Exam (elaborations)
FAC3764 Study pack 2025
- Institution
- University Of South Africa (Unisa)
These are questions and answers to all the IFRS and IAS of FAC3764. Old question papers and solutions.
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QUESTION (40 marks) (72 minutes)Ngomalungundu Ltd (“Ngoma”) is a farming enterprise based in Piesanghoek, Makhado. Ngoma has
over the years grown to become one of the largest producers of potatoes and pumpkins in Africa. Ngoma
is listed on the Namibian Stock Exchange (NSx) and has a 31-March year end.
The following relates to some of the transactions, assets & liabilities of Ngoma for the year ended
31 March 2024:
1. Farm in Nongoma
On 1 February 2024, Ngoma acquired a farm in Nongoma, KwaZulu-Natal for R1 125 000. The farm
was acquired to be used as an expansion of its current potato farming business within the KwaZulu
Natal province. The strategic location of the farm and the favorable climate conditions in the area makes
it the ideal location for potato farming. The farm covers an area spanning 650 hectares and has a large
river flowing through it. Ngoma is legally entitled to use the water from the river for irrigation purposes.
The river is one of the largest in South Africa and never runs dry. Over the years, the river has proved
to be a reliable water source for most communities in the area.
On 1 April 2024, you received the following email from the group Chief Financial Officer (CFO) of Ngoma
in relation to the river running through the farm:
From: Ms. Sibongile Ngomane (Group CFO)
To: FAC3764 Student
Date: 1 April 2024
Subject: Recognition of the river in the financial statements
Good Day
Hope this email finds you well.
I have been discussing the issue around the river flowing through the newly acquired Nongoma farm
with the Group Chief Executive Officer. He is of the view that this river should be recognized as a
separate asset in the Ngoma financial statements.
This will also have a positive impact on the financial position of the company.
Kind Regards
Ms. Sibongile Ngomane CA (SA)
Group CFO – Ngomalungundu Ltd
2. Contract with SaveU supermarket
On 1 August 2023, Ngoma entered into an agreement with SaveU supermarket in Eswatini to supply
potatoes at R20 per kg. The agreement stipulated that if SaveU supermarket buys more than 10 000kgs
of potatoes within a twelve-month period, the price per kg will be retrospectively reduced to R17. At the
time of the agreement and throughout the period when the potatoes were sold, it was expected that
SaveU supermarket would qualify for the rebate.
On 31 March 2024, Ngoma delivered 8 500kgs of potatoes to SaveU supermarket. Ngoma still
estimated that the sales to SaveU would exceed 10 000kgs by 31 July 2024. All sales made to SaveU
supermarket are settled in cash on the date of delivery.
Page 3 of 6
,QUESTION (continued)
The junior accountant has prepared the following journal entry to account for the agreement between
Ngoma and SaveU supermarket for the year ended 31 March 2024:
Debit Credit
R R
31 March 2024 Bank (SFP) 170 000
Revenue (P/L) 170 000
Recognition of revenue for the sale of 8 500kg of potatoes
3. Property in Modjadjiskloof
On 1 March 2023, Ngoma began the construction of a processing plant in Modjadjiskloof. The
construction of the plant was completed on 31 December 2023 at a total cost of R9 800 000 (excluding
compliance costs referred to below).
To adhere to health and safety regulations, a health inspection was conducted at a cost of R550 000 on
15 January 2024. On 31 January 2024, the inspector issued a compliance certificate confirming that the
plant complies with all health and safety requirements of South Africa and on that date, the plant was
available for use as intended by management.
Ngoma hosted an event to officially open the plant on 15 February 2024 at a cost of R150 000.
It is the accounting policy of Ngoma to account for the processing plant on the cost model and to provide
for depreciation on the straight-line method over an estimated useful life of 20 years. On
31 January 2024, an insignificant residual value was allocated to the processing plant.
4. Spraying tractors
On 1 May 2022, the directors of Ngoma decided to lease 5 spraying tractors from Bafana leasing (Pty)
Ltd (“Bafana”). The lease agreement contains a lease in terms of IFRS 16, Leases. Below is an extract
from the signed lease agreement between Ngoma and Bafana:
Commencement date .............................................................................................. 1 May 2022
Annual instalment (paid in arrears on 30 April) ...................................................... R900 000
Ngoma’s incremental borrowing rate ....................................................................... 12.3% p.a.
The lease term is for a non-cancellable period of 3 years with an option to renew the lease for an
additional 2 years. The directors of Ngoma are not sure whether they will exercise the renewal
option as this will depend on the circumstances at the point of renewal;
Ngoma incurred and paid legal and administrative costs of R75 000 to enter into the lease;
Ownership of the tractors will not transfer to Ngoma at the end of the lease term;
The implicit interest rate is indeterminable;
The tractors were estimated to have a useful life of 5 years on 1 May 2022;
SARS recognizes the lease of the tractors as a rental agreement in terms of part (b) of the definition
of an instalment credit agreement in the VAT Act, which means all lease payments are deductible
when paid.
Page 4 of 6
,QUESTION (continued)
Additional information:
The profit before tax of Ngoma for the year ended 31 March 2024 amounted to R5 550 000. The
profit was calculated before taking into account the effect of all the transactions above but after
taking into account the following:
o Dividends received in respect of a 20% shareholding interest acquired in a JSE listed farming
company, Chewa Ltd (“Chewa”) in 2023. Chewa declared a final dividend of R550 000 to all
registered shareholders on 31 December 2023. The dividend was paid on 28 February 2024.
o Legal fees amounting to R133 000 were incurred and paid by Ngoma during the 2024 financial
year. The legal fees are not deductible for tax purposes.
The opening deferred tax liability as per the audited annual financial statements for the year ended
31 March 2023, amounted to R22 646. You should assume this amount to be correct in all respects,
the information provided in the scenario is not sufficient to recalculate it.
The first and second provisional tax payments made during the current financial year, which have
not been recorded in the accounting records of Ngoma, amounted to R190 000 and R55 500
respectively. Ngoma had an assessed loss of R122 000 for the year ended 31 March 2023. A
deferred tax asset was provided for against the assessed loss as Ngoma anticipated to have
sufficient taxable profit in future against which any unused tax losses can be utilized.
The South African normal tax rate is 27% and the capital gains inclusion rate is 80%. These tax rates
were also applicable in the previous financial year.
The South African Revenue Service (SARS) allows a 5% annual building allowance on the
processing plant in terms of section 13(1) of the Income Tax Act, not apportioned for periods shorter
than a year.
SARS allows a tax allowance on tractors over a period of 5 years on the straight-line method in
terms of section 11(e) of the Income Tax Act, apportioned for periods shorter than a year.
Deferred tax is provided for on all temporary differences in accordance with the statement of financial
position approach. There are no other items causing temporary differences, except for those
mentioned in the question. The company will have sufficient taxable profits and capital gains in the
future, against which any unused tax losses can be utilized.
All property, plant and equipment are accounted for on the cost model in accordance with IAS 16
Property, plant and equipment.
Assumptions
All amounts are material.
Ignore the implications of Value-Added Tax (VAT).
Page 5 of 6
, REQUIRED:
Marks
a) Write a memorandum to the Group Chief Financial Officer (CFO) of Ngoma 8
advising her on whether the river flowing through the Nongoma farm is an asset
and whether it can be recognised as a separate asset in the accounting records
of Ngomalungundu Ltd for the year ended 31 March 2024, with reference to the
Conceptual Framework.
Communication mark – Presentation 1
Communication mark – Logical argument 1
b) Critically evaluate, with reasons, the journal entry processed by the junior 7
accountant of Ngomalungundu Ltd in respect of the agreement entered into
with SaveU supermarket for the financial year ended 31 March 2024.
Discuss both correct and incorrect aspects of the journal entry where
applicable.
Support your discussion with calculations and provide any correcting
journal entry/(s), if any.
Do not include any tax related discussions or calculations.
c) Calculate the amount of current tax payable to the South African Revenue 20
Service (SARS) as it would be disclosed in the statement of financial position
of Ngomalungundu Ltd as at 31 March 2024.
The movement in temporary differences in the current tax calculation
should be calculated using the statement of financial position approach.
All assets and liabilities evident from the scenario should be considered,
even if they have no deferred tax consequences.
d) In a recent engagement with the Group Chief Financial Officer (CFO) of 3
Ngomalungundu Ltd, she indicated that the company will not be paying any
income tax due to SARS as this may deprive the executive management team
from earning their bonuses.
Discuss any ethical considerations you may have regarding the suggestion by
the Group CFO around the non-payment of income tax to the South African
Revenue Services, in terms of the SAICA Code of Professional Conduct (CPC)
and any other applicable legislation.
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Round off all calculations to the nearest Rand.
All calculations must be shown.
Comparative amounts are not required.
Accounting policy notes are not required. [40]
©
UNISA 2024
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