QUESTION $(50$ marks$)(90$ minutes$)$

Noupoort Energy Ltd $($Noupoort$)$ is a manufacturer and installer of wind turbines and related energy

generating equipment in South Africa. The company is situated in the Eastern Cape and has a

$31$ December year$-$end.

The following information relates to some of the assets and transactions of the company:

$1.$ Licence to manufacture

Noupoort acquired a licence to manufacture wind turbine rotator blades on $15$ August $2019$ at a cost of

R$2755850.$ The licence entitles Noupoort to be the only manufacturer and seller of wind turbine rotator

blades in South Africa for a period of $7$ years. On $1$ September $2019,$ Noupoort Energy received an

invoice for legal fees amounting to R$450000$ from ZKC Attorneys. Noupoort Energy made a special

arrangement with ZKC Attorneys to only pay the amount on $28$ February $2020.$ ZKC Attorneys$$ payment

terms are normally strictly $30$ days after invoice date. All legal contracts were signed and submitted, and

the licence was available for use as intended by management, on $1$ September $2019.$ The licence was

correctly classified as a purchased intangible asset and its residual value was considered to be zero.

During the $2022$ financial year, a decision was made by the minister of energy to grant similar licences

to manufacture to two other energy generating companies in South Africa to ensure better competition

in the renewable energy sector. As a result of the decision by the minister, Noupoort became one of the

three manufacturers and sellers of wind turbine rotator blades in South Africa on $31$ December $2022.$

The licence to manufacture was assessed to have a fair value less costs to sell and value in use,

correctly determined, of R$1400000$ and R$1458950,$ respectively. The remaining useful life of the

licence remained unchanged.

As part of the $31$ December $2023$ financial year$-$end procedures, the junior accountant prepared the

following intangible asset note and supporting calculations:

Purchased

Intangible

Assets

R

Carrying amount at the beginning of the year $1400000$

Cost $($calc $1)3205850$

Accumulated depreciation and impairment loss $($calc $2$ and $3)(1805850)$

Additions $-$

Depreciation $($included in other expenses$)($calc $4)(200000)$

Impairment loss $-$

Carrying amount at the end of the year $1200000$

Cost $3205850$

Accumulated depreciation and impairment loss $(2005850)$

The licence had a remaining useful life of $2$ years and $8$ months as at $31$ December $2023.$ Calculations:

$1.2755850+450000=$ R$3205850$

$2.3205850/84$ x $40=$ R$1526595$

$3.$ Carrying amount on $31$ December $2022(32058501526595)=$ R$1679255$

Recoverable amount $=$ R$1400000$

Impairment loss $=16792551400000=$ R$279255$

$4.1400000/7=$ R$200000$

$2.$ Contract with Moya $($Pty$)$ Ltd

On $23$ August $2023,$ Noupoort entered into a contract which met all the requirements of a valid contract

according to IFRS $15,$ Revenue from contracts with customers, to construct two custom$-$made wind

turbines for Moya $($Pty$)$ Ltd $($Moya$).$ Noupoort will import some of the components required to construct

the wind turbines while other components will be manufactured in$-$house. Should the contract be

terminated, Moya will be entitled to take ownership of all work completed to date and will be liable to

Noupoort for revenue related to such work. On $1$ September $2023,$ Moya paid a deposit of $50\%$ towards

the contract price of R$12000000$ and the balance is payable upon completion of the contract. By

$31$ December $2023,$ the wind turbine towers had been erected, which represents $60\%$ of the construction

project. It is expected that the entire construction will be completed by $31$ March $2024.$

$3.$ Manufacturing equipment

Energy Wise Ltd$,$ one of the Noupoort$$s clients, approached Noupoort with a lease proposal wherein

Noupoort would purchase manufacturing equipment and then subsequently lease this equipment to

Energy Wise Ltd$.$

After consideration Noupoort decided to enter into this lease agreement which is a lease in terms of

IFRS $16,$ Leases and the equipment was purchased in cash on $1$ January $2023.$

The following information relates to this lease:

Commencement date $............................................1$ January $2023$

Cost price of equipment $($Fair value$)......................$ R$1550000$

Period of lease agreement $....................................6$ years

Instalments $............................................................$ R$350000($paid annually in advance$)$

Market related interest rate $....................................15\%$

Interest rate implicit in the lease $............................14\mathrm{.}15\%$

On $1$ January $2023,$ Noupoort determined the useful life of the equipment to be $7$ years. The equipment

was estimated to have a residual value of R$50000$ at the end of the lease term. Noupoort incurred and

paid $($in cash$)$ legal fees of R$20000$ to finalise the lease agreement. At the end of the lease term,

ownership of the equipment will be transferred to Energy Wise Ltd at a guaranteed price of R$35000.$

The equipment was available for use, as intended by management as well as brought into use on

$1$ January $2023.$

The South African Revenue Service $($SARS$)$ allows a section $12$C allowances on manufacturing

equipment at a rate of $40\%$ in the first year and $20\%$ in subsequent years, not apportioned for part of a year.The junior accountant processed only the following journal entry to account for the manufacturing

equipment for the year:

Dr Cr

R R

$1$ January $2023$

Bank $($SFP$)350000$

Rental income received $($P$/$L$)350000$

Recognition of lease payment received for the year

$4.$ Manufacturing property

Noupoort owns a manufacturing property in Middelburg in the Eastern Cape. The property was

purchased on $1$ April $2022$ and was available for use as intended by management, on $1$ June $2022.$ The

cost of the property amounted to R$6250000($land: R$1500000$; building: R$4750000).$ Total legal fees

and property transfer cost amounting to R$175000$ were paid for in cash on $1$ April $2022.$ These legal

fees and property transfer cost are proportionally attributable to the land and building.

On acquisition date it was determined that the building had an estimated useful life of $25$ years and a

residual value of R$975000$ was allocated to it$.$ The estimated useful life and residual value of the building

remained unchanged throughout the period.

On $31$ December $2023,$ the land was revalued for the first time by an independent sworn appraiser who

determined the fair value of land to amount to R$1600000.$

SARS allows a s$13(1)$ allowance of $5\%$ per annum on manufacturing buildings, on the straight line

method, not apportioned for part of a year. SARS allows the legal fees of R$175000$ as a deduction when

incurred and do not capitalise them to the base cost of the property.

$5.$ Delivery trucks

Noupoort owns a specialized delivery truck which was acquired on $15$ August $2021$ at a cost of

R$1500000.$ The delivery truck was available for use as intended by management, as well as brought

into use, on $1$ September $2021.$ On acquisition date an estimated useful life of $800000$km and no

residual value has been allocated to the delivery truck. The estimated useful life and residual value of

the delivery truck remained unchanged throughout the period.

As a legal requirement of continuing to operate the truck, it must undergo a major service inspection

every $50000$km$.$ The last inspection performed on the delivery truck was on $1$ September $2021$ by the

seller and the inspection cost was included in the purchase price. On acquisition date, the present value

of the future expected inspection cost to be incurred was estimated to amount to R$150000.$

At the end of the $2022$ and $2023$ financial years, the delivery truck had an odometer reading of $32450$km

and $58500$km$,$ respectively. The truck went for its first major inspection on $1$ September $2023$ at a cost

of R$165000,$ when the odometer reading was $50000$km$.$

The South African Revenue Service $($SARS$)$ allows a section $11($e$)$ tax allowance on the cost price of

delivery trucks over $4$ years, apportioned for a part of the year. SARS allows major inspection costs to

be deducted in full when incurred$\mathrm{.}6.$ Advance payment

During the $2023$ financial year Noupoort signed a non$-$cancellable contract with a client for the sale of

two wind turbine gearboxes. The contract met all the requirements of a valid contract according to IFRS

$15,$ Revenue from contracts with customers. According to the contract, Noupoort Energy Ltd needs to

deliver two wind turbine gearboxes to the client on $30$ June $2024.$ The client paid a $50\%$ deposit on

$30$ November $2023.$ In terms of IFRS $15,$ Revenue from contracts with customers, no performance

obligation was satisfied at $30$ June $2024$ and thus no revenue should be recognised. The CFO, who is

a CA$($SA$),$ has indicated that he is aware of this but he would like revenue on this contract to be

recognized in order to boost the company$$s sales figures for the year.

Additional information:

$$ A pre$-$tax discount rate of $10,50\%$ per annum is applicable.

$$ Owner occupied land is accounted for using the revaluation model. It is the policy of the company to

realise any revaluation surplus upon disposal of the underlying asset. It is company policy that

revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ

materially from the fair values at the end of the reporting period.

$$ Owner occupied buildings, delivery trucks and equipment are accounted for using the cost model.

Depreciation on buildings and equipment is accounted for according to the straight$-$line method over

the estimated useful life of the asset. Depreciation on delivery trucks is accounted for according to

the units of production method.

$$ Intangible assets are accounted for using the cost model. Amortisation is provided for on the straight$-$

line method over the estimated useful life of the asset.

Taxation:

$$ The South$-$African normal tax rate is $27\%.$ The capital gains tax inclusion rate is $80\%.$ You may

assume that both the tax rates have been effective and remained unchanged since $1$ January $2021.$

$$ Deferred tax is provided for on all temporary differences using the statement of financial position

approach. There are no items causing temporary or exempt differences except those identified in

the question. The company will have sufficient taxable income in future against which any unused

tax losses can be utilised.

Assumptions:

$$ All amounts are material.

$$ You may ignore the implications of Value$-$Added Tax