UNIVERSITY OF THE WESTERN CAPE

TERM TEST 1

01 SEPTEMBER 2018

MODULENAME : FINANCIAL ACCOUNTING 225

MODULE CODE : FIA 225

DURATION: 180 MINUTES MARKS: 100

EXAMINER: MR S GWADISO
MS B WILLIAMS

INTERNAL MODERATOR: MR SD KLEIN

QUESTION MARKS MINUTES BOOK

1 40 72 1
2 40 72 2
3 20 36 2
TOTAL 100 180

LECTURER(S) INSTRUCTIONS TO STUDENTS:

1. Answer question 1 in a separate book on its own

2. Answer all questions
3. Answers must be in black or blue ink
4. Show all workings clearly
5. Show workings to the nearest Rand.

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QUESTION 1: (40 MARKS; 72 MINUTES)

Ignore VAT and all other tax implications

You are the newly appointed accountant of AMG Ltd (“AMG”), a producer of luxury
leather products who has been very successful in their relevant industry. AMG has a
year end of 31 August. You have been given the following information:

Statement of financial position of AMG Ltd as at 31 August 2017

2017 2016
ASSETS

Property, plant and equipment 542,720 678,400

Inventory 3,110,000 2,903,000

Additional information:

1) AMG Ltd has two machines that produce the leather products. Both machines
were purchased on 1 February 2013 at a cost of R750,000 each. At the date
of purchase, management decided that both machines will be depreciated
using the diminishing balance method at a rate of 20% per annum. Based on
more reliable and relevant that has come to the fore, on 1 September 2015
management decided that the depreciation method would be changed to
straight line method. It was estimated that the remaining useful life would be
4 years at that date. The former accountant continued the depreciation
calculation based on the diminishing balance method for the financial years
ended 2016, 2017 and 2018. The errors are considered to be material.

2) AMG uses the weighted average cost as a measurement basis for their
Inventory balances. During the 2018, management decided that FIFO cost
formula would provide reliable and more relevant stock balances at year-end.
The following information related to the inventory were made available to you:

2018 2017 2016

FIFO 3,555,000 3,126,300 2,978,000

The inventory balance as at 31 August 2018 was 3,450,500, if the weighted

average method was applied.

The cost of sales for 2017 and 2018 amounted to R1,678,900 and
R1,956,000 respectively.
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REQUIRED:

1) Prepare the statement of financial position of AMG Ltd as at 31 August 2018

as well as the statement of comprehensive income for the year ended
31 August 2018, as far as the information allows. (24 marks)

2) Prepare the following notes for the year ended 31 August 2018:
 Change in accounting policy (14 marks)

Presentation marks (2 marks)

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QUESTION 2: (40 MARKS; 72 MINUTES)

Rev-A-New Buggy Limited (“Ranbugz”) is a listed company selling beach buggies

to wealthy residents of the Western Cape and other coastal cities of the world.
Ranbugz was started 15 years ago when the film industry started growing in Cape
Town. The aim was to serve Hollywood superstars and their families when they
spend a few months in the City filming. The company has since enjoyed a lot of
success, expanding to parts of Bollywood, Nollywood, and many other coastal and
famous resort towns around the world. In line with the tastes and demands of their
customers, Ranbugz is flexible with the design and specifications of the buggies. As
a result, the nature of contracts for sale of beach buggies is different from customer
to customer.

In addition to the main business of the sale of beach buggies, Ranbugz also offers
three other popular services, which are separate and distinct. Firstly, an advanced
buggy driving course has been offered a few years. The course takes one day and
has a normal selling price of R5,750. The second service is use of a sand
racecourse at a cost of R1,380 per participant. The racecourse includes man-made
dunes at the Cape Peninsula near Misty Cliffs. Lastly, the other popular service is
the cross border shipping of beach buggies to overseas destinations where most of
the customers live.

You will be assisting the financial accountant of Ranbugz in accounting for the
transactions below.

Transaction number 1 – Sale to Mr Smithies

On 1 January 2017, Ranbugz entered into a contract with Mr Willy Smithies.

According to the terms of the contract, Mr Smithies paid the full amount of
R115,000 on 1 January 2017, and Ranbugz was required deliver a complete, fully
customized and high quality beach buggy on 2 January 2018 (i.e. more than a year
later). The stand-alone selling price of a beach buggy with these specifications is
R115,000.

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With the customer paying a year early, and buying a premium product, Ranbugz
decided to add a free advanced driving course worth R5,750 (incl. VAT), together
with a free race day for four guests to the value of (R5,520). The beach buggy was
delivered on 2 January 2018 as agreed, and Mr Smithies attended the advanced
driving course on 3 January 2018, and Mr Smithies and his guests made use of the
free race day on 4 January 2018.

Transaction number 2: Sale to Mr Zachary Ephrone

On 21 February 2017 Ranbugz entered into a non-cancellable contract with

Zachary Ephrone, another famous actor. In terms of the contract, Ranbugz was
required to build four customized beach buggies for Mr Ephrone by 28 February
2017, and Mr Ephrone would pay R253,000 on 1 March 2018 (i.e. more than a year
later). The beach buggies were given to the customer on 28 February 2017 as per
the contract.

Transaction number 3 – Sale of beach buggy in exchange for a service

On 1 July 2018, Ranbugz entered into an agreement to sell a beach buggy worth
R109,250 to a customer, Mr. Sam-Earl Jack. As per the agreement, the customer
paid Ranbugz with an advert placement in his movie. According to this
arrangement, there would be a scene in the movie whereby the main characters
would be seen having fun at the Ranbugz beach buggy racecourse. You may
assume the full economic benefit of the advert was received on 31 July 2018 when
the movie made its’ global premier (was shown to the public for the first time).

The beach buggy was delivered on 31 July 2018. An expert gave a reliable
estimate of the value of the advertising received at R115,000. Further, Mr Sam-Earl
Jack’s production company is not a VAT vendor and therefore no input VAT should
be accounted for on the advertising received.

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Transaction number 4 – Sale of beach buggy with delivery

On 1 April 2018 Ranbugz agreed to a contract with another customer (Ms. Violetta
Davids) for the sale and delivery of four beach buggies to her residence in Las
Angeles. The contracted price of was R86,250 per beach buggy, and the combined
shipping price (charged by Ranbugz) for all of the beach buggies was R46,000. The
ownership of the beach buggies passed to the customer on 15 May 2018.

According to the contract, consideration is only due from the customer to Ranbugz
after 10 days after the beach buggies have arrived at the customers home. The
beach buggies arrived at Ms. Violetta’s Davids home on 30 June 2018. The full
amount due for the sale and delivery of the beach buggies was received by
Ranbugz on 12 July 2018.

Additional information

- Ranbugz has a year end of 31 July

- Where applicable, assume a fair interest rate of 10%
- Assume any financing beyond 12 months is significant.
- Unless otherwise stated, assume a VAT rate of 15% is included
- Assume the VAT rate has always been 15%
- VAT is due to SARS at the earlier of payment or invoice date as per VAT Act
- You may ignore other taxes

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REQUIRED:

1) Refer to the information in Transaction 1

a) Discuss the application of the revenue recognition steps 1 to 4 with

regards to the accounting for the contract with Mr Willie Smithies.
[11 marks]

b) Show ALL the journal entries resulting from transaction with Mr Willie
Smithies. Journal entries are required irrespective of financial year. Dates
and narrations are required. [9 marks]

2) Refer to transaction number 2 and number 3. Show ALL the journal entries
related to these transactions. Dates and narrations are required.
[10 marks]

3) Refer to transaction number 4 (transaction with Ms Violetta Davids).

a) Briefly explain the difference between contract asset and receivable

with reference to the transaction with Ms. Violetta [3 marks]

b) Show all the journal entries required to account for transaction number 4.
Dates and narrations are required. [7 marks]

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QUESTION 3: (20 MARKS; 36 MINUTES)

You are the accountant of the Creta Group, made of the parent company, Creta
Limited (Creta), and the subsidiary, Fiercebooks Limited (Fiercebooks). You are
busy with the preparation of the financial statements for the year ended
30 June 2018.

Creta bought 75% of Fiercebooks on 1 January 2017 for R4,500,000. An extract of

the trial balance of Fiercebooks on 1 January revealed the following:

1 January 17
Rand
Share Capital 1,000,000
Retained Income (1 July 2016) 3,000,000

Fiercebooks earned a profit of R600,000 for the financial year ended 31 June 2017.
The profit was earned evenly over the year. No dividends were declared in the 2017
or the 2018 financial years.

Creta decided to initially measure the Non-Controlling Interest in Fiercebook at a fair

value of R800,000.

At the time of purchase, all the assets and liabilities of Fiercebooks were considered
fairly valued with the exception of one of Fiercebooks’ buildings, which was
undervalued by R300,000. Fiercebooks originally bought this building for R750,000
on 1 July 2016, and depreciated it over its total estimated useful life of 20 years.

On 30 June 2018, Fiercebooks sold the building to Whatdown Limited for a total
amount of R1,000,000, paid cash on the same day.

On 1 July 2017, Creta Limited started selling inventory to Fiercebooks at a profit

mark up on cost of 40%. Total sales for the year amounted to R840,000. Fiercebook
had R350,000 worth of inventory bought from Creta at year-end.

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REQUIRED:

Ignore VAT and all other tax implications

1) Prepare the “at acquisition” pro-forma journal entry/(ies) required for the
consolidation of Fiercebooks into the financial statement of the Creta Group as
far as the information allows. Show your workings clearly. [6 marks]

2) Prepare all the pro-forma journal entries required in relation to the building that
was undervalued at acquisition, and later sold outside the group. Ignore any
possible effects on non-controlling interest.
[11 marks]

3) Prepare all the pro-forma journal entries resulting from the intra-groups sale of
inventory as far as the information above allows. [3 marks]