HOME TEST 1

1. Alummbi Events acquired the tents from a supplier in China on 1 January 2019.
Management is of the view that the following cost must be capitalised as Property plant and
equipment:

Purchase price R1 500 000

Delivery costs R45 000
Installation and assembly costs R30 000

2. In addition, the following items were incurred which were expensed through the profit and
loss account:
Import duties R15 000.00

Required:

1. Indicate whether the accounting treatments are CORRECT or INCORRECT, with reference
to the 2018 revised conceptual framework. (4 marks)
2. Calculate the costs to be capitalised as PPE. (5 marks)

Question 1
(i) The treatment is correct
(ii) The treatment is incorrect
The purchase price of the PPE includes import duties. Therefore, the import duties
must be capitalised to the cost of PPE

Question 2
Masana Ltd purchased a large delivery truck with trailer on 30 June 2012. The truck cost R250
000.00 and the trailer cost R150 000.00. The trailer has a residual value of R20 000. The truck is
depreciable over 10 years and the trailer over 5 years on straight line basis. The truck must
receive major service every two years and there are parts that are replaced.

The company has a year end of December. In 2014, the residual value of the trailer was reduced
to R10 000.
Required:

1. Calculate the accumulated depreciation for the assets at year end

31 December 2014. (6 marks)
2. Show journal entries for depreciation for the 2014 year (4 marks)
Question 2
1 Accumulated Depreciation calculation

Truck R250 000/10

R25 000/12*6 = 12500 2012
R25000 =25000 2013
R25000 2014
R62 500.00 Accumulated depreciation for truck
Trailer (R150000-R20 000.00)/5
26 000/12*6=13000 2012
26 000 2013
((150 000-39 000)-10 000)/ 3.5=28 857.14 2014
R67 857.14 Accumulated depreciation for trailer
2 Journal entries

Debit Credit
Depreciation on trailer R28 857.14
Depreciation on truck R25 000.00
Accumulated depreciation on trailer R28 857.14
Accumulated depreciation on truck R25 000.00

Question 3

Name and explain the Fundamental and enhancing qualitative characteristics of financial
information in terms of the Conceptual framework
(10 marks)

Question 3
Fundamental and enhancing qualitative characteristics
Relevance Relevant financial information is capable of making a difference
in the decisions made by users. (materiality)
Faithful presentation Represent true financial position of the business
Comparability Comparable to its previous reports and other entities
Verifiability User should be able to verify the information or independent and
knowledgeable person should be able to reach consensus
Timeliness Information available to decision-makers in time to be capable of
influencing their decisions
Understandability Information clearly and concisely makes it understandable.

2020 TEST 1

Question 1 38 Marks

1. Define the following terms of the revised CF for 2018:

1.1. Assets
1.2. Liabilities
1.3. Income
1.4. Expenses
1.5. Property, Plant, and Equipment (PPE)
1.6. Investment property
1.7. Recoverable amount (21 marks)
2. Describe briefly the objective of general purpose financial reports? (3 marks)
1.
1.1. An asset is defined as a:

• present economic resource

• controlled by the entity
• resulting from past events.

1.2. A liability is:

• a present obligation of the entity

• to transfer economic resource
• as a result of past events.

1.3. Income is defined as:

 • increases in assets or
• decreases in liabilities
• other than those relating to contributions from holders of equity claims.

1.4. Expenses are defined as:

• decreases in assets or
• increases in liabilities
• other than those relating to distributions to holders of equity claims.

1.5. PPE is defined as:

• Tangible items, that are held:
- For use in the production or supply of goods or services
- For rental to others or
- For administration purposes; and
• Are expected to be used during more than one period.

1.6. An investment property is defined as:

• land or buildings (or both or part of a building)
• held by the owner or by the lessee as a right-of-use asset
• for earning rental income or for capital appreciation. IAS 40.
1.7. Recoverable amount of an asset is defined as the higher of its fair value less costs of
disposal and its value in use.

2. The objective of general purpose financial reporting is:

• To provide financial information
• About the reporting entity
• That is useful to existing and potential investors, lenders, and other creditors
• In making decisions relating to providing resources to the entity.

Question 2 Plant, Property, and Equipment 21 Marks

Jombere Ltd purchased a machine on 1 January 20X15. The following details are applicable:

Note Rand
Purchase price 1 100 000
Delivery costs 3 000
 Installation costs 6 000
General administrative costs 2 1 000
Costs of testing 3 5 000
Pre-production costs 4 2 000
Initial operating losses 5 10 000
127 000

Additional information:

1. The purchase price of R100 000 is only payable on 31 December 20X15. The supplier of
the machine does not usually allow credit for the purchase of similar machines.
2. The administrative costs are of a general and indirect nature.
3. The costs of testing comprise costs incurred to produce samples while testing whether the
machine is functioning properly. Samples were sold at net proceeds of R500.
4. The pre-production costs were necessary to bring the machine to the condition necessary
to be able to operate in the manner intended by management.
5. The initial operating losses are attributable to the initial production of small quantities.
6. The asset was ready for use on 3 January 20X15 and immediately used.
7. The current interest rate is 14% per annum and the company does not follow a policy of
capitalizing borrowing costs.
8. The machine will be depreciated using straight-line method over 8 years, considering a
residual value of R7 000.
9. Assume that a liability exists to dismantle and remove the machine at the end of its useful
life at a cost of R3 500 (discounted present value equals R1 700)
10. Ignore VAT

Required:

1. Calculate the cost at which the asset will be recognized. (8 marks)

2. Calculate the depreciation on 31 December 20X15. Also, provide a journal entry for
depreciation on 32 December 20X15. (4 marks)
3. Calculate the carrying amount of the asset on 31 December 20X15. (3 marks)
4. Disclose the property, plant and equipment in the statement of financial position and
accompanying notes (including profit before tax) of Jombere Ltd for the year 31 December
20X15, to comply with the requirements of IFRS. (6 marks)
Question 2

1. Determination of cost price

Purchase price R87 719

Delivery costs 3 000
Installation costs 6 000
General administrative costs ----
Cost of testing 4 500
Pre-production 2 000
Initial operating losses ---
Cost to dismantle and remove the machine 1 700
R104 919

2. 104 919 – 7 000 /8 = 12 240

General Journal
DR CR

Depreciation 12 240
Accumulated depreciation: machine 12 240
Depreciation provided using straight-line over 8 years

3. Carrying amount
Cost: machine (PPE) R104 919
Less: accumulated depreciation (12 240)
R92 679
4.
JOMBERE LTD
EXTRACT FROM STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X15

Depreciation R12 240

JOMBERE LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT
31 DECEMBER 20X15
 ASSETS

Non-Current Assets

PPE (104 919 – 12 240) R92 679

JOMBERE LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20X15
1. Accounting policy
1.1. Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation:

The machine is depreciated on straight-line method over 8 years.

Cost 104 919

Accumulated depreciation (12 240)

Carrying amount at year end 31/12/20X15 92 679

Question 3 Investment Property 27 Marks

Alummbi Events Limited had its office located in River View Hotel in Nandoni Dam. During the floods on
30 June 20X18, a building nearby, which it owned and was renting to Agape Accountants, was
destroyed. As Agape Accounts was a valued tenant, Alummbi Events Limited decided to move its own
head office to another under-utilised building nearby, which was currently also used for administrative
purposes and to lease this original head-office building to Agape as a replacement. The move was
effective from 30 June 20X18.
Other information:

• The head office was purchased on the 1 January 20X18 for R600 000 (total useful life is 5 years
and R100 000 residual value)
• The fair value of the head office building was:
- R570 000 on 30 June 20X18 and
- R560 000 on 31 December 20X18.
• Alummbi Events Limited uses the:
- The cost model to measure its PPE, and
- The fair value model to measure its investment properties.

Required:

1. Show all the journal entries relating to Alummbi Events Limited for the year ended 31 December
20X18. (19 Marks)
2. Show the disclosure section in the Extract for statement of financial position and
accompanying notes (including profit before tax) of Alummbi Events Limited for the year
31 December 20X18, to comply with the requirements of IFRS. (8 marks)

Question 3

Journal Entries
Debit Credit

1 January 20X18
PPE: Office building: cost (A) 600 000
Bank/Liability 600 000
Purchase of Sibasa building (owner-occupied)
30 June 20X18
Depreciation: (Expense) 600 000 – 100 000)/5 *6/12) 50 000
PPE: Sibasa building: accumulated depreciation 50 000
Depreciation of building (PPE) to date of destruction
PPE: Office building: carrying amount 570 000 - (600 000 – 50 000) 20 000
Fair value adjustment to investment property 20 000
 Re-measurement of investment property prior to change in
use
IP: Office building: cost(A) 570 000
PPE: office building(A) 570 000
Transfer from PPE to investment property
31 December 20X18 10 000
Fair value adjustment on investment property
10 000
IP: office building
Re-measurement of investment property to fair value at year-
end

ALUMMBI EVENTS LIMITED

EXTRACT FROM SATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X18

Profit for the year

Depreciation (30 June 20X18) 50 000
Other comprehensive income
Fair value adjustment 20 000
Fair value adjustment (10 000)

ALUMMBI EVENTS LIMITED

EXTRACT FOR THE STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED

31 DECEMBER 20X18

Rand
ASSETS
Non-Current Assets
Investment Property 560 000

Question 4 Impairment of assets 14 Marks

On 20 January 20X12, Vhadau Properties Limited purchased land in a remote area of the Mpumalanga
province at a cost R160 000. The land purchased is held for future development into a retirement village
that would render rental income, though this development will only take place when transport links to
the area are made available. The land is measured under the cost model and is not depreciated.

At each reporting date, the directors estimated the net selling price of the land and value in use of the
land (based on the intention to keep it for future development). These estimates are as follows:

Reporting date Net selling price Value in use

30/06/20X12 R170 00 R200 000
30/06/20X13 R140 000 R185 000
30/06/20X14 R125 000 R140 000
30/06/20X15 R120 000 R135 000

1 January 20X16 the government cancelled all plans to provide transport to the area. There is no prospect
of selling the land and there appears to be no potential alternative use for this land at all. The cost to
vhadau Properties Limited of developing links exceeds the present value of the expected net inflows from
operating the resort.

Required:

1. Briefly explain whether the newly acquired land is required to be tested for impairment in terms
of IAS36 Impairment of assets. (2 marks)
2. State the amount at which the land should be recorded in the statement of financial position at
31 December 20X12 to 31 December 20X15. (8 marks)
3. Prepare journal entries that are needed in relation to the land at each of the above reporting
dates. (4 marks)

Question 4

1. The land is investment property measured under the cost model and thus is subject to
IAS 36 Impairment of assets.
2. Measurement of investment property at each reporting date:
Reporting date recorded at the lower of CA and RA based on the intention to keep it for
future development. These estimates are as follows:

Reporting date Lower of CA and RA Explanation/Calculations

30/06/20X12 R160 000 Impairment = None
30/06/20X13 R160 000 Impairment = None
30/06/20X14 R140 000 Impairment loss = R20 000
30/06/20X15 R135 000 Impairment loss = R5 000
 3. Journals
DR CR

30/06/20X14
Impairment loss 20 000
Land: accumulated impairment losses 20 000
Impairment of land
30/06/20X15
Impairment loss 5 000
Land: accumulated impairment losses 5 000
Impairment of land

Question 1 Conceptual Framework (30 Marks)

Define the following terms according to the new Conceptual framework of 2018:

Part A

1. Value in use (3 marks)

2. Assets (3 marks)
3. Liabilities (3 marks)
4. Recoverable amount (3 marks)
5. Expenses (3 marks)
6. Equity (2 marks)

Part B

1. Briefly describe the objective of general-purpose financial reporting. (3 marks)

2. Mention and briefly explain the enhancing qualitative characteristics for financial reporting.
(8 marks)
3. State the two recognition criteria for assets, liabilities, expenses and income according to the
new conceptual framework. (2 marks)

Question 1

Part A

3. The recoverable amount of an asset (or a cash-generating unit) is defined as ‘the higher of its
fair value less costs of disposal and its value in use.
4. An asset is defined as a:
 • present economic resource
• controlled by the entity
• resulting from past event.
5. A liability is:
• a present obligation of the entity
• to transfer economic resource
• as a result of past events.
6. Recoverable amount of an asset is defined as the higher of its fair value less costs of disposal
and its value in use.
7. Expenses are defined as
• a
• decrease in assets or
• increase in liabilities
• other than those relating to contributions from holders of equity claims.
8. Equity is defined:
as assts less liabilities

Part B

1. The objective of general-purpose financial reporting is to provide financial information about

the reporting entity that is useful to the users in making decisions about providing resources to
the entity.
2. The enhancing characteristics are comparability, verifiability, timeliness, and
understandability.

Question 2 property, plant and equipment 35 Marks

Gadafi Limited specializes in producing mega chocolates and bottling juices. At 31 December 2016
(reporting date), the accountant, Mrs. James, provided you with the following details regarding all items
of its Property, Plant and Equipment:

Machine:

Date Details
1 February 2016 Purchased for cash at an amount of R467 600
1 March 2016 Installation costs of R24 000, paid in cash
30 June 2016 Ready for use in the manner intended by
management.
1 September 2016 Brought into use

The machine has an estimated total useful life of 4 years and a residual value of R48 600.

Plant:

The company purchased a bottling plant on 2 January 2016. The plant is made up of three significant
components, the costs of which is as follows:
 Description of components Cost price Residual value Expected useful life
Rand Rand years
Engine 1 500 000 500 000 5
Conveyer belt and fittings R2 000 000 0 8
Outer structure 800 000 50 000 3
Other costs incurred in relation to the bottling plant are as follows:

Description of costs: Rand Transaction date

Delivery and installation 750 000 5 January 2016
Staff training 60 000 16 January 2016
Testing to ensure plant fully 33 000 20 January 2016
operational before start of
production
Launch party 250 000 31 January 2016

Other information:

• The plant was available for use in production on 1 February 2016, although production only
began on 1 April 2016.
• The plant was temporarily idle during December 2016 when the factory closed for its annual
holiday period
• The company uses the straight-line method when depreciating its bottling plant.
• All ‘other costs’ are incurred evenly between three significant components of the bottling plant
(i.e. where appropriate, a third of the cost is allocated to each component).
• The only other asset owned by Gadafi Limited is land used for parking purposes, which was
purchased on 31 December 2015 for R5 000 000. The land is not depreciated.

Required:

1. Show all related journal entries relating to the bottling plant and machine for the year ended
31 December 2016. Round to the nearest rand where possible. (22 marks)
2. Disclosure of the property, plant and equipment note in the financial statements of Gadafi
Limited for the year 31 December 2016. (13 marks)

Question 2

1. Journals
Debit Credit

2 January 2016
Plant – engine: cost 1 500 000
Plant - conveyer belt and fittings: cost 2 000 000
Plant – outer structure: cost 8 00 000
Bank/Liability 4 300 000
Purchase of bottling plant
5 January 2016
Plant – engine: cost 750 0000/3 250 000
Plant - conveyer belt and fittings: cost 250 000
Plant – outer structure: cost 250 000
Bank/Liability 750 000
Delivery and installation: 1/3 allocated to each component
16 January 2016
Staff training (E) 60 000
Bank/Liability 60 000
Staff training expensed
20 January 2016
Plant – engine: cost 33 000/3 11 000
Plant - conveyer belt and fittings: cost 11 000
Plant – outer structure: cost 11 000
Bank/Liability 33 000
Testing that plant to be fully operational: 1/3 allocated to each
component
31 January 2016
Entertainment/advertising 250 000
Bank/Liability 250 000
Bottling plant launch part: expensed
1 February 2016
Machine: cost (A) 467 600
Bank (A) 467 600
Purchase of machine
1 March 2016
Machine: cost (A) 24 000
Bank (A) 24 000
Payment of installation costs

31 December 2016
Depreciation: machine (E) (467 600 + 24 000 – 48 600)/4 * 6/12 55 375
Machine: accumulated depreciation 55 375

31 December 2016
Depreciation: plant (E) 799 173
Plant – engine: accumulated depreciation (A) 231 183
Plant - conveyer belt and fittings: accumulated depreciation (A) 259 073
Plant – outer structure: accumulated depreciation (A) 308 917
Depreciation each component of plant separately from 1 February 2016

Calculations plant depreciation components:

 1. Plant – engine (1 500 000 + 250 000 +11 000 – 500 000)/5 * 11/12 =231 183
2. Plant – conveyer belt and fittings (2 000 000 250 000 + 11 000 – 0)/8 *11/12 = 259 073
3. Plant – outer structure (8 000 + 250 000 + 11 000 – 50 000)/3 *11/12 = 308 917

2. Disclosure
GADAFI LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016
Property, plant and equipment
1/1/2016
Total Land Machine Bottling plant

Net carrying amount 5 000 000 5 000 000 - -

Gross carrying amount

Accumulated depreciation - - - -

Additions 5 574 600 - 491 600 5 083 000

Depreciation (854 548) - (55 375) (799 173)

31/12 2016

Net carrying amount 9 720 052 5 000 000 436 225 4 283 827

Gross carrying amount 10 574 600 5 000 000 491 600 5 083 000

Accumulated depreciation (854 548) - (55 375) (799 173)

Question 3 Investment Property 16 Marks

West Gate limited owns two buildings:

• A head office building located in Sibasa; and

• Another office block located in Thohoyandou.

The office building located in Sibasa is used as West gate Limited’s head office. Dineo floods, on 30 June
2016, completely destroyed this building. The building in Sibasa was purchased on 1 January 2016 for

R2 000 000. The building has a total useful life of 10 years and a residual value of nil.

The property in Thohoyandou was leased under an operating lease to a tenant Agape Accountants. After
the floods, West Gate Limited urgently needed new premises for its head office. Since Agape Accountants
was always late in paying their lease rentals, West Gate Limited decided to evict them and move its head
office to this building in Thohoyandou. This eviction and relocation were effective from 1 July 2016.

• The building in Thohoyandou was purchased on 1 January 2016 for R500 000.
• On 30 June 2016, the fair value of the building in Thohoyandou was R950 000
• There was no change in fair value at 31 December 2016.
• The total useful life was estimated to be 10 years from the date of purchase and the residual
value was estimated to be nil.

West gate Limited uses:

• The cost model to measure its property, plant and equipment and
• The fair value model for its investment properties.

Required:

1. Journalize the above transactions in the books of West Gate Limited for the year ended 31
December 2016. (16 marks)
2. Disclosure in the financial statements of West Gate Limited for the year ended 31
December 2016 so as to comply with IFRS. (6 marks)
Question 3

1. General Journal of West Gate Ltd

Debit Credit

1 January 2016
PPE: Sibasa building: cost (A) 2 000 000
Bank/Liability 2 000 000
Purchase of Sibasa building (owner-occupied)
IP: Thohoyandou building: cost 500 000
Bank/Liability 5 000 000
Purchase of Thohoyandou building (leased to a tenant)
30 June 2016
Depreciation: (Expense) 2 000 000/10 *6/12) 100 000
PPE: Sibasa building: accumulated depreciation 100 000
Depreciation of building (PPE) to date of destruction
Impairment loss (E) 1 900 000
PPE: Sibasa building: accumulated impairment losses 1 900 000
Write-off after Dineo floods
PPE: Sibasa building: accumulated impairment losses 2 000 000
PPE: Sibasa building: cost 2 000 000
Derecognition of Sibasa building after Dineo floods
IP: Thohoyandou: cost (950 000 – 500 000) 450 000
Fair value adjustment to investment property
 Remeasurement of investment property prior to change in use 450 000

PPE: Thohoyandou building: cost 950 000

IP: Thohoyandou building 950 000
Transfer from investment property to PPE
31 December 2016 50 000
Depreciation (E) (950 000/9.5) *6/12 50 000
PPE: Thohoyandou building: accumulated depreciation
Depreciation to year-end Thohoyandou building (PPE)

WEST GATE LIMITED

EXTRACT FROM SATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016

Profit for the year

Depreciation (30 June 2016) 100 000
Depreciation (31 December 2016) 50 000
Impairment loss 1 900 000
Other comprehensive income
Fair value adjustment 450 000

1. WEST GATE LIMITED

STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2016

Rand
ASSETS
Non-Current Assets
Property, plant and equipment (950 000 - 50 000) 900 000

Question 4 Impairment of assets (21 Marks)

On 20 January 2012, Chauchau Limited purchased land in a remote area of the Mpumalanga province at
a cost R160 000. The land purchased is held for future development into a retirement village that would
render rental income, though this development will only take place when transport links to the area are
made available. The land is measured under the cost model and is not depreciated.

At each reporting date, the directors estimated the net selling price of the land and value in use of the
land (based on the intention to keep it for future development). These estimates are as follows:

Reporting date Net selling price Value in use

30/06/2012 R170 00 R200 000
 30/06/2013 R140 000 R185 000
30/06/2014 R125 000 R140 000
30/06/2015 R185 000 R170 000

1 January 2016 the government cancelled all plans to provide transport to the area. There is no prospect
of selling the land and there appears to be no potential alternative use for this land at all. The cost to
Chauchau Limited of developing links exceeds the present value of the expected net inflows from
operating the resort.

Required:

1. Briefly explain whether the newly acquired land is required to be tested for impairment in terms
of IAS36 Impairment of assets. (3 marks)
2. State the amount at which the land should be recorded in the statement of financial position at
31 December 2012 to 31 December 2015. (8 marks)
3. Prepare journal entries that are needed in relation to the land at each of the above reporting
dates. (8 marks)

Total Marks: 100

Question 4

1. The land is investment property measured under the cost model and thus is subject to IAS36
Impairment of an asset.

2. 30/06/2012 - R160 000 – No impairment

30/06/2013 - R160 000 – No impairment

30/06/2014 - R140 000 – Impairment of R20 000

30/06/2015 - R160 000 – reversal of impairment limited to the cost

3. General Journal

Debit Credit

30/06/2014
Impairment loss: land 20 000
Land: accumulated impairment losses 20 000
Impairment of land
 30/06/2015
Land: accumulated impairment losses 20 000
Impairment loss reversal 20 000
Impairment loss reversal of land

2019 MAKE UP TEST

2018

Question 2 14 Marks

Jombere Ltd a VAT vendor, purchased a machine on 1 January 20X15. The following details
are applicable:

Note Rand

Purchase price 1 570 000

Delivery costs 5 000

Installation costs 2 000

General administrative costs 2 2 000

Costs of testing 3 3 000

Pre-production costs 4 2 000

Initial operating losses 5 1 000

582 000

Additional information:

11. The purchase price of R570 000 (VAT inclusive) was paid for cash on 3 January 20X15.
12. The administrative costs are of a general and indirect nature.
13. The costs of testing comprise costs incurred to produce samples while testing whether
the machine is functioning properly. Samples were sold at net proceeds of R500.
14. The pre-production costs were necessary to bring the machine to the condition
necessary to be able to operate in the manner intended by management.
15. The initial operating losses are attributable to the initial production of small quantities.
16. The asset was ready for use on 3 January 20X15 and immediately put to use.
17. The current VAT rate is 14%
18. The machine will be depreciated using straight-line method over 8 years, taking into
account a residual value of R17 000.
 19. Assume that a liability exists to dismantle and remove the machine at the end of its
useful life at a cost of R3 500 (discounted present value equals R1 700)
NB: All other items are VAT exclusive except the machine.
Required:

5. Calculate the cost at which the asset will be recognized. (8 marks)

6. Calculate the depreciation on 31 December 20X15. Also provide a journal entry for
depreciation on 31 December 20X15. (3 marks)

7. Calculate the carrying amount of the asset on 31 December 20X15. (3 marks)

Question 2

1. Determination of cost price Rand

Purchase price (1) 500 000
Delivery costs 5 000
Installation costs 2 000
General administrative costs ----
Costs of testing (2) 2 500
Pre-production 2 000
Initial operating ---
Cost to dismantle and remove the machine 1 700
513 200
Calculations:
(1) 570 000 * 100/114 = R500 000
(2) 3 000 – 500 = 2 500

2. Depreciation

(513 20000 – 17 000)/8 = 62 525

31/12/20X15
Debit Credit
Depreciation 62 025
Accumulated depreciation: Machine 62 025

3. Carrying amount

Cost 513 200

Accumulated depreciation (62 025)
R451 175
Question 3 29 Marks
A machine was purchased on 30 June 20x0 and was expected to be used for 4 years and have no residual
value. The original cost of the machine was R500 000.

A further amount of R150 000 was spent on the machine during January 20x1 to convert the machine
from a battery-powered machine to an electricity-powered machine following the installation of
electricity to the area where the factory was situated. This did not extend the machine’s useful life, but
the output increased due to the change. The machine functioned well for about 18 months but has not
functioned well in the last 6 months of 20x2.

At the end of the year, it was functioning at only about 40% of its capacity and as a result, management
considered that the asset might be impaired. They have determined that they would receive R75 000 if
they sold the machine; and that the present value of future net cash flows that will be generated by the
machine is R240 000. (All amounts relating to the machine are exclusive of VAT.)

YOU ARE REQUIRED TO:

1 Discuss whether the R150 000 expenditure in January 20x1 should have been expensed or
capitalized when it was incurred. (3 marks)

2 Discuss the basis of calculating the carrying amount on the statement of financial position at 31
December 20x2. (4 marks)

3 Based on the conclusions that you reached in 2 above, prepare the journal entries for the machine
in 20x1 and 20x2. Closing entries are not required. (6 marks)

4 Show how machinery should be disclosed in the Statements of Financial Position for the years
ended 31 December 20x1 and 20x2. (16 marks)

Question 3

1. The costs incurred to change from battery-powered to electricity represent subsequent

expenditure, which should be added to the carrying amount of a PPE asset when it is
probable that future economic benefits associated with the item will flow to the entity
(refer to IAS16 (AC123).

The result of the change lead to the improved output/usage; or less costs) – should be capitalised
as an asset.
• Conversion of machine from battery to electricity:

2. Calculating carrying amount:

Assume that improvement is capitalized:
Net carrying amount at 31 December 20x2 = R251 786 (show calculations)
Recoverable amount = R240 000 (motivate)
∴Impairment loss of R11 786
∴ Net carrying amount to be included in B/S at 31 December 20X2=
R240 000

3. Journal entries:
31/12/20x1
Dr Depreciation 167 857
Cr Accumulated depreciation 167 857

31/12/20x2
Dr Depreciation 167 857
Cr Accumulated depreciation 167 857

Dr Impairment loss 11 786

Cr Accumulated depreciation 11 786

4. Notes to the financial statements for the year ended 31/12/20x2:

Property, plant and equipment 31/12/20x2 31/12/20x1

Carrying amount at 1/1/20x2 419 643 437 500

Cost/valuation 650 000 500 000
Accumulated depreciation (230 357) (62 500)
Additions - 150 000
Disposals
- -
Depreciation
(167 857) (167 857)
(11 786)
Impairment
Carrying amount at 31/12/20x2
240 000 419 643
Cost/valuation
Accumulated depreciation 650 000 650 000
(410 000) (230 357)

2016

Question 2 Property, plant and equipment (PPE) (33 Marks)

The register of property, plant and equipment of Agape Accountants (Pty) Ltd is presented to
you. As the accountant you are required to prepare all the entries and calculations, and satisfy
all disclosure requirements, regarding PPE in the financial statements of the company for the
financial year ended 31 December 2015.
A summary of the register of PPE at 1 January 2015 is as follows:
Rand
Office Furniture
Cost 25 000
Accumulated depreciation 11 000
Motor vehicles
Cost 63 000
Accumulated depreciation 34 000
Machinery
Cost 105 000
Machine A 18 000
Machine B 66 000
Machine C 21 000
Accumulated depreciation 16 000
Machine A 10 000
Machine B -----
Machine C 6 000
Land
Cost 150 000
Additional information:
1. The following rates and methods of depreciation are applicable:
PPE are accounted for on the cost model
Land – no depreciation
Office furniture – 10% straight - line basis
Motor vehicles – 20% straight- line basis
Machinery – 20% diminishing balance method
Capitalized leased machinery – 20% diminishing balance method
The assets have no residual value.
2. On 30 June 2015 a delivery vehicle with the cost price of R21 000 was sold for R10 500
and this amount was credited to the motor vehicle account. On 1 January 2015 the
accumulated depreciation of the vehicle amounted to R14 000. Assume that the
requirements of IFRS5 were not met until the date until the date of the sale and that the
asset was never classified as “held for sale”.
3. Machine B was obtained and put into operation on 1 January 2015.
 4. Land consists of stand N0. 100, Thohoyandou, and was purchased in 2010. The board
of directors estimated the current market value of the property to be R200 000 at 31
December 2015. The land is not classified as an investment property.
5. The current market value of the other assets does not differ materially from their carrying
amount.
6. No other transactions relating to PPE took place during the year.

Required:
1. Prepare the journal entries necessary to account for the above information in the
financial records of Agape Accountants (Pty) Ltd for the financial year ended 31
December 2015, in compliance with the requirements of IFRS. (12 marks)
2. Provide the disclosure for PPE note to the statement of financial position of Agape
Accountants (Pty) Ltd for the year ended 31 December 2015 in compliance with the
requirements of IFRS. (21 marks)

Question 2

1. Journal Entries on 31/12/2015

Debit Credit
Depreciation (1) (P/L) 2 500
Accumulated depreciation: Office furniture 2 500
Depreciation (2) (P/L) 10 500
Accumulated depreciation: Motor vehicles 10 500
Depreciation (3) (P/L) 4 600
Accumulated depreciation: Machinery 4 600
Depreciation (4) (P/L) 13 200
Accumulated depreciation: Capitalized leased 13 200
machinery
Accumulated depreciation: Motor vehicle (5) 16 100
Bank /Proceeds on asset disposal 10 500
Motor vehicle 21 000
Profit on asset disposal (6) (P/L) 5 600

Calculations:

1. 25 000 * 10% = 2 500

2. (63 000 – 21 000) * 20% + (21 000 *20% * 6/12) =10 500
3. (105 000 – 66 000 – 16 000) * 20% = 4 600
4. 66 000 – 0 = 66 000 * 20% = 13 200
5. 14 000 + (21 000 *20% *6/12) = 16 100
6. 10 500 – (21 000 -16 100) = 5 600
2. AGAPE ACCOUNTANTS (PTY) LIMITED
STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2015

Rand
ASSETS
Non-Current Assets
Property, plant and equipment 246 300
(322 000 – 75 700)
1. Accounting policy
1.1. Property, plant and equipment are stated at cost less accumulated depreciation, except
for land is not depreciated, and is carried at cost. The remaining assets are depreciated
according to the following methods:
o Office furniture at 10% according to straight- line method
o Motor vehicles at 20% according to the straight-line method
o Machinery at 20% according to the diminishing balance method

1.2. Property, plant and equipment

AGAPE ACCOUNTANTS (PTY) LIMITED

NOTE FOR THE YEAR ENDED 31 DECEMBER 2015

Property, plant and equipment
Land Office Motor Machinery Total
furniture vehicles
CA at
1/1/2015 150 000 14 000 29 000 23 000
Cost 150 000 25 000 63 000 39 000

Accumulated 0 (11 000) (34 000) (16 000)

depreciation
at 1/1/2015
Movements

Additions at 0 0 0 66 000
cost
Disposal at 0 0 (4 900) 0
carrying
value
Depreciation 0 (2 500) (10 500) (17 800)

CA at year- 150 000 11 500 13 600 71 200 246 300

end
31/12/2015
Cost 150 000 25 000 42 000 105 000 322 000
 Accumulated 0 (13 500) (28 400) (33 800) (75 700)
depreciation
Question 3 Investment properties
Lovey Limited had its head-office building located in University Street in Thohoyandou. It also
owned a building nearby in Thohoyandou West that it rented out to students.
On 30 June 2015, the fire completely destroyed the building in Thohoyandou West. Since the
students were valued tenants, Lovey Limited decided to lease 80% of its head-office building to
them as a ‘replacement’.
Details relating to the head-office in University Street are as follows;

• Purchased on the 1 January 2015 for R500 000

• Total useful life: 10 years (residual value is nil)
• Fair values: R700 000 on 30 June 2015 and R720 000 on 31 December 2015.
• It is not possible to sell or lease out this 80% of the building separately from the rest of the
building.

Lovey Limited uses:

• The fair value model to measure its investment properties; and

• The cost model to measure its property, plant and equipment.

Required:
1. Prepare the journal entries necessary for the financial year ended 31 December 2015
regarding the asset so as to be in compliance with requirements of IFRS. (10 marks)
2. Disclosure in the financial statements of Lovey Limited for the year ended 31 December
2015 so as to comply with IFRS. (3 marks)

Question 3

Journal Entries

01/01/2015

Debit Credit
Office building: carrying amount 500 000
Bank/Payable 500 000
Purchase of head-office building (owner occupied)
30 June 2015

Depreciation expense 25 000

Accumulated depreciated: Building 25 000
Depreciation to date of change in use(500 000- 0) /10 *6/12)= 25
000
Office building: Carrying amount 225 000
 Revaluation surplus 225 000
Revaluation surplus of head office to fair value on date of change of
use (700 000 – (500 000 – 25 000) =225 000
Office building: Fair value (IP) 700 000
Office building: carrying amount (PPE) 700 000
Transfer of office building from PPE to IP on date of change of use
Office building : Fair value (IP) 20 0000
Fair value adjustment on investment property (P/L) 20 000
Measurement of investment property to fair value at year-end

2. LOVEY LIMITED

EXTRACT FROM SATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 2015

Profit for the year

Depreciation 25 000
Other comprehensive income
Fair value adjustment 20 000

LOVEY LIMITED

STATEMENT OF FINACIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2015

Rand
ASSETS
Non-Current Assets
Investment Property 720 000