DEPARTMENT OF ACCOUNTING
BUSINESS ACCOUNTING 300 / 310
ASSESSMENT 1
MARKS: 45 ** TIME: 90 minutes
Internal examiners:
HC Verster / M Pollock / J Joubert
1. This paper consists of 7 (seven) pages (including the cover page).
2. Answer question 1 on the orange MCQ form (USE SIDE 2).
3. Complete question 2 on paper.
Question
Topic
1
IFRS for SME’s, Conceptual Framework, GRAP
2
Property, plant and equipment and income taxes
Total
Marks
10
35
45
Minutes
20
70
90
© University of Pretoria (all rights reserved)
Page 1|7
QUESTION 1 – ANSWER ON ORANGE MCQ FORM
(10 marks, 20 minutes)
Instructions to answer the MCQ:
 You must use side 2 of the MCQ form.
 All questions must be answered in terms of International Financial Reporting
Standards (IFRS), or when indicated, in terms of IFRS for Small and Medium-sized
Entities (SME's) or Generally Recognised Accounting Practice (GRAP).
 Assume a corporate tax rate of 28% and that capital gains are taxed at 80% of the
corporate tax rate.
 Round all calculated amounts to the nearest Rand.
 Partial marks are awarded for certain selections, where applicable. However,
calculations will not be marked. Only answers on the orange form (side 2) will be
seen as valid answers.
Question 1.1
(1 mark)
Which TWO of the following statements are most correct in terms of IFRS for Small
and Medium-sized Entities?
According to the scope of the statement, small and medium-sized entities are entities
that:
a. do not have public accountability.
b. do have public accountability.
c. sometimes have public accountability.
d. publish general purpose financial statements for external users.
e. publish general purpose financial statements for internal users.
f. publish financial statements for external users.
g. publish generally accepted financial statements for external users.
h. publish generally accepted financial statements for internal users.
Question 1.2
(3 marks)
NKONYANE LIMITED is a company that is listed on the JSE Limited. Nkonyane
Limited’s business is to sell products that are produced by local town members to
nearby communities. The company employs 20 employees.
The company really loves the town it operates in and wants to help the citizens of the
town to invest in the town itself. In order to provide further growth opportunities for
Nkonyane Limited and its town members, the directors of Nkonyane Limited recently
created an app (software application) called HardEquities on which anyone from the
town can buy shares in Nkonyane Limited. They have launched the app among the
town members and are excited to see if town members are interested in investing in
Nkonyane Limited.
Nkonyane Limited recently also decided to help the low- and middle-income group of
people all over South Africa to invest their excess funds in the global share markets.
Nkonyane Limited accepts deposits and manages the buying and selling of the global
shares. A management fee is levied for each transaction undertaken by the company.
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Which THREE of the following statements in respect of Nkonyane Limited are most
correct in determining if IFRS for Small and Medium-sized Entities must be applied?
Nkonyane Limited:
a. sells its shares in a public market.
b. does not sell its shares in a public market.
c. holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses.
d. holds assets in a fiduciary capacity for a broad group of outsiders for reasons
incidental to the primary business.
e. does have public accountability.
f. does not have public accountability.
Question 1.3
(1 mark)
Financial statements should have eight (8) general features in terms of IAS 1,
Presentation of Financial Statements.
Which TWO features are not prescribed by IAS 1, Presentation of Financial
Statements?
a. Accrual basis
b. Consistency of presentation
c. Going concern
d. Materiality and aggregation
e. Offsetting
f. Timeliness
g. Substance over form
Question 1.4
(1 mark)
The statement of profit and loss and other comprehensive income of Solar Limited is
presented to you, as follows:
2019
2018
R
R
Revenue
25 789 000 20 123 000
Cost of sales
(10 234 000) (8 743 000)
Profit for the year
6 256 000
3 777 000
Items that will not be reclassified to profit or loss
- Revaluation surplus
Items that will be reclassified to profit or loss.
- Gain on cash flow hedge
Total comprehensive income for the year
20 500
100 000
35 000
6 311 500
27 000
3 904 000
Select the TWO line-items which are a minimum requirement in terms of IAS 1,
Presentation of Financial Statements that are missing from the face of the above
statement of profit or loss and other comprehensive income:
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a. Depreciation
b. Dividend income
c. Other comprehensive income
d. Staff costs
e. Income tax expense
f. Water and electricity
Question 1.5
(2 marks)
On 1 July 2019, plant with a cost of R4 200 000 was acquired by Springbuck Limited.
The plant must be removed at the end of its useful life at an estimated cost of
R400 000. The plant has an estimated useful life of ten (10) years and an insignificant
residual value. A pre-tax discount rate of 8% per annum was applicable.
The cost of the plant according to IAS 16, Property, Plant and Equipment is:
a. R4 200 000
b. R3 800 000
c. R4 014 723
d. R4 385 277
e. R4 600 000
Question 1.6
(2 marks)
KUDO LIMITED has entered into a contract to obtain fibre internet for the next
12 months, commencing on 1 November 2021. To obtain a discount, Kudo Limited is
required to pay the year’s subscription fee of R120 000 on 1 November 2021. Kudo
has a 31 December year-end.
Assume a corporate tax rate of 28%.
The temporary difference relating to the subscription fee when calculating deferred tax
is:
a. No temporary difference
b. R5 600 taxable temporary difference
c. R5 600 deductible temporary difference
d. R20 000 taxable temporary difference
e. R20 000 deductible temporary difference
f. R28 000 taxable temporary difference
g. R28 000 deductible temporary difference
h. R100 000 taxable temporary difference
i. R100 000 deductible temporary difference
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QUESTION 2
(35 marks, 70 minutes)
Aqualife Limited started its operations on 1 February 2020 and is in the business of
producing purified water. The following information relates to the property, plant and
equipment of Aqualife Limited for the year ended 28 February 2022:
1. Extract from accounting policy
1.1 All property, plant and equipment are accounted for in accordance with the cost
model, and are depreciated on a straight-line basis over their estimated useful
lives.
1.2 Deferred tax is recognised for all temporary differences using the statement of
financial position approach and is based on the tax rates that have been enacted
or substantially enacted at the reporting date.
2. Profit for the current year
2.1. The profit before tax for the year ended 28 February 2022, calculated correctly,
amounted to R485 000. The following items were, amongst others, included in
the profit before tax:
R
Dividends received
66 000
Depreciation on all property, plant and equipment
(refer to points 4, 5 and 6)
?
3. Tax information
3.1. Ignore all Value Added Tax (VAT) implications for this question.
3.2. During the current year, the Minister of Finance announced that the corporate
tax rate applicable to companies will decrease from 28% to 27% for financial
years ending on, or after 28 February 2022.
3.3. Capital gains are taxed at 80% of the corporate tax rate.
3.4. There are no other temporary differences, non-taxable items or non-deductible
items, other than those arising from the given information.
3.5. The South African Revenue Service (SARS) grants the following tax allowances
in respect of the assets of Aqualife Limited:




Land: no tax allowance is granted on land.
Buildings: 5% per annum straight-line (not apportioned for a part of a
year).
Water pump equipment: You must assume that the accounting and tax
treatment for the water pump equipment is the same.
Bottle manufacturing machinery: 20% per annum straight-line (not
apportioned for a part of a year). The cost for the bottle manufacturing
machine is the same for accounting and tax purposes. SARS, however,
does not consider components for wear and tear allowances.
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3.6. On 28 February 2021 and 28 February 2022, the financial director of Aqualife
Limited was certain that the company would be able to produce sufficient future
taxable profits against which any unused tax losses can be utilized.
3.7. When calculating the current and deferred tax for the year ended
28 February 2021, the accountant correctly calculated a tax loss of R150 000,
and a deferred tax balance of R12 600 (credit).
4. Property in Johannesburg
4.1. Aqualife Limited acquired a property in Johannesburg on 1 December 2020 with
the intention to utilise it for the manufacturing operations of Aqualife Limited. The
buildings were available for use as intended by management on 1 January 2021.
The useful life of the buildings is twenty five (25) years, with an insignificant
residual value.
4.2. The property in Johannesburg consisted of land and buildings and the cost
amounted to R6 500 000 in total. The cost of the land portion of the property
amounted to R2 000 000.
5. Water pump equipment
5.1. Aqualife Limited acquired ten (10) water pumps on 1 May 2021. The water pumps
cost R8 000 each. Aqualife Limited negotiated to pay R60 000 of the R80 000
total cost on installation of the pumps on 1 May 2021 and the balance on
1 May 2022. The extended settlement period exceeds normal credit terms. A
pre-tax discount rate of 12% per annum is applicable.
5.2. The water pumps have a useful life of five (5) years, with an insignificant residual
value. The water pumps were available for use as intended by management on
1 May 2021.
6. Water bottle production machinery
6.1. On 1 May 2021, Aqualife Limited purchased water bottle production machinery
and paid the following amounts in cash:
R
Cash purchase price
2 550 000
Installation costs
22 000
Cost to train employees to use the machinery
18 000
Aqualife Limited had to test whether the machinery functions properly. The costs
relating to the testing amounted to R85 000. The proceeds from the sale of
inventories manufactured during the testing phase, amounted to R69 000.
6.2. The useful life of the machinery is nine (9) years, provided that a major inspection
is performed every three (3) years. The residual value is insignificant. The
inspection costs have been identified as a separate component at initial
recognition. The first major inspection is scheduled for 1 June 2024, at an
estimated cost of R165 000. The machinery was available for use as intended
by management on 1 June 2021, but was only brought into use on 1 July 2021.
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REQUIRED:
ANSWER ALL THE QUESTIONS IN ACCORDANCE WITH INTERNATIONAL
FINANCIAL REPORTING STANDARDS (IFRS) AND SHOW ALL YOUR
CALCULATIONS:
a) Prepare ALL the general journal entries (including cash transactions) in respect of
the water pump equipment (refer to point 5) in the general journal of Aqualife
Limited for the year ended 28 February 2022.
(8)
NOTE:
-
Journal narrations are not required.
Journals must be dated.
You must indicate where the accounts should be included, i.e.
P/L, OCI, SCE or SFP.
You can ignore the journals in respect of taxation.
b) Calculate the current tax expense as it will be disclosed in the “Income tax
expense” note of Aqualife Limited for the year ended 28 February 2022.
(11)
NOTE:
-
Show all nil effects.
c) Calculate the deferred tax expense as it will be disclosed in the “Income tax
expense” note of Aqualife Limited for the year ended 28 February 2022.
(10)
NOTE:
-
Show all nil effects.
d) Prepare the “Income tax expense” note to the financial statements of Aqualife
Limited for the year ended 28 February 2022.
(6)
NOTE:
-
Comparative amounts are not required.
The tax reconciliation per the “Income tax expense” note
must be given in Rands.
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