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(20 marks) (36 minutes) Questions 1 - 10 relates to the annual financial statements of Kipla Pharma Ltd for the years ended 31 December 2019 and 31 December 2020. Please refer to the assessment section "assessment 2" for the relevant multiple choice questions. Kipla Pharma Ltd is a pharmaceutical company specialising in the manufacturing and distribution of vitamin supplements exclusively for the South African market. Kipla Pharma Ltd has a 31 December year-end Owner-occupied property On 1 October 2017. Kipla Lid purchased a property for R7 500 000 (Land: R2 500 000 Building: R5 000 000), which will be used by the company for its manufacturing activities. The property was available for use, as intended by management, as well as brought into use on acquisition date. On acquisition date an estimated useful life of 30 years and a residual value of R1 000 000 was allocated to the building The fair value of the land, on the respective dates, as determined by an independent swom appraiser, is as follows: R 31 December 2018 2 690 000 31 December 2020 2 850 000 On 31 December 2020, the residual value of the building was re-estimated to amount to R1 500 000 The useful life of the building remained unchanged throughout the period. Purchased product licence - GummyVite On 1 January 2018, Kipla Pharma Lid purchased a product licence for a paediatric vitamin gummy called Gummy Vite, at a cost of R2 500 000. The product licence will allow Kipla Pharma Ltd to manufacture and sell the GummyVite product for a period of 10 years. Due to the fact that the transaction was immediately settled, a discount of 2.5% on the cost price was negotiated with the licensor. Kipla Pharma Ltd paid legal fees amounting to R192 500 on acquisition of the product licence On 1 February 2018, the product licence was available for use, as intended by management, as well as brought into use. A residual value of Rnit was allocated to the product licence. During the year ended 31 December 2019, a competitor introduced a new paediatric vitamin chocolate to the market, resulting in a significant decrease in sales of the GummyVite product. On 31 December 2019. management of Kipla Pharma Ltd determined the fair value less costs to sell and the value in use of the product licence to amount to R1 850 000 and R1 725 000, respectively. During the 2020 financial year the competitor experienced financial difficulties and discontinued the manufacturing of the paediatric vitamin chocolate and was subsequently liquidated. This resulted in consumers reverting back to the GummyVite product. On 31 December 2020, management of Kipla Pharma Ltd determined the fair value less costs to sell and the value in use of the product licence to be R1 893 000 and R1 921 000, respectively. On 31 December 2020, the carrying amount of the Gummy Vite product, which you can assume to be correct, if no previous impairment loss was accounted for, would have amounted to R1 862 917. The useful life and residual value of the product licence remained unchanged throughout the period, Open Rubric (first semester) (continued) Internally generated formula - Vita-Support On 1 October 2019, Kipla Pharma Ltd commenced with research on a new formula for a supplement, called Vita-Support, to combat viral infections. On 1 June 2020, the board of directors determined that the Vita-Support formula satisfied all the criteria for intangible asset recognition. The development of the Vita-Support formula was completed on 30 November 2020 Kipla Pharma Ltd employs laboratory assistants on a full-time basis and they are allocated to work on different projects during the financial year. Kipla Pharma Ltd allocates the staff costs relating to these laboratory assistants to the different research and development projects based on their hours worked on a specific project, using an hourly rate of R550. The total hours logged by the laboratory assistants working on the research and the development of the Vita-Support formula, for the respective periods. were as follows: Period: Hours 1 October 2019 - 31 December 2019 210 1 January 2020 - 31 May 2020. 400 1 June 2020 - 30 November 2020 470 The following costs were directly attributable to the research and development of the Vita-Support formula and were incurred evenly during the research and development period: R Raw materials 741 250 Laboratory maintenance costs. 558 000 On 1 June 2020, Kipla Pharma Ltd purchased a specialised machine at a cost of R1 450 000 and immediately paid R1 000 000, in cash. A special arrangement was made with the seller to defer the payment of the outstanding amount of R450 000 until 31 January 2021. The seller's normal credit terms are strictly 90 days from invoice date. The machine will be used exclusively for the initial development of the Vita-Support formula and thereafter the manufacturing of the Via-Support supplement on acquisition date the useful life of the machine was determined to be 5 years and a residual value of R400 000 was allocated to the machine. The machine was available for use, as intended by management, as well as brought into use, on 1 June 2020, On 1 December 2020, the Vita-Support formula was available for use, as intended by management, as well as brought into use. The Vita-Support formula has an estimated useful life of 4 years with no residual value. A pre-tax discount rate of 12% per annum is applicable. Accounting policies The following is an extract from the accounting policies of Kipla Pharma Ltd: Owner-occupied land is accounted for using the revaluation model. It is the policy of the company to realise any revaluation surplus upon disposal of the underlying asset. It is company policy that revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ materially from which would be determined using fair values at the end of the reporting period. Intangible assets, owner-occupied buildings and machinery are accounted for in accordance with the cost model. Amortisation on intangible assets and depreciation on owner-occupied buildings and machinery are written off in accordance with the straight-line method over the estimated useful lives of the assets. (first semester) (continued) Taxation The South-African normal tax rate is 28%. The capital gains tax inclusion rate is 80%. The South African Revenue Service allows a 5% annual building allowance on the owner-occupied building, according to section 13(1) of the Income Tax Act, according to the straight-line method, not apportioned for part of the year. Deferred tax is provided for on all temporary differences in accordance with the statement of financial position approach. There are no other items causing temporary or exempt differences except those mentioned in the question. The company will have sufficient taxable profits and capital gains in future against which any unused tax losses can be utilised. Assumptions All amounts are material. Ignore the implications of Value Added Tax (VAT). Round off all amounts to the nearest Rand. (20 marks) (36 minutes) Questions 1 - 10 relates to the annual financial statements of Kipla Pharma Ltd for the years ended 31 December 2019 and 31 December 2020. Please refer to the assessment section "assessment 2" for the relevant multiple choice questions. Kipla Pharma Ltd is a pharmaceutical company specialising in the manufacturing and distribution of vitamin supplements exclusively for the South African market. Kipla Pharma Ltd has a 31 December year-end Owner-occupied property On 1 October 2017. Kipla Lid purchased a property for R7 500 000 (Land: R2 500 000 Building: R5 000 000), which will be used by the company for its manufacturing activities. The property was available for use, as intended by management, as well as brought into use on acquisition date. On acquisition date an estimated useful life of 30 years and a residual value of R1 000 000 was allocated to the building The fair value of the land, on the respective dates, as determined by an independent swom appraiser, is as follows: R 31 December 2018 2 690 000 31 December 2020 2 850 000 On 31 December 2020, the residual value of the building was re-estimated to amount to R1 500 000 The useful life of the building remained unchanged throughout the period. Purchased product licence - GummyVite On 1 January 2018, Kipla Pharma Lid purchased a product licence for a paediatric vitamin gummy called Gummy Vite, at a cost of R2 500 000. The product licence will allow Kipla Pharma Ltd to manufacture and sell the GummyVite product for a period of 10 years. Due to the fact that the transaction was immediately settled, a discount of 2.5% on the cost price was negotiated with the licensor. Kipla Pharma Ltd paid legal fees amounting to R192 500 on acquisition of the product licence On 1 February 2018, the product licence was available for use, as intended by management, as well as brought into use. A residual value of Rnit was allocated to the product licence. During the year ended 31 December 2019, a competitor introduced a new paediatric vitamin chocolate to the market, resulting in a significant decrease in sales of the GummyVite product. On 31 December 2019. management of Kipla Pharma Ltd determined the fair value less costs to sell and the value in use of the product licence to amount to R1 850 000 and R1 725 000, respectively. During the 2020 financial year the competitor experienced financial difficulties and discontinued the manufacturing of the paediatric vitamin chocolate and was subsequently liquidated. This resulted in consumers reverting back to the GummyVite product. On 31 December 2020, management of Kipla Pharma Ltd determined the fair value less costs to sell and the value in use of the product licence to be R1 893 000 and R1 921 000, respectively. On 31 December 2020, the carrying amount of the Gummy Vite product, which you can assume to be correct, if no previous impairment loss was accounted for, would have amounted to R1 862 917. The useful life and residual value of the product licence remained unchanged throughout the period, Open Rubric (first semester) (continued) Internally generated formula - Vita-Support On 1 October 2019, Kipla Pharma Ltd commenced with research on a new formula for a supplement, called Vita-Support, to combat viral infections. On 1 June 2020, the board of directors determined that the Vita-Support formula satisfied all the criteria for intangible asset recognition. The development of the Vita-Support formula was completed on 30 November 2020 Kipla Pharma Ltd employs laboratory assistants on a full-time basis and they are allocated to work on different projects during the financial year. Kipla Pharma Ltd allocates the staff costs relating to these laboratory assistants to the different research and development projects based on their hours worked on a specific project, using an hourly rate of R550. The total hours logged by the laboratory assistants working on the research and the development of the Vita-Support formula, for the respective periods. were as follows: Period: Hours 1 October 2019 - 31 December 2019 210 1 January 2020 - 31 May 2020. 400 1 June 2020 - 30 November 2020 470 The following costs were directly attributable to the research and development of the Vita-Support formula and were incurred evenly during the research and development period: R Raw materials 741 250 Laboratory maintenance costs. 558 000 On 1 June 2020, Kipla Pharma Ltd purchased a specialised machine at a cost of R1 450 000 and immediately paid R1 000 000, in cash. A special arrangement was made with the seller to defer the payment of the outstanding amount of R450 000 until 31 January 2021. The seller's normal credit terms are strictly 90 days from invoice date. The machine will be used exclusively for the initial development of the Vita-Support formula and thereafter the manufacturing of the Via-Support supplement on acquisition date the useful life of the machine was determined to be 5 years and a residual value of R400 000 was allocated to the machine. The machine was available for use, as intended by management, as well as brought into use, on 1 June 2020, On 1 December 2020, the Vita-Support formula was available for use, as intended by management, as well as brought into use. The Vita-Support formula has an estimated useful life of 4 years with no residual value. A pre-tax discount rate of 12% per annum is applicable. Accounting policies The following is an extract from the accounting policies of Kipla Pharma Ltd: Owner-occupied land is accounted for using the revaluation model. It is the policy of the company to realise any revaluation surplus upon disposal of the underlying asset. It is company policy that revaluations will be made with sufficient regularity to ensure that carrying amounts do not differ materially from which would be determined using fair values at the end of the reporting period. Intangible assets, owner-occupied buildings and machinery are accounted for in accordance with the cost model. Amortisation on intangible assets and depreciation on owner-occupied buildings and machinery are written off in accordance with the straight-line method over the estimated useful lives of the assets. (first semester) (continued) Taxation The South-African normal tax rate is 28%. The capital gains tax inclusion rate is 80%. The South African Revenue Service allows a 5% annual building allowance on the owner-occupied building, according to section 13(1) of the Income Tax Act, according to the straight-line method, not apportioned for part of the year. Deferred tax is provided for on all temporary differences in accordance with the statement of financial position approach. There are no other items causing temporary or exempt differences except those mentioned in the question. The company will have sufficient taxable profits and capital gains in future against which any unused tax losses can be utilised. Assumptions All amounts are material. Ignore the implications of Value Added Tax (VAT). Round off all amounts to the nearest Rand

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