You are the financial manager of Omega Ltd (Omega). Omega is unlisted. The following information and excerpts
Question:
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.
- 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 | ||||
- 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.
- 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.
- 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.
- Other expenses
The following items are, among others, included in ‘other expenses:
2010 | 2009 | |
R’000 | R’000 | |
Depreciation: Property, plant, and equipment: | ||
| 125 | 125 |
| 28 | 80 |
| 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.
- 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
Accounting for Governmental and Nonprofit Entities
ISBN: ?978-0073379609
15th Edition
Authors: Earl R. Wilson, Jacqueline L Reck, Susan C Kattelus