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FINANCIAL ACCOUNTING II
Study Guide
D20059601
Edition 1
*D10059601-E1*
D20059601-E1
FINANCIAL ACCOUNTING II
Study Guide
CONTENTS PAGE
Objectives 1
Using this Guide 2
Course Syllabus 4
Study Schedule 7
Study Session One 8
Assignment 1 11
Study Session Two 17
Assignment 2 23
Study Session Three 36
Assignment 3 37
Study Session Four 43
Assignment 4 45
Study Session Five 50
Assignment 5 53
Study Session Six 58
Assignment 6 59
Study Session Seven 64
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Financial Accounting II / © ICG
PLEASE NOTE
Please bear the following definitions in mind while working through the Study Unit.
Goodwill
The term Positive Goodwill is now referred to only as Goodwill.
 Goodwill is disclosed as a non-current asset in the consolidated annual financial

statements.
The term Negative Goodwill is now referred to as the excess of fair value above cost.
 The excess of fair value above cost must be recognised immediately in the profit
and loss (credited to other expenses in the Income Statement) by the acquirer in
the period in which it occurred. It will therefore have an influence on Retained
Earnings.
General reserve
The description of the nature and purpose of each reserve in equity must be disclosed.
By implication a general reserve, with no specific purpose, cannot be created anymore.
PRINTING HISTORY
1st Edition March 2014
 INTERNATIONAL COLLEGES GROUP (ICG) (PTY.) LTD. 2014

29 Martin Hammerschlag Way, Foreshore, Cape Town, 8000, South Africa.
_______________________________________________________________________
This document contains proprietary information that is protected by copyright. All
rights are reserved. No part of this document may be photocopied, reproduced,
electronically stored or transmitted, or translated without the written permission of
ICG.
_____________________________________________________________________________________
Financial Accounting II / © ICG / (ii)
OBJECTIVES
The objectives of this course are:
 to further develop the knowledge and understanding you gained in

Financial Accounting I;
 to introduce you to the financial statements of companies and close
corporations;
 to introduce you to branch accounts and consolidated financial
statements; and
 to introduce you to the presentation of information to management.
REMEMBER
Financial Accounting II builds on the concepts and principles you learned in

Financial Accounting I.
Therefore, you should have a very good understanding of all topics in the
Financial Accounting I syllabus before you commence your study of Financial
Accounting II.
_____________________________________________________________________________
Financial Accounting II / © ICG / Page 1
USING THIS GUIDE
This guide has been designed to help you with your studies. It consists of:
 a course syllabus;
 a study schedule;
 study material on some of the topics required by the syllabus;
 study sessions; and
 assignments for submission.
Course syllabus
The syllabus is a list of all the topics covered in this course. The topics have
been numbered, and these topic numbers are used in the study schedule.
Study schedule
You will find a study schedule on the page following the course syllabus.
It gives you an overall view of your course at a glance. The study schedule
breaks the syllabus down into manageable components called study sessions.
It indicates the topics covered in each study session, the study units you
should use, and the assignments for submission that you have to complete.
To ensure that you have all the study units for this course, tick off the
numbers of the units you have received from the College on your study
schedule.
Study Session
In the study schedule you will see that one or more study units have been
prescribed for each study session. You should make a detailed and thorough
study of the prescribed study units, complete the relevant assignment, and
submit your answers to the College before proceeding to the next study
session.
Assignments
This study guide contains all the assignments that you have to complete and
submit to the College. Additional assignments that may appear in the study
units themselves are for revision only. You must not submit them for grading.
You should only attempt an assignment when you thoroughly understand the
subject matter covered in the study session.
_____________________________________________________________________________
You must complete each assignment within the given time limit. This gives you
important practice for examinations, since your results will depend not only on
how well you know your work but also on whether you were able to reproduce
your knowledge within the required time.
Always ensure that your assignment answers are set out neatly.
The most effective way to learn accounting is by practising it. The assignment
and the additional assignments provide you with the opportunity of doing this,
so make use of them!
Supplementary reading
The prescribed study units, in conjunction with the additional information and
examples given in this study guide, cover the syllabus comprehensively.
However, you cannot overlook the importance of undertaking supplementary
reading. Whenever possible, read the financial pages of the press. For
supplementary reading on syllabus topics, consult the following texts:
 Financial Accounting (3rd edition), by Faul, Everingham, Redelinghuys &

Van Vuuren (Butterworth). This book covers all the topics in the syllabus.
 Practical Accountancy (4th edition), by Van Lill, Hechter, Van Niekerk &
Vorster (Juta). Covers partnerships, companies and close corporations.
 Fundamental Accounting (3rd edition), by Flynn, Koornhof &
Bezuidenhout (Juta). Covers partnerships, companies and close
corporations.
 Accounting – An Introduction (4th edition), by Faul, Pretorius & Van
Vuuren (Butterworth). Covers partnerships, companies, close
corporations and branch accounts.
 Selected Questions in Accounting: Intermediate (7th edition), by Wilson,
Cairns, Dickinson and Sanders (Juta). Contains questions only.
 Graded Questions on Financial Accounting (3rd edition), by Wilson,
Broome & Flynn (Juta). Contains questions only.
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COURSE SYLLABUS
The syllabus topics for the Financial Accounting II course are set out below.
Check your study schedule to see which units you have to study to cover the
syllabus topics.
Topic
1 PARTNERSHIPS
1.1 Admitting a new partner:

1.1.1 With cash, other assets and liabilities brought in by a new partner
1.1.2 Revaluation of assets
1.1.3 Working of all aspects of goodwill
1.1.4 Changes in profit-sharing ratio
1.2 Retirement of a partner:
1.2.1 Goodwill aspects
1.2.2 Revaluations
1.3 Dissolution of a partnership:
1.3.1 Sale of assets, including piecemeal selling off
1.3.2 Settling liabilities
1.3.3 Take-over of items by partner
1.3.4 Using the Garner vs. Murray rule
1.3.5 Piecemeal dissolution with immediate distribution of cash
1.4 Incomplete records
2 COMPANIES
2.1 Formation
2.2 Issue of shares and debentures:
2.2.1 No par value shares
2.2.2 At a premium
2.2.3 At par
2.2.4 Deferred expenses
2.3 Underwriting of shares
2.4 Capitalisation (bonus) shares
2.5 Conversion of shares:
2.5.1 Conversion of par value shares into shares without par value
2.5.2 Conversion of shares without par value into shares with par value
2.6 Redemption of preference shares:
2.6.1 New issues
2.6.2 Ex profits
2.7 Redemption of debentures:
2.7.1 At term end
2.7.2 By instalments
2.8 Final accounts/statements:
2.8.1 Internal use
2.8.2 For publication in accordance with the Companies Act and
generally accepted accounting practice (GAAP)
2.8.3 Cash flow statement (Statement AC118)
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2.9 Manufacturing companies:
2.9.1 Production cost statement
2.9.2 Final accounts/statements
2.9.3 Internal use
2.9.4 For publication
2.10 Buying a business (including a partnership)
2.11 Conversion of a partnership into a company
3 CLOSE CORPORATIONS
3.1 Formation
3.2 Difference between a close corporation, a company and a partnership
3.3 Annual financial statements:
3.3.1 Internal use
3.3.2 For publication in accordance with the Close Corporations Act and
GAAP
3.4 Conversion of a partnership into a close corporation
3.5 Conversion of a company into a close corporation
4 BRANCH ACCOUNTS
4.1 Non-independent branch:

4.1.1 Stock supplied at cost
4.1.2 Stock supplied at selling price
4.2 Independent branch
4.3 Mutual transactions between branches and items in transit
4.4 Foreign branches (Statement AC112)
5 DRAWING UP FINANCIAL STATEMENTS OF A COMPANY WITH WHOLLY-

OWNED SUBSIDIARIES
5.1 Consolidation at date of acquisition

5.2 Consolidation after date of acquisition
5.3 Inter-company transactions:
5.3.1 Balance sheet items
5.3.2 Income statement items
5.4 Profit in stock in the books of the holding company or in the books of the
subsidiary company
6 LONG-TERM CONSTRUCTION PROJECTS
6.1 Completed contract method

6.2 Percentage of completion method
7 INSTALMENT SALES
7.1 Books of buyer

7.2 Books of seller
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8 JOINT VENTURES
8.1 Separate sets of books account

8.2 No separate sets of books kept
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STUDY SCHEDULE
The purpose of this study schedule is to show you how the syllabus has been
presented in this course. The various assignments specify the prescribed
study units and related assignment s you need to complete. The study
schedule enables you to see at a glance where the material for each
assignment can be found and which assignment s you are required to submit
to the College.
Study Session Syllabus topic Prescribed study unit Assignment

number No.
1 1.1, 1.2, 1.3, 1.4 D20059594-E1, D20059589-E1 D20059601-A
2 2.1 D20059592-E1 D20059601-B

2.2, 2.3, 2.4 D20059595-E1
2.5 D20059601-E1
2.6, 2.7 D20059602-E1
2.8 D20059592-E1
2.9 D20059593-E1, D20059601-E1
2.10, 2.11 D20059589-E1, D20059596-E1
3 3.1, 3.2, 3.3, D20059603-E1 D20059601-C

3.4, 3.5
4 4.1, 4.2, 4.3, D20059588-E1 D20059601-D

4.4
5 5.1, 5.2, 5.3, 5.4 D20059597-E1, D20059590-E1, D20059601-E
6 6, 7, 8 D20059604-E1, D20059598-E1, D20059601-F

D20059604-E1, D20059600-E1
7 All topics Revise all
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STUDY SESSION ONE
What will you discover?
In this study session we concentrate on more advanced aspects of partnership

accounts, namely:
 goodwill;
 admitting a new partner;
 retirement of a partner;
 dissolution of a partnership; and
 incomplete records.
LEARNING OBJECTIVES
At the end of this study session you should be able to:
 process the accounting entries for goodwill in partnerships;

 process the accounting entries for the admission of a new partner,
including the revaluation of assets and liabilities, journal entries, ledger
accounts, changes in the profit-sharing ratio, and the balance sheet;
 process the accounting entries for the retirement of a partner, including
the revaluation of assets and liabilities, goodwill, journal entries, ledger
accounts and balance sheet;
 process the accounting entries for the dissolution of a partnership,
including the piecemeal selling off of assets, the take-over of assets by
partners, settling liabilities, the application of the Garner vs. Murray rule
and the distribution of cash; and
 draw up financial statements from the incomplete records of a
partnership.
Prescribed units
Accounting for goodwill, admission of a new partner, retirement of a partner,

dissolution of a partnership: Study Units D20059594-E1 and D20059589-E1.
You should study the whole of Study Unit D20059594-E1, and do all practice
exercises. Also work through all self-assessment questions in the second
section (entitled 'Final Accounts: Study Unit Four') of Study Unit D20059589-
E1, from the heading 'Self Examination Questions' to the heading 'Summary',
with the exception of question 7.
_____________________________________________________________________________
Now do Assignment 1
Once you fully understand all the study material covered in this study session,
complete Assignment 1.
_____________________________________________________________________________
FOR YOUR NOTES
_____________________________________________________________________________
ASSIGNMENT 1
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-A Edition: 1
_____________________________________________________________________________
Recommended time: 2 hours
_____________________________________________________________________________
INSTRUCTIONS
1. Please fill in a blank Assignment Cover sheet, which you should have received with your
study material. If you have only one Assignment Cover sheet left and more assignments to
submit, please photocopy the Assignment Cover sheet. Alternatively, you can download
the Assignment Cover sheet from the Damelin Correspondence website: www.dcc.edu.za.
Click on General Info, then under Study Skills, click on Assignments.
2. Please transfer the following information onto the cover of your Assignment Cover sheet:
 your student number;

 your name and surname;
 postal address;
 postal code;
 telephone number;
 subject name;
 assignment/test code (which you will find at the top of this page); and
 the total number of pages of your assignment (excluding the cover sheet).
3. You should send this assignment to the College for marking only if it is shown in your
Study Programme under 'Assignments for Submission'.
4. Answer the questions in your own words. Marks will be deducted if you copy directly from
your study material.
5. You can post or e-mail your assignment answers to us.

Post:
 You can post your assignment answers to Damelin Correspondence College,
PO Box 31001, Braamfontein, South Africa, 2017. If you post your assignment
answers, ensure that you have paid sufficient postage – otherwise your answers will
be returned unmarked.
 Draw a margin on the right-hand side of each page for your tutor to award marks
and write comments. Also, please leave two lines open after each question for
further comments.
 You can answer the questions in any order, but make sure that you staple them
together in the correct order. Handing in neat work will be to your advantage.
E-mail:
 Alternatively, you can e-mail your answers to dccassignments@damelin.edu.za. Please
include the assignment/test code, your name and your student number in the subject
heading of your e-mail. You can download the Assignment Cover form as a Word
document from the Damelin Correspondence website: www.dcc.edu.za. Click on
General Info, then under Study Skills, click on Assignments. Remember to attach the
Word document and your assignment file to your e-mail.
_____________________________________________________________________________
Additional instructions
 Please indicate on your assignments which edition of the study guide you are using. Certain
information and page references differ from edition to edition.
_____________________________________________________________________________
Question 1
Barney and Wally were partners, trading as B & W Traders. They shared
profits and losses in the ratio 3:2. On 1 July 2007 they decided to amalgamate
with Mac. On 30 June 2007 the balance sheets of the respective firms were as
follows:
BALANCE SHEET AT 30 JUNE 2007

Barney & Mac Barney & Mac
Wally Wally
R R R R
Assets Owners' equity and
liabilities
Buildings 100 000 – Capital:
Vehicles 20 000 10 000 – Barney 127 200
Goodwill 30 000 15 000 – Wally 84 700
Trading stock 45 000 20 000 – Mac 50 000
Debtors 40 000 12 000 Creditors 32 800 8 000
Cash at bank 9 700 1 000
244 700 58 000 244 700 58 000
The terms of the amalgamation were as follows:
1. The assets were revalued as follows:

Barney & Wally Mac
R R
Buildings 120 000 –
Trading stock 42 000 18 000
Goodwill 45 000 18 000
2. Goodwill was not to appear as an asset in the books of the new

partnership.
3. It was agreed that all Mac's assets and liabilities would be taken over,
with the exception of motor vehicles, which were to be taken over and
paid for in cash by Mac.
4. The profit-sharing ratio in the new partnership would be:
Barney 4 : Wally 3 : Mac 2
5. Capital balances were to be in profit-sharing ratio and based on Wally's

balance after all adjustments had been made. Cash had to be paid in or
withdrawn by Barney and Mac to that effect.
6. The name of the new firm was to remain B & W Traders.
_____________________________________________________________________________
Required
(a) Journalise all entries required to adjust and close Mac's books.
Narrations are not required.
(b) Journalise all entries in connection with the amalgamation in the books
of B & W Traders. Narrations are not required.
(c) Show the balance sheet of the new firm on 1 July 2007, after the
amalgamation.
Question 2
D, E, and F were in partnership for a number of years, sharing profits in the

ratio 5:2:3 respectively.
The partnership suffered losses as a result of an economic recession. They

therefore decided to dissolve the partnership on 30 June 2007, the end of the
financial year of the partnership.
On 30 June 2007, the balance sheet of the partnership was as follows:
Capital D R100 000 Plant and machinery R200 000

E 140 000 Accumulated depreciation on plant
F 60 000 and machinery (60 000)
300 000 Vehicles 300 000
Loan 110 000 Accumulated depreciation on vehicles (140 000)
300 000
Creditors 90 000 Joint life policy 20 000
Bank 40 000 Stock 50 000
Debtors 180 000
Provision for bad debts (10 000)
R540 000 R540 000
Further information relating to the dissolution:
1. On 2 July 2007, D personally paid R5 600 in respect of dissolution

expenses on behalf of the partnership.
2. The partnership assets were disposed of as follows:
 Motor vehicles were sold at a loss of R60 000 after one vehicle was
taken over by F at its book value of R52 000.
 The joint life policy realised R23 000.
 Stock realised R56 000.
 Debtors realised their net book value.
 Plant and machinery were sold for R90 000.
3. Liabilities were all duly paid and R9 000 discount received from creditors.
4. A debit balance on a capital account is to be made good by an additional

cash contribution by the particular partner.
_____________________________________________________________________________
Required
Show the following ledger accounts that are necessary to close off the books of
the partnership:
(a) realisation account; and
(b) capital accounts.
Question 3
B & B Sellers had the following balance sheet on 30 June 2006.
LIABILITIES ASSETS
Capital J Barnes R60 000 Fixed property R32 000
C Barnes 40 000 Equipment at cost R15 000
Less accumulated
depreciation 6 000 9 000
Creditors 10 000 Investments 12 000
Expenses due (salaries) 600 Stock at cost 39 500
Income received in advance: rent 300 Debtors 8 000
Bills receivable 2 000
Expenses prepaid (insurance) 800
Income accrued (interest) 600
Bank 7 000
110 900 110 900
The owners did not keep proper double-entry records, but it is ascertained
that the following events took place during the year ended 30 June 2007:
Cash received:
Rent received 3 300

Interest received 1 200
Cash sales 90 000
Payments received from debtors 44 000
Cash payments:
Creditors 67 000
Insurance 1 500
Salaries 18 000
Other operating expenses 6 000
Drawings (J Barnes, R12 000;
C Barnes, R8 000) 20 000
Investments made 23 000
Other items:
Discount allowed 700

Bad debts written off 500
Discount received 1 400
_____________________________________________________________________________
Balances 30 June 2007:
Stock at cost 18 000

Bills receivable 7 000
Interest receivable 600
Insurance prepaid 800
Creditors 13 000
Debtors 7 000
Salaries accrued 400
Required
Draw up an income statement for the year and a balance sheet on 30 June
2007 conforming to the requirements of generally accepted accounting
practice. Bear in mind that J Barnes and C Barnes share profits 3:2.
Question 4
X and Y are in partnership, sharing profits and losses in the ratio 3:2 after
allowing for interest on capital at the rate of 5% per annum.
After their first year of operations, their balance sheet at 30 September 2007,
before allowing for interest and the division of profits, was as follows:
R R
Capital X 16 000 Fixed assets
Y 8 000 Furniture 1 200
Profit for the year ended Current assets
30 September 2007 before Stock 8 000
allowing for interest 16 000 Debtors 56 000
Creditors 28 000 Bank 2 800
R68 000 R68 000
Z is admitted to this partnership on 1 October 2007. Z pays R4 000 into the

firm's bank account for his share of capital and goodwill. Goodwill is valued at
R6 000 and must not appear in the books.
The new agreement provides for interest on partners' capital accounts at 5%

per annum and the division of the remaining profits between X, Y and Z in the
ratio 3:2:1.
Required
Draw up the balance sheet of the partnership as at 1 October 2007.
_____________________________________________________________________________
STUDY SESSION TWO
In this study session you will learn about companies. The following aspects are
covered:
 formation of a company;
 issue of shares and debentures;
 capitalisation or bonus shares;
 conversion of shares;
 redemption of preference shares;
 redemption of debentures;
 financial statements;
 manufacturing companies;
 buying a business (including a partnership); and
 conversion of a partnership into a company.
LEARNING OBJECTIVES
At the end of this study session you should be able:
 to discuss the formation of a company;

 to distinguish between par value shares and no par value shares;
 to distinguish between the different classes of shares;
 to process the accounting entries for the issue of shares and debentures;
 to convert par value shares to no par value shares, and no par value
shares to par value shares;
 to process the accounting entries for the redemption of preference
shares;
 to process the accounting entries for the redemption of debentures;
 to draw up company financial statements, including an income
statement, balance sheet and cash flow statement;
 to draw up a production cost statement, income statement and balance
sheet of a manufacturing company;
 to process the accounting entries when a company buys a business,
including a partnership; and
 to account for the conversion of a partnership into a company.
_____________________________________________________________________________
Prescribed units
Formation of a company, types of shares and classes of shares: Study Units

D20059592-E1 and D20059595-E1
Work through Study Unit D20059592-E1, from the heading 'Company

Accounts' to just before the heading 'External Capital', and the whole of Study
Unit D20059595-E1.
Issue of shares and debentures, and capitalisation shares: Study Unit

D20059595-E1
Study from the heading 'Starting a Public Company' to just before Example 5.
Bear in mind the following:
 The total proceeds from the issue of no par value shares is credited to a
'stated capital account'.
 Where par value shares are issued at a premium – in other words an
amount in excess of the nominal value of the shares – the nominal value
is credited to the capital account, and the premium is credited to a share
premium account.
You should also study from 'Shares and dividends' to the heading 'GAAP and
Deferred Taxation'.
Study from 'Capitalisation and Rights Issues' to before the heading 'Forfeiture
of Shares'.
Study the issue of debentures from 'External Equities' to before the heading
'Short- and Long-term Liabilities'.
Conversion of shares
A company, if so authorised by its articles, may by special resolution convert

all of its ordinary or preference share capital – consisting of shares of par
value – into stated capital consisting of shares of not par value. When such a
conversion takes place, the balances on the capital account and share
premium accounts are transferred to the credit of the stated capital account.
EXAMPLE 1
A company has 500 000 ordinary shares of R1 each, issued at R1,10 per
share. It was decided to convert the shares into no par value shares.
The journal entry to record the conversion will be as follows:
Ordinary share capital account 500 000

Share premium account 50 000
Stated capital account 550 000
Conversion of par value shares to shares of no par value.
_____________________________________________________________________________
Redemption of preference shares and debentures: Study Unit D20059602-E1
Study from 'Redeemable Preference Shares' to just before the heading 'The
Sinking Fund Method'. Ignore the 'sinking fund method'.
Study from 'Redemption of Debentures' to just before the heading 'Use of

Sinking Fund', and from 'Collateral Security' to just before 'Conversion of
Debentures'. Ignore the 'sinking fund method'.
Although the conversion of debentures into shares is not included in your

syllabus, we recommend that you also make a study of this topic.
Note the example which deals with the redemption of debentures at the end of
the term. You are also required to study the following example, which deals
with the redemption of debentures at the end of the term and in instalments.
EXAMPLE 2
On 1 January 2004 Kallis Ltd. issued 1 000 12% debentures of R100 each,
at a discount of 6%. Interest is payable annually in arrears on 31 December.
The company's year end is 31 December.
Required
Record all journal entries, including those for cash transactions, where the
debentures are redeemable at par:
1. at 31 December 2007; and
2. by equal annual drawings over a period of four years, commencing

31 December 2004.
_____________________________________________________________________________
Solution
1. Here are the journal entries where debentures are redeemable in a single
payment at 31 December 2007.
2004 Bank 94 000

Jan. 1 Debenture application account 94 000
Application for 1 000 debentures of R100 each at a
discount of 6%
Debenture application account 94 000
Discount on debentures account 6 000
12% Debentures account 100 000
Issue of 1 000 debentures of R100 each at a discount of
6%.
Dec. 31 Interest paid 12 000
Bank 12 000
Interest on debentures: R100 000  12%
Profit/Loss account 13 500
Interest paid 12 000
Discount on debentures 1 500
Closing transfer
2005
Dec. 31 Repeat last two entries for 2004
2006
Dec. 31 Repeat the entries for 2005
2007
Bank 12 000
Closing transfer
Discount charged to income statement
Bank 100 000
Redemption of 1 000 debentures of R100 each at par.
Note that the R6 000 discount on debentures was charged to the income
statement in equal amounts over the life of the debentures, which was four
years.
2. The next page shows the journal entries where debentures are
redeemable in four equal annual drawings commencing 31 December
2004.
_____________________________________________________________________________
2004 Bank 94 000
Jan. 01 Debenture application account 94 000
Application for 1 000 debentures of R100 each at a discount of 6%
Debenture application account 94 000
Issue of 1 000 debentures of R100 each at a discount of 6%
Bank 12 000
Closing transfer
Bank 25 000
Redemption of 250 debentures of R100 each at par
2005 Interest paid 9 000
Dec. 31 Bank 9 000
Interest paid 9 000
Closing transfer
Bank 25 000
Dec. 31 Bank 6 000
Interest paid 6 000
Closing transfer
Discount on debentures 1 200
Bank 25 000
Dec. 31 Bank 3 000
Interest paid 3 000
Closing transfer
Profit/Loss account 600
Discount on debentures account 600
Bank 25 000
Redemption of 1 000 debentures of R100 each at par
_____________________________________________________________________________
Note that the R6 000 discount on debentures was charged to the income
statement on the basis of liability outstanding, as follows:
Year Liability Discount

outstanding
2004 R100 000 R2 400 100/250  R6 000
2005 75 000 1 800 75/250  R6 000
2006 50 000 1 200 50/250  R6 000
2007 25 000 600 25/250  R6 000
R250 000 R6 000
Financial statements of companies: Study Units D20059592-E1 and D20059604-

E1
The financial statements of companies prepared for publication must meet

certain disclosure requirements as set out in the Companies Act and in
statements of generally accepted accounting practice (GAAP). Study from the
heading 'Principal Accounting Provisions of the Companies Act' to just before
the heading 'Self-Assessment Questions'. This section covers the provisions of
the Companies Act, the requirements of Schedule 4 of the Act and the GAAP
statements.
Work through Study Unit D20059592-E1, and AC 101 and AC 118 in Study
Unit D20059604-E1.
Buying a partnership, and conversion of a partnership into a company: Study

Units D20059589-E1 and D20059596-E1
In the second section of Study Unit D20059589-E1 (the section entitled 'Final
Accounts: Study Unit Four'), study the material from the heading 'Sale of a
Going Concern' to just before the heading 'Self-examination Questions'. Study
very carefully the accounting entries in the books of the partnership, and
those in the books of the purchaser.
Note the following errata on page 14:
 The heading of the third ledger account should be 'Acquisition Account',

and not 'Books of AB (Pty) Ltd.'
 The heading 'Books of AB (Pty) Ltd.' should appear above 'Acquisition
Account'.
 The acquisition account, and the ledger accounts that follow after it, are
reflected in the books of AB (Pty) Ltd., purchaser.
You should also study the whole of Study Unit D20059596-E1.
Now do Assignment 2
Once you fully understand all the study material covered in this assignment,
complete Assignment 2.
_____________________________________________________________________________
ASSIGNMENT 2
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-B Edition: 1
_____________________________________________________________________________
_____________________________________________________________________________
INSTRUCTIONS

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_____________________________________________________________________________
Question 1
The following list of balances was extracted from the books of BG Trading
Limited at 30 June 2006 after the closing entries had been passed.
R
Trade creditors 137 883
Stock 699 715
Provision for income tax (balance due) 2 004
Provision for bad debts 20 997
16% Mortgage debentures 400 000
Land and buildings at cost 600 000
Debenture interest accrued 16 000
Goodwill at cost 300 000
General reserve 198 000
Furniture at cost less depreciation 100 000
Debtors 396 400
Ordinary share capital 1 500 000
Retained income 163 715
Additional information:
1. The cash book balance had been omitted.
2. A dividend of 10% has been declared but no entries have yet been made.
3. The authorised capital of the company is 1 000 000 ordinary shares of R2

each. The directors have unrestricted power to issue the unissued shares
as they deem fit before 31 March 2007.
4. Stock at 30 June 2006 has been valued at the lower of cost or net
realisable value. The basis was consistent with that used in previous
years.
5. The furniture on hand at 30 June 2006 was purchased on 1 July 2004.

Depreciation is calculated at 10% per annum according to the fixed
instalment method.
6. The debentures were issued in units of R100 and are redeemable at a

premium of 5% on 30 June 2016.
7. Land and buildings consist of office and shop premises on Site number
178, Evertal, purchased on 3 August 1996 for R600 000.
8. Debtors include an amount of R16 400 lent to a director. The loan was
made on 17 June 2006 and no repayments have yet been made. The loan
was for the purchase of a car to be used mainly for the company's
business, and was properly authorised.
Required
Prepare a balance sheet conforming to generally accepted accounting practice

and the provisions of the Companies Act. Ignore comparative figures and the
funds statements.
_____________________________________________________________________________
Question 2
On 1 March 2007, DB Limited issued R560 000 15% debentures at R98.

The debentures were to be redeemed at par in four equal annual payments
starting 28 February 2010.
Required
Journalise the above events in the books of DB Limited for the period 1 March
2001 to 28 February 2007.
Question 3
CW Ltd. had the following balance sheets at 31 December 2006 and 2007.
ASSETS 2006 2007

R R
Patents 124 000 112 000
Land 60 000 60 000
Machinery and equipment 174 000 174 000
Accumulated depreciation,
machinery and equipment (38 000) (64 000)
Buildings 290 000 440 000
Accumulated depreciation, buildings (90 000) (90 000)
Prepaid expenses 4 884 5 714
Stock 54 830 70 352
Bills receivable – 20 000
Debtors 112 000 175 110
Investments 52 200 78 400
Bank 62 840 79 122
R806 754 R1 060 698
LIABILITIES
Creditors 45 154 64 474

Salaries payable 27 000 30 000
Bond 170 000 230 000
Ordinary R10 shares 310 000 430 000
Preference shares, R100 par value 120 000 120 000
Ordinary share premium 30 000 30 000
Retained earnings 104 600 156 224
R806 754 R1 060 698
Additional information in respect of 2007:
1. The net income for the year, after tax of R61 074, amounted to R114 648.
2. Dividends paid for the year, R63 024.
3. Depreciation written off for year:

Buildings R30 000
Machinery and equipment R26 000
4. A building costing R30 000, fully depreciated, was abandoned.
5. Amortisation in respect of patents amounted to R12 000 for the year.
6. An additional bond was acquired during the year, R180 000.

_____________________________________________________________________________
7. A bond of R120 000 was redeemed during the year, issuing 12 000
ordinary shares in exchange.
Required
Prepare a cash flow statement for the year.
Question 4
A Edwards & Co. sold their business on 1 July 2006 to a company, Arthur
Edwards (Pty) Ltd., for the sum of R220 000, to be paid for by 125 000 R1
ordinary shares and R95 000 in cash.
Their assets consisted of:

R
Freehold land and buildings, valued at 28 000
Machinery and plant, etc., valued at 25 000
Book debts, certified by the auditors at 45 000
Stocks and materials in progress, valued at 140 000
Advertising plates, etc. 25 000
and their liabilities were:
Trade creditors 40 000

Loans on mortgage 45 000
The capital of the company was R250 000, consisting of 125 000 ordinary
shares of R1 each, and 125 000 6% preference shares of R1 each, issued at
R1,05 per share.
Required
Make the journal entries for the above transactions in the company's books,
and then set out the balance sheet.
Question 5
Chatenays Ltd. was registered with a nominal capital of R200 000, comprising
100 000 each of ordinary and 6% preference shares of R1 each, to purchase
the established business of Abel Chatenay. The purchase price was agreed at
R120 000, payable as R30 000 in cash, R40 000 in ordinary shares of R1 each,
and R50 000 in 6% preference shares of R1 each. The company was to
discharge the liabilities of the old firm. The balance sheet of Abel Chatenay as
on the date of purchase was as follows:
_____________________________________________________________________________
SUMMARISED BALANCE SHEET
as at 1 July 2007
LIABILITIES R ASSETS R
Capital 100 000 Land and buildings 36 000
Creditors 14 040 Machinery and plant 37 860
Bank loan 2 000 Sundry debtors 18 764
Stock 22 440
Cash in hand 976
R116 040 R116 040
The balance of both classes of shares was issued to the public and fully
subscribed and paid up.
Required
Prepare the accounts necessary to record the above purchase in the company's
books, and give the initial balance sheet of the new company.
_____________________________________________________________________________
Question 6
Joytoys Manufacturers had a policy of transferring factory production to the

sales department at a profit of 10% on total cost of production of finished
goods. The following particulars related to the records of the firm for the period
1 January 2007 to 31 December 2007.
Balances 1 January 2007 R
Raw materials 20 000

Work in progress 30 000
Finished goods 55 000
Direct wages due 400
Direct wages prepaid 200
Electricity due 800
Purchases of raw materials for the year 245 000
Carriage inwards 3 000
Customs duty 4 000
Purchases returns 5 000
Raw materials costing R10 000 sold 18 000
Direct wages paid 90 000
Electricity paid 3 400
Insurance, factory 1 200
Repairs to equipment (factory) 2 740
Returns inwards 10 000
Sales 792 000
Equipment (factory) at cost 60 000
Provision for unrealised profit on stock
of finished goods 5 500
Office furniture at cost 14 000
Motor vehicles at cost 50 000
Rates (factory) 4 800
Water (75% factory) 4 200
Stationery and printing ( 1 3 factory) 5 100
Factory maintenance 12 000
Postage and telephone ( 1 3 factory) 1 800
Accumulated depreciation: office furniture 5 600
equipment 24 000
motor vehicles 15 000
Other expenses (sundry) 235 240
Further information:
1. Balances 31 December: Raw materials 30 000

Work in progress 24 000
Electricity due 600
Direct wages due 960
Finished goods ?
Stock of finished goods had not been taken at 31 December 2007, but the
business works on a gross profit mark-up percentage of 50% on turnover.
This calculation is based on the price at which the factory delivers
manufactured goods to the sales department.
_____________________________________________________________________________
2. Depreciation to be provided:
Factory equipment at 10% per annum on cost.

Office furniture at 5% per annum on cost.
Motor vehicles at 20% per annum on cost.
Required
Draw up the production cost statement and income statement of the business
for the year ended 31 December 2007.
Question 7
At a meeting of the board of directors of Barby Limited it was decided:
1. To redeem the redeemable preference shares of the company on

30 September 2006.
2. To achieve this by a fresh issue of the maximum number of ordinary

shares permissible without the necessity of calling a meeting of
shareholders.
3. That the issue price for the proposed issue would be R1,20 per share.
4. That the redemption should be made in such a way that would have the
minimum effect on distributable reserves.
5. That after the redemption and the issue have been made, a proposal be
put to the shareholders in a general meeting that increased the
authorised share capital by an amount sufficient to allow a capitalisation
issue of one ordinary share for every two ordinary shares already held.
This is also to be arranged so that there is a minimum effect on
distributable reserves.
The following information has been extracted from the accounting records of
Barby Limited at 31 August 2006.
80 000 ordinary shares of no par value – stated capital R72 500

25 000 12% redeemable preference shares of R2 each 50 000
Share premium account 2 500
Surplus on revaluation of land 50 000
Retained earnings 65 000
Notes
1. The redeemable preference shares are redeemable at a premium of 20c

per share at any time at the option of the company.
2. The authorised share capital of the company is:
 100 000 ordinary shares of no par value; and

 25 000 redeemable preference shares of R2 each.
3. The directors have the power to issue unissued shares.
_____________________________________________________________________________
4. The company has sufficient cash, together with the proceeds of the fresh
issue, to make any payments which may be required.
5. The company earned a net income after taxation of R5 000 for the month
of September 2006.
6. Expenses related to the share issue amount to R1 000.
7. The year end of the company is 31 March.
Required
(a) Record the journal entries required to give effect to the redemption and
the fresh issue of shares on 30 September 2006, in accordance with the
directors' decisions in points 1 to 4.
(b) Prepare the 'Capital Employed' section of the balance sheet, as it would
appear immediately after the redemption and fresh issue. Presentation
must comply with the requirements of the Companies Act. Show all
workings separately.
(c) Illustrate by means of a pro forma journal entry the effect of the directors'
decision (point 5), if it should be confirmed by the shareholders.
(d) Give one good reason for the elaborate provisions made by the
Companies Act regulating the procedure for the redemption of
redeemable preference shares.
_____________________________________________________________________________
Question 8
Twala Ltd. was incorporated on 1 January 2007 with an authorised capital of

200 000 ordinary shares of R1,00 each and 200 000 10% redeemable
preference shares of R1,00 each. The trial balance of the company at
31 December 2007 was as follows:
R R
Ordinary share capital 130 000
Share premium 10 000
10% Preference share capital 40 000
6% Debentures of R10 each, secured by
mortgage bond over land and buildings 60 000
General reserve 20 000
Retained income (1 January 2007) 30 000
Land and buildings 160 000
Machinery 130 000
Furniture 40 000
Provision for depreciation:
Machinery 41 800
Furniture 18 400
Reserve for increased replacement value of machinery 34 000
Investments 35 000
Loan levy 9 000
Long-term loan 25 000
Stock (31.12.2007): Merchandise 55 000
Consumable stores 5 000
Debtors 45 000
Provision for doubtful debts 1 125
Bank 20 000
Creditors 27 000
Provision for tax (less provisional payments) 12 000
Expenses accrued 6 100
Net operating income 89 575
Dividends received 3 000
Interim dividend paid 8 500
Taxation payable for the year (including STC) 40 000
The following additional information must be considered:
1. Turnover for the year amounted to R450 000 and consisted of net sales.
2. The amount for net operating income was obtained after calculating the
gross profit and considering the following items:
Depreciation: Machinery R9 800
Furniture 2 400
Administrative expenses 28 000
Salaries:
Auditors' remuneration:
auditing 5 000
expenses 1 000
Directors' emoluments:
directors' fees 2 000
salary of managing director 5 000
Bona fide employees 2 000
Interest accrued: Debentures 3 600
Long-term loan 2 500
Lease charges for equipment 12 000
Provision for doubtful debts (decrease) 2 875
_____________________________________________________________________________
3. Dividends on listed investments amounted to R2 000.
Dividends on unlisted investments amounted to R1 000.
4. Final dividends recommended: ordinary shares at 10% and preference

shares at 5% of nominal value.
5. R20 000 was paid for the listed investments. At the end of the financial
period the market value was R25 000.
The balance of the investments was bought for R15 000 and valued by
the directors at R12 000. It was decided to diminish the value of the
unlisted investments permanently according to the valuation of the
directors.
6. The directors decided to transfer R5 000 from general reserve.
7. The directors were authorised to redeem half of the redeemable

preference shares at a premium of 10c per share on 31 December 2007.
The balance of the share premium account will be applied, as well as
profits available for dividend. You are also required to record the
necessary entries for the payments to shareholders.
8. The long-term loan is an unsecured 10% loan and has to be repaid

during 2007. The debentures must be redeemed as from 1 June 2008 in
equal annual instalments of R6 000.
9. The land and buildings are situated on erf no. 345, Epping, and were
acquired when the company was incorporated.
Required
Compile the income statement and balance sheet to comply with the minimum
requirements of the Companies Act (Act 61 of 1973) and generally accepted
accounting practice.
Note You are not required to disclose any notes with regard to the
accounting policy of the company.
_____________________________________________________________________________
Question 9
The following is an extract from the Annual Financial Statements of Diamond

Limited for the year ended 31 December 2006.
DIAMOND LIMITED
BALANCE SHEET AT 31 DECEMBER 2006
CAPITAL EMPLOYED 2006 2007
Ordinary share capital 400 000 ordinary shares of 50c par value 200 000 100 000
Share premium 15 000 5 000
Non-distributable reserve – surplus on sale of land 6 000 –
Distributable reserves – general reserve 50 000 30 000
– retained income 10 000 17 500
Ordinary shareholders' interest 281 000 152 500
Preference share capital 100 000 6% convertible preference
shares of R1 par value 100 000 40 000
Share capital and reserves 381 000 192 500
Long-term liability 8% mortgage debentures – 100 000
R381 000 R292 500
EMPLOYMENT OF CAPITAL
Fixed assets (Note 1) 316 200 281 000
Current assets
Stock 61 300 28 000
Debtors 25 800 6 000
Bank 5 900 –
93 000 34 000
Current liabilities
Creditors 24 200 17 400
Bank overdraft – 2 100
Shareholders' dividends 4 000 3 000
28 200 22 500
Net current assets 64 800 11 500

R381 000 R292 500
Note
Fixed assets Cost Accumulated Net book value

depreciation
2006 2005 2006 2005 2006 2005
Land and buildings 268 100 242 100 – – 268 100 242 100
Plant and equipment 58 700 34 000 21 600 11 600 37 100 22 400
Vehicles 18 000 18 000 9 000 4 500 9 000 13 500
Furniture and fittings 5 000 5 000 3 000 2 000 2 000 3 000
R349 800 R299 100 R33 600 R18 100 R316 200 R281 000
_____________________________________________________________________________
DIAMOND LIMITED
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2006
Net income before taxation: (including surplus on sale of land) R45 000
Less: Taxation – normal tax for current year 9 500
Net income after taxation: 35 500
Less: Share issue expenses 1 000
34 500
Less: Preference dividend 6 000
Net income attributable to ordinary shareholders: 28 500
Add: Retained income 1 January 2006 17 500
46 000
Less: Transfer to non-distributable reserves (surplus on
sale of land) 6 000
Transfer to general reserve 20 000 26 000
20 000
Less: Ordinary dividends 10 000
Retained income 31 December 2006 R10 000
The following additional information is to be taken into account:
1. Favourable market conditions enabled the company to place 200 000

ordinary shares privately with institutional investors at a premium of
5 cents per share, and issue 60 000 R1 6% preference shares to the
public at par. The issue of new shares was undertaken to permit the
redemption of the mortgage debentures. The company paid share issue
expenses of R1 000, and this amount was written off against income at
31 December 2006.
2. The company had sold a small plot (cost was R4 000) in December 2006.
No other fixed assets were sold or scrapped during the year.
3. Included in net income before taxation is interest paid of R5 400 and

interest received of R1 300.
Required
Prepare a cash flow statement for Diamond Limited for the year ended
31 December 2006, together with the relevant notes.
_____________________________________________________________________________
STUDY SESSION THREE
In this study session you will learn about close corporations. The following
aspects will be covered:
 the formation of a close corporation;

 the differences between a company, a close corporation and a
partnership;
 financial statements;
 the conversion of a partnership into a close corporation; and
 the conversion of a company into a close corporation.
LEARNING OBJECTIVES
 to discuss the formation of a close corporation;

 to explain the differences between a close corporation, a company and a
partnership;
 to draw up financial statements for a close corporation;
 to convert a partnership into a close corporation; and
 to convert a company into a close corporation.
Prescribed unit
Study the whole of Study Unit D20059603-E1.
Now do Assignment 3
do Assignment 3.
_____________________________________________________________________________
ASSIGNMENT 3
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-C Edition: 1
_____________________________________________________________________________
_____________________________________________________________________________
INSTRUCTIONS

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_____________________________________________________________________________
Question 1
The RMP CC has been in existence for some years. Its members are P, M and
R. Their respective shares of the financial interest are P 25%, M 35% and R
40% as at 31 December 2006. The corporation's balance sheet as at that date
showed the following figures.
R R R
FUNDS EMPLOYED
Members' contributions 320 000
Undrawn income 5 420
Members' funds 325 420
Loan from R 150 000
475 420
EMPLOYMENT OF FUNDS
Fixed assets
Land and building at cost 250 000
Plant and machinery at cost 220 000
Less: Depreciation 120 000 100 000
Current assets
Stock 100 000
Debtors 34 000
Cash 21 820 155 820
Current liabilities
Creditors 28 000
Taxation 2 400 30 400 125 420
475 420
The balances on the members' accounts were as follows:
P M R Total
R R R R
Investment account 125 000 175 000 20 000 320 000
Undrawn income 1 355 1 897 2 168 5 420
126 355 176 897 22 168 325 420
In the next year, 2007, the following occurred.
On 30 June, in response to R's request, her loan was reduced by R25 000, but
no repayment was made as it was agreed that her contribution of R20 000
should be repaid to her on 31 December 2007. At that date the assets were
revalued. The value of the land and buildings was assessed at R300 000 and
the value of the plant and machinery was found to be almost the same as its
depreciated value. The undrawn income for the year was R1 290. With effect
from 31 December, R's share is to be 35% while P's will be 27% and M's 38%.
_____________________________________________________________________________
Required
(a) Draft the member's net investment statement at 31 December 2007.
(b) Show the closing balances on the members' accounts and the total for
each member.
(c) Explain why the closing balance for each member on the net investment
statement will not agree with the total of the balances of their ledger
accounts which you have determined in exercise 1.2 above.
Question 2
The balances on the net investment statement of XYZ CC at 31 December

2006 were as follows:
X Y Z Total
R R R R
30% 40% 30% 100%
112 500 150 000 112 500 375 000
The members' contribution were as follows:
X R100 000
Y 100 000
Z 100 000
R300 000
The balance of R75 000 arose from a revaluation of land and buildings two
years earlier.
It was agreed that X should retire and should sell his interest to Y and Z for
R120 000 – each to pay R60 000. At the same time, M is to join the
corporation. M is prepared to contribute R10 000 in cash and provide a loan of
R50 000. What percentage interest should Y and Z offer to M, which would be
fair to themselves?
_____________________________________________________________________________
Question 3
Mpumalanga Engineers (Pty) Ltd. is a company that was registered in 1997. Its
financial year runs from 1 January to 31 December. Its balance sheet was
drawn on 31 December 2007 and is shown below.
MPUMALANGA ENGINEERS (PTY) LTD.
Balance sheet at 31 December 2007

R R R
FUNDS EMPLOYED
Share capital 90 000
Ordinary shares of R1 each 90 000
Undistributed profits 30 500
Shareholders' equity 120 500
EMPLOYMENT OF FUNDS
Fixed assets
Plant at cost 110 000
Motor vehicle at cost 15 000
Listed investment at cost 4 800
Current assets
Stock 13 200
Debtors 20 800
Cash 600 34 600
Current liabilities
Taxation 8 000
Bank overdraft 8 460
Creditors 6 440 Net current
Dividends 9 000 31 900 assets 2 700
R120 500
The company has three members: P holds 50 000 shares; Q and R hold 20 000
shares each.
The members have had a disagreement about the value of the land and
buildings and their respective shareholdings. They finally agree that the
company be converted to a close corporation in which P will have a 50%
interest and Q and R 25% each.
They also agree to the employment of an independent valuer to value the

assets at the date stated for conversion, which is 30 September 2008.
For the purpose of the conversion, the following balance sheet was drawn up.
_____________________________________________________________________________
MPUMALANGA ENGINEERS (PTY) LTD.
Balance sheet at 31 December 2007
R R R
FUNDS EMPLOYED
Share capital 90 000 ordinary shares of R1 each 90 000
General reserves 24 000
Undistributed profits 10 000
Shareholders' equity 124 000
EMPLOYMENT OF FUNDS
Fixed assets
Valued at 50 000
Plant at cost 110 000
Valued at 40 000
Motor vehicle at cost 15 000
Less: Depreciation 14 250 750
Valued at 2 000
Listed investments at cost 4 800
Valued at list price 5 200
Current assets
Stock 12 970 (fair value)
Debtors 16 600 (fair value)
Cash 500 30 070
Current liabilities
Bank overdraft 7 920 Net current
Creditors 5 450 13 370 assets 16 700
124 000
Required
(a) Show the contribution and undrawn profits attributable to each member.
(b) Calculate the tax liability on conversion and the date by which it must be
paid.
(c) Draft the balance sheet of the CC on 1 October 2008.
(d) Show the amount available for distribution to members of the CC on

conversion and how it is distributed, and the financial interest account of
each member.
(e) State what advantage, if any, there is in making the conversion during
the specified period in reference to the 2008 company's assessment year.
_____________________________________________________________________________
STUDY SESSION FOUR
In this study session you will study branch accounts.
LEARNING OBJECTIVES
 to write up the ledger accounts of non-independent branches;

 to draw up the financial statements of dependent branches; and
 to draw up the financial statements of foreign branches.
Prescribed units
Study the whole of Study Unit D20059588-E1, which is very comprehensive.
Now do Assignment 4
do Assignment 4.
_____________________________________________________________________________
FOR YOUR NOTES
_____________________________________________________________________________
ASSIGNMENT 4
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-D Edition: 1
_____________________________________________________________________________
_____________________________________________________________________________
INSTRUCTIONS

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_____________________________________________________________________________
Question 1
The following figures were extracted from head office books of the HPD Co.,
and submitted by the branches as at 31 December 2006.
Head Office Durban Prieska

Branch Branch
Cash at bank (Dr) 10 000 3 000 2 000

Branch account Durban (Dr) 4 800 – –
Branch account Prieska (Dr) 4 800 – –
Creditors 4 600 2 000 1 000
Debtors 7 000 4 000 1 500
Furniture and fittings at cost 6 000 2 000 1 500
Head office account (Cr) – 4 600 4 900
Land and buildings at cost 12 000 – –
Vehicles at cost 4 000 1 000 –
Depreciation provision Furniture and fittings 1 000 400 300
Vehicles 2 000 400 –
Owner's capital 50 000 – –
Stock at 31 December 10 000 2 000 4 000
Administration expenses 30 000 3 000 3 000
Gross profit 31 000 7 600 5 800
Durban Branch sent goods valued at R200 to Prieska Branch. The entries were
made in the branch books, but not in the head office books. Prieska sent Head
Office R100, which was only received on 3 January 2002.
Required
Pass all journal entries necessary to bring the branch trial balances into head
office books. Show the branch accounts and the branch income statement
accounts of the HPD Co. as at 31 December 2006.
Question 2
Kariema Samaar carries on a retail business under the name of KS Stores (Pty)
Ltd. and has a branch in Bloemfontein, the head office and principal store
being in Cape Town. She has an agreement with the manager of the branch
whereby the manager is to receive a commission of 10% of the net profits of
the branch calculated before such commission is deducted.
The trial balances extracted on 30 June 2007 from the sets of books kept at
Bloemfontein and Cape Town were as follows.
_____________________________________________________________________________
Bloemfontein Cape Town
(Branch) (Head Office)
Debit Credit Debit Credit

R R R R
Branch and head office current accounts 83 000 95 000
Ordinary share capital at R10 per share 180 000
Bank balance 16 000 5 000
Interim dividend paid 36 000
Commission paid on account to manager 2 200
Fixtures and fittings at cost 10 000 25 000
Goods sent to branch 116 400 126 000
Accumulated depreciation:
fixtures and fittings 5 000 9 000
Purchases 306 000
Debtors 47 000 66 000
Stock 30.6.87 37 900 82 000
Creditors 2 500 84 000
Sales 168 000 300 000
Salaries and wages 16 000 49 300
Rent, rates and insurance 7 000 12 000
Lighting and heating 300 500
Petty cash balances 100 200
General expenses 5 600 22 000
R258 500 R258 500 R699 000 R699 000
Additional information
1. Goods costing R9 600 had been despatched from Cape Town to

Bloemfontein and had been recorded in the Cape Town books. However,
they arrived in Bloemfontein after 30 June 2007, and were recorded in
the Bloemfontein books after that date.
2. On 30 June 2007 Bloemfontein had remitted R2 400 cash to Cape Town

and the entry had been made in its books, but as the cash had not been
received by Cape Town on that date, no record appeared in the Cape
Town books.
3. Stock on hand at 30 June 2007, valued at cost, was:
Bloemfontein R51 000

Cape Town R108 000
4. Any adjustments in connection with goods or cash in transit are to be

made in the Cape Town books.
5. Provision for depreciation on fixtures and fittings is to be made at 10% on

cost.
6. A final dividend of 20% of the net total profit must be provided and a
general reserve of 50% of the remaining profit is to be created.
_____________________________________________________________________________
Required
(a) Prepare a vertical columnar internal trading and profit and loss
statement for the year ended 30 June 2007, showing the respective
profits of the head office and the branch, and the total profit.
(b) Draw up the branch current account in the books of head office.
(c) Draw up the appropriation account in the books of head office.
(d) Prepare a vertical balance sheet of the firm as on 30 June 2007.

Additional notes are not required.
Question 3
A retail trading company opens a branch which is supplied with its stock by
its head office. The branch keeps its own customers' ledger and pays its daily
cash receipts into a local bank for transmission to its head office. The head
office invoices all goods to its branch at selling price and pays all branch
expenses itself.
Required
The branch was opened on July 1. From the following particulars, show the
entries in the head office books and prepare a statement showing the net profit
made at the branch:
 Goods supplied by head office to branch, July 1 to December 31 (invoiced

at selling price), R305 000 (note – the cost price of these goods was
R240 000);
 branch cash sales, R108 900;
 branch credit sales R160 100;
 cash received from debtors, R149 200;
 debtors at December 31, R10 900;
 stock on hand, December 31, at selling price, R36 000 – cost price
R28 500; branch expenses paid by head office, R32 700;
 ignore value-added tax.
_____________________________________________________________________________
STUDY SESSION FIVE
In this study session you will study the consolidation of the financial
statements of a company with wholly owned subsidiaries.
LEARNING OBJECTIVES
 to draw up consolidated financial statements for a company with wholly-

owned subsidiaries.
Prescribed units
Requirements of Companies Act – group financial statements: Study Unit

D20059597-E1
This study unit sets out the requirements of the Companies Act in respect of
group financial statements. You should study the whole unit.
Consolidated financial statements: Study Units I10059590-E1 and I10059591-E1
In Study Unit I10059590-E1, study the material that you will find under the
headings numbered as follows:
1. Comparison with branch accounts
2. Methods of acquisition
3. Holding company and wholly owned acquisition
5. Wholly-owned subsidiaries with preference shares
7. Consolidation after date of acquisition.
7.1 Wholly owned subsidiary – shares acquired at a premium (Leave out

7.2 and 7.3.)
8. Basic balance sheet adjustments in consolidation.
8.1 Inter-group balances
8.4 Treatment of fixed assets
(Leave out 8.2, 8.3 and 8.5.)

_____________________________________________________________________________
Study the following from Study Unit I10059591-E1:
I Consolidated turnovers.
II Consolidated income statements.
1. Wholly owned subsidiary (Stop just before 2: Partly owned

subsidiary.)
Now do Assignment 5
do Assignment 5.
_____________________________________________________________________________
FOR YOUR NOTES
_____________________________________________________________________________
ASSIGNMENT 5
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-E Edition: 1
_____________________________________________________________________________
_____________________________________________________________________________
INSTRUCTIONS

 postal address;
 postal code;
 subject name;

Post:
further comments.
E-mail:
_____________________________________________________________________________
_____________________________________________________________________________
Question 1
On 2 July 2005, H Ltd. purchased the entire issued ordinary share capital of
S Ltd. On this date, S Ltd. had a retained income balance of R4 000 and no
general reserve. Any purchase difference is to be attributed to the fixed assets
of S Ltd. On 30 June 2007, the trial balances of the two companies were as
follows:
H Ltd. S Ltd.
R R
Share capital (R1 ordinary shares) 40 000 20 000
General reserve 10 000 5 000
Retained income 34 000 10 000
Accumulated depreciation 6 000 –
R90 000 R35 000
Fixed assets at cost 30 000 14 000
Investments in S Ltd. 36 000 –
Net current assets 24 000 21 000
R90 000 R35 000
Note: Included in the net current assets of both companies is a dividend due
by S Ltd. to H Ltd. of R2 000.
Required
Draw up a consolidated balance sheet of H Ltd. and subsidiary S Ltd. on

30 June 2007.
Question 2
H Ltd. bought all the shares in S Ltd. on 30 June 2004 when the retained
income of S Ltd. was R8 000 and the general reserve was R12 000. The
following list of balances appeared in the books of the two companies on
30 June 2007.
H Ltd. S Ltd.
R R
Debits
Land and buildings at cost 60 000 28 000
Equipment at cost 44 000 24 000
Investment in S Ltd. 80 000 –
Stock 48 000 24 000
Bank 60 000 28 000
R292 000 R104 000
Credits
Share capital (ordinary R1 shares) 120 000 48 000
General reserve 88 000 20 000
Retained income 20 000 18 000
Creditors 52 000 10 000
Accumulated depreciation on equipment 12 000 8 000
R292 000 R104 000
_____________________________________________________________________________
Required
Draw up a consolidated balance sheet of H Ltd. and subsidiary S Ltd. on

30 June 2007.
Question 3
Define a holding company and a subsidiary company, and discuss the legal
relationship between the two.
Question 4
The following are the summarised balance sheets of Snow Ltd. at

30 September, years 12 and 13:
Year 12 Year 13 Year 12 Year 13

Share capital: R1 Fixed assets (other
ordinary shares 50 000 50 000 than goodwill) 20 000 21 300
Non-distributable Current assets, less
reserve 18 000 18 000 current liabilities 65 250 70 200
Taxation – accounting Current account – Hail
years to 30 Ltd. 2 750
September, years 12 4 750 6 000
and 13
Income statement 12 500 20 250
R85 250 R94 250 R85 250 R94 250
On 1 October year 12, Hail Ltd. acquired the entire share capital of Snow Ltd.
for a cash payment of R30 000 and the issue of 4 000 shares of R1 each at a
premium of 25 cents per share.
The following occurred during the year ended 30 September, year 13:
1. Hail Ltd. invoiced goods to Snow Ltd. at cost plus 20% and at the year-
end R3 600 of these goods remained unsold.
2. Snow Ltd. made a profit of R13 750 before charging taxation.
3. At 30 September, year 12, Snow Ltd. made a provision for taxation of

R4 750 for the accounting year to 30 September, year 12, and at
30 September, year 13, a taxation provision of R6 000 for the accounting
year to 30 September, year 13.
In determining the price of the shares of Snow Ltd. at 30 September, year 12,
it was agreed to revalue at R15 000 the factory standing in the books at
R12 500, and at R10 000 plant having a book value of R7 500, but the new
values were not recorded in the books. Snow Ltd. provided for R1 500 (20%)
depreciation on this plant in the year to 30 September, year 13.
On 30 September, year 13, stock valued at R1 500 was in transit from Hail
Ltd. to Snow Ltd., which did not record it in its books until 4 October, year 13.
A remittance of R1 000 from Snow Ltd., included in the balance at current

account, was not recorded by Hail Ltd. until 3 October, year 13.
_____________________________________________________________________________
Required
Prepare the necessary journal entries:
(a) to record the acquisition of Snow Ltd. in the books of Hail Ltd.; and
(b) the pro forma journal entries required to be added to the trial balance of
Hail Ltd. so that the consolidated balance sheet can be prepared at
30 September, year 13.
You do not have to prepare the actual balance sheet.
_____________________________________________________________________________
STUDY SESSION SIX
In this study session you will study the cash budget, and analysis and
interpretation of financial statements.
LEARNING OBJECTIVES
 to draw up contract accounts;

 to draw up instalment sales accounts; and
 to account for joint ventures.
Prescribed units
Long-term construction contracts
Study statement AC 109 in Study Unit D20059604-E1.
Instalment sales accounts
Work through Study Unit D20059598-E1.
Joint ventures
Work through Study Unit D20059600-E1.
Now do Assignment 6
do Assignment 6.
_____________________________________________________________________________
ASSIGNMENT 6
_____________________________________________________________________________
Subject: Financial Accounting II Assignment Code: D20059601-F Edition: 1
_____________________________________________________________________________
_____________________________________________________________________________
INSTRUCTIONS

 postal address;
 postal code;
 subject name;

Post:
further comments.
E-mail:
_____________________________________________________________________________
_____________________________________________________________________________
Question 1
B. Builder (Pty.) Ltd. is a construction company whose year end is

31 December. Contract no. 100 was started on 1 May 2006 and completed on
25 February l999. The following information relates to Contract no. 100 for the
2006 and 2007 financial years:
31/12/2006 31/12/2007
Material 105 000 10 000
Labour 60 000 6 000
Overheads 55 000 6 000
R220 000 R22 000
Tender price R305 000

Value of work certified to date R260 000 R305 000
Cash received to date R234 000 R274 000
Retention money payable six months
after date of completion R26 000 R30 500
At 31/12/2006 the costs to complete the contract were estimated at R28 000.
Required
(a) Draw up the contract account for both years based on the completed
contract method.
(b) Show the amount of profit that would be taken to the income statement
at 31 December 2006 where the following methods are used:
i. percentage of completion based on cost; and
ii. percentage of completion based on revenue.
(c) Show the current assets section of the balance sheet at 31 December
2006, where profit is determined as in 2.1.
Question 2
The following are details of Contract no. 21A undertaken by M N Ltd.
Date commenced: 1 July 2006

Date completed: 31 October 2007
Contract price: R1 000 000
Direct expenditure 2006 2007

R R
Materials 138 240 246 990
Wages 142 870 302 980
Expenses 9 440 13 240
R290 550 R563 210
Plant purchased for cash at beginning of contract R120 000

Payments for plant bought on an HP contract 20 000
Penalty for failure to complete by 30 September 2006 10 000
Cash received in 2007 360 000
Cash received in 2006 630 000
_____________________________________________________________________________
The plant purchased for cash was sold for R32 500 on 31 October 2007.
An initial deposit of R20 000 was paid on 1 March 2007 for the plant bought on
HP. The agreement called for three further payments at six monthly intervals,
each to be R20 000. These included interest at the rate of 10% per annum. The
cash price of this plant was R74 450. It was used on this contract until
31 August 2007, when it was transferred to another contract. At that date its
value for depreciation purposes was fixed at R58 000. Hire purchase interest is
to be charged to the contract.
The cash received in each year represented the contract price of all work
certified in that year, less 10% for retention and less the penalty in 2007.
When the annual accounts for the year ended 31 December 2006 were
completed, M N Ltd. anticipated that the contract would be completed by
30 September 2007. They also anticipated that:
 the realisable value of the plant bought for cash would be R38 550 at
30 September 2007; and
 expenditure still to be increased in 2007 would total R530 000 (excluding
depreciation).
They did not anticipate that any additional plant would be required in 2007.
All depreciation was charged to contracts by the straight-line method and was
calculated by reference to the anticipated market value of the plant at the
completion of the contract.
Credit was taken for the estimated profit on uncompleted contracts in the
proportion of the contract price of the work certified to the total contract price.
Required
Prepare the contract account for the two years 2006 and 2007 and to show the
transfer to the income statement.
Ignore taxation.
Question 3
Progress Limited sells power generator sets on an instalment sales basis. The
terms of payment are as follows:
Cash price: R1 500 per set

Deposit: 20% of cash price per set
Interest: 20% per annum
Instalments: 35 monthly payments of R54 and a final payment of R30.
The cost price per set amounted to R900, and 200 sets were sold during the
year ended 30 June 2006. Instalments totalling R64 800 were received. Profit is
regarded as realised in the year of sale, but finance charges are written off on
the basis of the ratio of instalments received to total instalments.
_____________________________________________________________________________
Required
(a) Show the following accounts:
 instalment sales debtors;

 instalment sales trading account; and
 interest suspense account
(b) Show how instalment sales debtors will be reflected in the balance sheet
at 30 June 2006.
Question 4
HP Sellers Ltd. sells TV sets under instalment-purchase agreements. The

company credits its profit and loss account each financial year with the profit
on deposits and instalments received.
This is done by multiplying the gross profit percentage for a particular

contract by the deposits and instalments received on that contract.
The following transactions took place during the financial year ended
31 December 2007.
Name of buyer Cost of TV Instalment- Deposit paid Instalments

sets purchase price paid
of TV set
P R500 R 800 R200 R400
Q R400 R 600 R150 R150
R R300 R 500 R120 R 80
S R600 R 900 R250 R200
T R700 R1 000 R300 R100
R's TV set was repossessed and sold for R350 cash.
Show the instalment credit debtors’ account, the instalment credit training
account and the second-hand trading account in the books of HP Sellers Ltd.
for the year ended 31 December 2007.
_____________________________________________________________________________
STUDY SESSION SEVEN
In this study session you will revise all topics previously covered in Study
Sessions 1 to 6. For practice you should work through the Assignments again.
Make sure that you keep to the time limit, as this is one of the essential
elements of successfully completing examinations. If there are sections of the
study material you still feel you're not on top of, work through those sections
again carefully.
_____________________________________________________________________________

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Rea

Using this Guide 2

Study Session One 8

Study Session Two 17

Study Session Three 36

Study Session Four 43

Study Session Five 50

Study Session Six 58

Study Session Seven 64

The term Positive Goodwill is now referred to only as Goodwill.

 Goodwill is disclosed as a non-current asset in the consolidated annual financial

1st Edition March 2014

 INTERNATIONAL COLLEGES GROUP (ICG) (PTY.) LTD. 2014

The objectives of this course are:

 to further develop the knowledge and understanding you gained in

Financial Accounting II builds on the concepts and principles you learned in

 Financial Accounting (3rd edition), by Faul, Everingham, Redelinghuys &

1.1 Admitting a new partner:

4.1 Non-independent branch:

5 DRAWING UP FINANCIAL STATEMENTS OF A COMPANY WITH WHOLLY-

5.1 Consolidation at date of acquisition

6 LONG-TERM CONSTRUCTION PROJECTS

6.1 Completed contract method

7.1 Books of buyer

8.1 Separate sets of books account

Study Session Syllabus topic Prescribed study unit Assignment

1 1.1, 1.2, 1.3, 1.4 D20059594-E1, D20059589-E1 D20059601-A

2 2.1 D20059592-E1 D20059601-B

3 3.1, 3.2, 3.3, D20059603-E1 D20059601-C

4 4.1, 4.2, 4.3, D20059588-E1 D20059601-D

5 5.1, 5.2, 5.3, 5.4 D20059597-E1, D20059590-E1, D20059601-E

6 6, 7, 8 D20059604-E1, D20059598-E1, D20059601-F

7 All topics Revise all

What will you discover?

In this study session we concentrate on more advanced aspects of partnership

At the end of this study session you should be able to:

 process the accounting entries for goodwill in partnerships;

Accounting for goodwill, admission of a new partner, retirement of a partner,

 your student number;

5. You can post or e-mail your assignment answers to us.

BALANCE SHEET AT 30 JUNE 2007

The terms of the amalgamation were as follows:

1. The assets were revalued as follows:

2. Goodwill was not to appear as an asset in the books of the new

4. The profit-sharing ratio in the new partnership would be:

Barney 4 : Wally 3 : Mac 2

5. Capital balances were to be in profit-sharing ratio and based on Wally's

6. The name of the new firm was to remain B & W Traders.

D, E, and F were in partnership for a number of years, sharing profits in the

The partnership suffered losses as a result of an economic recession. They

On 30 June 2007, the balance sheet of the partnership was as follows:

Capital D R100 000 Plant and machinery R200 000

Further information relating to the dissolution:

1. On 2 July 2007, D personally paid R5 600 in respect of dissolution

2. The partnership assets were disposed of as follows:

4. A debit balance on a capital account is to be made good by an additional

(a) realisation account; and

(b) capital accounts.