Question

Below is an extract from the initial trial balance of Zamzam provided to the auditors for the financial
year ended 31 December 2020 (‘FY2020’), before any of the errors and omissions identified and
noted below, were corrected and taken into consideration:
General ledger account Balance
Dr/ (Cr)
4000/000: Current tax expense (p/l) R420 651
4200/000: Deferred tax expense (p/l) R65 187
9100/000: SARS payable (SoFP) R420 651
9200/000: Deferred tax (SoFP) – 31 December 2020 R54 160
5400/000: Revaluation surplus: Owner-occupied land (SoCE) – 1 January 2020 (R117 500)
5500/000: Revaluation surplus: Owner-occupied land (OCI) (Before tax) R150 000
The only errors and omissions identified by the auditors (not yet correctly accounted for in the above
balances) are listed below:
Error 1: Incorrect depreciation expense on the office building
The depreciation expense on the office building was incorrectly calculated as R67 000 instead of
R77 000. Zamzam used R67 000 in the current tax calculation for the current financial year. The
South African Revenue Service (SARS) does not allow any capital allowances on the office building.
It is the intention of Zamzam to use the office building until the end of its useful life.
Omission 1: Exclusion of current tax effect on exchange of assets
Zamzam exchanged its old air conditioners for more technologically advanced air conditioners on
30 June 2020. The effect of both the old and new air conditioners were omitted from the current tax
calculation for the current financial year. Details of the old and new air conditioners include the
following:
Old air conditioners
Cost on 1 January 2019 (ready for and taken into use on this date; paid immediately
in cash)
R170 000
Fair value on 30 June 2020 R150 000
Useful life as of 1 January 2019 10 years
New air conditioners
Fair value on 30 June 2020 (ready for and taken into use on this date) R160 000
Useful life as of 30 June 2020 10 years.
The residual values of both the old and new air conditioners were considered to be immaterial. The
useful life and residual value estimates remained unchanged. The exchange transaction had
commercial substance as defined in terms of IAS 16 Property, Plant and Equipment. The SARS
allows a section 11(e) wear and- tear allowance over 15 years on both the old and new air
conditioners; apportioned for periods shorter than a year. Zamzam has never had any intention to
sell any of its air conditioners. The SARS deems the exchange transaction as if the old air
conditioners were sold and the new air conditioners were obtained for the same consideration as
would be recognised for accounting purposes in terms of IAS 16.
Omission 2: Deposits received in the current financial year
Zamzam receives deposits for large orders placed from new customers. The deposit is refundable
on cancellation of the order, which results in control only passing when the order will be delivered.
At the end of the current financial year, Zamzam received deposits to the value of R90 000 which
were correctly classified as revenue received in advance. The effect of these deposits were however
not taken into account in the current tax calculation for the current financial year. No such deposits
were received at the end of the prior financial year.
Omission 3: Exclusion of allowance for credit losses in the current financial year
The SARS allows a section 11(j) deduction of 25% of the accounting allowance for credit losses
each year. Zamzam did not recognise the doubtful debt as part of IFRS 9 Financial Instruments for
the purposes of SARS. The effect of the allowance was correctly accounted for in the current financial
year’s deferred tax calculation. However, the FY2020 current tax calculation does not include the
effect of the allowance for credit losses. The allowance for credit losses of Zamzam amounted to the
following at the respective dates:
Description Amount
Dr / (Cr)
Balance on 31 December 2019 (R145 000)
Balance on 31 December 2020 (R170 000)
Other relevant information:
1. The correctly calculated accounting profit before tax, after correctly taking into account the
above errors and omissions amounted to R1 950 000. This profit includes a net non-deductible
permanent difference of R2 000. The latter consists of dividends received form a local listed
company to the value of R10 000 and the remaining balance consists of other non-deductible
expenses incurred during the current financial year. The latter items were correctly accounted
for in the current year tax calculation.
2. The assessed loss for the financial year ended 31 December 2019 amounted to R360 000.
3. Zamzam’s board has always been of the opinion that the company will make taxable profits in
the foreseeable future to utilise any unused tax losses.
4. Zamzam always utilises any tax deductions received from SARS in the year of assessment
they are entitled to do so.
5. Assume that none of the identified errors and omissions affect any of the prior year balances.
6. Assume that all other information provided are correct and accurately accounted for to the
extent that it is not affected by the errors and omissions noted.
ZigZag provided an extract of the asset register as at the end of the current and prior financial year:
ASSETS CARRYING AMOUNTS
31 December 2020
R
31 December 2019
R
Land (1) 3 800 000 3 000 000
Office buildings (2) 1 900 000 1 370 000
Industrial buildings (3) 3 333 333 3 666 667
Machinery (4) 1 800 000 2 700 000
Additional information:
1. Land is vacant land and it is classified as investment property. The land was acquired on
1 April 2019 at R2 800 000. The fair value adjustments have been accounted for at the end of
the respective financial years.
2. The office building was acquired on 1 July 2019 for R1 400 000 and was revalued for the first
time on 31 December 2020 to its fair value of R1 900 000. The office buildings are depreciated
on the straight line basis over 20 years to its residual value of R200 000. During 2019,
management expected to use the asset up to the end of its economic life.
On 1 January 2020, management estimated the remaining useful life of the building to have
changed to 10 years and the residual value to be R500 000.
In December 2020 the management changed the intention and decided they were going to sell
the office building.
Office buildings have no capital allowances available.
3. Industrial buildings are depreciated over 12 years on the straight line basis. In terms of the
Income tax act, a section 13 allowance of 5% applies to the industrial buildings. The buildings
were bought on 1 January 2019, with the intention to keep the building, for an amount of
R4 000 000 paid in cash immediately with its residual value regarded as being insignificant.
4. Machinery is depreciated on a straight line basis at 20% per year to Rnil residual value. The
SARS allows a section 12C allowance of 40%/20%/20%/20% on machinery. The machinery had
a tax base of R1 800 000 on 31 December 2019 and R900 000 on 31 December 2020. No
additional machinery was acquired during FY2020.
5. ZigZag always pays their insurance in advance. At the end of FY2020 the balance for insurance
paid in advance amounted to R35 000 (2019: R25 000).
6. On 1 December 2020, Zamdela, a loyal customer, ordered transportation equipment from
ZigZag which will be delivered to him during December 2021. ZigZag received R500 000 from
Zamdela in cash when the order was placed.
7. The accounting profit before tax, which included dividends received of R40 000, amounted to
R3 200 000 for the year ended 31 December 2020. All above mentioned movements were taken
into account in arriving at this accounting profit.
8. The deferred tax asset balance as at 31 December 2019 was R390 150 due to an assessed
loss of R2 200 000 that existed at that time. ZigZag expected to make sufficient taxable profits
during 2020 and onwards to fully utilize assessed losses and other deductible temporary
differences.
Accounting policies and other information for both companies:
 Owner-occupied land is accounted for on the revaluation model and is revalued at the end of
each financial year in terms of IAS 16.
 Office buildings are carried on the revaluation model using the net replacement method in
terms of IAS 16.
 Machinery is measured on the cost model in terms of IAS 16.
 Industrial buildings are measured on the cost model in terms of IAS 16.
 In terms of IAS 8 Change in accounting policies, estimates and errors, changes in estimates
are accounted for using the re-allocation method.
 All other items of property, plant and equipment are accounted for on the cost model in terms
of IAS 16.
 Investment property is accounted for on the fair value model in terms of IAS 40 Investment
Properties.
 Depreciation and amortisation are accounted for on the straight-line method.
 Assume a normal tax rate of 28% for FY2020 (2019: 27%) and that 80% of capital gains are
taxable.
 There are no temporary differences other than those that are apparent from the given
information.

Required:
calculate deferred tax for the year ended 31 December 2020

Answer 1

MFRS provides that where an asset has been revalued there is rebuttal presumption that value would be primarily realized through sale and hence, capital gain tax is applicable. Following is detailed working of taxable deferred taxes working-

Item	Temporary difference	Tax rate	DTA/ (DTL)	Remarks
Land	(800,000)	28	(224,000)	MFRS provides that once an asset is fair valued, it is presumed that its value would be utilized through sale and since it is a investment property, capital gain would arise. Hence, 80% of 1 million taxed
Office buildings	(400,000)	28	(112,000)	Assumed that cost basis in tax is fixed and depreciation rate in taxe & books are same. Hence, revaluation amount creates temporary differences. Since, revalued asset would be realied through sales, 80% is applied for capital gain
Industrial buildings	133,333	28	37,333	Difference in depreciation is temporary differences
Machinery	(900,000)	28	(252,000)
			(550,667)