You are the financial manager of Omega Ltd (‘Omega’). Omega is unlisted. The following information and excerpts from financial statements were compiled by the financial accountant of the company. You are responsible for the preparation of the published annual financial statements for the year ended 30 September 2019.

1. Abridged draft (2019) and audited (2018) statement of comprehensive income for the year ended 30 September 2019

	Notes		2019		2018
			$’000		$’000
Revenue			112 500		80 000
Cost of sales	3		(78 750)		(52 500)
Gross profit			33 750		27 500
Other income			1 860		1 850
Other expenses	5		(11 085)		(8 605)
Profit before tax			24 525		20 375
Income tax expense	2		(5 000)		(5 185)
Profit for the year			19 525		15 190

2. Taxation

2.1 The statutory tax rate for companies has remained unchanged for a number of years at 28%.

2.2 Capital gains are taxed by including half of such gains in the taxable income of the company.

3. Inventory

You are aware of the fact that the directors of Omega decided, at a directors’ meeting held on 15 September 2019, after consideration of several factors, to change the accounting policy pertaining to the valuation of inventory. In the past, Omega valued inventory according to the weighted average method, but the directors decided to value inventory in the future according to the first in, first-out method. They are of the opinion that the new valuation method will be a more reasonable and reliable representation of the value of inventory, seeing as it will better reflect the effect of inflation on the stock prices.

The following schedule of closing inventory values was compiled on your request by the financial accountant:

	2017	2018	2019
	$’000	$’000	$’000
First-in-first-out	255	655	985
Weighted average	238	515	880

The new valuation method has not yet been taken into account in the draft statement of comprehensive income.

The SARS has already confirmed that the new policy pertaining to inventory valuation is acceptable for tax purposes, but only from the 2019 year of assessment.

4. Plant

The carrying amount of the plant of the company according to the draft annual financial statements is as follows:

	2019		2018
	R’000		R’000
Cost	625		625
Less: Accumulated depreciation	(375)		(250)
Carrying amount end of year	250		375

The board of directors decided, after studying and discussing the draft annual financial statements, to change the depreciation method pertaining to the plant, seeing as the current pattern of depreciation differs from the actual pattern of economic benefits obtained from the plant. The diminishing balance method will be applied from the 2019 financial year and the draft annual financial statements will be adjusted. The depreciation rate was set at 20% per annum.

A wear-and-tear allowance of 20% per annum is granted for income tax purposes by the SARS.

5. Other expenses

The following items are, among others, included in ‘other expenses:

	2010	2009
	R’000	R’000
Depreciation: Property, plant, and equipment:
Plant	125	125
Equipment	28	80
Vehicles	12	14
Staff costs	1 505	1 355
Accrued leave expense (tax-deductible upon payment)	185	-
Allowance for credit losses	75	50
Finance costs	255	145

The SARS grants 25% of the allowance for credit losses as a deduction. The previous year’s allowance is added back to taxable income.

6. Profit before tax

Assume that the adjusted profit before tax, after taking into account all the above-mentioned information, amounts to R24 525 000 for the year ended 30 September 2019
(2018: R20 723 000).

PREPARE JOURNAL ENTRIES TO SHOW THE INFORMATION ABOVE

Answer rating: 100% (QA)

Inventory First in first out Inventory at beginning of year 255 Inventory ... View the full answer