FAC 3701 EXAM PACK 2017 PDF

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FACEXAM PACKGENERALFINANCIALREPORTINGSOLUTION 1: CONCEPTUAL FRAMEWORK,ACCOUNTING POLICIES, CHANGES INACCOUNTING ESTIMATES & ERRORS, INCOMETAXES, PROVISIONS, CONTINGENT LIABILITIESAND CONTINGENT ASSETS & REVENUEPART A(a) Liability in respect of network airtime(i) The resulting from rent recei...

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FAC3701 EXAM PACK

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GENERAL FINANCIAL REPORTING

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OCTOBER – NOVEMBER 2017

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SOLUTION 1: CONCEPTUAL FRAMEWORK, ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS, INCOME TAXES, PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS & REVENUE PART A

(a)

Liability in respect of network airtime

(i) The resulting from rent received in advance will result in a performance obligation. This performance obligation should be quantified and recognised as a liability if it fits into the definition of a liability in terms of the Conceptual Framework (par 4.4(b)) and if it meets the recognition criteria. (ii)

A liability is  a present obligation;  arising from past events; and  The settlement of which is expected to result in an outflow from the entity of economic benefits.

(iii) Test whether a liability exists (application of components of definition).  There is a present obligation because of a past event. The past event is the rental that has been received in advance. This creates a present obligation hat the entity cannot avoid in future.  It is probable that an outflow of economic benefits will be required to settle the obligation, as the entity has to provide to provide accommodation with respect to rental received.  It should be possible to make a reliable estimate of the amount of the obligation, as the rental paid is known, and it might be assumed that the tenant will make use of the accommodation. (iv) Conclusion A liability exists in respect of the rental prepaid. There is, however, certainty about the the length of the period paid for (July 2017). Therefore, the liability should be classified as a liability.

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(b) FURPAWS LTD CALCULATION OF THE CORRECT PROFIT BEFORE TAX IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017

Provisional profit before tax Rental Income Change in accounting estimate Corrected profit before tax

(45 000 − 15 000) 3

R 895 000 35 000 10 000 940 000

(c) FURPAWS LTD CALCULATION OF CURRENT TAX EXPENSE IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017 R 940 000

Profit before tax Exempt Differences Foreign Income Penalty on late submission of PAYE return Capital profit on sale of machinery (650 000 − 567 000) ∗ 20%

(312 400) (301 000) 5 200 (16 600)

Profit after exemptions Temporary Differences Allowance for credit losses – accounting Allowance for credit losses – SARS (17 000 ∗ 25%) Depreciation on delivery vehicles Profit on sale of machinery (567 000 − 396 600) Prepaid expenses – 2016 Rent income prepaid – 2017 Recoupment on sale of machinery (567 000 − 226 800) Change in accounting estimate – depreciation Capital allowances – delivery vehicles (438 000 − 219 000)

627 600 650 750 17 000 (4 250) 172 200 (170 400) 32 000 55 000 340 200 (10 000) 219 000

Taxable Income

1 278 350

Income tax at 28%

357 938

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(d) FURPAWS LTD CALCULATION OF THE DEFERRED TAX BALANCE FOR THE YEARS ENDED 30 JUNE 2017 Carrying Amount 2017 Allowance for credit losses Income prepaid Delivery vehicles

17 000 55 000 369 4001

Tax Base

4 250 219 000

Temporary Difference

Deferred Tax Asset / (Liability) at 28%

12 750 55 000 150 400

3 570 15 400 (42 112)

Deferred tax liability

23 142 Deferred Tax Asset / (Liability) at 29%

2016 Prepaid expenses Delivery vehicles Machinery

32 000 531 600 396 900

438 000 226 800

32 000 93 600 (170 100)

(9 280) (27 144) (49 329)

Deferred tax liability

85 753

Calculations 1. (359 400 + 10 000) = 369 400 (e) FURPAWS LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 INCOME TAX EXPENSE Major components of tax expense R 357 938 (62 611) (59 654) (2 957)

Current tax expense – current year (c) Deferred tax expense Current [(85 753 − 23 142 − 2 957)

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Change in tax rate (d) (85 753 ∗ Foreign tax

1 29

) 60 200 355 527

(f) FURPAWS LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 1. Profit before tax Included in depreciation for 2017 is a change in estimate resulting in a decrease in depreciation in delivery vehicles for the current year of R10 000 (172 200 – 162 200) that arose from the decision to change the remaining residual value of delivery vehicles in the current year from R15 000 to R45 000. This change will result in a decrease of depreciation in future periods of R20 000(10 000 ∗ 2). 2. Contingent Liability On 25 May 2017 a claim of R25 000 was instituted against Furpaws Ltd by Mr. Bulldog. The claim relates to a claim by Mr. Bulldog for emotional suffering allegedly resulting from the death of his dog which he claims to have died after eating contaminated food manufactured by Furpaws Ltd. The legal advisors of Furpaws Ltd are of the opinion that it is not probable that the Mr. Bulldog will be successful with his claim against the company as all the dog food manufactured by the company is subjected to strict quality control procedures before being distributed to the retailers and Mr. Bulldog`s dog had reportedly experienced health problems in the past. (g) FURPAWS LTD GENERAL JOURNAL Date 2017 May 31

Details

Debit R

Dividends (SOCIE) SARS – Dividends tax payable (SFP) (250 000 ∗ 80% ∗ 15%) Dividends payable (SFP) (250 000 − 20 000)

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Credit R

250 000 30 000 220 000

PART B 1. 5 2. 4 3. 3 4 400 000

4. 2 ( 11 000 000 ∗ 16 000 000) = 𝟔 𝟒𝟎𝟎 𝟎𝟎𝟎 5. 2 SOLUTION 2: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS, EVENTS AFTER THE REPORTING PERIOD, INCOME TAXES, PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS. FAIR VALUE MEASUREMENT & REVENUE (a) LADUMA LTD GENERAL JOURNAL Date

Details

Debit

Credit R

R 2016 September 1

2017 August

2017 August 2017 August

Bank (SFP) Revenue (P / L) Contract Liability (SFP)

752 400 699 732 52 668

31 Contract Liability (SFP) (52 668 1) 8 Revenue (P / L)

6 584 6 584

31 Lease payment – onerous contract (P / L) Provision for onerous contract (SFP)

258 000

31 Credit losses (P / L) (250 000 ∗ 0.80) Trade receivables / Wellcox Ltd (SFP)

200 000

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258 000

200 000

Calculations Stand alone Price

Allocation in percentage

R 718 890 54 110 773 000

Sale of machine Service Plan

% 93 7

Allocation of the transaction price R 699 732 52 668 752 400

(b) LADUMA LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2017 1. Contingent asset On 25 August 2017, a claim of R1 250 000 was instituted by Laduma Ltd against transport contractors. The claim relates to damage to Laduma Ltd`s heavy duty machinery whilst it was being loaded on the delivery trucks of the contractors. According to the company’s legal advisors it is probable but not virtually certain that the claim will succeed as the delivery staff of the contractors were careless when they loaded the heavy duty machinery on the delivery trucks. 2. Change in accounting policy During the year the company changed its accounting policy in respect of the valuation of inventory from the weighted average method to the first-in, first-out method in order to give a realistic presentation of the effect of inflation on the company`s profit. This change in accounting policy has been accounted for retrospectively and the comparative amounts have been appropriately restated. The effect of the change is as follows:

Decrease in cost of sales [(42 300 − 23 500); (23 500 − 16 000)] Increase in current tax [(18 800 ∗ 28%); (7 500 ∗ 28%)] Increase in profit Increase in inventory Increase in current tax liability [(42 300 ∗ 28%); (23 500 ∗ 28%); (16 000 ∗ 28%) Increase in equity Increase in retained earnings at beginning of year

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2017 R 18 800 (5 264) 13 536

2016 R 7 500 (2 100) 5 400

2015 R

42 300

23 500

16 000

(11 844) 30 456

(6 580) 16 920

(4 480) 11 520

16 920

11 520

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3. Prior year error Correction of medical contributions paid on behalf of members incorrectly accounted for as accounts receivable instead of salaries and wages. The comparative amounts have been appropriately restated. The effect of this error on the results of 2015 & 2016 is as follows:

Increase in salaries and wages Decrease in tax expense [(450 900 ∗ 28%); (410 000 ∗ 28%)] Decrease in profit

2016 R 450 900 (126 252) 324 648

2015 R 410 000 (114 800) 295 200

Decrease in trade receivables Decrease in current tax due / SARS Revenue Service Decrease in equity

450 900 (126 252) 324 648

410 000 (114 800) 295 200

(c) An entity must not adjust the amounts recognised in its financial statements to reflect nonadjusting events after the reporting period. An example of a non-adjusting event after the reporting period is a decline in market value of investments between the reporting period and the date when the financial statements are authorised for issue. The decline in fair value does not normally relate to the condition of the investments at the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognised in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the reporting date, although it may need to give additional disclosure. Where non-adjusting events after the reporting period are of such importance that nondisclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions, an entity must disclose the following information for each significant category of non-adjusting event after the reporting period: (a) The nature of the event (decline in market value of investments); and (b) An estimate of its financial effect(460 000 − 230 000) = 230 000, or a statement that such an estimate cannot be made.

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(d) LADUMA LTD CALCULATION OF THE DEFERRED TAX BALANCE FOR THE YEARS ENDED 31 AUGUST 2017 Carrying Amount

Provision for onerous contract Contract liability (52 668 − 6 584)

258 000 46 084

Deferred tax asset

Tax Base

Temporary Difference

-

258 000 46 084

Deferred Tax Asset / (Liability) at 28% 72 240 12 904 85 144

(e) (1). Cost approach (2). Fair value (1 020 000 + 54 600) = 𝟏 𝟎𝟕𝟒 𝟔𝟎𝟎

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MAY – JUNE 2017

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SOLUTION 1: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS, INCOME TAXES, PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS & REVENUE (a) (1) The performance obligation are the award credits (loyalty points entitling the client to discount on redemption) and supply of gold earrings. (2) Stand alone Price

R 720 000 30 000 750 000

Gold earrings Award Credits (6 ∗ 5 000)

Allocation in percentage

% 96 4

Allocation of the transaction price R 691 200 28 800 720 000

(3) A good or service that is promised to a customer is distinct if both of the following are met: (a) The customer can benefit from the good or service either on their own or together with other resources that are readily available to the customer (the points and the gold earrings can be acquired alone or they can be acquired as a combination). (b) The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract) (IFRS 15 .27) (the promise for points can be separately identified as points are valued separately at one point for R144 of purchase and can be redeemable separately on future purchases whilst the gold earrings can also be transferred separately).

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(b) DESIGNER LTD GENERAL JOURNAL Date 2016 June 30

Details

Debit R

Inventory (SFP) Cost of Sales (P / L)

Credit R

38 000 38 000

(c) DESIGNER LTD CALCULATION OF THE CORRECT PROFIT BEFORE TAX IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016

Provisional profit before tax 4 000 Revenue [691 200 + ( ∗ 28 800) 4 500

Cost of Sales (720 000 ∗

100

) Change in accounting estimate (38 000 − 25 000) Corrected profit before tax 125

R 846 000 716 800 (576 000) 13 000 999 800

(d) DESIGNER LTD CALCULATION OF CURRENT TAX EXPENSE IN THE STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2016 R 999 800

Profit before tax Exempt Differences Foreign Income VAT Penalties Dividends received Depreciation – administration

(415 000) (450 000) 25 000 (80 000) 90 000

Profit after exemptions Temporary Differences

584 800 213 450

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Allowance for credit losses – accounting Allowance for credit losses – SARS (32 000 ∗ 25%) Depreciation on delivery vehicles Loss on delivery vehicle written off Revenue: accounting Revenue: SARS Provision for warranty costs (488 000 − 128 000) Actual repair costs incurred (296 000 − 128 000) Scrapping allowance on disposal of delivery vehicle (85 000 − 80 000) Change in accounting estimate – accounting Change in accounting estimate – SARS Capital allowances – delivery vehicles

32 000 (8 000) 191 000 22 000 (716 800) 720 000 360 000 (168 000) (5 000) (13 000) 38 000 (238 750)

Taxable Income

798 250

Income tax at 28%

223 510

(e) DESIGNER LTD GENERAL JOURNAL Date 2016 June 30

Details

Debit R

SA Revenue Service (SFP) (45 000 + 96 000) Bank (SFP)

Credit R

141 000 141 000

(f) CALCULATION OF THE DEFERRED TAX BALANCE FOR THE YEARS ENDED 30 JUNE 2016 Carrying Amount

Allowance for credit losses Delivery Vehicles Provision for warranty costs 500 Contract liability ( ∗ 28 800) 4 500

32 000 517 0001 488 000 3 200

Deferred tax asset

Tax Base

8 000 401 2502 -

Temporary Difference

24 000 115 750 488 000 3 200

Deferred Tax Asset / (Liability) at 28% 6 720 (32 410) 136 640 896 111 846

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Calculations 1. [510 000 + 300 000 − 191 000 − 102 000] = 𝟓𝟏𝟕 𝟎𝟎𝟎 2. [425 000 + 300 000 − 238 750 − 85 000] = 𝟒𝟎𝟏 𝟐𝟓𝟎 (g) DESIGNER LTD TAX RATE RECONCILIATION Standard tax (applicable tax) (999 800 ∗ 28%) Exempt Differences Foreign Income [(450 000 ∗ 28%) − 148 500] VAT Penalties (25 000 ∗ 28%) Dividends received (80 000 ∗ 28%) Depreciation – administration (90 000 ∗ 28%) Effective tax

R 279 944 22 500 7 000 (22 400) 25 200 312 244

(h) DESIGNER LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016 1. PROVISION FOR WARRANTY COSTS 2016 R 296 000 (168 000) (128 000) 488 000 488 000

Carrying amount – beginning of year Amount used during year [(296 000 − 128 000) Reversal of unused provision Provision created for current year Carrying amount – end of year

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2015 R 222 000 (222 000) 296 000 296 000

SOLUTION 2: CONCEPTUAL FRAMEWORK, EVENTS AFTER THE REPORTING PERIOD, ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS, INCOME TAXXES, REVENUE, PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS & FAIR VALUE MEASUREMENT PART A (a) MAUSER LTD GENERAL JOURNAL Date 2016 July July

Details

31 31

Debit R

Revenue (P / L) (308 000 ∗ 45%) Trade Receivables (SFP) Cost of Sales (P / L) (308 000 ∗ 55% ∗ Inventory

Credit R

138 600 138 600 100

121

)

140 000 140 000

(b) In terms of IAS 37.14, a provision is only recognised when:  The entity has a present legal or constructive obligation to forfeit economic benefits as a result of events in the past ("whether it complies"). Financial statements deal with the financial position of an entity at the end of its reporting period and not its possible position in the future. Therefore, no provision is recognised for costs that need to be incurred to operate in the future. The only liabilities recognised in an entity's statement of financial position are those that exist at the end of the reporting period (IAS 37.18). As such there is no current obligation to forfeit economic benefits.  It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation ("when"); and an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, that is the probability that the event will occur is greater than the probability that it will not. . In this case it is probable since the performance of extensive maintenance work is per company policy.  A reliable estimate of the obligation can be made ("how much"). A reliable estimate can be made as the amount is R6 000

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Conclusion A provision should not be created since there is no obligation.

(c) MAUSER LTD NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2016 1. Prior period error Correction of wood lathe machine incorrectly allocated to the cost of sales general ledger account. The comparative amounts have been appropriately restated. The effect of this error on the results of 2015 is as follows: 2015 R 2 220 000 (277 500) (543 900)

Decrease in cost of sales 2 220 000 Increase in depreciation ( ) 8 Increase in tax expense [(2 200 000 − 277 500) ∗ 28%)] Increase in profit

1 398 600

Increase in property, plant & equipment (2 220 000 − 277 500) Increase in current tax due / SARS Revenue Service Increase in equity

1 942 500 (543 900) 1 398 600

2. Profit before tax Included in depreciation for 2016 is a change in estimate resulting in a decrease in depreciation on machinery for the current year of R308 250i that arose from the decision to change the remaining useful life of machinery to 10 years. This change will result in an increase of depreciation in future periods of R308 250. i.

Change in accounting estimate

Depreciation under the previous

4 500 000+2 220 000 useful life 8 3 375 000 + 1 942 500

Depreciation under the new useful life Change in accounting estimate

10

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R 840 000 (531 750) 308 2509

3. Contingent Liability During June 2016 a claim of R1 700 000 was instituted against Mauser Ltd by Anti – Hunting Ltd. The claim relates to a claim by the group that Mauser Ltd manufactured rifles to be used specifically for the poaching of rhino`s and sold these rifles to convicted rhino poachers. The legal advisors of Mauser Ltd are of the opinion that it is not probable that Mauser Ltd will not be found.

4. Contingent asset On 10 July 2016, a claim of R300 000 was instituted by Mauser Ltd against Magnum Ltd. The claim relates to the use of the term “Obendorf” by Magnum Ltd in it`s advertising campaign as this term is a registered...