FACULTY/COLLEGE College of Business and Economics
SCHOOL School of Accounting
DEPARTMENT Commercial Accounting
CAMPUS(ES) SWC
MODULE NAME Financial Accounting 3A
MODULE CODE FAC33A3/FAC3AA3
SEMESTER First
ASSESSMENT OPPORTUNITY, Final Summative Assessment
MONTH AND YEAR Opportunity
May 2019
ASSESSMENT DATE 31 May 2019 SESSION
ASSESSOR(S) Mrs S Adam
Mr L Khumalo
Ms L Mbhalati
MODERATOR)(Internal) Ms B Madikizela
MODERATOR)(external) Mr M Malinga
DURATION 3 hours TOTAL MARKS 100
NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 9
INFORMATION/INSTRUCTIONS:
Answer all questions. Show all calculations and workings clearly.
Start each question on a new page in your answer book.
Silent, non-programmable calculators may be used.
Where applicable, round all calculations to the closest Rand.
A VAT rate of 15% is applicable.
________________________________________________________________________
Question Topic Marks Time
1 Concepts and pervasive principles 10 18 minutes
2 Property, Plant and Equipment 35 63 minutes
3 Intangible Assets 12 21 minutes
4 Borrowing costs 10 18 minutes
5 Financial Instruments 14 25 minutes
6 Leases 19 35 minutes
100 180 minutes
Question 1 [10 Marks]
Aggressive (Pty) Ltd “Aggressive” is an events management company. It has recently
been discovered that the company has been paying bribes to government officials in
order to obtain contracts.
It is estimated that these payments have come to a figure of R500 000. Management
has tried to make everything look as normal as possible so they have capitalised these
payments.
A junior bookkeeper has questioned whether this treatment is correct. Your services,
as an IFRS for SMME’s expert, have been sourced in order to resolve this.
Alternatively, management has suggested that these amounts should not be recorded
at all.
REQUIRED:
1.1 Discuss whether Aggressive (Pty) Ltd’s capitalisation as an asset of these bribe
payments is correct. (7)
1.2 With reference to the qualitative characteristics of financial information, discuss
whether it would be appropriate for management not to record these payments at
all. (3)
Question 2 [35 Marks]
Logan (Pty) Ltd (Logan) is a steel manufacturer with a 31 December financial
reporting period date. The directors have requested your assistance in how to deal
with some of their assets.
Factories
On 1 June 2016 they acquired a factory with a useful life of 20 years for R1 725 000
(incl. VAT). It was initially available for use on 1 October 2016 but was only brought
into use on 1 January 2017. The residual value of the factory was estimated to be
R500 000 (excl. VAT). During the 2017 year the directors estimated a new residual
value of R125 000 (excl. VAT) and a remaining useful life of nine years from 31
December 2017.
On 31 December 2017, the directors realised that their factory was applying outdated
processes and was not as profitable as those of competitor companies. On this date
the factory could be sold for R1 000 000 (excl. VAT), net of any disposal costs. If they
decided to keep using the factory they would generate cash flows with a net present
value of R900 000.
Vehicles
Logan has three trucks. Two of these were purchased for R250 000 (excl. VAT) each
and brought into use on 30 June 2016 while the third was purchased for R275 000
(excl. VAT) and brought into use on 1 January 2018. Vehicles are depreciated on the
straight-line method over a useful life of ten years with a R25 000 (excl. VAT) residual
value.
Logan uses the revaluation model to measure its vehicles. On 1 January 2018, the
gross replacement value for the first two trucks was determined to be R300 000 (excl.
VAT) each.
REQUIRED:
2.1 Prepare the property, plant and equipment reconciliation note for Logan (Pty) Ltd
for the reporting period ended 31 December 2018.
(35)
Comparatives are required.
Total column is not required.
A VAT rate of 15% is applicable.
Ignore deferred tax implications for this question.
Question 3 [12 Marks]
The following is an extract from the opening balances to the financial statements of
Tokyo (Pty) Limited (“Tokyo”), a home industry store, as at 1 July 2018.
Software Customer Right to use
Lists a 3D Printer
Cost 255 000 100 000 ?
Accumulated (170 000) ? ?
amortisation
Carrying amount 85 000 ? ?
Additional information:
Software was purchased on 1 July 2016. On that date, the estimated useful life
was 3 years and a residual value of R nil. On 30 June 2019, the entity estimated
that the software could still be used for a few more years. The remaining useful
life on 30 June 2019 was determined to be 3 years.
Customer lists were acquired in a separate acquisition on 1 January 2015 for
R100 000. Estimated useful life—five years from date of acquisition. A
competitor entered the market in the current year and management became
concerned about the value of these lists. The value in use could not be
determined, however the fair value was calculated on the 30 June 2019 to be
R20 000 and disposal costs was estimated to be R2 000.
During the current year, the company spent a significant amount of cash on
research with regard to the right of use of 3D printers in the business, in order
to remain ahead with the rapid changes in technology brought on by the fourth
industrial revolution. Tokyo spend R55 000 on research to determine the
feasibility of the 3D printer in the business and thereafter purchased the right to
use a 3D printer from a reliable supplier for R500 000 on the 1 March 2019.
Management believes this right has an indefinite useful life, and therefore was
unable to determine an exact useful life.
REQUIRED:
3.1 Provide the Intangible Assets note to the financial statements of Tokyo (Pty) Ltd
for the reporting period ended 30 June 2019 in compliance with section 17 of IFRS
for SMEs. (12)
Comparatives and total column are not required.
Question 4 [10 Marks]
Risana (Pty) Ltd is a manufacturing company based in Randburg. The company has
been growing rapidly and the directors decided to build a new plant. The company’s
financial reporting period end date is 31 December.
The plant was financed as follows:
The company obtained a loan of R2 000 000 from ABC Bank on the January 2018
at 2% per month, the interest is payable annually on 31 December. The capital is
repayable in full in 2020.
Construction of the plant started on 01 April 2018, however the preparation of the site
started on the 01 March 2018 with a visit to the site by specialist to inspect and prepare
the site and make sure it is ready for construction. They were paid R100 000 on the
same day. The junior accountant who has just started work at the company is not sure
when to start capitalisation as she is not familiar with the requirements of section 24
of IFRS for SME’s.
REQUIRED:
4.1 Discuss when the capitalisation of borrowing costs should start by applying the
requirements as per section 24 of IFRS for SMEs. (5)
4.2 Prepare the journal entries to account for the interest on the loan in the books of
Risana (Pty) Ltd for the reporting period ended 31 December 2018. (5)
Question 5 [14 Marks]
PART A
On the 31 January 2018, Mfumo Ltd purchased 125 000 shares cash in Open Ltd.
Transaction costs amounted to R11 000 and were paid immediately in cash. The
shares are to be valued at fair value through profit and loss. The price per share during
the year was as follows:
31 January 2018 : R10.00
30 December 2018 : R10.50
31 December 2018 : R11.30
On 15 December 2018, Open Ltd declared a dividend of 60cents per share. The
dividends were paid on 31 January 2019. Open Ltd had a total of 500 000 issued
shares as at 31 December 2018.
REQUIRED:
5.1 Prepare the journal entries to account for the transactions in the books of Mfumo
Ltd for the reporting period ended 31 December 2018. (5)
5.2 Prepare the journal entries to account for the dividends only, in the books of Open
Ltd for the reporting period ended 31 December 2018. (4)
PART B
Liquid Ltd is a retail company based in Radiokop. The company has a financial
reporting period end date of 31 December. During the current year, 2018, the company
decided to expand its operations. To fund the expansion, the company issued 100 000
debentures on 01 January 2018 for R8.00 per debenture. The debentures have a
principal amount of R6.50 each and a coupon rate of 12% per annum.
The full principal amount is repayable in cash on 31 December 2025. The effective
interest rate is 11.0664%. The cost of issuing the debentures amounted to R30 000.
The amortisation table has been correctly calculated as follows:
Year Opening Interest Payment Capital balance
ending Balances
31/12/2018 870 000 96 278 - 65 000 901 278
31/12/2019 901 278 99 739 - 65 000 936 017
31/12/2020 936 017 103 583 - 65 000 974 600
31/12/2021 974 600 107 853 - 65 000 1 017 453
31/12/2022 1 017 453 112 595 - 65 000 1 065 048
REQUIRED:
5.3 Give two examples of derivatives. (2)
5.4 Present the financial instrument in the financial statements of Liquid Ltd for the
reporting period ended 31 December 2018. Comparative figures are required. (3)
IGNORE VAT
Question 6 [19 Marks]
Down and Up (Pty) Ltd manufactures designer play areas for kids. The company has
a reporting date of 31 December 2018.
The company leases two machines. These leases were entered into on 1 January
2018 and the machines are available for use on the same day. Details of each lease
agreement are given below:
Lease A Lease B
Lease term 4 years 4 years
Fair value of machine at start of lease R60 000 R60 000
Present value of minimum lease payments R34 500 R59 500
Useful life of machine 10 years 4 years
Lease instalments per annum on
31 December R8 000 R15 000
REQUIRED:
6.1 Classify Lease A and Lease B in the financial statements of Down and Up (Pty)
Ltd for the reporting period ended 31 December 2018. Provide reasons for your
answers. (6)
6.2 Prepare the journal entries for Lease B in the accounting records of Down and Up
(Pty) Ltd for the reporting period ended 31 December 2018 assuming an Interest
rate implicit in the lease of 10%. (9)
6.3 Disclose Lease A in the financial statements of Down and Up (Pty) Ltd for the
reporting period ended 31 December 2018. (5)
IGNORE VAT
