QUESTION 1 (40 marks)

Queens (Pty) Ltd is a company with a 31 December year end. The company’s main business is the buying and selling of sports equipment.

2022 Financial year:

On 1 March 2022, Queens (Pty) Ltd bought a property and paid R9 500 000 in cash for the property. The property was bought with the intention of keeping it for investment purposes and a lease agreement was therefore entered into with a third party. In terms of the lease agreement, the third party will occupy Queens (Pty) Ltd’s property from 1 April 2022 for a period of 24 months.

2023 Financial year:

The property continued to be rented out by Queens (Pty) Ltd to the third party for the full financial year in terms of the lease agreement entered into during the 2022 financial year.

2024 Financial year:

The lease agreement with the third party came to an end on 31 March 2024. Queens (Pty) Ltd decided not to renew the lease agreement with the third party since they require additional warehouse space, and therefore, effective 1 April 2024, Queens (Pty) Ltd will use the property as one of their warehouses.

Additional information:

• The company makes use of the fair value model to account for investment property.

• The following fair values were applicable to the property:

o 31 December 2022 – R10 000 000

o 31 December 2023 – R9 800 000

o 1 April 2024 – R9 900 000

• Owner-occupied property is accounted for using the cost model.

• For all financial years, assume a corporate tax rate of 27% and a capital gains inclusion rate of 80%.

REQUIRED:

1.1) With reference to the information given, discuss how Queens (Pty) Ltd should classify and recognise the property on 1 March 2022. (9 marks)

1.2) Prepare all the general journal entries required in the records of Queens (Pty) Ltd to account for only the property for the 31 December 2022 financial year. Dates and narrations are not required. Round all calculated amounts to the nearest rand where applicable. (9 marks)

1.3) Prepare an extract from the Statement of Financial Position and the Statement of Profit or Loss and Other Comprehensive Income of Queens (Pty) Ltd for the 31 December 2023 financial year, showing all balances relating to the property. Comparative figures are required. Notes are not required. Round all calculated amounts to the nearest Rand where applicable. (16 marks)

1.4) With reference to the requirements of IAS 40, discuss how Queens (Pty) Ltd should account for the property in their records from 1 April 2024. Include in your discussion references to the applicable amounts. (6 marks)

QUESTION 2 (18 marks)

Green Energy (Pty) Ltd is a company that operates in the renewable energy industry, with a specific focus on wind energy. The company has a 30 June year end.

On 1 September 2023, Green Energy (Pty) Ltd purchased an incomplete research and development project, StormWindsTM, from a third party. The research and development project entails a new process design for wind energy. Green Energy (Pty) Ltd’s objective is to complete the development of the new process design and register it as a patent.

StormWindsTM was purchased for R2 970 250, and the purchase price is only payable on 1 September 2025, which is not considered to be within normal credit terms.

Green Energy (Pty) Ltd commenced with further development of StormWindsTM on 1 October 2023. The development of StormWindsTM was completed on 30 April 2024. Green Energy (Pty) Ltd incurred R545 000 on further development cost up until 30 April 2024 and all costs were paid for in cash.

Green Energy (Pty) Ltd has done a detailed assessment of the project and the assessment has confirmed that the project meets the definition of an intangible asset in terms of IAS 38: Intangible Assets and it has also met all the requirements for capitalisation of development costs on initial recognition.

StormWindsTM was completed, registered as a patent and ready for use on 1 May 2024.The patent is estimated to have a useful life of five years.

Additional information:

• Assume a discount rate of 9% per annum to be applicable for all periods.

• All classes of intangible assets are accounted for in accordance with the cost model of IAS 38 and patents have a nil residual value.
• Ignore all tax implications.

REQUIRED:

Prepare ALL the general journal entries to account for StormWindsTM in the financial statements of Green Energy (Pty) Ltd for the financial year ended 30 June 2024. Round all calculated amounts to the nearest rand where applicable. Dates and journal narrations are not required.

QUESTION 3 (32 marks)

Yellowstone (Pty) Ltd is a company with a 31 December year-end. The company operates in the transport industry and therefore owns various trucks.

Land

The company owns a piece of land that they use to park their trucks on when they are not out on a specific transportation route or job.

Yellowstone (Pty) Ltd originally purchased the property on 1 March 2019 for R470 000. Yellowstone (Pty) Ltd makes use of the revaluation model to account for all land and a revaluation is done annually.

The following fair values were applicable to the land:

• 31 December 2021 – R550 000

• 31 December 2022 – R450 000

• 31 December 2023 – R500 000

Trucks

On 1 July 2023, Yellowstone (Pty) Ltd bought a new 2021 Mercedes Benz Actros 2645 truck. The purchase price of R1 886 000 is only payable on 30 June 2024, which is considered to be within normal credit terms.

Yellowstone (Pty) Ltd spent R125 000 on modifications required to the new truck before it was brought into use. The amount was paid in cash on 31 July 2023. The truck was ready for and brought into use on 1 August 2023.

The truck was serviced on 5 November 2023 and Yellowstone (Pty) Ltd paid the R10 000 for the service in cash on 15 November 2023.

The new truck was bought to replace an old 2014 Mercedes Benz Axor 3335 truck, which Yellowstone (Pty) Ltd sold. The truck was originally purchased on 1 March 2019 for R1 255 000. This old truck was sold on 5 July 2023 for R550 000, and the amount was received in cash on the date of sale.

Yellowstone (Pty) Ltd makes use of the cost model to account for all trucks and the estimated number of kilometers is used to depreciate their trucks.

The following applies to the two trucks respectively:

2021 Mercedes

Benz Actros 2645

2014 Mercedes

Benz Axor 3335

Residual value R500 000 R450 000

Total estimated kilometers 250 000 km 200 000 km

Total kilometers to date of sale – 180 000 km

Total kilometers for 2023 17 500 km 18 000 km

You can ignore all tax consequences for purposes of answering this question.

REQUIRED:

3.1) With reference to the information under Land, prepare an extract from the Statement of Profit or Loss and Other Comprehensive Income of Yellowstone (Pty) Ltd for the financial year ended 31 December 2023. Comparative figures are required. Show all workings. Round all calculated amounts to the nearest
Rand where applicable. (11 marks)

3.2) With reference to the information under Trucks, prepare ALL the general journal entries required to account for the trucks in the records of Yellowstone (Pty) Ltd for the financial year ended 31 December 2023.

Round all calculated amounts to the nearest Rand where applicable. Dates and journal narrations are not required. Ignore VAT implications.
Please indicate the journals and calculations for each of the trucks clearly.

Mark allocation per truck:

• 2014 Mercedes Benz Axor 3335 – Old truck (10 marks)

• 2021 Mercedes Benz Actros 2645 – New truck (11 marks)

QUESTION 4 (10 marks)

The following represents companies in a group:

Greek (Pty) Ltd

Gamma
(Pty) Ltd

Delta (Pty) Ltd

Greek (Pty) Ltd owns 100% of the shares in both Gamma (Pty) Ltd and Delta (Pty) Ltd.

Gamma (Pty) Ltd issued 1 000, 4% debentures to Delta (Pty) Ltd at R50 per debenture.

This was the first time that Gamma (Pty) Ltd issued debentures, therefore, their debentures do not trade publicly and there is no active market with a quoted market price available for these debentures.

Per the requirements of IFRS 9, a financial asset shall be measured at its fair value on initial measurement and recognition.

The Financial Manager of the group is however concerned whether the transaction price of R50 per debenture will be considered the fair value per debenture, in terms of the requirements of IFRS 13: Fair value, for the initial recognition of the debentures in the records of Delta (Pty) Ltd.

REQUIRED:

Advise the Financial Manager whether the transaction price per debenture will be the appropriate value at which to record the purchase of the debentures in the records of Delta (Pty) Ltd. Your answer should be in terms of the requirements of IFRS 13: Fair value and should include the possible techniques that can be used to determine the appropriate fair value should the transaction price not be the appropriate value to use. (10 marks)

Answers to Above Questions on Financial Reporting

Answer 1: With respect to the classification and recognition of property by Queens Pty Limited, it is evaluated that the property has been purchased by the company as an investment property and entered into a lease agreement with a third party, hence it should be classified as investment property as per IFRS 16, property, plant and equipment.

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