FAC3701 OCTOBER EXAM
QUESTION 1
b) Profit before tax calculation of Pedal Ltd for the year ended 30 June
2025
Profit before tax 1 450 000
Exempt differences -
Temporary differences
-Revenue (550+39894+308) 40 752
-Warranty (53 000)
Profit on sale of vehicle (87000- (47 000)
40000)
Tax profit on sale of vehicle 57 000
Taxable profit before tax 1 447 752
c) Deferred tax balance 30 June 2025
Item Carrying Tax base Temporary Deferred
amount difference: tax:
(taxable)/deducti asset/(liabilit
ble y)
Contract 926 0 (926) 250
liability
(plan)
Warranty 50 000 0 (50 000) 13 500
Inventory 630 000 570 000 60 000 (16 700)
Old vehicle 40 000 30 000 10 000 (2 700)
New vehicle 256 000 240 000 16 000 (4 320)
Deferred (9 470)
tax balance
30 June
2025
d) Notes to the financial statements of Pedal Ltd for the year ended 30
June 2025
Note 1- Provision for warranty
All Pedal Ltd’s bikes come with a 2 year warranty against manufacturing
defects, excluding normal wear and tear. It is an assurance type warranty
and cannot be purchased separately. The current year’s provision of
R53 000 is based on the following assumptions
85% of bikes sold have no defects
10% bikes sold have minor defects
5% bikes have major defects
On 30 July 2024, the directors to base warranty provision on the recent
quality control survey which showed the following:
95% of bikes had no defects
3% had minor defects
2%had major defects
Note 2- Change in accounting policy- Inventory
During the current financial year. The directors of Pedal Ltd decided to
change the accounting policy in respect of the valuation of inventory
to give more reliable and relevant inventory information. Inventory
was previously valued according to the first-in-first-out method. The
change has been applied retrospectively, and comparative amounts
have been appropriately restated:
FIFO WEIGHTED DIFFERENCE
AVERAGE
30 June 2023 850 000 710 000 140 000
30 June 2024 740 000 660 000 80 000
30 June 2024 630 000 570 000 60 000
Increase in retained earnings 1 July 2024= R80 000
SARS will not accept the new valuation method and prior years
assessment will not be reopened.
Question 2
Part A
1- 5
2- 5
3- 4
4- 5
5- 3
Part B
Salesforce Ltd- Profit before tax calc 31 December 2024
R
Profit before tax 1 500 000
Exempt differences
Foreign income (65 000)
Donation 1 750
Depreciation: Admin building 5 500
Profit after exempt differences 1 442 250
Temporary differences
Profit on sale of vehicle (26 000)
Depreciation on vehicle 12 000
Tax profit on sale of vehicle (62 000- 30 000) 32 000
Tax allowance on vehicle (60 000/4) (15 000)
Profit after temporary differences 1 445 250
Tax expense for the year (1 445 250 *27/100) 390 218
Current tax due (390 218-77 000) 313 218
Income tax expense note
Salesforce Ltd notes to the annual financial statements for the year ended
31 Dec
2024
Note 3- Income tax expense
Current tax
390 218
Less foreign income tax
(9 750)
Total current tax expense
380 465
Deffered tax expense
(12 000)
Total income tax expense
368 465
Reconciliation
Profit before tax
1 500 000
Exempt differences
-Donations
1 750
-Foreign income tax
(9 750)
-Admin building depreciation
5 500
Income tax expense
404 325
Tax @27%(1 1500 000)
405 000
Safesecure Ltd Notes in the financial statements for the year ended 31
December 2024
1. Trade Receivables
A major client (Tembo Ltd) suffered a fire on 10 January 2025
resulting in financial losses and entered into liquidation. At 31
December 2025 Safesecure had a balance of R90 000 due from
Tembo Ltd. The liquidator advised that only 20c to the rand could be
recovered (90 000* 20c)= R18 000. An expected credit loss of
R72 000 has been recognised
2. Dividends
On 5 January 2025 the board of directors declared and approved an
ordinary dividend of R500 000 for all shareholders. The dividend and
dividends tax were paid on 25 January 2025.
3. Provisions and Contingent Liabilities
On 1 November 2024, Electro Ld instituted legal proceedings of
R25 000 against Safesecure Ltd claiming damages relating to a
robbery on their premises. Legal advisors are of the opinion that it is
not probable that safesecure will be found liable.
On 30 November 2024, Safesecure Ltd cancelled a service contract
with Nplace Ltd, effective 1 December 2024. The contract was due
to expire on 30 march 2025 and a penalty of R70 000 for early
termination arises. The cost of continuing with the contract is
estimated at R60 000, therefore a provision of R60 000 for an
onerous contract has been recognised.