Cocacola Ltd (hereafter ‘Cocacola’) is a soft-drink manufacturer located in Johannesburg.

Question

The company produces, bottles and dispatches carbonated beverages from its factory in
Newtown.
A manufacturing property (consisting of land and buildings) was originally acquired for
R6 000 000 which houses the bottling plant and production facilities. (PPE IAS 16)
At the time of the acquisition 25% of the purchase price was attributed to land and 75% of
the purchase price was attributable to the factory building.
The South African Revenue Service (‘SARS’) accepted the allocation of the purchase price
between land and buildings.
It has always been the intention of the company to make use of the manufacturing property
when producing carbonated beverages.
Although Cocacola has only been producing soft drinks from the Newtown facility for a
relatively short period, sales of the popular soft drink have skyrocketed, prompting the
company to look for larger production premises in order that they may increase the
production of Cocacola beverages.
To this end the company purchased a new manufacturing property in Pretoria on 1 January
2021 for R10 000 000.
When allocating the purchase price, it was deemed that 10% of the purchase price was
attributable to land whilst 90% was attributable to the building.
The existing bottling plant was expanded and moved to the Pretoria premises during March
2021. Production from the Pretoria bottling plant began on 1 April 2021.
Rather than sell the Newtown property, Cocacola decided to retain it and lease the property
(IAS 40) to another manufacturing company in terms of an operating lease effective from 1
April 2021.
The details of the Newtown Property are as follows:
Accumulated buildings (Depreciation) – 1 January
2021

(675 000)

Fair Value – 1 April 2021 25% x 6 mill-land; 75%x 6 mill-

building
Land 2 000 000
Buildings 6 000 000
Fair Value – 31 December 2021
Land 2 200 000
Buildings 6 200 000

Owner-occupied property is accounted for using the cost model whilst investment property
is accounted for using the fair value model.
Owner-occupied buildings are depreciated on a straight-line basis over 20 years to a zero
residual value.
Land is not depreciated.
SARS allows Cocacola an annual building allowance of 10% on the cost (not apportioned) in
the computation of Income tax.
The normal taxation rate is 28% and the inclusion rate (for Capital Gains Tax purposes) is
66.6%.
Cocacola has a 31 December year end and reports in terms of International Financial
Reporting Standards.
Required
1. List FIVE (5) main items which do not qualify as investment properties (5 Marks)
2. Prepare the journal entries that Cocacola Ltd will record in respect of the above-
mentioned information as it pertains to the Newtown property for the financial year
ended 31 December 2021.Journal entries in respect of the deferred taxation
consequences of the above-mentioned transactions are not required.
(15 Marks)
3. Explain, with reference to the appropriate paragraphs in IAS 12: Income Taxes, what
the deferred taxation consequences will be for Cocacola Ltd with regard to the
Newtown property being reclassified from Property, Plant and Equipment to
Investment Property on 1 April 2021. Your answer should set out the consequences
for land and buildings separately. Where possible refer to the actual amounts
involved as marks are awarded for these.
(10 Marks)

Answer 1

1. The five main items which do not qualify as investment properties are:
a. Land held for long-term capital appreciation
b. Property being held for use in the production or supply of goods or services
c. Property leased to others under an operating lease
d. Property under construction or development for future use as investment property
e. Property held for sale in the ordinary course of business

2. Journal Entries for Newtown Property for the year ended 31 December 2021:
Accumulated Depreciation:
Depreciation Expense 375,000
Accumulated Depreciation - Buildings 375,000

Fair Value Adjustment:
Land 200,000
Revaluation Surplus - Land 200,000
Buildings 200,000
Revaluation Surplus - Buildings 200,000

Depreciation for the year:
Depreciation Expense 400,000
Accumulated Depreciation - Buildings 400,000

Operating Lease Income:
Cash XXX
Operating Lease Income XXX

Fair Value Adjustment (31 December):
Revaluation Surplus - Buildings 1,000,000
Buildings 1,000,000

3. Deferred taxation consequences for Newtown property reclassification:
- Upon reclassification of the Newtown property from Property, Plant and Equipment to Investment Property, a deferred tax liability will be recognized for the tax consequences of the revaluation surplus on buildings. This is because the revaluation surplus on buildings is a taxable temporary difference as it will result in higher future taxable amounts when the building is eventually disposed of.
- The deferred tax liability will be calculated based on the tax rate of 28% and the inclusion rate of 66.6% on the revaluation surplus amount of R1,000,000. This will result in a deferred tax liability being recognized on the balance sheet.
- On the other hand, there will be no deferred tax consequences for the revaluation surplus on land as land is not depreciated and there are no tax consequences associated with revaluing land under IAS 12.