Question

QUESTION 2                                                                                                    (30 marks)
Ellesmere Limited entered into the following transactions during the year ended 31 December 20X3
(1) Entered into a speculative interest rate option costing N$ 10 000 on 1 January 20X3 to borrow N$ 6 000 000 from AB Bank commencing 31 March 20X5 for 6 months at 4%. The value of the option was N$ 15 250 (2) Purchased 6% debentures in FG Limited on 1 January 20X3 (their issue date for N$ 150 000 as an investment. Ellesmere Limited intends to hold the debentures until their redemption at a premium in 5 years’ time. The effective rate of interest of the bond is 8.0% (3) Purchased 50 000 shares in ST Limited on 1 July for N$ 3.50 each as an investment. The share price for on 31 December 20X3 was N$3.75.

Required
Show the accounting treatment and relevant extracts from the financial statements for the year ended 31 December 20X3. Ellesmere Limited only designates financial assets at their fair value through profit and loss where this is unavoidable (20 marks)
PART B
Broadfield Limited purchased 5% debentures in X Limited on 1 January 20X3 (their issue date) for N$ 100 000. The term of the debentures was 5 years and the maturity value is N$ 130 525. The effective interest on the debentures is 10% and the company has classified them as held to maturity financial asset.
At the end of 20X4   X Limited went into liquidation. All interest had been paid until that date. On 31 December 20X4 the liquidator of X Limited announce that no further interest would be paid and only 80% of the maturity value would be repaid, on the original repayment date. The market interest rate on similar bonds is 8% on that date.

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Required
(a) What value should the debentures have been stated at just before the impairment became apparent? ( 7 marks) (b)   At what value should the debentures be stated as 31 December 20X4 after the impairment? (1 mark) (c) How will the impairment be reported in the financial statements for the year ended 31 December 20X4 (2 marks)








QUESTION 1                                                                                                 25 marks

Mr Kananelo (Kananelo), 56 years old, is married (out of community of property and without the accrual system) to Kuvashna, who is 50 years old. Kananelo immigrated to Namibia at the age of 26. Kananelo married Kuvashna. The couple has three children:

- a son Vichai, who is fifteen years old;
- a daughter Vesh, who is twenty years old; and
- a son MJay, who is twenty-three years old.
Vichai attends a very expensive private school located just outside Windhoek in the he is currently in grade 9.
Vesh is unmarried and is enrolled at the University of Namibia studying towards a B Sc. (Bachelor of Science) degree.
MJay lives and works in America. He is unmarried and is not a resident of the Republic of Namibia.  
Kuvashna does not have an income and is a full-time housewife. Kananelo is a very wealthy businessman, earning an annual taxable income in excess of NAD3 million. He has built up an investment portfolio as follows:

NATURE OF THE INVESTMENT
MARKET VALUE AT 28 FEBRUARY 2019
AVERAGE NET ANNUAL INCOME

NOTES
Fixed property situated in Namibia
NAD4 million NAD900 000 Net rental after deducting expenses
Shares in Namibian listed companies
NAD3 million NAD360 000 Dividends
Shares in unlisted foreign companies
NAD1 million NAD200 000 The foreign dividends are not exempt in terms of the Act. The shares were inherited from his late father who lived his entire life and died five years
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES MODULES
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ago in Germany.
Interest-bearing investments in Namibia
NAD2 million NAD180 000 Interest
TOTAL NAD10 million NAD1 640 000


Kananelo wants to reduce his tax liability legally within the bounds of the law. He would however also like to retain as much control as possible over his assets.

Proposal
Kananelo is considering setting up a trust with his three children as beneficiaries. The trustees will be himself, his attorney and his bank manager. The trust will be a discretionary trust and the beneficiaries will not have a vested right to the income or capital of the trust.  
The trust will be wound up when the youngest surviving beneficiary has reached the age of thirty-five, the assets sold and the proceeds and accumulated income distributed to the surviving beneficiaries in equal shares. Should none of the beneficiaries survive to that age the money will be distributed to charities chosen by the trustees.
The trustees will be required to pay the following amounts to the three beneficiaries:
 Vichai: , an amount of NAD20 000 a month  Vesh: a monthly amount ofNAD30 000 is payable to her;  MJay: a monthly amount of NAD20 000 is payable to him.

In addition, the trustees will have the discretion to make such further distributions out of income as they deem fit. These payments will be made proportionally out of the various classes of income. Kananelo, concerned about his daughter’s possible marriage, will insert a clause into the trust deed in terms of which he has the right to revoke the payment to Vesh should she marry against his wishes.
Kananelo is considering this option:
Option To sell the assets to the trust at their market values, by way of a loan account bearing a market-related rate of interest.
FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES MODULES
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Net rental

(NAD)
Local dividends
(NAD)
Foreign dividends
(NAD)
Interest

(NAD)
Total

(NAD)
Income
Less: Interest
7.75% on R10 million
Distributions:
Vichai
Vesh
MJay

Undistributed
          
900 000

(425 305)

(131 707)
(197 561)
(131 707)
   
13 720

360 000

(170 122)

(52 683)
(79 024)
(52 683)

      5 488

200 000

(94 512)

(29 268)
(43 903)
(29 268)

    3 049

180 000

(85 061)

(26 342)
(39 512)
(26 342)

    2 743

1 640 000

(775 000)

(240 000)
(360 000)
(240 000)
  
   25 000




Other information
The official interest rate is currently 7.75% per annum (you may assume that this is also the market interest rate).

Required:                                                                                              

1. If Kananelo decided to set up a trust with his three children as beneficiaries on 28 February 2018.

(a) Discuss the normal tax consequences of the Option for all the parties concerned and calculate the taxable income flowing from the trust to be taxed in the hands of all parties for the 2019 year of assessment. (14)

(b) Discuss (briefly) the estate duty consequences of Kananelo’s decision to dispose of his assets to the trust as part of the proposal. (2)

(c) Define a discretionary trust by way of an example (5)

(d) What is a vested right & how does that affect undistributed income in a trust? (4)






                                                           

Answer 1

IF YOU HAVE ANY DOUBTS COMMENT BELOW I WILL BE TTHERE TO HELP YOU..ALL THE BEST..

1. Speculative transaction at $ 15250 at fair value of option.

2. 6% debentures @ $150000

3. 50000*3.75=$1

I HOPE YOU UNDERSTAND..

PLS RATE THUMBS UP..ITS HELPS ME ALOT..

THANK YOU...!!

87500 at fair value