculations: Profit before tax

w4 3 500 000 + 100 000

13
 QUESTION 2 (40 marks)(72 minutes)
Vhurivhuri Ltd (“Vhuri”) is a vehicle manufacturing company based in East London, South Africa. Vhuri
was founded by two vibrant young entrepreneurs who wanted to create environmentally friendly
vehicles. Due to increased global emphasis on reducing carbon emission, Vhuri has experienced
significant growth over the past 5 years. Vhuri has a 31 March year end.

1. Revenue

Vhuri has seen notable growth in the sale of its flagship vehicle, the VH200 microbus. The VH200
microbus is sold for R1 500 000 each. Each VH200 microbus is sold with a normal 90 000 km service
component which can be sold separately by Vhuri for R10 000 per 15 000 km intervals.

The following information relates to some of Vhuri’s revenue transactions during the current financial
year:

1.1. Revenue transaction 1

On 1 May 2020, Vhuri entered a lucrative contract with the government of Uganda to supply the
Ugandan police department with Vhuri’s latest VH200 microbuses. The signed contract stipulated that
Vhuri would supply 10 VH200 microbuses to the Ugandan government, annually, for the next 5 years.
The contract further stipulated that Vhuri would be responsible for the servicing of the microbuses in
intervals of 15 000 kms for a total of 90 000 kms.

As at 31 March 2021, Vhuri had only been able to deliver 5 VH200 microbuses to the Ugandan
government due to supply disruptions as a result of the Covid 19 pandemic. As at 31 March 2021, the
Ugandan government had not made payment to Vhuri.

1.2. Revenue transaction 2

On 1 September 2020, Vhuri sold 50 VH200 microbuses, to Zwakanaka Plc, a company based in
Senegal. Zwakanaka paid the full invoice amount of R75 000 000 to Vhuri on 1 October 2020. Due to
the Covid 19 pandemic, Senegal closed its borders for all international travelers and importation of non-
essential goods. The microbuses were considered non-essential goods and Zwakanaka requested that
Vhuri keep the microbuses at its warehouse until the Senegalese borders are opened. Zwakanaka
agreed to insure the microbuses whilst they are kept at Vhuri’s warehouse. In addition, Zwakanaka
accepted legal title of the microbuses on 1 October 2020, the date on which the microbuses were ready
for shipment to Zwakanaka. As at 31 March 2021, the Senegal borders were still closed.

1.3. Revenue transaction 3

On 1 March 2021, Vhuri entered a manufacturing deal with Yangtze, a company based in Thailand. The
company requested Vhuri to manufacture 5 custom-made left-hand drive VH200 microbuses. On
1 March 2021, Yangtze paid the full invoice amount of R7 500 000. On 31 March 2021, Vhuri was still
in the process of manufacturing the order. Vhuri expects to ship the microbuses, free on board, on
1 May 2021.

2. Property in Mashishing

To diversify their business portfolio, Vhuri’s board of directors resolved to acquire an apartment block in
Mashishing. Vhuri acquired the property in Mashishing on 1 October 2019 at a cost of R6 500 000 (land:
R500 000; building R6 000 000). The property was acquired with the intention to rent out to students
who attend the Mashishing College. The ancillary services offered by Vhuri to the tenants of the property
are considered insignificant. At acquisition, the building had an estimated useful life of 20 years and a
residual value of R1 500 000. The building was available for use, as intended by management, and
brought into use at acquisition date.

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QUESTION 2 (continued)
An independent sworn appraiser provided Vhuri with the following fair values for the property for the
respective financial year ends:
31 March 2021 31 March 2020
R R
Land ........................................................................................... 750 000 600 000
Building ...................................................................................... 5 500 000 6 500 000

3. Electric motor management system software

On 1 December 2019, Vhuri placed an order for computer equipment at a cost of R500 750 to be used
in the development of their Electric Motor Management System (EMMS) software The computer
equipment was delivered on 1 February 2020 and on that date, it was available for use, as intended by
management. On 1 February 2020 the useful life of the computer equipment was estimated to be 4
years and a residual value of R132 750 was allocated to it.

On 1 March 2020, Vhuri commenced with research on their EMMS Software. The research phase was
completed on 30 September 2020. On 30 September 2020 the management of the company concluded
that the definition and the criteria for intangible asset recognition were met and approved the
development of the electric motor management system software. Development of the software
commenced on 1 October 2020 and was completed on 31 December 2020. Vhuri was able to
demonstrate compliance with all the requirements as set out in IAS 38.57 during the development
phase. The EMMS software was available for use, as intended by management, on 1 January 2021 and
on that date, the estimated useful life of the EMMS software was estimated to be 5 years with an
insignificant residual value allocated to it.

The following costs were evenly incurred during the research and development phase of the electric
motor management system software:
 Two Information Technology (IT) programme developers were employed full time by Vhuri and were
involved in both the research and development phase. The salary per IT programme developer
amounted to R65 000 per month.
 Two IT technicians joined the research and development project from 1 March 2020 until the
development of the software was completed. The two technicians were contracted specifically for
the project and the total contract fees amounted to R700 000 for the period.
 The computer equipment was only used in the development phase of the project.

4. Dividends

The issued share capital of Vhuri consists of 500 000 ordinary shares of R2 each. On 25 March 2021
the directors declared a dividend of 10 cents per share for the year ended 31 March 2021. The dividends
as well as the dividend tax were paid on 10 April 2021. All the shareholders of Vhuri are natural persons.
The dividends are subject to dividends tax of 20%. The dividend transaction has not been recorded yet
in the accounting records of Vhuri for the year ended 31 March 2021.

15
 QUESTION 2 (continued)
Additional information

The finance manager revisited the company’s accounting policies and found the following extract from
the accounting policies of Vhuri:
 Investment property is accounted for using the fair value model in accordance with IAS 40,
Investment properties. The carrying amount of investment property will be recovered through sale.
 Property, plant and equipment and intangible assets are accounted for using with the cost model.
 Depreciation and amortisation are written off in accordance with the straight-line method over the
assets’ estimated useful lives.

REQUIRED:

Marks
a) Draft a memorandum, addressed to the Chief Financial Officer of Vhurivhuri Ltd, 23
advising on the correct recognition and measurement of revenue transactions 1 to 3.

You may assume that the revenue transactions above met all the criteria for
identifying the contract with the Ugandan government, Zwakanaka Plc and Yangtze
respectively. Identifying the contract (step 1) must not be discussed in the
memorandum.
Support your discussion with calculations.
b) Disclose information (2) and (3) above in the following notes to the annual financial
statements of Vhurivhuri Ltd for the year ended 31 March 2021:

 Profit before tax 4

 Investment property 3½
 Intangible asset 5½

Comparative information is not required.

c) Prepare the general journal entries to correctly account for the dividend declared on 4
25 March 2021 in the accounting records of Vhurivhuri Ltd for the year ended
31 March 2021.
Note:

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Accounting policy notes are not required.
Comparative information is not required.
Show all calculations.
Journal dates and narrations are not required.
Round of all amounts to the nearest Rand.
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 FAC3761/106

SOLUTION QUESTION 2
a. Memorandum: Revenue recognition and measurement

To: Chief Financial Officer

From: FAC3761 student
Date: 16 August 2021
Re: The correct recognition and measurement of Vhurivhuri Ltd’s revenue transactions

The memorandum details the steps that must be followed to meet the objective of recognising
revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for goods or services. These
steps and the application thereof on the revenue transactions will be discussed below.

Step 2 requires the identification of the performance obligations. Performance obligations

should be identified at contract inception as each promise to transfer to the customer either:

a. a good or service that is distinct; or

b. a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.

The performance obligations for the revenue transactions 1 – 3 can be identified as the promise to
transfer the VH200 microbus (good) and the service plan (service).

Step 3 requires the determination of the transaction price. The transaction price is the amount
of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer (excluding amounts collected on behalf of third parties).

The transaction price for the revenue transactions 1 – 3 can be calculated as follows:
R
Transaction 1 (R1 500 000 x 10 units x 5 years) 75 000 000
Transaction 2 (given) (R1 500 000 x 50 units) 75 000 000
Transaction 3 (given) (R1 500 000 x 5 units) 7 500 000

Step 4 requires the allocation of the transaction price to the identified performance
obligations. The transaction price should be allocated to each performance obligation in an amount
that depicts the amount of consideration to which the entity expects to be entitled in exchange for
transferring the promised goods or services to the customer. To achieve this, the transaction price
should be allocated to each performance obligation identified in the contract on a relative stand-
alone selling price basis.

 The stand-alone selling price for a 90 000 km service plan is R60 000 (90 000km service plan / 15 000km
service intervals x R10 000 separate selling price per 15 000 km service interval).
 The stand-alone selling price for the VH200 microbus needs to be determined (information not
given in the question). The best evidence of the stand-alone selling price is the observable price
of a VH200 microbus sold without the service plan. If, however a stand-alone selling price is not
directly observable, then Vhuri must estimate the stand-alone selling price of the performance
obligation.
Step 5 recognises revenue when or as the entity satisfies a performance obligation by
transferring a promised good or service to a customer. A promised good or service (an asset)
is transferred when (or as) the customer obtains control of that asset.

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SOLUTION 2 (continued)
An entity transfers control of a good or service over time and, therefore, satisfies a performance
obligation and recognises revenue over time, if one of the following criteria is met:
a. The entity simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b. The entity’s performance creates or enhances an asset (work in progress) that the customer
controls as the asset is created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date (IFRS 15.35).

If a performance obligation is not satisfied over time, an entity satisfies that performance obligation
at a point in time. Vhuri must determine the point in time at which a customer obtains control of a
promised asset and when they satisfy a performance obligation and consider the requirements for
control and the indicators of the transfer of control.

The above criteria can be applied as follows to the performance obligations of the revenue
transactions 1 – 3:

The performance obligation to perform the 90 000 km service plan (transaction 1 – 3) is satisfied
over time as the customer simultaneously receives and consumes the benefits provided by Vhuri’s
performance as they perform.

The detail regarding the method for measuring progress towards complete satisfaction is not
mentioned in the information and therefore needs to still be considered as the standard does provide
guidance in this regard.

The performance obligation, being a series of distinct VH200 microbuses that are substantially the
same and that have the same pattern of transfer to the Uganda government (transaction 1) is
satisfied over time as the customer is considered to simultaneously receive and consume the benefits
provided by the entity’s performance as the entity performs. This is evidenced by the fact that if
another entity were to complete Vhuri’s outstanding performance obligations, they would not have
to substantially reperform the work Vhuri has already done.

The detail regarding the method for measuring progress towards complete satisfaction is not
mentioned in the information and therefore needs to still be considered as the standard does provide
guidance in this regard.

The performance obligation to transfer the VH200 microbuses to the Zwakanaka Plc (transaction 2)
is satisfied at a point in time. In addition to the requirements for control and the indicators of the
transfer of control the requirements of a bill-and-hold transaction should also be considered. The
following criteria must all be met for a customer to have obtained control of a product in a bill-and-
hold arrangement:

a. The reason for the bill-and-hold arrangement must be substantive (the customer has requested
the arrangement).
b. The product must be identified separately as belonging to the customer.
c. The product currently must be ready for physical transfer to the customer.

The entity cannot have the ability to use the product or to direct it to another customer (IFRS 15.B81).

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 FAC3761/106

SOLUTION 2 (continued)
Based on the above bill-and-hold arrangement criteria, the sale of the 50 VH200 microbuses to
Zwakanaka Plc is a bill-and-hold arrangement, because:
a. Zwakanaka Plc requested the arrangement as the Senegal borders remain closed for imports
(substantive reason);
b. the microbuses are stored in their warehouse until the Senegalese borders are opened and as
such are assumed to have been separately identified;
c. The information indicates that the microbuses were ready for shipment on 1 October 2020 and
therefore they are ready for physical transfer to the customer; and
d. Zwakanaka Plc accepted legal title and insured the 50 microbuses and therefore it is assumed
that the microbuses cannot be directed to another customer.

The performance obligation to transfer the custom-made left-hand drive VH200 microbus to Yangtze
(transaction 3) is satisfied at a point in time as the custom-made manufacturing performance create
an asset with an alternative use to the entity. This is assumed based on the information that the
selling price was not adjusted to account for the customization, indicating that the creation of the
asset would have an alternative use to the entity and that the rework (for example to a right-hand
drive VH200 microbus) would not be significant. Vhuri is still busy manufacturing these VH200
microbuses and therefore has not yet satisfied any performance obligations in terms of this contract.

As noted, some of the information is still outstanding and if you want to discuss the treatment of
these transaction when the information is available, I am willing to again assist.
Regards,
Signed

LECTURER’S COMMENT
Revenue transaction 1 can alternatively be interpreted as not being satisfied over
time based on the terms of the contract and if it is found to not comply with any of
the criteria to be recognised over time, then by default the performance
obligations will be satisfied at a point in time. Vhuri must then determine the point
in time at which a customer obtains control of a promised asset and when they
satisfy a performance obligation and consider the requirements for control and
the indicators of the transfer of control.

b. Disclosure notes: Profit before tax, Investment property and Intangible asset

VHURIVHURI LTD
NOTES FOR THE YEAR ENDED 31 MARCH 2021.
1) Profit before tax
Profit before tax is calculated after the following
Expenses
Fair value adjustment (7 100 000 – 6 250 000) (refer below Investment property note) 850 000
Research costs 1 400 000
Amortisation, included in cost of sales 31 150
Depreciation [(500 750 – 132 750) / 4years] – 23 000 69 000

2) Investment property
Carrying amount at the beginning of the year (600 000 + 6 500 000) 7 100 000
Fair value adjustment (7 100 000 – 6 250 000) (850 000)
Carrying amount at the end of the year (750 000 + 5 500 000) 6 250 000
The fair value of the investment property as disclosed in the financial statements was based on a
valuation performed on the 31 March 2021 by an independent sworn appraiser.

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 SOLUTION 2 (continued)
3) Intangible asset
Internally
generated:
Software
R
Carrying amount at the beginning of the year -
Cost -
Accumulated amortisation -
Capitalisation of development cost 623 000
Amortisation, included in cost of sales (31 150)
Carrying amount at the end of the year 591 850
Cost 623 000
Accumulated amortisation (31 150)

Calculations: Internally generated software

R
Research: 1 March 2020 – 30 September 2020 = 7 months
IT programme developers: (2 x R65 000 x 7months) 910 000
IT technicians (R700 000 / 10months x 7months) 490 000
Total research costs expensed 1 400 000

Development: 1 October 2020 – 31 December 2020 = 3 months

IT programme developer: (2 x R65 000 x 3months) 390 000
IT technicians (R700 000 / 10months x 3months) 210 000
Depreciation [(R500 750 – R132 750) / 48months x 3months] 23 000
Total cost capitalised 623 000
Amortisation (R623 000 / 60 months x 3months) (31 150)
Carrying amount 31 March 2021 591 850

c. Prepare: Dividend journal entries

Dividends paid/declared (Equity) (500 000 x R0,10) 50 000
SA Revenue Service (SARS) / dividend tax payable (SFP) 10 000
(50 000 x 20%)
Shareholders for dividends/ dividends payable (SFP) 40 000
Recognition of dividends paid and dividends tax withheld for the year
ended 31 March 2021

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 FAC3761/106

QUESTION 3
QUESTION 3 will be released as part of Official Study Material on myUnisa as Tutorial Letter 106 (Both)
for FAC3761

SOLUTION QUESTION 3
SOLUTION QUESTION 3 will be released as part of Official Study Material on myUnisa as Tutorial
Letter 106 (Both) for FAC3761

QUESTION 4
QUESTION 4 will be released as part of Official Study Material on myUnisa as Tutorial Letter 106 (Both)
for FAC3761

SOLUTION QUESTION 4 (continued)

SOLUTION QUESTION 4 will be released as part of Official Study Material on myUnisa as Tutorial
Letter 106 (Both) for FAC3761

©
UNISA 2022
FAC3761_2022_TL_106_0_B.doc

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