# Question 1: Legal Case and Events After Reporting Period ## Relevant Definitions - **Event After the Reporting Period (IAS 10)**: Events, both favorable and unfavorable that occur between the end of the period and the date when the financial statements are authorized for issue. - **Adjusting Event**: Provides evidence of conditions that existed at the end of the reporting period. - **Non-adjusting Event**: Relates to conditions that arose after the reporting period. ## Facts - Year-end: **31 December 202** - At year-end, possibility of losing the case was *unlikely*, but potential legal and settlement costs were estimated at **R900,000**. - On **4 February 2021**, the court ruled against Fresh Limited: - Damages: **R1,000,000** - Legal fees: **R180,000** - Financial statements were *not* yet authorized for issue at the time of the ruling. ## Analysis 1. **Nature of the Event** - The court case relates to actions and conditions existing before 31 December 202. - The judgment provides *additional evidence* about the situation as at year-end. 2. **Type of Event** - According to IAS 10, because the judgment provides new information about a condition that existed at year-end, it is an **adjusting event**. 3. **Accounting Treatment** - The amount to be recognized should reflect the court ruling (R1,000,000 damages + R180,000 legal fees = **R1,180,000**). - Any existing provision or contingent liability should be adjusted to the new amount. 4. **Financial Statement Impact** - Recognize an **expense and liability** for R1,180,000 in the 31 December 202 financial statements. - Disclose the nature of the event and the amount in the notes if material. ## Summary Table | Item | Amount (R) | |------------------------|-----------------| | Damages Awarded | 1,000,000 | | Plaintiff’s Legal Fees | 180,000 | | **Total Liability** | **1,180,000** | ## Conclusion Fresh Limited must adjust its financial statements for the year ended 31 December 202 to recognize a liability and related expense of **R1,180,000**. This is an adjusting event after the reporting period under IAS 10, as it gives evidence of conditions existing at the reporting date. --- # Question 2: Taxable Income and Tax Note ## 2.1 Taxable Profit and Current Income Tax Calculation ### Step 1: Start with Accounting Profit - **Profit for the year**: R400,000 ### Step 2: Adjust for Non-Taxable and Non-Deductible Items #### Add Back Non-Deductible Expenses - Donations not deductible: R100,000 - Fines (not deductible): R10,000 #### Less Non-Taxable Income - Dividends received (exempt): R40,000 #### Capital Gain Calculation - **Original cost (base cost)**: R500,000 - **Accumulated depreciation/wear & tear**: R300,000 - **Carrying amount at date of sale**: R200,000 (not directly needed for tax) - **Profit on sale**: R350,000 (already included in accounting profit) - **Capital gain for tax**: - Proceeds = Cost + Profit = R500,000 + R350,000 = R850,000 - Base cost = R500,000 - Capital gain = Proceeds - Base cost = R350,000 - **Inclusion rate (22.4%)**: - Taxable portion of capital gain = R350,000 × 22.4% = R78,400 #### Adjust for Capital Gain - **Accounting profit includes entire gain (R350,000), but only R78,400 is taxable**. - So, **subtract gain in accounting profit, add taxable gain**: - Less: Accounting gain = R350,000 (already included in profit) - Add: Taxable gain = R78,400 ### Step 3: Calculate Taxable Profit \[ \begin{align*} \text{Accounting Profit} & : \quad R400,000 \\ \text{Add: Non-deductible donations} & : \quad +R100,000 \\ \text{Add: Fines} & : \quad +R10,000 \\ \text{Less: Dividend income} & : \quad -R40,000 \\ \text{Less: Accounting gain on building} & : \quad -R350,000 \\ \text{Add: Taxable capital gain} & : \quad +R78,400 \\ \hline \text{Taxable Profit} & : \quad R198,400 \\ \end{align*} \] ### Step 4: Calculate Income Tax - **Tax rate**: 28% \[ \text{Income Tax} = 28\% \times R198,400 = R55,552 \] --- ### Summary Table | Item | Amount (R) | |-----------------------------------------|-------------| | Accounting profit | 400,000 | | Add: Non-deductible donations | +100,000 | | Add: Fines (not deductible) | +10,000 | | Less: Dividends received (exempt) | -40,000 | | Less: Accounting building gain | -350,000 | | Add: Taxable capital gain (22.4%) | +78,400 | | **Taxable profit** | **198,400** | | **Income Tax (28%)** | **55,552** | --- ## 2.2 Taxation Note as at 31 December 202 ### Income Tax Expense | | R | |-------------------------------------------|------------| | Current income tax on taxable income | 55,552 | | Deferred tax | NIL | | **Total income tax expense** | 55,552 | ### Reconciliation of Tax Rate | | % | |-------------------------------------------|------------| | Standard rate | 28. | | Tax effect of: | | | - Non-deductible expenses (donations, fines) | +7. | | - Exempt income (dividends) | -5.6 | | - Difference in capital gains taxed | -15.5 | | **Effective tax rate** | 28. | ### Disclosure - **Current tax liability**: R55,552 (payable) - **Deferred tax**: None (no temporary differences) - **Capital gain**: Only 22.4% included for company tax - **Dividends**: Exempt from tax --- ## Final Summary 1. **Legal Case**: Recognize a liability and expense of R1,180,000 in 202 financial statements for the court ruling (adjusting event after reporting period under IAS 10). 2. **Taxable Profit & Tax Calculation**: - Taxable profit: **R198,400** - Current income tax: **R55,552** - Taxation note: Disclose current tax expense, no deferred tax, and summarize reconciliation with main adjustments (non-deductible expenses, exempt income, partial taxation of capital gain).