QUESTION 1 (40 marks)

Question

Comptia Ltd purchased machinery on 1 January 20.10 and the machinery is written off over
its estimated useful life (at that stage six years). It is the policy of the enterprise to revalue
machinery every two years. On 1 January 20.12 machinery was revalued for the first time by
Mr X, an independent sworn appraiser, on a depreciated (net) replacement value basis with
reference to recent market transactions on arm's length. On that date the remaining useful life
of all the machinery was estimated to be five years. The residual value of all machinery
remains Rnil despite the fact that the useful lives have changed. The following information is
available:
Marchinery A:
Cost R480 000
Accumulated depreciation - 1January 20.12 (R 160 000)
Carrying Amount R320 000
Net replacement value-1January 20.12 R500 000
MACHINERY B:
Cost R540 000
Accumulated depreciation (R180 000)
Carrying amount R 360 000
Net replacement value-1 January 20.12
Machinery C
Cost R600 000
Accumulated depreciation (R 200 000)
Carrying amount R400 000
Net replacement value-1 January 20.12 R450 000
Additional information
1. The entity realises revaluation surpluses as the assets are used.
2. The entity discloses all revalued property, plant and equipment on the net replacement value
basis.
3. The reduction in the replacement value of machine B is permanent.
4. A tax allowance is granted on the straight-line method over 5 years.
5. The income tax rate is 28%. 66,6% of all capital gains are taxable.
6. No decision has in principle been taken to sell the machinery.
7. Assume that all the dates mentioned above are after 1 October 2001.
Disclose all the notes to the financial statements of Comptia Ltd for the year ended 31
December 20.12 which relate to the above-mentioned information. Your answer must comply
with International Financial Reporting Standards.
Ignore comparative figures.
Also disclose the revaluation surplus in the statement of changes in equity

Answer 1

To prepare the notes to the financial statements for Comptia Ltd for the year ended 31 December 20.12, we'll adhere to the requirements of International Financial Reporting Standards (IFRS), particularly IAS 16 (Property, Plant and Equipment) and relevant other standards regarding revaluation, taxation, and presentation.

Notes to the Financial Statements of Comptia Ltd for the Year Ended 31 December 20.12

1. Property, Plant and Equipment
Machinery
The following table summarizes the carrying amounts, revaluation surplus, and depreciation of the company’s machinery:

| Machinery | Cost | Accumulated Depreciation | Carrying Amount | Revaluation (Net Replacement Value) | Revaluation Surplus | Remaining Useful Life | |-------------|--------------|--------------------------|-----------------|------------------------------------|---------------------|-----------------------| | Machinery A | R480,000 | R160,000 | R320,000 | R500,000 | R180,000 | 5 years | | Machinery B | R540,000 | R180,000 | R360,000 | R360,000 | Rnil | 5 years | | Machinery C | R600,000 | R200,000 | R400,000 | R450,000 | R50,000 | 5 years | | Total | R1,620,000 | R540,000 | R1,080,000 | R1,310,000 | R230,000 | |

2. Revaluation of Machinery
In January 20.12, the company conducted its first machinery revaluation. Mr. X, an independent sworn appraiser, determined the net replacement values of the machinery. As a result:

• Machinery A's carrying amount increased by R180,000 (from R320,000 to R500,000), with a corresponding revaluation surplus of R180,000 recognized in other comprehensive income.
• Machinery B's value remained unchanged at R360,000, with no revaluation surplus as the reduction is permanent.
• Machinery C's carrying amount increased by R50,000 (from R400,000 to R450,000), with a revaluation surplus of R50,000 also recognized in other comprehensive income.

3. Depreciation
For the year ended 31 December 20.12, the estimated depreciation expense for machinery is calculated on a straight-line basis based on revised estimates.

Depreciation Calculation:

Machinery A:

• New Carrying Amount: R500,000
• Remaining Useful Life: 5 years
• Annual Depreciation: R500,000 / 5 = R100,000

Machinery B:

• Carrying Amount: R360,000
• Remaining Useful Life: 5 years
• Annual Depreciation: R360,000 / 5 = R72,000

Machinery C:

• New Carrying Amount: R450,000
• Remaining Useful Life: 5 years
• Annual Depreciation: R450,000 / 5 = R90,000

Total Depreciation Expense:
R100,000 (A) + R72,000 (B) + R90,000 (C) = R262,000

4. Taxation
The company is entitled to tax allowances on straight-line depreciation over 5 years. Therefore, the taxable depreciation for the machinery is R262,000 for the year 20.12. The company's effective income tax rate is 28%.

Total Taxable Profit: Assuming only depreciation affects the profit, the adjusted tax expense on the depreciation would be:

• Tax Allowance: R262,000 * 28% = R73,360

5. Revaluation Surplus in Statement of Changes in Equity
The total revaluation surplus recognized in other comprehensive income for the year 20.12 is R230,000 which consists of:

• Machinery A: R180,000
• Machinery C: R50,000
  This amount will be transferred to a separate component of equity under “Revaluation Surplus” in the statement of changes in equity.

Statement of Changes in Equity for the Year Ended 31 December 20.12

| Description | Amount | |-------------------------------|---------| | Opening Balance | RXX | | Revaluation Surplus (Machinery)| R230,000| | Other Comprehensive Income | RXX | | Closing Balance | RXX |

(Note: Replace RXX with actual balances as necessary)

Conclusion

These notes comply with IFRS and provide a comprehensive overview of the revaluation, accounting treatment of the machinery, and its impact on the financial statements of Comptia Ltd.