BOOT CAMP 5 AUGUST 2023

QUESTION 1 (39 marks; 59 minutes)

Younger Ltd (‘Younger’) is a clothing manufacturing company listed on the JSE Ltd that
was incorporated on 1 July 20.18. The following draft statements of profit or loss and
other comprehensive income have been prepared for the years ended 30 June 20.19 and
30 June 20.20:
20.20 20.19
R R
Revenue 1 200 000 1 000 000
Cost of sales (550 000) (450 000)
Gross profit 650 000 550 000
Other income includes dividends received and 170 000 -
gain on disposal of investment
Other expenses include, among other
expenses fair value adjustment on investment (275 000) (145 000)
Profit before tax 495 000 405 000

Additional information:
1. On 1 July 20.18 Younger purchased all its equipment for R430 000. On this date, the
useful life of the equipment was estimated to be four years with a residual value of
R30 000. On 30 June 20.20, Younger revised the total useful life of the equipment to
be six years, but the residual value did not change. The effect of the change in
estimate has not been taken into account in the draft figures provided above. On the
date of purchase the equipment was ready for use as intended by management and
was put into use. Younger depreciates equipment over the expected useful life on a
straight-line basis.
Assume the SARS grants a wear and tear allowance of 25% per annum on the cost
of the equipment on the straight-line basis (not apportioned for parts of a year).
2. During June 20.20, it was discovered that the sales manager recorded fictitious credit
expenses amounting to R70 000 during the year ended 30 June 20.19 to undermine
the performance of a junior employee that he did not like. No entries have been
processed to correct this material error. Assume the SARS will re-open the tax
assessment for the 20.19 year.
3. During 20.20 the directors decided to change the basis for valuing inventories from the
weighted average method to the first-in-first-out method as it will result in a more
appropriate presentation of events in the financial statements.

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 A summary of the value of closing inventories is provided:
20.20 20.19 20.18
Rand Rand Rand
Weighted average: old method 90 000 110 000 105 000
First-in-first-out: new method 95 000 102 000 108 000
This effect of the change in accounting policy has not been accounted for in the draft
figures provided above.
Assume the SARS will allow the new valuation method from 30 June 20.20.
4. A depreciation expense of R25 000 in respect of machinery was correctly recognised
by Younger for the year ended 30 June 20.20. However, the accountant made a
calculation error as the depreciation expense should have been R28 000. The effect
of this calculation error has not been accounted for in the draft figures provided above.
Assume that the SARS does not allow a deduction on the cost of the specific
machinery.
5. On 1 January 20.19, Younger acquired ordinary shares in Lemon Tree Ltd ('Lemon
Tree') for R450 000 (fair value) in cash. Costs associated with the purchase
transaction were considered to be immaterial. On 30 June 20.19, the fair value of the
investment in Lemon Tree declined to R425 000. On 31 March 20.20, Younger
received a cash dividend of R25 000 from Lemon Tree. On 30 May 20.20, the entire
investment in Lemon Tree was disposed of at its fair value of R570 000 for cash. This
investment is held for speculative purposes and was correctly classified as
subsequently measured at fair value through profit or loss. This transaction was
correctly accounted for in the statement of profit or loss and other comprehensive
income for the years ended 20.19 and 20.20. Since the share investment was held for
speculative purposes, it was correctly not regarded as of a capital nature for tax
purposes. The accounting fair value adjustments will not be recognised by the SARS,
only the gain or loss on disposal in the taxable income between the selling price and
the original cost of the investment.
6. Assume that the dividend received from the investment in Lemon Tree is not taxable
by the SARS.
7. Other expenses for the year ended 30 June 20.20 includes fines of R7 000 (20.19:
Rnil) that are not deductible for tax purposes.
8. Younger started to pay their subscriptions in advance for the year ending
30 June 20.19. The amounts paid in advance during June 20.19 and June 20.20, were
R20 000 and R25 000 respectively. Assume that these expenses are deductible for

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 tax purposes on the earlier of the date of accrual or payment. These expenses were
correctly accounted for in the accounting records.
9. A list of credit losses (doubtful debts) was presented to the SARS, and an allowance
of 40% of the credit losses was granted as a deduction for tax purposes. The balance
of the allowance for credit losses account in the records of Younger for the financial
years ended 30 June 20.19 and 20.20 was R15 000 and R18 000, respectively. These
expenses were correctly accounted for in the accounting records.
10. Deferred tax is recognised on all temporary differences. There are no temporary or
permanent differences other than those indicated by the information presented.
11. Assume a normal tax rate of 27% for all years under review. Ignore VAT and CGT.

QUESTION 1: REQUIRED: Marks

(a) Calculate the profit before tax in the records of Younger for the
12
years ended 30 June 20.20 and 20.19.
(b) Prepare all the necessary journal entries to account for the current
income tax expense in the records of Younger for the years ended
30 June 20.20 and 20.19. Start your calculation with the profit
before tax as calculated in (a). 26
Indicate which component, part, and/or item of the financial
statement is affected by any journal entry. Journal narrations are
not required.
TOTAL MARKS 38
Answers are to comply with IFRS’s. Assume that all current IFRS’s have always
been in existence. Show all calculations clearly, cross-reference them to answers,
and work to the nearest Rand.

QUESTION 2 (40 marks; 60 minutes)

Resurgence Ltd (‘Resurgence’) is a company listed on the JSE Ltd. The following
information relates to the financial years ended 30 June 20.21 and 30 June 20.22.
Accounting policies
Some of the relevant accounting policies of Resurgence as follows:
• Owner-occupied property are accounted for under the cost model in terms of IAS 16
Property, plant and Equipment.
• Depreciation on property, plant and equipment (excluding land) is recognised on the
straight-line basis as the items are used evenly over their useful lives.

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• It is the policy of Lvis to account for investment properties in accordance with the fair
value model in terms of IAS 40 Investment Property.

Office building
On 1 May 20.21, Resurgence bought a new office building for R5 200 000. The value of
the land portion is not considered material, and the office building was immediately ready
for use, as intended by management.
Resurgence uses 20% of the floor space of the office building for administrative purposes.
The remainder of the office building is leased out to two separate entities in terms of a
non-cancellable operating lease agreement, effective from 1 June 20.21. Both lease
agreements fixed the monthly rental payment to R25 000 per month, payable in arrears.
The offices can be sold or leased separately.
Resurgence made some improvements to the office building by adding sandstone
cladding to the outside of the building. On 1 March 20.22, the cladding was done at a total
cost of R120 000. This improvement had no impact on the rental agreements. The
improvement value is allocated to the office building as a whole and has no separate
useful life. The South African Revenue Service (‘SARS’) allows the capitalisation of the
improvement.
On 30 June 20.21 and 30 June 20.22, the fair value of the office building was determined
to be R5 180 000 and R5 350 000, respectively.
An independent valuer valued the property with a recognised and relevant professional
qualification and who had recent experience in the location and category of the valued
property. The valuer, Mr K Night, determined the fair value of the property based on
observable prices for similar properties and adjusted for the condition and location of the
property.
Resurgence depreciates the applicable portion of the office building over the expected
useful life of 50 years using the straight-line method. The residual value of the building is
assumed to be Rnil.
The SARS grants a capital allowance of 5% per annum on the office building’s cost
(including the improvements). The tax allowance is not apportioned for periods shorter
than a year, on the cost of office buildings.
Factory building:
On 1 July 20.21, Resurgence purchased a factory building for R12 000 000. The transfer
of ownership took place on 1 July 20.22. The seller was willing to defer payment of the
purchase price until 30 June 20.22, whilst the normal credit term would be two months
from date of transfer. On 30 June 20.22, the company’s incremental borrowing rate is 9%.

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Any interest is compounded annually in arrears. On 1 July 20.21, the property became
available for use. The property was not considered to be an investment property.
Resurgence depreciates the applicable portion of the factory building over the expected
useful life of 20 years using the straight-line method. The residual value of the building is
assumed to be Rnil.
Additional information
1. On 30 June 20.21, the balance on the deferred tax account in the Statement of
Financial Position consisted of the following:
Dr/(Cr)
R
Office building (64 944)
Assume there are no other temporary, non-taxable, or non-deductible differences
other than those clear from the given information.
2. The company tax rate of 27% applies to all years under review. Ignore capital gains
tax (CGT) and value-added tax (VAT).
QUESTION 2: REQUIRED Marks

(a) Calculate the carrying amount of the owner-occupied office building to

be disclosed in the records of Resurgence for the year ended 6
30 June 20.22.
(b) Disclose the investment property note in the financial statements of
Resurgence for the year ended 30 June 20.22. Comparative figures 7
are required.
Communication skills – presentation and layout. 1
(c) Prepare all the journal entries (including cash, excluding tax) in respect
of the factory building and the settlement of the purchase price, in the 7
records of Resurgence, for the year ended 30 June 20.22.
You are required to clearly indicate which component, part and/or item
of the financial statements is affected by any journal entry. Journal
narrations are not required.
(d) Discuss, with reference to IAS 12, Income taxes and IAS 40,
Investment property, how the taxable income of Resurgence should be
calculated for the year ended 30 June 20.22, focusing only on the 10
transactions relating to the office building. Include calculations and
amounts as part of your discussion.
Communication skills – clarity of expression. 1

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(e) Using the statement of financial position method, calculate the
deferred tax balance in the statement of financial position at
30 June 20.22, as well as the amount charged to the statement of
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comprehensive income for the year ended 30 June 20.22. (Indicate
whether it is a debit or credit entry and show detailed calculations per
temporary difference.)
TOTAL MARKS for (d) and (e) 40
Answers are to comply with IFRSs. Assume that all current IFRSs have always been
in existence. Show all calculations clearly, cross-reference them to answers, and
round to the nearest Rand.