QUESTION 1 (45 marks)

Lucky Star Limited is a company with a 30 June financial year-end.

On 1 August 2021, Lucky Star Limited purchased a machine with a cost price of R3 500 000. The machine is expected to have a useful life of five years with no resid- ual value.

Lucky Star Limited makes use of the revaluation model to account for machinery, and the revaluation surplus is realised on the sale of the machinery. On 1 July 2023, the machine was revalued and had a net replacement cost of R3 000 000.

On 30 June 2023, the machine’s fair value less costs to sell was determined to be R2 000 000 and the following figures show the expected cash flows from the use of the machine for the remainder of its useful life:
Year Future cash flow

• 2024 R990 000

• 2025 R820 000

• 2026 R750 000

A discount rate of 12% is applicable.

REQUIRED:

1.1 Prepare extracts from the statement of financial position as at 30 June 2023 and the statement of profit or loss and comprehensive income for the year ended 30 June 2023 of Lucky Star Limited showing the necessary line items relating to the machine.
• Comparative figures are required.

• Notes to the financial statements are not required.

• Show all calculations.

• Round all amounts to the nearest Rand.

• Ignore all tax implications.

(29 marks)

1.2 Assume that on 30 June 2024, the machine had a recoverable amount of R1 470 000. Prepare all the general journal entries required in the records of Lucky Star Limited for the 30 June 2024 financial year to account for the
transactions relating to the machine. (16 marks)

QUESTION 2 (43 marks)

Milkwood Limited is a company with a 31 December financial year-end. You are presented with the following extracts from the financial statements of Milkwood Limited for the 31 December 2023 financial year.

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2023

Notes:

1. Milkwood Limited reported a profit before tax of R2 265 483. The profit before tax figure includes the following:
– Dividends received R25 200

– Interest received R5 250

– Donations made to non-registered charity organisations R20 000

– Traffic fine paid R2 500

– Depreciation ?

2. You can assume that no PPE assets were bought or sold during the 2023 financial year. The following information relating to Milkwood Limited’s PPE assets is available:

** Not apportioned for part of a year.

3. The 2023 trade receivables are shown net of allowance for doubtful debts of R9 350. No allowance was raised in 2022. SARS allows an allowance of 25% per annum.
4. The income received in advance is taxed in the year of receipt and the prepaid expenses are deductible in the year of payment.
5. Milkwood Limited provided for a tax expense of R5 222 in their 2022 financial state- ments. The tax assessment for the 2022 financial year-end was received during
2023 and showed that Milkwood Limited had an assessed loss of R25 656.

6. There are no other differences between accounting profit and taxable profit; other than those evident from the information provided.
7. Assume all amounts to be material.

8. The income tax rate is 27%.

REQUIRED:

Prepare all the notes relating to tax expense in Milkwood Limited’s 31 December 2023 annual financial statements to comply with the International Financial Reporting Standards.
• The tax rate reconciliation should be presented in currency.

• Accounting policies are not required.

• Show all workings and refer to amounts where applicable.

• Round all answers to the nearest Rand. (43 marks)

QUESTION 3 (12 marks)

You are presented with the following accounting profit and taxable income calculations for the 29 February 2024 financial year of a company:

Notes Accounting profit (Rand)

Taxable income
(Rand)

Gross profit 1 550 000 1 550 000

Other expenses 1 (881 200) (534 000) Other income 2 18 000 12 000
Wear and tear:

Machines – (164 000) Rental received in advance – 19 500
686 800 883 500

Notes:

1. Other expenses include the following:

Depreciation – building** R140 000

Depreciation – machines R152 000

Donations R50 000

Income tax penalty R5 200

** No tax allowances are applicable to the building.

2. Other income includes dividends received of R6 000.

REQUIRED:

Prepare a reconciliation between the accounting profit and the taxable income for the

29 February 2024 financial year. Classify each reconciling item as either a temporary difference, non-taxable item, or non-deductible item for tax purposes.

Use the following table to answer your question:

Item Amount Classification

Fines R1 000 Non-deductible (12 marks)

Notes:

1. Other expenses include the following:

Depreciation – building** R140 000

Depreciation – machines R152 000

Donations R50 000

Income tax penalty R5 200

** No tax allowances are applicable to the building.

2. Other income includes dividends received of R6 000.

REQUIRED:

Prepare a reconciliation between the accounting profit and the taxable income for the

29 February 2024 financial year. Classify each reconciling item as either a temporary difference, non-taxable item, or non-deductible item for tax purposes.

Use the following table to answer your question:

Item Amount Classification

Fines R1 000 Non-deductible

Answers to Above Questions on Financial Reporting

Answer 1: The extracts from the statement of financial position as at 30 June 2023 and the statement of profit or loss and comprehensive income for the year ended 30 June 2023 of Lucky Star Limited showing the necessary line items relating to the machine is prepared as follows:

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