FACULTY OF COMMERCE, HUMAN SCIENCES AND EDUCATION

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION : BACHELOR OF ACCOUNTING HONOURS

QUALIFICATION CODE: 08 BOAH LEVEL: 8
COURSE NAME: ADVANCED FINANCIAL ACCOUNTING AND
COURSE CODE: FAR 811S
REPORTING

SESSION: 22 APRIL 2023 PAPER: THEORY AND CALCULATIONS

DURATION: 90 Minutes (11/2 Hrs) MARKS: 50

ASSESSMENT TWO
EXAMINER(S) D W Kamotho

MODERATOR: K Tjondu

INSTRUCTIONS
1. Answer ALL questions in blue or black ink only.
2. Write clearly and neatly.
3. Start each question on a new page and number the answers clearly.
4. No programmable calculators are allowed.
5. Questions relating to the paper may be raised in the initial 30 minutes
after the start of the paper. Thereafter, candidates must use their
initiative to deal with any perceived error or ambiguities & any
assumption made by the candidate should be clearly stated.
6. Any resemblance to any people, places, organisations or anything is
purely coincidental.

THIS QUESTION PAPER CONSISTS OF 3 PAGES (Including the front page)

1
Question 1 25 marks

Thermometer Limited (Thermometer) is a company involved in the entertainment industry. They

have a lounge on Independence Street in the CBD. Thermometer imported a range of new lighting
equipment for its dance floor costing N$ 400,000 that was delivered on 1st January 2020.

Prior to the equipment being delivered, the loss of a major contract led Thermometer limited to
realise that the equipment was surplus to its needs and thus it entered into a contract with the
Temperature entertainment limited to lease the equipment for a lease term of 3 years from 1st
January 2020.

Temperature limited has paid rental of N$150,000 annually in advance and guaranteed the
residual value of N$20,000 at the end of the contract on 31 December 2022.The lighting
equipment was subsequently bought by Barometer Entertainers in January 2023 for N$ 20,000.

The interest rate implicit in the contract was 17.08204%

The estimated useful life of the equipment was 3 years, and this is the same period over which
NAMRA (tax authority in Namibia) allows the equipment to be written off for tax purposes.

NAMRA rules stipulate that lease instalments are taxed when received.

The current tax rate is 30% and there is no transaction tax or VAT.

The profit before tax considering all the relevant information above has been correctly calculated
as follows:

Year ended N$
31st December 2020 240 705
31st December 2021 244 377
31st December 2022 212 918

Required
Provide journal entries in the records of Thermometer limited for ONLY the year ended 31st
December 2020, 2021 and 2022 recording the gross receivable and the unearned finance income.
The workings however must include the amortisation table and deferred tax effects based on the
three-year period of 01 January 2020 to 31 December 2022.

2
Question 2 25 marks
Cash and GO supermarket has recently launched a customer loyalty program that rewards a
customer with one customer royal point for every N$30 of purchase the Loyalty Program is
optional (customer however need to register to join it) and is free to join.

However not all customers use to take advantage of the program. On average only 75% of the
customer take on the royalty programme

Each point is redeemable for N$3 in value for purchases of perfect purchases products.

During the reporting period ended 31 December 2022, customers purchased product worth
N$600,000 from Cash and GO.

Customer who took part in the programme earned the promised number of points.

Cash and GO expect 95% of the point earned to be redeemed. All the points were redeemed as
at 31 January 2023.

The entity estimates a stand-alone selling price of $3 per point and the year end is 31 December.

Required:
a) Briefly explain briefly explain how Cash and GO should account for the customer loyalty
programme.
b) Provide the necessary journal entries to correctly account for the transaction.
ignore loss allowances.

END OF QUESTION PAPER

3
 SUGGESTED SOLUTIONS

SOLUTION 1

Journals
1/1/2020 Debit Credit Marks
Equipment: cost (A) 400 000
Bank 400 000
Purchase of equipment

Finance lease receivable – gross investment in lease (A) 470 000

Unearned finance income (-A) 70 000
Equipment: cost (A) 400 000
Finance lease entered into over equipment (W1)
Bank 150 000
Finance lease receivable – gross investment in lease (A) 150 000
Finance lease instalment received

31/12/2020
Unearned finance income (-A) 42 705
Finance income (I) 42 705
Interest income earned, (W2)

Income tax expense (E) 65 000

Current tax payable: income tax (L 65 000
Current tax charge (W6)

Income tax expense (E) 7 812

Deferred tax: income tax (L) 7 812
Deferred tax adjustment (W5)

W1: Calculation of gross investment in the lease, net investment in the lease and the
amount of finance income

N$
Gross investment in Lease payments receivable by [(150 000 x 3) + 470 000
lease (GL) lessor 20 000) +0]
Net investment in + Unguaranteed
GL discounted atresidual
interest value
rate [Financial calculator – 400 000
lease implicit see below)
(NL)
Unearned finance in lease 70 000
income

Using Casio financial calculator

 CMPD function
 Set = Begin (advance payments)
 i% = 17,08204
 n=3
 PMT = 150 000
 FV = 20 000
SOLVE for PV

4
  = 400 000 = PV of annuity of N$150 000 at 17,08204% in advance for three years plus N$20
000 at the end of year 3.

W2: Finance income using effective interest rate method.

Date Instalment Interest Balance

(17,08204%)

1 Jan 20 400 000

1 Jan 20 (150 000) 0 250 000
31 Dec 20 42 705 292 705
1 Jan 21 (150 000) 142 705
31 Dec 21 24 377 167 082
1 Jan 22 (150 000) 17 082
31 Dec 22 2 918 20 000
31 Dec 22 (20 000)
470 000 70 000 0

W3: Deferred tax on the lighting equipment

Carrying Tax Base Temporary Deferred

Amount Difference Taxation
Opening balance 2020 0 0 0 0
Purchase 400 000 400 000
Finance lease (400 000) 0
disposal
Capital allowance 0 (133 333)
Closing balance 2020 0 266 667 266 667 80 000 A
Capital allowance 0 (133 333)
Closing balance 2021 0 133 334 133 334 40 000 A
Capital allowance 0 (133 334)
Closing balance 2022 0 0 0 0

W4: Deferred tax on the finance lease debtor

Carrying Tax Temporary Deferred

Amount Base Difference Taxation
Opening balance 2020 0 0 0 0
New lease 400 000 0
Movement (107 295) 0
Closing balance 2020 292 705 0 292 705 87 812 L
Movement (125 623) 0
Closing balance 2021 167 082 0 167 082 50 125 L
Movement (167 082) 0
Closing balance 2022 0 0 0 0

5
SOLUTION 2

(a)

Marks
When a contract with a customer to provide goods or services also provides the
customer with an option to acquire additional goods or services, this must be accounted
for as a separate performance obligation if this option amounts to a ‘material right that it
would not receive without entering into that contract’. See IFRS 15.B40

In this case, the contract provides the customer with points, based on existing
purchases, that equate to a discount of N$3 per point on future purchases of a specific
product (if, for example, the customer purchased further goods of the same amount, it
would effectively work out to a 10% discount off the selling price of these purchase).

The points thus amount to a material right that the customer would not have received
had that customer not entered into the first contract.

Thus, the offer of points must be accounted for as a separate performance obligation.

This means that the total transaction price (N$450 000) must be allocated between two
performance obligations: the sale of goods and the sale of points.

The sale of goods to the value of N$450 000 automatically results in the sale of 15 000
points since every sale of N$30 results in the sale of one point (N$450 000 / N$30 = 15
000 points).
The allocation of the transaction price must be done based on the relative stand-alone
selling prices. Where a stand-alone selling price is not available, it must be estimated.

The total stand-alone selling price of the goods sold is N$450 000 (i.e. the price of the
goods sold does not change based on whether the customer is a member of the loyalty
programme) and the points that are effectively ‘sold’ are valued at N$3 per point.

When allocating the transaction price, however, we must also build into the estimate of
the stand-alone price ‘the likelihood that the option will be exercised’. In this regard, the
entity estimates that only 95% of the points will be redeemed.
(15 000 x 95% = 14 250 points),

thus the stand-alone selling price of the points is estimated at N$42 750 (14 250 points x
N$3 = N$42 750).
The transaction price of N$450 000 is thus allocated as follows:

6
 Stand-alone Allocation
selling price of TP
Goods sold N$450 000 N$450 000/N$492 750 x N$450 000 N$410 959
Points sold N$42 750 N$42 750/N$492 750 x N$450 000 N$39 041
N$492 750 N$450 000
The sale of goods is recognised as revenue at the point of sale (because the sale of goods
is a PO satisfied at a point in time).

The sale of points is recognised as a contract liability until either the points are redeemed
or expire, whichever occurs first.
On date of sale of goods - Debit Credit
Bank/ Receivable (A) Given 450 000
Revenue from customer contract (I) Working above 410 959
Contract liability (L) Working above 39 041
Recognising the receipt from the customer (or receivable), partly recognised as revenue from
the sale of goods and partly recognised as a contract liability for the sale of customer loyalty
points

On date of redemption of points – 31 Jan 2023

Contract liability (L) Not given 39 041
Revenue from customer contract (I) 39 041
Recognising the revenue when the customer loyalty points are redeemed

Available
Maximum

END OF MEMORANDUM PAPER