DEPARTMENT OF ACCOUNTANCY

ACCOUNTING 300 / S3BCTQ2

ASSESSEMENT OPPORTUNITY 3
5 JUNE 2023

INFORMATION

ASSESSORS: MS A GAZI-BABANA
MS Z PATEL
MR E BRUSSELS

MODERATORS: PROF. A. MOHAMMADALI- HAJI

MARKS: 90

READING TIME: 27 MINUTES

WRITING TIME: 135 MINUTES (2 HOURS 15 MINUTES)

UPLOAD TIME: 15 MINUTES

 THE INFORMATION CONSISTS OF 2 QUESTIONS AND 7 PAGES (this page included).

 SILENT NON-PROGRAMMABLE FINANCIAL CALCULATORS ARE ALLOWED.
 SHOW ALL CALCULATIONS AS MARKS MAY BE AWARDED THERETO.
 START EVERY PART OF THE QUESTION AT THE TOP OF A NEW PAGE.
 ENSURE YOUR SUBMISSION IS LEGIBLE. AVOID USING PENCIL AND TIPPEX OTHERWISE
ONLY WHAT IS VISIBLE WILL BE MARKED.
 THIS IS AN OPEN BOOK ASSESSMENT– ALL FIVE VOLUMES OF ‘A Guide Through IFRS’
MAY BE USED DURING THE ASSESSMENT AS WELL AS OFFICIAL COPIES OF
STANDARDS AND ILLUSTRATIVE EXAMPLES ISSUED BY THE IASB. NO OTHER MATERIAL
IS PERMITTED.
 WE SUGGEST THAT YOU WRITE WITH A DARK COLOUR PEN ON A LIGHT BACKGROUND,
TO ENSURE LEGIBILITY. DO NOT WRITE ON THE EDGE OF THE PAGE, AS YOU MAY CUT
OFF A PORTION OF YOUR ANSWER WHEN YOU SCAN THE DOCUMENTS IN.
 YOUR SUBMISSION MUST BE HANDWRITTEN AND YOUR OWN ORIGINAL ATTEMPT.

1
QUESTION 1 51 MARKS

IGNORE VAT

SpotCloudMusic (Pty) Limited (SCM) is a company that specialises in digital music. The
company is based in East London, South Africa within the Industrial Development Zone
(IDZ). SCM has a 31 December reporting period and complies fully with the International
Financial Reporting Standards (IFRS).

Acquisition
During the 2019 financial year, SCM acquired a group of assets which included goodwill of
R250 000 which arose on the acquisition date. This goodwill was allocated to this group of
assets. The group of assets comprised of the cloud software, cloud server and the cloud
central processing unit. This group of assets constitutes a cash generating unit.

a) Cloud Software
On acquisition (1 January 2019), the cloud software had a cost of R1 500 000 and at
this date the cloud software had an indefinite useful life. The cloud software is
recovered through use. SARS grants allowances of 150% based on the purchase
cost at a rate of 20% per annum. These allowances are granted from the year in
which the software is brought into use in the production of income i.e.,1 January
2019.

b) Cloud Server
On acquisition (1 January 2019), the cloud server had a cost of R800 000 and a
useful life of 10 years. Due to rapid technological advancements, on 31 December
2022, the cloud server was considered to have a fair value less cost to sell of R450
000.
SARS does not grant any allowance on cloud servers.

c) Cloud Central Processing Unit - CPU

On the date of acquisition (1 January 2019), the CPU had a cost of R3 400 000 and
an estimated useful life of 9 years. On 31 December 2022, the CPU had a
recoverable amount of R1 200 000. SARS grants allowances of 40%,20%, 20%, 20%
per annum unapportioned on the CPU.

On 31 December 2022, the group of assets had a recoverable amount of R2 200 000.

2
QUESTION 1 continued

Manufacturing Land and Plant

SCM shareholders elected to diversify the company’s operations by manufacturing and
selling EarPods with specialised software suitable for long distance running.
a) During the 2020 financial year, a plant with a cost R50 000 000 was established and
was ready and available for use on 20 October 2020. The manufacturing plant has
the capacity to produce 1 000 000 EarPods. During the 2022 financial year, the
manufacturing plant produced 180 000 (2021: 150 000) and (2020: 20 000) EarPods.
On 31 December 2021, the remaining plant capacity remained unchanged. During
the 2022 financial year, it was discovered that maintenance costs of R120 000, were
incorrectly capitalised to the manufacturing plant on 1 January 2021.
SARS grants allowances of 20% per annum unapportioned on the plant. The
maintenance costs are allowed as a deduction when incurred.
b) Adjacent to the manufacturing plant is a plot of land that is used as a parking lot for
the manufacturing plant employees. On acquisition (during 2020 financial year), it
had a cost of R500 000 and had a fair value of R670 000 and R430 000 on 31
December 2022 and 31 December 2021 respectively.

Property
SCM has a property that is held for capital appreciation. The property was acquired for R1
000 000 on 1 January 2019. The property was not fairly valued during the current financial
year and it had a carrying amount of R2 500 000 on 31 December 2022. The property was
sold for R3 000 000. SARS grants allowances at 5% p.a unapportioned.

Additional information
 The accounting profit before tax for the year ended 31 December 2022 after taking into
account all the above transactions is R47 000 000.
 The corporate tax rate is 27% for all financial years and the capital gains tax inclusion
rate is 80%.
 Manufacturing plant and machinery are accounted for under the cost model as per IAS
16 Property, Plant and Equipment.
 Land is accounted for under the revaluation model as per IAS 16 Property, Plant and
Equipment.
 Intangibles are accounted for under the cost model as per IAS 38 Intangibles.

 Investment property is accounted for on the fair value model as per IAS 40 Investment
Property

END OF QUESTION 1.

3
QUESTION 2 39 MARKS

IGNORE INCOME TAX AND VAT

DrinkUp (Pty) Ltd, hereafter referred to DrinkUp, is a company that manufactures and
distributes a variety of non-alcoholic beverages country wide in South Africa. DrinkUp was
incorporated a few years ago by friends, LP and Kasi. The company’s financial year end is
28 February.

Whilst finalising the financial statements of DrinkUp for the reporting period ended 28
February 2023, the financial manager identified the following transactions that required some
attention.

Drimo Hydration Drink (DRIMO)

DrinkUp’s main income stream is derived from sales of energy and hydration sports drinks to
large retail stores in South Africa. In August 2022, DrinkUp launched a new product, DRIMO
Hydration Drink (DRIMO), which is manufactured locally in three different flavours,
ReallyRaspberry, LemonLight and PinkPassion.

Cheepers, a South African retail store, had entered into a contract with DrinkUp to buy and
sell the drink to the public. The terms of the agreement state the following:

 Cheepers will have the exclusive right of the sale of the drink in South Africa.
 Cheepers will purchase 6 million bottles of the drink between September 2022 and
September 2023.
 DrinkUp sells each bottle to Cheepers for R30 each (Cost plus 50%). Cheepers is then
responsible for determining a reasonable selling price of the drink to the public.
 Cheepers makes an upfront payment of R18 per bottle delivered and is given a 90 day
credit-term to settle their account.

On 1 September 2022, DrinkUp delivered the first batch of 500 000 bottles of DRIMO to
Cheepers. With ingenious marketing, Cheepers had sold 250 000 of DRIMO on the first day
it launched the product on its shelves. Between 1 October 2022 and 28 February 2023,
DrinkUp sold a further 950 000 bottles of DRIMO to Cheepers.

On 3 February 2023, DrinkUp noted that the PinkPassion flavour of the drink delivered to
Cheepers in January had a minor misprint on its label and had therefore recalled the product
from Cheepers. Cheepers had returned all 150 000 bottles that they had in stock on this date
and received a full refund from DrinkUp.

QUESTION 2 continues on the next page

4
QUESTION 2 continued

On 13 February, DrinkUp was made aware of a few customers who had taken ill after
allegedly consuming the LemonLight flavour of DRIMO. Based on these allegations,
Cheepers had lodged a lawsuit against DrinkUp for the potential harmful supply of the
LemonLight flavour. DrinkUp consulted with its lawyers immediately. Based on these
consultations, all 350 000 bottles of the LemonLight flavour, distributed to Cheepers in
January and February 2023 were recalled and returned to DrinkUp immediately. Cheepers
were once again refunded in full for these products that were recalled.

Following ongoing investigations, by 28 February 2023, DrinkUp’s lawyers had indicated that
it is highly likely that the court would rule in favour of Cheepers as there appears to be
medical evidence showing that an ingredient in the LemonLight flavour has caused harm to
the customers. Therefore, the lawyers suggested that DrinkUp should enter into an “out of
court” settlement with Cheepers. Based on their calculations and legal findings, the lawyers
estimate that Cheepers would be comfortable with a monetary “out of court” settlement of
R870 000. As at 28 February 2023, management of DrinkUp had not yet made contact with
Cheepers and it is unclear if Cheepers would accept the “out-of-court” settlement.

As at 28 February, legal fees of R530 000 was invoiced by the lawyers to DrinkUp for their
investigations completed to date on the DRIMO matter above. No further sales of the
LemonLight flavour was made until the matter was to be fully investigated and resolved.

Recalled products

All products recalled are inspected to determine if they can be resold or if they are to be
disposed based on the specific circumstances. The following was noted for the DRIMO
bottles recalled during the year:

PinkPassion - As noted above, these products were recalled due to a misprint on the label.
Once recalled, these products were still deemed fit for consumption and were therefore
donated to various charitable organisations. These donations are presented under
distribution expenses when preparing the statement of profit or loss.

LemonLight – As a precaution, DrinkUp agreed that these were not deemed fit for
consumption. Hence these items are written down to zero and safely disposed of by the
company. Inventory write offs are presented as part of cost of sales.

The only products recalled in the current financial year related DRIMO are as mentioned
above. DrinkUp had incurred the following further costs associated with the recall of these
products:

QUESTION 2 continues on the next page

5
QUESTION 2 continued

Costs Amount
Announcements made in various media platforms for the recall R120 000
- (presented as administrative costs)
Disposing the product – (presented as other expenses) R 40 000
Arranging for the return of the product – (presented as R 30 000
distribution costs)

Machinery to manufacture beverages

In order to manufacture the beverages, DrinkUp required some machinery. However,

DrinkUp did not have sufficient cash reserves to purchase all the machinery outright. As the
cash flow of the company was stable, DrinkUp decided to lease some of its machinery. One
such item is the Ingredient Mixture and Storage (IMS) machine which is leased from Major
Machines. Details of the written contract between DrinkUp and Major Machines are as
follows:

 DrinkUp obtained the use of the IMS (Serial number: 128539BI) on 1 March 2021 for
an initial rental period of 5 years.
 DrinkUp makes a R80 000 non-refundable deposit.
 DrinkUp makes bi-annual payments of R950 000 for the use of the machine, with the
first payment made on 31 August 2021.
 The agreement contains an option to extend the rental arrangement for an additional
period of up to 3 years. DrinkUp intends to purchase their own machine and therefore
plans to only extend the rental agreement for a further year and no longer.
 DrinkUp would also have the option to purchase the IMS for R450 000 at the end of
the lease term. As DrinkUp intends to purchase their own machine, it is highly unlikely
that this option will be exercised.
 DrinkUp may only use the IMS for mixing and storage of beverages so as to prevent
harmful chemicals from damaging the IMS.
 DrinkUp will have exclusive use of the IMS for the rental period.
 In the event of a breakage or malfunction, Major Machines will have the right to
replace the IMS. The replacement will be done from surplus stock of Major Machines.
 The useful life of the IMS is 9 years, with no residual value.
 Major Machines would have to set up and install the IMS for it to function effectively
and efficiently for DrinkUp’s use. This installation was done at a cost of R50 000 for
DrinkUp.
 The interest rate implicit in the lease is 13.54% per annum and DrinkUp’s incremental
rate of borrowing is 8% per annum.

6
QUESTION 2 continues on the next page

QUESTION 2 continued

Additional information

1. The following extract from the statement of profit or loss was prepared by the junior
accountant before the above transactions were taken into account

DRINKUP (PTY) LTD

Extract from statement of profit or loss and other comprehensive income
Revenue 98,000,000
Cost of Sales 51,000,000
Gross Profit 47,000,000
Other Income 10,000,000
Distribution costs 5,000,000
Administrative expenses 8,000,000
Other expenses 12,125,000
Finance costs 4,500,000
Profit before tax 27,375,000

2. DrinkUp presents its statement of profit or loss and other comprehensive income by
function.
3. Expenses are presented as follows unless otherwise stated:
a. Legal expenses are presented as part of other expenses
b. It is DrinkUp’s accounting policy that all depreciation on property plant and
equipment is presented as part of other expenses. All other depreciation on
machinery is presented as part of distribution costs unless the depreciation is
incurred on a manufacturing machine, in which case the depreciation is
capitalised to inventories.
c. Provisions are presented as part of other expenses
4. You may assume a market related interest rate of 12% per annum where necessary
that takes into account the credit risk characteristics of the customer.
5. DrinkUp considers the effect of discounting to be insignificant for all periods of 12
months or less.

END OF QUESTION 2

7
 DEPARTMENT OF ACCOUNTANCY

ACCOUNTING 300 / S3BCTQ2

ASSESSMENT OPPORTUNITY 3
5 JUNE 2023

REQUIRED

 THE REQUIRED CONSISTS OF 2 QUESTIONS AND 3 PAGES (this page included).

 SILENT NON-PROGRAMMABLE FINANCIAL CALCULATORS ARE ALLOWED.
 SHOW ALL CALCULATIONS AS MARKS MAY BE AWARDED THERETO.
 START EVERY PART TO THE QUESTION AT THE TOP OF A PAGE.
 ENSURE YOUR SUBMISSION IS LEGIBLE. AVOID USING PENCIL AND TIPPEX OTHERWISE
ONLY WHAT IS VISIBLE WILL BE MARKED.
 THIS IS AN OPEN BOOK ASSESSMENT – ALL FIVE VOLUMES OF ‘A Guide Through IFRS’
MAY BE USED DURING THE ASSESSMENT AS WELL AS OFFICIAL COPIES OF
STANDARDS AND ILLUSTRATIVE EXAMPLES ISSUED BY THE IASB. NO OTHER MATERIAL
IS PERMITTED.
 WE SUGGEST THAT YOU WRITE WITH A DARK COLOUR PEN ON A LIGHT BACKGROUND,
TO ENSURE LEGIBILITY. DO NOT WRITE ON THE EDGE OF THE PAGE, AS YOU MAY CUT
OFF A PORTION OF YOUR ANSWER WHEN YOU SCAN THE DOCUMENTS IN.
 YOUR SUBMISSION MUST BE HANDWRITTEN AND YOUR OWN ORIGINAL ATTEMPT.

1
2
QUESTION 1 (51 MARKS)
51 x 1.5 = 76.5 minutes

You are required to:

a) Prepare the journal entry/ies required to account for the impairment of 14

SpotCloudMusic cash generating unit for the year ended 31 December
2022. Refer to the information under “Acquisition”.

 Ignore tax.

Marks are allocated as follows:

Journal Entry 2 marks
Workings 10 marks

Communication: Clarity of workings 1

b) Prepare the disclosure required for the incorrect capitalisation of the 8

maintenance costs as per IAS 8, for the 31 December 2022 financial
statements of SpotCloudMusic.
Communication: Presentation 1

c) Prepare the journal entry/ies required to account for the plot of land in the 5
SpotCloudMusic financial statements for the year ended 31 December
2022.

 Deferred tax is required.

 Ignore narrations.

d) Calculate SpotCloudMusic’s taxable income for the year ended 31 21

December 2022.

 Begin your calculation with accounting profit before tax.

 You are required to show permanent differences separately from

temporary differences.

 Show all your working clearly. 1

Communication: Clarity of working

51

(END OF QUESTION 1)

3
QUESTION 2 (39 MARKS)
39 x 1.5 = 59 minutes

You are required to:

The financial manager of DrinkUp has requested your assistance with the following matters

a) The junior accountant of DrinkUp is of the opinion that a principle vs agent

relationship is present between DrinkUp and Cheepers for the sale of
4
DRIMO.
Discuss whether you agree with the junior accountant and motivate your
answer by referring to principles from IFRS 15: Revenue from Contracts
with Customers.

b) Discuss how the lawsuit between DrinkUp and Cheepers would have to be 6
recognised and measured in the accounting records of DrinkUp for the
reporting period ended 28 February 2023.

c) Discuss, with reasons, why the agreement between DrinkUp and Major 8
Machines is a lease agreement as defined in IFRS 16: Leases.

d) Prepare the journals that would be recorded for the lease of the IMS in the 9
accounting records of DrinkUp for the reporting period ended 28 February
2023.

 Journal dates and narrations are not required

 Show all calculations as marks may be awarded thereto.

 Round off all balances to the nearest Rand.

e) Prepare the statement of profit or loss for DrinkUp (Pty) Ltd for the financial 12
year ended 28 February 2023 taking into account the transactions that
were not recorded.

Note:

 Present the financial statement up to the profit before tax line item

 Comparatives are not required.

 Round all amounts presented to the nearest R 1 000

 Show all workings clearly as marks are awarded thereto.

39

4
(END OF QUESTION 2)