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.
Name of the Examiner: Name of the Moderator:
Signature of Examiner: Signature of Moderator:
Date: Date:
NUMBERS QUESTIONS MARKS TIME IN MINUTES
1 Question One 35 75
2 Question Two 30 75
3 Question Three 35 30
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)
1 March 2022
Plant account Dr 57,200
Accounts payable Cr 57,200
15 April 2022
Plant account Dr 57,200
Accumulated depreciation Dr 373
Cost of sales Cr 57,573
31 December 2023
Impairment loss Dr 18,800
Accumulated depreciation Cr 18,800
31 December 2024
Accumulated depreciation Dr 1,042
Impairment loss Cr 1,042
b)
31 December 2023
Deferred tax expense Dr 919
Deferred tax liability Cr 919
The journal entry is necessary to adjust the deferred tax liability to reflect the new tax rate of 28%.
c)
Accounting policy note for plant:
Plant is initially recognized at cost and depreciated over its estimated useful life of 10 years using the straight-line method. Impairment tests are conducted when events or changes in circumstances indicate that the carrying amount of the plant may not be recoverable.
d)
i. Plant note:
Plant is stated at cost less accumulated depreciation and impairment losses. The carrying amount is reviewed for impairment annually. Depreciation is provided at 20% per annum on the diminishing balance basis.
ii. Deferred tax note:
Deferred tax assets and liabilities are recognized for temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax base. The change in tax rate from 29% to 28% has resulted in a deferred tax adjustment.