UNIVERSITY OF THE FREE STATE
SCHOOL OF ACCOUNTANCY
FINANCIAL ACCOUNTING
EACC2608
2026 Support class 1
Marks: 62 Minutes: 105
Property, plant and equipment
Sandton Ltd purchased a machine on 1 January 20.3. The following details are
applicable:
Description Note Rand (R)
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
Total 127 000
Additional information
1. The purchase price of R100 000 is only payable on 31 December 20.3. 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 20.3 and immediately put to use.
7. The current interest rate is 14% per annum and the company does not follow a policy
of capitalising borrowing costs.
8. The machine will be depreciated using the straight-line method over eight years,
taking into account 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.
QUESTION ONE : REQUIRED
Marks
Discuss with calculate the cost at which the asset will be recognised.
Process the relevent journal entries
Calculate the carrying amount of the asset on 31 December 20.3.
Your answers have to comply with IFRS Accounting Standards. Clearly show all
calculations and work to the nearest Rand. Assume all items and amounts to be
material, unless the contrary is clearly evident from the information given.
Comparative amounts are not required.
QUESTION 2
Wood Ltd commenced in 20.4 with the manufacturing of wood products at a new plant.
The plant was purchased on 1 January 20.4 for R700 000. During January 20.4, some
equipment was installed and other equipment was modified. Installation and
modification costs incurred amounted to R130 000.
For security reasons a fence was erected at the plant at a cost of R20 000.
The plant was ready for use on 1 February 20.4.
An opening function was held in the plant on 15 February 20.4 at a cost of R50 000 in
order to entertain customers and to introduce the new products to be manufactured at
this plant.
Production only commenced on 1 March 20.4.
The plant has a useful life of 10 years and the residual value was estimated at R200 000.
Expected scrapping costs amount to R140 000 (discounted present value of scrapping
costs equals R100 000). Assume that the provision for the scrapping costs will be raised
in accordance with IAS 37.
At the end of August 20.4 heavy rain caused severe damage to the houses of the
employees in the region. Management granted special leave to all the employees of the
plant to attend to the repair of their houses. The plant stood idle during September 20.4.
The company’s year-end is 31 December.
QUESTION TWO : REQUIRED
Marks
Calculate the cost of the plant..
Calculate the depreciable amount of the plant
Calculate the depreciation for the year ended 31 December 20.4.
Calculate the carrying amount of the plant on 31 December 20.4
Your answers have to comply with IFRS Accounting Standards. Clearly show all
calculations and work to the nearest Rand. Assume all items and amounts to be
material, unless the contrary is clearly evident from the information given.
Comparative amounts are not required.
Question 3
Kabazela (Pty) Ltd prepares its financial statements in accordance with International
Financial Reporting Standards. During the preparation of the financial statements for
the year ended 31 December 20X7, the financial accountant identified certain
temporary differences (which are differences between Tax requirements and the
accounting requirements of one transaction), between the carrying amounts of
assets and liabilities in the statement of financial position and their tax bases.
The accountant referred to IAS 12 – Income Taxes, which defines the following:
• Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of SARS deductible amounts, the carryforward of unused
tax losses and the carryforward of unused tax credits.
• Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable amounts.
The following transactions occurred during the year:
1. Kabazela recognised a provision for warranty repairs of R500 000 in its
financial statements. However, for tax purposes, the warranty costs will only
be deductible when the repairs are actually carried out in future periods.
2. Kabazela purchased machinery for R1 000 000. The machinery is depreciated
on a straight-line basis over 10 years for accounting purposes. However, for
tax purposes, the tax authorities allow accelerated depreciation, which results
in the tax base of the machinery being lower than its carrying amount at the
reporting date.
QUESTION THREE : REQUIRED
Marks
Using the definition of an asset in the Conceptual Framework, explain
why the deferred tax asset arising from the warranty provision meets the
definition of an asset.
Using the definition of a liability in the Conceptual Framework, explain
why the deferred tax liability arising from the accelerated tax depreciation
meets the definition of a liability.
Your answers have to comply with IFRS Accounting Standards. Clearly show all
calculations and work to the nearest Rand. Assume all items and amounts to be
material, unless the contrary is clearly evident from the information given.
Comparative amounts are not required.