Assessment Opportunity 11 November 2019

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COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF ACCOUNTING
DEPARTMENT OF ACCOUNTANCY

ASSESSMENT OPPORTUNITY 6

MODULE: Accounting 100

MODULE CODE: ACC100
EXAM/TEST PERIOD: First Semester 2019
DURATION: 150 Minutes (2.5 hours)
TOTAL MARKS: 125
EXAMINER(S): Prof G Els, Ms T Mohohlo, Ms L Molelekoa
MODERATOR: Ms Marelize Malan
NUMBER OF PAGES: 9

INFORMATION/INSTRUCTIONS:
___________________________________________________________________________
- Please confirm that your question paper consist of 9 pages (including cover page).
- Read questions carefully and manage your time.
- Do not write in pencil and do not use tip-ex, as this will not be marked.
- Cancel open spaces on your answer sheets before handing in, otherwise your script
will not be allowed to be handed in for remarking.
- Hand back unused answer sheet(s) together with your completed answer sheet(s).
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QUESTION 1 [25 MARKS]

QUESTION 2 [30 MARKS]

QUESTION 3 [50 MARKS]

QUESTION 4 [20 MARKS]

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pg. 2
2019 Accounting 100 Assessment Opportunity 6 Question 2

QUESTION 1 (25 MARKS)

(30 MINUTES)

Leribe Ltd, is a leading supplier of complete “smart” water filtration systems. Due to the specialised
nature of the product, customers are required to make payment upfront before the order can be
processed.
On 12 December 2019, Maliba Hotels, a leading hotel group, ordered 50 filtration units for installation
in their chalets. Leribe issued Maliba Hotels with an invoice for R14 245 090. Maliba Hotels accepted
the order on 16 December 2019 and paid the amount via EFT on the same date.
Due to the size of the order, the managing director of Leribe Ltd is eager to recognise the amount
as revenue for the reporting period ended 31 December 2019. The delivery and installation of the
order will be completed on 15 January 2020.
Both entities are registered VAT vendors and VAT is levied at 15%.

REQUIRED:
a) Provide the journal entry to record the transaction with Maliba Hotels in the records
of Leribe Ltd for the reporting period ended 31 December 2019. Dates and
narrations ARE required
(5)

b) Using the five step model of IFRS 15, discuss with reasons the recognition of
revenue from the contract between the two entities.

Assume that the agreement satisfies the requirements of step 1 of IFRS15. (15)

c) Provide the journal entry to account for Step 5 of the five step model of IFRS 15.
Dates and narrations ARE required (5)

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2019 Accounting 100 Assessment Opportunity 6 Question 2

QUESTION 2 (30 MARKS)

(36 MINUTES)
Note: VAT must be ignored for purposes of this question.
You have been provided with the following information, extracted from the financial records
of Tshehla Ltd. The company, based in Vanderbijlpark, Gauteng specializes in the provision
of expert consultancy services to Rand Water overseeing and advising on the purification
of drinking water flowing from the Katse Dam in Lesotho, through to the Vaal Dam and
ultimately the drinking taps of consumers in and around the provinces of Gauteng, North
West and the Free State.
Additional 2019 2018
information
Investment in Highlands Ltd 1 625 000 0
Investment in Orange Ltd 1 910 000 615 000
Vehicles 2 1 000 000 1 050 000
Accumulated depreciation – vehicles 2 (355 000) (500 000)
Equipment 3 38 320 000 32 500 000
Accumulated depreciation – equipment 3 (12 108 00) (11 694 000)
Computer Software 4 2 180 000 980 000
Accumulated amortisation – computer software 4 (708 000) (392 000)
Ordinary share capital (18 000 000) (14 000 000)
Payable – equipment item purchased 3 (3 000 000) 0
Long-term borrowings 5 (3 331 456) 0
Current portion of long-term borrowings 5 (881 495) 0

ADDITIONAL INFORMATION:
1. Tshehla Ltd has the following JSE listed investments:
 Orange Ltd
50 000 shares, representing a 5% interest in Orange Ltd, were purchased on 1
July 2019. As at 31 December 2019, the shares were trading at R12,50 per
share. The following journal was processed to recognise the increase in the fair
value of the investment:

2019 DR CR
31 Dec Investment in Orange Ltd (listed shares) (SFP) R175 000
Profit on fair value adjustment of shares (P/L) R175 000
Recognise the profit with the increase in the
fair value of 50 000 shares in Orange Ltd at
R12,50 per share

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2019 Accounting 100 Assessment Opportunity 6 Question 2

QUESTION 2 (CONTINUED)
 Highlands Ltd
Tshehla Ltd, purchased a 65% shareholding in Highlands Ltd on 1 April 2016
for R575 000. At that date, Highlands Ltd had 200 000 ordinary shares in issue.
On 1 August 2019, an additional 10 000 shares were purchased from another
shareholder for R60 000, bringing the total shareholding to 70%. Highlands Ltd
has not issued any additional shares since Tshehla Ltd became a shareholder.
As at 31 December 2019, Highlands Ltd ordinary shares had a market value of
R6,50 per share.

2019 DR CR
31 Dec Investment in subsidiary Highlands Ltd (listed) (SFP) R235 000
Profit on fair value adjustment of shares (P/L) R235 000
Recognise the profit with the increase in the fair
value of 140 000 shares in Highlands Ltd at
R6,50 per share

2. A vehicle with a cost of R400 000 and a carrying value of R300 000 was sold during
the year. Profit on the disposal amounted to R200 000. In addition, another vehicle
with a cost of R400 000 and accumulated depreciation of R150 000 was involved in
an accident and written off. An insurance claim was submitted and the insurance
company paid out R300 000 on the claim.
3. On 31 December 2019, equipment with a cost price of R2 880 000 and accumulated
depreciation of R2 808 000, as at that date, was withdrawn and scrapped.
On 25 October 2019, an order to the amount of R4 200 000 was placed to replace the
abovementioned equipment item. The replacing equipment item was received on
29 November 2019 and put into service by Tshehla Ltd on 1 December 2019. On 1 December
2019 an amount of R1 200 000 was paid to the supplier. The outstanding amount of
R3 000 000 is payable on 31 January 2019.
4. To assist in their water purification assessments, Tshehla Ltd purchased computer
software worth R980 000 on 1 January 2017. At the date of purchase it was estimated
that the software would have an expected useful life of 5 years with no residual value.
New software was purchased on 1 July 2019.
5. A loan of R5 000 000 was obtained from Beta Bank on 1 January 2019. Interest is charged at
12% per annum. Capital and interest on the loan are repayable in five equal instalments on 31
December each year.
REQUIRED:
d) Prepare only the following sections of the Statement of cash flows of Tshehla Ltd for
the reporting period ended 31 December 2019: (30)
 The “Cash flows from investing activities”.
 The “Cash flows from financing activities”.
Note:
- Ignore VAT.
- Show ALL calculations clearly.

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2019 Accounting 100 Assessment Opportunity 6 Question 3

QUESTION 3 (50 MARKS)

(60 MINUTES)
Essop Manufacturers Limited manufactures wooden toys.
Their bookkeeper produced the following statement of financial position as at 30 September 2019:
Notes R R
Land and buildings 4 9 000 000
Less: 16% Mortgage loan 3 (2 400 000) 6 600 000
Machinery at carrying amount 5 5 040 000
Office equipment at carrying amount 6 700 000
Investment in Triangle Ltd (purchased on 1 October 2018) 8 600 000
Inventories 9 1 950 000
Receivables 10 1 807 000
Less: Payables 11 (1 082 000) 725 000
Bank and petty cash 360 000
15 975 000

Ordinary shares 1 8 250 000

Preference shares 1 1 100 000 9 350 000
Retained earnings (1 October 2018) 3 625 000
Less: Brand names 7 (600 000)
Plus: Profit for the year before tax 3 600 000 6 625 000
15 975 000

ADDITIONAL INFORMATION:

1. Essop Manufacturers Limited was incorporated on 1 October 2014 with an authorised share
capital of 2 000 000 ordinary no-par value shares and 1 000 000, 10% preference shares
without par value. All the preference shares were issued, but only 1 500 000 of the ordinary
shares were issued. Preference shares are classified as part of equity.

2. The following must be provided for on 30 September 2019:

 Preference dividends and a final ordinary dividend of 50 cents per share.

 Tax to the amount of R1 050 000 (calculated correctly) on the company’s profit for the year.

3. The mortgage loan was incurred in 2017 at Second National Bank (SNB) on the condition that
it is repayable in twelve equal instalments commencing 1 April 2020. The interest rate was
adjusted on 1 April 2019 from 15% per year to 16% per year. All interest was already provided
and paid for.

4. Land and buildings were acquired in 2014 and serve as security for the mortgage loan. A sworn
valuer revalued the land and buildings on 1 July 2016 at R9 000 000 (replacement value) and
will do so again in 2021.

QUESTION 3 (CONTINUED)
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2019 Accounting 100 Assessment Opportunity 6 Question 3

5. The company launched a modernisation program in 2018 and all the machinery were replaced
on 1 April 2018 with new machinery at a cost of R7 000 000 (excluding VAT). Depreciation has
already been written off at 20% per annum on the declining-balance method.

6. The cost of office equipment on 1 October 2018 amounts to R1 200 000 and depreciation must
still be written off for the current year at 10% per year on the straight-line method. Office
equipment, with a cost of R300 000 and accumulated depreciation on 30 September 2018 of
R90 000, was sold on 31 December 2018 for R287 500. The only entry the bookkeeper has
done was:

Dr Bank R287 500

Cr Office equipment R287 500

On 1 January 2019 new equipment was bought for R517 500. The only entry the bookkeeper
has done was:

Dr Office equipment R517 500

Cr Bank R517 500

7. An amount of R100 000 in respect of brand names is amortised annually against profit. The
original cost amounted to R1 000 000. Amortisation for this year has already been provided
for.

8. The investment in Triangle Ltd consisted of 120 000 shares purchased at R5,00 each. On
30 September 2019 shares were trading at R6,25 each. No entry has been made yet regarding
the increase in the market value.

9. Inventories on hand consist of merchandise.

10. Receivables are made up as follows:

Trade receivables R907 000

Provisional tax paid 450 000
Ordinary interim dividend paid 450 000
1 807 000

11. Payables are made up as follows:

Trade payables R900 000

Provision for bad debts 57 000
SARS – VAT 125 000
1 082 000

12. On 28 September 2019 the City of Johannesburg served Essop Manufacturers Limited with a
notice of the intention to sue the company for R2 500 000 for environmental pollution that
allegedly occurred during the first few months of 2019 in the Braamfontein Spruit.

QUESTION 3 (CONTINUED)

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2019 Accounting 100 Assessment Opportunity 6 Question 3

Essop Manufacturers’ legal team is of the opinion that it is more than 50% probable that a court
will adjudicate in favour of the City of Johannesburg. Environmental experts are of the opinion
that R2 500 000 is a reliable estimate of the costs to rehabilitate the environment around the
Braamfontein Spruit. All indications are that the case will probably be adjudicated by the court
during August 2020.

REQUIRED:

a) Calculate the net profit of Essop Manufacturers Limited for the year ended
30 September 2019. (6)

b) Present the above information in the ASSETS section only of the statement of financial
position of Essop Manufacturers Limited AND disclose the information in the
applicable notes as at 30 September 2019 to comply with IFRS. Assume any further
information you may deem necessary in order to comply with the disclosure
requirements. (44)

PLEASE NOTE:
(i) The notes relating to corporate information, compliance with IFRS, measurement bases and
accounting policy is not required.
(ii) Essop Manufacturers Limited and all of its suppliers are registered VAT vendors and a VAT rate
of 15% is applicable.

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2019 Accounting 100 Assessment Opportunity 6 Question 4

QUESTION 4 (20 MARKS)

(24 MINUTES)

Hermes (Pty) Ltd (hereafter “Hermes”) is a French high fashion luxury goods manufacturer
established in 1837. It specialises in leather and leather products and is famous for its luxury
handbags. Introduced in the 1980s, the handbags quickly became a symbol of wealth and
exclusivity due to the high price and exceptional quality. Hermes uses heavy-duty machinery
to produce the handbags.

Due to the increasing demand of the handbags, Hermes purchased an additional machine
for R1 350 000 during the current reporting period that ends on 31 March 2019. The machine
was purchased and delivered on the same day.

REQUIRED:

Discuss based on the Conceptual Framework for Financial Reporting (2018), the recognition
for the purchase of the additional machinery in the financial records of Hermes (Pty) Ltd. (20)

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