FAC3702/203/2/2011

SCHOOL OF ACCOUNTING SCIENCES

DEPARTMENT OF FINANCIAL ACCOUNTING

DISTINCTIVE FINANCIAL REPORTING

Dear Student

Kindly note that in this tutorial letter you will find the following:
PAGE NO:

ANNEXURE A: MAY 2011 EXAMINATION PAPER AND SUGGESTED SOLUTION 2

ANNEXURE B: FEEDBACK ON THE MAY 2011 EXAMINATION 18

It is in your own interest to work through the suggested solutions in conjunction with the assignment and
compare them with your own answers.

All the tutorial letters are available on the internet. Tutorial letters that include the solutions to
assignment questions will be available on the internet on the due date of the assignment.
Documents on the internet can be accessed via the Unisa website, after registering as a myUnisa
user. Documents are in Acrobat Reader 7 format. Access can be obtained as follows:

1. Enter your user ID and password.

2. Select the relevant course code (eg: FAC3702).
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4. A table with all the study material will appear.
5. Select the relevant tutorial letter and click on it to open the file.
(Tutorial letter will appear as follows: Tutorial letter 203 (Eng) for FAC3702)

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

Please make use of the following details for all communication with the lecturers:

Telephone number: (012) 429-4268

E-mail address: [email protected]

Yours faithfully

Mrs M Evans
Mrs T Buonaguro
Mr M Mokgobinyane
Mr M Engelbrecht
Mrs M Els

LECTURERS: ACCOUNTING III (FAC3702)

2 FAC3702/203/2

ANNEXURE A - MAY 2011 EXAMINATION PAPER AND SUGGESTED SOLUTION

QUESTION 1 (56 marks) (67 minutes)

Zaka Limited is a stationery manufacturing company based in Cape Town. The financial year-end of the
company is 31 March. Details of the company’s assets are as follows:

Machinery

On 1 April 2010, Zaka Limited placed a non-cancellable order for a Z1 pencil machine from a company in
China for 340 000 Chinese yuan (¥). The invoice amount is payable on 28 February 2011. On
1 September 2010, the order was shipped free on board (FOB) and the machine was available for use, as
intended by management on 30 September 2010.

On 1 April 2010, Zaka Limited took out a forward exchange contract (FEC), for the same amount, to
counter the exchange rate fluctuations. The FEC will expire on 28 February 2011. Zaka Limited chose to
apply hedge accounting and on 1 April 2010, designated the FEC as the hedging instrument and the firm
commitment and foreign creditor that arises as a result of this transaction, as the hedged items. The
hedge complied with all the requirements for hedge accounting and the hedge was considered to be
highly effective at all times during the period.

Zaka Limited accounts for the hedge using cash flow hedge accounting. It is the policy of Zaka Limited to
reclassify the associated gains and losses, previously recognized in other comprehensive income, to
profit or loss, as a reclassification adjustment in the same period during which the asset acquired affects
profit or loss.

Due to a manufacturing defect in the Z1 pencil machine it could not perform at its optimum level. As a
result, Zaka Limited withheld the payment to the Chinese company until the machine was repaired. On
15 March 2011 an engineer from China was sent to South Africa to repair the machine. On
31 March 2011, Zaka Limited settled the outstanding supplier account.

The company uses the units of production method to depreciate its machinery. The useful life of this
machine was estimated to be 300 000 units with a Rnil residual value. Machinery is carried at cost less
accumulated depreciation and impairment losses. On 31 March 2011, the machine had produced 50 000
units.

The following dates and exchange rates are applicable:

Forward rate for

Spot rate FEC
Date ¥1 = R ¥1 = R FEC period

1 April 2010 1.04 1.11 11 months

1 September 2010 1.13 1.16 6 months
28 February 2011 1.03
31 March 2011 1.33
3 FAC3702/203/2

QUESTION 1 (continued)

Manufacturing building

Zaka Limited owns a property located at Sea Point which is used for the manufacturing of its products.
The property was purchased on 1 October 2008 for R6 000 000 (land: R2 500 000; building: R3 500 000)
and was available for use, as intended by management, on that date. On that date, the useful life of the
building was estimated to be 35 years. A residual value of R700 000 was allocated to the building.

Property will be revalued every three years and on 31 March 2011 the property was revalued for the first
time. Dr. Mula, a sworn appraiser, who holds a recognised and relevant professional qualification and who
has recent experience in the location and category of the property being valued, determined the net
replacement value of the property to be R5 400 000 (land: R2 450 000; building: R2 950 000). These
values were determined by reference to current market evidence. The residual value and remaining useful
life of the property remained unchanged. No decision has been made by the company to sell this
property.

Office building

Zaka Limited owns a property of which it utilises 15% of the total floor space for administration purposes.
The building was purchased on 1 April 2010 for R2 000 000 (land: R500 000; building: R1 500 000). On
that date, Zaka Limited entered into a lease contract with Bahiri Limited to rent out the remainder of the
building for R12 000 per month. The directors of Zaka Limited consider the 15% that Zaka Limited
occupies, to be insignificant.

During the 2011 financial year, Zaka Limited renegotiated with its tenant and agreed that Bahiri Limited
will now only occupy 50% of the total floor space of the building, and the remainder will then be occupied
by Zaka Limited as they required more office space. On 31 March 2011, Zaka Limited took occupation of
the 35% of the floor space that was previously occupied by Bahiri Limited. The directors of Zaka Limited
consider the 50% of the floor space of the building that Zaka Limited occupied from 31 March 2011, to be
significant. At year-end on 31 March 2011, the property’s fair value was determined to be R2 250 000
(land: R525 000; building: R1 725 000). The fair values were determined by Dr Mula with reference to
current market evidence.

The office building is registered under one title deed and it cannot be divided or sold separately. No
decision has been made by the company to sell this property.

Additional information

1. It is the accounting policy of Zaka Limited to account for owner occupied land and buildings using the
revaluation model on the net replacement value basis. Depreciation for the year is calculated on the
most recent revalued amount.

2. It is the accounting policy of Zaka Limited to account for investment property using the fair value model.

3. The South African normal tax rate is 28%.

4. The South African Revenue Service allows the following as capital allowances:

• a building allowance over 20 years on industrial and administration buildings, not proportioned for
part of the year;

• a wear and tear allowance over 5 years on machinery, not proportioned for part of the year.
4 FAC3702/203/2

QUESTION 1 (continued)

5. Depreciation on land and buildings are provided for according to the straight-line method over their
estimated useful lives.

6. Deferred tax is provided for on all temporary differences using the financial position approach. There
are no temporary differences other than those evident from the question.

7. Assume all amounts to be material.

REQUIRED:

1. Prepare all the relevant journal entries (cash transactions included) in the accounting records of
Zaka Limited for the year ended 31 March 2011, to account for the machinery, the foreign exchange
transaction and the forward exchange contract. (19)

Your answer must comply with the requirements of International Financial Reporting Standards.

Note:
• Indicate the date on which each journal entry is made.
• Show all calculations.
• Journal narrations are not required.
• Ignore all tax implications.

2. Based on the given information, disclose the following notes to the annual financial statements of
Zaka Limited for the year ended 31 March 2011: (37)

2.1. Property, plant and equipment (Disclose classes of property, plant and equipment separately)
2.2. Deferred tax

Your answer must comply with the requirements of International Financial Reporting Standards.

Note:
• Accounting policy notes are not required.
• Ignore comparative information.
• Show all calculations.
• Round all calculations to the nearest rand.
• A total column for the property, plant and equipment note is not required.
5 FAC3702/203/2

QUESTION 2 (44 marks) (53 minutes)

THIS QUESTION CONSISTS OF TWO (2) INDEPENDENT PARTS

PART A (31 marks, 37 minutes)

Vino Limited is a company which produces and sells wine. The wine is produced in the Western Cape and
bottled at their plant in Gauteng. The company has a 31 March year-end.

Vino Limited has been operating in the wine industry for the past 30 years. On 1 April 2009, they
purchased “Vino Veritas”, a brand name, for R4 125 000. The asset had an indefinite useful life and a
residual value of Rnil. The brand name was ready to be used, as intended by management, on acquisition
date.

Due to employee strike action during the current financial year, the Gauteng bottling plant had to use
temporary workers to enable the plant to meet its current volume demands. The temporary workers were
not sufficiently trained in the operation of the machinery. This resulted in 20 000 bottles, filled during the
months of July and August 2010, to be spoilt as they had not been properly sealed.

Management only became aware of this problem after the brand received negative publicity and
subsequently decided to recall all those bottles of wine. However, most of these bottles had already been
sold to the public. On 31 March 2011, the impact of the negative publicity on the brand name was
assessed and the fair value less cost to sell on that date was estimated to be R2 400 000. Due to the
negative publicity, it was estimated that the brand name would now have a remaining useful life of only 5
years, from 31 March 2011.

Management expects the brand to generate the following cash flows over its remaining useful life:
Year Net cash inflow
R
1 April 2011 – 31 March 2012 1 200 000
1 April 2012 – 31 March 2013 1 000 000
1 April 2013 – 31 March 2014 800 000
1 April 2014 – 31 March 2015 500 000
1 April 2015 – 31 March 2016 500 000

On 31 October 2010, the directors decided to sell the Gauteng bottling plant and all of its assets. On that
date they approved a detailed formal plan of disposal. On 31 December 2010, the approved formal sales
plan was at a stage of completion where no realistic possibility of withdrawal existed and all the
requirements to classify the Gauteng bottling plant as held for sale were met. Management expects that a
binding sales agreement for all the assets will be concluded by 1 May 2011, and the assets will be sold for
cash.

Details of the bottling plant’s assets are as follows:

• Machinery with an original cost price of R8 000 000 was acquired on 1 July 2005. The machinery is
used specifically in the bottling process. It has a residual value of R80 000 and an expected useful life
of 15 years. The machinery was available for use, as intended by management, on acquisition date.
The carrying amount of the machinery on 1 April 2010 amounted to R5 492 000.
• The carrying amount of inventory on 31 December 2010 and 31 March 2011 amounted to R650 000
and R625 000 respectively. The net realisable value of the inventory amounted to R550 000 on
31 December 2010 and R525 000 on 31 March 2011.
6 FAC3702/203/2

QUESTION 2 (continued)

• Vino Limited developed a customised software package to be used in the bottling plant. The software
package met all the criteria for the recognition as an intangible asset. The software was used to
operate the machinery. The software was developed at a cost price of R860 000. It was estimated that
the software will have an expected useful life of 20 years. The software was available for use, as
intended by management, on 30 September 2007 and was brought into use on the same date. The
carrying amount on 1 April 2010 amounted to R752 500.
• No provision for depreciation or amortisation has been made for the current financial year.

The fair value less costs to sell of the bottling plant, on the respective dates, is as follows:
- 31 October 2010 R6 400 000
- 31 December 2010 R6 250 000
- 31 March 2011 R6 225 000

Additional information

1. A pre-tax discount rate of 15% is considered to be appropriate.

2. It is the accounting policy of Vino Limited to account for intangible assets using the cost model.

3. Depreciation and amortisation is provided for in accordance with the straight-line method over the
expected useful life of the assets.

4. The South African normal tax rate is 28% for all applicable periods.

5. Consider all amounts to be material to the financial statements.

REQUIRED:
Disclose the following notes to the annual financial statements of Vino Limited for the year ended
31 March 2011: (31)
1. Intangible assets
2. Impairment loss
3. Non-current assets held for sale

Your answer must comply with the requirements of International Financial Reporting Standards.

Note:
• Accounting policy notes are not required.
• Show all the data input into your financial calculator.
• Show all calculations.
• Round all amounts to the nearest rand.
• Ignore comparative information.
• Ignore any VAT implications.
• A total column for the intangible assets note is not required.
7 FAC3702/203/2

QUESTION 2 (continued)

PART B (13 marks, 16 minutes)

Egoli Limited purchased 2 000 9% government bonds with a par value of R4 000 000 on 1 July 2010 at a
discounted price of R1 800 per bond. Transaction costs amounted to R50 000. Interest is paid bi-annually
in arrears. The bonds will be redeemed at par value on 30 June 2015. Egoli Limited has the ability and
intention to keep the investment to maturity.

Egoli Limited has a 31 March year-end.

The following amortisation table relates to the abovementioned government bonds for the year-ended
31 March 2011:
Opening Effective
balance interest Payment at 9% Closing balance
R R R R
31 December 2010 3 650 000 ? 180 000 3 676 955
30 June 2011 3 676 955 ? 180 000 3 705 438

REQUIRED:

Prepare the journal entries (cash transactions included) to account for the government bonds in the
accounting records of Egoli Limited for the year ended 31 March 2011. (13)

Your answer must comply with the requirements of International Financial Reporting Standards.

Note:
• Show all calculations.
• Show all the data input into your financial calculator.
• Round all amounts to the nearest rand.
• Indicate the date on which each journal entry is made.
• Journal narrations are not required.
• Ignore any VAT implications.
8 FAC3702/203/2

SOLUTION: QUESTION 1

1. JOURNAL ENTRIES
Dt Ct
R R
01 September 2010
Machinery (No mark for property, plant and equipment) 384 200
Accounts Payables / Creditors / Trade payables 384 200
Recording of creditor
(340 000 x 1.13)

FEC Asset 17 000

Cash flow hedge reserve (OCI) 17 000
Revaluing FEC
[340 000 x (1.16 - 1.11)]

28 February 2011
Foreign exchange difference / loss 44 200
FEC Asset 17 000
FEC Liability 27 200
Revaluing FEC
[340 000 x (1.16 - 1.03)]

OR:
Foreign exchange difference / loss 44 200
FEC Liability 44 200
Revaluing FEC
[340 000 x (1.16 - 1.03)]

28 February 2011
FEC Liability 27 200
Bank 27 200
Settlement of FEC
[340 000 x (1.11 – 1.03)]

OR:
FEC Liability 44 200
FEC Asset 17 000
Bank 27 200
Settlement of FEC
[340 000 x (1.11 – 1.03)]

OR:
Foreign exchange difference / loss [340 000 x (1.16 - 1.03)] 44 200
FEC Asset 17 000
Bank [340 000 x (1.11 – 1.03)] 27 200
Revaluing FEC & Settlement of FEC
9 FAC3702/203/2

QUESTION 1 SUGGESTED SOLUTION (continued)

31 March 2011
Foreign exchange difference / loss 68 000
Accounts Payables / Creditors 68 000
Revaluing the creditor
[340 000 x (1.33 - 1.13)]

Accounts payables / Creditors 452 200

Bank 452 200
Payment to creditor
(340 000 x 1.33)

Cash flow hedge reserve (OCI) 2 833

Depreciation 2 833
Reclassification of Cash flow hedge reserve
[17 000 x 50 000 / 300 000]

Depreciation 64 033
Accumulated Depreciation: Machinery 64 033
Recording depreciation
[384 200 x 50 000 / 300 000]

OR:
Foreign exchange difference / loss (P/L) 68 000
[340 000 x (1.33 – 1.13)]
Accounts payables / Creditors 384 200
Bank (340 000 x 1.33) 452 200
Restatement and payment of creditor
10 FAC3702/203/2

QUESTION 1 SUGGESTED SOLUTION (continued)

ZAKA LIMITED

2. NOTES FOR THE YEAR ENDED 31 MARCH 2011

2.1. Property, plant and equipment

Land Buildings Machinery Total
R R R R
Carrying amount at beginning of year 2 500 000 3 380 000 - 5 880 000
Cost 2 500 000 3 500 000 - 6 000 000
Accumulated depreciation (calc 3) - (120 000) - (120 000)
Additions (calc 1) - - 384 200 384 200
Revaluation deficit (calc 1 and 2) (50 000) (360 769) - (410 769)
Depreciation (calc 1 and 3) - (69 231) (61 200)3 (133 264)
Transfer from investment property 525 000 1 725 000 - 2 250 000
Carrying amount at end of year 2 975 0001 4 675 0002 323 000 5 720 167
Cost/gross carrying amount 2 975 0001 4 744 231 384 200 5 853 431
Accumulated depreciation - (69 231) (61 200) (133 264)

1. 2 450 000 + 525 000

2. 2 950 000 + 1 725 000
3. 64 033 – 2 833

Valuations were performed on 31 March 2011 by a sworn appraiser on the net replacement value basis.
The net replacement value was determined with reference to current market prices of similar property in
the same location and condition as the assets valued.

The carrying amount of land and buildings if it was carried at cost minus accumulated depreciation would
have amounted to R8 050 000 (land: R3 025 000; buildings: R5 025 000).

2.2. Deferred Tax

R
Revaluation deficit: land (50 000 x 50% x 28%) (calc 2) ( 7 000)
Revaluation deficit: building [(360 769 - 10 769) x 28%)] (calc 3) ( 98 000)
Fair value adjustment: Office Land (25 000 x 14%) (calc 4) 3 500
Fair value adjustment: Office building (225 000 x 28%) (calc 5) 63 000
Accelerated wear and tear: Office building ( 75 000) x 28%] (calc 5) 21 000
Accelerated wear and tear: building [(3 300 000 - 2 975 000) x 28%] (calc 3) 91 000
Accelerated wear and tear: machine [(323 000 - 307 360) x 28%] (calc 1) 4 379
Deferred tax liability at the end of year 77 879

OR:
R
Revaluation deficit (50 000 x 50% x 28%) + [(360 769 - 10 769) x 28%)] (calc 2 + 3) (105 000)
Fair value adjustment (25 000 x 14%) + (225 000 x 28%) (calc 4 + 5) 66 500
Accelerated wear and tear (calc 1, 3 and 5) 116 379
(75 000) x 28%] + [(3 300 000 - 2 975 000) x 28%] + [(323 000 - 307 360) x 28%]
Deferred tax liability at the end of year 77 879
11 FAC3702/203/2

QUESTION 1 SUGGESTED SOLUTION (continued)

OR:
R
Land: (50 000 x 50% x 28%) + (25 000 x 14%) (calc 2 + 4) (3 500)
Building: (calc 3 + 5) 77 000
[(360 769 - 10 769) x 28%)] + (225 000 x 28%) + [(3 300 000 - 2 975 000) x 28%]
Machine: [(323 000 - 307 360) x 28%] (calc 1) 4 379
Deferred tax liability at the end of year 77 879

CALCULATIONS

Calculation 1 - Machinery

Deferred tax
Carrying Historical Temp (asset)/
Amount Cost Tax Base difference liability
R R R R R
Cost 01 October 2009 384 200 384 200 384 200 - -
Depreciation (calc 1.1)/ (61 200) (61 200) (76 840) 15 640 4 379
Wear & tear (calc 1.2)
CA 31 March 2010 323 000 323 000 307 360 15 640 4 379

1.1. [[384 200/ 300 000 x 50 000] – [17 000 x 50 000 / 300 000]] = 64 033 – 2 833 = 61 200
1.2. 384 200 / 5 = 76 840

Calculation 2 - Land – Manufacturing property (Property, plant and equipment)

Deferred
Temp tax
Carrying Historical Revaluation differ- (asset)/
Amount Cost Deficit Tax Base ence liability
R R R R R R
Cost 01 October 2008 2 500 000 2 500 000 - 2 500 000 - -
Accumulated - - - - - -
depreciation
CA 31 March 2010 2 500 000 2 500 000 - 2 500 000 - -
Revaluation deficit (50 000) - (50 000) -
(calc 2.1.) 50 000 (7 000)
Depreciation - - - - - -
CA 31 March 2011 2 450 000 2500 000 (50 000) 2 500 000 50 000 (7 000)

2.1. (2 450 000 – 2 500 000) = 50 000

12 FAC3702/203/2

QUESTION 1 SUGGESTED SOLUTION (continued)

Calculation 3 - Building – Manufacturing property (Property, plant and equipment)

Deferred
Temp tax
Carrying Historical Revaluation differ- (asset)/
Amount Cost Deficit Tax Base ence liability
R R R R R R
Cost 01 October 2008 3 500 000 3 500 000 - 3 500 000 - -
Accumulated
Depreciation (calc 3.1) /
Wear & tear (calc 3.2) (120 000) (120 000) - (350 000) 230 000 64 400
CA 31 March 2010 3 380 000 3 380 000 - 3 150 000 230 000 64 400
Revaluation deficit
(calc 3.3) (360 769) - (360 769) - (360 769) (101 015)
Depreciation (calc 3.4,
3.5, 3.7) /
Wear & tear (calc 3.6) (69 231) (80 000) 10 769 (175 000) 105 769 29 615
CA 31 March 2011 2 950 000 3 300 000 (350 000) 2 975 000 (25 000) (7 000)

3.1. [[(3 500 000 - 700 000) /420] x 18] = 120 000
OR [[(3 500 000 - 700 000) /35] x 1,5] = 120 000

3.2. [(3 500 000 / 20) x 2] = 350 000

3.3. [[(2 950 000 - 700 000)/ 390 x 402] + 700 000] - 3 380 000 = - 360 769
OR: [[(2 950 000 - 700 000)/ 32,5 x 33,5] + 700 000] - 3 380 000 = - 360 769
OR: 2 950 000 + 69 231 = 3 019 231; 3 019 231 – 3 380 000 = - 360 769

3.4. [(3 380 000 - 360 769) - 700 000] / 402 x 12 = 69 231
OR: [3 019 231 - 700 000] / 402 x 12 = 69 231
OR: [(3 380 000 - 360 769) - 700 000] / 33,5 = 69 231
OR: (2 950 000 – 700 000) / 390 x 12 = 69 231

3.5. [(3 500 000 – 700 000) / 35]

3.6. 3 500 000 / 20 = 175 000

3.7. 360 769 / 402 x 12 = 10 769

OR: 360 769 / 33,5 x 12 = 10 769
13 FAC3702/203/2

QUESTION 1 SUGGESTED SOLUTION (continued)

Calculation 4 - Land – Administration property (Investment property transferred to Property,

plant and equipment)
Deferred
Fair tax
Carrying Historical value Temp differ- (asset)/
Amount Cost adj Tax Base ence liability
R R R R R R
Cost 1 April 2010 500 000 500 000 - 500 000 - -
FV adjustment
25 000 - 25 000 - 25 000 3 500
(calc 4.1)
CA 31 March 2011 525 000 - - 500 000 25 000 3 500

4.1. (525 000 – 500 000) = 25 000

Calculation 5 - Building – Administration property (Investment property transferred to Property,

plant and equipment)
Deferred
Fair tax
Carrying Historical value Temp differ- (asset)/
Amount Cost adj Tax Base ence liability
R R R R R R
Cost 1 April 2010 1 500 000 1 500 000 - 1 500 000 - -
Fair value adjustment
(calc 5.1) 225 000 - 225 000 - 225 000 63 000
Wear and tear
(calc 5.2) - - - ( 75 000) 75 000 21 000
CA 31 March 2011 1 725 000 1 500 000 225 000 1 425 000 290 000 84 000

5.1. (1 725 000 – 1 500 000) = 225 000

5.2. (1 500 000 / 20) = 75 000
14 FAC3702/203/2

QUESTION 2 SUGGESTED SOLUTION

NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2011

1. Intangible assets
Internally
Other: Generated:
Brand Software
Name Package Total
R R R
Carrying amount at the beginning of year 4 125 000 752 500 4 920 500
Cost 4 125 000 860 000 4 985 000
Accumulated amortisation (860 500 – 752 500) - (107 500) (107 500)
Additions - - -
Amortisation (included in other expenses) (687 500) (32 250) (719 750)
Impairment loss (included in profit/loss) (577 400) - (577 400)
Transferred to NCAHFS (752 500 – 32 250) - (720 250) (720 250)
Carrying amount at the end of the year 2 860 100 - 2 860 100
Cost 4 125 000 - 4 125 000
Accumulated amortisation and impairment losses (1 264 900) - (1 264 900)

The brand name “Vino Veritas” has a remaining useful life of 5 years. The asset has a carrying amount of
R2 860 100 at year-end.

2. Impairment loss

The brand name “Vino Veritas” received negative publicity during the current financial year. The negative
publicity is due to the 20 000 spoilt bottles of wine that were sold to the public. The impairment loss
amounted to R577 400. The recoverable amount is based on the value in use and is determined using a
pre-tax discount rate of 15%. The impairment loss was included in profit/loss in the other expenses line
item.

3. Non-current assets held for sale

A decision to dispose of the assets of the Gauteng bottling plant was taken on 31 October 2010 after a
formal detailed disposal plan for the assets of the bottling plant was approved. The plan regarding the
once-off sale of the assets was at a stage of completion on 31 December 2010, where no realistic
possibility of withdrawal existed. It is expected that the plan for the sale of the assets will be completed by
1 May 2011 for cash.

The disposal group under discussion comprises:

ASSETS R
Plant and equipment 4 994 146
Intangible assets 705 854
Inventory (550 000 – 25 000) 525 000
6 225 000

An impairment loss of R116 250 was recognised upon initial classification of the disposal group as held
for sale. The impairment loss was included under loss after tax on remeasurement on the face of the
statement of comprehensive income.
15 FAC3702/203/2

QUESTION 2 SUGGESTED SOLUTION (continued)

CALCULATIONS:

Brand Name

R
Carrying amount 4 125 000
Cost Price 4 125 000
Accumulated amortisation Rnil as asset previously had indefinite -
useful life
Amortisation 4 125 000/ 6 (687 500)
Impairment loss (577 400)
Carrying amount 2 860 100

Calculation of impairment loss

Using HP10bii financial calculator:

CF0 0
CF1 1 200 000
CF2 1 000 000
CF3 800 000
CF4 500 000
CF5 500 000
‘i = 15%
Comp NPV = R2 860 100

OR:

Alternative:
FV = 1 200 000 FV = 1 000 000 FV = 800 000 FV = 500 000 FV = 500 000
N=1 N=2 N=3 N=4 N=5
‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15% ‘i = 15%
PV = ? PV = ? R756 144 PV = ? R526 013 PV = ? R285 877 PV = ? R248 588
R1 043 478

Total PV = R2 860 100

Value in use R2 860 100

Fair Value less cost to sell R2 400 000

Therefore recoverable amount is R2 860 100 as it is the higher of value in use or fair value less cost to
sell.

R
Carrying amount (4 125 000 – 687 500) 3 437 500
Recoverable amount 2 860 100
Impairment loss 577 400
16 FAC3702/203/2

QUESTION 2 SUGGESTED SOLUTION (continued)

Disposal group

Step 1:
Determine the carrying amount of all the individual assets in the disposal group at 31 December 2010

Machinery
Carrying amount on 1 April 2010 5 492 000
Depreciation [(8 000 000 – 80 000)/15 * 9/12] (396 000)
Carrying amount on 31 December 2010 5 096 000

Software Package
Carrying amount on 1 April 2010 752 500
Amortisation [860 000/20 * 9/12] (32 250)
Carrying amount on 31 December 2010 720 250

Inventory
Carrying amount on 31 December 2010 650 000
Write down to NRV (650 000 – 550 000) (100 000)
NRV on 31 December 2010 550 000 550 000
Carrying value of disposal group on 31 December 2010 6 366 250

Step 2:
Determine the fair value less cost to sell the disposal group at 31 December 2010
Fair value less cost to sell (given) 6 250 000

Step 3:
Determine the lower of carrying amount and fair value less cost to sell at 31 December 2010

Measure the disposal group at fair value less cost to sell

Fair value less cost to sell (given) 6 250 000

Step 4:
Calculate impairment loss suffered at 31 December 2010
Carrying amount less Fair value less cost to sell 116 250

Step 5:
Allocate the impairment loss to the assets
CA on initial Impairment loss CA after impairment
classification allocated allocated
Machinery(calc 1) 5 096 000 101 854 4 994 146
Software package (calc 2) 720 250 14 396 705 854
Inventory 550 000 nil 550 000
6 366 250 116 250 6 250 000

1. 5 096 000 / 5 816 250 x 116 250 = 101 854

2. 720 250 / 5 816 250 x 116 250 = 14 396
17 FAC3702/203/2

QUESTION 2 SUGGESTED SOLUTION (continued)

PART B

1. Journal entries for the year-ended 31 March 2011.

DR CR
R R
1 July 2010 – Initial measurement
Debentures / Bond / Investment (3 600 000 + 50 000) 3 650 000
Bank 3 650 000

31 December 2010
Bank 180 000
Debentures / Bond / Investment (206 955 – 180 000) 26 955
Interest received (3 650 000 x 11.34% x 6/12) 206 955

OR:
Debentures / Bond / Investment 206 955
Interest received 206 955
Bank 180 000
Debentures / Bond / Investment 180 000

31 March 2011 – Year-end

Accrued interest / Interest receivable (180 000 x 3/6) 90 000
Debentures / Bond / Investment (104 242 – 90 000) 14 242
Interest received [(3 650 000 + 26 955) x 11.34% x 3/12] 104 242

HP10bii Financial calculator (2 PMT/PY)

FV = 4 000 000
PV = -(3 600 000 + 50 000) = -3 650 000
N = 10
PMT = 180 000
Comp ‘i = 11.34%
18 FAC3702/203/2

ANNEXURE B – FEEDBACK ON THE MAY 2011 EXAMINATION

General mistakes:

• Many students did not attempt some of the questions. It is very important that you attempt all questions
in an exam. If you omit a question, you need to do twice as well in the question that you do answer to
possibly achieve a pass mark.

• Do not waste time writing out unnecessary information that is not required, the question paper clearly
indicates what notes are required.

• During your preparation, practise writing under exam conditions. Time yourself so that you do not go
over the 2 hour allocated time. Allocate your time as indicated on the first page of the exam question
paper. Do not spend more time on a question than indicated. It has been proved that you earn the
most marks during the first 20 minutes spent on a question.

• Calculations – please always show what inputs you are using when using a financial calculator.

• Remember that dates are extremely important for journal entries.

• Do not make use of abbreviations in your journal entries or when writing out your notes. Each student
may have a different abbreviation for the same thing, so it is difficult to mark.

Question 1:

Journal entries on foreign exchange transactions

• Clear distinction was needed between the cash flow hedge and the fair value hedge. Gains and losses
on the cash flow hedge are accounted for in a cash flow hedge reserve account. Gains and losses on
the fair value hedge are accounted for in profit and loss as foreign exchange differences. Please refer
to the study guide, study unit 7, page 243 & 244 – Accounting treatments of fair value and cash flow
hedges.

• The accumulated balance in the cash flow hedge reserve account should have been transferred to the
statement of comprehensive income via depreciation since the company follows the policy to reclassify
the associated gains and losses, previously recognized in other comprehensive income, to profit or
loss, as a reclassification adjustment in the same period during which the asset acquired affects profit
or loss. Please refer to the study guide, study unit 7, page 244 – Accounting treatment of cash flow
hedges, policy A.

• If year-end journals are required the depreciation journal on the purchased asset is required.

Property, plant and equipment note

• Disclose the classes of property, plant and equipment separately. A column is thus needed for land,
buildings, machinery etc. Please refer to the study guide, study unit 1, page 34 – Disclosure
requirements for the cost and revaluation model.
19 FAC3702/203/2

FEEDBACK (continued)

• The standard requires that you disclose the date of the valuation, the basis used in the valuation
process and how the valuation amounts were determined. If the company follows the revaluation
model the carrying amount of the land and buildings under the cost model is also required to be
disclosed. Many students forget to include this narrative. These are easy marks you are throwing
away! Please refer to the study guide, study unit 1, page 35 – Specific disclosure requirements for the
revaluation model.

• A revaluation/devaluation calculation will always occur in the beginning of the financial year. The net
replacement values given at the end of the financial year will have to be restated to a value at the
beginning of the financial year to be able to calculate the revaluation/devaluation amounts. Please
refer to the study guide, study unit 1, page 26 – Date of revaluation.

• When calculating deferred tax on land a tax percentage of 14% will be applied due to the fact that the
carrying amount of land will be recovered through sale. Please refer to the study guide, study unit 1,
page 40 – Deferred tax.

• Deferred tax should have been calculated on the revaluation/devaluation amounts, fair value
adjustments and accelerated wear and tear according to the statement of financial position-approach.

Question 2:

PART A

Intangible asset note

• Disclose the different classes of intangible assets separately i.e. Other (purchased – brand name) and
the internally generated intangible asset (software package). Please refer to the study guide, study unit
4, page 138 – General disclosure.

• Intangible assets are not depreciated, but are amortised. Terminology is also very important when
dealing with the different study units. You must also indicate where in the Statement of Comprehensive
Income (SCI) the amortisation is included (in what line-item). Please refer to the study guide, study unit
4, page 138 – General disclosure.

• When there is a transfer from Intangible asset to Non-Current Assets Held for Sale (NCAHFS), this
transfer has to be disclosed. Please refer to the study guide, study unit 4, page 138 – General
disclosure.

• The standard also requires that you disclose the carrying amound and the remaining useful life of an
intangible asset. Many students forget to include this narrative. These are easy marks you are throwing
away! Please refer to the study guide, study unit 4, page 138 – General disclosure.

Impairment loss note

• The standard requires that you provide a description of the events which lead to the impairment. You
must disclose the amount by which the asset has been impaired, as well as the basis on which the
recoverable amount is determined. Please refer to the study guide, study unit 3, page 108 – Disclosure
requirements.
20 FAC3702/203/2

FEEDBACK (continued)

• You must indicate where in the Statement of Comprehensive Income (SCI) the impairment loss is
included (in what line-item). Please refer to the study guide, study unit 3, page 108 – Disclosure
requirements.

• Sufficient information was provided to calculate the value in use, using the expected cash flows over
the forthcoming 5 years. You could either have performed a Net Present Value (NPV) calculation or a
separate Present Value (PV) calculation for each of the 5 years. Many students assumed that the
value in use was nil as it was not given. Please refer to the study guide, study unit 3, page 101 – Value
in use.

Non-Current Assets Held for Sale note

• A description of the decision to sell needs to be included in the note, detailing that all the requirements
for classification as a disposal group are met. The expected date of completion needs to be disclosed
as well. Please refer to the study guide, study unit 5, page 173 – Additional disclosures.

• You must disclose the items that form part of the disposal group and disclose the carrying amount of
each of these items as well as of the total disposal group at year end. You must also include a
description of any impairment loss recognised on the disposal group and state where the impairment
loss is included in the Statement of Comprehensive Income. Please refer to the study guide, study unit
5, page 173 – Presentation & Additional disclosures.

• When calculating the value of the disposal group upon initial classification, you will calculate the
carrying amount of each asset and liability included in that disposal group, on the date of classification.
By adding all of these individual carrying amounts together you will determine the total carrying amount
of the disposal group on initial classification. You will compare the carrying amount of the disposal
group to the recoverable amount of the disposal group and determine whether there is any impairment
loss. Refer to the study guide, study unit 5, page 161 – Application of IFRS 5 to a disposal group at
initial classification as held for sale.

• An impairment loss on a disposal group will be allocated to the non-current assets included in that
group on a pro rata basis. Please refer to the study guide, study unit 5, page 166 – Impairment loss for
a disposal group.

Part B

Financial instruments

• Account names are important when doing journal entries. If you use an incorrect account name, you
will not receive marks.

LECTURERS: ACCOUNTING III (FAC3702)

UNISA
FAC3702_2011_TL_203_2_E.doc