FINANCIAL ACCOUNTING 3A (MFAC73116) - 2025

CLASS PRACTICE QUESTION 2: PPE

Question

Jackson Sport Limited is a company that produces cricket equipment.

The 8th ICC Cricket World Cup in South Africa and the expected cricket mania motivated
Jackson Sport to increase its capacity during the year.

The following took place during the year:

NEW PLANT

During the year ending 31 December 2002, the company constructed a new manufacturing
plant in Midrand. The details concerning the new plant are as follows:

• The land was purchased a few years back for R950 000 (excluding VAT).

• The manufacturing building, where the new plant will be housed, was constructed during the
year at a cost of R1 368 000 (including 15% VAT). The full cost was paid before year-end.

• The machinery was imported. It was imported free on board on 31 March 2002 from
America at a cost US$1 200 000. The machinery was delivered on 30 April 2002 at Jackson
Sport Limited’s premises in Midrand.

Import duties amounted to R100 000. VAT of R512 000 was paid on the transaction. The
cost price is repayable in three equal payments. The first payment is payable on
30 November 2002. Interest at 10% per annum is payable yearly on 30 November.

• Local engineers installed the machinery in Midrand. The total cost of the installation
amounted to R940 500 (including 15% VAT).

• The engineers completed the installation in December 2002, and the plant was available for
production on 2 January 2003.

FIXED ASSET REGISTER

The following extract of Jackson Sports Limited’s Property, plant and equipment noted on
31 December 2001 was as follows:

Cost price Accumulated Carrying

Depreciation Amount
R R R
Land at cost 1 650 000 - 1 650 000
Buildings at cost 2 150 000 (750 000) 1 400 000
Plant at cost 2 240 000 (448 000) 1 792 000
6 040 000 (1 198 000) 4 842 000

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The buildings consisted of the following on 31 December 2001:
• The office buildings:
Depreciation is provided at 5% per annum on the reducing balance method. The net
carrying amount on 31 December 2001 was R585 494.

• The factory building:

The factory building situated in Durban also depreciated at 5% per annum using the
reducing balance method. The cost of the factory building was R1 000 000, and the taxation
value on 31 December 2001 was R800 000. The receiver of revenue grants a capital
allowance of 5% per year on the cost price.

The land consisted of the following on 31 December 2001:

• Plot 5216 in Durban, with a manufacturing plant thereon.
• Plot 452 in Midrand, where a new manufacturing plant was constructed during the year.

On 31 December 2002, the plant in Durban was revalued under the following conditions:

• The gross replacement cost at the end of each year will be used to revalue the plant. The
company’s engineers will determine the gross replacement cost.
• Depreciation for the year will be based on the gross replacement cost.
• Deferred taxation will be provided on the revaluation reserve.
• The gross replacement cost on 31 December 2002 was R3 600 000.

Additional information concerning the plant in Durban on 31 December 2002 was as follows:

• The plant is depreciated on the straight-line method over 10 years.

• The cost price of the plant was R2 240 000.

ADDITIONAL INFORMATION

The following additional information is also given:

• Plants will be revalued for the first time in the year that they are taken into use.
• The company is registered for VAT purposes, and the taxation rate is 30 %.
• Relevant exchange rates:
o 31 March 2002 US$1 = R4.76
o 30 April 2002 US$1 = R4.81
o 30 November 2002 US$1 = R4.95
o 31 December 2002 US$1 = R4.91

YOU ARE REQUIRED TO:

a) Prepare the following notes to the Statement of Financial position of Jackson Sports
Limited for the year ended 31 December 2002:

➢ Revaluation reserve
➢ Property, plant and equipment

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 Answer:
NOTES:

(A) Revaluation reserve

Revaluation Surplus 2 168 000
Deferred Tax Liability
(2 168 000 x 30% of 2 168 000) (650 000)
Transfer to equity (added to equity) 1 517 600

(B) Property, plant and equipment

Land Buildings Plant Total

R R R R
Carrying amount at 1 650 000 1 400 000 1 792 000
beginning of year
Gross carrying 1 650 000 2 150 000 2 240 000
Amount
Accumulated - (750 000) (448 000)
depreciation
Additions - 1189565 #1 6 629 826
#4
Disposals - - -
Revaluations - - 2 168 006
(Surplus)
Depreciation - (70 000) #2 (360 000)
Carrying amount at 1 650 000 2 519 565 10 229 826* 14 399 391
the end of the year (B/S)
Gross carrying 1 650 000 3 339 565 12 469 826**
amount
Accumulated - (820 000) (808 000)
depreciation

*1 432 000 [cost 2 240 000 – acc dep 808 000 (448 000 + 360 000) + 6 629 826
(new item) + 2 168 000 (revaluation surplus) = 10 229 826

**2 240 000 + 6 624 826 + 3 600 000 = 12 469 826

Calculations: 1. Cost price of buildings

Beginning of the year 2 150 000

Purchase (1 368 000 X 100/115) 1 189 565
3 339 565

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2. Depreciation

Office buildings (585 494 X 5%) 29 275

Factory buildings (814 506 #3 X 5%) 40 725
70 000
Plant (3 600 000 /10) 360 000
430 000

3. Cost (Factory Building) 1 000 000

Dep (5%) for 1998 (50 000)
CA at end1998 950 000
Dep (5%) for 1999 (47 500)
CA at end 1999 902 500
Dep (5%) for 2000 (45 125)
CA at end 2000 857 375
Dep (5%) for 2001 (42 869)
CA at end 2001 814 506

Refer to question Fixed Asset Register

(Building CA at 31 Dec 2001: Office Build R585 494 + Factory Build R814 506 = R
1400 000)

4. Machines imported and constructed

Import cost (1 200 000 X 4.76) 5 712 000

Import duties 100 000
Installation costs (940 500 X 100/115) 817 826
6 629 826

Some notes regarding tax allowance:

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 • For financial reporting under IAS 16, the asset's carrying amount reduces yearly
due to depreciation.
• Capital Allowance=Cost Price×5%
• Fixed at 5% of the original cost price (R1,000,000) every year = R50 000
• For tax purposes, the company gets a fixed capital allowance of R50,000 each
year based on the original cost.
• Capital allowance is NOT considered when calculating depreciation under IAS
16.
• Capital allowance is used for tax purposes and is deducted from taxable income.
• IAS 16 focuses on accounting depreciation, whereas the capital allowance
(granted by the tax authority) is used for tax purposes. You should calculate both
separately.
• Fixed at 5% of the original cost price (R1,000,000) every year.
• Capital allowance does NOT reduce the carrying amount in financial statements
but reduces taxable income.
• Capital allowance is deducted from taxable income, reducing the company's tax
burden.

Some Notes regarding Government Grant:

When a government grant is received for an asset, the grant is deducted from the cost
of the asset, and depreciation is calculated on the reduced cost.

Steps:

1. Determine the original cost of the asset.

2. Deduct the government grant from the cost.
3. Compute depreciation on the net amount.

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 Understanding the Revaluation Process

Revaluation is used to adjust the value of assets to reflect their fair market value. In this
case, we are revaluing a plant asset using its Gross Replacement Cost at the end of
each year.

Key concepts need to know

1. Depreciation: The plant is depreciated using the straight-line method over 10

years. This means that the asset loses an equal amount of its value every year.
2. Carrying Amount (Book Value): This is the original cost minus accumulated
depreciation. This represents how much the asset is worth in the company's
books before revaluation.
3. Revaluation Surplus: The difference between the new (revalued) asset value
and its current book value before revaluation.
4. Deferred Tax: When an asset is revalued, the increase in value is not
immediately taxed. Instead, a deferred tax liability is created, which is calculated
as 30% of the revaluation surplus.
5. Revaluation Reserve: This is the revaluation surplus after deducting deferred
tax. It is an equity account that holds the increase in asset value

Understanding the Given Data

• The plant was originally recorded at R2,240,000.

• By 31 Dec 2001, accumulated depreciation was R448,000, meaning the carrying
amount was R1,792,000.
• Depreciation is based on the Gross Replacement Cost, which means that when
the asset is revalued, we use the new revalued amount to calculate depreciation.
• The plant is depreciated using the straight-line method over 10 years, meaning
each year’s depreciation is (cost ÷ 10 years).
• The new revalued cost (Gross Replacement Cost) on 31 Dec 2002 is
R3,600,000.
• Deferred tax is provided on the revaluation reserve at a 30% tax rate.

Step 1: Calculate the Revaluation and Other Figures for the Existing Plant

Existing Plant (Purchased Before 2002)

• Cost (31 Dec 2001) = R2,240,000

• Accumulated Depreciation (31 Dec 2001) = R448,000
• Carrying Amount (31 Dec 2001) = R1,792,000

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Step 2: Calculating Depreciation for 2002

• Since depreciation is now based on the revalued Gross Replacement Cost of

R3,600,000, the annual depreciation is:

Depreciation for 2002: 3,600,000 / 10 = 360,000 (Annual depreciation)

Step 3: Carrying Amount Before Revaluation (31 Dec 2002):

Carrying Amount =1,792,000 − 360,000 = 1,432,000

This means that before considering the revaluation, the plant's book value would have
been R1,432,000 at year-end 2002.

Step 4: Calculating Revaluation Surplus

• The Gross Replacement Cost (Revalued Amount) is R3,600,000.

• Since the book value before revaluation was R1,432,000, the increase in value
(Revaluation Surplus) is:

Revaluation Surplus: 3,600,000−1,432,000=2,168,000

Step 5: Deferred Tax Calculation

• Since revaluation increases the value of the asset, it also creates a deferred tax
liability.

• Deferred Tax Liability (30% of revaluation surplus):

2,168,000 × 30% = 650,400

Step 6: Calculating Revaluation Reserve

• The Revaluation Reserve is the Revaluation Surplus after deducting Deferred

Tax:

Revaluation Reserve (Net of Tax): 2,168,000 − 650,400 = 1,517,600

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Step 7: Final Carrying Amount

• The Carrying Amount after Revaluation is equal to the new Gross Replacement
Cost:

Final Carrying Amount After Revaluation = R3,600,000

Step 8: Calculate for the New Plant Purchased in 2002

• Cost of Additional Plant (Purchased in 2002) = R6,629,826 (refer to cal # 4)

• Since the asset will be used from January 2003, there will be no depreciation
charged for 2002. Its carrying amount will be equal to its cost:

Carrying Amount = 6,629,826

Final Answer Summary

• Revaluation Surplus: R2,168,000

• Deferred Tax Liability: R650,400 (2 168 000 x 30%)
• Revaluation Reserve (Net of Tax): R1,517,600 (2 168 000 – 650 000)
• Final Carrying Amount (31 Dec 2002): R10,229,826 (1 432 000 + 6 629 826 +
2 168 000)

Key Notes:

1. After revaluation, The Gross Carrying Amount for the existing plant is
R3,600,000.
2. The new plant purchased in 2002 costs R6,629,826 and is not depreciated for
the year.
3. The revaluation reserve of R1,517,600 is added to equity, reflecting the increase
in the value of the plant.