Question 2

Suggested solution

Part 1: Journal entries for service equipment

No impairment on 30 November 2023 when decide to sell as carrying amount is R183 000 compared
to the recoverable amount is R200 000 (value in use exceeds the fair value less costs to sell).

Alternate 1

Dr Cr
Rands Rands
1 Oct to 31 Dec 2022
Depreciation (W1) 9 000
Accumulated depreciation 9 000
Recognition of depreciation until classified as held
for sale
01 Jan 2023
Impairment loss (P/L) 21 000
Equipment: accumulated depreciation 21 000
Recognition of impairment prior to classification
as held for sale
1 Jan 2023
Equipment: accumulated depreciation (252 + 21) 273 000
Non-current assets held for sale (W5) 152 500
Impairment expense (P/L) (W6) 6 500
Equipment: gross carrying amount 432 000
Classification as held for sale
30 Sept 2023
Bank (R158 000 – R7 000) 151 000
Loss on sale (P/L) 1 500
Non-current asset held for sale 152 500
Derecognition on sale
Workings
Available and maximum 16
Dates and narrations 1

Alternate 2

Dr Cr
Rands Rands
1 Oct to 31 Dec 2022
Depreciation (W1) 9 000
Accumulated depreciation 9 000
Recognition of depreciation until classified as
held for sale
1 Jan 2023
Equipment: accumulated depreciation (W3) 252 000
Non-current assets held for sale (W5) 152 500
Impairment expense (P/L) (W6) 27 500
Equipment: gross carrying amount 432 000

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 Classification as held for sale
30 Sept 2023
Bank (R158 000 – R7 000) 151 000
Loss on sale (P/L) 1 500
Non-current asset held for sale 152 500
Derecognition on sale
Workings
Available and maximum 16
Dates and narrations 1

Alternate 3

Dr Cr
Rands Rands
1 Oct to 31 Dec 2022
Depreciation (W1) 9 000
Accumulated depreciation 9 000
Recognition of depreciation until classified as
held for sale
01 Jan 2023
Impairment loss (P/L) 21 000
Equipment: accumulated depreciation 21 000
Recognition of impairment prior to classification
as held for sale
1 Jan 2023
Equipment: accumulated depreciation (W3) 252 000
Non-current assets held for sale (W5) 159 000
Equipment: gross carrying amount 432 000
Classification as held for sale
Impairment expense (P/L) (W6) 6 500
Non-current assets held for sale (W5) 6 500
Recognition of impairment loss
30 Sept 2023
Bank (R158 000 – R7 000) 151 000
Loss on sale (P/L) 1 500
Non-current asset held for sale 152 500
Derecognition on sale
Workings
Available and maximum 16
Dates and narrations 1

Alternate 4

Dr Cr
Rands Rands
1 Oct to 31 Dec 2022
Depreciation (W1) 9 000
Accumulated depreciation 9 000
Recognition of depreciation until classified as held for
sale
1 Jan 2023

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 Equipment: accumulated depreciation (W3) 252 000
Non-current assets held for sale (W5) 180 000
Equipment: gross carrying amount 432 000
Classification as held for sale
Impairment expense (P/L) (W6) 27 500
Non-current assets held for sale (W5) 27 500
Recognition of impairment loss
30 Sept 2023
Bank (R158 000 – R7 000) 151 000
Loss on sale (P/L) 1 500
Non-current asset held for sale 152 500
Derecognition on sale
Workings
Available and maximum 16
Dates and narrations 1

Workings

1. Depreciation Oct and Nov 2022 (R432 000/12 x 2/12) 6 000

2. Depreciation Dec 2022 (R432 000/12 x 1/12) 3 000
3. Total depreciation for FY2023 (R432 000/121 x 3/121) 9 000
4. 30 Nov 2022 1 Jan 2023
5. Cost 432 000 432 000
6. Accumulated depreciation at (R432 000 x 83/144; 7/12) (249 000) (252 000)
7. Carrying amount at 1 Jan 2023 183 000 180 000
8. Recoverable amount at 30 Nov 2022 (higher of value-in-use 200 000 159 000
of R200 000 and FVLCTS of R195 000 – R9 500)
9. Recoverable amount at 01 January 2023 prior to
classification as held for sale (higher of value-in-use of
R159 000 and FVLCTS of R152 500)
10. Impairment loss - 21 000
11. 159 000
12. Fair value less cost to sell at (162 000 – 9 500) (152 500)
13. Impairment loss - 6 500
27 500

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Part 2: Note disclosure

Tractor Units and Trailers Limited

Annual financial statement for the year ended 30 September 2023

Note 13 – The major components of income tax expense

2023
Rands
Current tax expense (W1) 2 808 000
Deferred tax expense
- Origination and reversal of temporary differences 3 375 000
(R49 500 000 – R37 000 000) x 27%
- Assessed loss utilised 11 232 000
R41 600 000 * 27%
Tax Expense 17 415 000
Workings
Layout 1

W1 – current tax
Taxable income – given 52 000 000
Less assessed loss utilised (41 600 000)
R50m, limited to higher 80% (R52 000 000 x 80%) and R1m
10 400 000

Current income tax at 27% 2 808 000

Part 3: Thutha contract

MEMORANDUM
TO : FINANCIAL ACCOUNTANT
FROM : STUDENT
DATE : 8 NOVEMBER 2023
RE : THUTHA CONTRACT
Format and clarity if expression 2

This memorandum sets out my responses to your specific questions.

a. Is TUTs acting as principal or agent as it relates to the tanker?

TUT has to determine whether it controls the tanker before it is transferred to Thutha, the
customer.

The entity that controls a good or service before it is transferred to the customer is acting
as principal, whilst it acting as an agent if it does not. The is not solely dependent on legal
title.

IFRS15.B37, gives some indicators that an entity controls a good or service before it is
transferred to the customer as follows:

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 • TUTs is primarily responsible for fulfilling the promise to provide tanker unit to Thutha.
Even though the supplier delivers the tanker unit directly to Thutha, TUTs is responsible
for fulfilling the promise to Thutha as TUTs has to find the supplier, arrange
transportation and bears responsibility for losses that Thutha may incur if the tanker
unit does not conform to Thutha’s specifications.
• TUTs has inventory risk before transfer. It is not immediately apparent if this indicator
is met.
• TUTs has the discretion in establishing the price for the tanker unit. This is indicator is
met as TUTs has the discretion in setting the price for the whole contract.

Based on the above, we conclude that TUTs is acting as the principal in this transaction as
they set the price and are primarily responsible for fulfilling the performance obligation.

Total available 6
Max 4

b. What are TUTs’ performance obligations?

The following promises are stated in the contract:

- The tractor unit
- The warranty
- The service plan
- The Tanker unit
- Training of drivers

TUTs must identify each promise in the contract as a performance obligation if it is distinct.

The promise inherent in 1-year warranty provides assurance to Thutha that the units will
function appropriately. The assurance is required by law and as such is not a performance
obligation but rather to protect customers and should be accounted for as an assurance-
type warranty in accordance with IAS 37.

A good or service is distinct if it the customer can benefit from it on its own (capable of being
distinct) and is separately identifiable in the contract (distinct in the context of the contract)
(IFRS 15.27).

The remaining promises (tractor unit, tanker unit, training of drivers and the service plan)
are distinct because they can be sold on their own, or used together with a good or service
obtained from elsewhere, or do not modify or customise each other.

Performance obligations are satisfied when the promised goods or services are transferred
to the customer, or when the customer obtains control of the asset being sold (IFRS 15.31).

The tractor unit and tanker unit are satisfied at a point in time when TUTs transfers control
of these assets to Thutha, which is the date that Thutha obtains the significant risks and
rewards of ownership of the assets.

Performance obligations are satisfied over time if they meet one of three criteria (IFRS
15.35). The service plan is a performance obligation satisfied over time because the
customer (Thutha) Thutha simultaneously receives and consumes the benefits of the service
as and when it is performed (IFRS 15.B3). In addition, TUTs’ promise to stand ready to

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 provide such service at any point implies this is provided over time rather than a point in
time.

The training of drivers is also performed over time as the customer simultaneously received
and consumes the benefits of the lessons as TUTs performs.
For each the two performance obligations satisfied over time (service plan, and training of
drivers), TUTs has to determing an appropriate measure of progress.

TUTs has the option of using output methods where they can measure what they have
transferred to the Thutha, or input methods, which means measuring TUTs effort towards
satisfying the performance obligation.

For the warranty and service plan, it may be appropriate to use time elapsed as a measure
of progress. This is because the customer has a right to bring the tractor in for a repair under
warrany over the 5-year period. If TUTs is able to reliably estimate the future effort to repair
the truck at contract inception absed on prior experience, then the company could use costs
incurred as a proportion of total estimated costs to service as a basis for measuring progress.
Where there is (or there are) clear major services that will require more effort in the future,
these may need to be adjusted for in the estimation of progress measurement

For the training of drivers, there appear to be multiple options for measuring progress
towards the satisfaction of this performance obligation. TUTs output for this training is time
over which the learner is registered and received teaching, and not a certificate at the end,
because a pass is not guaranteed.

It is also noted that the TUTs input into the training of drivers is the hours the instructors
spend training the drivers. Under this input method, 50% of the effort is expended in the
first month. However, this effort could be indicative of the benefit received by the customer
and as such is a resonable basis for recognising the performance obligation.

An alterntaive measure of progress could the time elapsed in months, divided by six months,
which assumes that benefit received by the customer is on a straight-line basis over the
training period .
Total available 24
Max 21

c. How would TUTs allocate the transaction price to the performance obligations?

Given that there are multiple performance obligations, TUTs has to allocate the transaction
price to each performance obligation based on stand-alone selling prices, where available.

TUTs has a standalone selling price each, for the tractor unit and the training of drivers as
these performance obligations are normally offered on their own.

The extended service plan is not normally offered on its own, and a standalone price will not
be available. TUTs maybe able to estimate this as a multiple of the stand-alone selling price
of the standard 2-year warranty. Alternatively, if TUTs is able to reliably estimate the future
effort to repair the truck at contract inception based on prior experience, then the company
could use estimated costs to service (plus a reasonable margin) as a basis for estimating a
stand-alone selling price. As a second alternative, TUTs may use the residual method, if it is

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clear that there is no discount to be allocated to the the other performance obligations or if
TUTs has not established a price of the extended warranty and service plan.

The stand-alone selling price of the tanker unit is not available as TUTs has not sold this
tanker before. However, TUTs maybe able to estimate the standalone selling price based on
the cost incurred to purchase the tanker, and the normal mark up that TUTs achieves on
similar items.

The allocation of the transaction price to the performance obligations also needs to consider
that the contract includes a significant financing component as there is. Atiming difference
between some of the performance obligations are performed and when the related cash
flows are received.
Total available 7
Max 6