Lux Ltd requires your advice with regards to the appropriate accounting treatment of the following transactions for the year ended 31 December 2017. It is expected that these financial statements will be authorised for issue on 28 February 2018.
Part A
The directors of Lux Ltd signed a contract with an IT company for the implementation and use of a new point of sale software system to capture sales and returns, thereby reducing costs and improving operational efficiencies in the business. The cost of the new system amounts to R 2 000 000. A deposit of R1 000 000 was paid when the contract was signed, and the balance is due once the new system has been installed and tested. The carrying amount of the existing software system amounted to R500 000 at 31 December 2017.
The contract was signed on 30 November 2017 and the new system was installed during December 2017 and January 2018. It is expected that the installation of the new system will be completed by 31 January 2018. The new system will run parallel to the existing system for the initial 6 month period. Thereafter, the existing system will be discontinued.
All sales staff and cashiers are required to attend training sessions in order to learn the new system. The total cost of training in terms of the training contract for all staff amounts to R500 000 and is payable on 31 January 2018. At 31 December 2017, half of the staff had completed the training.
Lux Ltd received a tax ruling from SARS indicating that similar software systems qualify for wear and tear allowances over 3 years, once installed. Staff training costs are deductible for tax purposes when paid.
Part B
Lux Ltd purchased a machine on 1 January 2014 at a cost of R4 000 000. The machine had an expected economic useful life of 8 years with a residual value of R500 000. In terms of its
BACHELOR OF COMMERCE YEAR 3 – ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE
64
operating conditions, the machine requires a complete overhaul every 4 years. The estimated cost to overhaul the machine during January 2018 amounts to R500 000. For tax purposes, the machine qualifies for wear and tear allowances, deductible on a straight-line basis over 5 years.
Part C
At 31 December 2017 a debtor, Silver Ltd, owing R1 000 000 at that date, indicated that it would not be able to meet its full obligation, and a s a result, Lux Ltd recognised a doubtful debt allowance of R500 000 in relation to this debtor. However, Silver Ltd secured a significant contract in January 2018 and managed to settle the full amount due on
20 February 2018.
In addition to the doubtful debt allowance relating to Silver Ltd, Lux Ltd has correctly recognised an allowance for other uncollectible debts, amounting to R150 000.
SARS allows 25% of amounts considered uncollectible, as a deduction for tax purposes.

Required:
Part A
Draft a memo to your client discussing the accounting treatment of the following items in the financial statements of Lux Ltd for the year ended 31 December 2017:
- Existing point of sale system (definitions and recognition criteria are not required)
- New point of sale system
- Costs to train staff
Part B
Prepare all journal entries relating to the machine and the overhaul for the financial year ended 31 December 2017. If no journal entries are required, state that fact and motivate your answer. Current and deferred tax entries are not required.
Part C
Discuss whether the doubtful debt allowance in the books of Lux Ltd, relating to Silver Ltd, is appropriate at 31 December 2017. Ignore deferred tax.
BACHELOR OF COMMERCE YEAR 3 – ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE
65

Part D
a) Using the information provided in Parts A, B, and C, prepare a deferred tax table in order to calculate the deferred tax asset/liability of Lux Ltd at 31 December 2017.
Assume all expenses are deductible for tax purposes when paid, unless stated otherwise.
The company tax rate is 28%. In each calculation, indicate whether a deferred tax asset or liability exists, if any.
b) Prepare the journal entry on 31 December 2017 to account for deferred tax assuming that a deferred tax liability balance of R400 000 existed at 31 December 2016.