QUESTIONS AND
ANSWERS
FOR ASSISTANCE CONTACT
EMAIL:gabrielmusyoka940@gmail.com
, lOMoARcPSD|44660598
QUESTION 1
LTea Ltd bottles and distributes ice tea. The financial manager of LTea Ltd, Mr G Nhamo,
completed the draft financial statements for the year ended 30 September 2010 on 15
November 2010. On 30 November 2010 the board of directors reviewed and authorised the
financial statements for issue.
Included in the profit before tax of LTea Ltd for the year ended 30 September 2010, amounting to R1
450 000, are the following items: 2010
Income R
Annual agency fees (refer 4) 600 000
Profit on sale of machine (refer 1) 80 000
Expenses
Depreciation - administration building (refer 2) 90 000
Depreciation – machinery (refer 1) 74 000
Depreciation - furniture and fittings (refer 2) 150 000
Additional information:
1. On 31 December 2009 the directors of LTea Ltd decided to replace an old machine used
for the bottling of ice tea with a new machine. On 31 December 2009 the old machine
was sold for R290 000. The old machine was acquired on 1 October 2008 at a cost of
R280 000. On the date of sale the carrying amount and tax base of the old machine
amounted to R210 000 and R192 500 respectively. On 2 January 2010 a new machine
was acquired for R400 000 and immediately brought into use. The carrying amount and
tax base of the newly acquired machine on 30 September 2010 amounted to R340 000
and R325 000 respectively. Depreciation on machinery is written off at 20% per annum
according to the straight-line method. The tax allowance on machinery is written off over
4 years (pro-rata) according to the straight-line method. The tax allowance on machinery
for the year ended 30 September 2010 amounted to R92 500. No other machinery were
acquired or sold during the year.
2. On 1 August 2009, LTea Ltd signed a contract with Lester Ltd to repair all the office
furniture in their eight storey administration building. The contract stipulated the contract
price to be R200 000, payable on completion of the contract. Lester Ltd estimated that
the total cost to repair all the furniture in the administration building of LTea Ltd would
amount to R120 000. At 30 September 2009, Lester Ltd completed 25% of the repairs of
the furniture (based on the costs incurred to date to total expected costs). On 30 June
2010 Lester Ltd completed the remainder of the contract. After inspection of the repair
work done, LTea Ltd issued a cheque on 2 July 2010 for the work completed. The repair
, lOMoARcPSD|44660598
expense has been recorded in the accounting records of LTea Ltd according to the
requirements of International Financial Reporting Standards (IFRSs). The SA Revenue
Service will allow the repair costs as a deduction when these costs are actually paid.
Depreciation on the administration building is written off at 2% per annum according to
the straight-line method. The SA Revenue Service does not allow any capital allowances
on the administration building. Furniture and fittings are depreciated at 20% per annum
according to the straight-line method which is consistent with the capital allowance on
furniture and fittings allowed by the
3. As a result of the increase in the demand for ice tea, the current warehouse used by
LTea Ltd to store the ice tea has become too small. On 30 September 2010 the directors
decided to relocate to a bigger warehouse in a nearby town. Upon cancellation of the
operating lease agreement of the current warehouse, which only expires on 30
September 2011, a penalty of 60% of the outstanding amounts will be payable. The
rental of the warehouse currently amount to R3 500 per month, payable in arrears. The
lease payments for the year ended 30 September 2010 have been paid up to date. The
lease contract stipulates that LTea Ltd cannot sublet the warehouse.
4. LTea Ltd use independent distribution agents to distribute their ice tea throughout Africa.
LTea Ltd has developed customary business practices to analyse customer’s changing
preferences and to implement product improvements, pricing strategies and marketing
campaigns to support the franchise name. These agents need to sign a contract and pay
a special agency fee of R90 000 for the exclusive right to distribute the ice tea in a
specific area. These agency fees are payable in advance in three equal annual
instalments over the contract period. The first instalment of R30 000 is payable on the
commencement date of the contract. The annual agency fees included in profit before
tax of LTea Ltd for the year ended 30 September 2010 consist of the following:
R
First instalments received relating to contracts 240 000
commencing on 1 October 2009
Second instalments received relating to contracts 360 000
commencing on 1 October 2008
600 000
The first instalment of agency fees in respect of contracts which only commences on 1 October
2010, amounting to R180 000, was also received in advance in the current year.
5. LTea Ltd increases their inventory levels of ice tea closer to September in order to
provide for the increased demand for ice tea during the summer months. After the draft
, lOMoARcPSD|44660598
financial statements for the year ended 30 September 2010 had been prepared, the
directors decided to change the inventory valuation method of the ice tea in order to
comply with International Financial Reporting Standards (IFRSs). The valuation method
was changed from the last-in-first-out method to the first-in-first-out method. The change
in the inventory valuation method has not been accounted for yet in the accounting
records of LTea Ltd for the year ended 30 September 2010.
The value of inventory based on the different valuation methods
was as follows: Last-in, First-out First-in, Difference
First-out
R R R
30 September 2008 190 000 230 000 40 000
30 September 2009 296 000 344 000 48 000
30 September 2010 305 000 355 000 50 000
The SA Revenue Service indicated that they will accept the new inventory valuation method for
tax purposes and that they will not reopen the previous year’s tax assessments.
6. The company provides for deferred tax on all temporary differences according to the
statement of financial position approach. There is certainty beyond any reasonable
doubt, that the company will have sufficient taxable profit in future against which any
deductible temporary differences can be utilised. There are no other exempt or
temporary differences except those mentioned in the question.
7. The SA Normal tax rate has remained unchanged at 28% for the past few years. All
capital gains are taxable at 66,6%.
8. The tax assessment of LTea Ltd for the year ended 30 September 2009, which was
received on 31 January 2010, showed that the company had an assessed loss of R130
000, which was in agreement with the accounting records of the company.
9. LTea Ltd made the following provisional tax payments for the financial year ended 30
September 2010:
R
31 March 2010 110 000
30 September 2010 70 000
180 000
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