Reference no: EM13315668

QUESTION 1

Big Guy Limited is a lorry manufacturer. On 1 January 2012, the company entered into an operating lease (as a lessee) over a company system. Details of the annual lease rentals, payable in arrears, are as follows:
• 2012 R 0
• 2013 to 2015 R30 000 per annum
• 2016 0
• 2017 to 2019 R10 000 per annum

Big Guy Ltd's profit before tax is R900 000 in 2012 (correctly calculated).

The tax authorities grant a 20% capital allowance on owned assets but allow a deduction from taxable profits of the lease payments if the asset is leased. The normal tax rate is 30%. There are no temporary differences other than those evident from the information provided. Berry Limited satisfies the requirements to raise deferred tax assets.

REQUIRED:

1 Prepare the 2012 journal entries with regard to the above lease agreement.

2 Draft the following to fully disclose the above lease and its tax effect:

Statement of comprehensive income for the year ended 31 December 2012

- Statement of financial position as at 31 December 201

- Notes to the financial statements for the year ended 31 December 2012.

Note that the accounting policy note is required, whilst the deferred tax note is not required. Ignore VAT

QUESTION 2

Newgate Limited, a manufacturer of toothpaste, was taken to court over alleged defamation charges when the company accused a rival toothpaste manufacturer of fraud. Before year-end (31 December 2013), the lawyers of Newgate Limited advised that, although losing the case was unlikely, legal fees and settlement costs could amount to R900 000 in the event that the court case was lost.

On 4 February 2014, the judge presiding over the case ruled that Newgate Ltd should pay R1000 000 to the plaintiff as well as pay all of the plaintiffs legal fees, which amounted to R180 000. The financial statements had not yet been authorised for issue at the time of the court ruling.

REQUIRED:

Discuss how this information should be treated in the financial statements of Newgate Limited for the year ended 31 December 2013.

Include all relevant definitions.

QUESTION 3

The following information refers to the fixed assets of Slender Limited for the year ended 31 December 2013:

Land, stand 99 Eastville (purchased on 1 January 2013) 1 000 000
Office building thereon (purchased on 1 January 2013) 2 200 000
Improvements to the building (up to 28 February 2013) 500 000
Rental income received 200 000
Repairs and maintenance 50 000

The building is used as Slender Limited's administration building. The company occupies only 5% of the floor space. The remainder of the building is leased out under an operating lease for R20 000 per month from 1 March 2013.

On 31 December 2013. the financial year-end of Slender Limited. Mr Fine, an independent sworn appraiser who holds a recognised and relevant professional qualification and has recent experience in the location and category of the property being valued, valued the property at the following fair values:

Land 1 200 000
Building 3 000 000

The valuation is based on current market prices for similar property in the Eastville area in the same condition and subject to similar lease and other contracts.

Slender Limited applies IAS 40 (AC 135) Investment Property on its investment property according to the fair value model.

The company shows a profit before tax of R650 000, including all the above information, for the year ended 31 December 2013. Deferred tax is provided for on all temporary differences according to the balance sheet approach. There no other items to be considered for deferred tax. The current income tax rate is 30%, accept that the cost price of the property is equal to the base cost.

REQUIRED:
Disclose the following notes to the financial statements of Slender Limited for the year ended 31 December 2013.
a. Accounting policy note on investment property
b. Profit before tax
c. Income tax expense, including the tax reconciliation
d. Deferred tax
e. Investment property