Question 1 [35 marks]
Peterson (Pty) Ltd is a manufacturer of quality leather handbags situated
at Sandton. Thefinancial yearend of the company is 31 December.
Plant
A plant was acquired on 1 March 2022 from Xing Limited in China and the
following costs were incurred and paid on that date:
• Supplier invoice amounted to R53 600;
• Delivery fee amounted to R1 000;
• Staff training costs on how to use the machine totaled R1 200;
• Import duties amounted to R900; and
• Installation costs of R500 were also incurred.
The estimated useful life at acquisition date was 10 years and the estimated residual
value was R8 000.
Production commenced on 15 April 2022, even though the plant was available for
use on1 April 2022.
During 2023 a burst pipe in the building resulted in significant damage to the plant. As
a result the directors performed an impairment test and determined that the
recoverableamount of the plant was estimated to be R34 400 at 31 December 2023.
During January 2024 repairs and maintenance on the plant were carried out at a
cost of R3 000 paid for by Peterson. As a result of this maintenance, another
impairment test was performed as at 31 December 2024 and the fair value of the plant
was R46 000, cost to sell R1 600, and value in use was R47 000.
Peterson has pledged this plant as a security for a loan with the Standard Bank, valued
atR40 000.
Additional information
• Peterson’s turnover is less than R1 million per annum and therefore it is not a registered
VAT vendor.
• Peterson uses the cost model to account for its plant.
SARS grants a wear and tear allowance of 20% per annum on the plant (not apportioned
for time).
The tax rate changed from 29% in 2023 to 28% in 2024.
You are required to:
a) Prepare all the journal entries relating to the plant from the date of its acquisition to
31 December 2024. Do not provide journal entries relating to current or deferred tax.
Journal narrations are not required (12 marks)
b) Provide the journal entry to account for the tax rate change and briefly, in no more than
two sentences, explain why this entry is necessary.(5 marks)
c) Prepare the accounting policy note for plant for the year ended 31 December 2024.(3
marks)
d) Prepare the following notes to the financial statements of Peterson (Pty) Ltd for the year ended 31 December 2024:
i. Plant (11 marks)
ii. Deferred tax (4 marks)
Comparative figures are not required except for the deferred tax note. All
disclosures should be made in accordance with International Financial Reporting
Standards(IFRS)
a) Journal entries:
1 March 2022:
Plant account Dr. R58,200
Supplier invoice Cr. R53,600
Delivery fee Cr. R1,000
Staff training costs Cr. R1,200
Import duties Cr. R900
Installation costs Cr. R500
15 April 2022:
Plant account Dr. R58,200
Accumulated depreciation Cr. R600
Accumulated impairment loss Cr. R17,400
Accumulated impairment loss - revaluation Cr. R3,000
Gain on revaluation Cr. R4,800
Accumulated impairment loss - revaluation Cr. R4,400
31 December 2023:
Impairment loss account Dr. R7,200
Accumulated impairment loss - revaluation Cr. R7,200
31 December 2024:
Profit or loss account Dr. R2,000
Deferred tax liability Cr. R560
Deferred tax expense Cr. R1,440
Accumulated depreciation Cr. R1,200
Accumulated impairment loss - revaluation Cr. R7,200
Accumulated impairment loss - revaluation Cr. R400
Accumulated impairment loss Cr. R3,000
b) Journal entry for tax rate change:
1 January 2024:
Deferred tax liability Dr. R18
Profit or loss account Cr. R18
Explanation: The entry is necessary to adjust the deferred tax liability based on the change in tax rate.
c) Accounting policy note for plant:
The company recognizes plant at cost and depreciates it over its estimated useful life of 10 years using the straight-line method. Impairment tests are conducted whenever events or changes in circumstances indicate that the carrying amount of the plant may not be recoverable. Any impairment loss is recognized in the profit or loss.
d) Notes to financial statements:
i. Plant:
- The carrying amount of the plant as at 31 December 2024 is R45,000.
- The plant has been pledged as security for a loan with a value of R40,000.
- Impairment tests were performed in 2023 and 2024, resulting in impairment losses recognized in the profit or loss.
- Repairs and maintenance costs were capitalized in 2024.
ii. Deferred tax:
- The deferred tax liability as at 31 December 2024 is R18.
- The change in the tax rate from 29% to 28% resulted in a deferred tax expense of R1,440 recognized in the profit or loss for 2024.