QUESTION 1 (53 marks)
Cape Climate (Pty) Ltd is a company based in Cape Town that supplies residential and commercial air conditioners. The company has a June financial year-end. During the current financial year-end, Cape Climate (Pty) Ltd entered into a contract with a local restaurant franchise, called Pizza Perfect, to supply, install and maintain the air conditioners in all their restaurants across Cape Town.
The terms of the contract are as follows:
• Pizza Perfect will place a non-cancellable order for 90 air-conditioning units with Cape Climate (Pty) Ltd on 1 April 2023.
• Cape Climate (Pty) Ltd will acquire each unit from their supplier at an amount of R7 500 per unit and deliver them to the Pizza Perfect stores on 30 June 2023. Each unit will be supplied at an amount of R16 000.
• The units will be fitted and installed at the Pizza Perfect stores on 3 July 2023. The initial fitting and installation, as well as the maintenance for the first 2 years will be provided at no additional charge to the Pizza Perfect stores.
• Fitting and installation costs are supplied by a third-party supplier to the customer. The cost for fitting and installation is as follows:
Initial fitting and installation R1 200 per unit
The initial fitting and installation are paid for on a cash basis by Cape Climate (Pty) Ltd to the technicians supplying the service on 3rd of July 2023.
• Maintenance costs are supplied by a third-party supplier to the customer. The cost
of maintenance is as follows:
Maintenance services R2 500 per unit per annum
After a board meeting was held on 27th June 2023, it was noted that the supplier of the maintenance services will increase their costs by 2% per annum at the end of the 2023 financial year-end.
Industry practice is to apply a 20% profit margin on similar fitting and installation and maintenance services, which Cape Climate (Pty) Ltd also implements.
• The selling price of the contract will be settled in full on 31 December 2023.
Identify the performance obligations within the contract according to the 5-step approach in accordance with IFRS 15 of the International Financial Reporting Standards.(3 marks)
Discuss and calculate the transaction price for the contract to supply the air- conditioning units according to Step 3 of the 5-step approach in accordance with IFRS 15 of the International Financial Reporting Standards. Note: Assume that the financing component relating to the maintenance contract, if applicable, is not significant.(16 marks)
Allocate the transaction price according to Step 4 of the 5-step approach in accordance with IFRS 15 of the International Financial Reporting Standards. Note: The stand-alone selling prices of the performance obligations are determined using the residual approach.(12 marks)
Prepare all the general journal entries to account for the contract to supply the air-conditioning units in the records of Cape Climate (Pty) Ltd for the 30 June 2023 and 30 June 2024 year-end in accordance with the IFRS 15 of the International Financial Reporting Standards. Note: The general journal entry relating to the maintenance contract for the June 2024 financial year end, should be provided for in 1 entry (ie. maintenance services for 12 months should be recognised in one general journal entry). No general journal entries are required for the initial purchase of the air conditioning units.
Journal dates are required.
Journal narrations are not required.(22 marks)
• All amounts should be rounded to the nearest Rand. Show all calculations clearly.
• Your answer must comply with International Financial Reporting Standards (IFRS).
• Ignore and value-added tax and income tax implications.
QUESTION 2 (47 marks)
Compuware (Pty) Ltd is an established company within the technology industry specialising in the design, manufacture, and retail of electronic devices such as computers, computer accessories, and software.
You have been provided with draft extracts from the entity’s Statement of Profit or Loss and Other Comprehensive Income and the Statement of Financial Position for the financial year ended 31 December 2023.
COMPUWARE (PTY) LTD
DRAFT EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2023
|Profit before tax||350 000||300 000|
|Income tax expense||(119 000)||(105 000)|
|Profit for the year||231 000||195 000|
|Other comprehensive income for the year||–||–|
|Total comprehensive income||231 000||195 000|
COMPUWARE (PTY) LTD
DRAFT EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2023
|Equipment – carrying amount||420 000||720 000||1 020 000|
|Cost||1 500 000||1 500 000||1 500 000|
|Accumulated depreciation||(1 080 000)||(780 000)||(480 000)|
The following additional information has been provided which has not yet been con- sidered during the preparation of the draft financial statements:
• During December 2023, it was discovered that the cost of an item of inventory sold on 30 June 2021 costing R400 000, had been incorrectly debited to the equipment account at the time it was sold.
• The taxable profit and tax base of equipment were correctly computed in all the financial years affected.
• Compuware (Pty) Ltd depreciates all equipment at 20% per annum on a straight- line basis. The equipment has a Rnil residual value. The carrying value and tax base of the equipment are the same.
• The opening retained earnings balance on 1 January 2022 was R900 000. There were no dividends declared or paid as well as no transfers to or from retained earnings during 2022 and 2023.
• There were no other movements in property, plant, and equipment other than that which is evident from the information provided. Other than the incorrect debit of inventory to the equipment account, all movements in the carrying amount of equip- ment since its date of acquisition are depreciation.
• Consider all amounts to be material.
• The income tax rate applicable for all three financial years ending on 31 March 2023 is 28%.
Calculate the effect of the prior period error on the statement of profit or loss and other comprehensive income and the statement of financial position for the financial year ending 31 December 2021 (i.e. the year in which the error occurred).(16 marks)
Disclose the prior period error in the notes to the annual financial statements of Compuware (Pty) Ltd for the year ended 31 December 2023 so as to comply with the IAS 8 of the International Financial Reporting Standards.(21 marks)
Prepare all the necessary general journal adjustments to account for the prior period error in the 31 December 2023 financial statements of Compuware (Pty) Ltd. Journal dates and narrations are not required.(10 marks)
Get Answers on Questions Above on Financial Reporting
Answer 1: The five step approach as per IFRS 15 of the international financial reporting standard is quite useful in evaluating the obligations that are there within a contract. In the given case of contract between the Cape climate Limited and Pizza perfect, application of the 5 step approach of IFRS 15 is performed as follows:
1) identify the contract with the customer
2) evaluating the performance obligation existence within the contract
Get completed answers on the questions above on financial reporting from the accounting assignment help South Africa experts of Student Life Saviour.
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