ADVANCED ACCOUNTING

UNSEEN WEEK 7 – TAXATION (25 minutes)

Trumpet Limited accounts for its investment properties using the fair value model and its property, plant and
equipment on the revaluation model. It also has certain financial assets which comprise minority share
investments (less than 20% holding) in various companies. The tax rate is 30%. Assume that capital gains
tax has always been in existence. The deferred tax balance at 31 December 20.6 is R361 500 credit.

The following information (all figures in thousands) is relevant for the year ended 31 December 20.7.

Investment Properties

On 1 January 20.1, Trumpet Ltd purchased the following investment properties:

Cost Carrying amount

31/12/20.7
Land 1 000 1 340
Industrial Park –
Buildings 3 500 3 720

An annual tax allowance of 5% applies to the industrial buildings. The carrying amount of the investment
properties will be recovered by way of the receipt of operating lease rentals.

Property, plant and equipment

On 1 January 20.1, Trumpet Limited acquired the owner-occupied properties identified in the table below. It
was estimated that the factory buildings, which enjoy an annual tax allowance of 5%, had a useful life of 30
years with a nil residual value.

Cost Carrying amount Carrying amount

31/12/20.6 31/12/20.7
Land 2 000 2 700 3 100
Factory buildings 4 200 2 000 5 000

On 31 December 20.4, Trumpet Limited impaired its factory buildings. On 31 December 20.7, the company
revalued both the owner-occupied land and factory buildings. There is no intention to dispose of these assets.

Financial assets (JSE listed share investments)

Financial asset Cost Carrying Carrying

category amount amount
31/12/20.6 31/12/20.7
Ordinary shares in A Ltd Fair value through
profit or loss 400 720 840
Ordinary shares in X Ltd Available-for-sale 1 200 1 370 1 500

Fair value gains and losses on equity investments are treated as capital gains or losses for tax purposes and
the company raises any related deferred tax accordingly as share investments are disposed of after 5 years.

REQUIRED

1. Calculate the deferred tax balance at 31 December 20.7.

2. Calculate the deferred tax expense/ (income) to be charged/(credited) to profit or loss for the year
ended 31 December 20.7.
3. Draft the ‘Other comprehensive income’ section of Trumpet Limited’s ‘single statement’ Statement of
Comprehensive Income for the year ended 31 December 20.7. Each component of other
comprehensive income is to be disclosed net of tax.
ADVANCED ACCOUNTING
UNSEEN WEEK 7 – TAXATION – Suggested Solution (Page 1 of 1 page)

Part 1
CA TB TD DT
Investment properties
Land 1 340
• Cost 1 000 - 1 000 exempt -
• FV adjustment 340 - 340 15% 51

Industrial buildings (TB = 3500x65%) 3 720 2 275 1 445 30% 433.5

Property, plant & equipment

Land 3 100
• Cost 2 000 - 2 000 exempt -
• Cumulative revaluation 1 100 - 1 100 15% 165

Factory buildings (TB = 4200x65%) 5 000 2 730 2 270 30% 681

Financial assets
Shares in A Ltd 840 400 440 15% 66
Shares in X Ld 1 500 1 200 300 15% 45

Deferred tax balance at 31 December 20.7 1441.

5
credit

Part 2

Deferred tax movement for the year ended 31 December 20.7

(1441.5 cr – 361.5cr) 1 080
• Relating to land (PPE) current year revaluation
(15% (3 100 – 2700)) (60)
• Relating to factory buildings current year revaluation
(30% x 1 780)* (534)
• Relating to FV adjustment on available-for-sale shares
(15% x (1 500 – 1 370)) (19.5)
Deferred tax charge to profit or loss – 20.7 466.5

* Revalued carrying amount at 31 December 20.7 5 000

DHC at 31 December 20.7 (4 200 x 23/30) 3 200
Therefore revaluation that is not a reversal of impairment = 1 780
Although the total ‘revaluation’ is (5000 – (2000 x 23/24)) = 3 083, the balance of the revaluation (3 083 – 1780) is a
reversal of impairment ie. it affects profit or loss.

Part 3

Trumpet Limited – Statement of comprehensive income for the year ended 31 December 20.7

Other comprehensive income

R’000
Gain on revaluation
(85% (400 PPE land)) + (70%(1 780 factory building)) 1 586
Fair value gain on available-for-sale assets
(85% (1 500 – 1 370)) 110.5

Other comprehensive income for the year, net of tax 1 696.5