TITLE HET: BCOM ACCOUNTING

SUBJECT FINANCIAL ACCOUNTING 2B

SUBJECT CODE FNA220
TEST/EXAM SUPP EXAM MEMO
SEMESTER 2ND
DATE WRITTEN 23 JAN 2017

TOTAL MARKS 120

DURATION 2 HOURS
PASS MARK 50%
WEIGHTING 50%
EXAMINER NKOSINATHI MKHIZE
MODERATOR BONGIWE MSOMI

REQUIREMENTS:

Learner Requirements: Stationery and Examination Book

Equipment Requirements: None

This paper consists of:

1. SECTION A 25 marks
2. SECTION B 45 marks
3. SECTION C 50 marks

Please answer ALL questions.

PLEASE READ THE ASSESSMENT RULES AND REGULATIONS THAT FOLLOW

Learners are warned that contravening any of the examination rules or disobeying the
instructions of an invigilator could result in the examination being declared invalid.
Disciplinary measures will be taken which may result in the students’ expulsion from
Damelin.

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ASSESSMENT RULES AND REGULATIONS

Please ensure that you have read and fully understand the following assessment rules and
regulations prior to commencing with your assessment:

1. To be permitted access to the examination, a learner must arrive with:

- an Identity Document or other official proof of identity (for example,
- a student card, passport or driver's license card with photo); and
- The required exam stationery.
2. No learner may enter the examination room more than 30 minutes after the
examination sitting has commenced and no candidate may leave the room less than
one hour after the examination sitting has commenced.
3. No extra time will be allowed should a student arrive late.
4. All learners must sign the Attendance Register for the examination on arrival.
5. It is the responsibility of learners to familiarize themselves with the examination rules
prior to sitting for the examination.
6. All examinations are to be written on the date and time officially stipulated by the
College.
7. It is the responsibility of learners to ensure that they are writing the correct paper and
that the question paper is complete
8. Cell phones must be switched off prior to entering the exam venue. Cell phones and
wallets may be placed under candidates' chairs rather than at the front of the room.
9. Learners may not handle cell phones or wallets during the exam.
10. No weapon of any description may be taken into the assessment room.
11. All personal belongings are to be placed at the front of the examination room. Personal
belongings brought to the examination are at the owner's risk.
12. Smoking is not permitted and learners will not be allowed to leave the examination
room in order to smoke
13. Once the examination has commenced, all conversation of any form between
candidates must cease until after candidates have left the room, after the examination.
14. Only the official College examination book, as supplied by the College, may be used.
15. Learners must ensure that their student number is written on the answer book.
16. Learners are responsible for ensuring that they follow the instructions in the
examination for submitting their answers.
17. Please read the instruction appearing on the examination paper carefully
18. The number of every question must be clearly indicated at the top of every answer.
19. No pages may be torn out of the answer book. All question papers and scrap paper
must be handed to the invigilator after the examination.
20. Learners finishing earlier are to leave the examination room as quietly as possible on
the instruction of the invigilator, and may not talk until outside the building where the
examination is being written.
21. Only under exceptional circumstances will a learner be permitted to leave the
examination room during the examination, and if the invigilator gives permission.

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SECTION A
QUESTION 1 (25 Marks)

The following events occurred/ information became available between 1 January 20X3 and
28 February 20X3 ( the date the financial statements were authorized for issue).

a) A debtor that owed Yzone Limited R100 000 at 31 December 2002 (year end) had
their factory destroyed in fire. As a result, this debtor filed for insolvency and will
probably pay 30% of the balance owing. A letter from the debtor’s lawyers to this
effect was received by Yzone Limited in February 2003. The financial statements are
not yet authorized for issue. The fire occurred during January 2003.
b) A debtor that owed Fresh Limited R100 000 at year- end was in financial difficulties
at year-end. As a result, Fresh Limited processed an impairment loss adjustment of
R30 000 against this account. In January 2003, the debtor’s lawyers announced that
it would be paying only 40% of all debts. The financial period ends on 31 December.
c) Current tax expense of R30 000 had been incorrectly debited as revenue in 2002.
d) Fresh had decided in a directors meeting held on 28 December 2002 to close down a
branch in the Canary Islands. This decision was announced to the affected suppliers
and employees via a newspaper article published on 15 January 2003.
e) Inventory carried at R100 000 at year end was sold for R80 000 in January 2003.It
had been damaged in flood during 2002.

Required

1.1. None of the above events has yet been considered. Explain whether the above
events should be adjusted for or not when finalizing the financial statements for
the year ended 31 December 2002 (25 marks).

Solution

a) The event that caused the debtor to go insolvent was the fire, which happened
in January 2003, being after year-end. Thus this is a non-adjusting event.√√√√√
b) The event that caused the debtor to go insolvent is financial difficulties which
occurred before year-end. The lawyer’s announcement simply provided
information regarding conditions in existence at year-end. Therefore this is an
adjusting event.√√√√√
c) The discovery of this error during the post-reporting date period is an
adjusting event since it gives us more information about a condition that
existed at year-end. √√√√√
d) Non-adjusting event: A liability is based on either a legal obligation or present
obligation. There is no legal obligation at year-end to close the factory and
there is no constructive obligation at year-end since the announcement was
only made after year-end. The announcement is therefore a non-adjusting
event. If the decision-making ability of the users may be affected by this
information, details of the decision should be disclosed.√√√√√
e) An adjusting event: The event that caused inventory to be sold at a loss
occurred before year-end (the post-reporting period event simply gives more
information about the net realizable value at year-end).√√√√√

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SECTION B

QUESTION 2 (45 Marks)

Lilian Limited purchased a plant for R 1000 000 on 1 January 2005.

Depreciation is calculated using the straight line method and a nil residual value.

Lilian Limited has a legal obligation to dismantle the plant at the end of its 4-year useful life.
 The estimated future cost of dismantling is R40 000.
 The present value of the future dismantling cost is R 27 321 (using a discount rate of
10%)
The company uses the cost model to account for property, plant and equipment.

Required:

Ignoring tax, prepare the journal entries for 2005 and 2006 assuming
2.1. The dismantling cost increased to R60 000 on 1 January 2006 (45)
Please show all workings. Narrations are required.

Solution
Workings:
W1: Effective interest rate table: estimate increase on 1 January 2006
Date Discount factor: Calculation of liability Finance Liability
10% balance charges balance
1/01/2005 0.683013√ 40 000 x 0.683013√ 27 321√
1/12/2005 0.751315√ 40000 x 0751315√ 2 732√ 30 053√
01/01/2006 45 079√ 15 026√
01/01/2006 0.751315√ 60 000 x 0.751315√ 45 079√
31/12/2006 0.826446√ 60 000 x 0.826446√ 4 508√ 49 587√
31/12/2007 0.909091√ 60 000 x 0.909091√ 4 959√ 54 545√
31/12/2008 1√ 60 000 x 1√ 5 455√ 60 000√
Total 17 653√

Journals:

workings Debit Credit

1 January 2005 1 000 000+ 27 321√√

Plant: cost (A) 1 027 321√√
Provision:
decommissioning costs( L) 1 027 321√√
Purchase of plant and
provision is capitalized to
the asset

31 December 2005 (1 027 321- 0)/ 4 years x 1

Depreciation year√ 256 830√√
Plant: accumulated
depreciation 256 830√√
Depreciation for the year
Finance charges 2 732√
Provision:
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decommissioning costs 2 732√
Finance charge for 2005
1 January 2006
Plant: cost 15 026√
Provision: 15 026√
decommissioning costs
Increase in
decommissioning liability
31 December 2006 (1 027 321 -256 830 +
Depreciation 15 026)√ 261 839√
Plant: accumulated 261839√
depreciation
Depreciation for 2006
Finance charge 4 508√
Provision : 4 508√
decommissioning costs

SECTION C

QUESTION 3 (50 Marks)

On 1 January 2011, date of incorporation, a company issued:

 100 000 ordinary shares, issued at C3,50 each

 50 000 10% cumulative, redeemable preference shares, issued at C2 each.

The preference shares must be redeemed on 31 December 2016 at a premium of 20 cents

per share

The effective rate of interest paid is calculated to be 11, 25563551%

There are a total of 120 000 authorized ordinary shares (unchanged since incorporation)

Half of the authorized preference shares have been issued.

Retained earnings on 1 January 2015 was R150 000.

Total comprehensive income (after taking into account the above information) was R80 000
in 2015

An ordinary dividend of R10 000 was declared in 2015.

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Required:

3.1. Calculate and show all journal entries from the date of issue to the date of redemption
(excluding the redemption).

Solution

Preference share liability: Effective interest rate = 11, 25563551% (given –or calculated
as the internal rate of return using the financial calculator):

PV=100 000√

FV= -110 000 (2.20 X 50 000) √

PMT= -10 000 (50 000 x R2 x 10%) √

n= 6√

COMP i= 11.25563551%√

W1: Effective interest rate table

Interest Dr/ (Cr) Bank Liability balance Dr/

(Cr)
Dr/ (Cr)

1/1/2011 11 256√ 100 000√ (100 000)√

31/12/2011 11 397√ (10 000)√ (101 256)√

31/12/2012 11 554√ (10 000)√ (102 653)√

31/12/2013 11 729√ (10 000)√ (104 207)√

31/12/2014 11 924√ (10 000)√ (105 936)√

31/12/2015 12 140√ (10 000)√ (107 860)√

31/12/2016 (110 000)√ (110 000)

31/12/2016 70 000 (70 000) 0

1/1/2011

Bank (50 000 x R2) 100 000√

Preference share capital 100 000√

Interest expense 11 256√

Preference share liability 11 256√

Preference share liability 10 000√

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Bank 10 000√

Interest expense 11 397√

Preference share liability 11 397√

Preference share liability

Bank 10 000√ 10 000√

31/12/2013

Interest expense 11 554√

Preference share liability 11 554√

Preference share liability 10 000√

Bank 10 000√

31/12/2014

Interest expense 11 729√

Preference share liability 11 729√

Preference share liability 10 000√

Bank 10 000√

31/12/2015

Interest expense 11 924√

Preference share liability 11 924√

31/12/2015

Preference share liability 10 000√

Bank 10 000√

31/12/2016 12 140√

Interest expense 12 140√

Preference share liability

Preference share liability 10 000√

Bank 10 000√

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