Question Pack - Income Taxes Highlighted
Question Pack - Income Taxes Highlighted
STUDY UNIT 1:
INCOME TAX
QUESTION PACK
Compiled by: Prof RR de Villiers
Reviewed by: Prof RR de Villiers
Copyright © 2022 edition. Review date 2022.
North-West University
No part of this document may be reproduced in any form or in any way without the written permission of the publishers.
INDEX OF QUESTIONS
Question MA Study unit (Primary) Required L
1: Suits 30 SU 1: Income tax (IAS 12) Disclosure 1
SU 2: Property, plant and equipment (IAS 16)
SU 4: Investment property (IAS 40)
2: Poema 30 SU 1: Income tax (IAS 12) Disclosure 2
SU 2: Property, plant and equipment (IAS 16)
3: Tax Man 40 SU 1: Income tax (IAS 12) Journal entries 2
SU 2: Property, plant and equipment (IAS 16) Presentation
Discussion
4: Mangwanani 32 SU 1: Income tax (IAS 12) Presentation 3
SU 2: Property, plant and equipment (IAS 16) Discussion
5: YAG 30 SU 1: Income tax (IAS 12) Discussion 3
SU 2: Property, plant and equipment (IAS 16)
6: KUCC 40 SU 1: Income tax (IAS 12) Journal entries 3
SU 2: Property, plant and equipment (IAS 16) Presentation
SU 4: Investment property (IAS 40) Discussion
7: G&T 50 SU 1: Income tax (IAS 12) Presentation 3
SU 2: Property, plant and equipment Discussion
(IAS 16, IFRIC 1) Disclosure
SU 4: Investment property (IAS 40)
Note 1: The mark allocation (‘MA’) in the suggested solutions may differ between questions of a
similar nature. Marks allocated to a question depend on the difficulty of the question, the insight
required in order to answer the question and thus the time that is required to complete the question.
The mark allocation is provided to give you a guide as to the time that will be required to complete the
question.
Note 2: The level (‘L’) of the questions are provided to give you an indication of when to do these
questions during the process of you mastering the study unit(s). Please see below for detail:
• Level 1: These questions should be done after all the study material, which includes the textbook
and class notes, have been thoroughly studied to determine if you have mastered the basic
principles in connection with the study unit(s). These questions may also contain some basic
principles of a study unit(s) completed in prior modules (i.e. ACCC 271).
• Level 2: These questions test the basic principles of the study unit(s) on a higher level and
should be completed only after the level 1 questions have been completed. These questions
may also contain some basic principles of a study unit(s) completed in prior modules (i.e. ACCC
271). These questions provide an introduction to the level this study unit(s) will be assessed at
during tests or exams.
• Level 3: These questions test more advanced principles of the study unit(s) on a higher and
more integrated level and should only be completed after the level 2 questions have been
completed. These questions are also integrated with other study units completed during this
module (i.e. ACCC 372) or previous modules of a similar nature (i.e. ACCC 271). These
questions should be tackled in preparation for tests or exams to determine whether the learning
outcomes, as stipulated in the module overview document, have been mastered. Some of these
questions will also be completed and discussed in detail during the tutorial session of this specific
study unit.
When completing the level 1 & 2 questions, the following steps should be taken for EACH
question to enable you to get test and/or exam ready:
- Step 1: Allow yourself as much time as required for you to really work through the question
slowly and ensure that you really grasp the concepts and the scenario. After completing this,
do the question completely and use as much time as needed to complete the question
properly. It is extremely important that you actually write out your attempt as you would have
done in the test and/or exam.
- Step 2: When you are done, mark yourself by comparing your written attempt to the
suggested solution. When marking yourself, it is important that you identify what aspects /
study units / principles you still need to work on and then to actually go back to those aspects
/ study units / principles in your study material and revise it again or study principles you
might have missed (or misunderstood) the first time.
- Step 3: Go back to the study material on the aspects / study units / principles you still need
to work on (i.e. those identified in Step 2) and revise those BEFORE commencing with the
next question. After having done so, and you are now comfortable with the aspects /
study units / principles you needed to work on, continue with the next question by following
the aforementioned steps again.
When completing the level 3 questions, the following steps should be taken for EACH question
to enable you to get test and/or exam ready:
- Step 1: Allow yourself 0.3 minutes per mark reading time. It is extremely important that you
read, high light etc. as you would have done in the test and/or exam.
- Step 2: Allow yourself 1.5 minutes per mark writing time after the reading time is up. It is
extremely important that you actually write out your attempt as you would have done in the
test and/or exam.
- Step 3: When your time is up, you can continue writing to complete the question. You can
consider continue writing in a different colour pen for example (after your time is up) to give
you an indication of what you would have been able to do in the actual test and/or exam
under the time allowed.
- Step 4: Mark yourself by comparing your written attempt to the suggested solution. When
marking yourself, it is important that you identify what aspects / study units / principles you
still need to work on and then to actually go back to those aspects / study units / principles
in your study material and revise it again or study principles you might have missed (or
misunderstood) the first time.
- Step 5: Go back to the study material on the aspects / study units / principles you still need
to work on (i.e. those identified in Step 4) and revise those BEFORE commencing with the
next question. After having done so, and you are now comfortable with the aspects /
study units / principles you needed to work on, continue with the next question by following
the aforementioned steps again.
DISCLAIMER: Please note that these questions are not to provide you with any scope for
the test and/or exams. It is merely for practice purposes to give you an opportunity
to evaluate your test and/or exam readiness before writing the actual tests and/or exams.
You should therefore still study every principle in each study unit, even if it is not
included in any of the test and/or exam question packs.
TIME
Allow 0.3 minutes per mark to read the question and 1.5 minutes per mark to write the suggested
solution, for example a 40 mark question should take you 12 minutes to read (0.3 x 40 marks) and 1
hour (1.5 x 40 marks) to write.
ACTION VERBS
That which you as student should learn (and that which will be assessed by the lecturer later) are
always formulated with a specific verb – which is known as the action verb in the formulation of the
outcome, assignment or exam question.
In the Accounting context the following verbs are regularly used in the formulation of exam questions
(please note the meaning of each):
Journal narrations. It is general practice to always provide journal narrations (descriptions), in order
to keep a record of the reasons for general journals in practice.
Presentation brackets. If uncertainty can arise over the type of account, the type of account should
be shown in brackets after the account name, e.g. in journals (i.e. specify ‘P/L’, ‘OCI’, ‘SFP’ or ‘SCE’
in brackets after the account name). It is also not sufficient to simply specify ‘SPLOCI’ – be more
specific in specifying either ‘P/L’ or ‘OCI’.
Copying of text from other learners or from other sources (for instance prescribed material or directly
from the internet) is not allowed – only brief quotations are allowed and then only if indicated as such.
You should reformulate existing text and use your own words to explain what you have read. It is
not acceptable to retype existing text and just acknowledge the source in a footnote – you should be
able to relate the idea or concept, without repeating the original author to the letter.
The aim of the assignments is not the reproduction of existing material, but to ascertain whether you
have the ability to integrate existing texts, add your own interpretation and/or critique of the texts and
offer a creative solution to existing problems.
Be warned: students who submit copied text will obtain a mark of zero for the assignment and
disciplinary steps may be taken by the Faculty and/or University. It is also unacceptable to do
somebody else’s work, to lend your work to them or to make your work available to them to
copy – be careful and do not make your work available to anyone.
QUESTION 1 30 marks
The following information pertains to Suits Ltd (‘Suits’) for the year ended 28 February 2014
(‘FY2014’). You are assisting the new accountant, Mr Harvey Specter, with various taxation issues in
order to finalise the annual financial statements.
Machinery
Suits revalues machinery annually in accordance with IAS 16 Property, Plant and Equipment.
Machinery is revalued by Mr Michael Ross, a sworn appraiser, annually on 1 March. The following
information is available for the machinery that makes customised suits:
Description R
Cost (1 March 2011) 800 000
Gross replacement value (1 March 2012) 900 000
Revaluation surplus balance in the statement of changes in equity (after tax) 56 800
(28 February 2013)
On 1 March 2013, the gross replacement value of the machine was R1 050 000 with an insignificant
residual value. There is no intention to sell the asset.
Suits realises the revaluation surplus to retained earnings over the useful life of the asset.
Office building
Due to the significant increase in the demand for suits, Suits decided to expand and therefore acquired
an office building on 1 September 2011 for R800 000 in cash. Although the office building was
immediately available for use, it was only brought into use from 1 December 2011. The building has
an insignificant residual value. There is no intention to sell the office building.
Suits accounts for buildings on the cost model in accordance with IAS 16 and provides for
depreciation on the straight-line basis at 2.5% per annum. The office building does not qualify for any
tax allowances.
Land
Suits purchased vacant land in Cape Town and Durban for R1 000 000 each on 1 March 2013. Suits
sold the Cape Town land on 31 December 2013 for R1 060 000. Suits accounts for this land as
investment property on the fair value model in accordance with IAS 40 Investment Property. The land
in Durban had a fair value of R1 100 000 on 28 February 2014.
Insurance
Suits pays insurance annually in advance. The prepaid payment relating to FY2014 paid on
28 February 2013 amounted to R50 000 and R30 000 was paid on 28 February 2014 in connection
with FY2015. The SARS allows a section 11(a) deduction in the year of payment.
Profit before tax
The accounting profit before tax for FY2014 amounted to R2 200 000 after the above information, as
well as the following items, was correctly taken into account as:
Other information
• During the budget speech in February 2013, the Minister of Finance announced that the
companies’ tax rate will decrease from 29% to 28% for all financial years starting on or after
1 March 2013.
• The assessed loss for FY2013 amounted to R160 000. The board of directors was of the opinion
that the company will make enough taxable profits in the foreseeable future to utilise this unused
tax loss as the company’s budget includes new contracts to deliver business suits.
• The deferred tax liability balance amounted to R37 700 at 28 February 2013.
• Assume a normal tax rate of 28% for FY2014 and that 66.6% of capital gains are taxed resulting
in an effective capital gains tax rate of 18.648% for all financial years.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• There are no temporary differences other than those that are apparent from the given information.
MARKS
REQUIRED: Sub-
Total
total
Prepare the income tax expense note to be disclosed in the individual financial
statements of Suits for FY2014. You are required to show non-deductible and
non-taxable items separately from deductible and taxable items in your current
tax calculation. Deferred tax should be calculated on the statement of financial
position method. Accounting policy notes and comparative figures are not
required. 29
Communications skills – presentation and layout 1 30
TOTAL MARKS 30
QUESTION 2 30 marks
POEMA Pty (Ltd) (‘POEMA’) is a fuel filling station operating in the Mpumalanga province. The filling
station provide commuters with a one-stop-shop where they can fill up their motor vehicles whilst also
shopping at the convenience store and other restaurants available at the premises.
POEMA was incorporated four years ago and initially made some losses before it started to show
profits during the previous financial year which ended on 31 December 2019 (‘FY2019’). As the new
financial accountant appointed at POEMA, you were presented with the following background
information with regards to the financial activities of POEMA for FY2020 and FY2021:
EQUIPMENT
The equipment at the filling station consists of the fuel pumps, tyre pressure pumps, and other
equipment used within the convenience store. The equipment was acquired for at an immediate cash
payment of R3 500 000 in total on 1 May 2017. The equipment was ready for and taken into use on
1 May 2017. The initial useful life estimates on the equipment amounted to ten years with a residual
value of R800 000. The SARS allows a section 11(e) wear-and-tear allowance over five years from
the date the equipment is taken into use; apportioned for periods shorter than a year.
INVENTORY
The inventory of POEMA consist of fuel as well as the other inventory items such as consumables
and the various items sold at the convenience store. The SARS allows the gross inventory balance
as a deduction when the inventory is actually sold and does not allow the write-down to net realisable
value as a deduction from the closing inventory balance. The inventory balance consisted of the
following for the following financial years:
TRADE DEBTORS
The gross debtors balance amounted to R850 000 at the end of FY2020 (FY2019: R750 000) before
the allowance for credit losses balance of R75 000 for FY2020 (FY2019: R60 000) has been taken
into account. The SARS allows a section 11(j) deduction on the accounting allowance for credit losses
of 40% per annum during both years of assessment.
TRADE CREDITORS AND ACCRUED EXPENSES
The trade creditors balance amounted to R950 000 at the end of FY2020 (FY2019: R820 000) in total
and includes an accrued expenses balance of R210 000 for FY2020 (FY2019: R180 000). The SARS
allows the expenses in connection with the trade creditors as a deduction when incurred and allows
the accrued expenses as a deduction when paid in cash. All trade creditor and accrual balances at
the end of a specific month are settled during the following month.
PREPAID EXPENSES
The prepaid expenses balance amounted to R350 000 at the end of FY2020 (FY2019: R220 000) in
total. These expenses relate to expenses being incurred in the following financial year. The SARS
applies the section 23H limitation on these expenses which results in POEMA only being able to claim
these expenses as a deduction in the year of assessment it is actually incurred and not when paid in
cash.
The correctly calculated and recognised deductible deferred tax balance for FY2019 amounted to
R181 419. Of this balance, R382 438 (credit) pertains to the revaluations of items of property, plant
and equipment accounted for on the revaluation model in prior financial years. POEMA correctly
concluded at the end of FY2019 that the company had enough future taxable profits to utilise any
deductible temporary differences.
The correctly calculated profit before tax for FY2020 amounted to R2 160 000 on 31 December 2020.
This profit includes a restraint of trade expense amounting to R110 000 which was paid to a
competitor which prohibits the competitor to open another filling station within a 50km radius of the
POEMA filling station. The SARS does not allow any deduction for this expense.
Additional information
• Owner-occupied land and the buildings are accounted for on the revaluation model in accordance
with IAS 16 Property, Plant and Equipment and revaluations are performed at the end of each
financial year. Any revaluation surplus balances are realised to retained earnings over the
remaining useful life of the underlying asset.
• All other items of property, plant and equipment are accounted for on the cost model in accordance
with IAS 16.
• Depreciation is accounted for on the straight-line method.
• All useful life and residual value estimates remained unchanged unless the contrary is clearly
evident or stated.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• All disclosures required in the individual financial statements are always presented in rand.
• Assume a normal tax rate of 28% for FY2020 (FY2019: 29%) and that 80% of capital gains are
taxed at an effective capital gains tax rate of 22.4% for FY2020 (FY2019: 23.2%).
• There are no temporary differences other than those that are apparent from the given information.
MARKS
REQUIRED: Sub-
Total
total
Prepare the income tax expense note to be disclosed in the individual financial
statements of POEMA for FY2020. Your deferred tax calculation should be
prepared using the statement of financial position method and should include all
assets and liabilities even if it results in no temporary differences. Clearly indicate
the following as part of your calculation:
• Whether each of the temporary differences result in a deferred tax asset or
liability; and
• Whether the resulting deferred tax asset or liability is recognised in profit or loss
or in other comprehensive income.
Accounting policy notes and comparative figures are not required. 29
Communications skills – presentation 1 30
TOTAL MARKS 30
QUESTION 3 40 marks
Tax Man (Pty) Ltd (‘Tax Man’) is a manufacturer of luxury motor vehicles situated in Bloemfontein.
The company opened its doors for business during FY2015 and has since grown into a profitable
business. You are the financial accountant of Tax Man and you are in the process of finalising the
individual financial statements for the financial year ended 28 February 2017 (‘FY2017’). You obtained
the following information which you require to finalise the taxation workings and some financial
statement disclosures for the current financial year:
Land
Tax Man purchased land in Bloemfontein for R600 000 on 1 July 2015 and paid in cash immediately.
Land is accounted for on the revaluation model in terms of IAS 16 Property, Plant and Equipment.
Admin building
The admin building was bought from its previous owner at a total cost of R920 000 which was paid in
cash on 1 September 2015. The building was ready for use on 1 September 2015 but was only taken
into use on 1 January 2016. Tax Man accounts for buildings on the cost model in terms of IAS 16 and
provides for depreciation on a straight-line basis at 5% per annum to an insignificant residual value.
The South African Revenue Service (SARS) does not allow any tax allowances on the admin building.
It is the intention of Tax Man to use the admin building until the end of its useful life. To date, the
residual value and useful life estimate remained unchanged.
Equipment
The equipment used to manufacture the luxury vehicles was obtained at a total cost of R1 500 000
which was paid in cash immediately on 1 January 2016. The equipment was ready for and taken into
use on this date. Depreciation is provided on a straight-line basis to an insignificant residual value
over an estimated useful life of 20 years. The SARS allows a section 12C wear-and-tear allowance
of 20% per annum on a straight-line basis; not apportioned for periods shorted than a year.
Tax Man accounts for equipment on the revaluation model in terms of IAS 16. It is the intention of
Tax Man to use the equipment until the end of its useful life. To date, the residual value and useful
life estimate remained unchanged.
Trade debtors
Tax Man’s gross trade debtors balance at the end of FY2017 amounted to R3 450 000 (FY2016:
R3 175 000). Tax Man provided for an allowance for credit losses for both years resulting to a balance
of R517 500 and R476 250 respectively at the end of FY2017 and FY2016. The SARS grants a 25%
deduction of the accounting allowance for credit losses in terms of section 11(j) each year.
Deposits received
Tax Man received a number of orders for a new luxury vehicle scheduled to be released during
July 2017. The orders are subject to a 50% deposit to be paid by the customer on the date the order
is placed. The orders are cancellable by the customer at any point in time and the vehicles are not
controlled by the customers before its release date. The total value of the deposits received during
FY2017 amounted to R620 000 on 28 February 2017, which was correctly accounted for as revenue
received in advance in the statement of financial position. No such deposits were received in any
previous financial year. The SARS taxes the deposits on receipt and allows them as a deduction
should it be paid back to the customer. No cancellations has taken place in any period under review.
Security monitoring
Tax Man pays the security monitoring annually in advance. The prepaid payment relating to FY2017
year amounted to R36 000 and was paid on 28 February 2016. R45 000 was paid on
28 February 2017 in connection with FY2018. The SARS allows a section 11(a) deduction in the year
the payment is made.
Revaluation surplus
The before tax revaluation surplus balance in the statement of changes in equity was made up as
follows for the respective assets:
Land Equipment
Dr. / (Cr.) Dr. / (Cr.)
Balance on 1 March 2016 (R150 000) (R162 500)
Revaluation during FY2017 (R100 000) (R193 193)
Realisation to retained earnings - R8 193
Balance on 28 February 2017 (R250 000) (R347 500)
Deferred tax
The net taxable temporary differences at the end of FY2016 resulted in the deferred tax recognised
in the statement of financial position having a balance amounting to R18 580 which consists of
temporary differences recognised in both profit or loss and other comprehensive income. Of this
balance, a credit of R76 275 is as a result of the revaluation of the land and the equipment during
FY2016. The remainder of the balance consists of the deferred tax on other items recognised in profit
or loss.
Office building (Note 2) Managements intention is to use the asset hence we use the statutory tax rate of 28%
Historical carrying amount* 315 000 - 315 000 28% (88 200) p/l
Revaluation surplus* 175 000 - 175 000 22.4% (39 200) OCI 49 000
Trade debtors (Note 5) CA for debtors is supposed to be 250 000, this is because the tax base of an asset that is not taxable its = CA
Gross carrying amount* 250 000 - 250 000 28% (70 000) p/l
Allowance for credit losses* (62 500) - (62 500) 28% 17 500 p/l
The tax base of allowance for credit losses is 15 625 because the tax base of a liability is CA - amount taxable in the future. =350000- 75%
of this amount
Revenue received in 135 000 135 000 - 28% - p/l
advance* (Note 6) TB of income received in advance id CA minus amounts not taxable ein the future
CA is equal to 550 00
Trade payables* (Note 7) 550 000 - 550 000 28% 154 000 p/l
Closing balance on 30 June 2016 (143 033)
* Assume that the historical carrying amount and revaluation surplus balance (if applicable) are calculated
correctly.
#
Assume that the tax base is calculated correctly in accordance with IAS 12 Income Taxes.
The journal entry processed to account for the FY2016 deferred tax
Note 1: Land
The land on which Mangwanani is operating was originally purchased from the previous owner at a
total cost of R1 320 000 which was paid immediately in cash. The land was revalued to its fair value
of R1 500 000 and R1 600 000 on 30 June 2015 and 30 June 2016 respectively.
Mangwanani provides for depreciation on a straight-line basis at 10% per annum to an insignificant
residual value. The SARS allows a section 13quin capital allowance of 5% per annum on these rooms;
not apportioned for periods shorter than a year. It is the intention of Mangwanani to use the therapy
rooms until the end of its useful life. The therapy rooms were revalued to its fair value of R900 000
and R930 000 on 30 June 2015 and 30 June 2016 respectively.
Note 4: Equipment
The equipment used in the therapy rooms were originally purchased for R650 000 on
30 October 2014. The equipment was ready for and taken into use on 1 November 2014.
Mangwanani provides for depreciation on a straight-line basis at 10% per annum to an insignificant
residual value. The SARS allows a section 11(e) wear-and-tear allowance of 20% per annum on this
equipment; apportioned for periods shorter than a year. It is the intention of Mangwanani to use the
equipment until the end of its useful life.
MARKS
REQUIRED: Sub-
Total
total
(a) Calculate the current tax payable to be recognised in the individual statement
of profit or loss and other comprehensive income of Mangwanani for the 2016
year of assessment. You are required to show non-deductible and non-
taxable items separately from deductible and taxable items in your
calculation. 10 10
(b) Identify and discuss any errors from the following information provided to you
by the financial manager of Mangwanani:
You are a consultant at You’re a Genius (Pty) Ltd (‘YAG’), a firm that provides outsourced accounting
services to a variety of clients across South Africa. All of YAG’s clients are registered at the South
African Revenue Service (SARS) as ordinary residents. The following information pertaining to one
of these clients are provided below:
FY2019
Dr. / (Cr.)
Note 1
Profit / loss for the year (before tax) (R250 000)
Note 2
SARS payable (SoFP) (R311 720)
Note 3
Deferred tax (SoFP) R168 200
Note 1: DAP made an accounting loss before tax amounting to R1 450 000 during FY2020 in contrast
to the profit it made during FY2019.
Note 2: The SARS payable balance of R311 720 was settled on 1 January 2020. No provisional
payments were made in any financial year. DAP has a correctly calculated assessed loss amounting
to R715 000 for the 2020 year of assessment. The statutory tax rate of DAP changed at the beginning
of FY2020 from 29% to 28% and has remained unchanged to date. Capital gains have always been
included at an inclusion rate of 80%.
Note 3: The net deductible deferred tax balance of R168 200 consist amongst other things of a credit
amounting to R34 800 which was recognised at the end of FY2019 in connection with the revaluation
of land above its original cost. No other items of other comprehensive income were recognised during
FY2019. The management of DAP always assessed DAP as having enough future taxable profits to
recognise any deductible temporary differences. This assessment was however revised at the end of
FY2020 and it was noted that DAP will now only have enough future taxable profits to recognise 70%
of deductible temporary differences. It was also confirmed that no tax planning opportunities existed
at the end of FY2020.
The financial manager at DAP provided you with the following final income tax expense note, with
supporting calculations and notes (Notes 4 – 8) that will be included in the individual financial
statements of DAP for FY2020, and he requires your expertise advice on the matter:
Loss before tax at statutory rate (1 450 000 x 28%) (406 000)
Tax rate change (168 200 x 1/29) 5 800
Total income tax expense (400 200)
Note 4: Deferred tax calculation and normal temporary difference movement for FY2020 to be
recognised in profit or loss:
SoFP
Item
Dr. / (Cr.)
Deferred tax (SoFP) – Balance on 1 January 2020 R168 200
Tax rate change (R168 200 x 1/29) R5 800
Deferred tax (SoFP) – Balance on 31 December 2020 (R518 000 x 90%) (R466 200)
Normal temporary difference movement for FY2020 to be recognised in profit
(R292 200)
or loss
Note 5: The land and buildings were acquired for an immediate cash consideration on
1 January 2020. The land and buildings was ready for and taken into use on the same date. The land
was considered to be material in relation to the total value of the property. The land and building are
accounted for on the revaluation model in accordance with IAS 16 Property, Plant and Equipment and
are revalued at the end of the financial year. The building had an insignificant residual value and an
estimated useful life of 15 years on its acquisition date. These estimates have remained unchanged
to date. At the end of FY2020 the land and building was revalued with R100 000 and R200 000
upwards respectively. The SARS allows no allowances on the land nor the building. The building is
held with the intention to use the building until the end of its useful life.
Note 6: The SARS allows these expenses as a deduction when incurred and not only when paid. All
these accrued expenses were incurred during FY2020.
Note 7: The SARS allows these expenses as a deduction when paid in cash. All these expenses were
incurred during FY2020, however, none has been paid at the end of FY2020.
Note 8: These deposits received are non-refundable and SARS taxes these deposits on the earlier
of receipt or accrual. All these deposits were received during FY2020.
MARKS
REQUIRED: Sub-
Total
total
With reference to the information about Client 1:
Identify and briefly discuss, supported by valid reason(s), any errors/omissions
in the following:
i) Income tax expense note to the individual financial statements of DAP for the
year ended 31 December 2020;
ii) Deferred tax balance calculation at the end of FY2020; and
iii) Normal temporary difference movement calculation for FY2020 to be
recognised in profit or loss.
You can assume that all calculations provided are arithmetically accurate. Limit
your errors and omissions to those evident from the given information. Do not
discuss the consequential effect of any errors or omissions identified. The
identification of any qualitative disclosure or accounting policy note
requirements omitted are not required. Limit your reason(s) to the requirements
of IAS 12 Income Taxes and IAS 1 Presentation of Financial Statements. You
are not required to perform any calculations or to provide any recommendations
on the correct treatment of the errors or omissions identified.
Khaya Ububezi Conference Centre (Pty) Ltd (‘KUCC’) is a distinguished 4 star graded conference
facility near Parys, situated on the banks of the Vaal river. This conference facility accommodates
conferencing and corporate functions and caters for the specific needs of the conference delegate
within an African inspired setting.
KUCC has a 31 December financial year end and the statutory audit for the 2017 financial year has
just been completed. You, as the financial manager of KUCC, are now tasked with the job to evaluate
and rectify, where necessary, the several errors and omissions identified by the auditors, as well as
to finalise the financial statements for approval by the board at the end of March 2018.
Below is an extract from the initial trial balance of KUCC provided to the auditors for the financial year
ended 31 December 2017 (‘FY2017’), before any of the errors and omissions identified and noted
below, were corrected and taken into consideration:
Balance
General ledger account
Dr. / (Cr.)
GL-123: Current tax expense (p/l) R390 192
GL-129: Deferred tax expense (p/l) R57 739
GL-661: SARS payable (SoFP) R390 192
GL-669: Deferred tax (SoFP) – 31 December 2017 R46 783
GL-731: Revaluation surplus: Owner-occupied land (SoCE) – 31 December 2016 (R115 200)
GL-140: Revaluation surplus: Owner-occupied land (OCI) (Before tax) R100 000
The only errors and omissions identified by the auditors (not yet correctly accounted for in
the above balances) are listed below:
Error 1: Incorrect tax rate used in the FY2017 deferred tax calculations to reflect the manner
of recovery of the fair value adjustments of the vacant land held for capital appreciation
In performing the FY2017 deferred tax calculation, KUCC was of the opinion that they correctly
rebutted the rebuttable presumption on the manner of recovery of the carrying amount of a piece of
vacant land. Details in connection with this vacant land included the following:
Description Amount
Cost on 1 January 2017 (paid immediately in cash) R950 000
Fair value on 31 December 2017 R1 200 000
Fair value adjustment recognised in profit or loss during FY2017 R250 000
Amount
Description
Dr. / (Cr.)
Taxable temporary difference during FY2016 of R18 457 x 29% (R5 354)
Tax rate change during FY2017 of R5 353 x 1/29 R185
Taxable temporary difference during FY2017 of R36 914 x 28% (R10 336)
Total movement (R5 167)
The residual values of both the old and new projectors were considered immaterial. The useful life
and residual value estimates remained unchanged. The exchange transaction had commercial
substance as defined in terms of IAS 16 Property, Plant and Equipment. The SARS allows a section
11(e) wear-and-tear allowance over 15 years on both the old and new projectors; apportioned for
periods shorter than a year. KUCC has never had any intention to sell any of its data projectors. The
SARS deems the exchange transaction as if the old projectors were sold and the new projectors were
obtained for the same consideration as would be recognised for accounting purposes in terms of
IAS 16.
Omission 3: Exclusion of deposits received from the FY2017 current and deferred tax
calculation
KUCC receives deposits for conferences on receiving a booking for a future conference. The deposit
is refundable on cancellation of the booking, which results in control only passing when the conference
takes place. At the end of FY2017, KUCC received deposits to the value of R80 000 which were
correctly classified as revenue received in advance during FY2017. SARS taxes the deposits on the
earlier of receipt or accrual. The effect of these deposits were however not included in the current and
deferred tax calculation for FY2017. No such deposits were received at the end of the prior financial
year.
Omission 4: Exclusion of allowance for credit losses from the FY2017 current tax calculation
The SARS allows a section 11(j) deduction of 25% of the accounting allowance for credit losses each
year. The effect of the allowance was correctly accounted for in the FY2017 deferred tax calculation.
However, the FY2017 current tax calculation does not include the effect of the allowance for credit
losses. The allowance for credit losses of KUCC amounted to the following at the respective dates:
Amount
Description
Dr. / (Cr.)
Balance on 31 December 2016 (R150 000)
Balance on 31 December 2017 (R160 000)
G&T Consultants Inc. (‘G&T’) is an accounting consulting firm specialising in providing clients with
high quality assistance in connection with the International Financial Reporting Standards (‘IFRS’).
G&T has various divisions, each specialising in specific IFRS standards.
During January 2019, G&T advertised a permanent employment position in one of its divisions in the
Sunday Times newspaper. This division mainly provides consultation services to clients in connection
with IAS 12 Income Taxes, IAS 16 Property, Plant and Equipment and IFRIC 1 Changes in Existing
Decommissioning, Restoration and Similar Liabilities. As an expert in these fields you applied for the
position and was short-listed for an interview. Upon your short-listing, you were informed by the
Human Resources Department that you are required to complete several unrelated case studies in
connection with IAS 12, IAS 16 and IFRIC 1 as part of the interview process. A few days later you
received the following unrelated case studies and other relevant information to enable you to complete
the case studies in preparation for the interview:
--------------------------
ACCOUNTING POLICIES TO BE USED AND OTHER INFORMATION:
You can assume the following in connection with each case study unless the contrary is clearly stated
or evident:
• All companies reflected in the case studies have a 31 December financial year end.
• Any tax rate changes are accounted for by adjusting the opening deferred tax balance in the
statement of financial position.
• Depreciation is accounted for on the straight-line method.
• All companies always utilise any tax deductions received from the South African Revenue
Service (SARS) in the year of assessment they are entitled to do so.
• Assume a normal tax rate of 28% and that 80% of capital gains are taxed at an effective capital
gains tax rate of 22.4% for all financial years under consideration.
• Assume that any initial useful life and residual value estimates remained unchanged unless the
contrary is clearly stated or evident.
• Assume an after tax discount rate of 7.92% as appropriate where necessary.
• There are no temporary differences other than those that are apparent from the given information
in each case study.
• Abbreviations generally used within the case studies include the following:
- Carrying amount [CA]
- Historical carrying amount [HCA]
- Revalued carrying amount [RCA]
- Tax base [TB]
The SARS allows a section 13quin capital allowance on this office building at 5% per annum; not
apportioned for periods shorter than a year. Company A has the intention to use the office building
until the end of its useful life and then to scrap it. dpr ?
Proposed DTI’s: The only taxable temporary difference that would arise will amount to
R2 691 875 (R2 691 875 [HCA] – R0 [TB]) as a result of the difference between the historical
carrying amount and the tax base of the office building.
w & t = 2 950 000*5%=147 00
• Transaction 3
Company A purchased a piece of equipment during FY2017 which is measured on the cost model
in terms of IAS 16. The correctly calculated carrying amount and tax base amounted to R350 000
(FY2017:R420 000) and R180 000 (FY2017:R220 000) respectively on 31 December 2018. The
residual value is regarded to be insignificant. The company has the intention the use its
equipment until the end of its useful life.
Proposed DTI’s: A deductible temporary difference of R170 000 (R350 000 [CA] – R180 000
[TB]) would arise as a result of this equipment. This deductible temporary difference would be
measured by using the capital gains tax rate of 22.4% resulting in a deferred tax asset of
R38 080 (R170 000 x 22.4%) being recognised.
• Transaction 4
Company A purchased an office building for R1 460 000 in cash on 1 January 2018 from its
previous owner. The office building had an estimated useful life of 20 years and an insignificant
residual value on this date. Company A leases out this office building to an unrelated third party
in terms of IFRS 16 Leases and has therefore correctly classified the office building as investment
property in terms of IAS 40 Investment Property. The SARS does not allow any capital
allowances on this office building.
This office building is measured on the fair value model in terms of IAS 40. The fair value of the
office building amounted to R1 950 000 on 31 December 2018 which resulted in a fair value
adjustment to the value of R490 000 being recognised in profit or loss during FY2018.
Company A has correctly proven the intention to use the office building to consume substantially
all of the economic benefits embodied within this investment property over time, rather than to
sell it in the future.
Proposed DTI’s: A temporary difference of R0 (R1 460 000 [CA] – R1 460 000 [TB]) would
arise on the difference between the historical carrying amount and the tax base.
• Transaction 5
Company A received rental income on 31 December 2018 to the value of R250 000 for the month
of January 2019 in connection with the building noted in transaction 4 above. The SARS taxes
this rental income on the earlier of receipt or accrual. The tenants have never before paid any
rental in advance.
Proposed DTI’s: A temporary difference of R0 (R250 000 [CA] – R250 000 [TB]) would arise
on the rental income received in advance.
• Transaction 6
Company A accrued for leave pay during December 2018 to the value of R125 000 on
31 December 2018. The SARS allows this expense as a deduction when paid in cash.
Proposed DTI’s: A temporary difference of R0 (R125 000 [CA] – R125 000 [TB]) would arise
on the provision (accrual).
Company C provided you with the following draft income tax expense note which will be included in
the individual financial statements of Company C for FY2018:
Notes to the individual financial statements of Company C for the financial year ended
31 December 2018
2018
12. Income tax expense R
The major components of the income tax expense are as follows:
Current tax expense ?
Deferred tax expense ?
- Movement in normal temporary differences ?
- Tax rate change ?
- Other items ?
?
MARKS
REQUIRED: Sub- Total
total
(a) With reference to case study 1 only, calculate the current tax payable to be
recognised in the individual statement of profit or loss and other
comprehensive income of Company A for the 2018 year of assessment. You
are required to show non-deductible and non-taxable items separately from
deductible and taxable items in your calculation. 10 10
(b) With reference to case study 1 only, identify and briefly discuss, supported
by valid reason(s), any errors in the financial accountants’ initial thoughts on
some of the proposed DTI’s of each transaction.