Accounting I ACCN1006A and ACCN1005A Blocks 3 and 4 Combined Riedwaan

2023
Accounting I
Lecture and Tutorial
Programme
ACCN 1006A & 1005A
SCHOOL OF ACCOUNTANCY
COMMERCE, LAW AND MANAGEMENT (CLM)
FACULTY
BLOCKS 3 & 4
Accounting I ACCN1006A and ACCN1005A
Lecture Programme – Block 3
Block 3 – Inventory, Financial statements and

Notes, Companies
Week Date Lecture Topic Tut Comments/
projects/
Assignments
15 17 July June Test Feedback Tut Block 3 starts
11 17 July
Inventory
• Understand the difference between a service entity and Chapter 12
retailer
• Understand the nature of inventory Assignment 6
• Understand and compute the relationship between cost, (released on
selling price and gross profit Ulwazi)
• Compute the initial cost of inventory in accordance with
Section 13 of IFRS for SMEs
• Understand the different methods of valuing inventory
(FIFO; weighted average)Compute the value of closing
stock and cost of sales using one the methods of valuation
• Understand the difference between the perpetual and

periodic system of accounting for inventory
• Record purchase transactions and purchase return
transactions (including the effects of VAT) under both
systems of inventory in the relevant analysis journal
• Understand and compute the adjustment to be made to
inventory if the selling price if lower than its cost
16 24 July Inventory (Continued) Tut Chapter 12

12
17 31 July Notes to Financial Statement – PPE Tut Chapter 11

13
• Understand what is meant by Property, Plant and Submit
Equipment Assignment 6
• Understand why items of property, plant and equipment
are classified as non-current assets Assignment 7
• Compute the initial cost of an item of property, plant and (released on
equipment Ulwazi)
• Compute the depreciation on items of PPE using various
methods
• Account for the disposal of items of PPE
1
Block 3 – Inventory, Financial statements and
Notes, Companies
projects/
Assignments
18 7 Aug Notes to Financial Statement – PPE (continued) Tut Chapter 11
14
Tuesday 9 Aug
Public holiday
Companies
Project
released on
Ulwazi
19 14 Aug Companies Tut Chapter 18

• Introduction to Companies 15
• Prepare the accounting entries relating to share issues Submit
• Prepare the accounting entries relating to debenture issues Assignment 7
Prepare the financial information for a company
20 21 Aug Companies Continued Tut Chapter 18

16
21 28 Aug Test week – no lectures and no tutorials No Block 3 ends

Tut
Accounting I Test 2 Wednesday 30 August (details to be
communicated closer to test date)
2
Lecture Slides
per Chapter
Chapter 12:
INVENTORY
© Juta and Company, 2019 Inventory 6e 1

Contents
• Recognition and classification of inventory
• Relationship between cost, gross profit and
selling price
• Measuring the cost of inventory
• Other recognition and measurement issues
• Cost formulae
• Measurement of inventory at period end
• Inventory errors
• Estimating inventory

Recognition and classification of
inventory
• Affects the
– Statement of profit or loss, and
– Statement of financial position

inventory. . .
• Conceptual Framework definition of asset
– Present economic resource
– Controlled by the entity
– As a result of past events
• IAS 2 defines inventories as assets that
– Are held for sale in the ordinary course of
business
– Are held as materials or supplies to be consumed

inventory . . .
• Important to distinguish between goods held
for resale and consumable stores

Relationship between cost, gross
profit and selling price
• Mark-up on cost
Cost 100 mark-up on cost = GP/C= 25% (25/100)
GP 25
SP 125 expected GP% = GP/SP = 20% (25/125)
• Expected GP %
Cost 75 mark-up on cost = GP/C= 33,3% (25/75)
GP 25
SP 100 expected GP% = GP/SP = 25% (25/100)

Measuring the cost of inventory
• Cost of inventory comprises all costs of
purchase and other costs incurred in bringing
the inventory to its present location and
condition.

Costs of purchase
• Purchase price and import duties
• Non-recoverable taxes
– If VAT is non-recoverable, it forms part of the cost of
inventory
– If VAT is recoverable from tax authorities, no cost has been
incurred
• Transport costs
– Transport inwards
• cost of transporting purchased inventory from the supplier
to the purchaser
• Included in cost of inventory asset
– Transport outwards
• cost of delivering sold inventory to the customer
• recorded as an expense

Other costs
• Included to the extent incurred in bringing the
inventories to their present location and
condition
• Examples include
– Cost of customising an item for a customer
– Cost of storing maturing inventory

Goods in transit
• Goods that have not physically arrived at the
premises of the buying entity
• Key issue is whether control of the goods has
passed from supplier to buyer
– Factors to consider include right of payment, legal
title, physical possession and transfer of risks and
rewards of ownership

Goods in transit . . .

Risks and rewards of ownership . . .
Supplier’s Foreign Destination Buyer’s

warehouse port port premises
‘FOB’ ‘DAT’
12
Accounting entries for goods in transit . . .
• Periodic
– Dr Goods in transit
Cr Accounts payable
• Perpetual
– Dr Goods in transit
Cr Accounts payable

Goods on consignment
• Goods on consignment are
– goods delivered by entity owning the goods
(consignor)
– to another entity who sells the goods on behalf of
the owner (consignee)
• Control remains with consignor
– included in consignor’s inventory
– not included in consignee’s inventory

Inventory shortages
• Detection and prevention of
inventory shortages is a key area of
management responsibility
• Physical inventory needs to be
counted at regular intervals
– GP% computed for periodic system
– cost of inventory counted is compared
to balance in inventory a/c for perpetual
system
• Amount of shortage is recognised as
an expense, and usually included in
cost of sales
Periodic system
• Need to compare actual GP% with
expected GP%
• Reconciliation:
Expected GP% 50,00%
Actual GP% 48,75%
Difference 1,25%
Known shortage 0,50%
Unknown shortage 0,25%
1,25%
• Cost of shortage is included in COS as cost
of inventory lost is included in opening
inventory or purchases and not included in
closing inventory
Perpetual system
• Cost of physical count of inventory compared
to GL balance in inventory a/c
• Inventory a/c adjusted to reflect physical
count by recording difference as inventory
shortage
• Recording the shortage
Dr Inventory shortage (E)
Cr Inventory (A)
• Reconciliation between expected GP% and
actual GP%

Summary of entries to account for
inventory shortage
Periodic Perpetual
• Recording the shortage • Recording the shortage
– Included in COS – Dr Inventory shortage (E)
because of reduced Cr Inventory (A)
closing inventory • Closing entry
• Closing entry – Dr Cost of sales (E)
– N/A Cr Inventory shortage (E)

Cost formulae
• Several different methods for determining
cost of sales and cost of inventories
– Specific identification
– FIFO
– Weighted average
• All cost flow assumptions, and do not
necessarily conform to the actual physical
movement of the goods

Specific identification
• Used where items of

inventory are dissimilar
and not interchangeable
• Feasible when inventory
items are uniquely
identifiable and of
sufficient value to keep
detailed records

FIFO
• FIFO method based on the cost flow
assumption that the first units acquired are
the first units sold
• When using FIFO
– COS is represented by the cost of the earliest
purchases
– CI is represented by the cost of the latest
purchases

Weighted average
• Weighted average method is based on the
cost flow assumption of the weighted
average cost
Weighted average Cost of inventory at beginning +
cost per item = cost of inventory purchased
Total units available for sale
• Thus, in times of rising prices,

– COS is reported above the FIFO amount
– CI is reported below the FIFO amount

Measuring inventory at period end
- Lower of cost and net realisable value
• Inventory is measured at the lower of
– Cost
– NRV
• Consistent with view that assets should not
be carried in excess of amounts expected
from their sale or use

Lower of cost and net realisable value . .
• Cost
– All costs of purchase and other costs incurred in
bringing inventory to its present location and
condition
– Computed based on one of the cost formulas
• NRV
– Estimated selling price in ordinary course of
business
less
Costs of completion and costs to make sale

Accounting for the write-down of
inventory
• When preparing financial statements,
management assesses the NRV of inventory
items
– If NRV > cost, closing entries processed as usual
– If NRV < cost
• Amount of write-down is recognised as an expense
• Inventory write-down expense usually included in
cost of sales

Accounting for write-down of inventory:
Periodic system
• Closing inventory entered into accounting
system at reduced value
• Lower closing inventory leads to
– Higher COS
– Lower GP and profit
• Reconciliation needed between expected
GP% and actual GP%

Accounting for write-down of inventory:
(perpetual system)
• Balance on inventory a/c represents cost of
inventory at end of period - no specific entry
required to introduce closing inventory into
accounting system
• Recording the write-down
Dr Inventory write-down (E)
Cr Inventory (A)
• Higher COS leads to lower GP and profit
• Reconciliation needed between expected
GP% and actual GP%
Summary of entries to account for
inventory write-down
Periodic Perpetual
• Recording the write- • Recording the write-down
down – Dr Inventory write-down (E)
– Included in COS Cr Inventory (A)
because of reduced • Closing entry
closing inventory
– Dr Cost of sales (E)
• Closing entry Cr Inventory write-down (E)
– N/A

Inventory errors
• Periodic system
CI CI
overstated understated
OI 5 5 5
+ P 10 10 10
- CI (8) (9) (7)
= COS 7 6 (8)
Sales 20 20 20
GP 13 14 12
GP GP

Inventory errors ...
• Perpetual system
COS COS
understated overstated
OI 5 5 5
+ P 10 10 10
- COS (7) (6) (8)
= CI 8 9 (7)
CI CI

Estimating inventory
• Value of closing inventory
may need to be estimated
in relation to two points in
time
– closing inventory at some
point in current period (eg,
fire or theft)
– closing inventory at end of a
previous period (eg,
inventory not counted at end
of previous period

Estimating inventory . . .

Chapter 11:
PROPERTY, PLANT and
EQUIPMENT
© Juta and Company, 2019 Property, Plant and Equipment 6e 1

Contents
• The nature of property, plant and equipment
• Definition and recognition of property, plant and
equipment
• Measurement at acquisition
• Depreciation expense
• Reassessment of useful life and residual value
• Disposals
• Impairment of assets
• Measurement after recognition

The nature of property, plant and
equipment
• Assets categorised as
– Non-current
– Current
• Non-current assets categorised as
– Tangible
• Including land, buildings, plant and machinery,
equipment, vehicles
• Collectively known as property, plant and equipment
– Non-tangible
• Including goodwill, patents
Definition and recognition of
property, plant and equipment
Definition
• Conceptual framework definition of asset
– Present economic resource
– Controlled by the entity
– As a result of past events
• IAS 16 defines property, plant and equipment as tangible
assets that
– are held by an entity
• for use in production or supply of goods or services
• for rental to others
• for administration purposes
– are expected to be used during more than one period
4
Definition and recognition of property,
plant & equipment . . .
Recognition
• Item of P, P & E recognised as an asset if
– probable future economic benefits will flow to the entity
– cost measured reliably
• Entity evaluates all costs associated with items of P, P & E at
the time they are incurred. Includes costs incurred
– Initially to acquire item
– Subsequently to replace part of it or service it
• Costs of day to day servicing recognised as an expense
when incurred

Measurement at acquisition
- Elements of cost
• An item of property, plant and equipment should be
measured initially at cost

Measurement at acquisition. . .
- Measurement of cost
• Cost of item of P, P & E is cash
price equivalent at recognition
date
• If payment deferred beyond
normal credit terms, interest
expense is recognised

Depreciation expense
• The use of an item of property, plant

and equipment represents a
consumption of the benefits inherent
in the asset
• Expense known as depreciation

Terminology
• Depreciation – allocation of depreciable amount of
asset over its useful life
• Depreciable amount = Cost of asset – residual value
• Useful life
– Period of time asset is available to entity, or
– Number of units of output expected to be obtained from
the asset
• Residual value – Estimated amount entity would
currently obtain from the asset if it were already of age
and condition at end of its useful life
• Carrying amount = Cost – accumulated depreciation

Depreciable amount, depreciation
period, useful life and carrying amount
• Example
– Cost : C120 000
– Estimated useful life : 4 years
– Residual value : C15 000
– Straight line method
– Available for use from 01/05/X5
– Used from 01/06/X5
– Year end 31/12/X5

Depreciable amount . . .
• Allocated on systematic basis over asset’s
useful life
• Example . . .
C
Cost 120 000
Residual value (15 000)
Depreciable amount 105 000

Depreciation period . . .
• Begins when asset is available for use

(location and condition capable of
operating in manner intended by
management)
• Ceases when asset is derecognised
• Example . . .
– Asset available for use on 1 May 20X5 (even
though only used from 1 June 20X5)

Useful life . . .
• Future economic benefits consumed
through use of the asset
• Other factors to take into account to
determine useful life
– Expected usage
– Expected physical wear and tear
– Technological or commercial obsolescence
• Example . . .
– Useful life is 4 years

Carrying amount . . .
• As economic benefits are consumed,
carrying amount is reduced by charging
depreciation expense
• Carrying amount represents future
benefits yet to be consumed as
depreciation
• Depreciation charge is made even if fair
value exceeds carrying amount
Example . . .
C
Cost 120 000
Accumulated (C120 000 – C15 000) / 4 yrs x 8/12) (17 500)
depreciation
Carrying amount, at 31/12/X5 102 500
• Available for use: 1 May 20X5 (8/12)

• Used from: 1 June 20X5

Methods of depreciation
• Straight-line method
– Depreciation expense = Cost - residual value
Useful life
• Diminishing balance method
– Depreciation expense = Carrying amount x % rate
– % rate = (1 - n√r/c)
• Units of production method

– Depreciation = Depreciable X Output in period
expense amount Total estimated
output

Accounting entries
• For presentation, the original cost and related
accumulated depreciation are shown separately on
the statement of financial position
Dr Depreciation expense (E)
Cr Accumulated depreciation (-A)
• Accounting equation expanded to accommodate
accumulated depreciation
© Kolitz & Quinn, 2005

Depreciation of significant parts
• Each part of an item of P, P & E with a cost
significant in relation to the total cost is
depreciated separately
• Separate but significant parts may have
same useful life and depreciation method –
grouped together for depreciation purposes
• After significant parts identified, remainder
of the non-significant parts are grouped
together for calculation of depreciation

Reassessment of useful life and
residual value
• Useful life, residual value and depreciation
method of need to be reviewed annually
• if expectations are significantly different from
original estimates
– depreciation charge for current and future periods
is adjusted
• Revised depreciation expense calculated as
Carrying amount - residual value
Remaining useful life

Disposals
• Disposal occurs when asset is sold, scrapped
or stolen
• Known as the derecognition of the asset
• Profit or loss on disposal = Proceeds – Carrying
amount

Disposals . . .
• Four steps to follow when accounting for
disposal of property, plant and equipment
– cost eliminated as an asset
– accumulated depreciation eliminated as a
contra-asset
– proceeds on disposal recorded
– profit or loss recorded

Impairment of assets
• IAS 36, ‘Impairment of assets’
• Objective of IAS 36 is to ensure that an
entity’s assets are not overstated
• If carrying amount > recoverable amount,
– carrying amount will not be recovered
– asset is impaired, and an impairment loss must
be recognised
• Impairment loss = CA - RA

Impairment of assets . . .
• Recoverable amount is greater of
– Fair value less costs of disposal
– Value in use
• Fair value less costs of disposal
– Amount obtainable from sale of asset in arms length transaction less
costs of disposal
• Value in use
– PV of estimated cash flows from continuing use of asset and from
disposal

Impairment of assets . . .
• Entity assesses external and internal
factors that may indicate impairment
• Accounting treatment
– Dr Impairment expense
Cr Accumulated impairment
– Cost model
• Cost
less
Accumulated depreciation
less
Accumulated impairment
Measurement after recognition
• Initially measured at cost
• IAS 16 provides two possible
measurement treatments
– Cost model
– Revaluation model
• Entity can choose either
model but must then apply
that model to an entire class
of assets

Cost model
• Property, plant and equipment is carried

at
– Cost
less
– Accumulated depreciation

Revaluation model
• Property, plant and equipment is carried at
revalued amount (Fair value at revaluation
date - subsequent accumulated depreciation –
subsequent accumulated impairment losses)
• Fair value is the price that would be received
to sell an asset in an orderly transaction
between market participants at measurement
date
• Revaluation increase is credited directly to
equity in a revaluation surplus account

Accounting for a revaluation
• Non-depreciable asset
– Dr Asset
Cr Revaluation surplus (OE)
• Depreciable asset
– Reverse accumulated depreciation against cost
• Dr Accumulated depreciation (-A)
Cr Asset
– Restate asset to revalued amount and credit
surplus to revaluation surplus
• Dr Asset
Cr Revaluation surplus (OE)

Presentation
EXTRACT FROM STATEMENT OF COMPREHENSIVE INCOME
C
Profit for the period 120
Other comprehensive income
Revaluation surplus 10
Total comprehensive income 130
EXTRACT FROM STATEMENT OF CHANGES IN EQUITY

Capital Revaluation Total
surplus
C C C
Balance X X x
Total comprehensive income 120 10 130
Balance X X x

Revaluation increases and decreases
• Property, plant and equipment measured on
the revaluation model need to be revalued on
a regular basis
• Revaluation can result in an increase or a
decrease

Revaluation increases and decreases . . .
• If cost model is used, there can be no

revaluation increase or decrease
• Revaluation increases or decreases are only
recognized when using the revaluation model

Revaluation decrease compared to
impairment
• Revaluation decrease is not the same as an

impairment
• Entity must first revalue asset in terms of
IAS16 before testing for impairment in terms
of IAS 36

Accounting for revaluation increases and
decreases
• If carrying amount increases
– Recognised in OCI as increase in revaluation
surplus, or
– Recognised in P/L as revaluation income (if
reversing a previous revaluation decrease)
• If carrying amount decreases
– Recognised in OCI as decrease in revaluation
surplus, then
– Recognised in P/L as revaluation expense (after
any revaluation surplus is reduced to nil

Accounting I ACCN1006A and ACCN1005A
Lecture Programme – Block 4
Block 4 – Partnerships, Cash Flows, Analysis of

Financial Statements and Revision
projects/
Assignments
22 11 Sept Statement of Cash Flows Tut Block 4 starts

• Explain the relevance of cash flow information 17
• Explain what is meant by cash flows Chapter 20
• Understand the format of a cash flow statement in terms of
IFRS for SMEs Submit
• Classify cash flows are either operating; investing or Companies
financing Project
• Prepare a cash flow statement
Examples related to a Statement of Cash Flow Assignment 8
released on
Ulwazi
23 18 Sep Statement of Cash Flows (Continued) Tut Chapter 20

18
1
24 25 Sep Partnerships Tut Chapter 17
• Understand the characteristics of a partnership 19
• Identify the sources of finance for a partnership – Submit
capital contributions vs profits retained in partnership Assignment 8
• Describe the formation process of a partnership
• Record the transactions regarding the formation of a
partnership in the general journal and general ledger
• Account for the appropriation of the profit in the
accounting records
• Prepare financial statements for a partnership
• Process the accounting entries for the admission of a
new partner to an existing partnership
25 2 Oct Analysis of Financial Statements Tut Chapter 21

20
• Explain the objectives of financial statement
analysis
• Identify the external influenced affecting a
business
• Determine ratios to analyse a set of financial
statements and apply ratios as tools of financial
statement analysis
26 9 Oct Revision Tut

• Revision case studies (Questions and solutions included at 21
the end of the Block 4 course pack)
• Past final exam papers 2020, 2021 & 2022 (Questions and
solutions included on Ulwazi)
• Preparation and scope for final exam (will be made

available on Ulwazi closer to the exam)
27 16 Oct Revision (Continued) No Year-to-date
tut marks up until
final exam
released – all
assignment
marks also to
be finalised
Study break starts Tuesday 24 October
15 Nov Exam period – 30 October to 17 November:

Timetable for final exam (date and time of Acc I final exam) to
be communicated by the Exam Office as per the official
University exam timetable
2
Lecture Slides
per Chapter
Chapter 18:
COMPANIES
© Juta and Company, 2019 Companies 6e 1

Contents
• Introduction
• Types of companies
• Characteristics of a company
• Listing of a public company
• Sources of finance for a company
• Formation of a company and share issues
• Debenture issues
• Producing financial information for a company
Introduction
• In South Africa, companies are regulated by
– the Companies Act 71 of 2008, (the Companies Act)
– the Companies Amendment Act 3 of 2011 (the
Amendment Act)
• A key document required by the Companies Act
for all companies is a memorandum of
incorporation (MOI)
– It is a set of rights, duties and responsibilities of
shareholders, directors and others within and in
relation to a company
– Its purpose is to protect the interests of shareholders

Types of companies
• Profit companies
– Private company
– Public company
– State-owned company
– Personal liability company
• Non-profit companies
– Formed for a cultural or social activity or for a
communal interest, eg a private school

Characteristics of a company
• A company is a legal entity distinct from its
owners, known as shareholders
• Owners and management likely to be a
separate group of persons
– board of directors control company
– individual shareholders cannot bind company

Characteristics of a company . . .
• Consequences of separate legal entity status
– limitation of liability
– indefinite life
• Companies Act requirements for an audit
– Required only for public companies
– Private companies, often SMEs, are subject to
audit only if regarded as being in the public
interest
• As alternative to an audit, Companies Act
provides for an independent review for
companies with a low public interest score

Listing of a public company
• A public company can be listed on a stock
exchange such as the Johannesburg Stock
Exchange (JSE) or London Stock Exchange
(LSE) and is known as a listed public company
• Not all public companies are listed, and are
known as unlisted public companies

Sources of finance for a company
• Company financed from two

sources
– investors funds, known as
share capital
– borrowed funds, in form of
• loans
• debentures

Share capital
• A share is an equity instrument
• The classes of shares are set out in the MOI
– Ordinary shares
• main risk bearing shares
• shareholders benefit from growth in value of
investment and from dividends
– Preference
• receive dividends prior to ordinary shareholders
• dividends are either cumulative or non-cumulative
• participating preference shares
• redeemable preference shares

Debentures
• A debenture is a financial liability
• Type of loan
• Document issued by company evidencing
indebtedness to debenture holders
• Usually secured over property
• Characteristics
– negotiable documents
– not part of equity
– issued and redeemed at par, premium or discount

Identification of profits retained
• Share capital is primary source of financing
• As a separate legal entity,
– company pays tax on its profits
– directors decide how much of after tax profit to
declare as a dividend to shareholders
• Profits retained are referred to as reserves
– distributable
– non-distributable

Distributable reserves
• Are retained profits which
– at the discretion of the directors
– may be declared as a dividend to shareholders
• The distributable reserves are known as the retained
earnings
• The dividend is initiated by the company and a
dividends payable or shareholders for dividend
account records the liability
• Dividends declared
– before SOFP date and not paid at end of financial year
• recognised as a liability on the SOFP
– after SOFPdate
• not recognised as a liability on the SOFP
Non-distributable reserves
• Not available to be declared as a dividend to
shareholders
– Unrealised surplus on revaluation of a non-current
asset is a non-distributable reserve
– Realised surplus on disposal of a non-current asset
• is an income item
• included in retained earnings as a distributable
reserve

Equity of a company
• Share capital
• Reserves
– distributable
– non-distributable

Formation of a company and share
issues
• Companies Act requires all companies to have
a memorandum of incorporation (MOI)
– is effectively the governing document of a company
– the company may accept or alter the default rules
provided by the Companies Act
– MOI may not override the provisions of the
Companies Act
• On formation, the initial issue of shares is
made to the incorporators of the company

Process for issue of shares
• Three methods of obtaining a listing
– An introduction
– A private placing
– A public offer
• Public offer for a subscription
– Underwriter
– Prospectus
– Allotting of shares

Recording an issue of shares
• Same procedure
followed on issue of both
ordinary and preference
shares
• Proceeds on issue are
recorded in a share
capital a/c

Preliminary costs
• Relate to establishing a company or raising
capital
• Does provide potential future benefits but no
asset can be recognised
• Preliminary expenses allocated to profit or
loss
– Dr Preliminary costs (E)
Cr Bank
– Dr Profit or loss (T)
Cr Preliminary costs (E)

Share issue costs
• Includes amounts paid relating to the issue of
shares by a company
• Share issue costs are set off against the equity
account
– Dr Share issue costs (OE)
Cr Bank
– Dr Share capital (OE) / Retained earnings (OE)
Cr Share issue costs (OE)
(The set-off against SC or RE is an accounting policy
choice)

Underwriting an issue of shares
• Public offer of shares can be
underwritten by a merchant
bank or other financial
institution
• Underwriter agrees to
subscribe for shares not taken
up by the public
• The underwriter is paid a
commission, usually based on
issue price

Debenture issues
• Rates of interest
– Nominal rate
• determines interest paid each year
• PV of debentures X nominal rate
– Market rate
• prevailing interest rate
• Debentures are carried at amortised
cost, using an effective interest rate
method

Issue of debentures at par, discount or
premium

Issue of debentures at a discount
• When nominal rate < market rate, debentures
can be offered at a discount
– Leads to effective rate > nominal rate
• Steps
– Schedule of cash flows to calculate effective
interest rate
• IRR = effective interest rate
– Amortisation table to calculate interest expense
and carrying amount of liability

Example: Issue of debentures at a discount
• Schedule of cash flows
• Amortisation table

Issue of debentures at a premium
• When nominal rate > market rate, debentures
can be offered at a premium
– Leads to effective rate < nominal rate
• Steps
– Schedule of cash flows to calculate effective
interest rate
• IRR = effective interest rate
– Amortisation table to calculate interest expense
and carrying amount of liability

Example: Issue of debentures at a premium
• Schedule of cash flows
• Amortisation table

Producing information for a company
• Objective of general purpose financial

reporting is to provide financial
information about the reporting entity
that is useful to existing and potential
investors, lenders and other creditors in
making decisions
(Conceptual Framework)

Concept of stewardship
• Relates to flow of information between
management and investors

Determination of profit for the period
• Profit for the period of a company is
determined in same way as for a sole
proprietor or partnership except for an
additional line item for income tax expense
• Statement of profit or loss
Profit before tax
(Income tax expense)
Profit for the period

Taxation
• As a separate legal entity, a company is
subject to normal income tax at 28% on
taxable income
• A company is required to make advance
payments of tax during the year, known as
provisional payments
– Journal entry on payment of provisional tax
• Dr Current tax payable (A/L)
Cr Bank

Taxation . . .
• At the end of the financial year, the tax charge
is computed
– Journal entry to record tax charge at end of
financial year
• Dr Income tax expense
Cr Current tax payable (A/L)

Appropriation of profit
• Shareholders do not have an automatic claim

to the accumulated profit
• Liability to shareholders established when
directors declare a dividend
• Dividends to shareholders are an
appropriation of profits
– Not recorded on statement of profit or loss
– Recorded on statement of changes in equity

Dividends
• Most companies declare dividends twice
during the year
– Interim, half way through the year
– Final, at the end of the year

Withholding tax on dividends
• Dividends tax is levied on the shareholder at
20% of the dividend paid
• Entity declaring the dividend is responsible for
– Calculating the dividends tax owed by the
shareholder
– Withholding the tax when paying the dividend to
the shareholder
– Paying the tax to the SARS

Withholding tax on dividends . . .
• The dividends tax is not a tax on the entity
– Not debited to the tax expense account
– Rather debited to the dividends payable account
• Journal entries
– Dr Dividends (OE)
Cr Dividends payable (L)
(Amount of dividend declared)
– Dr Dividends payable (L)
Cr Current tax payable: dividends tax
(Dividend declared x 20%)

Capitalisation issue
• Listed companies can offer their shareholders
a choice of
– receiving a cash dividend
– receiving further shares in the company in place of
a cash dividend, known as a capitalisation issue
• Capitalisation issue is provided from retained
earnings
– Dr Retained earnings (OE)
Cr Share capital
• No cash flow associated with a capitalisation
issue
Accounting for taxation and dividends
• Expansion of
accounting entries for
taxation and
dividends based on
Intense Sports Ltd
example, pg541 - 545

Income tax expense
• The recognition of the income tax expense
could result in
– A debit balance on the tax authority a/c (current
tax receivable)
– A credit balance on the tax authority a/c (current
tax payable)

Dividends to shareholders
- Preference dividends
• MOI usually requires preference shareholders
to be allocated their dividend before ordinary
shareholders share in profit

Dividends to shareholders
- Ordinary dividends
• Company does not have a separate liability
account for each shareholder

Closing entries for a company
• Closing entries to trading a/c and profit or loss
a/c identical for all entity forms
• For a company, additional closing entry
required to close off taxation expense to profit
or loss
– Dr Profit or loss (OE)
Cr Taxation expense (E)

Closing entries for a company . . .
• Profit (after tax) is transferred from profit or
loss to a retained earnings account
– Dr Profit or loss (T)
Cr Retained earnings (OE)
• Balances on dividends accounts transferred to
retained earnings
– Dr Retained earnings (OE)
Cr Preference dividend (OE)
Cr Ordinary dividend (OE)

Chapter 20:
STATEMENT OF CASH FLOWS
© Juta and Company Ltd, 2019 Statement of Cash Flows 6e 1

Contents
• Importance of cash flow information

• Meaning of cash flows
• Classification of cash flows
• Preparation of a statement of cash flows

Importance of cash flow
information
• Objective of financial reporting is to provide
information that is useful to existing and
potential investors, lenders and other creditors
in making decisions
• Information about cash flows provided users
with details of how the enterprise
– generates cash flows
– utilises cash flows
• Statement of cash flows must be used in
conjunction with the accrual basis statement of
profit or loss and statement of financial position

Meaning of cash flows
• Inflows and outflows of cash
and cash equivalents

Classification of cash flows
• IAS 7 requires the

statement of cash flows to
report cash flows from
– operating activities
– investing activities
– financing activities

Operating activities
• Relate to the principal revenue producing
activities of the entity
• Examples
– Cash receipts from
• sale of goods & rendering of services
• commissions & other income
– Cash payments to
• suppliers
• employees
• tax authority

Investing activities
• Relate to the acquisition and disposal of non-current
assets
• Examples
– Cash receipts from
• sale of property, plant & equipment, intangibles and
long term assets
• sale of shares and debentures of other enterprises
• repayment of loans made to others
• acquire p, p & e, intangibles and long term assets
• acquire shares or debentures
• advance loans to others

Financing activities
• Relate to equity and borrowings
• Examples
– Cash proceeds from
• increases in equity
• long term borrowings
• owners on repayment of equity
• repay amounts borrowed

Preparation of a statement of
cash flows
• Need to examine movement in each non-cash
item on the SOFP, using corresponding SOPoL
and SOCIE items where necessary.
• Two methods
– direct
– indirect
Preparation of the operating activities
section – Direct method

Operating activities – direct method
Cash receipts from customers
• Reconstruct the accounts receivable account
Accounts receivable
Balance 1 200 . . Bank 30 150
Sales 30 650 Balance 1 700
31 850 31 850
Balance 1 700
• or
Cash O/B in C/B in
received
accounts Sales accounts
from = + - receivable
customers receivable
30 150 1 200 30 650 1 700

= + -

Cash payments to suppliers and employees
• Calculate
1. Cash paid to suppliers of goods for resale
• Reconstruct the inventory and accounts
payable accounts
2. Cash paid for all operating expenses
• Identify operating expenses from statement of
profit or loss
• Convert from accrual to cash

1. Cash paid to suppliers of goods for resale
• Reconstruct inventory and accounts payable
accounts
Inventory
Balance 1 950 Cost of sales 26 000
. . Accounts payable 24 950 Balance 900
26 900 26 900
Balance 900
Accounts payable
. . Bank 26 700 Balance 1 880
Balance 130 Inventory 24 950
26 830 26 830
Balance 130

1. Cash paid to suppliers of goods for resale . . .
• or
O/B in Purchases C/B in
+ - COS =
inventory / AP inventory
1 950 + 24 950 - 26 000 = 900
Cash O/B in C/B in

paid to = accounts + Purchases - accounts
suppliers payable payable
26 700 = 1 880 + 24 950 - 130

2. Cash paid for operating expenses
• Administration and selling expenses (accrual on SOFP)
Cash Expense
paid for O/B in C/B in
operating = + on the -
expenses liability SOPoL liability
390 15 410 35
= + -
• Insurance expense (prepayment on SOFP)

Cash Expense
paid for C/B in O/B in
operating = + on the -
expenses asset asset
SOPoL
510 15 500 5
= + -
• Depreciation and loss on sale of equipment are non-

cash items
Cash effects of non-operating items, taxation and
dividends
1. Non-operating items
– Investment income received in cash
– Interest paid in cash
2. Taxation
– Amounts paid in cash to the tax authority
3. Dividends
– Amounts paid in cash to shareholders

1. Non-operating items
• Investment income received

Income
Cash O/B in C/B in
received = + on the -
receivable SOPoL receivable
400 0 500 100

= + -
• Interest paid
Expense
Cash O/B in C/B in
paid = + on the -
payable SOPoL payable
120 100 250 230

= + -

Taxation paid and dividends paid
2. Taxation paid
Taxation payable / Tax authority
. . Bank 700 Balance 800
Balance 400 Taxation 300
1 100 1 100
Balance 400
3. Dividends paid
Dividends payable
. . Bank 1 000 Balance 200
Balance 400 Dividends 1 200
1 400 1 400
Balance 400

Preparation of a
statement of cash flows
(Operating activities section – Direct method)
© Juta and Company Ltd, 2019 Statement of Cash Flows 6e 19 19

Preparation of the operating activities
section – Indirect method

Operating activities – indirect method
• Non-cash items
Profit before tax
Income items that do not result in inflow of cash

-
Expense items that do not result in outflow of cash
+
• Non-operating items
– Reverse non-operating income and expense
items included in determination of profit for
the period

Operating activities – indirect method . . .
• Working capital changes
Profit before tax
Increases in current assets

-
Decreases in current assets
+
Increases in current liabilities
+
- Decreases in current liabilities
• Cash effects of non-operating items, taxation

and dividends
– treatment identical for direct and indirect
methods
Preparation of a
(Operating activities section – Indirect method)
© Juta and Company Ltd, 2019

Statement of Cash Flows 6e
23
Preparation of the investing activities
section
• Relates to the acquisition and disposal of non-
current assets
• Identical for both the direct and indirect
methods
– no accrual basis income or expenses are
adjusted
– incorporates cash inflows and outflows that are
not on the income statement
• Reconstruct relevant statement of financial
position accounts and establish cash flows
Equipment: Cost
Balance 1 910 Disposal 200
. . Bank 2 170 Balance 3 880
Investing activities – PP&E
4 080 4 080
Balance 3 880
Equipment: Accumulated depreciation

Disposal 60 Balance 1 060
Balance 1 450 Depreciation 450
1 510 1 510
Balance 1 450
Disposal
Equipment: Cost 200 Acc dep 60
. . Bank 100
Loss on disposal 40
200 200

Preparation of the financing activities
section
• Relates to the equity and borrowings
• Identical for both the direct and indirect
methods
– no accrual basis income or expenses are
adjusted
– incorporates cash inflows and outflows that are
not on the income statement
• Reconstruct relevant statement of financial
position accounts and establish cash flows

Preparation of a
(Investing and financing activities sections)

Chapter 17:
PARTNERSHIPS
© Juta and Company, 2019 Partnerships 6e 1

Contents
• Characteristics of a partnership
• Sources of finance for a partnership
• Formation of a partnership
• Producing information for a partnership
• Admission of a partner
• Partnership dissolution

Characteristics of a partnership
• Generally used for small businesses to
combine financial capital and managerial
talent
• Between 2 - 20 persons, except for organised
professions
• The partnership is not a separate legal entity
apart from its members
• Individual partners are joint owners of the
assets and jointly and severally liable for the
liabilities
Sources of finance for a partnership
• Financed from two sources
– Investors funds, in the form of
contributions by partners to
equity
– Borrowed funds, a liability of the
partnership
• loans from financial
institutions or private
individuals
• loans from a partner, not part
of capital contribution

Distinction between capital
contribution and retained profit
• The capital contribution is the long-term or
relatively permanent contribution by the
owner
• The retained profit is the cumulative
excess of profit over distributions
• To distinguish the above,
– capital a/c reflects fixed capital contribution
– current a/c records allocations of profit to
partners and distributions to them

Equity of a partnership
• Equity of a partnership comprises
– Capital accounts
– Current accounts
• Combined balance represents the
interest of each partner in the net
assets

Formation of a partnership
• Partners contribute cash or
other assets
• Fair value to be placed on
non-cash assets
– FV is price that would be
received from selling an asset
in an orderly transaction
between independent buyers
and sellers

Producing information for a
partnership
• Accounting is an information system that
– selects data
– processes that data
– produces information
• Selection and processing of data identical for
all entity forms
• Procedure to produce information differs for
all entity forms

Determination of profit
• Profit computed according to accrual

basis of accounting
• Procedural aspects of recording
transactions in a journal, posting to a
ledger and preparing a trial balance are
same as for a sole trader

Appropriation of profit
• Appropriation of profit is an accounting
procedure which allocates the profit earned to
each partner taking into account salaries and
interest on capital

Appropriation of profit . . .

Interest on capital
• Not recognised as an expense
• It is an appropriation of profit
• Accounting entry

Partners’ salaries
• Not recognised as an expense
• It is an appropriation of profit
• It is not a cash payment to partners

Interest on drawings
• Is charged against a partner to compensate
other partners for unequal drawings
• Interest on drawings charged when debit
balance on partner’s drawings a/c exceeds
credit balance on current a/c

Interest on loans
• Interest on loans to outside parties treated
as expense

Preparation of the financial
statements
• Once the appropriating entries are completed,
the financial statements are prepared
• Statement of profit or loss presented in same
format as for a sole proprietor
• Statement of financial position discloses
details of capital and current accounts for
each partner
• Statement of changes in equity expanded to
include
– Columns for capital and current accounts
– Column for appropriation
Closing entries for a partnership
• Profit from P & L a/c is transferred to an
appropriation a/c
• Closing entries required to transfer interest on

capital, partners’ salaries and interest on drawings to
appropriation a/c
17
Closing entries for a partnership . . .
• The balance in the appropriation a/c is the amount
available to allocate to the partners in their profit sharing
ratio.
• Final closing entry is to transfer the drawings a/c balances

to the partners’ current a/c’s

Admission of a partner
• Procedure on admission
– Adjustment to the profit-sharing
ratio
– Restating the assets and liabilities
of the partnership to fair value
– Accounting for goodwill
– Recording the new partner’s
contribution

Adjustment to profit-sharing ratio
• Possible agreements
– New partner’s share relinquished by existing
partners according to existing ratio
partners equally
partners according to agreed ratio

Restating assets and liabilities to fair
value
• Important to determine the fair value of the
partnership equity at the date of admission of
a new partner
• A change in the members of a partnership
ends the existing partnership and a new
partnership comes into existence
• Practically, the records of the existing
partnership are used with adjustments made
to the equity of the existing partners to reflect
fair value
value . . .
• IAS 1 requires statement of changes in
equity to present changes in equity
separated into
– Owner changes in equity
• Contributions and distributions
– Non-owner changes in equity
• Profit or loss for the period
• The restating of assets and liabilities to fair
value represents an owner change in equity

value . . .
• Restating assets to fair value on admission of a
partner represents an owner change in equity
– Will not appear on statement of profit or loss and
other comprehensive income
– Will appear on the statement of changes in equity
as an adjustment to the partner’s capital accounts
• A revaluation account is used
– Balance on revaluation account represents gain or
loss
– Allocated to existing partners in existing profit-
sharing ratio
Accounting entries
• Non-depreciable non-current assets
• Depreciable non-current assets
24
Accounting entries . . .
• Current assets

Accounting entries. . .
• The balance on the revaluation account
represents the gain / loss resulting from the
change in the net assets of the partnership
• Allocated to existing partners in existing ratio

Identification of goodwill
• Nature of goodwill
– Value of business as a whole could be greater than
the sum of the individual net assets
– Excess of value of business over fair value of
identifiable net assets represents goodwill
– It is an intangible asset

Internally generated goodwill and
purchased goodwill
• Internally generated goodwill
– not recognised as an asset
• not an identifiable resource
• cost cannot be measured reliably
• Purchased goodwill
– valued based on arms length
transaction
– represents a payment made by the
acquirer in anticipation of future
economic benefits

Accounting for goodwill
• Two possible accounting treatments for

goodwill
• Raise goodwill as an asset and report it on the
SOFP
• Not to raise goodwill as an asset and exclude
from the SOFP

Goodwill raised as an asset
• Amount raised is allocated to the existing
partners in the existing profit-sharing ratio
• IFRS for SMEs permits the amortisation of

goodwill
• Over their useful lives, or
• Over an assumed period of 10 years

Goodwill not raised as an asset
• Adjustment made to compensate the existing
partners for their share of goodwill acquired by the
new partner
• Two possible accounting treatments
• Adjust directly to the partners’ capital accounts
• Write up in old ratio and write off in new ratio

Contribution to capital
 Record new partners contribution to
equity of partnership

Partnership dissolution
• Dissolution can take two forms
– Retirement or death of a partner
– Liquidation, where activities are
terminated

Retirement or death of a partner
• Retired or deceased partner is entitled to
the settlement of his interest
– balance on capital a/c
– balance on current a/c
– share of gains or losses on restatement of A / L
to fair values
– share of movement in goodwill
– charge for assets taken over
– share of costs incurred
• Adjustments made through a revaluation
a/c
Liquidation of the partnership
• Cessation of activities
• Assets are sold and
liabilities settled
• Once procedure is
complete, the only items
remaining on SOFP are
– Cash in bank
– Partners’ capital accounts

Liquidation of the partnership . . .
• Procedure
– Transfer current a/c balances to capital a/c s
– Transfer assets at carrying amount to realisation a/c
– Record proceeds on realisation, other profits or losses
in realisation a/c
– Settle liabilities and expenses
• liabilities transferred to realisation a/c if business is sold as a
going concern
• otherwise liabilities are not normally transferred to
realisation a/c
– Profit or loss on realisation transferred to partners’
capital a/c s
– Remaining cash paid to partners to settle balanced on
their capital a/cs
Chapter 21:
ANALYSIS OF FINANCIAL
STATEMENTS
© Juta and Company, 2019 Analysis of Financial Statements 6e 1

Contents
• Objectives of financial statement analysis

• External influences
• Tools of financial statement analysis
• Ratio analysis
• Headline earnings

Objectives of financial analysis
• Users need to evaluate
– financial position
– results of operations
• Analysis used to predict future events, based on
– past performance
– financial position at a particular time
• Different users have different needs for information
– investors
– lenders
– management
External influences
• A business entity is
affected by many
outside factors
– economy
– industry

Tools of financial statement
analysis
• Ratio analysis is a widely used tool for

analysing financial statements
• Other tools include
– Common-size financial statements
– Comparative statements

Common-size financial statements
• Prepared using percentages for each item
instead of the actual amounts
– For the statement of profit or loss, sales are
shown as 100%, with other items shown as a
percentage of sales
– For the statement of financial position
• Totals of both ‘assets’ and ‘equity & liabilities’
sections are shown as 100%
• Individual items shown as a percentage of
these totals

Comparative statements
• Financial statements are shown side by side,
highlighting changes in individual items from year to
year
Current year amount – prior year amount x 100
Prior year amount 1
• Usefulness limited
– meaningful percentages cannot be computed when
• movement from + to - or from - to +
• prior year amount was zero
– If an item had a value in prior year and is zero in current
year, decrease is 100%

Ratio analysis
• Ratios are used to
– summarise financial data
– monitor trends in
performance and
deviations
– evaluate results of an
entity against results of
other entities

Categories of ratios
Category of ratios Purpose of ratios
• Short-term liquidity • Management of working

capital
• Capital structure and • Analysis of financial
long-term solvency structure
• Efficiency and • Effectiveness in generating
profitability profits
• Performance • Analysis of returns to
investors

Short-term liquidity ratios

Short-term liquidity
• Current ratio
– ability of current assets to meet existing current
liabilities
Current assets
Current liabilities
Acid test or quick ratio

– refinement of the current ratio
Current assets - inventory - prepayments

Current liabilities

Short-term liquidity . . .
• Inventory turnover ratio
– measures rate at which inventories move through
and out of the enterprise
COS
Average inventory
• Inventory holding period

– measures number of days it will take to sell the
average inventory
365
Inventory turnover ratio

• Accounts receivable turnover ratio
– indicates how many times the average accounts
receivable is generated each year
Net sales on credit
Average accounts receivable
• Collection period for accounts receivable

– measures number of days it takes, on average to
collect the accounts receivable
365
Accounts receivable turnover ratio

• Accounts payable turnover ratio
– indicates how many times the average accounts
payable is generated during the year
Net purchases on credit
Average accounts payable
• Payment period for accounts payable

– measures the number of days it takes, on
average to pay the accounts payable
365
Accounts payable turnover ratio

Capital structure and long-term
solvency ratios

solvency
• Need to consider
– level of debt in relation to
equity
– ability of the enterprise to
service the debt
• Gearing or leverage refer
to the use of debt in the
capital structure of the
enterprise
solvency . . .
• Debt and gearing ratios
– measure the relative contributions of equity and
debt to total funding
Debt ratio Total liabilities

Total assets
Gearing ratio Interest bearing liabilities

Equity
17
solvency . . .
• Interest cover
– measures ability of enterprise to meet its interest charges
Profit before tax and interest expense

Interest expense

Efficiency and profitability ratios

Efficiency and profitability . . .
• Return on assets
– measures how profitably the assets have been
used. In its simplest form..
Profit
Assets
– Using operating profit eliminates the effects of

the source of financing
Profit before tax and interest (Operating profit)

Average total assets

• Profit-margin ratios
– Gross profit percentage
GP
Sales
– Operating profit percentage

Operating profit (Profit before interest and tax)
Sales
– Net profit percentage

Profit after tax
Sales

• Asset turnover
– measures asset utilisation
– determines how effectively
assets are utilised in terms
of sales generation
Sales
Average total assets

Performance ratios

Performance . . .
• Return on equity (ROE)
– Measures the return to ordinary shareholders
Profit after tax – preference dividend

Average ordinary shareholders equity

Performance. . .
• Earnings per share (EPS)
– measures the profit after tax and preference
dividends attributable to each ordinary share
Profit after tax - preference dividend
Number of ordinary shares issued
• Earnings yield (EY)

– measures earnings in relation to market value
EPS
Current market price per share

Performance . . .
• Price earnings (P/E) ratio
– indication of the number of years earnings
investors are buying
– serves as a yardstick and enables comparisons
• between companies with high and low share prices
• between shares with high and low earnings
Current MP per share

EPS

Performance . . .
• Dividends per share (DPS)
– measures the dividends attributable to each
ordinary share
DPS
• Dividend yield (DY)

– measures the % return in cash by way of
dividends
DPS

Headline earnings
• Listing requirements of JSE require all listed
companies to use headline earnings for the
calculation of P/E ratios
• Headline earnings is a profit number that
investors can use to assess a company’s
ongoing profitability
• It excludes items that do not relate to the
trading and operating activities, such as
– Gain or loss on disposal of non-current assets
– Impairment of non-current assets
Block 3
Tutorials
ACCN1006A/1005A Accounting I 2023
Block 3 - Tutorial Programme
The tutorial questions listed below should be attempted under exam conditions BEFORE the relevant
tutorial.
Tutorial questions can be found in the prescribed question book (refer to the course outline for the list
of prescribed books).
The suggested solutions to each tutorial question listed below, are included in this course pack in
sequence of how it is presented in the table below (suggested solutions starts on the next page).
Tutorial Chapter Topic Tutorials Questions

number
11 Chapter 9 Introduction to Inventory Q9-1 to Q9-7, Q9-10, E9-1, Unseen P9-1
12 Chapter 12 Inventory Q12-1, Q12-2, Q12-3, Q12-9, E12-1, E12-2,

E12-3 Unseen E9-3
13 Chapter 12 Inventory Q12-5, Q12-6, E12-6, E12-7, P12-3, P12-5,
Test 2 Question 2; Unseen P12-9
14 Chapter 11 Notes to Financial Q11-6, Q11-7, Q11-8, E11-2, E11-5, E11-6,
Statements PPE E11-7, P11-2 (a) only, P11-3, P11-8 (a) and (b);
Unseen E11-1
15 Chapter 11 Notes to Financial Test 2 2021 Question 1 (Cash and PPE); Test 2
Statements PPE Question 1
16 Chapter 18 Companies Q18-1 to Q18-5; E18-1; E18-2;

Test 2 Question 2
Revise Chapters 9, 11, 12 and 18 (As per
lecture of Week 20), this is your opportunity to
ask questions to prepare for Test 2
Page 1 of 37
Accounting I 2023
Block 3 - Tutorial Solutions
Chapter 9
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Chapter 12
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Chapter 11
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Page 29 of 37
Test 2 September 2021 Question 1 30 marks (45 minutes)
NYX Chemicals (hereafter referred to as ‘NYX’) was started by Joan Moloi and
specializes in the manufacturing of hygienic consumable products such as cleaning
detergents and hand sanitizers. The accountant of NYX has recently resigned and
Joan is clueless when it comes to accounting and finances. Joan approached you for
assistance with some outstanding matters related to the financial year ended 31
August 2021 presented below:
1. Bank balance does not balance?

The accountant prepared the bank reconciliation for the month ended 31 August
2021 presented below. NYX’s policy when preparing bank reconciliations, is to
present any unfavourable balances as a negative amount (in brackets) in the bank
reconciliation. Joan is confused as to why the bank balance in the accounting
records, even after processing the necessary adjustments, are not the same as the
balance as per the bank statement and she is sure that the accountant or the bank
must have done something wrong.
NYX Chemicals
BANK RECONCILIATION AT 31 AUGUST 2021
Notes R
Balance as per bank statement (favourable) 1.1 205 000
Payment to creditor overstated in error by NYX 1.2 18 000
Error made by bank (account incorrectly credited) 1.3 20 000
Deposit not yet processed by bank 1.4 (250 000)
Cheques not yet processed by bank: 1.5
• Cheque nr 4566 (10 000)
• Cheque nr 5681 (17 800)
Unreconcilable difference? 1.6 42 000
Balance as per general ledger (after 1.7 7 200
adjustments)
Notes made by accountant
Page 30 of 37
1.1. The bank statement reflected an overdraft balance of R205 000 on 31
August 2021.
1.2. On comparison to the bank statement it was discovered that a payment
of R46 000 made to a creditor on 12 August 2021 has been recorded as
R64 000 in the cash payments journal. The amount was correctly reflected in
the bank statement.
1.3. The bank credited NYX’s account with R20 000 in error.
1.4. A payment of R250 000 received from a debtor on 31 August 2021 and
included in the cash receipts journal was not yet reflected in the August bank
statement.
1.5. Cheque 4566 relates to a reconciling item in the July 2021 bank
reconciliation and represents a payment made to a creditor on 2 July 2021.
The cheque has still not been processed by the bank and has since gone stale.
Cheque 5681 relates to a payment made to a creditor on 31 August 2021 that
was cleared by the bank but was not yet reflected in the August bank
statement.
1.6. Unreconcilable difference – all reconciling items have been accounted
for, not sure what this unreconcilable difference is. The next accountant should
please investigate this difference.
1.7. The balance as per the general ledger is a debit closing balance. This is
the balance after all necessary adjustments have been processed in NYX’s
accounting records.
2. Account with HZO (Pty) Ltd

NYX has an account with HZO (Pty) Ltd (hereafter referred to as ‘HZO’) which
supplies them with the main chemicals used in manufacturing hand sanitizer. HZO
allows NYX a 10% trade discount on all transactions and a 5% settlement discount
if payment is made within 10 days of the statement date. NYX received a statement
dated 31 August 2021 from HZO which reflected an amount payable of R72 800.
On comparing the statement with the ledger account of NYX, the following
discrepancies were noted:
• NYX returned goods (invoice 7612) with an invoice value of R12 000
(gross value) to HZO on 27 August 2021, which was processed in NYX’s
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accounting records on that same date. The credit note for these returned
goods were only received from HZO on 8 September 2021.
• Invoice 7823 for a gross amount of R8 100 was included at that price on
the statement without the trade discount incorporated.
NYX is planning on making the payment regarding the balance outstanding for
August 2021 on Monday 6 September 2021 and has historically always settled the
outstanding balance within 10 days of the statement date.
3. Non-current assets
NYX has a variety of non-current assets that are used in the manufacturing of
inventory and for administrative purposes. All items are subsequently measured in
accordance with the cost model and consists of the following items:
Land and buildings

NYX acquired the premises in Kempton Park, Johannesburg, where the
administrative head office and manufacturing plant are situated, on 1 September
2019 for R20 000 000. 20% of this value can be allocated to the land. It is the policy
of NYX to depreciate buildings on the diminishing value method at a rate of 5%.
Machinery
Machinery consists of the machine that is used to manufacture all of the hygienic
consumable products. The carrying amount of the machine was correctly
determined as R908 000 on 31 August 2021 (after correctly accounting for 2021’s
depreciation). The machine had a remaining useful life of 4 years on this date before
taking the following information into account:
• At year-end the machine was damaged due to an abnormal electric
surge. Management would like to continue using the machine but is also
considering obtaining a new machine. Management estimated that it will be
able to dispose of the damaged machine for R650 000. Costs of R40 000
will have to be incurred in moving this machine from NYX’s premises. It is
estimated that the machine will be able to generate a net cash inflow of
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R220 000 per year for the remainder of its useful life and can be disposed of
for R100 000 at the end of its useful life.
Vehicles
Vehicles consists of a delivery truck and a business vehicle and are depreciated
using the straight-line method over 5 years:
• The delivery truck was purchased on 1 June 2019 for R800 000. The
residual value was estimated as R150 000. The delivery truck was disposed
of on 1 July 2021 for R550 000 as NYX decided to rather outsource the
delivery of inventory for economic reasons.
• The business vehicle was bought for R315 000 cash. The business
vehicle is mainly used to assist with transporting some of the workers
between the factory and public transport stations. The vehicle was imported
and import duties amounted to R15 000. Transport costs of R7 000 was
incurred in getting the vehicle to NYX’s premises. Management also paid
R2 000 towards registering the vehicle in NYX’s name. The vehicle was
delivered to NYX’s premises on
1 March 2021 and was available for use from this date going forward.
Management however decided that the vehicle must first be branded with
NYX’s logo for marketing purposes before it will be used. The branding of
the vehicle was finished on 1 April 2021 at a cost of R20 000. The vehicle
was used for the transport of workers from this date going forward.
UVD robot
Management is considering purchasing the UVD robot in light of Covid-19. The UVD
robot retails at a price of R1 200 000. This robot uses UV light to disinfect the
surrounding environment it is placed in. During the 3rd wave of Covid-19 infections,
NYX has been hard hit by many employees being infected and operations being
impacted. Thus management hopes that the UVD robot will assist in managing
infections and outbreaks. The robot can be used for 15 years.
Please note:
• An appropriate discount rate is 11% per annum
• Ignore VAT and any tax consequences
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• Show all workings clearly
• Round all amounts to the nearest Rand where applicable
You are required to: Marks

(a) Refer to point 1: Critically evaluate the bank reconciliation for August (7)
2021 as prepared by the accountant (critically evaluate means to
discuss if it is accurately prepared, thus both items you agree and
disagree with). As part of your discussion, you are required to discuss
any adjustments to be made where applicable and you disagree.
You can assume that the balance as per the general ledger provided
is correct and that all necessary adjusting entries have been
processed correctly by NYX.
(b) Refer to point 2: Calculate the amount to be paid to HZO for August (3)
2021.
(c) With reference to the information under point 3 only, prepare an (14)
extract of the Statement of Profit or Loss of NYX for the year ended 31
August 2021 for ‘other income’ and ‘operating expenses’. Comparative
figures should not be presented in the extract.
(d) Discuss if the UVD Robot can be classified and recognised as (6)
property, plant and equipment by NYX once purchased. You are not
required to discuss the definition of an asset as per the Conceptual
Framework as part of your solution.
Total: 30 marks
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Solution to Test 2
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Test 2 September 2022 60 marks (90 minutes)
Question 1 20 marks (30 minutes)
Please note the following:

• Ignore VAT and any tax consequences.
• Show all workings clearly.
• Round all amounts to the nearest Rand where applicable.
Deja Brew is a very popular coffee shop in Braamfontein Johannesburg. It was established
as a sole proprietorship by Joseph Ndlovu on 1 July 2018 with a 30 June financial year end.
Espresso machines
Joseph purchased two commercial espresso machines on 1 July 2018 at a cost of R76 500
each. It is estimated that each machine will be used to produce 440 000 espressos over an
estimated period of 10 years. The residual value of each machine was estimated at
R25 000.
• Joseph realised that only one machine is needed and sold espresso machine 1 for
R58 000 on 1 April 2022.
• Espresso machine 2 was serviced at R5 500 on 1 January 2022 which was paid for
in cash. These machines must be routinely serviced every 3 to 4 years to keep it
operating efficiently. During the 2022 financial year Joseph re-estimated that
espresso machine 2 will be used to manufacture 550 000 espressos in total over a
total estimated period of 12 years and the new residual value is Rnil.
The total number of espressos produced by each machine over the years whilst in use by
Deja Brew are:
Financial years Espresso machine 1 Espresso machine 2

1 July 2018 – 30 June 2021 112 000 90 000
1 July 2021 – 30 June 2022 22 000 46 000
Premises of Deja Brew

Joseph decided to purchase the property where the coffee shop is located for
R2 000 000 on 1 January 2019 (10% of the purchase price can be allocated to the value of
the land). Joseph estimated that the building will be used as the location of Deja Brew for
the next 40 years with a residual value of Rnil.
On 1 June 2021 Joseph contracted a famous street artist to paint a flower mural on the
outside wall of the building. The aim behind the mural is to attract people to Deja Brew to
take selfies in front of it, post it on social media platforms and visit Deja Brew.
The mural was completed on 1 July 2021 at a cost of R150 000. Joseph expects to keep
the mural on the wall until the end of the building’s useful life.
Page 1 of 6 ACCN1005A/ACCN1006A Test 2 September 2022

Additional information
• It is the policy of Deja Brew to subsequently measure all property, plant and equipment
in accordance with the cost model.
• Buildings are depreciated using the straight-line method.
• Commercial espresso machines are depreciated using the units of production method
based on the number of espressos.

(a) Calculate the profit (or loss) that Deja Brew should account for on the (5)
disposal of Espresso machine 1.
(b) Prepare the journal entries related to the 2022 financial year to correctly (8)
account for the Espresso machine 2 in the financial statements of Deja
Brew.
Please note:
• Dates and journal narrations are not required.
(c) Advise Joseph if the costs related to the mural can be classified as (7)
property, plant and equipment and how it should be accounted for in the
financial statements of Deja Brew for the year ended 30 June 2022.
Please note:
• You are not required to discuss any definitions.
• You are required to discuss any relevant recognition criteria.
• You are required to include workings where applicable.
Total: 20 marks

Best Pipes Limited Ltd is a company involved in the manufacture of plastic pipes. The
company’s manufacturing plant is situated in the industrial area of Longdale, Johannesburg.
The authorised share capital according to the Memorandum of Incorporation is as follows:

• Class A Shares – 300 000 shares with voting rights and no fixed distribution.
• Class B Shares – 160 000 shares without voting rights but have a fixed distribution
rate of 10% per annum.
• Class C Shares - 120 000 shares without voting rights but have a cumulative fixed
distribution rate of 15% per annum.
Additional Information
For the company to enter the export market additional funding will be required for it to be
competitive and effective to supply the demand overseas. The board of directors have
decided to source funding from the general public by issue of shares.
The following transactions, related to the issue of shares, occurred during the current
financial year ended 30 June 2022:
1. On 1 September 2021, an additional 100 000 Class A shares were offered to the
general public, through a prospectus, at the market price of R6 per share. The shares
were over-subscribed by 15% and the cash together with the application forms were
received by the business and banked by 15 September 2021. The unsuccessful
applicants were refunded their money on 22 September 2021 and the allotment of
shares was finalised for the successful applicants by 30 September 2021.
2. On 1 December 2021, an additional 50 000 Class B shares were offered to the

general public, through a prospectus, at the market price of R20 per share. The
prospectus specifically stated that a minimum of 10 000 shares needed to be taken
up by the public, failing which no shares would be issued and any monies received
would be refunded. The subscription was under-subscribed as only 7 500 shares
were applied for by the public. The money for these shares was banked by 15
December 2021. As the terms of the issue, as stated in the prospectus, had not been
met the applicants were refunded their money on 22 December 2021.
3. A capitalisation issue was undertaken by Best Pipes on 1 June 2022. Under the
capitalisation issue existing Class A shareholders would receive one share for every
two shares held. The capitalisation was at R10 per share.
4. In order to attract further capital from small investors, 100 000 Class C shares, of R1
each, were offered to the general public on 1 March 2022. The directors were unsure
if all the shares would be taken up and did not want to risk an under-subscription.
Best Pipes Limited entered into a contract with Ensure Bank to underwrite the

subscription. Ensure Bank charged a commission of 6% on value of the shares
issued for their services. Applications, together with the money, were received for
85 000 shares by 15 March 2022. The bank took up the balance of Class C shares
and paid their portion on 20 March 2022. Best Pipes Limited immediately paid Ensure
bank the commission due. The allotment of the Class C shares was finalised on 28
March 2022.

(a) Prepare the journal entries to record the above transactions for the 20
financial year ended 30 June 2022. Narrations and closing entries are
not required but dates are required. Show calculations to the nearest
Rand.

‘Wrogue Style Casual Sneakers’ is a business started by Lesego in 2021, during the Covid-
19 pandemic, in an outside room at her parents’ house. Lesego sells casual sneakers
(shoes) that are manufactured in Copenhagen, Denmark. Sneakers is a new trend among
teenagers and young adults in South Africa. Lesego’s grandmother is situated in Denmark
and bought a pair of sneakers when she visited in 2019 and thought it would be a good
opportunity to sell to teenagers and young adults. Lesego is also the chairperson of the SA
Youth League and will use this contact to sell the casual sneakers.
She appointed an assistant on 1 November 2021 to assist her with general office work,
modifying stock and unpacking shoes on the shelves. Each pair is packed in a box.
Wrogue Style Casual Sneakers’ is not a VAT vendor.
The following information is relevant relating to the stock for the year ended 31 March
2022:
1. The financial year end is 31 March, and a periodic inventory system is used.
2. Total sales for the period until 31 March amounted to R3 300 000.
3. The opening stock amounted to 150 boxes of sneakers at R390 each.
4. Lesego performed a stock count on the last day of the accounting period, 31 March
2022, which amounted to 1 950 boxes of sneakers. These exclude sneakers that
were purchased on 31 March 2022 that were still in transit at year-end (see point 10
below). The stock is measured using the FIFO method. Lesego kept a schedule of
the purchases of sneakers she made during the year as indicated below:
Date Number of boxes Purchase price per box of

of sneakers sneakers (Rands)
1-November 2021 1 200 R 450
1-December 2021 2 550 R 500
1-January 2022 1 800 R 680
31-March-2022 650 R 680
Goods in transit- see point 10
5. The total shipping costs for the year amounted to R58 600. The cost of local delivery
to Lesego’s business premises amounted to R75 540.
6. Once Lesego receives the stock, each shoe is modified by adding a special shoe
cap. The total cost of this modification amounted to R99 500 excluding wages.
7. Wages paid to the assistant for general office work amounted to R4 000 per month
and R3 000 per delivery for modifying and unpacking of stock on the shelves at
Lesego’s premises.

8. The total cost incurred for delivery to customers amounted to R26 800 for the year.
9. Electricity and water paid and amounted to R15 850 for the period to 31 March 2022.
10. As at 31 March 2022, 650 boxes of sneakers arrived at the Durban harbour awaiting
collection by local couriers. The following journal entry was correctly captured in the
accounting records in respect of these goods that are in transit:
Date Dr Cr Amount
31 March Purchases Accounts Payable R442 000
11. The total shipping costs of the closing stock (point 4 above) amounted to R6 600. The
total cost of local delivery to Lesego’s business of the closing stock (point 4 above)
amounted to R2 990. The total cost of modification of the closing stock (point 4 above)
amounted to R7 600.

(a) Prepare the Statement of Comprehensive Income for the year ended 31 (18)
March 2022. Show all workings. Round to the nearest Rand.
(b) Calculate the actual gross profit percentage. Show all workings. Round to (2)
the nearest one decimal.
Total: 20 marks

QUESTION 1 a)
Question assesses the calculation of the profit/(loss) on the disposal of PPE
Proceeds 58 000 0,5

60 816
Cost 76 500 0,5
Accumulated depreciation: - 15 684
Working Acc Dep: (76 500 - 25 000) 1
x (22 000 + 112 000) 1
/ 440 000 1
Loss on disposal (Procees < carrying amount) (consequential mark) - 2 816 1
Available 5
Max 5
QUESTION 1 b)
Question assesses journals to be processed for repairs and maintenance and depreciation expense (based on untis of production)
Journal entries for the 2022 financial year - Espresso machine 2

Account description Dr Cr
1 Repairs and maintenance (expense) 5 500 Journal (correct dr/cr, account description) 1
Bank 5 500 Amount 1
Recognition of servicing costs of espresso machine 2
2 Depreciation (expense) 6 597 Journal (correct dr/cr, account description) 1
Accumulated depreciation 6 597 Amount (working)
Recognition of depreciation on espresso machine 2 for 2022 financial year
Working (5 marks)
Carrying amount - 1 July 2021 65 966
Cost 76 500 0,5
Acc depreciation - 10 534
((76 500 - 25 000) 1
x 90 000/440 000 1
Remaining useful life (espressos) - 1 July 2021 460 000

Total estimated espressos (new estimate) 550 000 0,5
Espressos made up until 1 July 2021 90 000 0,5
Depreciation 2022 6 597

(65 966 (C) 0,5
x 46 000/460 000 (460 000 is (C)) 1
Alternative to working (5 marks)

Carrying amount - 1 July 2021 65 966
Cost 76 500 0,5
Acc depreciation - 10 534
((76 500 - 25 000) 1
x 90 000/440 000 1
Carrying amount - 30 June 2022: 57 584

Cost (given) 76 500 0,5
Acc dep - 18 916
(76 500 x (90 000 + 46 000) 1
/550 000) 0,5
Depreciation current year (65 966 - 57 584) 8 382 0,5
Available 13
Max 8
QUESTION 1 c)
Discussion question on recognition of subsequent costs incurred related to PPE item and measurement thereof
The mural is a subsequent expenditure incurred related to the building as it occurred after the initial recognition of the building on January 2019. 1
The mural is inseperable from the building and in order for it to be recognised as part of the building, it should meet the recognition criteria of PPE. 1
The recognition criteria for PPE are: (mark for definition)
It is probable that future economic benfits associated with the item will flow to the entity; and 1
the cost of the item can be measured reliably.
It is probable that the mural will attract more people to Deja Brew in the form of people wanting to take pictures in front of it and sharing and posting it on social media
0,5
platforms,
thereby attracting more prospective customers which will increase future economic benefits in the form of sales. 0,5
The cost of the mural reliably measured at R150 000. 1
Conclusion - initial measurement: the cost of the mural can be classified as PPE and R150 000 should be recognised as part of the cost of the building on 1 July 2021. 1
In terms of subsequent measurement, the mural should be depreciated using the straight-line method over the remainder of the building's useful life. 1
The depreciation that should be recognised for the 2022 financial year is: 4 000 (R150 000/37,5 years) 1
Available 8
Max 7
Date Description Dr Cr Mark
Rand Rand
15/09/2021 Bank (SOFP) 690 000 0,5
Application Account: Class A shares (SOFP) 690 000 0,5
Workings:(115 000 x 6) = 690 000 1,0
22/09/2021 Application Account: Class A shares (E) 90 000 0,5
Bank (SOFP) 0,5
Workings:(15 000 x 6) = 90 000 refund 90 000 1,0
30/09/2021 Application Account: Class A shares (SOFP) 600 000 0,5
Share capital: Class A shares (SCE) 0,5
Workings:(100 000 x 6) = 600 000 600 000 1,0
1/12/2021-15/12/2021 Bank (SOFP) 150 000 0,5
Application Account: Class B shares (SOFP) 150 000 0,5
Workings: (7 500 x 20) = 150 000 1,0
22/12/2021 Application Account: Class B shares (SOFP) 150 000 0,5
Bank (SOFP) 150 000 0,5
1/03/2022 -15/03/2022 Bank (SOFP) 85 000 0,5
Application Account: Class C shares (SOFP) 85 000 0,5
20/03/2022 Bank (SOFP) 15 000 0,5
Application Account: Class C shares (SOFP) 15 000 0,5
Workings:(15 000 x 1) = 15 000 1,0
20/03/2022 Underwriter’s commission (E) 6 000 1,0
Bank (SOFP) 6 000 0,5
Workings:(100 000 x 1 x 0.06) = 6 000 1,5
28/03/2022 Application Account: Class C shares (SOFP) 100 000 0,5
Share capital: Class C shares (SCE) 100 000 0,5
1/06/2022 Retained earnings (E) 100 000 1,0
Share Capital (E) 100 000 0,5
Workings:(200 000/2x1) = 100 000 1,5
Format/Structure/Presentation 1,0
Total available marks 20,0
QUESTION 3 (a) Mark
Prepare the Statement of Comprehensive Income for the year ended 31 March 2022. Show all workings. Round to the nearest Rand.
awarde
d
Statement of Comprehensive Income of Wrogue Style Casual Sneakers for the year ended 31 March 2022
R'
Sales 3 300 000 1
Cost of Sales 2 023 950
Opening stock 150*390 58 500 1
Purchases
3 481 000
1 200*450 540 000 1
2 550*500 1 275 000 1
1 800*680 1 224 000 1
650*680 442 000 1
Add shipping costs 58 600 1
Add local delivery costs 75 540 1
Add modification costs 99 500 1
Add wages (3000*3) 9 000 1
Less goods in transit - 442 000 1

Cost of goods available for
3 340 140
sale
Less Closing stock (Working 1) 1 316 190
Gross Profit 1 276 050
Expenses 62 650
Wages 20 000 1
Transport/Delivery Cost 26 800 1
Electricity and water 15 850 1

Profit for the year 1 213 400
Working 1
Closing stock
1800 boxes @ R680 1 224 000 1
(1950-1800 = 150 boxes @
75 000 1 299 000 1
R500
Shipping 6 600 1
Local delivery 2 990 1
Modification 7 600 17 190 1
1 316 190
Available 19
Max 18 0
QUESTION 3 (b) Mark

Calculate the actual gross profit percentage. Show all workings. Round to the nearest one decimal awarde
d
Actual Gross profit (1 276 050/
38.7% 1
percentage
3 300 000) 1
Available 2
Max 2 0
Block 4
Tutorials
ACCN1006A/1005A Accounting I 2023
Block 4 - Tutorial Programme
The tutorial questions listed below should be attempted under exam conditions BEFORE the relevant
tutorial.
Tutorial questions can be found in the prescribed question book (refer to the course outline for the list
of prescribed books).
The suggested solutions to each tutorial question listed below, are included in this course pack in
sequence of how it is presented in the table below (suggested solutions starts on the next page).
Tutorial Chapter Topic Tutorials Questions

number
17 Chapter 18 Companies E18-5; E18-6; E18-7; P18-1; P18-3
Exam 2022 Question 1
Unseen E18-3
18 Chapter 20 Statement of Cash Flows Q20-1 to Q20-7; E20-3; E20-4

Unseen E20-2
19 Chapter 20 Statement of Cash Flows P20-1; Final Exam 2020 Question 1 Part B
Exam 2021 Question 2
20 Chapter 17 Partnerships Q17-1 to Q17-5; E17-1; E17-2

Unseen E17-3
21 Chapter 21 Analysis of Financial Q21-1 to Q21-6, P21-3, P21-6
Statement Exam 2022 Question 3 Part B a-c
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Accounting I 2023
Block 4 - Tutorial Solutions
Chapter 18
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Chapter 20
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Final Exam 2020 Question 1 Part B
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Final Exam 2020 Question 1 Part B: Solution
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Final Exam 2021: Question 2 40 marks (60 minutes)
Ultra Mirrors (Pty) Ltd (hereafter referred to as “UM”) is in the business of

manufacturing a wide range of mirrors for both individual and corporate clients. The
company is in the process of preparing their financial statements for the year ended
31 December 2021. You are a newly hired employee in the accounting department of
UM and have been tasked with assisting in the preparation of the statement of cash
flows.
The following information has been provided to you:
Account description Notes 2021 2020
R’ R’
Dr/(Cr) Dr/(Cr)
Land and Buildings (at cost) 2 256 000 2 256 000
Vehicles (at cost) 1 450 000 600 000
Machinery and Equipment (at 2
cost) 120 000 80 000
Trade Receivables 3 62 100 45 000
Inventory 4 318 000 242 000
Bank 1 734 436 41 275
Prepaid Expenses 5 4 194 0
Mortgage 6 ??? 0
SARS Payable (7 315) (12 750)
Trade Payables 4 (22 000) (14 470)
Accumulated depreciation
(buildings) (200 960) (175 840)
Accumulated depreciation 1
(vehicles) (112 500) (100 000)
Accumulated depreciation 2
(machinery and equipment) (16 200) (15 000)
Share Capital 7 (1 250 000) (1 000 000)
Dividend Declared 200 000 150 000
Dividend Payable (50 000) (20 000)
Sales (2 050 000) (1 455 200)
Cost of Sales 4 ???
Tax Expense 61 050 54 225
Other Income 8 (55 500) (33 250)
Operating Expenses 6,9 200 000 85 000
1. Vehicles
UM purchased 4 delivery vehicles on 1 January 2019 at a cost of R150 000 each. The
delivery vehicles have a residual value of R75 000 each with a useful life of 6 years.
On 30 June 2021, UM sold one of the delivery vehicles at a profit of R11 250. The
transaction was a cash sale. The profit on the sale of the delivery vehicle has correctly
been included in other income.
2. Machinery and Equipment
In order to meet the increased demand for their products, UM purchased an additional
manufacturing machine on 1 July 2021. The invoice was only paid 30 days after
purchase. Depreciation on the machinery and equipment has correctly been included
in operating expenses.
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3. Trade Receivables
The allowance for credit losses increased from R5 000 to R6 500 during the year
(these balances have been closed off to trade receivables). The increase in allowance
for bad debts has correctly been included in operating expenses.
4. Inventory and Trade Payables
Um achieves a consistent 45% gross profit margin.
5. Prepaid Expenses
On 1 July 2021, UM entered into a contract for a 12-month fibre internet connection.
UM paid upfront for the 12 months. Per the contract, the monthly charge is R699. The
internet expense has correctly been included in operating expenses.
6. Mortgage
On 1 January 2021, UM obtained a R1 000 000 mortgage from Nonstandard Bank.
The mortgage bears interest at 12% per annum. The mortgage is repayable in 5 equal
instalments, each due on 31 December (each payment is first allocated towards the
interest, before being allocated to the capital portion). Interest accrued on the loan is
also payable on 31 December every year. There was no other interest expense for the
year, other than the interest incurred on this loan. Interest Expense has been correctly
included in operating expenses.
7. Share Capital
During the year, UM issued additional shares. R50 000 share issue costs were
incurred and paid in cash. These share issue costs have been closed off to the cost
of Equity.
8. Other Income
Assume all other income (other than income pertaining to Point 1) to be from cash
transactions.
9. Operating Expenses
Assume operating expenses (other than expenses pertaining to depreciation, Point 3,
Point 5 to be from cash transactions).
Additional information:
• Ignore VAT and dividend tax.
• UM prepares their statement of cash flows using the direct method.
• All sales are on credit.

(a) Prepare the Statement of Cash Flows for Ultra Mirrors (Pty) Ltd for the (40)
financial year ending 31 December 2021.
Comparative Figures and the reconciliation note are not required.
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Chapter 21
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Accounting I Exam 2022 120 marks (180 minutes)
Question 1 35 marks (52.5 minutes)

• Ignore VAT
• Round all decimals to two decimal places where applicable.
Grasse Ltd (‘Grasse’) is South Africa's leading fragrance and perfume oil manufacturer
located in Pietermaritzburg. Grasse was founded by John Cartier Grasse in 2002 with an
authorized share capital of 500 000 ordinary shares and 600 000 preference shares.
The below draft Trial balance for the financial year ended 30 September 2022 has been
prepared by the accountant:
Dr Cr
R R
Ordinary share capital (200 000 shares issued at R20) 4 000 000
6% Non-redeemable cumulative preference shares 800 000
(100 000 shares issued at R8 per share)
Retained earnings (as at 30 September 2022) 1 020 000
Land and Buildings (Cost) 10 257 500
Buildings (Accumulated depreciation) 750 000
Machinery (Cost) 850 000
Machinery (Accumulated depreciation) 350 000
Accounts receivable 660 000
Allowance for expected credit losses 120 000
Inventory 540 000
Bank overdraft 3 950 000
7% Debentures 142 500
Accounts payable 770 000
Current tax payable 25 000
Profit before tax 380 000
12 307 500 12 307 500
Page 1 of 12 ACCN1005A/ACCN1006A Exam November 2022

Additional information:
The accountant however resigned unexpectedly and was not able to finalise all accounting
entries before his resignation. The below items have not yet been incorporated in the draft
trial balance above:
1. Grasse purchased a fleet of 10 delivery vehicles which was delivered to Grasse’s

premises on 1 September 2022. Due to cash flow constraints, Grasse financed the
purchase price and delivery costs of the fleet via Capital Bank. The loan for the fleet is
to be repaid in 24 monthly instalments of R158 574 at the prime interest rate of 7,75%
per annum (compounded monthly). It is estimated that the vehicles will be used for 5
years. The residual value is estimated as R125 000 per vehicle.
2. On 11 September 2022 Grasse made a public offer of 150 000 ordinary shares at R28
per share to raise funds for the future expansion of the entity. Grasse entered into an
underwriting agreement with VC Bank at a commission of 2%. By the closing date of
applications, 26 September 2022, only 90% of the shares were subscribed for by the
public. All shares were allotted on 30 September 2022. Grasse settled their account
with VC Bank at the end of September. There were no other transactions related to
ordinary share capital during the financial year.
3. At the directors meeting that was held on 22 September 2022, the directors decided that
an ordinary dividend will not be declared but only a preference dividend. The preference
shares were issued on 1 April 2022. The preference dividend has not yet been
accounted for in the draft trial balance provided and was unsettled by the end of the
financial year. All preference shareholders are natural South African citizens.
4. The debenture balance relates to 1 000 7% debentures of R150 each that were issued
on 1 October 2021 at a discount of 5%. These debentures are redeemable on
30 September 2026 at a premium of 10%. Interest on the debentures is payable
annually on 30 September. No entry has been processed for any payments or interest
on the debentures for the 2022 financial year.
Please note:
• It is the accounting policy of Grasse to measure all property, plant and equipment
items in accordance with the cost model. Vehicles is depreciated using the straight-
line method.
• It is Grasse’s policy to recognize share transaction costs against share capital.
• Assume a company tax rate of 28% and a dividends tax rate of 20%.

(a) Discuss and calculate the amount at which the delivery vehicles fleet should (4)
be recognised by Grasse on 1 September 2022. Cleary show all inputs for
calculations.
(b) Prepare the journal entry to correctly account for the preference dividend (3)
declared in the accounting records of Grasse for the financial year ended
30 September 2022. Journal narrations and dates are not required.
(c) Calculate the profit or loss after tax of Grasse Ltd for the year ended (9)
30 September 2022. Clearly show all inputs for calculations.
(d) Prepare the Statement of changes in equity of Grasse Ltd for the year ended (6)
30 September 2022. Comparative figures and the totals are not required.
(e) Prepare only the current liabilities section of the statement of financial (13)
position of Grasse Ltd on 30 September 2022. You can assume that the
total interest on the debentures for the financial year ended
30 September 2023 will amount to R202 320. Comparative figures are not
required.
Total: 35 marks

• Ignore VAT
• Round all final amounts to the nearest Rand where applicable.
• Round all decimals to two decimal places where applicable.

Question 3 Part B 30 marks
Elton and Lebo, are bothers, and decided to invest the money inherited from their
grandfather in shares in companies listed on the Johannesburg Stock Exchange (JSE). After
a thorough investigation they decided to invest in the Transport and Equipment Sectors.
Elton decided to invest in Trans Africa Ltd, a company manufacturing trucks and Lebo to
invest in Equipnet Ltd, a company manufacturing earthmoving equipment mainly for the
mining sector. Each believes that their chosen company was the best investment and
therefor use the information available to compare their respective investments. Both
companies' financial year ended on 30 June.
The abridged Statements of Profit/loss and Statements of Financial Position at 30 June

2022 for each company were as follows:
STATEMENTS OF PROFIT/LOSS FOR THE YEAR ENDED 30 JUNE 2022
Trans Africa Equipnet

R’000 R’000
Sales 56 980 96 870
Cost of sales 27 650 49 670
Gross Profit 29 330 47 200
Operating expenses 3540 6 200
Interest paid 3100 10 100
Profit before tax 22 690 30 900
Taxation 7 942 10 815
Profit for the period 14 749 20 085

STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 2022
R’000 R’000
ASSETS
Non-current assets 59 000 50 000
Current assets 45 250 76 320
Inventory 32 790 23 500
Accounts Receivable 6 050 50 800
Short-term deposits 4 760
Bank and Cash 1 650 2 020
104 250 126 320
EQUITY AND LIABILITIES
Equity 55 680 87 870
Ordinary share Capital (issued for R10 each) 18 000 30 000
Retained Earnings 37 680 57 870
Non-current liabilities 21 000 11 500
Current liabilities 27 570 26 950
Accounts payable 20 810 19 990
Short-term Loan 2 900
Taxation payable 3 860 1 990
Bank overdraft 4 970
104 250 126 320
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED AT 30 JUNE 2022

Retained
Trans Africa Share Capital Total
earnings
R’000 R’000 R’000
Balance, 30 June 2021 18 000 24 931 42 931
Less Dividends 2 000 2 000
Balance, 30 June 2022 18 000 37 680 55 680
Retained
Equipnet Share Capital Total
earnings
R’000 R’000 R’000
Balance, 30 June 2021 30 000 38 785 68 785
Balance, 30 June 2022 30 000 57 870 87 870


R’000 R’000
Inventory, 30 June 2021 26 100 24 750
Accounts Receivable, 30
11 450 30 500
June 2021
Total Assets 82 320 103 700
For both companies sales are on credit

(a) Calculate and discuss each of the following ratios to assist with the
investment decision in comparing these ratios of Elton and Lebo investment
decision to determine which company is best suited for an investment. (4
marks for the ratio and 1 mark for explanation for each of the following ratios)
(i) Acid-test ratio (5)
(ii) Interest cover ratio (5)
(iii) Earnings per share (5)
(iv) Inventory holding period (5)
(v) Collection period for accounts receivable (5)
(b) Indicate which ratio in (a) is best to evaluate the two companies and provide (2)
a reason for your answer.
(c) Mention three performance ratios (excluding ratios mentioned in (a)) that (3)
would be appropriate to determine an investment decision and provide what
could be an indication of a good investment at each ratio.
Round to the nearest two decimals

Show all workings
Total Part B: 30 marks

Total Parts A and B: 45 marks

Question 1 (a)
The cost of a PPE item is the amount of cash or cash equivalents paid or the fair value of the
1 consideration given to acquire the asset at the time of its acquisition 1
As the payment of the fleet has been deferred for the purchase price and registration and licensing
fees and is financed, the cash price equivalent should be determined which is the present value of
2 the financing. 1
3 The interest charged on the financing should not be recognised as part of the cost of the fleet. 1
Cost of fleet on 1 September 2022 (initial

measurement)
FV 0 0.5
PMT - 158 574 0.5
N 24 0.5
I (7,75%/12) 0.65% 0.5
PV R3 515 012
Available 5
Maximum 4
Amortisation table - not required

Month Balance - start of month Interest Payment Balance end of month
Sep 22 R3 515 012 22 701 - 158 574 3 379 139
Oct 22 3 379 139 21 824 - 158 574 3 242 389
Nov 22 3 242 389 20 940 - 158 574 3 104 755
Dec 22 3 104 755 20 052 - 158 574 2 966 233
Jan 23 2 966 233 19 157 - 158 574 2 826 816
Feb 23 2 826 816 18 257 - 158 574 2 686 498
Mar 23 2 686 498 17 350 - 158 574 2 545 275
Apr 23 2 545 275 16 438 - 158 574 2 403 139
May 23 2 403 139 15 520 - 158 574 2 260 085
Jun 23 2 260 085 14 596 - 158 574 2 116 108
Jul 23 2 116 108 13 667 - 158 574 1 971 200
Aug 23 1 971 200 12 731 - 158 574 1 825 357
Sep 23 1 825 357 11 789 - 158 574 1 678 572
Question 1 (b)
Journal entries for the 2022 financial year - dividends declared
Account description Dr Cr
1 Retained earnings (800 000 x 6% x 6/12) 24 000 1
Preference dividend payable (24 000 x 80%) 19 200 1
Dividend withholding tax payable (24 000 x 20%) 4 800 1
Recording of preference share dividend declared
Available 3
Maximum 3
Question 1 c
Calculation of profit or loss for the year ended 30 September 2022
Profit before tax (given) 380 000 0.5 Given
Depreciation - fleet of delivery vehicles Part a (3 515 012 - (125 000*10)) (1)/5*1/12 (1) - 37 750 2
Interest - fleet of delivery vehicles Part a (3 515 012 x 7,75% x 1/12) - 22 701 1
Interest - debentures (142 500 x 9,96%) - 14 189 1
Profit after adjustments 305 360
Income tax expense (profit after adjustments x 28%) - 85 501 1
Profit after tax 219 859
Workings
W1 Debentures
FV (1 000*150*1,1) 165 000 1
PMT (1000*150*7%) 10 500 1
N 5 0.5
PV (150*1000*0,95) - 142 500 1
I 9.96%
Available 9
Maximum 9
Question 1 (d)
Statement of changes in equity of Grasse Ltd for the year ended 30 September 2022 1 Presentation
Share capital
Ordinary Preference Retained earnings
Balance at 1 October 2021 4 000 000 - 1 020 000 0.5 Given
Issue of shares
Ordinary shares (150 000 x R28) 4 200 000 1
Preference shares 800 000 0.5 Given
Share issue costs (4 200 000 x 2%) - 84 000 1
Profit for the period (part c) 219 859 1 C Part c
Preference dividend (part b) - 24 000 1 C
Balance at 30 September 2022 8 116 000 800 000 1 215 859
Available 6
Maximum 6
Question 1 (e)
Statement of financial position of Grasse Ltd on 30 September 2022
LIABILITIES
Current liabilities
Loan ((158 574 x 12) - 202 320) 1 700 568 1
Debentures payment payable (1 000 x 150 x 7%) 10 500 1
Accounts payable (770 000 - 120 000) 650 000 1
Bank overdraft W1 3 074
Preference dividend payable Part b 19 200 1
Current taxes payable 110 501
Dividend witholding tax payable Part b 4 800 1 C
Total current liabilities 2 493 843 1
Workings
W1 Bank closing balance
Credit balance (given) - 3 950 000 1
Share issue deposit not recorded Part d 4 200 000 1 C
Monthly loan payment - 158 574 1
Underwriters commission Part d - 84 000 1 C
Yearly debenture payment (1 000*150*7%) - 10 500 1
Credit balance (overdraft/unfavourable) - 3 074
W2 Current taxes payable

Opening balance (given) 25 000 1
Current tax Part c 85 501 1 C
110 501
Available 13
Maximum 13
Quesiton 1 Trial Balance Dr Cr
Ordinary share capital (200 000 shares issued at R20) 4 000 000
6% Non-redeemable cumulative preference shares (100 000 shares issued at R8 per share) 800 000
Retained earnings 1 020 000
Land and Buildings (Cost) 10 257 500
Buildings (Accumulated depreciation) 750 000
Machinery (Cost) 850 000
Machinery (Accumulated depreciation) 350 000
Accounts receivable 660 000
Allowance for expected credit losses 120 000
Inventory 540 000
Bank overdraft 3 950 000
7% Debentures 142 500
Accounts payable 770 000
Current tax payable 25 000
Profit before tax 380 000
12 307 500 12 307 500
Question 3 Part B
(a) Calculate and discuss each of the following ratios to
assist with the investment decision in comparing these
ratios of Elton and Lebo investment decision to
determine which company is best suited for an
investment. (4 marks for the ratio and 1 mark for
explanation for each of the following ratio) Marks
25
STATEMENTS OF PROFIT/LOSS FOR THE YEAR ENDED 30 JUNE 2022

R’000 R’000
Sales 56 980 96 870
Cost of sales 27 650 49 670
Gross Profit 29 330 47 200
Operating expenses 3540 6 200
Interest paid 3100 10 100
Profit before tax 22 690 30 900
Taxation 7 942 10 815
STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 2022

R’000 R’000
ASSETS
Non-current assets 59 000 50 000
Current assets 45 250 76 320
Inventory 32 790 23 500
Accounts Receivable 6 050 50 800
Short-term deposits 4 760
Bank and Cash 1 650 2 020
104 250 126 320
EQUITY AND LIABILITIES

Equity 55 680 87 870
Ordinary share Capital (issued for R10 each) 18 000 30 000
Retained Earnings 37 680 57 870
Non-current liabilities 21 000 11 500
Current liabilities 27 570 26 950
Accounts payable 20 810 19 990
Short-term Loan 2 900
Taxation payable 3 860 1 990
Bank overdraft 4 970
104 250 126 320
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED AT 30 JUNE 2022
Trans Africa Share Capital Retained earnings Total

R’000 R’000 R’000
Balance, 30 June 2021 18 000 24 932 42 932
Balance, 30 June 2022 18 000 37 680 55 680
Equipnet Share Capital Retained earnings Total

R’000 R’000 R’000
Balance, 30 June 2021 30 000 38 785 68 785
Balance, 30 June 2022 30 000 57 870 89 870

R’000 R’000
Inventory, 30 June 2021 26 100 24 750
Accounts Receivable, 30 June 2021 11 450 30 500
Total Assets 82 320 103 700
All sales are on credit for both companies

(i) Acid-test ratio
= Current Assets - Inventory)/Current Liabilities
Current Assets 45 250 76 320 1
-Inventory 32 790 23 500 1
Current Liabilities 27 570 26 950 2
= 0.45 1.96
Any one of the following reasons:

The Acid-test ratio is a Short Term Liquidity ratio that
excludes inventory that is the least liquid component of
current assets and may take some time to realise in cash. 1
Trans Africa ratio of 0.45 is worse than Equipnet and 1:1 is
normally regarded as acceptable.
(ii) Interest cover ratio

= Profit before tax and interest/Interest Expense
= Profit before tax and interest 25 790 41 000 2
Interest expense 3 100 10 100 2
= times 8.32 4.06
The Interest cover ratio is a Capital structure and LT
solvency ratio which measures how many times the interest
expense is covered by the profit. 1
Trans Africa interest cover is much higher than Equipnet
indicating that Trans Africa has a better ability comparing to
Equipnet to meet their interest cost.
Equipnet has less LT Liabilities than Trans Africa indicating
that Equipnet may have settled LT Debt due to the higher
interest paid.
(iii) Earnings per share

=(Profit for period - preference dividend)/No. of ordinary shares issued
=(Profit for period - preference dividend) 14 749 000 20 085 000 2 Rounded
No. of ordinary shares issued 1 800 000 3 000 000 2
= cent 819.39 669.50
Earnings per share (EPS) is a Performance ratio and of

interest of shareholders measuring the returns of shares. 1
Trans Africa's EPs is higher than Equipnet indicating
investors to likely invest in Trans Africa.
(iv) Inventory holding period

=Cost of sales/Average Inventory
Cost of Sales 27 650 49 670 2
Average inventory 29 445 24 125 2
365
= 0.94 2.06
days 388.70 177.28
The Inventory Holding period is a Short Term Liquidity ratio
that is important for investors to measure the number of
days it take to sell inventory in a given year. 1
Trans Africa's holding period is much longer than Equipnet.
(v) Collection period for accounts receivable

=Credit sales/Average Accounts receivable
Credit Sales 56 980 96 870 2
Average accounts receivable 8 750 40 650 2
365
= 6.51 2.38
days 56.05 153.17

The Collection period for accounts receivable is a Short
Term Liquidity ratio that indicates the number of days it
take to collect accounts receivable. 1
Trans Africa has a much lower collection time comparing to Equipnet.
Trans Africa has a much lower Accounts Receivable
comparing to Credit Sales as Equipnet.
Available 25
Maximum 25
Question 3 Part A
(b) Indicate which ratio in (a) is best to evaluate the two companies and provide a reason for your answer. Mark
Earnings per share (EPS) is a Performance ratio and of

interest of shareholders measuring the returns of
shares. 1
Trans Africa's EPs is higher than Equipnet indicating
investors to likely invest in Trans Africa. 1
Investors consider EPS as the key ratio to make an
investment decision. 1
Available 3
Maximum 2
Question 3 Part A
(c)
Mention three performance ratios (excluding ratios
mentioned in (a)) that would be appropriate to
determine an investment decision and provide what
could be an indication of a good investment at each ratio.
Mark
Any three of the following performance ratios: Max =3 3
Return on Equity 1
The return of equity (ROE) ratio measures the percentage of profit after tax and preference dividends which are available to ordinary shareholders.
The higher the ROE, the better a company is at converting its equity financing into profits.
Dividend per share 1

The dividends per share ratio measures the amount of dividends attributable to each ordinary share issued by a company.
The higher the dividend yield, the more profits a company pays out to shareholders on a relative basis.
Dividend Yield
The dividend yield measures the return in cash, by way of dividends that investors can expect to receive on their investment 1
A higher yield is better.
Earnings Yield 1
The earnings yield measures the earning of the company in relation to the market value.
A low ratio may indicate stock that is over-valued and a high value stock thar is under-valued
Price/Earnings Ratio 1
The Price/Earnings ratio compares the market price of the share with the earnings per share. Also indicate the number of years of earnings investors are buying.
This ratio will consistently change as market price change.
Higher price/earnings ratios may indicate investors' perceptions of earnings and growth potential.
5
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Accounting I ACCN1006A and ACCN1005A Blocks 3 and 4 Combined Riedwaan

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Accounting I ACCN1006A and ACCN1005A Blocks 3 and 4 Combined Riedwaan

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2023

Block 3 – Inventory, Financial statements and

• Understand the difference between the perpetual and

16 24 July Inventory (Continued) Tut Chapter 12

17 31 July Notes to Financial Statement – PPE Tut Chapter 11

19 14 Aug Companies Tut Chapter 18

20 21 Aug Companies Continued Tut Chapter 18

21 28 Aug Test week – no lectures and no tutorials No Block 3 ends

© Juta and Company, 2019 Inventory 6e 1

© Juta and Company, 2019 Inventory 6e 2

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© Juta and Company, 2019 Inventory 6e 11

Supplier’s Foreign Destination Buyer’s

© Juta and Company, 2019 Inventory 6e 13

© Juta and Company, 2019 Inventory 6e 14

© Juta and Company, 2019 Inventory 6e 17

© Juta and Company, 2019 Inventory 6e 18

© Juta and Company, 2019 Inventory 6e 19

• Used where items of

© Juta and Company, 2019 Inventory 6e 20

© Juta and Company, 2019 Inventory 6e 21

• Thus, in times of rising prices,

© Juta and Company, 2019 Inventory 6e 22

© Juta and Company, 2019 Inventory 6e 23

© Juta and Company, 2019 Inventory 6e 24

© Juta and Company, 2019 Inventory 6e 25

© Juta and Company, 2019 Inventory 6e 26

© Juta and Company, 2019 Inventory 6e 28

© Juta and Company, 2019 Inventory 6e 29

© Juta and Company, 2019 Inventory 6e 30

© Juta and Company, 2019 Inventory 6e 31

© Juta and Company, 2019 Inventory 6e 32

© Juta and Company, 2019 Property, Plant and Equipment 6e 1

© Juta and Company, 2019 Property, Plant and Equipment 6e 2

© Juta and Company, 2019 Property, Plant and Equipment 6e 5

© Juta and Company, 2019 Property, Plant and Equipment 6e 6

© Juta and Company, 2019 Property, Plant and Equipment 6e 7

• The use of an item of property, plant

© Juta and Company, 2019 Property, Plant and Equipment 6e 8

© Juta and Company, 2019 Property, Plant and Equipment 6e 9

© Juta and Company, 2019 Property, Plant and Equipment 6e 10

© Juta and Company, 2019 Property, Plant and Equipment 6e 11

• Begins when asset is available for use

© Juta and Company, 2019 Property, Plant and Equipment 6e 12

© Juta and Company, 2019 Property, Plant and Equipment 6e 13

• Available for use: 1 May 20X5 (8/12)

© Juta and Company, 2019 Property, Plant and Equipment 6e 15

• Units of production method

© Juta and Company, 2019 Property, Plant and Equipment 6e 16

© Kolitz & Quinn, 2005

© Juta and Company, 2019 Property, Plant and Equipment 6e 18

© Juta and Company, 2019 Property, Plant and Equipment 6e 19

© Juta and Company, 2019 Property, Plant and Equipment 6e 20

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© Juta and Company, 2019 Property, Plant and Equipment 6e 22

© Juta and Company, 2019 Property, Plant and Equipment 6e 23