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IAS 8 Tutorial Question (SS)

The company changed its accounting policy for valuing inventories from weighted average cost to FIFO, which provides a fairer presentation of the effect of inflation on profits. This resulted in a decrease in cost of sales of R35,000 in 2014 and an increase of R30,000 in 2013, along with related tax effects. The change was applied retrospectively, decreasing retained earnings at 1 January 2013 by R14,000. Taxation expense for 2014 comprised current tax of R172,575 and deferred tax of R(18,825). The effective tax rate was 31% compared to the standard rate of 30% due to Companies Act penalties. Deferred tax comprised equipment of R11,025 and nil for inventory and prepaid

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43 views2 pages

IAS 8 Tutorial Question (SS)

The company changed its accounting policy for valuing inventories from weighted average cost to FIFO, which provides a fairer presentation of the effect of inflation on profits. This resulted in a decrease in cost of sales of R35,000 in 2014 and an increase of R30,000 in 2013, along with related tax effects. The change was applied retrospectively, decreasing retained earnings at 1 January 2013 by R14,000. Taxation expense for 2014 comprised current tax of R172,575 and deferred tax of R(18,825). The effective tax rate was 31% compared to the standard rate of 30% due to Companies Act penalties. Deferred tax comprised equipment of R11,025 and nil for inventory and prepaid

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Tutorial question: Rosemary McHerb (SUGGESTED SOLUTION)

PART A
Healing Herbs Ltd
Notes to the financial statements at 31 December 2014
1. Change in accounting policy
During the year the company changed its accounting policy regarding the valuation of
inventories from the weighted average cost formula to the first-in-first-out basis in order to
achieve a fairer presentation (1). A fairer presentation will be achieved due to the fact that
value of closing inventory will give a reliable presentation of the effect of inflation on the
company’s profits (1). The change in policy was accounted for retrospectively and
comparative amounts have been appropriately restated (1). The effect of the change is as
follows:
2014 2013
R R

(Decrease)/increase in cost of sales (35 000) (1) 30 000 (1)


(Decrease)/increase in taxation expense 10 500 (1) (9 000) (1)
(Increase)/decrease in profit (24 500) 21 000

2014 2013
R R

Increase/(decrease) in inventories 25 000 (1) (10 000) (1)


(Increase)/decrease in deferred tax - 3 000 (1)
(Increase)/decrease in current tax payable (7 500) (1) -
Increase/(decrease) in equity 17 500 (7 000)

Decrease in retained earnings at the beginning of (14 000) (1)


2013
-2-
2. Taxation expense
2014 2013
R R
South African normal tax
Current tax 172 575 (1) 282 525 (1)
Deferred: Temporary differences (18 825) (1) 17 475 (1)
Applied against profit before tax 153 750 300 000

Normal tax rate reconciliation:


Standard rate 30% 30%
Profit before tax multiplied by the standard tax rate 150 000 (1) 300 000 (1)
Companies Act penalty 3 000 (1) -
Interest – Companies Act penalty 750 (1) -
Applied against profit 153 750 300 000

Effective rate (153 750/500 000) (300 000/1 000 000) 31% (1) 30% (1)

3. Deferred taxation liability


2014 2013
R R
Deferred tax is comprised as follows:
• Equipment 11 025 (1) 12 750 (1)
• Inventory - (1) (3 000) (1)
• Prepaid rent - (1) 20 100 (1)
11 025 29 850

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