University of Venda Department of Accounting and Auditing Company Financial Statements ACC 2541 ‘Supplementary Examination 2014 Time: 3 hours Marks: 100 Internal examin MrM P Ndou 2e4 internal examiner: Mrs N Dhumazi Internal moderator: Mr A Tshifhango INSTRUCTIONS: = This paper consists of 6 pages including the cover page. = Answer all questions * Show all workings clearly * Start each question on a new page. + Silent, non-programmable calculators may be used Question Topic Marks 1 Group Statements 35 2 Inventories 20 e Leases 20 4 PPE and Investments property 25 100 Time 63 minutes 36 minutes 36 minutes 45 minutes 480 minutes _Question 4 Group Statements 35 Marks (On 1 January 2004 Holly Ltd purchased 32 000 shares of the ordinary shares in Sophy Ltd for R192 000. At that stage Sophy Ltd’s shareholder’ interest consisted of Share capital: R5 ordinary shares R200 000 Retained earnings R40 000 ‘The condensed income statements of the two entities for the year ended 31 December 2009 are as follows: INCOME STAEMENT FOR THE YEAR ENDED 31 DECEMBER 2009 Holly Ltd | Sophy Ltd Revenue 600 000 F350 000 Cost of sales (300 000) (175 000) "Gross profit 300 000 175 000 Other expenses (100.000) (15.000) Profit before tax 200 000 - | 160 000 [Income tax expense (80.000) (30.000) [ Profit for the year R120 000 R130 000 i “The condensed statements of changes in equity of the two entities for the year ended 31 December 2009 are as follows: _ EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR | ENDED LL 31 DECEMBER 2009 Retained Earnings —| Holly Ltd "| Sophy Ltd Balance on 31 December 2008 _| R100 000. R80 000 | [Profitforthe year 420 000 130 000 ai | Ordinary dividends (20 000) - Balance on 31 December 2009 | R200 000 R210 000 (On 31 December 2009 the following items, inter alia, appeared on the balance sheets of the two entities: Holly Ltd Sophy Ltd Plant: Cost price R400 000 R160 000 Accumulated depreciation R160 000 Re4 000 Additional information: 4. Included in the plant of Holly Ltd is a machine sold on 1 January 2008 by Sophy Ltd. to Holly Ltd. Sophy Ltd, a manufacturer of machinery, earned a profit of R40 000 on this transaction. 2. Plant and equipment are depreciated at 10 % per annum according to the straight-line method 3. Tax should be calculated at a rate of 30 %.Require 1. Prepare the pro forma journal entries for Hall Ltd group. (17 marks) 2. Prepare the condensed consolidated statement of comprehensive income and consolidated statement of changes in equity of Hall Ltd group for the year ended 31 December 2009. (15 marks) 3. Disclose the following items as they shall appear in the consolidated statement of financial position of Hall Ltd group at 31 December 2009: © Plant (3 marks) Question 2 Inventories 20 Marks The following information has been extracted from the trial balance of Univen Ltd, 2 manufacturer with the reporting date of 30 June 20X12. Rand Dri(Cr) Sales (800 000) Opening inventory Finished goods 70.000 Work in progress. 20000 Raw materials 40 000 Purchases of raw materials 200 000 Variable production costs Labour and overheads 120 000 Fixed production overheads 400 000 Additional information: 4. During the year there was an abnormal spoilage of raw materials of R18 000. 2. Fixed production overheads are allocated at R2 per unit on a normal capacity of 50 000 units. The actual production for 20X12 was 40 000 units. 3. Closing inventory is as follows: Cost Net realisable value Rand Rand Raw materials 30.000 30 000 Work in progress 40.000 40 000 Finished goods 40.000 60 000 4. Other closing inventories is as follows: Cost Rand Stationery 12.000 Packing materials 43.000 The net realisable value of the above is not more than cost. Univen Ltd uses the first-in, first out method to value inventory.Required: 4. Calculate the cost per classification of inventory at 30 June 20X12 so as to comply with the requirements of Statements of Generally Accepted Accounting practice. (14 marks) 2. Prepare the disclosure related to all matters in the financial statements of Univen Ltd for fhe reporting date 30 June 20X12 in compliance with the requirements of Statements of GAAP (6 marks) Question 3 Leases 20 Marks Part A Limpopo (Pty) lid entered into a lease contract 1 January 2013 for 5 years. The lease payments are R50 000 payable annually in arrears on 1 January and the effective interest rate fe 15%, The asset has an expected useful life of 5 years. The asset will not be retained by the leseee at the end of year 5. The present value of the minimum payments amounts to at least substantially all of the fair value of the asset. Required: 4, Based on the information presented, discuss broadly how Limpopo Ltd would need to account for the contracts, No calculations or amounts are required. (4 marks) 2, Aesuming that this isa finance lease, prepare the journal entry that would be posted on 4 January 2013, Show all the workings. (5 marks) 3, What amounts would be reflected in the statement of comprehensive income for the 2013 financial year? (4 marks) 4, What amount would be disclosed in the statement of financial position for 2013 financial year? (4 marks) Part B You are @ trainee accountant responsible for the reporting for small and medium enterprise One of your clients does not understand the difference between the operating lease and the Finance lease. Explain to your client what an operating lease is? (3 marks) Question 4 (PPE & Investment property) 25 Marks Chain Radiologist (‘Chain’) operates chain of radiology practises in the major cities in South ‘Afica. The company applied the following accounting policies consistently since incorporation _ Property, Plant and Equipment is measured in accordance with the revaluation model, Revaluntions occur at the beginning of every second year and accumulated depreciation is proportionally restated upon revaluation. The revaluation surplus is released to retained earnings as itis realised through use or sale. _ Investment Property is measured in accordance with the cost model.The following information relates to some of Chain's non-current assets held at 31 December 2010, its current reporting period: X-Ray machine Chain signed a contract to purchase an X-Ray machine on 1 April 2008, which indicated that the X-Ray machine would be delivered on 1 June 2008 and the purchase price of RS 250 000 was payable on delivery. ‘The asset was delivered on 1 June 2008 but to the wrong practises branch. On the same day, Chain therefore had to pay a courier company R40 000 to have it carefully transported to the correct location. The supplier has agreed that it was their mistake and therefore Chain only had to pay them R5 210 000 on the delivery day. The X-Ray machine needed to be loaded with software worth R400 000 before it would work. It also needed to be expertly installed in order for the X-ray's to be accurate enough for usage by the radiologists. The company paid R50 000 for expert engineers to perform this installation task. Included in that amount was R15 000 that related to the cost of fiying the engineers out from Germany. The installation was complete and the software installed on 1 July 2008. ‘The X-Ray machine has a residual value of R500 000 and a total useful life of 8 years, these estimates have been confirmed at each subsequent reporting date. The total useful life of the software was estimated at 4 years with no residual value. A revaluation is performed every two years by the expert, Mrs Green. On 1 January 2010, the gross replacement cost of an X-Ray machine was estimated at R6 000 000, excluding software. Cape Town Property Chain owns a property in Cape Town that is leased to a group of doctors that use the premises to run their own private practice. Chain does not occupy the Cape Town property at all and it is held in order to eam rentals from the tenants. The property was originally purchased on 1 September 2003 for R14 000 000 and consisted of land worth RS 000 000 and a building worth R6 000 000. The building had an estimated total useful life of 25 years and a residual value of R750 000. These estimates have remained unchanged. ‘The directors resolved to change the accounting policy for investment property in the current year from the cost model to the fair value model, as the fair value model will result in a fairer presentation of the value of the property. Once again Mrs Green performed the following valuations’ The fair value of land and building at Land Building TOTAL 31 December 20x68 9-000 000 R4 500 000 R13 500 000 | 31 December 20x9 RB 500 000 R4 100 000 [12.600 000 31 December 20x10 __| R8 750.000 R3 750 000 [R12 500 000YOU ARE REQUIRED TO 1 Calculate the cost of the X-Ray machine. Provide short reasons for the initial recognition date of the X-Ray machine and for each amount included in your calculation. Your answer should not deal with any subsequent issues relating to the machine. (5 marks) Prepare the note disclosure relating to Property, plant and equipment to be included in the notes to the financial statements of Life Limited for the year ended 31 December 2010, in compliance with IAS16. Total columns and comparatives figures are NOT required. (10 marks) Prepare the note disclosure for the Change in accounting policy of Investment Property, to be included in the notes to the financial statements of Life Limited for the year ended 31 December 2010, in compliance with IASB. (10 marks) Instruction: show all workings as marks are allocated to the workings also. Total Marks: 100