Amounts in the question exclude VAT except where indicated.
Xolani Ltd is a manufacturing company listed on the JSE Securities Exchange. The company has a foreign branch. The financial manager has prepared the following draft summarised trial balance for the year ended 28 February 2009. The notes indicate how various items have been processed in the draft summarised trial balance.
DRAFT SUMMARISED TRIAL BALANCE
28 FEBRUARY 2009
Debit Credi Notes t
R R
Property, plant and equipment
Owned 1 3 876 000
Leased 2 1 560 000
Investment properties 3 880 000
Goodwill 4 564 000
Intangible assets 5 594 000
Available-for-sale assets 6 350 000
Inventories 7 1 456 765
Trade and other receivables 8 2 265 987
Cash and cash equivalents 2 925 208
Share capital 9 2 823 600
Retained earnings on 1 March 2008 979 159
Available-for-sale equity reserve 10 260 696
Profit before tax 11 5 545 937
Foreign tax 11 195 000
Dividends paid 12 560 000
Deferred tax on 1 March 2008* 448 991
Long-term liabilities 13 2 356 000
Short-term liabilities 14 2 812 577
15 226 960 15 226 960
* The deferred tax balance has been calculated using a tax rate of 28%.
Notes
1 Owned property, plant and equipment
The total depreciation expense for owned property, plant and equipment for the year ended 28 February 2009 amounted to R890 400 which included an amount of R32 242 relating to office buildings and R103 394 in respect of other non-manufacturing assets.
The policy of the company is to depreciate all property, plant and equipment, except land, on a straight-line basis from the date the assets became available for use by the company. The Commissioner for the South African Revenue Service (SARS) has accepted the depreciation rates applied by the company in instances where the Income Tax Act does not specify specific rates.
2 An analysis of owned property, plant and equipment at 28 February 2009 showed the following:
Cost Accumulated
Depreciation
Carrying
value
R R R
Land 354 400 0 354 400
Office buildings (erected in 2002) 680 200 273 400 406 800
Manufacturing buildings (see below) 1 376 700 503 200 873 500
Manufacturing plant (see below) 3 825 100 1 967 400 1 857 700
Non-manufacturing assets 651 400 267 800 383 600
Balance at 28 February 2009 6 887 800 3 011 800 3 876 000
Erection of the original manufacturing buildings by Xolani Ltd commenced in November 1999
and these buildings were completed and brought into use on 30 September 2000.
Improvements of R370 700 were capitalised to manufacturing buildings effective from
31 October 2006.
Details of manufacturing plant held at 28 February 2009 were as follows:
Cost
Year of acquisition R
Year ended 29 February 2005 and before 1 602 600
Year ended 28 February 2007 880 700
Year ended 28 February 2009 1 341 800
3 825 100
The company only acquires new and unused plant. Exchange differences recognised in profit before tax include realised exchange losses of R250 000 incurred on the acquisition of plant brought into use for the year ended 28 February 2009.
2 Leased property, plant and equipment
The movement in leased property, plant and equipment was as follows:
R
Balance at the beginning of the year 2 080 000
Depreciation (520 000)
Balance at 28 February 2009 1 560 000
The leased assets consist of manufacturing plant, which is leased in terms of a finance lease. The lease liability is included in long-term and short-term liabilities (see notes 13 and 14).
3 Investment properties
It is the policy of the company to measure investment properties at fair value. The investment properties are office buildings which were acquired during 2006. The original cost of the investment properties held at 28 February 2009 was R420 100. An investment property with a cost of R234 600 was sold during the financial year ended 28 February 2009 for R324 600.
3 The movement in investment properties was as follows:
R
Balance at the beginning of the year 1 006 400
Investment property sold (324 600)
Fair value adjustments 198 200
Balance at 28 February 2009 880 000
The company made a decision in 2007 to sell all of its investment properties over the course of the next three years as they were not considered to be core to operations.
4 Goodwill
The goodwill arose on the acquisition of the assets and liabilities of two businesses on 1 March 2006. One of the businesses was not as profitable as was expected and an impairment loss was recognised in terms of IAS 36, Impairment of assets.
The movement in goodwill was as follows:
R
Balance at the beginning of the year 727 000
Impairment (163 000)
Balance at 28 February 2009 564 000
5 Intangible assets
The movement in intangible assets was as follows:
Design
Assets
Other
intangible
assets
Total
R R R
Balance at the beginning of the year 219 000 701 000 920 000
Amortisation (14 000) (202 000) (216 000)
Impairment 0 (110 000) (110 000)
Balance at 28 February 2009 205 000 389 000 594 000
The intangible assets include a design as defined in the Designs Act of 1993, which was purchased by the company at a cost of R280 000. The design was brought into use during the financial year ended 28 February 2007.
All the other intangible assets arose on the acquisition of the two businesses effective from 1 March 2006 and are not subject to any allowances for tax purposes (see note 4).
6 Available-for-sale assets
Available-for-sale assets consist of shares in listed companies. It is the policy of the company to invest surplus funds in listed shares. The company is not regarded as a share dealer for income tax purposes. For financial reporting purposes the shares are classified as available for sale in terms of IAS 39, Financial instruments: Recognition and measurement.
4 The movement in the available-for-sale assets was as follows:
R
Balance at the beginning of the year 250 000
Acquisitions at cost 45 000
Fair value adjustment for the year 120 000
Sold during the year (65 000)
Fair value balance at 28 February 2009 350 000
In the accounting records the total proceeds of R65 000 on the sale of the shares were credited to the available-for-sale asset account. No other entries were processed in respect of the sales. The cost of the shares sold during the year amounted to R10 000.
7 Inventories
In terms of IAS 2, Inventory, the company measures inventory at the lower of cost or net realisable value. In a previous assessment of the policy of the company, SARS determined that they would only allow 50% of the accounting write-off as a deduction.
29 February
2008
28 February
2009
R R
Cost 1 283 875 1 716 765
Provision for write down to net asset value (156 000) (260 000)
Balance 1 127 875 1 456 765
8 Trade and other receivables
Trade and other receivables were as follows:
29 February
2008
28 February
2009
R R
Trade receivables 2 102 225 2 395 600
Provision for doubtful debts (240 600) (350 600)
Other receivables 181 100 220 987
Balance 2 042 725 2 265 987
SARS has, on a consistent basis, allowed an annual doubtful debt allowance of 25% of the amount provided for financial reporting purposes.
9 Share capital
Share capital increased by R276 000 during the financial year ended 28 February 2009. The increase relates to shares issued to directors in terms of a bonus scheme. The decision was made not to pay any cash bonuses to the directors of the company for the financial year ended 28 February 2009. Instead of a cash bonus, 138 000 shares were granted to the directors at an issue price of R2 per share on 1 December 2008. The fair value of the shares of Xolani Ltd was R3 per share on 1 December 2008.
5
The only journal entry processed in respect of this transaction was the following:
Dr Cr
Bank 276 000
Share capital 276 000
Shares granted to directors on 1 December 2008
10 Available-for-sale equity reserve
This consists of the fair value adjustments on the available-for-sale investments. The movement in this reserve was as follows:
R
Balance at the beginning of the year (net of deferred tax of R22 904) 140 696
Fair value adjustment for the year 120 000
Balance at 28 February 2009 260 696
11 Profit before tax
The profit before tax includes the profits of R650 000 of the foreign branch which are not taxable in South Africa. Income tax of R195 000 is due and payable to the foreign country for the year ended 28 February 2009. The profit before tax also includes local dividends received on the available-for-sale investments of R128 000. R12 000 of the dividends were received during December 2008 and the balance before 15 November 2008. The dividends received before 15 November 2008 were the only dividends received during the dividend cycle ending on 15 November 2008.
Expenses deducted in determining profit before tax for the financial year ended 28 February 2009 include -
· interest recognised on the lease liability of R362 000; and
· interest recognised on other liabilities of R298 600.
The South African taxation expense for the financial year ended 28 February 2009 has not yet been calculated or provided for.
12 Dividends paid
The company declared a dividend of R560 000 on 15 November 2008.
13 Long-term liabilities
The long-term liabilities were as follows:
29 February
2008
28 February
2009
R R
Lease liabilities 1 632 400 1 209 800
Other liabilities 1 362 327 1 146 200
Balance 2 994 727 2 356 000
The lease liability arose on the acquisition of manufacturing plant by means of a finance lease (see note 2). Instalments paid on the lease liability during the financial year ended 28 February 2009 amounted to R687 420 (including VAT).
VAT on the original transaction amounted to R436 800 while the lease payments up to 28 February 2009 amounted to R3 015 001 (including VAT) and the future lease payments amount to R2 285 353 (including VAT).
Instalments paid during the financial year ended 28 February 2009 in respect of the other liabilities amounted to R425 480.
14 Short-term liabilities
The short-term liabilities were as follows:
29 February
2008
28 February
2009
R R
Trade payables 1 420 100 1 324 450
Other payables 159 460 186 200
Current portion of lease liabilities 596 300 693 480
Current portion of other liabilities 519 200 608 447
Balance 2 695 060 2 812 577
Other payables include a provision for leave pay of R88 200 (2007: R42 600).
A tax rate of 28% applies for the year ended 28 February 2009.
All other items have been correctly accounted for in the draft summarised trial balance and all VAT entries have been processed appropriately.
REQUIRED
(a) Calculate the profit before tax of Xolani Ltd for the financial year ended 28 February 2009 in accordance with International Financial Reporting Standards.
(b) Calculate the normal tax payable in South Africa by Xolani Ltd for the 28 February 2009 year of assessment. Begin your calculation with the profit before tax as calculated in (a) above.
(c) Disclose all information relating to income taxes in the notes to the annual financial statements of Xolani Ltd for the year ended 28 February 2009 as required by IAS 12, Income taxes.
The disclosure of the categories of movements in deferred tax for the year in terms of paragraph 81(g)(ii) is not required.
Accounting policy information and comparative figures are not required.