QUESTIONS AND
ANSWERS
FOR ASSISTANCE CONTACT
EMAIL:gabrielmusyoka940@gmail.com
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FAC3703
EXAM PREPARATION
Dear FAC3703 student,
The purpose of this document is to assist you with your preparation for the FAC3703 exam that is
scheduled for 31 October 2019.
The three questions listed below formed part of the FAC3703 exam that was written in June 2019.
In order to maximise your learning, the lecturers recommend the following steps:
1. Attempt these questions under exam conditions only after you worked through all the study
material.
2. Compare your attempt to the suggested solution only after you completed your attempt. The
suggested solution is provided at the end of this document.
3. Ensure that you understand the suggested solution and learn from the mistakes you made
when you attempted these questions.
Regards
FAC3703 Lecturers
List of questions
Question Subject Marks Time
number (minutes)
1 Leases and related parties 50 90
2 Employee benefits and borrowing costs 24 43
3 Financial instruments 26 47
TOTAL 100 180
, lOMoARcPSD|31863004
FAC3703 exam preparation
QUESTION 1 (50 marks)(90 minutes)
Dance Ltd is an international dance company based in Johannesburg. The company has a
31 December financial year-end. During the financial year that ended 31 December 2018, Dance Ltd
secured a contract to teach various dancing styles to school children who attend school within the
Loro School Group.
The contract with the Loro School Group was signed on 1 May 2018 and dance lessons started on
1 June 2018. To fulfil the requirements of the contract, three new dance instructors were employed.
Dance Ltd entered into a lease agreement to lease three motor vehicles from KL Costumes Ltd for
the three new dance instructors. (KL Costumes Ltd no longer had a use for the three motor vehicles.)
KL Costumes Ltd is a company owned by Mrs Martin, who is also the majority shareholder of Dance
Ltd. The lease of the three motor vehicles contains a lease as defined in terms of IFRS 16, Leases.
The lease agreement contains the following information:
Fair value of the three motor vehicles on 1 June 2018 (R160 000 x 3) R480 000
Effective date of agreement 1 June 2018
Lease term 4 years
Payment intervals starting on 31 May 2019 annually in arrears
Instalment per annum R150 000
At the end of the lease term, ownership of the three motor vehicles will be transferred to Dance Ltd.
Legal fees of R4 500 were incurred by Dance Ltd when negotiating the lease transaction.
KL Costumes Ltd paid a commission fee of R6 000 to an agent to enter into the lease agreement.
The lease agreement had been entered into at arm’s length.
KL Costumes Ltd originally purchased the three motor vehicles on 1 June 2016 at a total cost of
R900 000 (R300 000 x 3). On this date, KL Costumes Ltd estimated the total residual value of the
three motors vehicles to be R60 000 (R20 000 x 3). KL Costumes Ltd provides for depreciation on
motor vehicles using the straight-line method over the useful life of six years.
Dance Ltd provides for depreciation on motor vehicles using the straight-line method over the useful
life of the asset. On 1 June 2018, Dance Ltd estimated the remaining useful life of the three motor
vehicles to be five years with an estimated residual value of Rnil for each motor vehicle.
The accounting profit before tax of Dance Ltd for the financial year ended 31 December 2018 after
taking all the above transactions into account amounted to R1 080 000. The current tax expense of
Dance Ltd was R186 452, after taking all the above transactions into account.
KL Costumes Ltd also has a 31 December year-end. The accounting profit before tax of
KL Costumes Ltd for the financial year ended 31 December 2018 after taking all the above
transactions into account amounted to R855 000. The current tax expense of KL Costumes Ltd was
R235 712, after taking all the above transactions into account.
The SA normal income tax rate is 28%. The South African Revenue Service allows a tax deduction
over five years on motor vehicles using the straight-line method, apportioned for part of a year. The
balance for deferred tax as at 1 January 2018 for Dance Ltd was Rnil and for KL Costumes Ltd was
R17 733 (deferred tax liability). Both Dance Ltd and KL Costumes Ltd had no non-taxable and non-
deductible items for tax purposes for the financial year ended 31 December 2018.
2
, lOMoARcPSD|31863004
FAC3703 exam preparation
QUESTION 1 (continued)
REQUIRED:
Marks
(a) Prepare the journal entries for the year ended 31 December 2018 in the
accounting records of Dance Ltd to account for the lease of the three motor
vehicles from KL Costumes Ltd.
Journal narrations and tax implications are not required. 13
(b) Disclose the following notes to the annual financial statements of
KL Costumes Ltd for the year ended 31 December 2018:
- Profit before tax;
- Net investment in finance leases; and
- Related parties. 20
(c) Calculate the deferred tax balance of KL Costumes Ltd as at
31 December 2018 using the statement of financial position approach. Indicate
whether the balance is a deferred tax asset or liability. 5
(d) Disclose the income tax expense note to the annual financial statements of
KL Costumes Ltd for the year ended 31 December 2018. 4
(e) Multiple choice questions (refer to pages 4 and 5). 8
50
Please note:
Your answers must comply with the requirements of International Financial Reporting
Standards (IFRS).
Comparative figures are not required.
Round all interest rates to four decimals places.
Round all amounts to the nearest rand.
Ignore value-added tax (VAT).
QUESTION 1(e) - MULTIPLE CHOICE QUESTIONS
The four multiple choice questions are based on the information given below.
On 1 March 2018, Coffee House Ltd entered into a lease agreement with Fresh Bakers Ltd, whereby
Coffee House Ltd would rent a portion of Fresh Bakers Ltd’s building that is currently not in use. The
renting of the building contains a lease as defined in terms of IFRS 16, Leases.
The terms of the lease agreement for the building are as follows:
Lease term 3 years
Effective date of agreement 1 March 2018
Instalment intervals Monthly in arrears
Instalment on 31 March 2018 R60 000
Date of first payment 31 March 2018
Last payment to be made on 28 February 2021
Annual escalation effective on 1 March 10%
3
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