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Department of Commercial Accounting

Financial Accounting 3A
SUBJECT CODE: FAC33A3

Final Assessment Opportunity 2015

Date: 2 June 2014

Time: 180 minutes Marks: 100

Assessors: S Adam
L Khumalo
L Mphalele

Internal Moderator: Mr HS van der Watt


External Moderator: Ms F Ngwenya

INSTRUCTIONS:
 This paper consists of 12 pages (including the cover page).
 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 nearest Rand.

Question Topic Marks Time


1 Theory 14 25 minutes
2 Property, Plant and Equipment 15 27 minutes
3 Property, Plant and Equipment 20 36 minutes
4 Leases 21 38 minutes
5 Financial Instruments 20 36 minutes
6 Borrowing Costs 10 18 minutes
100 180 minutes
FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 1 (14 marks)

This question consists of two independent parts.

PART A

A friend of yours is working as an assistant to an accounting officer. She has heard


the accounting officer mention the words “materiality” and “faithful representation”,
however she is not sure what these terms are.

REQUIRED:

1.1. Explain in your own words, by making reference to the Conceptual Framework,
what “materiality” means in terms of International Financial Reporting
Standards (IFRS) (3)

1.2. Explain in your own words, by making reference to the Conceptual Framework,
what “faithful representation” means in terms of financial reporting for IFRS
(3)

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 1 continued…

PART B

Choose the correct statement (8)


(Questions are equally weighted and count 1 mark each)

1.3. Information about a reporting entity’s economic resources, claims and changes
in resources and claims are illustrated in the statement of financial position.
The information can help users to identify the reporting entity’s:

a. liquidity
b. solvency
c. all of the above
d. none of the above

1.4. Qualitative characteristics are the attributes that make financial information
useful. Fundamental qualitative characteristics include:

a. relevance
b. faithful representation
c. all of the above
d. none of the above

1.5. The following is/are excluded from the definition of property, plant and
equipment:

a. Investment property,
b. Inventory,
c. Mineral rights and reserves,
d. All of the above

1.6. The following is/are external indicators of impairment:

a. Evidence that the use of the asset will result in higher benefits,
b. Significant technological changes have occurred,
c. The carrying amount of net assets of entity (NAV) is more than the fair value
of entity as a whole,
d. All of the above

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 1 continued…

1.7. Direct costs incurred in negotiating and arranging the lease are included in the
carrying amount of the asset. These costs include:

a. Administration salaries,
b. Legal fees,
c. None of the above,
d. All of the above

1.8. A financial asset is an asset that is any of the following:

a. Cash,
b. An equity instrument of another entity,
c. A contractual right to receive cash or another financial asset from another
entity,
d. All of the above

1.9. A financial liability is any liability that is any of the following:

a. a contractual obligation to deliver cash or another financial asset to another


entity
b. Cash,
c. None of the above,
d. All of the above

1.10. Basic financial instruments include:

a. Preference shares that are puttable,


b. Preference shares that are convertible,
c. None of the above,
d. All of the above

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 2 (15 marks)

Little Kingdom (Pty) Ltd is a medium sized coffee shop in Soweto. The company’s
reporting date is 31 December.

You have been presented with an extract from the general ledger of Little Kingdom
(Pty) Ltd as at 31 December 2013:

Note R

Property, plant and equipment:

Land (cost) 2 150 000

Motor vehicles (carrying value) 1 275 000

Equipment (carrying value) 2 800 000

Additional Information:

1. The market value of the motor vehicle has permanently declined as at


31 December 2014. The motor vehicle was purchased on the 1 May 2013. The
following information was available on the 31 December 2014:

Fair value 130 000


Costs of disposal 15 000
Value in use 116 000

Motor vehicles are depreciated at 10% on the diminishing balance method.

2. All equipment was purchased on the 1 January 2013. Depreciation on


equipment is calculated at 20% on the straight line method.

REQUIRED:

2.1 Prepare ALL the journal entries relating to the property, plant and equipment
for Little Kingdom (Pty) Ltd for the reporting period ended 31 December 2014.
(15)
Show all calculations.

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 3 (20 marks)

TSN (Pty) Ltd is a manufacturing concern. The company has a reporting date of
31 December 2014.The company uses the cost model to value all their property, plant
and equipment with the exception of their Equipment.

The following is an extract from the notes to the financial statements of TSN (Pty) Ltd
as at 31 December 2013, the end of their previous financial period:

Motor
Land Buildings Vehicles Equipments Total
Cost 1 000 000 4 500 000 900 000 1 000 000 7 400 000
Accumulated Depreciation - -360 000 -360 000 -326 667 -1 046 667
Closing Balance 1 000 000 4 140 000 540 000 673 333 6 353 333

Notes Note 1 Note 1 and 2 Note 2 Note 3

Additional Information:

Note 1:

Land and buildings were purchased 5 years ago at a cost of R1 000 000 and
R4 500 000, respectively. Buildings are depreciated at 2% per annum on the straight-
line method to a zero residual value.

Note 2:

All Motor vehicles are depreciated on a straight line basis over the expected useful life
of 5 years, with no residual values. On 18 February, the company acquired a
specialised truck from Germany. The truck cost €60 000, including shipping. The truck
was available for use on 1 April 2014 but the company only started using it on 1 May
2014.

The company bought 2 trucks for R450 000 each on 1 January 2012. One of these
trucks started to give the company problems. The supplier of the trucks agreed to take
the truck back but instead of refunding TSN (Pty) Ltd in cash, the supplier offered TSN
(Pty) Ltd a small warehouse with a fair value of R450 000. TSN (Pty) Ltd accepted
this offer and the exchange was concluded on 1 April 2014. The spot Euro Rand
exchange rates were as follows: 18 February 2014: R10.50 = €1

Note 3:

TSN (Pty) Ltd acquired an equipment on 1 January 2012 for R1 000 000. Management
estimates the useful life of the equipment to be 6 years with a residual value of
R20 000. It is the company’s policy to revalue equipment every 3 years. On the
31 December 2014, the equipment was re-valued by an independent appraiser. The

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

gross replacement value was determined at R1 400 000.

Question 3 continued…

REQUIRED:

3.1. Prepare the property, plant and equipment note for TSN (Pty) Ltd as at
31 December 2014, in compliance with section 17 of International Financial
Reporting Standards for Small and Medium sizes Entities. (20)

Include Accounting Policy Note for Equipment.

Comparatives are not required.

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 4 (22 marks)

Go-go (Pty) Ltd is a transport company that collect and delivers all kinds of goods from
all over South Africa. The head office is in Johannesburg, where all the administration
is done.

Operating lease:
From 1 January 2011 they agreed with iRent (Pty) Ltd, to pay an amount of R50 000
per month for a building in Stanger from. The agreement is for a period of two years.
Rental will escalate by 10% in January 2012.

Finance lease:

1. They have also signed an agreement to hire 5 trucks from Trucks’R’Us over a
period of 5 years for R1 427 396 per year. The estimated useful life of the
trucks is 5 years. The cost price of the trucks is R5 000 000. It was available
for use on 1 January 2011. The following amortization schedule applies:

Amount
Date Instalment Interest Capital Owing
R R R R
January 2011 118,950 62,500 56,450 4,943,550
February 2011 118,950 61,794 57,155 4,886,395
March 2011 118,950 61,080 57,870 4,828,525
April 2011 118,950 60,357 58,593 4,769,932
May 2011 118,950 59,624 59,325 4,710,607
June 2011 118,950 58,883 60,067 4,650,540
July 2011 118,950 58,132 60,818 4,589,722
August 2011 118,950 57,372 61,578 4,528,144
September 2011 118,950 56,602 62,348 4,465,796
October 2011 118,950 55,822 63,127 4,402,669
November 2011 118,950 55,033 63,916 4,338,752
December 2011 118,950 54,234 64,715 4,274,037
Total 2011 1,427,396 701,433 725,963 4,274,037
Total 2012 1,427,396 584,731 842,665 3,431,372
Total 2013 1,427,396 449,269 978,127 2,453,245
Total 2014 1,427,396 292,031 1,135,365 1,317,880
Total 2015 1,427,396 109,516 1,317,880 -
7,136,979 2,136,979 5,000,000 -

2. Depreciation on trucks is written off at 20% per annum on the straight line
method. Go-go (Pty) Ltd will not obtain ownership of the trucks at the end of the
lease agreement.

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

QUESTION 4 (continued)

REQUIRED:

4.1 Journalise all the lease transactions (including cash transactions and
depreciation) in the general journal of Go-go (Pty) Ltd for the reporting period
ended 31 December 2011 (11)

Monthly payments of both leases in one journal


Journals must be dated
Journal descriptions are not required
Ignore tax and VAT

4.2 Disclose the finance lease, operating lease and property plant and equipment
notes (only) at 31 December 2012. .

Accounting policies are not required


Comparatives are required

(10)

[21]

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 5 (20 marks)

Thebe Ltd is a listed Investment house. The company has a reporting date of
31 December. On 1 January 2014 Thebe Ltd has had the following balances in their
books:

Share Capital: 200 000 Class A


shares at R3 par value R 600 000
Retained Income R 550 000

Note 1:

 On 1 April 2014 Thebe Ltd issued 50 000 new Class A shares at R4.50
 On 20 May 2014 Thebe Ltd had a share split in terms of which each Class A
share was split in two.
 On 1 June 2014 the directors decided declare a dividend of 18 cents per share.

Net Profit for the reporting period ended 31 December 2014: R68 500

Note 2:

On 1 January 2014 Thebe Ltd held 1 000 shares in Vuvu Ltd. On 31 December 2013
these shares closed trading at R148 per share.

On 1 January 2014 Thebe Ltd purchased an additional 11 000 shares in Vuvu Ltd (a
listed company). At the date of purchase the shares traded at R150 per share. Thebe
Ltd incurred R10 000 (excluding VAT) as transaction fees.

On 30 June 2014 Thebe Ltd decided to sell 3 500 shares in Vuvu to raise quick cash
for other operations. The shares were trading at R174 on the day. On 31 December
2014, the closing price of Vuvu Ltd’s shares was R180.

Thebe classified this investment at fair value with fair value adjustments in other
comprehensive income.

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

QUESTION 5 (continued)

REQUIRED:

5.1. Prepare journal entries relating to Note 1 for the reporting period ended
31 December 2014 (6)

5.2. Prepare a schedule (calculation) showing the movements in the shares held by
Thebe Ltd in Vuvu Ltd and the related journal entries thereafter. (6)

5.3. How different would the answer in number 5.1 be if the Investment is classified
at Fair value, with fair value adjustments taken to profit and loss? (2)

5.4. Prepare statement of changes in equity for Thebe Ltd for the reporting period
ended 31 December 2014. (6)

(20)

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FINANCIAL ACCOUNTING 3A: FAC33A3 Final assessment opportunity 2015

Question 6 (11 marks)

Group AKM (Pty) Ltd is in the construction industry and has a 31 December reporting
period end.

On 1 January 2014 the entity commenced with construction of a new plant. The
construction will be financed with a general 13% loan of R7 000 000 obtained from
Finance Bank and a bank overdraft of R3 000 000. The interest payable on the bank
overdraft is 15% per annum. Both funds were available from 1 January 2014.

On 30 April 2014, R500 000 was paid to the contractors. A further R800 000 was paid
on 31 July 2014.

REQUIRED:

6.1 Calculate the capitalisation rate for Group AKM (Pty) Ltd on the new plant for
the reporting period ended 31 December 2014. (6)

6.2 Calculate the amount of borrowing costs to be capitalised by Group AKM (Pty)
Ltd for the reporting period ended 31 December 2014. (5)

(11)

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