MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE
DEPARTMENT OF ACCOUNTING
APPLIED FINANCIAL ACCOUNTING: MACC 700

SESSIONAL EXAMINATIONS

DECEMBER 2018

DURATION: 3 HOURS

TOTAL MARKS: 100

INSTRUCTIONS

I. Answer four out of six questions.

2. Begin an answer to a new question on a new page.
3. In order to earn marks, show all your workings as
appropriate.
4. You are allowed to make any assumptions in
answering any question. Highlight any
assumptions made in answering any of the
questions in the question paper

1
Question 1 (IAS 10)

a) In terms IAS 10, what is the accounting treatment of going concern concept (4)

b) Exotic Foods Ltd received a letter from Legal Liquidators on 15 January

2018, stating that Ocean Fish Shop has been placed into liquidation
owing to trading difficulties and that all creditors could expect to receive
a liquidation dividend of no more than $0.15 in $1.00. Ocean Fish Shop
owed Exotic Foods Ltd $204 000 at 31 December 2017.

The financial statements for the year ended 31 December 2017 were
approved on 15 March 2018.

Required

Identify, giving reasons, what type of event this information would be

classified as in terms of IAS 10: Events after reporting period. (6)

c) As the auditor of Tastee Ltd, the directors of the company have asked
your assistance in deciding on the most appropriate method for the
accounting treatment of the under-mentioned problem at the end of the
2017 financial year in order to comply with the requirements of IFRSs.

Tastee Ltd is a listed food preparation company with a 31 December year

end. The vast majority of Tastee Ltd's business includes the preparation
of meals for airline companies. On 15 February 2018 one of the airline
companies, Comfort Fly Ltd, which was responsible for 80% of Tastee
Ltd's profit and 70% of Tastee Ltd's sales, announced that it is not going
to renew its contract with Tastee Ltd for the provision of food on its
flights. The renewal date of the contract is 30 June 2018. Tastee Ltd is in
the process of finalizing its financial statements for the year ended 31
December 2017. Stock Exchange regulations require that the financial
statements should be published not later than 31 March 2018

Required

Advise, stating your reasons, as to the most appropriate accounting

treatment of the announcement by Comfort Fly Ltd in the financial
statements of Tastee Ltd for the 2017 financial year. (15)

[Total: 25 Marks]

2
Question 2 (IAS 20)

The Financial Director of Patriotic Ltd phoned you in your capacity as company auditor,
requesting a meeting to discuss the impact that the repayment of a government grant will have on
the financial statements for the year ended 31 December 2017. He also informed you that the
financial statements should be ready for approval on 20 February 2018, the date of the directors'
meeting.

He furnished you with the following information in order to prepare for the meeting:

i. On lApril 2015 Patriotic Ltd received a $500 000 government grant based on a plant that
was erected at a cost of $2 500 000 and that was ready for use and brought into production
on 1 January 2015. The company became entitled to the grant on the date the plant was
brought into use.

11. The conditions of the grant was that Patriotic Ltd should maintaini
500 units per financial year for a period five years Sho
level, Patriotic Ltd would have to repay the grant e
outstanding years over the total years

On 20 January 2018 a revised production report was issued, with actual production units
for the financial year ended 31 December 2017 being 1 500 not 2 500 units as originally
reported. Consequently, Patriotic Ltd paid the pro-rate grant of $200 000 (2/5 years x $500
000) back to the government on 3 February 2018.

iv. The grant was initially deducted from the cost of the plant.

v. The plant is written-off over five years for accounting and taxation purposes (straight-line
method)

vi. The grant was not taxable.

Required

a. Discuss the effect that the repayment of the grant will have on the financial statements for
the year ended 31 December 2017. (19)

b. Give journal entries in connection with the repayment of the grant for the year ended 31
December 2017 (6)
[Total: 25 Marks]

3
Question 3 RAS 19)]

Mr Fuza was recently appointed as the new CFO at Empowered Ltd. Whilst
Empowered Ltd's HR department were explaining the various policies,
procedures and forms of benefits provided to employees, Mr Fuza found himself
becoming more and more confused over how the company is supposed to
account for all of it. Mr Fuza is a family friend and since he knows you are
currently studying financial accounting, he has approached you for help,
sending you the following email:

To: Wizzy
Subject: Update Information on IAS 19
Date: 01 January 2017

Hi
You may have heard that I was recently appointed as CFO of Empowered Ltd. It
is all very exciting. However, during my introduction to the company, the
compensation policies were explained to me and I suddenly realized how out of
date I am with regard to my knowledge of IFRSs. Frankly, I have no idea how
these employee compensation policies would be accounted for! Please could you
help me by telling me if my understanding of the following issues is right or
wrong?
I have many questions, but off the top of my head are the following thoughts I
had:
a. If an employee was to die in an accident at work and in terms of a
company life insurance policy a payment is made to his/her family (where
this family member is not an employee of our company), that payment will
not be accounted for as an employee benefit by Empowered Ltd.

b. Any leave earned by employees which vests at the end of the next
financialy ear is a long-term employee benefit since it is settled in the next
financial period.

c. The company will be providing our employees with free medical check-ups
at the company clinic once a month due to the potential hazardous work
environment. These benefits will be expensed as incurred and included in
employee benefit expense.

d. All our employees receive accumulating annual leave, the equivalent of 22

working days per year. As I understand it, because this leave is termed
"accumulating", any leave not taken at the end of the next financial year
will have to be paid out in cash.

e. The executives of Empowered Ltd participate in profit-sharing scheme.

The correct method to account for the profit sharing scheme at year end
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 would be

Debit: Profit share drawings (Equity)

Credit: Provision for bonuses

f. The terms of the abovementioned profit-sharing scheme, in which all the

executives willparticipate, requires that in order to receive the bonus,
they must remain in the employ of the company for a further year after
the end of the financial year in which the profit share is allocated to the
employee. It seems to me that the provision for such profit sharing
bonuses should only be recognised based on the number of employees
probable to receive them.

All the employees are members of a defined contribution fund to which

g-
the company will contribute. The plan is unfunded. My understanding is
that Empowered Ltd will be required fund any shortfall there may be in
the fund.

h. If the fund had been a defined benefit fund, certain actuarial gains and
losses would not be recognised (i.e. according to the corridor approach).

i. The interest rate used to determine the return on plan assets and the
interest on fund liabilities is the rate applicable at year end on high risk
unit trust funds.

j. If Empowered Ltd decides to terminate the services of any employee due

to worsening economic conditions, the terminated employee will receive a
lump sum which I believe would be recognised as a post-employment
benefit since it would be paid to him after his employment.

Yours sincerely
Mr. Fuza

Required

Write an email to Mr. Fuza, stating weather his understanding of how to

account for the different types of compensation is true or false, and briefly
explain as to why. [Total: 25Marks]

5
Question 4 (IAS 12)

Given below are separate accounting profit and taxable profit calculations for
the year ended 31 December 2017 prepared the accountant of International Ltd.

Notes Accounting Taxable

profit profit
$ $
Gross profit 475 000 475 000
Other expenses (200 000) (200 000)
Other income 100 000 100 000
Dividends received 40 000 nil
Donations (20 000) nil
Office building 1
Depreciation (10 000) nil
Manufacturing plant 2
Depreciation (60 000 nil
Wear & tear allowance nil (85 000)
Gain on sale of land 110 000 nil
Rental received for the year 120 00 120 000
nil 10 000
Rental received in advance
(5 000) nil
VAT penalty
550 000 420 000

Additional information

1. The cost of the original office building was $200 000 and the building is
depreciated at 5% per annum on the straight-line method. On 31
December 2017, the carrying amount was $150 000. No tax allowance is
given on this building.

2. Information on the manufacturing building is as follows:

Carrying amount at 31 December 2017 $140 000

Tax base at 31 December 2017 $115 000

3. Assume that the residual value, useful life and depreciation method of all
assets were reviewed at each financial year end and that there were no

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 changes.

4. Assume a tax rate of 28%. Ignore capital gains tax.

5. There was no balance on the deferred tax liability account at 31

December 2016.

Required

a. Prepare reconciliation between accounting profit and taxable profit by

differentiating between temporary differences, non-taxable items and
non-deductible items for tax purposes. (6)

b. Calculate and journalise the transfer to and from the deferred tax
account at 31 December 2017. (7)

c. Calculate income tax expense for the year ended 31 December 2017.
(1)
d. Prepare the tax rate reconciliation for the year ended 31 December
2017. (5)

e. Assume that on 1 January 2018 the Minister of Finance announces a

change in the corporate tax rate from 28% TO 27% in the Budget
Statement. The change is effective for entities with a year of
assessment ending on or after 31 December 2018. No other significant
changes in the tax laws are announced in the Budget Statement.

Assume that the financial statements for 2017 are approved for issue
on 15 February 2018.

Discuss with reasons, what the effect of the reduction in the tax rate
has on the financial statements for the year ended 31 December 2018.
(6)

[Total: 25 Marks]

Question 5 (IAS36)

a. In terms of IAS 36: Impairment of Assets, briefly explain what an

indicator review is and what should be taken into consideration during
that review. (5)

b. Jack Tapi is a very successful sweet maker with very little knowledge
about IFRSs

In addition to other assets (which have already been tested for

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 impairment), Jack Tapi holds the famed Tapi Bar Choc Machine. As the
financialy ear has been very hectic, Jack Tapi was unable to find any data
for the Tapi Bar Choc Machine. The only information Jack Tapi has is
shown below:

Net asset value of the entire 'Jack Tapi Empire' $150 000 000

Market price per share $13.50

The number of shares in issue, at the end of the current financial year,
are 10 000 000. The net asset value shown above was calculated before
taking into account the total impairment losses of $5 000 000 relating to
the assets other than this machine. Jack Tapi would like to test the Tapi
Bar Choc Machine for impairment but is not sure how to go about it.

Required
Explain whether Jack Tapi must calculate the recoverable amount of the
Tapi Bar Choc Machine. (15)

c. Industrial Ltd is a manufacturing company and owns various items of

machinery. At the end of the year, one item of machinery was damaged,
but it is still in working order. The machine was acquired on 1 January
2015 at a cost of $900 000. Depreciation was calculated on the straight-
line method over the expected useful life of 10 years. Owing to the
damaged the useful life of the machine is now only three years from 31
December 2017.
Management determined the fair value less costs of disposal to be $530
000 and the value in use of the machine to be $525 000 using an
appropriate discount rate of 10%.

Ignore tax implications.

Required
Calculate the impairment loss to be recognised by Industrial Ltd for the
year ended 31 December 2017 so as to comply with IAS 38. (5)
[Total: 25 Marks]

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Question 6 (CONCEPTUAL FRAMEWORK)

Command Ltd has had a long reputation of producing high-quality tobacco. During the year
ended 30 June 2017 they planted tobacco on all available land at a cost of $3 million. At the
financial year end it appears from projections that they will reap a record harvest which will yield
a return of about $10 million. (This was calculated by multiplying the expected crop size by the
current price of tobacco). A further four months will elapse after the year end before the tobacco is
ready for sale.
The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have a difference of
opinion regarding the accounting treatment of the planting coats of the tobacco. In the previous
year the CEO insisted that the planting costs should be treated as an asset. After the financial
statements had been issued, unexpected hail and rain resulted in the loss of a substantial part of
the crop and they were unable to recover their costs.

The CFO now insists that the planting costs should be treated as an expense in the 2017 financial
year. The CEO does not support this approach as he argues that it will not be consistent with the
previous year, and it will also result in two years expenses being recognized in 2017 with no
income. He suggests that the planting costs should be treated as an asset once again. This crop is
insured this year against rain and hail damage.

A well known cigarette manufacturer, Smoker Ltd, contracted with Command Ltd to buy half of
the current harvest for $5 million. The CEO wants to recognize this income at 30 June 2017 since
the contract was finalized during June 2017. Other than a deposit of 1 million that was paid on the
contact date, no further amount will be received until delivery of the tobacco.

Required

Provide a well reasoned argument, by referring ONLY to the Framework, for the treatment of the
above items in the financial statements of Command Ltd for the year ended 30 June 2017.
[Total: 25 Marks]

END OF EXAMINATION PAPER