Desperado Limited, based in Durban, is a company that manufactures and imports pallets and other storage handling

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Question:

Desperado Limited, based in Durban, is a company that manufactures and imports pallets and other storage handling items from Italy. The company is facing some serious issues due to the ailing economic conditions, together with the recent looting and flooding and as a result the financial director, Mr Bon Voyage, believes the company may need to dispose of a number of its assets, more particularly, its pallet manufacturing plant as has become more feasible to import pallets.

Mr Bon Voyage decided to discuss this matter with the accountant, however before Mr Bon Voyage could say anything, the accountant told him that the recent events of looting and with him losing his material possessions in the recent flood, he saw it as an opportunity to emigrate. Further, he will be resigning with immediate effect as he has received his emigration papers. Mr Bon Voyage is quite concerned as even though he is hands on, over the last few years, he left all the financial accounting to his accountant with limited involvement from himself.

The accountant reminded Mr Bon Voyage that if he intends to sell the company assets, that he may have to apply IFRS 5 Non-current assets held for sale and discontinued operations for the measurement of these assets however if it’s just individual assets to sell, the measurement is quite simple and if it is groups, he suggested to rather call in an IFRS expert as it could get tricky. Mr Bon Voyage already feeling despondent, nodded his head in silence, not having a clue what IFRS 5 was all about, mentally making a note to contact the company’s IFRS consultants to ask for advice. The next day, Mr Bon Voyage contacted the consultants and forwarded the following information on to them.

On 1 August 2021, Desperado Limited’s pallet making plant, plant Z was classified as ‘heldfor-sale’ in terms of all the classification criteria as set out in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Plant Z had cost R100 000 and had a carrying amount of R80 000 on 1 January 2021. On 1 August 2021, the ‘fair value less costs of disposal’ of plant Z amounted to R68 000. On 31 December 2021, the ‘fair value less costs of disposal’ of plant Z amounted to R63 000.

All plant is depreciated at 10% p.a. on the straight-line basis with nil residual values. The carrying amount of the remaining assets of Desperado Limited at 31 December 2021 were as follows:

• Property, plant and equipment R200 000

• Inventory 70 000

• Intangible assets 62 000

• Trade receivables 40 000ues.

REQUIRED:

2.1 Draft all the journal entries relating to plant Z for the year ended 31 December 2021

2.2 Prepare the Non-Current Asset Held for sale note Assets section of Desperado Limited’s statement of financial position on 31 December 2021 (comparatives not required)

2.3 Explain the effect on your answer in 1 above if the ‘fair value fewer costs of disposal’ of plant Z amounted to:

a. R70 000 on 31 December 2021

b. R90 000 on 31 December 2021