FAC3702 Assignment 1 (QUALITY ANSWERS) Semester 2 2024

This document contains workings, explanations and solutions to the FAC3702 Assignment 1 (QUALITY ANSWERS) Semester 2 2024. For assistance whats-app us on 0.6.8..8.1.2..0.9.3.4... Question 1 (50 marks - 75 minutes) KassiLam Limited (“KassiLam”) was founded by two Soweto born young entrepreneurs while they were in Varsity. KassiLam specialises in WIFI installation in the townships and have expanded to the villages. KassiLam makes money from contracts with the government through competitive bidding. KassiLam has a 31 December year end and prepares the financial statement in accordance with the International Financial Reporting standards (IFRS). KassiLam qualifies as a small business (SME) in terms of the Income tax Act of South Africa. KassiLam is preparing the financial statement for the year ended 31 December 2023 and has the following assets. 1. Vacant Land KassiLam’ s strategy follows that of McDonald, which is to own as much of their property. KassiLam acquired land in Limpopo and Eastern Cape as they are expanding their business to rural areas. The land was purchased in July 2022 for R1 050 000 in Limpopo and R1 240 000 in the Eastern Cape. The independent appraiser has valued this land for R1 199 000 in Limpopo and R1 300 000 in the Eastern Cape on 31 December 2022. On 31 December 2023 the land was valued at R1 140 000 in Limpopo and R1 250 000 in the Eastern Cape. The land is measured on revaluation basis since it was purchased, and it is the policy of KassiLam to revalue the land every year. 2. Plant On 1 April 2021, KassiLam purchased a cable plant that connects the African and American continent through the Atlantic Ocean. The plant was purchased for a total cost of R 88 million including the inspection costs. The cable plant is depreciated over the period of 15 years. On purchase date, R6 million was incurred for a major inspection and this major inspection is set to be done every 3 years with minor upgrades. Due to drastic weather changes in South America, an urgent major inspection was approved by management as the internet was becoming slow. The inspection took place between July 2023 and September 2023. The cost of the inspection was R7,5 million and were completed and available for use on 1 September 2023. 3. Machinery On 18 May 2023, KassiLam purchased a highly specialised technological machine on credit from a Chinese company for $239 000, and the machine was shipped free on board on 1 August 2023, on the same day, shipping cost of R43 899 were settled immediately by KassiLam. It was agreed between the supplier of the machine and KassiLam that the cost to assemble the machine will be shared 60% and 40%, respectively. A consultant from China and one permanent employee from KassiLam worked on assembling the machine. The total fees that were incurred by the consultant and employee were R87 000 and R71 000 (including his salary of R56 000). They worked on the machine for 6 weeks and the machine was ready for use on 1 November 2023. This machinery was estimated to be depreciated over 7 years on a straight-line method with a RNil residual value. FAC3702/2024/S2 3 The spot rates were as follows: Date $: ZAR 18 May 2023 $1: ZAR17,99 1 August 2023 $1: ZAR18,22 1 November 2023 $1: ZAR18,12 The South African Revenue Service grants KassiLam an accelerated allowance of 50:30:20 for the machine, non-apportioned. 4. Block of Flats in Dobsonville On 1 March 2021, KassiLam purchased four houses that are connected by a fence, in Dobsonville for R450 000 each and removed the fencing that was separating the houses. The space between two of the houses was used to build a block of flats while using the houses as their offices. The houses were available for use immediately after the sale. The total costs of construction of the flats were R3 750 000 and was completed on 1 June 2022 and they were rented out to tenants from this date. The block of flats took about 40% of the total space and the rest is occupied by the houses and parking for employees. The depreciation for the houses was estimated to be on a straight-line basis over 20 years with R100 000 per house residual value. There were no changes in these estimates. SARS does not grant any allowances for office space but grants 5% non- apportioned allowance for the residential accommodation The fair value for the block of flats was estimated by the independent appraiser to be R3 890 000 and R4 120 000 on 31 December 2022 and 31 December 2023, respectively. Land costs are negligible. 5. Additional information • The South African normal tax rate is 28%. The capital gains tax inclusion rate is 80%. • Investment property is accounted for according to the fair value model. • Owner-occupied buildings, machinery, plant and vehicles are accounted for according to the cost model. • Assume that the inspection costs are significant and regarded as a separate component of the plant. • Owner-occupied land is accounted for in accordance with the revaluation model. Any revaluation surplus is realized on disposal. FAC3702/2024/S2 4 REQUIRED Marks a) Prepare a property plant and equipment note for the year ended 31 December 2023. 30 b) Calculate the deferred tax expense or income for the year ended 31 December 2023, using the statement of financial position approach. • Ignore deferred tax on plant 13 c) Journalise the accounting treatment for the Block of Flats in Dobsonville for the year ended 31 December 2023. • Ignore deferred tax journal entries