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AutoTechnix Limited is a manufacturer of motor spare parts. The company has recently appointed a new managing director who has little accounting experience. You are the accountant and are currently finalising the financial Accounting records for the year ended 31 December 2020. The following information is available.
- The profit before tax for the year ended 31 December 2020 amounted to R700 000 (2019: profit before tax of R585 000).
- Dividends that are not taxable amounted to R50 000 (2019: R40 000)
- Donations paid that are not tax deductible amounted to R15 000 (2019: R10 000).
- Penalties imposed by the Motor Bargaining council for late submission of required documents amount to R1 000 (non-deductible).
- Equipment is recovered through use. Depreciation on equipment of R110 000 in 2020. The tax authorities allowed a deduction of R80 000 for wear and tear on this equipment for the same year.
- Rent received in advance (taxable when received) –
- R6 500 31 December 2019
- R7 500 31 December 2020
- Insurance expense prepaid –
- R3 000 31 December 2019
- R6 000 31 December 2020
- A provision for leave pay of R50 000 was recorded on the 31 December The tax authority only allows this to be deducted when paid.
- Profit on sale of machinery of R150 000. The machine was acquired on 1 January 2018 at a cost of R600 000 and sold on the 31 December 2020. Depreciation is calculated at 25% with zero residual value. Wear & Tear is calculated at 20% pa on a straight-line
- A state-of-the-art quality control machine was purchased for R100 000 on the 2 January 2020. Depreciation of R10 000 relating to the current year was erroneously debited to Equipment: Cost The error was discovered during finalisation of the Accounting. Wear and tear of R4 000 was granted by the tax authority based on the correct cost.
- The normal income tax rate is 28%.
- The inclusion rate for capital gains tax is 40%.
- No other temporary differences in the
Draft a memorandum to the company’s managing director in which you explain the tax calculation for the year including the following information:
- What is deferred tax
- When should a deferred tax asset or deferred tax liability be recognised
- Compute the current tax for the year ended 31 December 2020
- The related journals to be processed in respect to tax and deferred tax for the year ending 31 December 2020
- The disclosure of taxation to be included in the financial statements for the year ended 31 December 2020, in accordance with
All workings must be shown. Include comparatives where applicable. Ignore any Value-Added Tax (VAT) implications.
Round off all Accounting to the nearest Rand
Your answer must comply with International Financial Reporting Standards (IFRS).
- DWH Limited recently issued annual financial Accounting statements for the year ended 31 December Below is a timeline of events leading up to the issue of the AFS.
|31 December 2020||Year end|
|10 January 2021||Preparation of annual financial statements|
|20 January 2021||Approval by the Audit Committee for presentation of financial statements to the Board of Directors for their approval.|
|25 January 2021||Public announcement of key financial results.|
|26 January 2021||Approval by Board of Directors for the presentation of financial statements at the Annual General Meeting (AGM) for approval by the shareholders.|
|28 January 2021||Approval of financial statements by shareholders at the AGM.|
|30 January 2021||Issuance of copies of annual report to shareholders.|
What is the last relevant date for the consideration of the Events After Reporting Period of the issued financial statements?
- XYZ LIMITED is in the process of issuing its financial statements for the year ended 30 June
In a meeting of Board of Directors held on 31 August 2020, the directors authorized the issue of financial statements to shareholders.
Consider the impact (if any) of the following events after the reporting period on the financial statements of XYZ LIMITED for the year ended 30 June 2020 assuming they have not already been accounted for:
- In a meeting held on 10 July, the Board of Directors announced a final dividend of
0.5 cents per share for the year ended 30 June 2020.
How should the final dividend be accounted for in the financial statements for the year ended 30 June 2020?
- During the year, a customer had sued XYZ LIMITED for damages that he claims to have suffered as a direct result of the faulty goods supplied to him by XYZ
At the year end, the litigation was in process and the Court had not reached a verdict. The Company’s legal advisors suggested that the chance of an adverse opinion against XYZ LIMITED was very low as the contract with the customer explicitly states that the company shall not be liable to such claims. Consequently, no liability was recognized in the financial statements and neither was the contingency disclosed.
On 28 August 2020, the court issued a verdict against XYZ LIMITED and ordered the payment of damages amounting R5 million to the claimant within 30 days.
The CFO is of the view that the financial statements need not be adjusted because the obligation to pay damages to the customer arose after the year end upon the decision of the court.
How should the liability for payment of damages be accounted for in the financial statements for the year ended 30 June 2020?
Is the argument of the CFO valid and why?
- XYZ LIMITED suffered losses on their sales in the first week of July 2020 due to a decrease in the prices of their products.
The reduction in price was caused by falling demand of the Company’s products due to the unexpected launch of technologically superior products by its competitor on 30 June 2020. The CFO is of the view that because the sales were transacted after the year end, the associated loss should be recognized in the next accounting period in line with the matching principle.
How should the decrease in inventory prices be accounted for in the financial statements for the year ended 30 June 2020?
- FKU Limited, a customer of XYZ LIMITED, was declared bankrupt on 5 July 2020 due to its deteriorating liquidity position after the withdrawal of financial support by its bank since the past 3 months.
XYZ LIMITED was owed a material amount by FKU Limited as at 30 June 2020 which will not be recoverable.
How should bankruptcy of the customer be accounted for in the financial statements for the year ended 30 June 2020?
- On 24 July 2020, a major earthquake disrupted the entire operations of XYZ The Company suffered great loss due to the damage caused to its factories and other business premises.
The Company’s insurance policy does not cover the risk of loss arising from natural disasters. The Company does not have sufficient internal funds or the availability of external finance to rebuild the infrastructure necessary for it to resume its business operations. Consequently, XYZ LIMITED is unlikely to operate as a going concern in the foreseeable future.
How will the change in going concern status of XYZ LIMITED be reflected in its financial statements for the year ended 30 June 2020?
Specs Limited placed an order for 500 Contact Lenses Cleaning Solution to LCS Limited, a manufacturer in the UAE. The order was placed on the 15th of January 2018 and was accepted by LCS Limited on the 18th of January 2018. On the 27th of January 2018, the order was completed and packed for delivery. On the 1st of February 2018, the stock was delivered to the harbour and loaded onto the ship. Due to industrial strike action by staff at the Port, the ship had to delay its leaving of the Port. The ship eventually left the harbour on the 4th of February 2018 and arrived in Durban on the 31 March 2019. The inventory was off loaded and released from Customs on the same day. On the 3rd of April, the inventory was delivered to Spec Limited’s warehouse. Payment for the order was made on the 30th of April 2018. Spec Limited’s financial year end is 28th February.
- State the transaction, translation and settlement dates assuming the solutions were shipped CIF.
- State the transaction, translation and settlement dates assuming the solutions were shipped.
- Blankets & Tents Limited is a company based in South Africa involved in the manufacture and supply of blankets, tents and related products. In the current year, the company Imported a container of blankets and tents for refugee/displacement purposes from an American company. Total invoice value after discount was $150 000. The container was ordered on the 15th of March 2019 then shipped on the 6th of July 2019 (CIF) and arrived in South Africa on the 1st August 2019. The company sold 80% of the goods ordered to a local humanitarian organization by the 31st of December 2019 with a markup on 20% on cost. Payment of the goods took place on the 15th of January 2020 as requested by the Blankets & Tents Limited has a 31st December year end.
|15 March 2019||$1 = 15|
|6 July 2019||$1 = 15,2|
|1 August 2019||$1 = 15,6|
|31 December 2019||$1 = 15,1|
|15 January 2020||$1 = 14,9|
Show all the journal entries in the books of Blankets & Tents Limited for the year ended 31 December 2019 and 31 December 2020. Please include narrations and dates and workings – marks awarded!
Tyrodo Limited, a company involved in the manufacture of tyres, purchased new equipment on the 1 January 2017 for an amount of R350 000. The equipment had a useful life of 4 years on this date and a R0 residual value. The equipment had a carrying value of R175 000 on the 31st December 2018. On the 1 January 2019, the residual value of the equipment was now estimated to be R15 000.
- Prepare the depreciation journal entry/entries for the year ended 31st December 2019 using the Re-allocation Method assuming no journals had been passed yet. Please include
- Prepare the Profit before tax note and the note in terms of IAS 8, the statement on Accounting policies, estimate and errors for the year ended 31st December 2019
All workings must be shown. Include comparatives where applicable. Ignore tax implications.
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