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FAC3701 EXAM PACK
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,QUESTION 1The following information relates to Furniture Limited, a manufacturer and retailer of chairs, for the year ended
28 February 2011:
1. The profit before tax of Furniture Limited for the year ended 28 February 2011 amounted to R690 000,
according to the draft financial statements compiled by an inexperienced accounting clerk. The revenue of
Furniture Limited for the year ended 28 February 2011 consisted of the following: royalties received amounting
to R485 000 (2010: R220 000), cash on delivery sales amounting to R350 000 (2010: R50 000) and credit sales
amounting to R250 000 (2010: R40 000).
Included in cash on delivery sales above is an amount of R40 000 received on 2 February 2011 from Table
Limited in respect of an order for paints which was only dispatched to Table Limited on 10 March 2011.
Included in credit sales above is an amount of R10 000 owing by Radio Limited to Furniture Limited. However
on 10 April 2011 Radio Limited indicated that they are unable to pay the money’s due as they were placed
under liquidation and its creditors will probably only receive 10 cent in the rand as a liquidation dividend.
Included in other income of Furniture Limited for the year ended 28 February 2011 are dividends received from
an unlisted investment amounting to R60 000 (2010: R20 000) and an amount of R12 000 in respect of a profit
realized on the sale of Pro Fan. Pro Fan was originally purchased on 1 March 2008 at a cost of R20 000 and
sold on 1 March 2010 for R24 000. The carrying amount and tax base of Pro Fan on date of sale amounted to
R12 000 and R10 000 respectively.
2. Furniture Limited purchased all its machinery on 1 March 2008 at a cost of R500 000 (excluding Pro Fan) on
which date it was estimated that the machinery will have a useful life of 5 years and a R nil residual value. After
the draft financial statements have been prepared, the directors of Furniture Limited re-estimated the remaining
useful life of machinery and determined that their remaining useful life is actually only 2 years as they are
already used to their full capacity. The residual value of the machinery remained unchanged at R nil. On 28
February 2010 the carrying amount and the tax base of the machinery (excluding Pro Fan) amounted to R300
000 and R250 000 respectively. This change in the useful life of machinery has not been recorded yet in the
draft financial statements of Furniture Limited for the year ended 28 February 2011. The SA Revenue Service
allows a capital allowance on machinery over 4 years according to the straight-line method. No other machinery
were purchased or sold during the year except for Machine Max.
3. Included in current liabilities in the statement of financial position of Furniture Limited at 28 February 2011 is an
amount of R20 000 in respect of royalties received for the period from 1 March 2011 to 30 June 2011 for the
patent rights of “quick dry” paint manufactured by Furniture Limited.
4. The inexperienced accounting clerk made the following entries for the current year in the “current tax due to the
SA Revenue Service” account in the general ledger of Furniture Limited:
, Dr SA Revenue Service – current tax Cr
31/08/2010 Bank (1st provisional 50 000 01/03/2010 Balance b/d 20 000
tax payment for 2011) (relating to 2010 tax year)
30/09/2010 Bank (final payment 15 000 of assessment 28/02/2011 Balance c/d 115 000
for 2010, including R4 000 interest and
R6 000 penalties for the late submission of tax return)
28/02/2011 Bank (2nd 70 000 provisional tax
payment for 2011)
135 000 135 000
01/03/2011 Balance b/d 115 000
No provision for current tax has been made yet in the draft financial statements for the year ended 28
February 2011.
5. The SA Normal tax rate changed from 29% in 2010 to 28% in 2011. 50% of all capital gains are
taxable. The company provides for deferred tax on all temporary differences according to the
comprehensive basis using the statement of financial position approach. There are no other exempt
or temporary differences except those mentioned in the question. There is certainty beyond any
reasonable doubt, that the company will have sufficient taxable profit in the future against which any
deductible temporary differences can be utilised. The deferred tax liability balance on 28 February
2010 amounted to R15 080, which you can assume to be correct.
6. The financial statements of Furniture Limited for the year ended 28 February 2011 were presented to
the board of directors for authorization for issue on 20 April 2011.
7. Ignore any VAT implications
8. Assume all amounts to be material.
, REQUIRED:
1. Calculate the correct profit before tax in the statement of profit or loss and other comprehensive
income of Furniture Limited for the year ended 28 February 2011 taking into account all the above
mentioned information.
2. Calculate the current tax due to the SA Revenue Service by Furniture Limited for the year ended 28
February 2011. Use the profit before tax in the statement of profit or loss and other comprehensive
income as calculated in (1) above as your starting point.
3. Calculate the deferred tax balance in the statement of financial position of Furniture Limited for the
year ended 28 February 2011 using the statement of financial position approach, according to the
requirements of IAS 12 – Income taxes. Indicate if your answer is a deferred tax asset or deferred tax
liability.
4. Disclose the tax rate reconciliation, using R-values only, in the annual financial statements of
Furniture Limited for the year ended 28 February 2011, according to the requirements of IAS 12 –
Income taxes.
All calculations must be shown.
Comparative figures are not required.
5. Disclose (1) and (2) in the notes to the annual financial statements of Furniture Limited for the year
ended 28 February 2011, according to the requirements of only IAS 8 – Accounting policies, changes
in accounting estimates and errors and IAS 18 – Revenue.
Comparative figures are required. No other notes are required.
No accounting policy notes are required.
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