QUESTION 1 (27 marks)

Scenario 1
GreenTech Innovations Ltd has recently developed a new type of battery technology that significantly extends the life of electric car batteries. This technology is protected by a patent, and GreenTech Innovations Ltd controls the rights to this technology due to its development and registration of the patent. GreenTech Innovations Ltd expects that this technology will generate substantial future economic benefits through licensing agreements with major car manufacturers who have indicated their interest in GreenTech Innovations Ltd’s new technology.

Scenario 2
AquaPure Ltd, a water purification company, has entered into a contract with CleanWater Ltd to deliver a custom water filtration system within the next year. AquaPure Ltd has received an advance payment of 50% of the contract value from CleanWater Ltd. As per the agreement, if AquaPure Ltd fails to deliver the system on time, they must refund the advance payment along with a 10% penalty.

REQUIRED:

Please note that the following questions need to be answered with reference to the Conceptual Framework for Financial Reporting ONLY.

With reference to Scenario 1 and the Conceptual Framework, advise GreenTech Innovations Ltd on how they should recognise the new battery technology in their financial statements.
(13 marks)

With reference to Scenario 2 and the Conceptual Framework, advise AquaPure Ltd on how they should recognise the advance payment received in their financial statements.

QUESTION 2 (60 marks)

Snitchy (Pty) Ltd is an energy drink manufacturing company whose signature energy drink is Snitchy. The company has a 30 June year-end.

You are presented with the following pre-adjustment trial balance of Snitchy (Pty) Ltd:

Pre-adjustment trial balance of Snitchy (Pty) Ltd as at 30 June 2024:

The following transactions have not yet been accounted for in the pre-adjustment trial balance given above:

1. Share capital:

2024 2023
Authorised shares 2 000 000 2 000 000
Issued shares 1 500 000 1 000 000

On 5 January 2024, Snitchy (Pty) Ltd issued additional shares at R1.50 per share.

2. Property:
The property is used as Snitchy (Pty) Ltd’s head office and is accounted for under the revaluation model in accordance with IAS 16. The property was revalued on 30 June 2024 and a gain on the revaluation of the property of R100 000 needs to be accounted for through other comprehensive income. The income tax relating to the revaluation was calculated as R21 600.

3. Machinery:
Snitchy (Pty) Ltd purchased a new manufacturing machine on 1 February 2024 with a cost price of R553 000. The manufacturing machine was ready for use on 1 February 2024. The new manufacturing machine was purchased to replace an older machine.

The old machine was sold on 5 February 2024, and the following details applied to the old machine:

All machinery had a residual value of nil. Machinery is depreciated over a period of 5 years on a straight-line basis.

4. Investments – held for trading:
Snitchy (Pty) Ltd holds a share investment portfolio with a registered share trader. These shares are held for trading purposes. The shares are recorded in Snitchy (Pty) Ltd’s records at fair value through profit and loss. On 30 June 2024, the fair value of the share portfolio was as follows:

You can assume all movements relating to the share portfolio have been accounted for except the year-end fair value adjustment.

5. Trade receivables:
Snitchy (Pty) Ltd’s management went through the company’s debtors list and identified customers to the value of R15 230 that are unable to pay their debts and require write off.

6. Inventory:
During the year-end stock count, a batch of Snitchy that was past its due date was identified and disposed of as it is no longer suitable for sale and consumption. The inventory balance on hand was determined to be R519 900 on 30 June 2024.

7. Trade payables:
Snitchy (Pty) Ltd purchased raw materials on credit from a local supplier. The cost price of the raw materials acquired amounted to R125 000.

8. Loan payable:
On 1 March 2024, Snitchy (Pty) Ltd borrowed R200 000 from a financial institution. The loan is repayable in 4 equal instalments, with the first instalment due on 28 February 2025. Interest is payable annually at a rate of 12% per annum. No transactions relating to the loan have been accounted for at year-end.

9. Insurance expense:
The insurance expense includes a premium of R140 000 that was paid for the insurance contract relating to the period 1 January 2024 to 31 December 2024.

10. Income received in advance:
On 25 June 2024, Snitchy (Pty) Ltd received a payment of R50 000 from one of their customers. The delivery of the goods purchased only took place on 3 July 2024.

14. Income tax expense:
Income tax for the current year has been correctly calculated and amounted to R275
082. The balance was still outstanding at the financial year-end.

15. Dividends paid:
During the current financial year, Snitchy (Pty) Ltd declared and paid the following dividends to its shareholders:

REQUIRED:

Prepare the Statement of Profit or Loss and Other Comprehensive Income of Snitchy (Pty) Ltd for the financial year ended 30 June 2024 in accordance with International Financial Reporting Standards. Comparative figures are not required. Show all workings, and reference accordingly.
(44 marks)

Prepare the Statement of Changes in Equity of Snitchy (Pty) Ltd for the financial year ended 30 June 2024 in accordance with International Financial Reporting Standards. Comparative figures are not required. Show all workings, and reference accordingly.

QUESTION 3 (13 marks)

Queens Ltd is a company that imports solar panels and is listed on the JSE. Mr. Ace is the Chief Executive Officer (CEO) of Queens Ltd.
Mr. Ace owns 30% of the shares in Kings (Pty) Ltd and, therefore, has significant influence over Kings (Pty) Ltd.

Queens Ltd entered into a significant contract with Kings (Pty) Ltd, which allowed them to supply solar panels to Kings (Pty) Ltd. The transaction was carried out under terms that might not be considered an arm’s length transaction.

REQUIRED:

With reference to the requirements of IAS 24, identify which parties in the scenario will be considered related parties of Queens Ltd.
(8 marks)

Assume that Kings (Pty) Ltd is a related party of Queens Ltd. With reference to the requirements of IAS 24, discuss the disclosure that Queens Ltd would be required to disclose in its annual financial statements.
(5 marks)
Answers to Above Questions on Financial Accounting

Answer 1: On the basis of the Conceptual Framework, GreenTech Innovations Ltd should recognise the new battery technology in their financial statements as..