Financial Accounting The Question Book - Revised 5th Edition

******ebook converter DEMO Watermarks*******

Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
Published in South Africa by
Oxford University Press Southern Africa (Pty) Limited
Vasco Boulevard, Goodwood, N1 City, P O Box 12119, Cape Town,
South Africa
© Unless otherwise indicated, the questions and suggested solutions are copyrighted to the
University of Cape Town and reprinted by Oxford University Press South Africa with permission.
The moral rights of the author have been asserted
First published 2009
Fourth edition published 2012
Fifth edition published 2017
Revised fifth edition published 2019
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press Southern Africa (Pty) Ltd,
or as expressly permitted by law, by licence, or under terms agreed
with the appropriate reprographic rights organisation, DALRO, The Dramatic, Artistic
and Literary Rights Organisation at dalro@dalro.co.za. Enquiries concerning
reproduction outside the scope of the above should be sent to the Rights Department,
Oxford University Press Southern Africa (Pty) Ltd, at the above address.
You must not circulate this work in any other form
and you must impose this same condition on any acquirer.
Financial Accounting: The Question book revised 5th edition
Print ISBN: 978-0-190439-50-7
ePUB ISBN: 978-0-190432-15-7
Typeset in Palatino LT Std 9.5pt on 11.5pt
Acknowledgements
Publishing Manager: Alida Terblanche
Publisher: Marisa Montemarano
Development Editor: Ilka Lane
Project Manager: Kelly Williams
Editor: Annette de Villiers
Designers: Judith Cross and Cindy Armstrong
Typesetter: Swift Prosys Pvt Ltd
Cover design: Judith Cross
The authors and publisher gratefully acknowledge permission to reproduce copyright material in this book.
Every effort has been made to trace copyright holders, but if any copyright infringements have been made,
the publisher would be grateful for information that would enable any omissions or errors to be corrected in subsequent
impressions.
Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims
any responsibility for the materials contained in any third party website referenced in this work.

Contents
INTRODUCTION
ABOUT THE AUTHORS AND CONTRIBUTORS
QUESTIONS
2 The purpose of accounting
3 The practice of accounting
4 The conceptual framework
5 Adjustments
6 Inventory
7 Value added tax (VAT)
8 Bank reconciliation statements
9 Introducing credit: Trade payables
10 The other side of credit: Trade receivables and working capital management
11 Property, plant and equipment (PPE)
12 Companies
13 Partnerships, and a brief note on close corporations (CCs)
14 Statement of cash flows
15 Financial analysis
16 Non-profit organisations and club accounting
17 Incomplete records and other accounting issues
SELECTED SOLUTIONS
2.1
2.4
2.5
2.6
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
5 Adjustments
5.1
5.2
5.3
6 Inventory
6.1
6.2
6.3
6.4
7.1
7.2
8.1
8.2
8.3
9.1
10.1
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
11.10
12 Companies
12.1
12.2
12.3
12.4
12.5
12.6
13.1
13.2
13.3
13.4
13.5
14.1
14.2
14.3
14.4
15.1
15.2
15.3
16.1
16.2
17.1
GLOSSARY
KEY CONCEPTS

Introduction
Financial Accounting: The Question Book fifth edition supplements the textbook Financial
Accounting: An Introduction fifth edition by providing questions that cover all the topic
areas in the textbook. The authors of the textbook and the question book would like to
thank the members of the UCT College of Accounting for their contributions to the
questions appearing in the textbook and the question book. These questions have been
used by the college in a variety of tutorials, tests and examinations.
The questions are graded A (objective test − easy), B (tutorial − intermediate), or C

(challenging test − advanced). The grade of each question is indicated in brackets after
the question number. For ease of cross-referencing, the grade of each question has also
been indicated in the selected solutions section in this book.
Practice questions are an important part of ensuring that your accounting knowledge
has increased. However, students are often tempted to do as many questions as quickly
as possible rather than doing fewer questions properly. So how should you use this
book? You are encouraged to attempt (and complete) each question without referring to
the solution. Once you have completed the question, use the solution to mark your
work. Any sections of the question that are incorrect should be re-attempted only once
you have spent time reviewing that section in the textbook. In this way, you use the
questions to identify areas that you need to review, and once you have reviewed these
sections (in your class notes or the textbook), you can retest yourself by re-doing the
sections you got wrong − and hopefully get them correct.
There are also several objective tests. These are short 10−15 mark questions that test the
students’ understanding of key concepts raised in the book
The authors trust that users of the textbook and the question book will enjoy the variety
of questions. Any comments on the questions and/or the solutions will be appreciated.
About the authors and contributors

Jacqui Kew is an associate professor in the College of Accounting at the University of
Cape Town, where she co-ordinates the first-year accounting course. She also lectures at
the University of Cape Town’s Graduate School of Business, where she specialises in
finance for non-financial managers and small business development. She is a member of
the South African Global Entrepreneurship Monitor team and in this capacity is actively
involved in small business research. She is also the co-author of Tracking
Entrepreneurship in South Africa: A GEM Perspective.
Riley Carpenter is a lecturer in the College of Accounting at the University of Cape

Town. He qualified as a Chartered Accountant (South Africa) in 2007. After working for
some time as manager at an auditing firm, he returned to academics in 2009.

THE PURPOSE OF ACCOUNTING
A = E + L (Accounting equation)
QUESTION 2.1 (A) [Solution on page 188]

(8 marks: 7 minutes)
1. Some reports are prepared as at a particular date, whilst others are prepared for a
period in time. Which method is used for the statement of financial position and
why? (2 marks)
2. What is the primary information that the cash flow statement gives its users?
(1 mark)
3. Consider the following two transactions:
a) Company A buys a motor vehicle and pays R30 000 cash
b) Company A sells inventory for R30 000 cash
Explain, using the definition of “income”, whether each of these transactions results in
income being earned for Company A. (5 marks)
QUESTION 2.2 (A)

Jolly Johns party packs had the following transactions during December 20x6:
1. Purchased a vehicle for the business using the personal funds of the owner to the
value of R180 000.
2. Sold goods on credit to customers for R8 000 that had cost R4 500 originally.
3. Purchased inventory costing R45 000 on credit from a supplier.
4. Purchased a property for R800 000. A cash deposit of R50 000 was paid out of the

entity’s bank account and the balance was paid by taking out a mortgage bond over
the property.
5. Paid R2 500 for gardening services at the entity’s premises.
6. Paid R5 000 from the entity’s bank account for furniture purchased by the owner
for personal use.
Show how the above transactions affect the financial position of the business as
represented by A = E + L. You need to indicate whether the element has increased or
decreased and provide the relevant amount and account that would be affected.
QUESTION 2.3 (B)

The following transactions occurred in the business during the year ended 31 December
X2:
1. The owner deposited R105 000 cash into the business’s bank account on 1 Jan X2.
2. The business bought R450 000 worth of inventory from various suppliers during
the year. 80% of these purchases were on credit and the remaining 20% were paid
for in cash.
3. During the year, the business paid R96 900 cash in operating costs. These costs
related to goods and services that had all been used during the year.
4. The employees earned R104 000 in salaries and wages during the year. These were
paid in cash by the end of the year.
5. During the year, the business paid creditors R400 000.
6. The business received R1 010 000 in payments from debtors during the year.
7. The business made cash sales of R410 400 and credit sales of R957 600 during the
year.
8. The cost of the inventory sold during the year was R480 000.
9. A customer had returned goods on the 15 December X2, selling price of R2 280. The
cost price was R912. The original sale had been for cash, and so the customer was
refunded R2 280 in cash. The item was returned to inventory.
10. The business rents the land out. The rental is R15 200 per month. All rentals owing
by tenants had been received by year-end and no amounts had been paid in
advance for X3.
11. During the year, the owner took R55 000 out of the business for his own personal
use.
12. The business pays R6 333 per month for the rental of some business premises. All
rentals were paid in cash during the year.

R114 000 worth of stationery was purchased on credit during the year. The
13. bookkeeper counted R20 000 worth of stationery on hand on 31 December X2.
QUESTION 2.4 (B) [Solution on page 188]

PART A (5 marks)
Refer to the statement of financial position of Business A below and answer the
questions that follow:
Assume that Business A has only been operating for one financial year.
1. Briefly explain what the statement of financial position communicates to the users
of financial statements.
2. Assume that drawings for the year amounted to R10 000. Calculate the profit/loss
that was made for the financial year.
3. “Drawings are recorded as an expense in the statement of comprehensive income.”
Is this statement true or false? You need to give a reason for the answer you
provide.
4. Explain what you understand by the “entity concept”.
PART B (2 marks)
Business A paid wages of R3 000 during the financial year.
Explain whether the transaction above will result in income being earned or an expense
being incurred for Business A. Your explanation needs to show a clear understanding
of the definitions of “income” or “expense”.
PART C (3 marks)
Business B has a year-end of 31 December. The business receives the electricity bill for
December X2 for R1 500. Eskom is paid the full amount on 2 January X3.
At 31 December X3:
1. What amount will be recognised on the SOCI for the year ended 31 December X3?
2. What amount will be recognised on the SCF for the year ended 31 December X3?
3. What amount will be recognised on the SOFP as at 31 December X3?

PART A
Fitness Gear had the following transactions in February 2013:
1. Explain in your own words what transaction took place on 2 February 2013 and
identify what business decision was being made.
2. Explain in your own words whether or not the owner was wealthier after the
transaction that took place on 2 February 2013.
3. The business purchased inventory for cash on 10 February 2013. How else could
the business have purchased inventory from the supplier? Explain briefly how this
alternative method of purchasing inventory works.
4. What is the main objective of a business?
5. Calculate the profit/loss that was made by the business on 16 February 2013.

PART B
Show how the following transactions affect the financial position of the business as
4 Feb: Fitness Gear borrowed R6 000 from ABC Bank. This amount was deposited into
the business bank account.
15 Feb: Fitness Gear purchased R2 000 worth of cellphone airtime for cash.
QUESTION 2.6 (C) [Solution on page 190]

Ms Le Grange was retrenched and she decided to start a small electronics supply and
repair shop in High Street, Grahamstown. She received a payout of R10 000 from her
employers and decided to use that as start-up capital.
The following transactions occurred during January 20x1:

1. Ms Le Grange deposits R10 000 into an FNB account that will be used solely for
business purposes.
2. The business borrows R5 000 from FNB to help fund the business. This is deposited
into the business bank account.
3. The business paid R450 in bank charges to set up the banking accounts of the
business.
4. The business buys a cash register and other equipment for the store for R3 500 cash.
5. The business bought cash register rolls and other stationary and pens for R350 on
credit.
6. The business pays the first month’s rent of R600 cash.
7. The business purchases inventory to the value of R14 000 on credit from GHT
Electronic suppliers.
8. The business invoiced and banked a total of R2 500 for cash services rendered in
terms of repairs for customers.
9. The business paid the telephone account of R465.
10. Ms Le Grange paid R3 500 for a lounge suite for her house out of the business bank
account.
11. The business sold electronic equipment to the value of R6 000 for the two months
cash. The original cost of the inventory was R4 500.

12. The business paid GHT Electronics R2 500 of the money owed to them.
13. During the period, there was a large rain storm and some of the packaging of the
inventory was damaged. The business sold this stock to a second-hand dealer for
R500 cash. The original cost of the stock had been R650.
14. Ms Le Grange pays her children’s school fees out of their personal bank account of
R650.
Show the impact of the above transactions on the assets, liabilities and equity of the
business. For each transaction, show the amount − whether the elements increase or
decrease, and the relevant account affected.

THE PRACTICE OF ACCOUNTING
RECORDING INFORMATION: JOURNALS AND LEDGERS

The following balances appeared on 28 February X8 in the ledger of AB Traders:
Bank 10 000
Trade receivables 44 600
Sales income 125 000
Trade payables 39 100
Inventory 71 200
General expenses 24 200
Stationery expense 3 400
Wages expense 23 400
Repairs and maintenance expense 14 800
Capital ?
Land and buildings 180 000
Drawings 43 500
It was discovered that the bookkeeper had made a number of errors. These are detailed
below:

1. Trade receivables were overstated by R4 500 because of an addition error.
2. The payment of RI 700 for stationery was posted in error to the inventory account.
3. Cash of R500 paid for inventory was posted as a credit in the bank account and a
debit in the repairs and maintenance account.
4. Bank charges of R300 had, as yet, been recorded only in the bank account.
5. General expenses of R550 had been recorded on the credit side of the general
expenses account and on the credit side of the bank account.
Prepare a corrected trial balance as at 28 February X8.

The following information has been provided to you by Jamie-Lee, the owner of a small
gift shop in Kalk Bay. Jamie-Lee has extracted the amounts below from both his
personal records and the business records prepared by his bookkeeper. The business
started on 1 March 2011 and has a financial year-end of 28 February.
Amounts of assets and liabilities at 28 February 2013

Cash at bank (Personal) 5 000
House (Personal) 235 000
Car (Personal) 95 000
Loan on house (Personal) 140 000
Property, plant and equipment 340 000
Inventory 50 000
Bank overdraft 45 000
Loan on shop building 120 000
Summary of business activities during the financial year ended 28 February 2013
Cost of sales expense 95 000
Electricity expense 17 000
Interest expense 20 000
Rates expense 14 000
Telephone and other expenses 23 000
Owner’s transactions with the business during the financial year ended 28 February
2013
Additional capital introduced 40 000
Drawings 24 000
Additional information
1. Since the start of the business on 1 March 2011 until 28 February 2013, Jamie-Lee
has personally invested a total of R150 000 cash into the business.
2. The following business transactions, inter alia, were recorded during the year
ended 28 February 2013 (these amounts have already been included in the amounts
above):
2.1 Purchased stationery costing R2 500 on account.
2.2 Jamie-Lee took inventory from the business for personal use. The inventory
had a selling price of R4 000 and a cost price of R1 200.
2.3 The business sold gift vouchers amounting to R23 000. The gift vouchers
would be redeemed in March 2013.
2.4 The business received a bill for electricity for February 2013 amounting to
R650. The electricity bill is paid on the 15th of the following month.
2.5 Received R575 from a customer who had purchased inventory on account.
3. The bookkeeper prepared a trial balance as at 28 February 2013. The accountant
reviewed the ledger accounts and discovered the following errors:
3.1 A payment of R900 in respect of rates was credited to the bank account and
debited to the electricity expense account.
3.2 An invoice for inventory purchased amounted to R549. This was recorded as
R549 in the inventory account and R459 in the trade payables account.
3.3 Other expenses include a payment for advertising of R750 which was
processed by debiting the bank account and crediting the advertising account.
4. The accountant corrected all errors made during the year before the bookkeeper
provided the information in respect of the assets, liabilities and transactions above.

1. Briefly explain what is meant by the entity concept. (1 mark)
2. Calculate the owner’s total wealth as at 28 February 2013. (4 marks)
3.
3.1 Prepare journal entries for the transactions listed in point (2) of the additional
information (indicate whether each account is an Asset (A), Liability (L) or
Equity (E)). Ignore dates and narrations. (10 marks)
3.2 Briefly explain why you have debited the particular account used in preparing
the journal entry for point (2.4) of the additional information. (2 marks)
4. Prepare the statement of comprehensive income for the year ended 28 February
2013. (4 marks)
5. Prepare ONE closing entry that the bookkeeper would have processed on 28
February 2013. (3 marks)
6. Prepare the statement of changes in equity for the year ended 28 February 2013.
The total column is NOT required. (8 marks)
7. For each error highlighted by the accountant in point (3) of the additional
information, indicate what effect, if any, the error would have on the balancing of
the trial balance. Briefly explain each answer. (6 marks)

Mr Joe Ramaposa decides to open a garden services business. You have been asked to
do his bookkeeping for him. The company does garden services, but also supplies
customers with plants, pesticides, fertiliser and irrigation systems. He started the
business on 1 January 20x0. It is Mr Ramaposa’s policy that all services rendered and
stock sold is on a cash basis. However, there are certain customers for whom he does
provide the services on credit.
The following transactions occurred during the month:
1. Mr Ramaposa deposited R50 000 into an ABSA bank account to start up the
business.
2. The business buys a second-hand bakkie for R105 000 to use in the business. The
business pays R15 000 out of the bank account into the dealers bank account as a
deposit. The balance of the purchase price was borrowed from Wesbank.
3. The business buys petrol worth R450 for the bakkie.
4. The business buys lawnmowers and brush cutters for R15 000 in cash.
5. The business buys tools (such as spades and shovels) that it believes it will have to
replace every 3 months for R400 on credit from a supplier.
6. The business buys fertiliser and plants on behalf of Mrs Jones for R2 500 cash. It
then sells it to her for R4 000. On delivery, the customer pays cash for the goods.
7. The business invoiced a total of R6 000 for garden services for the two months to
cash customers. It also invoiced R2 500 for garden services on credit.

8. The business paid its staff R2 500 for their services for the two months.
9. Mr Ramaposa paid personal expenses to the value of R3 500 over the two months
out of the business account.
10. One of the customers the business supplies on credit paid R500 to settle his
account.
11. The business pays the supplier of the equipment R200 of the money owed.
12. Mr Ramaposa purchased fertiliser and other stock to be used in the business to the
value of R1 000 and paid for it out of his personal bank account.
13. Over the period, the business sold fertiliser and other stock to the value of R550 to
customers for cash and gave them R50 discount. The original cost was R300.
Record the above transactions in the General Ledger of the business.

Olympic Dreams is a retail shop that sells merchandise from the London 2012 Olympic
Games. The business, which is owned by Mr Freddie Phelps, is in its second year of
trading and has a year-end of 31 July. You have been provided with the trial balance for
the 11 months ended 30 June 2012 as well as transactions for the month of July.
Trial balance of Olympic Dreams for the 11 months ended 30 June 2012
Debit Credit
Capital 300 000
Accumulated profit (1/8/2011) 85 000
Drawings 40 000
Vehicle 282 150
Bank 160 687
Inventory 62 000
Stationery asset 1 250
Loan: Bronze Bank (15% p.a.) 75 000

Salaries & wages expense 44 000
Rent expense 17 600
786 000 786 000
The following transactions took place during the month of July 2012:
1. On 1 July, Olympic Dreams repaid R15 000 of the loan owing to Bronze Bank.
2. On 5 July, Olympic Dreams sold 10 gold medal replicas on credit to Mrs Swimmer
for a total amount of R500. Each medal had cost the business R20 to produce.
3. On 7 July, Mr Phelps (the owner) contributed a vehicle to the business to help with
deliveries to customers. The vehicle had been reliably valued at R8 500.
4. On 10 July, Mrs Swimmer returned one of the gold medal replicas purchased on 5
July, as it was damaged. Her account was credited with the full amount.
5. On 13 July, Olympic Dreams purchased inventory on credit from Silver Stores for a
total cost of R5 500.
6. On 19 July, Olympic Dreams purchased stationery amounting to R450 from
Valtons and paid by cheque.
7. On 24 July, Mr Phelps took 3 T-shirts home for his children. The T-shirts cost R100
each and had a selling price of R150 each.
8. On 26 July, Olympic Dreams paid a total of R3 200 to the landlord for rent. Half of
this was for July’s rent and the rest was paid in advance for August.
9. Interest is payable on the last day of every month in arrears at a rate of 15% per
annum. On 31 July, the interest for the month of July was due, but was only paid by
Olympic Dreams on 2 August.
10. On 31 July, Olympic Dreams had stationery on hand amounting to R950.
1. Show how transactions (1) and (3) effect the financial position of the business as
represented by A = E + L. You need to clearly indicate whether the element has
increased or decreased and provide the relevant amount and the name of the
account that would be affected. (4 marks)
2. Prepare the general journal entry/ies that would have been processed by Olympic
Dreams to record the following transactions. Ignore dates and narrations.
2.1 Transaction (8) (5 marks)
2.2 Transaction (9). (4 marks)
3. Prepare the closing journal entry/ies that would be processed by Olympic Dreams
as at 31 July 2012 with respect to the salaries and wages expense. Ignore dates and
narrations. (2 marks)
4. Prepare the following ledger accounts in the General Ledger of Olympic Dreams
for the month ended 31 July 2012. Show dates and close off or balance the accounts
where appropriate:
4.1 Inventory account. (6 marks)
4.2 Stationery asset account. (3 marks)
5. Prepare the statement of comprehensive income of Olympic Dreams for the year
ended 31 July 2012. You are required to clearly show the gross profit, operating
profit and the profit for the period. (9 marks)
6. Prepare the statement of changes in equity of Olympic Dreams for the year ended
31 July 2012. You are NOT required to provide a TOTAL column. (10 marks)
7. Prepare ONLY the CURRENT assets section of the statement of financial
position of Olympic Dreams for the year ended 31 July 2012. Assume that the
bank balance on 31 July 2012 was R155 000. (7 marks)
QUESTION 3.5 (C)

Used with kind permission of Walter Sisulu University.
Zamakulungisa is a hardware store that buys and sells all types of household
equipment and electrical appliances. The shop, which is owned by Mr Bandile Melane,
is located at Mthatha Plaza shopping centre and has been operating for four years.
Zamakulungisa has a year-end of 31 December. You have been provided with a trial
balance for the 11 months ended 30 November 2011 as well as transactions for the
month of December 2011.
Trial balance of Zamakulungisa as at 30 November 2011

Debit Credit
Capital 500 900
Accumulated profit (30/11/2011) 60 500
Drawings 5 500
Shop fittings 23 000
Vehicles (Truck) 476 565
Equipment 36 000
Bank 156 000
Inventory 122 000
Loan: Matshonisa (20%) 120 000
Salaries and wages expense 80 000
Electricity & water expense 20 750
1 219 890 1 219 890
The following transactions took place during the month of December 2011:
1. On 1 December, Bandile Melane, the owner, contributed a second-hand truck to the
business. He estimated that the vehicle was worth R465 000.
2. On 1 December, Matshonisa Bank increased the loan to Zamakulungisa by a cash
amount of R50 000. Interest on the loan is paid by Zamakulungisa on the last day
of each month. The loan will be repaid in full on 31 December 2012. The loan was
initially taken out on 1 January 2009.
3. On 4 December, Zamakulungisa purchased stationery amounting to R2 125 on
credit from Postdam Stationery.
4. On 10 December, Zamakulungisa sold 5 electrical heaters with a selling price of
R400 each and a cost price of R200 each to Mrs Mali on credit. Mrs Mali lives very
close to the Lesotho border which is renowned for extremely cold winters. Her
purchase is in anticipation of the low temperatures expected in the winter months.
5. On 12 December, a local businessman, Mr Mthendeni, visited Zamakulungisa. He
needed, as a matter of urgency, 12 big screen TVs for his shop in Ngangelizwe. He
had received an order from a prominent family in Qunu and needed the TVs before
Christmas. Zamakulungisa did not have the TVs in stock and placed an urgent
order from NMD. NMD promised to deliver the inventory before 22 December.
The local businessman was desperate and paid Zamakulungisa 50% of the total
selling price of R108 000 (that is, he paid R54 000) to speed up the process. The
remainder would be paid once the inventory arrives. Transactions of this nature are
recorded by Zamakulungisa as income received in advance.
6. On 16 December, Mrs Mali returned all 5 electrical heaters (refer to transaction (4)).
She explained to Zamakulungisa that her sister, Y Mbananga, had also purchased 5
heaters and that they did not need 10 heaters in their house. Zamakulungisa
decreased the amount owing by Mrs Mali by the 5 electrical heaters returned and
reversed the sale.
7. Zamakulungisa has a purchasing contract with NMD suppliers and must purchase
certain types of inventory from NMD. All purchases are made on credit with 60
days to settle the amount owing. On the 17th of December 2011, Zamakulingisa
purchased inventory for R120 000.
8. On 22 December, Zamakulungisa received the TVs ordered on behalf of Mr
Mthendeni (refer to transaction (5)). The total cost of the TVs amounted to R60 000.
Zamakulungisa purchased these TVs from NMD on credit. Mr Mthendeni
collected the TVs on the same day and paid Zamakulungisa the outstanding
amount.
9. On 30 December, the interest on the loan (initial R120 000 and the additional loan of
R50 000) for the month of December was due. Bandile Melane forgot to pay the
interest on the 30th and the bank was closed on the 31st. The interest is still owing
at the end of the year.
10. On 30 December, Bandile Melane’s son Ziphozethu Tunzi turned 8 years old.
Bandile took stationery amounting to R1 000 from the business and gave it to his
son as a birthday present.
11. On 31 December, Zamakulungisa had stationery on hand amounting to R 325.
1. Show how the following transactions affect the assets, equity and liabilities of
Zamakulungisa. Indicate clearly whether the element has increased or decreased
and provide the relevant amount and name of the account that would be affected.
Your answer should be set out in the form of the accounting equation.
1.1 Transaction (2) (only the event on 1 December 2011). (2 marks)
2. Process the general journal entries required by Zamakulungisa to record the
information provided in the following transactions:
No dates or narrations required.
3. Process the general journal entries required by Zamakulungisa to close off the
electricity & water expense account as at 31 December 2011. (2 marks)
4. Prepare the following ledger accounts in the general ledger of Zamakulungisa for
the year ended 31 December 2011. All accounts must be correctly balanced or
closed off as at 31 December 2011.
4.1 Loan: Matshonisa. (2 marks)
4.2 Inventory. (7 marks)
4.3 Interest expense. (3 marks)
5. Prepare the statement of comprehensive income of Zamakulungisa for the year
ended 31 December 2011. (9 marks)
6. Prepare the statement of changes in equity of Zamakulungisa for the year ended
31 December 2011. You are NOT required to complete a total column. (7 marks)
7. Prepare ONLY the liabilities section of the statement of financial position of
Zamakulungisa as at 31 December 2011 after taking into account all the
information above. (4 marks)
QUESTION 3.6 (B)

Toys Galore specialises in toys that are purchased by environmentally aware clients.
The shop does not sell any plastic toys and neither does it stock toys that have excessive
packaging. The business has a financial year-end of 31 December.
Pre-closing trial balance of Toys Galore for the ELEVEN MONTHS ended 30 November
X7
Debit Credit
Capital 87 250
Accumulated profit 41 500
Drawings 17 900
Equipment at cost 92 000
Bank 52 531
Inventory 28 000
Loan: Fidelity Bank (12%) 60 000
Telephone expense 10 300
Salaries & wages expense 31 000
Rent income 11 000
Rent expense 27 500
408 791 408 791
The following transactions occurred during December X7:

1. On 1 December X7, the business borrowed an additional R30 000 from Fidelity
Bank.
2. On 1 December X7, the business purchased a computer and printer on credit from
Discount Computer Suppliers for R15 000.
3. On 1 December X7, Tracey paid the monthly rent of R2 500 for the month of
December X7. Tracey sub-lets part of her premise at a monthly rental of R1 000 per
month. She received the December rental on 1 December X7.
4. On 1 December X7, Tracey transferred her motor vehicle, which she reliably
estimated to be worth R45 000, to the business to be used for deliveries.
5. On 6 December X7, the business purchased 100 toy model aeroplanes with a total
cost of R27 000 on account from William’s Wholesale Toys.
6. On 15 December X7, the business sold 10 of the model aeroplanes bought from
William’s Wholesale Toys for R500 each on credit.
7. On 29 December X7, Tracey discovered that there was no stationery left in the
stationery cupboard, therefore she purchased additional stationery for R1 200 cash
from the Same Day Stationery Suppliers. By 31 December X7, R200 of this
stationery had been used.
8. On 31 December X7, the business paid Fidelity Bank the interest owing for
December and repaid R10 000 of the loan.
9. By 31 December X7, the telephone bill for the month, amounting to R2 100, had
been received but had, as yet, not been paid.
1. Prepare the general journal entries required to record each transaction.

2. Post the general journal entries to the general ledger (be sure to include the opening
balances where appropriate).
3. Balance all relevant general ledger accounts.
4. Close off all relevant accounts.
5. Prepare the trading account and profit and loss account.
6. Prepare the post-closing trial balance for the year ended 31 December X7.
QUESTION 3.7 (B)

Andrea recently opened a camera store in Retreat, Andrea’s Photography. The business
buys and sells digital cameras. All the firm’s inventory is purchased from one supplier,
Electronics Warehouse. The business has a year- end of 30 June. Below is a trial balance
as at 31 May X7. The business started operating on 1 July X6.
Trial balance of Andrea’s Photography as at 31 May X7

Debit Credit
Capital 40 000
12% p.a. bank loan : ABC Bank 20 000
Equipment 12 500
Office furniture 15 000
Cellphone 1 500
Trade payables (Electronics Warehouse) 18 000
Cash at bank 46 450
Inventory (7 cameras at R500 each ) 3 500
Prepaid cellphone airtime 5 450
Rent expense 36 000
R224 000 R224 000
The following transactions took place during the month of June X7:
1 June: The business increased the loan from ABC bank up to R50 000.
3 June: The business bought 60 cameras for R500 each on account from Electronic
Wholesalers.
5 June: Andrea contributed her motor car worth R25 000 to the business.
8 June: One of the cameras bought from Electronic Wholesalers was found to be
damaged on delivery and Andrea’s Photography returned the camera and received
a full credit.
15 June: Andrea took a camera out of the shop to give to her sister as a birthday
present.
20 June: The business sold a total of 21 cameras for a cash price of R1 050 each.
21 June: David Bond purchased 3 cameras for a total of R3 150 from Andrea’s
Photography. He will pay for these cameras in 30 days.
29 June: Debtors paid R5 700 of the amount owing.
29 June: The business paid the balance owing to Electronic Wholesalers as at 1 June
X7.
30 June: The business processed the necessary journal entry to record the interest
expense for the month. The interest was paid on 1 July X7.
30 June: The business paid the monthly rent of R3 000 for July X7. The rent was
inclusive of a charge for electricity and water.
30 June: The business estimated that R12 050 worth of stationery was used during
the year.
30 June: Prepaid airtime amounting to R300 was on hand as at 30 June X7.
1. Identify the type of business decision that resulted in each of the following
transactions and provide a brief explanation of the type of decision made:
2. Show how the following transactions affect the assets, equity and liabilities of
the business. You need to indicate whether the element has increased or decreased
and provide the relevant amount and account that would be affected.
3. Prepare the following ledger accounts in the general ledger of Andrea’s
Photography for June X7. You are required to close off or balance the accounts as at
30 June X7.
3.1 Loan (3 marks)
3.2 Sales income (2 marks)
3.3 Stationery asset (3 marks)
3.4 Interest expense. (3 marks)
4. Prepare the statement of comprehensive income for Andrea’s Photography for the
year ended 30 June X7. (7 marks)
5. Briefly explain what you understand by the term “inventory”. (1 mark)

QUESTION 3.8 (A)
You decide to start a business that buys and sells second-hand kayaks.
1. To start the business, you contribute R30 000 of your own money and deposit this
into the business’s bank account.
2. The business still requires further funds so you borrow R10 000 cash from your
parents (interest free) and deposit this into the business’s bank account.
3. The business purchases 5 second-hand kayaks for R2 000 cash each.
4. The business sells 3 of the second-hand kayaks for R3 400 cash each.
5. You withdraw R1 500 cash from the business’s bank account and celebrate your
first sale by doing a trip down the Breede River.
Prepare the journal entries required to record the transactions above.
Question 3.9 (C)

Landscaping Delight is a sole proprietor offering landscaping services, mainly in

industrial areas.
The following balances appeared in the General Ledger on 1 April X1:
The following transactions took place in April:

1 Paid the telephone account, R60 from petty cash
3 A cheque of R1 670 was received for services rendered and deposited in the bank
4 Bought a lawn mower (machinery) from Lawns Unlimited and paid by cheque, R4
830

7 Green Grow delivered fertiliser. The business made out a cheque, R250
9 Paid R20 from petty cash to the Constantia Bulletin for an advertisement
11 Linen Ltd employed the firm to landscape its premise. Landscaping Delight
received a cheque for R8 500 for the work done
15 Sent a cheque to Garage Motors to pay for repairs to the firm’s bakkie, R730
17 Cashed a cheque to pay wages, R2 500
20 Paid R150 cash from petty cash for fuel
24 Cash received from clients for gardening services completed, R2 800, left in petty
cash
25 Deposited R2 000 from the petty cash into the current bank account
27 Bought a computer from Office Supplies Ltd on account, R5 900
28 Sent a cheque to Standard Bank to repay an instalment of R2 000 and interest out-
standing for the past 6 months
29 Paid rent per cheque for April, R1 500
1. Enter the opening balances on 1 April X1 in the general ledger of Landscaping

Delight.
2. Record the transactions for April X1.
3. Balance the general ledger.
4. Extract a trial balance for April X1.

THE CONCEPTUAL FRAMEWORK
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

Global Children is a charitable organisation, which raises funds for the care of children
around the world. A South African branch of the organisation, GC (SA), opened
recently. Subsequent to extensive market research, the organisation plans to raise funds
by launching its own scratch card competition, starting in December X0. It plans to
apply the following conditions to the sale of scratch cards and payments of prizes:
1. Scratch cards will be sold for R2 (cash) each.
2. The design, printing and distribution costs of the scratch card are estimated to be 50
cents per card.
3. The organisation has decided that for every 50 000 scratch cards, prize money of
R60 000 will be awarded (on average, every scratch card will pay a prize of R1.20).
4. Individual scratch cards will either reflect no prize, or prizes ranging from R2 to
R10 000.
5. Each prize under R100 is paid out immediately in cash, whereas prizes exceeding
R100 need to be claimed by post from the organisation’s head office in Cape Town.
The manager of GC (SA) has asked you for advice regarding the correct accounting
treatment of the scratch cards to be reflected in the financial statements for the financial
year ended 31 December X0. The manager has asked two questions:
a) If R50 000 expenditure is incurred for the design, printing and distribution of
100 000 scratch cards, but none are sold by 31 December X0, should this
expenditure be treated as an asset?
b) If 40 000 of the scratch cards purchased in (a) above are sold during December
X0 and prizes totalling R38 000 have been paid by 31 December X0, how
should these transactions be reflected in the financial statements?

1. Advise the manager, with specific reference to the Conceptual Framework for
Financial Reporting, whether the expenditure of R50 000 should be treated as an
asset in the financial statements. (8 marks)
2. Prepare journal entry/ies to reflect the transactions in situation (b) above. Explain
to the manager, with specific reference to the conceptual framework, the most
appropriate accounting treatment in the financial statements, arising from these
transactions. (16 marks)

1. The Framework for the Preparation and Presentation of Financial Statements
includes an underlying assumption. Name this underlying assumption and briefly
explain it.
2. Briefly explain the term ‘‘recognition’’ in relation to the elements of financial
statements.
3. Briefly explain the term ‘‘faithful representation’’, one of the fundamental
qualitative characteristic of useful financial information.
4. Briefly explain the term ‘‘relevance’’, one of the fundamental qualitative
characteristic of useful financial information.
5. Briefly explain the term ‘‘measurement’’ in relation to the elements of financial
statements.

Answer the following questions:

1. What is the purpose of a statement of financial position?
2. Explain why a vehicle purchased for cash by the business to do deliveries would be
reported as an asset on the statement of financial position. Use full definitions and
recognition criteria in your explanation.
3. Explain why trade payables are reported as a liability on the statement of financial
position. Use full definitions and recognition criteria in your explanation.
4. What do you understand by the term ‘‘cost model’’?
PART A
The owner of a business has used a cheque drawn on the business bank account to pay
for personal insurance. (2 marks)
Explain how the transaction will be dealt with in the business accounts and the effect on
profit.
PART B
The bookkeeper of a medium-sized business provides you with the following
information at year-end:
a) They have a stock of unused postage stamps that cost R5. They wish to reflect
this on the statement of financial position as a current asset called ‘‘postage
stamps’’. (2 marks)
b) The business has stationery on hand at year-end that cost R10 500. They wish
to reflect this in the statement of comprehensive income as an expense at year-
end. Their reason is that it was bought to use in the business and not for resale.
(2 marks)
Mention how you would treat each of the above aspects in the financial statements of
the business. Mention and briefly explain in each case which accounting concept is
being applied.
PART C
A student who is new to accounting is concerned about the statement of financial
position. He asks: ‘‘My capital contribution in the business is my greatest asset, so why
do I show it with liabilities on the statement of financial position and not with my
assets?’’ (2 marks)
Explain briefly to the student why capital appears with liabilities on the statement of

financial position.

1.1 From the transactions (a – d) below, indicate ONE transaction in which income
would be recognised on 1 January 2012 and explain, according to the Conceptual
Framework, why income would be recognised in this transaction. (4 marks)
1.2 From the transactions (a – d) below, indicate ONE transaction in which income
would NOT be recognised on 1 January 2012 and briefly justify why no income is
recognised. (3 marks)
a) On 1 January 2012, the business received R100 000 from the owner, as an
additional capital contribution.
b) On 1 January 2012, the business received R100 000 from a customer as a
deposit for inventory that was shipped, FOB destination point, on 1 January
2012.
c) On 1 January 2012, the business redeemed R100 000 worth of vouchers that
had been sold for cash on 1 December 2011.
d) On 1 January 2012, the business received a payment of R100 000 from a debtor.
2. For the assets underlined in each of the statements below (2.1 and 2.2), identify the
economic benefits the item has the potential to produce. If the item does not have
the potential to produce economic benefit, indicate ‘‘no potential economic
benefit’’.
2.1 A GPS system (allows the business to find its destination quickly) installed
into a delivery vehicle.
2.2 Water-damaged inventory that will have to be sold off at below its original
cost. (3 marks)
3. For each of the following statements below (3.1 − 3.4) indicate whether or not the
business has assumed control of the photocopy machine on 1 January 2012. If
control has transferred, indicate what the past event is that has transferred control.
If control has NOT been transferred, briefly explain why.
3.1 On 1 January 2012, the business paid a deposit to purchase the photocopy
machine.
3.2 On 1 January 2012, the photocopy machine was delivered to the business. The
photocopy machine will not be able to be used until, as per the sales contract
agreement, it is installed by the supplier.
3.3 On 1 January 2012, the photocopy machine was purchased by the business on
hire purchase and delivered on that date. Legal ownership transfers in six

months when the final payment is made.
3.4 On 1 January 2012, the business signed a rental contract for the photocopy
machine on which the business will pay insurance to cover damage caused by
misuse by employees. (8 marks)
4. Francis Kwahene owns a furniture business, Comfort and Class that sells to
businesses throughout South Africa. The business has a year-end of 30 June. His
furniture is in huge demand and his terms of sale state that businesses purchasing
his furniture pay a 50% deposit on the date he loads the furniture on the trucks.
Comfort and Class supplies furniture F.O.B destination point.
On 31 May 2011, Furniture Delight placed an order for 20 couches (at R12 000 each).
The furniture was loaded on to a truck in Mthatha on 29 June 2011 and will be off-
loaded at Furniture Delight on 1 July 2011. Furniture Delight paid the deposit on 29
June 2011 via the Internet and had emailed a confirmation to Comfort and Class on the
same day.
1. Indicate the date on which Comfort and Class would recognise a liability. (1 mark)
2. Explain, using the definition and recognition criteria as per the conceptual
framework, why a liability would be recognised on the date indicated in 4.1 above.
(8 marks)
QUESTION 4.6 (C)
1.
1.1 From the transactions (a – d) below, indicate ONE transaction in which an
expense would be recognised for the month ended 31 July 2012 and explain,
according to the Conceptual Framework for Financial Reporting, why an
expense would be recognised in this transaction. (4 marks)
1.2 From the transactions (a – d) below, indicate ONE transaction in which an
expense would NOT be recognised for the month ended 31 July 2012 and
briefly justify why no expense is recognised. (3 marks)
a) During the month ended 31 July 2012, the business purchased a computer for
R12 000 cash.
b) During the month ended 31 July 2012, the business purchased inventory to the
value R8 000 on credit from a supplier.
c) During the month ended 31 July 2012, the business purchased a pre-paid

voucher for electricity amounting to R1 200.
d) During the month ended 31 July 2012, the business used electricity amounting
to R1 750. However, as the electricity bill has not yet been received, no
payment has been made as yet.
2. For the assets underlined in each of the statements below (2.1 and 2.2), identify the
economic benefits the item has the potential to produce. If the item does not have
the potential to produce economic benefit, indicate ‘‘no potential economic
benefit’’.
2.1 A generator in a hospital which provides electricity when the normal supply is
interrupted.
2.2 Old hospital beds that are no longer used and will be sold off at a price below
their original cost. (4 marks)
3. For each of the statements below (3.1 – 3.4) indicate whether or not the business
has assumed control of the vending machine on 1 July 2012. If control has
transferred, indicate what the past event is that has transferred control. If control
has NOT been transferred, briefly explain why.
3.1 On 1 July 2012, the business paid a deposit to purchase the vending machine.
3.2 On 1 July 2012, the vending machine was delivered to the business. The
vending machine will only be used once, as per the sales contract agreement it
was installed by the supplier and filled with a variety of chips and chocolates.
3.3 On 1 July 2012, the vending machine was purchased by the business on hire
purchase and delivered on that date. Legal ownership would transfer in six
months when the final payment was made.
3.4 On 1 July 2012, the business signed a rental contract for the vending machine
on which the business would pay insurance to cover damage caused by misuse
by employees. (8 marks)
4. For each of the key business decisions listed below, briefly explain the business
decision and indicate on which financial report you will best be able to determine
the impact of the decision on the business.
a) Financing decision.
b) Investing decision.
c) Operating decision.
d) Distribution decision. (6 marks)
QUESTION 4.7 (C)

Moedverloor Farm is currently experiencing severe financial difficulties. Currently they

are unable to pay their liabilities and their financial year-end is 31 December 20x3. It is
now mid-March and you are busy finalising their financial statements for the year that
has to be presented to the bank on 31 March 20x3.

The farm is currently negotiating with a prospective investor who would invest enough
capital to solve the entities solvency and cash flow crises. No agreement has been
reached with the investor.
Discuss whether the going concern principle should be applied to the preparation of the
annual financial statements of Moedverloor Farm and indicate what alternative
principles could be used to prepare the financial statements.
QUESTION 4.8 (C)

Lulu is the financial director of a business called Kayak Safaris, which offers kayak
trips down the Orange River. The trips have become extremely popular and the
business requires an additional section of land to accommodate the groups prior to the
trip. The business has a year-end of 31 December. Assume a fair interest rate of 14%.
Transaction 1
On 1 September X6, Lulu signed a sale agreement with Richtersveld Developers to

purchase a section of land on the Orange River. The transfer of ownership of the land
occurred on 1 January X7. The agreement states that Lulu will pay R2 800 000 on 31
December X7.
Transaction 2
On 1 February X7, Lulu ordered an additional 10 kayaks to accommodate the increasing

number of clients that were interested in the trips offered by Kayak Safaris. The kayaks
cost R15 000 each and were delivered on 1 March X7 and Lulu paid for the kayaks on 31
May X7.
1. Prepare the general journal entry/ies that would have been processed on 1
September X6 and 31 December X7.
2. Briefly justify the element you would have chosen to debit in the journal entry on 1
January X7. Your answer should include full definitions and recognition criteria
as outlined by IFRS in the conceptual framework.
3. Prepare the general journal entry/ies that would have been processed on 1
February X7, 1 March X7 and 31 May X7. If no journal entry is required, briefly
motivate why.
QUESTION 4.9 (B)

Craig Williams, an old university friend, has started a business, Caterers-R-Us that buys
and sells catering equipment to fast-food outlets in South Africa. He has to prepare
financial statements for the financial year ended 30 June X8. He has asked you for help
with a transaction that has, as yet, not been recorded, the details of which are provided
below.
On 1 April X8 Craig placed an order for 200 deep fryers at R8 000, each from a
manufacturer in India. The terms and conditions of the sales agreement indicated that a
deposit amounting to 50% of the total purchase price had to be paid in advance (two
weeks after placing the order) and the balance must be paid on 5 July X8. Control of the
deep fryers would pass from the manufacturer to Caterers-R-Us once the deep fryers
have been placed onto the container ship in India.
The deposit was paid on 15 April X8. The manufacturer notified Caterers-R-Us that the
200 deep fryers were loaded onto a container ship on 28 June X8.
Prepare the general entry/entries that should have been processed on 1 April X8, 15
April X8, 28 June X8 and 5 July X8 in the books of Caterers-R-Us. Ignore general
journal narrations. If no journal entry is required, briefly motivate why.
QUESTION 4.10 (A)

Vathiswa is the financial director of a business called Logistic Fittings which sells a
variety of wooden, aluminium and chipboard sheets to the construction industry. With
the lead-up to the 2010 Soccer World Cup, the business has become extremely profitable
and requires additional factory space to manufacture and store the material. The
business has a year-end of 31 December.
On 1 January X8, Vathiswa signed an offer with MM Properties to purchase a factory in

Maitland for R1 900 000. The offer was accepted on 15 January X8 at the offered price.

Vathiswa negotiated a 100% mortgage bond (loan) to cover the purchase price. The
terms of the contract stated that transfer of ownership of the factory took place on 1
May X8, on which date the factory was available for occupation by Logistic Fittings.
The mortgage bond was granted by Sharia Bank on the transfer date. On 31 December
X8, the property was valued at R3 500 000. Assume a market-related interest rate of
11%.
1. Prepare the general journal entry/ies that would have been processed on 1 January
X8.
2. Briefly justify the element you have chosen to debit in the journal entry in (1)
above. Your answer should include full definitions and recognition criteria as
outlined by the Conceptual Framework for Financial Reporting in IFRS.
3. Prepare the general journal entry to record the purchase of the factory by Fitting
Warehouse. Your general journal entry must clearly show the date that this
transaction should be recognised in the books of the business.
4. State whether you think this transaction (the purchase of the factory) has affected
the net asset value of Vathiswa’s business. Briefly justify your answer.
5. Assume that the property is transferred on 1 January X8, but Vathiswa only needs
to pay R2.8m for the factory on 31 December X8. Prepare the required general
journal entries on 1 January X8 and 31 December X8.
6. Ignore the information in question (5) above when answering this question.
Prepare any general journal entries necessary as at 31 December X8 assuming that:
6.1 The business recognises the asset at historical cost.
6.2 The business recognises the asset at fair value.
If no journal entry is required, briefly motivate why.
QUESTION 4.11 (C)

PART A
Heather is the owner of Images, a lifestyle and beauty consultancy in Cape Town. The
financial year of the business runs from 1 January to 31 December. Heather offers
workshops on how to improve one’s image in the workplace. Each workshop costs R1
500 per person and runs over three days.
On 10 December X7, Heather received a fax from Frumpy, a local business in Cape
Town. The fax confirmed that six of the business’s employees would be attending the

workshop that will be held by Images from the 15th to the 18th of January X8.
Images has a policy that a 50% refundable deposit per person is required to be paid
within 10 days of confirmation of attending a workshop. On 20 December X7, Images
received the total deposit required from Frumpy via an Internet transfer. The
outstanding balance for the workshop was paid to Images on 18 January X8.
Show how the transaction on 20 December X7 would be reported in the statement of

financial position, statement of comprehensive income and statement of changes in
equity. For each financial statement indicated, you should show only the line item(s)
that would be affected by the transaction, and the amount at which the affected line
item(s) would be reported.
If the transaction would have no effect on the financial statement required, then write
“no effect”.
You are not required to show the impact of income and expenses on retained earnings
in the statement of financial position. You are also not required to provide full headings
for each financial statement. The following abbreviations are acceptable for this
question: SOFP, SOCI and SCE.
PART B
On 1 January X7, Heather, the owner of Images purchased a machine that is designed to
enhance skin tone. The estimated useful life of the machine was 6 years. The business
was required to pay R207 000 for the machine on 31 December X7. Payment was made
after a period of more than a year. Assume a fair interest rate of 15%.
On 31 December X7, the accountant of Images informed Heather that research showed
that the machine had proven to be unpopular in the beauty industry as the treatments
from using the machine were not long lasting. The accountant identified that the future
economic benefits from using the machine would amount to R145 000 and the future
economic benefits from selling the machine would be R105 000. Images measures
machinery at cost.
Show how the transactions on 1 January X7 and 31 December X7 would be reported in

the statement of financial position, statement of comprehensive income and statement
of changes in equity. For each financial statement indicated, you should show only the
line item(s) that would be affected by the transaction, and the amount at which the
affected line item(s) would be reported.
“no effect”.
QUESTION 4.12 (B)

Malta Ltd is an electronics company that has shown exceptional profits over the past
few years. You are considering investing in the company and have asked to see the
most recent financial statements. You have found out that the financial statements are
audited by Arthur (Pty) Ltd, a firm that is paid R100 000 for the audit and R4 million in
consulting fees by Malta Ltd. The consulting fees are dependent on the exceptional
profits generated. You have also identified that inventory amounting to R2 million that
is recognised on the statement of financial position at cost is 3 years old. You have
consulted with experts and have been informed that it is more likely than not that the
inventory could be sold for 10% of its original cost. The financial information for last
year has been omitted from the financial statements and you are unable to find notes
relating to how assets have been measured.
Briefly explain, with justification from the information provided above, whether or not
you believe that the financial statements provided by Malta Ltd are useful. A maximum
of 8 marks will be awarded regardless of the length of your answer.

ADJUSTMENTS

1. Briefly explain the difference between an adjusting journal entry and a closing
journal entry. (2 marks)
2. For each of the statements below, indicate whether the statement is ‘‘TRUE’’ or
‘‘FALSE’’. If FALSE, briefly correct the statement and show you understand the
highlighted term. (6 marks)
a) The carrying amount of non-current assets measured on the cost model
represents the value-in-use of the asset on that date.
b) As the value of non-current assets decrease as they are used, depreciation
ensures that non-current assets are carried at their current market value.
c) Equipment delivered on 1 January 2010 is paid for (R1 500 000) on 31
December 2011. This is longer than a year. The cost at which the equipment is
initially recognised amounts to R1 500 000.

African Experience is a tourism business that provides tours to various African

countries for clients mostly from Europe, the United States and Australia. The business
is in the second year of trading. You have been provided with a number of the
transactions that occurred during the current financial year (1 February X2 to 31 January
X3), as well as an extract of the summarised statement of financial position of the
business from the previous financial year (as at 31 January X2).
African Experience’s payment terms for clients booking for tours

African Experience requires all clients who book to go on the various tours to pay 50%
of the tour price in advance (before the tour). The remaining 50% of the tour price is to
be paid within 30 days after the tour has ended.
African Experience
Extract: Statement of financial position as at 31 January X2
Equity 12 200 000
Capital 10 500 000
Drawings (2 050 000)
Accumulated profit 3 750 000
Liabilities 9 300 000
Loan (15%) 6 000 000
Trade payable 2 100 000
Bank overdraft 1 200 000
Total equity and liabilities 21 500 000
List of transactions that occurred during the period 1 February X2 to 31 January X3:
1. The owner, Leo Travel, contributed a vehicle to the business on 28 February X2. On
this date, this vehicle was worth R44 000.
2. On 1 May X2, African Experience received the advance payment (50%) from clients
booking for the 30-day Cape to Cairo tour, leaving on 1 June X2 and returning on
30 June X2. The tour cost a total of R10 000 per person and 15 people were booked
on the tour. All the tourists had paid the remaining 50% on 30 June X2, except for a
couple named Bob and Twiggy. On 31 January X3, the accountant learnt that these
clients had lost their jobs and were unable to pay the balance of the tour price
owing by them. The bookkeeper records advanced payments in the income
received in advance account.
3. During the year, African Experience offered a number of other tours, other than
the tour described in (3) above. All of these tours had ended before the year-end
and total payments of R12 600 000 had been received. Only R300 000 was still owed
on 31 January X3 by clients who had been on these tours. The management thought
that it was probable they would receive the R300 000 within 90 days after the year-
end.
4. On 31 January X3, African Experience paid salaries and wages of R500 000 to staff
for work performed during the year.
5. On 31 August X2, African Experience paid for printing costs of pamphlets
explaining the various tours on offer. These printing costs amounted to R750 000.
75% of the pamphlets had been used and distributed to the public and the
remaining 25% of the pamphlets were still being stored by African Experience on
31 January X3 and would be distributed to the public during the following year.
6. The business used water and electricity of R65 000 during the year ended 31
January X3. The business had paid R60 000 of this electricity by the end of the year.
The remaining portion of the electricity that had been used during the current year
was paid to Eskom only during February X3.
7. The loan of R6 000 000 shown on the statement of financial position as at 31 January
X2 was from Bankard Bank. This loan was taken out when the business started and
is repayable only from X4. All interest had been paid across to the Bankard Bank,
except for R10 000 of the current year’s total interest expense, which was still owing
to the bank on 31 January X3.
8. Petrol used by the tour vehicles during the year amounted to R400 000, and repairs
that were carried out on the vehicles during the year amounted to R220 000. 90% of
these costs had been paid for in cash and 10% of these costs were still unpaid on 31
January X3.
9. The manager knew she would have to carry out repairs of R1 million in X4 on the
fleet of vehicles owned by African Experience. The management thought that
because they planned to do the repairs the following year, they should process the
following journal entry on 31 January X3:
Debit Credit
Repairs (expense) 1 000 000
Provision for repairs (liability) 1 000 000
1. Prepare the general journal entries to record the following transactions on the date
of the transaction:
a) Transaction number (1) (3 marks)
b) Transaction number (4). (2 marks)
2. Answer the following questions with respect to transaction number (2):
a) Prepare the general journal entry to record the cash received on 1 May X2 in
respect of transaction number (2). (3 marks)
b) Prepare any general journal entry/ies that you think should be processed on
30 June X2 in respect of transaction (2). If you think that no journal entry/ies
is required, please support your opinion with a short explanation. (7 marks)
c) Calculate the total sales income that would be reported in the statement of
comprehensive income of African Experience for the period 1 February X2 to
31 January X3 in respect of transaction number (2). (2 marks)
You should assume at this point that Bob and Twiggy would be able to pay
their outstanding balance owing.
d) On 31 January X3, briefly explain how you would account for the fact that Bob
and Twiggy were unable to pay the balance owing in respect of the Cape to
Cairo trip. Your explanation should include a general journal entry to record
this additional information. A full discussion of the concepts in the
conceptual framework is not required and only the relevant parts of the
definition and/or recognition criteria need be referred to. (5 marks)
3. Show how the following transactions would affect assets, liabilities and equity.
Indicate whether equity, assets and liabilities have increased/decreased, the
account names and the amount. (11 marks)
a) Transaction number (3)
b) Transaction number (6)
c) Transaction number (8).
4. a) Calculate the total interest expense for African Experience for the year ended
31 January X3. You should refer to transaction (7) when calculating this interest
expense. (2 marks)
b) Prepare the general journal entry to record the total interest expense in the
general ledger. (4 marks)
c) Briefly explain why the total interest calculated in (a) above is classified as an
‘‘expense’’. (2 marks)
5. Show how transaction number (5) should be reported in the financial statements
(statement of comprehensive income and statement of financial position) of African
Experience for the period ended 31 January X3. Support your answer with a brief
explanation of why you have presented the information in this way. A full
discussion of concepts in the conceptual framework is not required and only the
relevant parts of the definitions and recognition criteria need be referred to.
6. Prepare the statement of comprehensive income of African Experience (6 marks)
for the year ended 31 January X3, after taking into account all of the relevant
additional information in points (1 to 10) previously. (10 marks)
7. Prepare only the EQUITY section of the statement of financial position of African
Experience as at 31 January X3, after taking into account all of the relevant
additional information in points (1 to 10) previously. Show all workings. (6 marks)
8. Briefly explain whether you think the manager was correct in wanting to process
the journal entry set out in transaction (10) in respect of the future repairs to be
carried out. You are not required to discuss the full element definitions and
recognition criteria but only the parts of the criteria that are problematic. You
should also address whether the debit element and the credit element has been
correctly dealt with.
Debit Credit
Repairs (expense) 1 000 000
Provision for repairs (liability) 1 000 000

(5 marks)
9. State whether you think that the owner’s claim on the business has increased or
decreased between the financial years ended 31 January X2 and 31 January X3.
Support your answer with a brief explanation. (3 marks)

Trendy Sweats is a business that makes a range of gym clothing. The business sells its
products to retail shops such as Lotal Sports and Sportswoman Warehouse. We have
provided with the statement of comprehensive income and statement of financial
position of this business for the year ended 31 December X1. The bookkeeper tells you
that the income method is used to record cash receipts, the asset method is used to
record cash payments, and the perpetual system is used for inventory.

Note:
1. The owners’ contribution in X1 was 60% cash and 40% machinery and equipment.
2. All drawings consisted of cash. Retained earnings in X1 are net of R3 635 000 drawings and in X0 are net
of R2 835 000 drawings.

1. What is the current reporting period for Trendy Sweats? (1 mark)
2. On what date are we reporting on the financial position of Trendy Sweats? (1 mark)
3. What is meant by the term ‘‘profit’’? What is the profit for X0 and X1? (4 marks)
4. What is the retained earnings on 31 December X1? Explain the difference between
profit and retained earnings. (4 marks)
5. In which general ledger account do we find profit recorded? (1 mark)
6. a) What is the total of the retained earnings and capital on the statement of financial
position on 31 December X1, and what is the name given to this total? (3 marks)
b) What is the value of the assets less liabilities of the business on 31 December
X1? (1 mark)
7. Did the net asset value of the business increase or decrease in X1? What caused this
change during the year? (4 marks)
8. Rental of the premises is payable monthly in arrears. On 31 December X0 the
bookkeeper made a mistake and paid the rental for January X1 in advance. On 31
December X1 the bookkeeper had not yet received the monthly invoice for the
December rental and so did not make any rental payment for December X1.
a) Prepare any adjusting journal entry the bookkeeper would have processed
before preparing the X1 financial statements, in light of the information above
(question (8)). (3 marks)
b) Prepare the rental expense general ledger account, as it would appear in the
ledger for the whole year ended 31 December X1. (5 marks)
QUESTION 5.4 (B)

Part A and Part B are independent questions.
Tybalt Stores is a large pet shop which sells a variety of pet food products and has a 30
September financial year-end.
PART A (27 marks: 35 minutes)

Tybalt stores
Extract of pre-adjustment trial balance as at 30 September 2012
Debit Credit
Vehicles 150 000
Furniture 80 000
Inventory 120 000
FBN current account bank balance 312 000
Loan from Substandard Bank 18 000
Sales income 1 096 000
Interest income 2 000
Rent expense 26 000
Printing expense 10 000
1 260 000 1 260 000
a) The bookkeeper records printing expense as and when it is paid. Tybalt Stores
reliably estimated that it incurred printing expenditure of R14 500 for the year
ended 30 September 2012.
b) Tybalt Stores rents a store in a shopping mall where the monthly rental
expense is R2 000. Tybalt Stores has operated in the store for the entire
financial year ending 30 September 2012.
c) Tybalt Stores purchased a vehicle on 1 October 2011 for R150 000.
Depreciation on this vehicle for the year ended 30 September 2012 amounted
to R25 200.
d) On 31 September 2012, the accountant was informed that Miss Puppy, a debtor
who purchased inventory during the year, had gone insolvent. Her balance on
30 September 2012 was R11 000.
e) Based on past experience, the accountant reliably estimated that Tybalt Stores
would not collect 4% of outstanding debtors at year-end.
f) The total interest earned by Tybalt Stores on the current account bank balance
at FBN bank for the year ended 30 September 2012 was R2 100.

1. For transactions (a), (b) and (c), indicate whether or not it is necessary to process an
adjusting journal entry as at 30 September 2012. Briefly motivate your answer.
2. Prepare the necessary general journal entries to account for the (7 marks)
information in transactions (d) and (e). Dates and narrations are not required.
3. Prepare the interest income general ledger account in the books of Tybalt (6 marks)
Stores for the year ended 30 September 2012. Show all dates and close off necessary
accounts. (5 marks)
4. Calculate the following amounts:
4.1 Total other expenses, as they would appear in the statement of comprehensive
income for Tybalt Stores for the year ending 30 September 2012. (6 marks)
4.2 Total liabilities, as disclosed in the statement of financial position of Tybalt
Stores as at 30 September 2012. (3 marks)
PART B (8 marks: 10 minutes)
Windy Seas offers two basic and one advanced workshop to amateur boat makers.
Each person attending the basic three-day workshop is charged R2 400 per person and
is charged R3 900 for the basic five-day workshop. The advanced boat-making
workshop attracts many international boat makers and charges R8 600 per person
attending. Windy Seas recommends that bookings for all workshops are made and paid
for in advance to ensure that clients secure a place.
On 26 February 2011, We Make Boats, a Durban-based business and regular client of

Windy Seas, confirmed and paid for employees to attend the following workshops:
• 10 employees to attend the basic three-day workshop on 30 April, 1 and 2 May
2011
• 22 employees to attend the basic five-day workshop on 12 January − 16 January
2012
• 5 managers to attend the advanced workshop on 23 May − 27 May 2012.
The bookkeeper records all payments received for workshops as workshop income.
1. Calculate the amount of cash received by Windy Seas and recorded as workshop
income for the year ended 30 April 2011. Marks are specifically allocated to the
calculations. (3 marks)
2. Calculate the amount that will appear in the statement of comprehensive income
as workshop income of Windy Seas for the year ended 30 April 2012. Marks are
specifically allocated to the calculations. (2 marks)
3. Prepare the reversing general journal entry that will be processed by Windy Seas
on 1 May 2012. Ignore dates and narrations. (3 marks)
PART C (12 marks: 14 minutes)
Windy seas
Extract of the pre-adjustment trial balance as at 30 April 2012
Loan: Solid Rock Bank 705 000
Accrued interest expense (01/05/11) ?
Interest expense ?
The loan had been granted to Windy Seas by Solid Rock Bank on 1 February 2008. The
loan agreement included the following information:
• The loan is to be repaid in seven equal annual instalments with the first instalment
being paid on 1 January 2009.
• The annual interest rate is fixed at 12% per annum.
• Interest is paid every four months in arrears on the last day of January, May and
September each year.
1. Prepare the loan account as it would appear in the general ledger of Windy Seas
for the year ended 30 April 2012. (3 marks)
2. Prepare the interest expense account as it would appear in the general ledger of
Windy Seas for the year ended 30 April 2012. The payments for interest MUST be
shown separately in the account. Balance or close off the account appropriately.
(9 marks)
QUESTION 5.5 (B)
Kitchen Extravaganza is a business that buys and sells a wide range of kitchen
appliances in bright colours. The business has been operating for a number of years and
has a financial year-end of 31 December.
You have been provided with an extract of the statement of financial position on 31
December X4 and an extract of the income statement for the year ended 31 December
X4. You are required to look carefully at the extracts and the additional information
given and then answer the questions that follow.
Kitchen Extravaganza
Extract from the statement of financial performance for the year ended 31 December
X4
Cost of sales expense 7 430 000
Gross Profit 7 345 000
Other income
Rent income ?
Expenses
Additional information:
a) An extremely important customer, Ms Home, ordered (FOB destination) a large
number of red kettles for her business in Durban. She paid R140 000 in total for the
kettles on 4 December X4. The kettles will be delivered to Ms Home on 1 February
X5. The kettles cost Colours in the House a total of R85 000.
b) Kitchen Extravaganza entered into an insurance agreement on 1 September X3. The

agreement was that the factory premises would be insured for 3 years starting on 1
September X3, after which the insurance agreement would be renegotiated. The
insurance agreement was R145 000 each year for 3 years or a once-off payment of
R360 000. The business decided to pay the full R360 000 on 1 September X3 and
recorded the payment as an asset.
c) The manager performed an inventory count on 31 December X4 and found that
toasters amounting to R70 000 had been damaged by water. These toasters would
have to be discarded as they had no resale value. The bookkeeper was not sure
what to do with this information and therefore has not processed any entry.
d) The business receives the electricity account in arrears on the 15th of each month.
e) Kitchen Extravaganza rents a portion of its warehouse to an appliance repairs
store. You have agreed that the tenant can pay you the rental on the first day of
each month in arrears. The rental increases on the 1st of January each year.
(Ignore narrations for all journal entries)

1. Prepare the general journal entries required to record each transaction. (15 marks)
2. Post the general journal entries to the General Ledger (be sure to include the
opening balances where appropriate). (15 marks)
3. Prepare the trading account and profit and loss account. (8 marks)
4. Prepare the post-closing trial balance for the year ended 31 December X2, to the
extent possible. (10 marks)
QUESTION 5.6 (A)

Power Chargers is a business based in Epping in Cape Town that buys and sells
generators. The business was started with an initial capital contribution of R300 000 and
has a year-end of 30 June.
The bookkeeper records cash receipts as income and cash payments as expenses. The
accountant makes the necessary adjusting journal entries at the end of each financial
year. All appropriate reversing entries were correctly processed on 1 July X7.
Power Chargers
Extract from the pre-adjustment trial balance as at 30 June X8
Debit Credit

Bank 247 750
Capital 300 000
Drawings 401 250
12% Loan – Permanent Trust 300 000
Power Chargers took out a loan from Permanent Trust on 1 February X5. The terms of
the loan stated that the initial amount was repayable over 5 years, in equal annual
instalments, starting on 31 January X6. Interest at 12% per annum is payable every four
months in arrears on 31 January, 31 May and 30 September. All interest and capital
payments have been made as required.
Show how the transaction above would be reported in the statement of financial
position, statement of comprehensive income and statement of changes in equity. For
each financial statement indicated, you should show only the line item(s) that would
be affected by the transaction, and the amount at which the affected line item(s)
would be reported.
“no effect”.
QUESTION 5.7 (C)

Manic Computers is a computer business in Observatory that specialises in selling solar

powered laptops and laptop accessories made from recycled material. The business also
earns income (service fees) from consulting to businesses regarding the design of solar
friendly workspaces. Andreas Lowly, the owner, has approached you for help as his
accountant is in Japan protesting the killing of 680 whales for research purposes.

He has provided you with the pre-adjustment trial balance as at 31 March X8, the
financial year-end of the business, as well as some additional information he believes
may be relevant.
Pre-adjustment trial balance as at 31 March X8

Debit Credit
Capital 235 000
Drawings 10 000
Retained earnings 70 000
Long-term loan 140 000
Inventory ?
Bank 64 700
Consumable stores asset 6 525
Sundry expenses 32 000
Services fee income 180 000
Transport costs 37 000
Advertising expense 44 000
Interest expense ?
Rent expense ?
All relevant reversals had been correctly processed on 1 April X7.
a) Manic Computers has rented the same property in Observatory for the last two
year. The rental agreement states that the rent is payable monthly in arrears, that is,
the payment is made on the first day of each month for the past month. The
agreement indicated that the rental would increase by 10% per annum on 1 January
each year. The rental for January X8 amounted to R4 675. All rental payments
during the year ended 31 March X8 have been correctly made.
b) The long-term loan was taken out on 1 December X4. The terms of the loan state
that the initial amount is repayable over 7 years, in equal annual instalments,
starting on 1 December X5. Interest at 15% per annum is payable in arrears on 30
June and 31 December. All interest and capital repayments have been made as
required.
c) During December X7, Manic Computers was awarded a contract to design solar
friendly work spaces in the UCT libraries and residences. The contract agreed that
it would take 18 months to complete the work and that the work would be
performed evenly over the 18 months, starting on 1 February X8. To secure the
contract, UCT paid Manic Computers a deposit of R108 000, which amounted to
six months’ worth of work. The entire R108 000 was recorded as service fee income.
d) Andrew uses prepaid telephone vouchers as he finds that they allow him to
manage his telephone expense better. The business had prepaid telephone
vouchers amounting to R3 200 on hand as at 31 March X7. The business had
prepaid telephone vouchers amounting to R1 400 on hand as at 31 March X8.
e) On 31 March X8, Andrew still owed one of his employees R4 500 for work done in
March X8.
f) Andrew had taken a laptop which he gave to his niece for her birthday. The laptop
had cost R5 400 and had a selling price of R10 250. No entry has been processed to
record this transaction.
g) Included in the inventory count on 31 March X8 were 10 laptops with a cost of R5
000 each. The solar cells had been damaged and could be sold for R6 200 if an
additional solar unit, costing R1 850 each, was attached to each laptop. No entry
has been processed to record this information.
h) The inventory count also included 20 laptops with an experimental solar cell
system that had cost R7 000 each. The initial selling price had been set at R11 000,
however, the experimental cells have been so successful that Manic Computers has
decided to increase the selling price of these units to R16 000. No entry has been
processed to record this information.
1. Prepare the general journal entries required to record each transaction.

2. Prepare the statement of comprehensive income for Manic Computers for the
month ended 31 March X8.
3. Prepare the statement of financial position for Manic Computers as at 31 March X8.
4. Briefly explain whether income is earned or expenses are incurred in transaction (g)
above. Use the accounting terminology you have become familiar with to answer
this question.

QUESTION 5.8 (C)
Crazy Computers buys and sells computers and computer accessories and also offers
computer training to individuals and business clients. The firm’s PRE-ADJUSTMENT
trial balance as at 31 December X5 is presented below.
Crazy Computers pre-adjustment trial balance as at 31 December X5

Debit Credit
Capital 472 200
Bank loan (12%) 240 000
Furniture and equipment, at cost 260 000
Motor vehicles, at cost 375 000
Investment: Fixed deposit account 126 000
Inventory (1 January X5) 290 000
Prepaid insurance (ASSET) 115 200
Stationery on hand (ASSET) 37 900
Cash at bank 181 100
Sales 988 000
Fees income 238 000
Interest income 6 300
Purchases 433 000
Sales returns 43 000
Drawings 54 700
Carriage outwards (delivery costs) 15 500
Rent, water and electricity expenses 148 800

Salaries and wages 126 200
2 516 400 2 516 400
The following additional information relating to Crazy Computers is provided:
1. The statement of financial position of Crazy Computers as at 31 December X4
included (amongst others) the following assets and liabilities:
R
Accrued interest expense (or interest expense payable) 9 600
Prepaid insurance 43 200
Accrued telephone expense (or telephone expense payable) 8 400
Stationery on hand 5 700
Bank loan (12%) 320 000
All the appropriate reversal entries were processed correctly on 1 January X5.
2. On 30 September X5, a cheque for R80 000 was issued to repay part of the 12% bank
loan. Interest on the loan is payable half-yearly in arrears (on 31 March and 30
September).
3. The bookkeeper has not recorded (or adjusted for) the following items relating to
the financial year ended 31 December X5:
3.1 Stationery on hand on 31 December X5 amounted to R7 400 at cost.
3.2 A telephone bill for R4 000 relating to the month of December X5 was received
on 4 January X6 and no entries had been made for it.
3.3 A sales invoice for R20 000 relating to computers costing R10 000 sold to UCT
on 31 December X5 had not been recorded.
3.4 The prepaid insurance of R115 200 (see the pre-adjustment trial balance)
includes an amount of R72 000 paid on 31 August X5 covering the year from 1
September X5 to 31 August X6.
3.5 The fixed deposit investment was made on 1 May X5 and earns interest at 10%
per annum. The interest on this investment is received quarterly in arrears (on
1 August, 1 November, 1 February and 1 May).
3.6 The fees income of R238 000 (refer to trial balance) includes an amount of R23
000 (received in December X5), which relates to computer training provided in

January X6.
4. The physical count conducted on 31 December X5 revealed that inventory on hand
had a cost of R340 000 and a net realisable value (NRV) of R335 000.
1. Prepare the general journal entries required to record each transaction in point (3).
2. Prepare the closing entries required as at 31 December X5. (15 marks)(16 marks)
3. Prepare the statement of comprehensive income for Crazy Computers for the year
ended 31 December X5. (10 marks)
4. Prepare the statement of financial position for Crazy Computers as at 31 December
X5. (15 marks)
QUESTION 5.9 (B)

Africa Alive is a specialist bookstore in Long Street in Cape Town that John Ford, a
friend, started on 1 July X1. The bookstore sells fiction, non-fiction and a wide range of
travel books relating to the African continent. Although John has done a lot of travelling
and enjoys owning his own business, he has never really understood how to manage
the accounting records. His partner used to do the bookkeeping for the business but she
is currently travelling through South America and will only be back in 10 months’ time.
John has prepared the statement of financial performance and statement of financial
position as at 30 June X7, the year-end of the business, and is unsure if he has prepared
them correctly. He has provided you with the statement of financial performance and
statement of financial position and some additional information.
The following is an extract of the financial statements that John prepared for you to
review at 30 June X7:
Africa Alive
Statement of financial performance for the year ended 30 June X7
Less: Cost of sales (402 000)
Gross Profit 522 880
Add: Other income 4 933
Investment income 4 933

Less: Expenses (304 540)
Water and electricity expense 7 300
Profit for the year 223 273
EXTRACT from the statement of financial position of Africa Alive as at 30 June X7

Non-current assets ?
Fixed deposit: Able Bank (8%) 70 000
Property 600 000
Vehicles ?
Accumulated depreciation on vehicle (01/07/06) (66 000)
Current assets
Less: Allowance for doubtful debts (01/07/06) (30 525)
Bank 534 654
Inventory 755 000
a) According to the non-current assets register, vehicles are depreciated at 20% per
annum using the straight-line method of depreciation. The business owns two
vehicles and the details of each vehicle are outlined in the register as follows:
b) Bad debts written off during the current year amounted to R57 000. R25 000 related
to sales made during the year ended 30 June X6 and the remainder related to sales
made during the year ended 30 June X7.
c) The business has found that an increasing number of debtors do not pay their
accounts. John has decided that the allowance for doubtful debts should amount to
5% of the outstanding Debtors’ Balance.
d) John performed an inventory count on 30 June X7 and found that no inventory had
been stolen. However included in the inventory were travel books on the Congo
that had cost R25 000. These were out of date and could only be sold for R26 000 if
up-to-date maps costing R6 500 were provided with the books. No entry/ies have
been processed to record this information.
1. Prepare the general journal entries required to record each transaction. (16 marks)
2. Prepare the closing entries required as at 30 June X7. (10 marks)
3. Briefly explain whether income is earned or expenses are incurred in transaction (c)
above. Use the accounting terminology you have become familiar with to answer
this question. (3 marks)
4. Prepare the following accounts in the General Ledger for the year ended 30 June
X7:
4.1 Trade receivables account
4.2 Allowance for doubtful debts
4.3 Accumulated depreciation. (10 marks)

INVENTORY

Part A and Part B are independent questions.

An old varsity friend, Luyando, has started a business called Mayan Wood that imports
wooden chests from Mexico. Unfortunately his bookkeeper so enjoyed Mexico that he
has decided to move there. Luyando has found the following information regarding
transactions that occurred during the year. He needs your help to try to sort out his
books.
You have identified that Luyando’s business uses the perpetual inventory recording
method and allocates the cost of inventory by applying the weighted average method.
The business has a year-end of 28 February.
Stock sheet − wooden chests
Transaction 1
Vuyo Mhlanga, a regular customer ordered 50 wooden chests. The listed selling price
on Mayan wood catalogue amounted to R1 450 each. Mayan Wood offered him a
settlement discount of 5% if paid within 30 days. It is probable that Vuyo will pay
within 30 days. The wooden chests were delivered on 27 February X8.
Transaction 2
Vuyo Mhlanga settled his account on 1 April X8.
1. Calculate the cost of sales amount that would be recorded on 27 February X8 (see
transaction (1) above). (3 marks)
2. Prepare the general journal entry(ies) for Mayan Wood to record transactions (1)
and (2). (5 marks)

Foods Delight imports blenders from Italy in a range of bright colours. The business
uses the perpetual inventory recording method. The business has a year-end of 31
December.
Transaction 3
Foods Delight purchased 20 blenders from a supplier in Italy. Each blender cost R85
and Foods Delight had to pay import and custom duties amounting to 7% of the cost
price per blender. Foods Delight hired workers, at a total cost of R400, to offload the
blenders at the harbour to prevent their being damaged. These costs were paid in cash.
The business spent a further R500 on an advertisement as they believed this was
necessary to help sell the blenders.
Transaction 4
Foods Delight realised that all the blenders (see transaction (3) above) had been
damaged by rust. It is impossible to prove that the rust was due to a fault by the
supplier so Foods Delight cannot return the blenders to their supplier. Foods Delight
estimates that after spending R10 per blender on a rust spray they should be able to sell
the blenders to a cooking school in Cape Town for R90 each.
1. Calculate the cost per blender purchased from the supplier in Italy. See transaction
(3) above. (2 marks)
2. Prepare the general journal entry(ies) in the books of Foods Delight required to
record the information provided in transaction (4) above. (4 marks)

Organic Eating uses the FIFO cost allocation method and the periodic inventory
recording system.
The business had 10 items of inventory on hand on 1 April 2012, with a unit cost of R14
each.
The following transactions occurred during April 2012:
Date Purchased/sold Cost/selling price

7 April Purchased 30 items R15 each
10 April Sold 33 items R45 each
16 April Purchased 10 items R12 each
On 30 April 2012, Organic Eating had 16 items on hand.
1. Using the above information, prepare the adjusting journal entries required on 30
April 2012 to calculate the cost of sales correctly. Dates and narrations are not
required. (5 marks)
2. Assume that after COS expense had been calculated, the business realised that two
items had been damaged and could be sold for R11 if R3 was spent on repairs.
Calculate the carrying value at which the inventory should be reported in the
statement of financial position of Organic Eating on 30 April 2012. (3 marks)
3. Assume for this question that Organic Eating uses the weighted average cost
allocation method and the periodic inventory recording system. Calculate the cost
at which inventory would be carried at on the statement of financial position as at
30 April 2012. (2 marks)

Complete the table by calculating the missing numbers:

Zambian Zebras (ZZ), a business based in Johannesburg, imports carved wooden

animals from other Southern African countries, and sells them to curio shops around
South Africa. The owner of the business, Thobile Kutekwatekwa, does not know a great
deal about accounting. Thobile has asked for your guidance with respect to the
reporting of inventory and trade receivables in the financial statements for the year
ended 31 March 2012.
In an interview with Thobile, you discover the following information:
1. Although ZZ mainly sells to curio shops directly, the business also uses a
consignment agent, Azanian Animals (AA), which charges a commission of 15% to
sell inventory at ZZ’s normal selling price. The contract between ZZ and AA
stipulates that AA should sell for cash only, and on the first day of each month AA
should send ZZ the amount owing for the previous month’s sales. During the
month of March 2012, AA made total sales of R21 600 on behalf of ZZ. The
consignment inventory had a cost of R14 000 (this cost has been calculated
correctly).
2. The business uses a perpetual inventory recording system. On 31 March 2011,
inventory was reported in the 2011 financial statements of ZZ costing R240 000.
3. All ZZ’s purchase and sales contracts stipulate FOB shipping point. The business
incurred the following costs on inventory purchased during the 2012 financial year
as follows:
Purchases
Total purchase price of inventory R620 000
Import duties R220 000
4. ZZ sold items with a purchase price of R935 000.

5.
5.1 On 31 March 2012, the following information is available after a physical
inventory count:

5.2 On 31 March 2012, several wooden giraffes in the warehouse in Johannesburg,
had been damaged in transit and had broken ears and horns. These giraffes
had a total cost (calculated correctly according to GAAP) of R2 500. The
business plans to spend a total of R400 to fix them and then plans to sell them
to employees for a total of R2 000.
6. On 31 March 2012, the business was informed that one of its regular customers,
Tswana Tsessebe, had been declared bankrupt, and that ZZ should only expect to
receive 30c in the rand for the amount of R40 000 due by Tswana Tsessebe. No
entry has been processed to record this information.
7. On 31 March 2012, Thobile determined that 5% of TOTAL outstanding trade
receivables on 31 March 2012 are not likely to be collected. The trade receivables
balance in the pre-adjustment trial balance on 31 March 2012 is R350 000. No entry
has been processed to record this information.
1. Prepare ALL the journal entry/ies relating to the consignment sales made in March
2012 in the books of Azanian Animals. Show dates. Ignore narrations. (6 marks)
2. Calculate the balance on the inventory account of Zambian Zebras, as it would
appear in the pre-adjustment trial balance on 31 March 2012. (5 marks)
3. Calculate the balance on the inventory account of Zambian Zebras, as it should
appear in the post-adjustment trial balance on 31 March 2012. (6 marks)
4. Prepare the adjusting journal entry/ies necessary for Zambian Zebras to report
inventory correctly at 31 March 2012. Ignore dates and narrations. (3 marks)
5. Prepare the adjusting journal entry/ies necessary for Zambian Zebras to report
trade receivables correctly at 31 March 2012. Ignore dates and narrations. (6 marks)
6. Show how the information in points (6) and (7) should be presented in the
statement of financial position as at 31 March 2012, and in the income statement
of Zambian Zebras for the year ended 31 March 2012. (4 marks)
7. Explain the term “FOB shipping point”. Be sure to explain what ‘‘FOB’’ stands for,
what ‘‘FOB shipping point’’ means, and why this is important for accounting
purposes. (2 marks)

QUESTION 6.5 (B)
Painpharm is a pharmacy and they maintain their inventory records using the periodic
system and measures inventory on the first-in-first-out basis. On 1 June 20x1, the
opening inventory for Granpain, an over-the-counter pain killer, amounted to 20 units
at a cost of R24 per unit. Painpharm is not VAT registered.
The following transactions occurred during the month:

1. Purchased 10 units of Granpain from a supplier for R25 each.
2. Sold 25 units to customers.
3. Purchased 25 units from a supplier for R26 each.
4. Returned 5 units purchased in 3 above as they were damaged in transit.
5. Sold 10 units to customers.
6. One customer returned a unit. This unit was returned to the supplier and they
refunded the purchase price.
7. Ordered 50 units from a supplier on 25 June 20x1 to take advantage of a reduced
price. The units were only received and the supplier only invoiced Painpharm on 3
July 20x1.
Painpharm also had 30 units of Wondercream on hand as at 30 June 20x1.

Wondercream is received from the supplier on consignment and had not been sold.
1. Indicate whether the 50 units ordered from the supplier on 25 June 20x1 should be
included or excluded from inventory as at 30 June 20x1. Give reasons for your
answer based on the conceptual framework. (3 marks)
2. Indicate whether the 30 units of Wondercream would form part of inventory as at
30 June 20x1. Give reasons for your answer based on the conceptual framework.
3. Calculate the units of Granpain on hand as at 30 June 20x1 and calculate (3 marks)
the amount at which inventory will be shown at in the financial statements,
assuming the business uses the first-in-first-out measurement basis. (4 marks)
QUESTION 6.6 (B)


PARTS A AND B ARE INDEPENDENT QUESTIONS
PART A (23 marks)

Patrick Cherry owns a furniture business, Atlanta Here We Come, operating in Cala.
The business only purchases and sells top quality furniture made from rare wood
harvested from plantations in Mthatha. The business has a year-end of 30 September.
Patrick has managed to source high quality furniture from a business, Tsomo Green,
operating in Mqanduli. As his business is growing rapidly, he currently places a new
order on almost a monthly basis.
On 30 June 2011, Atlanta Here We Come placed an order for 120 beds (at R2 000 each)
and 120 table and chair combos (at R1 000 per set). This order was placed at the request
of one of Atlanta Here We Come’s major clients namely UNITRA. These items were
requested by UNITRA in order to rehabilitate one of their residences. Tsomo Green
requires that a 60% deposit is paid on order; no production or shipping of the furniture
will start if the deposit is not paid. Atlanta Here We Come paid the deposit (on the day
of the order) via the Internet and emailed a confirmation to Tsomo Green on the same
day. Tsomo Green also received a SMS notification directly from their bank. Tsomo
Green supplies furniture FOB destination point. The furniture is always loaded on to a
truck in Mqanduli and leaves as soon as all the items have been manufactured. The cost
of the items to Tsomo Green amounted to R150 000.
On 2 August 2011, the order placed on 30 June 2011 was completed and loaded onto the
truck in Mqanduli and left on the same day. The goods arrived in Cala the following
day (3 August 2011).
Atlanta Here We Come has negotiated that they only pay 7 days after delivery, as this
allows the business to check the furniture for any defects before final payment. As there
were no defects, Atlanta Here We Come paid the outstanding amount via the Internet
on 10 August 2011 and emailed a confirmation of the payment on the same day.
1. Prepare any general journal entries that Atlanta Here We Come would process on
the following dates. If no journal entry is required on a particular date, clearly
indicate “no entry required” and give a very short explanation. Dates AND
narrations are required.
1.1 30 June 2011 1.2 2 August 2011
1.3 3 August 2011
1.4 10 August 2011. (10½ marks)
2. Prepare any general journal entries that Tsomo Green would process on the
following dates. If no journal entry is required, clearly indicate “no entry required”

and give a short explanation. Dates AND narrations are required.
2.1 3 August 2011. (3½ marks)
3. Indicate the date on which Atlanta Here We Come will recognise the tables and
chairs as an asset. Explain, with reference to definition and recognition criteria in
the IFRS framework, why the tables and chairs would be recognised as an asset on
this date. (7 marks)
4. Indicate the date on which Tsomo Green will recognise sales income with respect
to the tables and chairs. Explain in full, with reference to the IFRS framework, why
income is recognised on this date. You are not expected to provide full
asset/liability definitions in your answer. (2 marks)
PART B (5 marks)
1. Briefly explain how a liability can lead to an outflow of future economic benefits.
2. Briefly explain the qualitative characteristic “relevance”. (1 mark)(1 mark)
3. Name the underlying assumption under which financial statements are prepared
and briefly explain the concept. (2 marks)
4. Briefly explain the term “distributing decision”. (1 mark)
QUESTION 6.7 (A)

Nqweshi is a retailer that buys and sells handmade necklaces. The following
information relates to the month ended May 2012:
On 31 May 2012, 49 units were on hand. Assume that all the units sold in the current
year were sold on 28 May 2012. The net realisable value of these items was R130.
1. Determine the cost of closing inventory, assuming that the business uses the FIFO
cost allocation method and the periodic recording system. (3 marks)
2. Determine the cost of closing inventory, assuming that the business uses the
weighted average cost allocation method and the periodic recording system.
(7 marks)
QUESTION 6.8 (C)
Tiny Tots is a business that imports children’s clothing from Madagascar and sells the
clothes locally in Cape Town. Tiny Tots started operating on 1 March 2005. The business
uses the perpetual inventory method to record inventory. Your aunt is the owner of
Tiny Tots and has not had much accounting experience. She has asked you to review
the financial statements for the year ended 29 February X8. The net profit calculated by
your aunt before taking into account additional information points (a − i) amounted to
R183 000. No reversals had been processed on 1 March x7.
a) On 20 February X8, Tiny Tots placed an order with their main supplier in
Madagascar. The order consisted of 200 winter dresses at a purchase price of R80
each and 150 pairs of shorts costing a total of R15 000. To secure the order, a
deposit, equal to 30% of the total purchase price, was required by the supplier. Tiny
Tots paid the amount on 22 February X8 via an Internet transfer. The terms of the
sale contract stated that the inventory was purchased FOB shipping point and that
the balance owing to the supplier was to be paid on the date that the inventory
arrived in Cape Town.
b) On 27 February X8, the inventory, ordered in (a) above, was loaded onto a plane.
The plane was expected to arrive at Cape Town International Airport on 1 March
X8 and would be ready for collection on this date. The payment of the deposit was
the ONLY transaction processed in respect of the inventory ordered.
c) On 3 December X7, your aunt sent a box of 50 summer dresses, with a cost price of
R95 each, on consignment to a business in Durban. The inventory arrived in
Durban on the same day. It was agreed that the dresses would be sold for R240
each and that Tiny Tots would pay a commission of 20% on the selling price of each
dress sold. On the last day of each month, Tiny Tots records the necessary journal
entries relating to the sales of the dresses. Cash from the sales is only paid into the
business bank account by the consignee on the 15th day of the following month. A
record showing the number of dresses sold is as follows:
December X7 January X8 February X8

22 10 4
The transaction relating to the sale of dresses for the month of February X8 had not
yet been processed.

d) On 29 February X8, a physical inventory count revealed that Tiny Tots had
inventory with a total cost price of R475 000 in their storeroom in Woodstock. No
inventory had been damaged or stolen during the year ended 29 February X8.
e) Tiny Tots has rented a portion of their premises to a computer company for the
past two years. The rental agreement states that rent is paid in advance on the last
day of each month and that the rental amount increases by 15% per annum on 1
December each year. On 29 February X8, the tenant paid Tiny Tots the correct
rental amount of R8 625. This amount was credited to the rent income account.
f) On 15 October X7, Tiny Tots paid Cape Town’s Child magazine an amount of R9
000. This was for an annual contract in which a monthly advert for Tiny Tots would
be published in the magazine starting in the November X7 issue. Your aunt
processed the following journal entry in the books of Tiny Tots:
g) The fixed asset register of Tiny Tots showed the following details regarding non-
current assets owned by the business:
Asset type Purchase date Purchase price

Vehicle A 1 March 2005 ?
Vehicle B 1 June X7 R235 000
Furniture and equipment 1 March X7 R140 000
All vehicles will be used evenly over their estimated useful life of five years.
Vehicle A has no residual value. It was reliably estimated that Vehicle B would be
able to be sold for R65 000 at the end of its estimated useful life. The balance on the
accumulated depreciation account for vehicles on 1 March X7 was R72 000.
Furniture and equipment is depreciated at 10% per annum and is not expected to
have a residual value.
All non-current assets listed in the fixed asset register were ready for use on the
purchase date. No entries have been processed to record depreciation for the year.
h) On 29 February X8, the trade receivable account reflected a balance of R245 650 and
the Debtors’ List reflected a balance of R265 000. On further investigation, you
found that for the month of February, total sales to various debtors amounting to
R21 500, had been posted correctly to the Debtors’ Ledger, but had been posted as
R2 150 to the accounts receivable account. No entries have been processed to
correct this error. The cost of sales expense had been processed correctly. Credit
sales for the year amounted to R125 000 before taking the above correction into
account.
During February X8, your aunt received a letter from the lawyer of Mr Broke, a
debtor who owed Tiny Tots an amount of R6 400 from purchases he had made
during the current year. The letter confirmed that Mr Broke had been declared
insolvent and that he would only be able to pay Tiny Tots 30 cents in the rand for
his debt owing to the business. Included in the letter was a cheque written out in
favour of Tiny Tots for the amount that he could afford to pay. Your aunt decided
to write off the remainder of Mr Broke’s debt as bad.
Bad debts from credit sales made in the previous financial year amounted to R1
850.
The balance on the allowance for doubtful debts account on 1 March X7 was R16
800. At the end of each year, Tiny Tots makes an allowance for 6% of the
outstanding trade receivable balance as the business reliably estimates that this will
not be collected.
No entries have been processed in the books of Tiny Tots to take into account any
of the above information.
1. Prepare the statement of comprehensive income of Tiny Tots for the year ended 29
February X8 to the extent of the information provided. (30 marks)
2. Prepare the following accounts in the General Ledger of Tiny Tots for the year
ended 29 February X8:
2.1 Trade Receivables (8 marks)
2.2 Vehicles (4 marks)
2.3 Accumulate depreciation on vehicles. (8 marks)
QUESTION 6.9 (A)

Nosipho studied at the University of Johannesburg and has since graduated and started
a company that buys and sells one type of machinery.
An extract of the transactions entered into by Nosipho’s Equipment during the

financial year ended 31 December X1 has been set out below.
The following information relates to the business:

• Nosipho’s Equipment uses the periodic system to record inventory.
• Nosipho’s Equipment allocates the cost of inventory using the FIFO system.
• All sales and purchases are made on credit.
1. • The purchase price of R 2 778 was before deducting the prompt settlement
discount of 10%. Based on past experience it is not probable that Nosipho’s
Equipment will pay the creditor within the settlement period.
• Nosipho’s Equipment paid wages of R12 000 to workmen to clean the gardens
at the company’s offices.
2. The purchase price of R4 500 has been stated before a prompt settlement discount
of 15%, given if payment is made within 30 days of delivery of the inventory. Based
on past experience, it is probable that Nosipho’s Equipment will pay the creditor
within the settlement period.
3. The 10 units of machinery returned to the supplier on the 1 June X1 were originally
purchased on the 1 April and were part of the purchase transaction of 40 units
(transaction number (2)). When these units were returned to the supplier on 1 June
because they were damaged, the supplier immediately gave the driver 10 units of
the identical machinery to replace those that were returned.
4. The machinery that is purchased is very heavy and so Nosipho’s Equipment has to
use a crane to lift the machinery off the supplier’s truck for packing into the
warehouse. The crane was purchased on 1 January X0 and cost R1 140 000 (VAT
inclusive). The annual depreciation on this crane is R180 000. All units of
machinery purchased and delivered receive an equal amount of use from the crane.
The total amount of units to be offloaded by the crane during the year was 100 000
units.
1.
a) Calculate the total unit cost for each purchase made. (5 marks)
b) Calculate the total cost to be allocated to the 60 units sold on 15 May X1
(transaction (3)). (3 marks)

c) Prepare the general journal entry required to update the inventory account in
the General Ledger for the sale of the 60 units on 15 May X1 in Nosipho’s
Equipment’s General Ledger. Ignore narrations. (4 marks)
d) Briefly explain whether you think the journal entry prepared in (3) above
would be any different if Nosipho’s Equipment was using the perpetual
recording system. Justify your answer. (2 marks)
2. Prepare the general journal entry to record the payment of the amount owed to
Supplier B in respect of the purchase on 31 May X1.
Assume the payment was made within the 30 day period.
Ignore narrations. (4 marks)
QUESTION 6.10 (C)

Incredible Computers is a small business which specialises in selling computers to

private households and small businesses in the Western Cape. You have been asked by
Incredible Computers to review certain transactions that took place with respect to
inventory during the financial year ended 30 April X6. Incredible Computers uses the
perpetual method when recording inventory.
You have been provided with the following information:

1. On 1 June X5, Incredible Computers ordered 25 computers from a local supplier.
Each computer had a cost price of R4 550. Of these computers, 5 computers were to
be used in the sales and administration office of Incredible Computers. The
computers were delivered to the premises of Incredible Computers on 3 June X5.
Incredible Computers settled the total amount owing for the computers on 30 June
X5.
2. Tom Barton, the owner of Incredible Computers had a cousin who had just
returned from overseas and was unemployed. Tom suggested to him that he could
make some money by selling computers on behalf of Incredible Computers in the
Montagu area where his cousin lived. On 15 November X5, Incredible Computers
delivered 10 computers on consignment to Tom Barton’s cousin in Montagu. Each
computer had a cost of R3 980. It was agreed that the computers would each be
sold for R5 600 and that Tom’s cousin would earn commission of 20% on the selling
price of each computer sold. On 30 April X6, Tom’s cousin had sold a total of 6
computers.
3. Incredible Computers has a major client in Cape Town that required a specialised
desktop computer that would have to be imported from Hong Kong. The computer
had a cost price of R29 800. On 15 April X6 Incredible Computers ordered and paid
for the computer. Other costs included import duties of R3 260 and packaging costs
of R1 250. These costs would be paid in cash on the date that the computer was
collected by Incredible Computers from the harbour. The sales agreement stated
that the computer would be sent by the supplier to Incredible Computers FOB
shipping point on 25 April X6. The computer arrived and was ready for collection
on 2 May X6.
4. On 30 April X6, Incredible Computers had 9 computers on hand that had become
obsolete. Each computer had a cost price of R2 590. Incredible Computers had done
some research and found that if they spent R560 on each computer, they could sell
them each for R2 100.
Show how the 4 transactions above would be reported in the statement of financial
position, statement of comprehensive income and statement of changes in equity. For
each financial statement indicated, you should show only the line item(s) that would
be affected by the transaction, and the amount at which the affected line item(s)
would be reported.
“no effect”.
QUESTION 6.11 (B)

Pang Mei is a retailer buying and selling handmade scented soaps. The following
information relates to the month ended 30 April X8:
On 30 April X8, 44 units were on hand. The net realisable value of these items was R70.
The only sale during the month of April X8 was a sale of 54 units on 17 April.
1. Determine the cost of closing inventory on the FIFO cost allocation method.
2. Prepare the cost of sales and inventory accounts in the General Ledger (3 marks)
for the month ended 30 April X8, using the FIFO cost allocation method, assuming
the periodic recording system was used. Adjusting and closing entries should be
included. (7 marks)
3. Prepare the cost of sales and inventory accounts in the General Ledger for the
month ended 30 April X8, using the FIFO cost allocation method, assuming the
perpetual recording system was used. Adjusting and closing entries should be
included. (10 marks)
4. Prepare the cost of sales and inventory accounts in the General Ledger for the
month ended 30 April X8, using the weighted average cost allocation method,
assuming the perpetual recording system was used. Adjusting and closing entries
should be included. (10 marks)
QUESTION 6.12 (C)

The Green Planet is a company based in Cape Town that sells environmentally friendly
solar panels. The company also offers the additional service of installing the panels. The
Green Planet has a 30 September financial year-end. Land is accounted for on the
revaluation model.
You have been provided with following information for the year ended 30 September
2012:
1. On 1 October 2011, the business had 5 solar panels in stock with a total cost of R50
000.
2. On 1 December 2011, to help reduce their electricity payments, The Green Planet
decided to install one of these solar panels in their factory. The panel was installed
on 1 December and was ready for use on the same day. The Green Planet estimated
that they could use the panel for the next 20 years, after which they could sell off
the parts for R1 000.
3. On 1 February 2012, The Green Planet placed an order with a supplier in Germany
for a special type of glass used in one of their custom-made panels. The glass had a
selling price of R20 000 and the terms of the sales contract stipulated FOB shipping
point. As The Green Planet is a regular customer, the supplier granted them a trade
discount of 10%. The glass was loaded onto an aeroplane by the supplier on 10
February and arrived at Cape Town International Airport on 11 February where it
was immediately transported to the factory by a delivery company at a cost of
R150. Additional import and custom duties were charged at a rate of 5% of the
purchase price paid.
4. On 1 August 2012, the business received an order for a custom-made solar panel
from Sunny Systems, an IT company in Stellenbosch. The Green Planet delivered
the custom-made panel to the premises in Stellenbosch on 28 August for a price of
R17 000. At delivery, control of the panel was transferred to Sunny Systems. On 29
August, Sunny Systems contacted and asked The Green Planet to install the panel
for R3 000. Payment for the purchase of the panel and installation thereof was
made on 29 August. The installation took place on 3 September 2012.
5. Excluding any information in point (4) above, The Green Planet earned additional
service fee income of R23 000 (excluding any information in point (4) above) during
the year ended 30 September. Of this amount, R18 000 was received in cash and the
remainder was still owing at year-end.
6. On 1 January 2012, The Green Planet purchased a small plot of land adjacent to
their factory for R150 000 cash. This land was used by the business to test the
effectiveness of their custom-made solar panels. At 30 September 2012, the land
had a fair value of R165 000.
1. Refer to additional information in point (2).

1.1 Indicate how the business should account for the solar panel on 1 December.
Justify why the panel should be accounted for in this manner. You do not need
to refer to framework definitions in your answer. (3 marks)
1.2 Show how this solar panel would appear in the Statement of Financial Position
of The Green Planet as at 30 September 2012. Show all workings. (6 marks)
2.1 Indicate the date on which The Green Planet would recognise the glass used in
the custom-made panels as an asset. Briefly explain your answer. (2 marks)
2.2 Calculate the cost of the imported inventory recognised by The Green Planet.
Show all workings clearly. (4 marks)
3.1 Prepare all the general journal entries required to process this transaction in
the books of The Green Planet for the year ended 30 September 2012. Dates
and narrations are required. (8 marks)
4. Refer to additional information in points (4) and (5).
4.1. Prepare the Service Fee Income General Ledger Account in the books of The
Green Planet for the year ended 30 September 2012. Show all dates and close
off accounts as necessary. (7 marks)
5.1 Prepare all journal entries to account for the plot of land in the books of The
Green Planet for the year ended 30 September 2012. Dates and narrations are
required. (9 marks)
QUESTION 6.13 (C)

Rainy Days is a retail store in Cape Town which sells a variety of umbrellas to
customers, many of whom are UCT students needing to walk to classes in the rain. Mr
Roux is the owner of Rainy Days, which has a 31 October financial year-end. The
business uses the perpetual method to record inventory and applies a consistent mark-
up of 40% on cost.
PART A AND PART B ARE INDEPENDENT QUESTIONS.

You have been provided with the pre-adjustment trial balance as at 30 September 2012
and all the transactions that occurred during October 2012.
Pre-adjustment trial balance of Rainy Days as at 30 September 2012

Debit Credit
Vehicles at cost 300 000
Accumulated depreciation: Vehicles 150 000
Inventory 230 000
Accrued rental income (1 November 2011) 3 500
Bank (RNB Bank) 300 000
Loan from Rabsa Bank (12% p.a.) 120 000
Capital 180 000
Rental income 39 200

1 167 250 1 167 250
The following transactions took place during the month of October 2012:
1. On 1 October 2012, Rainy Days increased its loan from Rabsa bank to R150 000.
This is the business’s only loan. The applicable interest rate remained unchanged.
2. On 1 October 2012, Rainy Days sold a vehicle, which had a cost of R120 000 and
accumulated depreciation of R90 000, for R40 000 cash.
3. On 1 October 2012, Rainy Days purchased a replacement vehicle for R150 000 cash.
This vehicle is to be used to deliver umbrellas to customers living in the greater
area of Cape Town and is expected to travel 100 000 km before it will be sold. It is
expected to be sold for R40 000 if new tyres costing R2 000 are put on the vehicle. In
the month of October, the vehicle travelled 2 500 km.
4. On 3 October 2012, Rainy Days purchased inventory on credit from Real Suppliers
at a total cost of R12 000.
5. On 4 October 2012, Mr Roux’s daughter celebrated her fifth birthday. He took 12
pink umbrellas to give to the guests at the party to take home as presents. The total
selling price of these umbrellas was R2 940.
6. On 6 October 2012, Rainy Days sold 2 umbrellas on credit to a new customer, Miss
Red, for R400 each (cost price R286). This is the only credit purchase Miss Red has
made.
7. On 7 October 2012, a tourist from the UK paid cash for a Proudly South African
special edition umbrella with a cost price of R643.
8. On 9 October 2012, a debtor, Mr Rudolph, paid R12 000 into Rainy Days’s bank
account.
9. On 18 October 2012, the accountant was informed that Miss Red (refer to point (6))
had been declared insolvent and would only be able to pay R400 in the full and
final settlement of her balance outstanding in the following financial year.
10. The bookkeeper was unsure how to treat the accrued rental income balance on 1
November 2011 (see trial balance) and has not processed any entry as yet. The
rental agreement indicates that rent is received in arrears on the first day of the
month, that is, rental for January is received on 1 February. Rental income increases
by 10% annually on 1 July that is, rent income increases from July each year.
11. The bookkeeper incorrectly paid the telephone account which reflected an amount
of R1 000 twice in September. The bookkeeper was therefore not meant to pay the
telephone account (an amount of R1 000) again in October. However, the
bookkeeper paid R1 000 during October.
12. On 30 October 2012, Rainy Days paid the interest for the year owing on the loan
from Rabsa Bank.
13. Stationery on hand at 31 October 2012 amounted to R1 500.
14. The bank statement received from RNB bank as at 31 October 2012 showed bank
charges of R110 which Rainy Days had not accounted for.
15. Total depreciation expense for the year ended 31 October 2012, excluding any
depreciation relating to the new vehicle purchased on 1 October 2012, amounted to
R18 000.
16. The accountant reliably estimated that Rainy Days would not collect 4% of the total
outstanding trade receivables at year-end.
1. Prepare the general journal entry/ies that would have been processed by Rainy
Days to record the following transactions. Ignore dates and narrations.
2. Prepare the following accounts as they would appear in the general ledger of Rainy
Days for the month ended 31 October 2012. Show dates and close off or balance the
accounts where appropriate.
2.1 Trade receivables (6 marks)
2.2 Rental income (5 marks)
3. Prepare the statement of comprehensive income of Rainy Days for the year ended
31 October 2012. You are required to show clearly the gross profit, operating profit
and the profit/(loss) for the period. (18 marks)
4. Prepare the total equity and liabilities section of the statement of financial
position of Rainy Days as at 31 October 2012. (7 marks)
5. State the two fundamental qualitative characteristics of useful financial information
and explain what each characteristic implies about the information that is being
presented. (4 marks)

For transactions (a) and (b) below, indicate whether the information or item in bold and
underlined text meets the definition of a liability per the Conceptual Framework for
Financial Reporting.
(a) On 1 November, Rainy Days moved into a new retail space. Upon moving in,
Mr Roux constructs additional shelving in order to display more umbrellas. In
accordance with the rental contract, Rainy Days are required to remove this
shelving at their own expense upon vacating the space in the future. (4 marks)
(b) A debtor, Mrs Ruby, with a debit balance of R2 000 as at 30 October 2012,
overpaid her account by paying R3 000 into the Rainy Days’ bank account on
30 November 2012. (4 marks)
For transaction (c) below, indicate whether the information or item in bold and
underlined text meets the definition of an expense per the Conceptual Framework for
Financial Reporting.
(c) In order to inform potential customers that Rainy Days is operating from a
new store, Mr Roux prints flyers and pays a promotion company to
distribute these flyers to UCT students during the first few weeks of
November. No flyers were on hand at 30 November 2012. (2 marks)
QUESTION 6.14 (C)

Taj Mahal Traders is a company in Epping that imports material, clothing and spices
from India. The business has a financial year-end of 31 December and uses the
perpetual system for recording inventory. The business uses the cost model for the
measurement of equipment and the revaluation model for the measurement of land.
The business uses a constant mark-up of 50% on cost.
You have been provided with an extract from the statement of financial position as at 31
December 2010 as well as an extract from the pre-adjustment trial balance and the
income statement for the year ended 31 December 2011.
Extract: Statement of financial position as at 31 December 2010

Current assets R
Inventory 33 000
Equity
Capital 1 500 000
Liabilities
Accrued Rent expense 5 600
Extract: Pre-adjustment trial balance for the year ended 31 December 2011
Debit Credit

R R
Inventory ?
Bank 25 700
Equipment ?
Accumulated depreciation: Equipment ?
Rent income 7 440
All reversals were processed on 1 January 2011.
Extract: Income statement for the year ended 31 December 2011

R
Cost of sales expense (1010 000)
Gross profit 2 090 000
Operating expenses (950 000)
Finance costs ?
Transactions
1. The physical inventory count on 31 December 2011 indicated inventory with a cost
of R55 000. Included in this inventory was inventory costing R5 000 that had been
damaged. This inventory could be sold for R5 100 if R450 was spent on repairs. The
business had also sent inventory with a selling price of R4 800 to a client in Port
Elizabeth. The terms of the contract indicate FOB destination. The inventory left
Cape Town on 31 December 2011 and will arrive in Port Elizabeth on 2 January
2012. This inventory is not included in the R55 000. (6½ marks)
2. On 1 July 2007, Taj Mahal Traders purchased equipment costing R1 950 000 with a
residual value of R450 000. The equipment will be used evenly over its estimated
useful life of 8 years.
On 31 December 2011 this equipment had a value in use amounting to R1 050 000
and could be sold for R1 200 000 if R120 000 was spent on refurbishing. (10½
marks)
3. Taj Mahal Traders rents property in Epping. The rental agreement indicates that
rental is paid in arrears on the first day of the month (The bookkeeper records the
expense in operating expenses when it is paid.). The rental agreement also has an
8% escalation clause, according to which the rental increases by 8% per annum on 1

January each year. (4 marks)
4. On 1 December 2011, the owner withdrew R10 000 for his personal use. (3 marks)
5. Taj Mahal Traders purchased land on 31 December 2007 at a cost of R1 million.
The fair value of land on 31 December 2009 had increased to R1.5 million and the
fair value of the land had increased by R3.2 million on 31 December 2011. (7 marks)
6. During the bank reconciliation process, it was identified that the business had
recorded rent income as R950 in the General Ledger and R590 on the bank
statement. The correct amount was R590. (5 marks)
Show how, where and at what amount the information provided in transactions (1 − 6)
above will be reported on the statement of comprehensive income and statement of
changes in equity for the year ended 31 December 2011, and the statement of financial
position as at 31 December 2011. Where necessary, you are expected to use the
information provided in the extracts from the financial statements and business records
provided above. If there is no impact on a particular statement, state “no effect” in your
answer for that statement. You are not required to indicate the impact of income and
expenses on accumulated profit.
You are not expected to provide full statement headings for each section of the question.
The following statement heading abbreviations are acceptable for this question; SoFP,
SoCI and SCE (please ensure that your abbreviations, if used, are clearly identifiable).

VALUE ADDED TAX (VAT)

Assume a VAT rate of 15%.
Pets Paradise sells pet food, toys and accessories for all types and breeds of animals.
The business is a registered VAT vendor.
The following were transactions that occurred on 15 June X2:

a) Sold dog baskets, dog food, various dog toys and designer dog body-warmers to
the value of R6 270. The customer would have 30 days in which to pay for his
purchase. The amount which Pets Paradise had paid for all these items was R4 560
(VAT inclusive).
b) Paid a supplier, Adorable Animal Accessories, R51 984.
1. Prepare journal entries for the above two transactions. No narrations are required.
2. In which two cases would the journal entry for transaction (a) not have an (8 marks)
entry to the SARS (VAT) account and why? (2 marks)
Bonus question
Name one expense that does not attract VAT, that is, one for which you would be
denied an input VAT deduction. (1 mark)

Evan Harder runs a small retail hardware shop, Harder than Ever, in Rondebosch. He is
VAT registered and sells a large number of goods on credit. Because he requires a lot of
information about his debtors, he keeps them in a subsidiary system outside the
General Ledger.
Below are Evan Harder’s:

a) Sales/sales returns journal
b) Cash receipts journal
c) Comments about debtors (that require handling in the general journal).
Assume that:
• Trade receivables balances at the beginning of May were nil.
• VAT is 15%.
a) Sales journal
b) Cash receipts journal
c) Evan decided to write off the remainder of Vera Slow’s debt.

R200 of About Wright’s invoice in the trade receivables ledger was to be set off
against what Evan owed About Wright in the trade payables ledger.

1. Prepare the two appropriate general journal entries for part (c) above.
2. Prepare the trade receivables account as it would appear in the General Ledger as
at 31 May X8 (dates are not required).
3. Calculate the VAT payable (assuming that the entries shown are the entire record
for Evan Harder).
4. Show About Wright’s ledger account as it would appear in the trade receivables
ledger on 31 May X8 (dates not required).
QUESTION 7.3 (B) Includes settlement discount

Leporello’s Fruit and Veg is VAT registered; the current VAT rate is 15%. He uses the
periodic inventory system. Leporello’s Fruit and Veg made the following transactions in
February 2010:
1. He purchased stock for resale to the value of R18 000 exclusive of VAT, from
Giovanni Farm Products on credit.
2. Sold stock to Mr Conte on credit for R1 083 including VAT.
3. He banked cash sales of R17 000 exclusive of VAT.
4. Purchased packing materials for R1 500 cash from a local store that is not registered
for VAT.
5. Settled the account of Giovanni Farm Products.
6. He paid R350 to Almaviva Motors for fuel.
7. Mr Lord settled his account of R1 500 for goods previously purchased and was
allowed a 5% settlement discount, Mr Lord paid within the time as expected.
8. Paid the electricity and water account from Mbashe Municipality of R855 including
VAT.
9. Received R150 excluding VAT for the sale of old packaging materials.
10. Banked R10 700, which comprises R5 000 from Leporello, for extra capital
introduced and R5 700 for cash sales made.
11. Paid the Receiver of Revenue R3 000 for the VAT owing.
12. Paid the salaries of R5 000 and the telephone account of R684 including VAT.
Record the transactions in the general journal of the company for February 2010.

QUESTION 7.4 (C)
MusicUs is a music store at the V&A Waterfront in Cape Town. The business was
started on 1 January 2006 by Reg Neel and sells a variety of CDs, DVDs and other
music-related items. MusicUs’s financial year ends on 31 December each year and it has
adopted the FIFO basis for the valuation of inventory on the perpetual recording
system.
PARTS A AND B ARE INDEPENDENT QUESTIONS.

Ignore VAT
You have been provided with information regarding certain inventory items of
MusicUs.
DJ mixing decks
MusicUs purchased 50 DJ mixing decks from a supplier in China. Each mixing deck
cost R1 000 and MusicUs had to pay import and custom duties amounting to 8% of the
cost price per mixing deck and transport costs of R2 500. These costs were paid in cash.
The goods arrived at MusicUs on 28 December 2012 and the owner, Reg, asked Robbie
to unload and pack them in the storeroom. Robbie is paid on a casual basis and was
paid R5 per mixing deck.
1.Calculate the cost per DJ mixing deck purchased from the supplier in China.
(3 marks)
DVDs
a) The following Twilight Breaking Dawn DVDs were on hand as at 31 December
2012:
b) MusicUs purchases DVDs from two suppliers, namely Universal Studios in the
USA and Sony Pictures in the UK. Import and transport costs per DVD
purchased from Universal Studios and Sony Pictures amount to 10% and 12%
of the purchase price of the DVD respectively.
c) From 1 December to 31 December 2012, MusicUs sold 150 Twilight Breaking
Dawn DVDs. The gross profit percentage on the total sales value of these
DVDs was 20% (that is, GP% was calculated on the total sales for December
and not on each DVD sold). The customers all paid in cash.
d) On 31 December 2012, Robbie delivered 10 Twilight Breaking Dawn DVDs to
Moenieba’s Movies in Canal Walk, on consignment. The selling price was set
at R110 each. MusicUs would receive a commission of 7% of the sales value of
each CD. Moenieba’s Movies sold all 10 CDs in January for cash. MusicUs
expects their payments on the 1st day of the month following a sale.
e) At 31 December 2012, Reg noticed that 12 Twilight Breaking Dawn DVDs
(purchased on 4 November 2012) had been damaged by the sun from being
displayed in the shop window. He could sell each one for R110 if he bought
new packaging for R25 per DVD.
2. Prepare the general journal entry/entries relating to the sales transactions referred
to in point (c) above. Refer to points (a), (b) and (c). (9 marks)
3. Show all the movements in inventory that occurred during the month of December
in calculating the closing inventory balance that should appear in the statement of
financial position of MusicUs as at 31 December 2012. Refer to points (a – e).
4. Refer to point (d). (6 marks)
4.1 Prepare the general journal entry that would be raised in the accounting
records of Moenieba’s Movies on 31 December 2012. If no journal entry is
required, briefly explain why.
4.2 Prepare the general journal entry/entries that would be raised in the
accounting records of Moenieba’s Movies to record the sale of the consignment
DVDs during January 2012. If no journal entry is required, briefly explain why.
(5 marks)
CDs
The following information relates to NOW 62 CDs for the month ended 31 December
2012:

1. Determine the cost of closing inventory for NOW 62 CDs on the FIFO cost
allocation method, assuming the periodic recording system was used. (3 marks)
2. Prepare the cost of sales account for NOW 62 CDs in the General Ledger of
MusicUs for the month ended 31 December 2012, using the FIFO cost allocation
method, assuming the periodic recording system was used. Adjusting and closing
entries should be included. (7 marks)
3. Prepare the inventory account for NOW 62 CDs in the General Ledger of MusicUs
for the month ended 31 December 2012, using the moving weighted average cost
allocation method, assuming the perpetual recording system was used. Adjusting
and closing entries should be included. (14 marks)

Assume VAT at a rate of 15% is applicable for Part B only.
You have been provided with the following balances for the year ended 31 December
2012:
Trade receivables R120 000

Allowance for doubtful debts (1 July 2011) R3 000
On 31 December 2012, MusicUs received a cheque from a debtor, H. Geyer, for R7 980
in full settlement of his debt. His debt of R7 980 was previously written off as
irrecoverable on 22 March 2012. No entry has been processed for this recovery.
1. Prepare the additional general journal entry/ies required to correctly record the
information provided in the additional information above. (5 marks)
2. Prepare the general journal entry/ies required to correctly reflect the trade
receivables balance to be disclosed in the statement of financial position as at 31
December 2012, that is, you will need to adjust the allowance for doubtful debts
balance which is provided for as 3% of the outstanding trade receivables balance at
year-end. (4 marks)
QUESTION 7.5 (B)

Seif Limited is registered for value added tax. The current rate of value added tax is
15%. The following transactions occurred during September 20X7:
1. Purchased a single cab bakkie for the business for R250 000 excluding VAT cash.
2. Sold goods to the value of R60 000 inclusive of VAT to a customer on credit. The
original cost of the goods was R45 600 inclusive of VAT.
3. Issued a credit note to the customer in (2) as a refund for faulty goods returned for
R5 000 including VAT. The original cost of the goods were R3 000 excluding VAT
and were returned to the supplied for a refund for which a credit note was
received.
4. Received a refund for value added tax per the previous return of R6 000.
5. Purchased petrol for the vehicle of R600. Petrol is exempt from VAT.
6. Purchased stationary from a non-VAT vendor for R300.
7. Purchased goods to the value of R20 000 excluding VAT and received a trade
discount of 5% on credit.
Prepare general journal entries to record the above transactions in the accounting
records of Seif Ltd.
QUESTION 7.6 (B)

Amber Roses are registered for value added tax. The current VAT rate is 15%.
The following information has been extracted from the accounting records of the entity
for the two months ended 31/05/20X6 for the preparation of the VAT return for the two
months:
Output VAT per cashbook 3 500

Output VAT per sales journal 18 680
Input VAT per cashbook 2 100
Input VAT per purchases journal 8 350
The following transactions that occurred during the VAT period have not been
recorded in the accounting records:
1. Purchased a truck for R399 000 including VAT for the business with a loan from AR
Bank.

The owner paid the municipal accounts to the value of R9 120 inclusive of VAT
2. from her personal funds.
3. A sale to the value of R18 000 excluding VAT (original cost R14 000 excluding VAT)
had not been recorded in the sales journal.
4. Accruals for sundry expenses need to be made to the value of R4 500 excluding
VAT.
Assume bills have been received.
a) Prepare the general journal entries to record the transactions that have not been
recorded in the accounting records of the entity. (15 marks)
b) Calculate the VAT payable/refundable for the period ended 31 May 20X6. You are
required to calculate the total input and total output VAT separately. (12 marks)
c) Prepare the general journal entry to record the VAT payable/refundable. (3 marks)
Assume the business uses a VAT control account as well as a VAT input and
output account.
QUESTION 7.7 (C)

Assume a value added tax rate of 15%.
Assume ALL relevant accounts are INCLUSIVE of VAT unless stated otherwise.
WSU bookstore was established in 2005 in the Mthatha campus of Walter Sisulu
University. The business specialises in selling books and other items of stationery. The
bookstore buys its books from local publishers and is proudly South African. The
business is a registered VAT vendor and only buys books from registered VAT vendors.
The business uses the perpetual inventory system to record inventory and consistently
applies a mark-up of 55% on selling price. The business has a February year-end.
The following list of account balances were extracted from the firm’s accounting records
as at 31 January 2012:
Debit Credit
Inventory 387 900
SARS VAT (Liability) 16 240
Water and electricity account 39 600
The following additional financial information is provided for February 2012:

1. The following totals were extracted from the journals for February 2012:
Sales column in sales journal R 682 000

Debtors’ Column in cash receipts journal R 532 000
Total column in purchases journal R 484 500
Creditors’ Column in cash payments journal R 427 500
Total column in sales returns journal R 27 360
Total column in purchases returns journal R 155 040
VAT column in cash receipts journal R 138 000
VAT column in cash payments journal R 96 000
Sales column in cash receipts journal R 240 000
Inventory column in cash payments journal R 680 000
2. The business received the water and electricity account for the month of February
2012 amounting to R4 104. The bill had been paid and the bookkeeper had
incorrectly recorded the information twice in the relevant journal.
3. On 25 February 2012, the business ordered 100 Business Management textbooks for
its favourite customer, Mr Kwahene, at a cost of R425 per book. The books were
couriered FOB shipping point from Cape Town on 27 February. The books were
expected to arrive in Mthatha within 14 days. No entry was recorded by WSU
bookstore in relation to this transaction.
4. During the year, the business transferred books with a selling price of R73 530 to
Azizozam bookstore at the Ibika campus of WSU. The books are to be sold on WSU
bookstore’s behalf. Azizozam does not offer credit facilities and is entitled to a
commission of 15% of the selling price. By 29 February 2012, the entire stock sent
to Ibika campus had been sold. Azizozam pays WSU the amount owing on the 15th
of the following month.
1. Prepare the SARS (VAT) account in the General Ledger WSU bookstore for the
month of February 2012. The account must be properly balanced or closed off.
2. Prepare the inventory account for the period for the month of February (13 marks)
2012 in the books of WSU bookstores. Properly balance or close off the account.
3. Prepare the journal entry to correct the error made on the recording of(15 marks)
the water and electricity transaction in the books of WSU bookstore on 29 February
2012. Date and narrations are not required. (5 marks)
Prepare the journal entry that would be recorded in the books of Azizozam
4.
bookstores in respect of the books sold on 29 February 2012 on behalf of WSU
Incorporated. (5 marks)
QUESTION 7.8 (A)

Due North is a hiking shop in Claremont. The business uses the periodic method for
recording stock. VAT of 15% is charged on all purchases and sales.
The transactions for April 1998 were as follows:

1. Purchased hiking boots from Outdoor Adventure Ltd on credit, R770.
2. Sold boots on credit to a customer, R570.
increased or decreased and provide the relevant amount and account that would be
affected.
QUESTION 7.9 (B)

Assume VAT at 15%.
Borne Traders uses the periodic system to record inventory. The business is a registered
VAT vendor. The following amounts appeared in the trial balance, inter alia, as at 28
February X1:
SARS (VAT) (Cr) 3 945

Purchases 180 500
Rates and taxes 8 760
Stationery on hand 1 520
Salaries and wages 57 860
Electricity and water 3 640
Sales 310 700
Sales returns 2 000
The following transactions occurred during March X1:

1. Paid the SARS the balance outstanding as at 1 March X1.
2. WM Traders purchased inventory costing R3 135 from Steady Suppliers for cash.
3. WM Traders paid March wages amounting to R7 752 by cheque.
4. Purchased stationery from Waltons, paid by cheque, R570.
5. Sold inventory on credit for R7 809.
The inventory on hand as at 31 March X1 amounted to R75 000. There was no inventory
on hand at the beginning of the year. There was no stationery on hand as at the end of
March.
1. Show how the above transactions affect the financial position of the business as
increased or decreased and provide the relevant amount and account that would be
affected. (13 marks)
2. Prepare the income statement for Borne Traders for the year ended 31 March X1.
(14 marks)
QUESTION 7.10 (A)
Assume VAT of 15% and that all parties are VAT vendors.
You are provided with the following information for the year ended 31 December X2:
Purchases amount paid to suppliers. R517 500

Amount paid to transport companies for delivering inventory to the factory from the R51 750
suppliers.
Wages of factory staff who convert raw materials into finished product. R 88 000
Wages of office workers. R 63 000
• 20% of the purchases were returned to suppliers by the end of the year and a full
refund given.
• 40% of all inventory purchased was sold by the end of the year.

The marketing manager estimated that due to changes in demand the inventory
• held on 31 December X2 would only be sold in future for R300 000 (VAT exclusive).
• 10% of the sales amount (R300 000) would be payable to sales agents as commission
and 5% of the sales amount would be payable to transport companies for
delivering inventory to customers.
1. Calculate the value of closing inventory on 31 December X2. (9 marks)

2. The company uses a perpetual inventory system. Prepare the journal entry/entries
for the return of the inventory to suppliers. Assume the returns were made before
the purchase price had been settled. (5 marks)
QUESTION 7.11 (C)

Two identical twin brothers, Cane and Abel, each own a company, both of which are
registered VAT vendors. These companies (company Cane and company Abel) sell the
identical product. The companies each entered into identical transactions during the
current year ended 31 December X1. The total sales and purchases for the year were the
same in both companies, and they had the same number of units of closing inventory
left at the end of the year.
Abel was boasting to his brother Cane and said, ‘‘Look, my company has made a bigger
profit for the year. I must be the better businessman!’’
The companies both use the perpetual method of recording inventory. However,
company Cane uses the moving weighted average cost allocation method, whereas
company Abel uses the first-in-first-out (FIFO) cost allocation method.
The following table is an extract from the transactions entered into by both companies:

1. Calculate the amount that would be debited to the cost of sales expense account for
the sale of 140 units on 15 April X1 for both company Abel and company Cane.
Show all workings. Round off your calculations to two decimal places. (8 marks)
2. a) Comment on why you think the profit is different in company Abel and
Company Cane. Would you not expect both companies to make the same profit if
they have the same trading results (the same amount of sales, purchases, expenses,
number of units in opening and closing inventory)? (3 marks)
b) Do you think the profit of each company would still be different if both
companies had no inventory on hand at the beginning and end of the year?
Briefly explain your answer. (3 marks)
QUESTION 7.12 (C)

Round up numbers to two decimal points.
Christopher owns a small business, SolarMusic, that buys and sells solar-powered
wind-up radios selling around the Cape Peninsula. The business started slowly, but
with new designs and a greater awareness of the environment, his product is becoming
increasingly popular. SolarMusic uses the periodic method to record inventory and the
weighted average cost allocation method. All models of the inventory (other than
Funky radios) are sold at a mark-up of 65% on cost price. The financial year-end of the
business is 31 December.
The following additional information relates to SolarMusic during the month of

December 2011:
a) SolarMusic currently has 4 different radio models, namely the Economical, the
Standard, the Funky and the Cartoon models.
b) The information below relates to the purchase and sale of Funky radios during
December 2011.

On 31 December 2011, 37 units were on hand. Of these, two had been damaged and
could be sold for R475 each if R80 was spent on each radio to replace one of the
solar panels.
c) On 15 December 2011, Christopher ordered 110 Standard radios from an overseas
supplier. The normal price of the radio was R300 per radio, but Christopher was
offered a trade discount of 10%. The radio’s arrived on 28 December 2011 and
SolarMusic paid a local transport company R2 200 to deliver the radios to his
premises. The following additional costs, which were all paid by cheque, were also
incurred on this shipment:
Freight and insurance 16 500

Import duty 10 700
These transactions were all correctly recorded during the year.
d) On 15 December 2011, SolarMusic sold 150 Cartoon radios to Reggies for a total
amount of R68 062.50 on credit.
1. Refer to additional information (b).

1.1 Calculate the amount at which the Funky radios will be recognised at on the
statement of financial position as at 31 December 2011.
1.2 Calculate the cost of sales expense that will be recognised with respect to the
Funky Radio model for the month ended 31 December 2011. (10 marks)
2. Refer to additional information (b). Assume the business uses the perpetual
method to record inventory and the FIFO cost allocation method for this part
(part 2) of the question only.
Prepare ALL the general journal entries that are necessary to record the
transactions on 18 December 2011, assuming a selling price of R750. Narrations are
not required. (6 marks)
3. Assume VAT of 15% for this part (part 3) of the question only.
Refer to additional information (b).
Prepare ALL the general journal entries that are necessary to record the
transactions on 3 December and 18 December 2011. Narrations are not required.
Assume the following VAT information for this section only.

(8 marks)
4. Refer to additional information (c).
Calculate the cost per unit of a Standard radio. (3 marks)
5. Refer to additional information (d).
Calculate the cost price per Cartoon radio. (2 marks)

BANK RECONCILIATION STATEMENTS

Africa and Beyond is a new travel company in Cape Town. The accountant is in
quarantine in Uganda as a result of having come into contact with the Ebola virus, and
the owners have asked you to check the accuracy of the annual financial statements. The
bookkeeper has given you the following information regarding the financial year
ending 31 December X10:
a) On 1 January X8, the owner contributed the following as his initial capital
contribution: R90 000 cash into a bank account and a truck he purchased on 1
January X7 for R110 000. The vehicle has a useful life of 5 years, after which it will
have a residual value of R10 000. Retained earnings amounted to R50 000 on 1
January X10.
b) The bookkeeper had calculated that the net profit for the year should be R76 870.
You discover that the profit had been calculated by the bookkeeper WITHOUT
processing any of the adjustments or corrections required from the following
information (points c− j):
c) A long-term loan of R80 000 was raised by the business on 1 September X8. The
loan is repayable in equal half-yearly instalments over 5 years starting on 1 March
X9, and interest is charged at 16% per annum, payable half-yearly in advance (on 1
March and 1 September).
d) The other non-current assets owned by the business are furniture, equipment and
land. The existing non-current assets, other than land, were purchased on 1 January
X8. None of the assets have a residual value. The land was purchased for R210 000
on 1 January X10. The furniture had cost R30 000 and is depreciated at 10% per
annum. As at 31 December X10, the equipment had a carrying value of R54 000 and
has a useful life of 5 years. In addition to the equipment with a carrying value of
R54 000, new equipment costing R10 000 was purchased and ready for use on 1
April X10 and has a useful life of 5 years. No other assets were purchased this year.

On 31 December X9, the business had consumable stores on hand amounting to R3
e) 100. Purchases of consumable stores recorded for the year amounted to R12 000.
Consumable stores are recorded as an expense when purchased. An invoice for
R200 for consumable stores delivered on 27 December X7, arrived on 7 January X8.
Consumable stores amounting to R2 200 were on hand as at 31 December X10.
f) The total per the trade payables account at 30 November X10 was R14 300, and the
totals per the subsidiary journals for December were:
Total column in the purchases journal 12 700

Purchases column in the cash payments journal 3 600
Trade payables column in the cash payments journal 15 400
g) The total of the list of Debtors’ Balances amounted to R24 090. This, however, does
not agree with the balance per the trade receivables account. On investigation, you
realise that an amount of R3 300 for wages had been incorrectly debited to the trade
receivables account. The entry had been correctly recorded in the bank account.
One of the Debtors’ Ledger accounts had been over-cast by R650.
h) The bank statement at 31 December X10 had an unfavourable balance of R5 600. In
comparing the bank statement and the journals, you have identified the following
differences:
• A deposit of R800 made by Africa and Beyond appeared as a debit on the bank
statement and cheques totalling R4 100 had not been presented at the bank.
• A deposit of R4 200 made on 31 December X10 did not appear on the bank
statement.
• Bank charges of R180 and interest on overdrawn account of R250 appeared on
the bank statement.
i) The business uses a prepaid electricity meter. Total payments of R18 900 were
made during the year and posted to the electricity expense account. You have
calculated that the correct amount of electricity used during the year was R18 800.
Electricity amounting to R800 was unused as at 31 December X9.
j) The business has a policy of confirming bookings for a tour only once a 10% non-
refundable deposit has been paid. All deposits and tour income are credited to the
tour income account. On 31 December X10, the business had confirmed a tour in
January X1 at a total cost of R15 000 and a tour in February, for which a deposit
amounting to R2 500 had been paid.
k) The owner withdrew R25 000 to use as a deposit on a jet-ski he had purchased for
his own personal use.
1. Prepare the adjusting journal entries that should have been processed to record
transactions (d), (e) and (j). (13 marks)
2. Prepare the bank reconciliation statement of Africa and Beyond for December X10.
3. Calculate the corrected profit after all the adjustments have been (6 marks)
completed. (10 marks)
4. Prepare the statement of financial position of Africa and Beyond as at 31 December
X10. You are not required to calculate the totals for Assets, Equities and Liabilities
(28 marks)
Assume ALL parties are VAT vendors. Round off figures to the nearest cent.
Ms Soko has been temporarily appointed as the bookkeeper at Mbatho Traders. The
permanent bookkeeper has recently taken ill and is expected to be away from work for
an extended period of time. The business uses the perpetual inventory method.
Ms Soko’s first task is to update the accounting records. She comes across the following
information during her examination of the accounting records.
1. The bank account in the General Ledger had a credit balance of R1 789 at 30 April
X9, before taking into account any of the following information.
2. The following transactions for April X9 have NOT been recorded in the accounting
records:
Purchased inventory for cash from Wheeler Wholesalers for R22 000
24 April
(VAT exclusive).
29 April Paid cash wages of R21 000.
The bookkeeper had correctly recorded cash received from a debtor of
R29 640 (VAT inclusive) for inventory sold on credit in February X9.
However, Mbatho Traders should have granted a 10% trade discount
30 April
on the credit sale. On 30 April X9, Mbatho Traders sent a cheque to the
debtor for the amount of the trade discount. This refund has not been
recorded in the accounting records.
3. When comparing the bank statement for April X9 with the General Ledger bank
account for April X9, the following differences are identified:
3.1 An amount of R5 900 received from an insurance company was recorded on
the incorrect side of the General Ledger bank account.
3.2 Cheque number 475 issued to SARS for VAT owing for March X9 amounting
to R8 600 had been incorrectly recorded in the bank account as R6 800.
3.3 An insurance premium debit order of R2 400 appeared on the April X9 bank
statement. When contacting the bank, Ms Soko discovers that this premium
should have been recorded on the bank statement of another of the bank’s
clients.
3.4 A deposit made on 16 April X9 had been recorded as R54 600 on the April X9
bank statement instead of R45 600. The deposit had been correctly recorded in
the General Ledger.
3.5 A cheque for R2 850 received from a debtor on 25 March X9 and deposited on
that day was returned by the bank as ‘‘returned to drawer’’. It is the policy of
Mbatho Traders to charge administrative fees on dishonoured cheques to the
debtor’s account (refer to point (3.8)).
3.6 A deposit for R3 876 appeared on the bank statement on 28 April X9. Further
investigation revealed that the amount was deposited by a debtor whose debt
had been written off as bad in December X8 by Mbatho Traders.
3.7 The following deposits and cheques recorded in the bank account in April X9
do not appear on the April X9 bank statement.
Deposit 30 April X9 R16 000
Cheque number 473 R33 600
3.8 On the bank statement for April X9, amounts charged by the bank consisted of
the following: cheque book: R57; service fees: R376 (including the
administration costs of R68 on the dishonoured cheque received from the
debtor in point (3.5) above); and interest on overdraft: R560.
1. Refer to the purchase of inventory on 24 April, listed under point (2). Prepare the
general journal entry(ies) that should have been recorded to process this
transaction. Ignore dates and narrations. (4 marks)
2. Refer to point (3.6). Provide the general journal entry that should have been
processed to re-instate the debtor that had previously been written off as bad.
Ignore dates and narrations. (4 marks)
3. Refer to point (3.8). Calculate the amount of bank charges expense that should
appear in the statement of comprehensive income of Mbatho Traders for the month
ended 30 April X9. (2 marks)
4. Prepare the bank account as it should appear in the General Ledger of Mbatho
Traders on 30 April X9. You must begin with the balance given in point (1).
5. Prepare a bank reconciliation statement for Mbatho Traders as at 30 (12 marks)
April X9. (5 marks)

Tiny Tots is a business that imports children’s clothing from Madagascar and sells the
clothes locally in Cape Town. Tiny Tots started operating on 1 March X5. Before taking
into consideration the information provided below, the bank account in the General
Ledger had a credit balance of R16 000 as at 29 February X8. On comparing the
February bank statement with the bank account in the General Ledger and the bank
reconciliation statement for January X8, you identified the following:
1. Outstanding deposits on 31 January X8 and 29 February X8 amounted to R19 300
and R14 800 respectively.
2. Cheque 114 amounting to R5 150, which was issued to a creditor during February
X8, had as yet not been presented for payment.
3. Tiny Tots incorrectly entered a cheque for wages amounting to R2 427 as R20 427 in
the cash payments journal on 18 February X8.
4. Tiny Tots identified that the bank had incorrectly recorded a deposit for cash sales
as R10 500 instead of R15 000.
5. Bank charges amounting to R350 and interest income of R150 appeared on the bank
statement.
Post the necessary adjustments to the bank account in the General Ledger of Tiny Tots
as at 29 February X8. (4 marks)
QUESTION 8.4 (A)
PART C (6 marks: 7 minutes)

Ignore VAT
MusicUs operates a bank account at Sittert Bank, which had a debit balance per the
bank statement dated 31 December 2012 of R5 000.
a) Cheques totalling R18 150 were received from debtors on 31 December 2012. This
information had been recorded in the cash receipts journal on the same day. This
information appeared on the bank statement for January 2013. These were the only
outstanding deposits as at 31 December 2012.
b) On receiving the bank statement, the bookkeeper, M. Fleming, noted that interest
earned by MusicUs of R1 120 had been credited and bank charges amounting to
R300 had been debited by Sittert Bank on the bank statement of MusicUs dated 31
December 2012.

On reviewing the bank statement of MusicUs dated 31 December 2012, the
c) bookkeeper identified a credit of R910 that related to a business named Listen &
Look that had been incorrectly included on the bank statement of MusicUs.
d) Outstanding cheques at 30 November 2012 amount to R8 000. Of these, cheques
amounting to R2 500 were presented for payment during January 2013. Cheques
amounting to R4 400 that were issued during December 2013 had, as yet, not been
presented for payment.
1. Prepare the bank reconciliation statement of MusicUs as at 31 December 2012.

(6 marks)
QUESTION 8.5 (A)
Shiloh trading store received the following bank statement for October 20X5 in the post:
The Current Account in the General Ledger reflected the following transactions:

Deposit 059 and Cheque 1145 appeared on the previous month’s bank reconciliation as
an outstanding deposit and cheque respectively.
Cheque 1146 was for inventory purchased and amounted to R3 500
1. Update the bank account in the General Ledger for October 20x5. (8 marks)
2. Prepare the bank reconciliation as at 31 October 20x5. (5 marks)
QUESTION 8.6 (A)

Before taking into consideration the information provided below, the bank account in
the general ledger had a credit balance of R16 000 as at 29 February X8. On comparing
the February bank statement with the bank account in the General Ledger and the bank
reconciliation statement for January X8, you identified the following:
1. Outstanding deposits on 31 January X8 and 29 February X8 amounted to R19 300
and R14 800 respectively.
2. Cheque 114 amounting to R5 150 that was issued to a creditor during February X8
had, as yet, not been presented for payment.
3. Tiny Tots incorrectly entered a cheque for wages amounting to R2 427 as R20 427 in
the cash payments journal on 18 February X8.
4. Tiny Tots identified that the bank had incorrectly recorded a deposit for cash sales
as R10 500 instead of R15 000.
5. Bank charges amounting to R350 and interest income of R150 appeared on the bank
statement.
Prepare the corrected bank account in the General Ledger for the month ended 29
February X8.
QUESTION 8.7 (A)

The bank account balance on the pre-adjustment trial balance amounted to R308 930.
However, it has not been updated with regards to any relevant information on the bank
statement for May. The bank statement for May X5 included, amongst others, the
following transactions:
1.1 Bank charges of R178.
1.2 A direct deposit from a debtor for R663.
1.3 Debit orders for the month of May:
Sunnylam Insurance Company R380.
1.4 An R/D cheque for R1 520 that had been received from a credit customer and
deposited by Second Time Around on 15 May X5. The customer, Mr Letdown,
had insufficient funds in his bank account.
1.5 Cheque 110 (for stationery, R250) and cheque 114 (for inventory, R1 200) were
issued by Second Time Around in April X5. They had been debited on the
bank statement for May X5.
Prepare the corrected bank account in the General Ledger for the month ended 30 May
X5.
QUESTION 8.8 (C)

The PRE-ADJUSTMENT trial balance of Rantambore Ruminations, a book store in

Kalk Bay, as at 31 August 2011 included the following balances:
R
Capital 400 000
Loan ?
Vehicle 1 000 000
Accumulated depreciation: Vehicle ?
Inventory 475 000
Allowance for doubtful debts 5 600
Bank ?
Drawings 75 000
Prepaid insurance ?
Rent expense 75 350
Cost of sales expense 1 757 900
Bad debts expense 12 600
Interest expense ?
Salaries and wages expenses 307 000
Stationery ?
1. All reversals were processed as at 1 September 2010.
2. The delivery vehicle had been purchased for R1 million on 1 April 2008. The
vehicle will be used for 400 000 km. Rantambore Ruminations estimates that, at
the end of the vehicle’s useful life, if it spends R15 000 (in total) removing the
company logo from the vehicle, they will be able to sell the vehicle for R400 000. By
1 September 2010, the vehicle had been used for 310 000 km. During the year ended
31 August 2011, the vehicle had been used for 50 000 km.
3. Rantambore Ruminations received a loan from First Bank for R500 000 on 1
August 2009. The loan is repayable in 5 equal annual instalments. The first
instalment was paid on 1 January 2010. Interest at 9% per annum is payable every
four months in arrears on 1 December, 1 April and 1 August.
4. On 1 August 2011, Rantambore Ruminations requested a price list from Albums
for Africa, a new potential supplier based in Knysna. On 10 August 2011,
Rantambore Ruminations placed an order for 100 hard copies of Trekking in Asia
at R500 each and paid for the books on the same day. Albums for Africa confirmed
that they had the books in stock and would arrange transport of them to Cape
Town. The terms of the contract were FOB shipping point. The books were sent by
rail and were loaded on to the train on 15 August 2011 and arrived in Cape Town
on 17 August 2011.
5. According to the General Ledger, the bank account has a debit balance of R165 200
and the bank statement balance is about R50 different. The owner of Rantambore
Ruminations is not sure whether this difference is merely an addition error.
After comparing the August 2011 bank statement with the bank account and the
bank reconciliation statement for July 2011, the following is identified:
5.1 Rantambore Ruminations incorrectly entered a cheque for stationery
amounting to R1 472 as R1 427 in the cash payments journal on 18 August
2011.
5.2 The bank statement for August 2011 included, amongst others, the following
transactions: bank charges amounting to R178, a direct deposit from a debtor
for R663 and an R/D cheque for R1 520 that had been received from a debtor
and had been deposited by Rantambore Ruminations on 15 July 2011. The
debtor had insufficient funds in his bank account.
5.3 Outstanding deposits on 31 July and 31 August amounted to R9 300 and R4
800 respectively. The 31 July deposit was included in the August bank
statement.
5.4 Outstanding cheques at 31 July 2011 amount to R6 200. Of these, cheques
amounting to R5 000 were presented for payment during August 2011.
Cheques amounting to R5 150 that were issued during August 2011 had, as
yet, not been presented for payment.
6. On 31 August 2010, Rantambore Ruminations had stationery of R1 500 on hand
and R950 on hand as at 31 August 2011. On 1 May 2011, when additional stationery
had been purchased, Rantambore Ruminations processed the following entry:
DR Stationery (A) 2 800

CR Payables (L) 2 800
7. Rantambore Ruminations pays for an annual insurance policy on 1 January each

year. On 1 January 2010, Rantambore Ruminations paid R22 200, and on 1 January
2011, they paid R30 600. This is the only insurance paid for by Rantambore
Ruminations. All insurance payments are debited to a prepaid insurance account.
8. On 31 August 2011, the accountant for Rantambore Ruminations confirmed that
debtors, to whom sales of R5 200 had been made in the previous financial year, had
gone bad and were written off. The entry to process this information was prepared
on the same date.
9. The accountant reliably estimates that the business will not collect 4% of the
outstanding trade receivables balance at 31 August 2011.
1.
1.1 Update the bank account in the General Ledger of Rantambore Ruminations
as at 31 August 2011.
1.2 Prepare the bank reconciliation statement for August 2011. (11 marks)
2. Refer to point (4).
Prepare the general journal entry/ies required by Rantambore Ruminations on

each of the following dates: dates and narrations are required. If no journal entry is
required on a particular date, indicate “no entry required”, and provide a brief
explanation.
2.1 10 August 2011
2.2 15 August 2011
2.3 17 August 2011 (9 marks)
3. Prepare the general journal entry/ies required by Rantambore Ruminations to
process the information provided in point (8). (2 marks)
4. Prepare any adjusting journal entries required by Rantambore Ruminations to
process the information provided in points (7) and (9) above. (10 marks)
5. Prepare the following ledger account as they would appear in the ledger of
Rantambore Ruminations for the year ended 31 August 2011. Balance/close off the
accounts:
5.1 Stationery asset
5.2 Accumulated depreciation: Vehicle
5.3 Interest on loan (18 marks)
6. Briefly explain why adjusting journal entries are processed. (2 marks)
7. Prepare the current asset section of the statement of financial position of
Rantambore Ruminations as at 31 August 2011. (9 marks)
8. Rantambore Ruminations had used electricity amounting to R1 500 during August
2011 and on 31 August 2011 had, as yet, not paid the outstanding amount. Briefly
explain whether an expense or income should be recognised on 31 August 2011.
Although your answer may indicate the existence of assets and/or liabilities, you
are not expected to discuss these items in detail. (3 marks)
9. State the fundamental qualitative characteristics. (1 mark)

INTRODUCING CREDIT: TRADE PAYABLES

Ignore vat
Sole Mate is a business that sells high quality footwear and has a financial year-end of
30 June. You have been provided with the following balances for the year ended 30 June
2012:
Bank ?
Trade Payables (from the General Ledger) 105 206
Creditors’ Ledger 109 836
1. The business received their bank statement for June 2012, which had a credit
balance of R105 640. This balance differed from the bank account balance in the
General Ledger of Sole Mate as at 30 June 2012. The owner investigated and made
the following notes:
1.1 The business received a deposit from Mr Fish via EFT (direct deposit into the
bank account). The amount of R2 500 settled their debt owed to Sole Mate.
There was no record of this transaction in the books of Sole Mate.
1.2 The bank incorrectly recorded a debit to Sole Mate’s bank account of R1 425.
This transaction was meant to appear in another customer’s bank account.
1.3 The bank account reflected an amount of R625 paid by cheque to ABC Traders
on 28 June that was not shown on the bank statement.
1.4 The bank statement reflected bank charges of R126 that had not been recorded
by the business.
2. The business also has the following information available regarding their trade
payables:
2.1 The total column of the purchases journal was incorrectly posted to the
General Ledger as R3 245 instead of R3 425.
2.2 Interest on overdue accounts was not accounted for. Upon closer inspection, it
was discovered that there was only one account that was overdue: Sole Mate
had an outstanding balance of R1 600 owed to Luigi’s Leather. The debt was
due six months ago and Luigi’s Leather charges interest at a rate of 8% per
annum on overdue amounts.
2.3 A credit purchase from Lucy’s Laces was incorrectly posted to their account in
the Creditors’ Ledger as R4 500 instead of R450.
2.4 The Creditors’ Ledger was miscast, that is, the total was R400 more than it
should have been.
1. What is the purpose of a bank reconciliation? Describe the two types of differences
that can explain why the bank statement does not match the bank account.
2. Explain in which respect a bank reconciliation is different to a Debtors’ (3 marks)
Reconciliation? (2 marks)
3. Refer to the additional information in point (1).
Prepare the journal entries for the four transactions. If you think no journal entries
are required, explain your answer and indicate whether these transactions should
appear in a bank reconciliation statement. (10 marks)
4. Refer to the additional information in point (2).
Prepare the Internal Creditors’ Reconciliation for Sole Mate as at 30 June 2012.
(9 marks)
QUESTION 9.2 (A)
The accountant at Natal Traders is training a recently employed creditors clerk. The
first task given to the clerk was to reconcile the balance of Gauteng Suppliers in the
creditors ledger at 31 May X1 with the balance per their statement dated 31 May X1. The
balance per statement at 31 May X1 amounts to R12 122.65. The following items need to
be taken into consideration:
a) Goods sent by Gauteng Suppliers on 20 May X1 had not arrived at Natal Traders
by 31 May X1. Invoice 443 amounting to R670.35 appeared on the statement for
these goods.
b) The balance per Gauteng Suppliers account in the creditors ledger on 30 April X1
amounted to R6 110.80. This was paid on 20 May X1 but did not appear on the
statement.
c) Debit note D4 sent by Natal Traders on 20 May X1 amounting to R90.75 was
recorded in the creditors ledger but does not appear on the statement.
d) Following a phone call to Gauteng Suppliers it was discovered that invoice 122GH

amounting to R1 255.60 per the statement should have been entered on Kwazulu
Traders statement.
e) Credit note 333 amounting to R102.40 and invoice 475 amounting to R456.80 both
appear on the incorrect sides of the statement.
f) The credit column in Gauteng Suppliers account in the creditors ledger for May X1
has been overcast by R1 000.
Prepare a remittance advice to accompany the payment to clear the balance in the
account of Gauteng Suppliers at 31 May X1. The cheque will be posted on 20 June X1.
QUESTION 9.3 (B)

Omar Ltd imports promotional items, such as caps, cushions, and scarves, from Zecha
Ltd, which is Omar Ltd’s only supplier. Zecha Ltd’s account is kept in the general
ledger of Omar Ltd because it is the only creditor. Omar Ltd uses the periodic method
of recording inventory.
Payments made to Zecha Ltd are transferred directly from Omar Ltd’s bank to Zecha
Ltd’s bank. These payments are made on the last day of each month and equal the
balance at the end of the previous month on Zecha Ltd’s account in the general ledger.
Zecha Ltd prepares its statements up to the 25th of each month.
The following additional information has been drawn to your attention:

a) Balance per Zecha Ltd’s statement at 25 September X1 is R86 445.
b) Balance per Zecha Ltd’s account in the general ledger of Omar Ltd at 31 August X1
is R108 000.
c) Included on the wrong side of the September statement is invoice A10 dated 28
August X1 amounting to R12 600. This was the only invoice for the period 25
August to 31 August and was correctly recorded in Omar Ltd’s books on 30
August.
d) A credit note for R18 910 appears on the September statement as R18 190. This
credit note has been correctly recorded by Omar Ltd in September. This is the only
entry in the purchases returns journal for September.
e) An invoice on the September statement amounting R13 400 is for Ouma Ltd, not
Omar Ltd.
f) The bookkeeper incorrectly posted the total column in the purchases journal for
September amounting to R110 610 as R101 610.
g) Invoice S21 on the September statement dated 12 September X1 reflected 850 items
at R60, whereas the delivery made in respect of this invoice contained 580 items.
Omar Ltd recorded the invoice amount in the purchases journal on 16 September
X1.
h) Invoice S24 on the September statement totalling R900 in respect of goods sent by
Zecha Ltd (FOB − shipping point) on 24 September has not been recorded in Omar
Ltd’s books.
1. Prepare a remittance advice at 30 September X1 to reflect the amount to be paid to

Zecha Ltd on 31 October X1
2. Prepare the ledger account of Zecha Ltd in the books of Omar Ltd for the month of
September X1.

THE OTHER SIDE OF CREDIT: TRADE RECEIVABLES AND
WORKING CAPITAL MANAGEMENT

Assume all parties are VAT vendors unless otherwise stated.
Azure Enterprises is a business that buys and sells garden equipment. The business is a
registered VAT vendor and uses the perpetual inventory recording method. The
accountant has provided you with extracts from the trial balance together with extracts
from the subsidiary journals for the year ended 31 December X4.
Extract from the post-adjustment trial balance as at 31 December X4

X4 X3
R R
Inventory 354 000 226 000
Trade receivable ? 316 537
Bank ? 500 000
Capital 800 000(Cr) 700 000(Cr)
Accumulated profit ? 650 000(Cr)
Accrued expenses 50 000(Cr) −
SARS (VAT) ? 31 800(Cr)

1. Debtors who owed a total of R65 892 were written off as bad debts during the year
ended 31 December X4.
2. All inventory has been purchased for cash.
3. The business has a mark-up on cost of 45%.
1. Prepare the general journal entry that would have been processed to record the
bad debts expense. (Refer to the additional information above.) (4 marks)
2. Prepare the Trade Receivables General Ledger Account as it would appear in the
General Ledger of Azure Enterprises for the whole year ended 31 December X4.
(Refer to the extract from the trial balance, the extract from the subsidiary journals,
and the additional information above.) (4 marks)
3. Prepare the VAT General Ledger Account as it would appear in the General
Ledger of Azure Enterprises for the whole year ended 31 December X4. (Refer to
the extract from the trial balance, the extract from the subsidiary journals, and the
additional information above.) (12 marks)
4. Briefly discuss whether sales income as recognised in the statement of
comprehensive income of Azure Enterprises will be inclusive or exclusive of VAT.
Justify your answer by discussing the VAT portion charged on sales in terms of
the conceptual framework. (9 marks)
QUESTION 10.2 (B)

Extract from the pre-adjustment trial balance of Windy Seas as at 30 April 2012
Trade receivables 1 355 000

Allowance for doubtful debts (01/05/11) 103 500
The following information became available to the accountant on 30 April 2012:
Please note that the following information has as yet not been processed in the books of
the business:
a) When posting the totals from the sales journal to the General Ledger at the end of
April 2012, the sales column was posted as R1 750 000 instead of R1 705 000.
b) A sale return made by debtor P. Storm on 15 April 2012 had been recorded in
debtor F. Storm’s account in the Debtors’ Ledger.
c) The April bank statement included transactions up to and including 27 April 2012.
d) The April 2012 bank statement reflected a dishonoured (R/D) cheque for an
amount of R25 600. This cheque had been received from debtor D. Cloud on 5 April
2012 and had been deposited in the bank account on the same day. It is the policy
of Windy Seas to allocate all charges relating to dishonoured cheques to the
individual debtors concerned. The dishonoured cheque above resulted in
additional bank charges of R375.
e) Bank charges (excluding those indicated in (d) above) amounting to R1 200 were
reflected on the April 2012 bank statement.
f) Debtor B. Calm was declared insolvent during 2012. The total debt owing by B.
Calm on 30 April 2012 was R18 500. This amount related to sales made to the
debtor during the current financial year. B. Calm’s lawyer confirmed that Windy
Seas would receive 35c for each Rand owed to the business. On 30 April 2012, a
cheque was received from B. Calm. At 30 April 2012, Windy Seas decided to write
the remainder of B. Calm’s debt off as irrecoverable.
g) At 30 April 2012, debtors to whom sales amounting to R85 000 had been made in
the previous financial year were considered irrecoverable and the decision to write
off these debtors had been made.
h) Windy Seas reliably estimated that it was unlikely that 6% of outstanding debtors
on 30 April 2012 would be collected.
1. Prepare the general journal entry/ies that would have been processed to record the
information in points (a) and (b). If NO general journal entry/ies are required,
provide reasons for your answer. Ignore dates and narrations. (4 marks)
2. Refer to point (f).
Prepare the general journal entry(ies) necessary to process the information
provided in point (f). Closing entries are not required. Ignore dates and narrations.
3. Refer to points (a) − (h). (4 marks)
Prepare the Trade Receivables Account as it would appear in the General Ledger of
Windy Seas for the year ended 30 April 2012. Balance or close off the account
appropriately. (7 marks)
4. Calculate the amount that will appear in the statement of comprehensive income of
Windy Seas for the year ended 30 April 2012 as bad debts expense. (3 marks)
QUESTION 10.3 (B)

Ignore VAT
Joe’s Hardware Ltd. is a company which manufactures ice cream squirrels for children’s
parties and hot air balloon trips. The company accountant, Miss A. Thompson, is in the
process of preparing the Debtors’ Reconciliation for the month of May X7.
The following information is available to her:
• Trade receivables (30/04/X7):(This balance is net of a 5% allowance for doubtful debts) R51 490
• Total column of the sales journal: R27 800
• Trade receivables column in the Cash Receipts Journal: R31 546
• Credit sales returns for the month: R4 500
• Closing balance on the Debtors’ List R37 400
• Early in May a decision was taken to write off a debtor, A. Palmer, as bad. Palmer,
a known gambler, who went missing after a high stakes poker game, had
purchased goods to the value of R3 500 in the previous month.
• On the 31st of May, another debtor, N. Meier was declared insolvent. Reliable
estimates from the executor indicate that creditors will be able to recover 16c in the
rand. The outstanding balance on his account was R5 600.
• On the last day of the month, a cheque was received from A. Palmer in full
payment of his outstanding balance. As it turned out, he had been in Europe
betting on football.
When comparing the Debtors’ Ledger with the General Ledger, Miss Thompson
identified the following errors:
1. The balance of F. Stevens account in the Debtors’ Ledger was overstated by R400
(The balance was correctly reflected in the General Ledger).
2. A credit sale to J. van Aswegens account was incorrectly recorded in L. van
Schoor’s account in the Debtors’ Ledger.
3. A credit sale to a customer, J. Spurdle was incorrectly accounted for in the company
books. The sale was for R7 500, and Miss Spurdle was offered a 10% trade discount
for her bulk purchase. The sale was recorded as follows in the General Ledger:
Dr Trade receivables R7 500

Cr Sales R7 500
The transaction was correctly dealt with in the Debtors’ Ledger.
Joe’s Hardware maintains their allowance for doubtful debts at 5% of the outstanding
trade receivables balance at month end.
a) Prepare the trade receivables account in the General Ledger. (8 marks)

b) Prepare the account of Mr Palmer in the Debtors’ Ledger. (5 marks)
c) Prepare ALL the entries in the general journal with regards to Bad Debts and
allowance for doubtful debts. (10 marks)

PROPERTY, PLANT AND EQUIPMENT (PPE)

Ignore VAT.
Babytique (Pty) Ltd designs and manufactures baby bonnets and booties. PPE consists
of bonnet and bootie manufacturing machine, and 2 delivery vehicles (Speedy and
Hasty). All the assets were acquired on the same date. Babytique (Pty) Ltd’s year-end is
30 June.
As the accountant went into labour and had to rush off in the middle of finalising the
Property, Plant and Equipment (PPE) section, you are helping the company to finalise
its financial statements for the year ended 30 June X4. You have been provided with the
following information:
1. An incomplete property, plant and equipment (PPE) reconciliation note which the
accountant had started:
Machinery Motor vehicles
Carrying value as at 1 July X3 ? 297 500

− Cost 600 000 350 000
− Accumulated depreciation ? (52 500)
Movements
− Depreciation ? ?

− Disposal of motor vehicle at CA − (127 500)
−? ? −
Carrying value as at 30 June X4 ? ?

− Cost 600 000 ?
− Accumulated depreciation ? ?
−? ? ?
2. Extract: Accounting policy notes

• PPE is measured on the cost model.
• Machinery is depreciated at 20% on the reducing balance method.
• Motor vehicles are depreciated over their estimated useful lives of 10 years,
with the expectation that benefits will be generated evenly over the 10-year
period. Motor vehicles are not expected to have residual values.
3. You deciphered from the accountant’s notes that:
• A competitor, Trendy Babes Ltd, had started producing berets and beanies for
babies. Due to babies being born to extremely fashion-conscious mothers
nowadays, these new products are threatening to erode Babytique (Pty) Ltd’s
market share for bonnets.
• Attached to these notes you found calculations estimating the machine’s value
in use and fair value less costs to sell at R250 000 and R90 000 respectively, as
at 30 June X4. You are satisfied that the information is reliable.
4. Delivery vehicles:
Owing to the decline in demand for the company’s products, one of the delivery
vehicles (Speedy), which had been acquired for R150 000, was disposed of on 1 July
X3 at a loss of R12 500. As the remaining delivery vehicle (Hasty) would now be
used considerably more, its estimated useful life was reduced to 5 years from the
date it was ready for use.
1. Prepare the asset disposal account, as it would have appeared in the General
Ledger for the year ended 30 June X4. Dates are not necessary. Contra accounts are
essential. (4 marks)
2. Complete the PPE reconciliation note as at 30 June X4, taking into account all the
information in points (1-4) above. It is essential that you show all your workings.
You are not required to complete a total column. (19 marks)
3. Give the extracts of the statement of financial position as at 30 June X4 relating to
the property, plant and equipment. Comparative figures are not required. (2 marks)
4. Refer to part (2) of the information: Explain the effect on reporting equity that
selecting the revaluation model for PPE had they selected this measurement basis
instead. (2 marks)
5. Explain what the implication is of the information in part (3) above with respect to
property, plant and equipment as well as inventory. (6 marks)

Assume that Excellent It’s Friday (Pty Ltd) is a VAT vendor, and a VAT rate of 15%.
The company has a December year-end. Excellent It’s Friday Pty Ltd purchased a
machine (Machine A) for R920 000 (VAT inclusive) on the 1 January X1.
The company financed the purchase of this machine (Machine A) as follows:

• Cash of R575 000.
• A trade-in of old plant and machinery that was recorded in the General Ledger at a
cost of R600 000, and accumulated depreciation of R250 000.
Machine A was used to produce Product X, for which there was a large and established
market. This machine was able to produce units for 5 years from the date it was ready
for use before becoming unusable. We will be able to sell the machine A for R23 000
(VAT inclusive) at the end of its useful life.
The marketing department advises that the sales are expected to occur in equal
proportions each year, over this five-year period.
Before Machine A was ready to be used, the company had to import a part that was
then attached to the machine. The following costs were incurred:
• The cost of the part was R11 500 (VAT inclusive).
• Wages of the maintenance staff to attach the part to the machinery − 100 hours at
R150 per hour.
• Transport of the part to the factory − R17 250 (VAT inclusive).
This machine was ready for use and began production on 1 July X1.
The production manager noted in February X2 that Machine A’s output had dropped
by 20%. The maintenance staff found that a defect had occurred in one of the cylinders
and spent 250 hours at R150 per hour to restore the production to the previous levels.
During the course of X2, an international company designed and marketed a new part
for the machine. This part cost R69 000 (VAT inclusive) and increased the output of the
machine by 30% of its original assessed output ability. The following costs were
incurred on 1 August X2:
• Purchase of the new part R69 000.
• Installation costs R5 000 (VAT exclusive).
On 1 January X4, the equipment maintenance manager advised that a more realistic
estimate for Machine A was a useful life of 8 years. The estimate for the residual value
has not changed.
On 31 December X6, the marketing manager advised us that due to a new product that
had been introduced onto the market, the demand for Product X had been considerably
reduced. The future demand for Product X was estimated at 8 000 units at a present
value of profit earned per unit of R20 per unit.
The company sold the machine on 1 January X8 for R161 000.
1. Prepare all General Ledger Accounts for the period 1 January X1 to 1 January X8
for the above transactions. (75 marks)
2. Show how the information provided in these General Ledger Accounts would be
disclosed in the annual financial statements and notes to the financial statements
for the year ended 31 December X4. (13 marks)

Simbani Chips is a company that makes and sells delicious fried chips. The company
has an August year-end and is a registered VAT vendor. During the year ended 31
August X1, the company incurred the following costs:
• Bought an oven for R13 800 000 (VAT inclusive) on 1 May X1. Delivery took place
on this date.
• The company had to pay:
– Transport costs of R80 000 (VAT exclusive) for the delivery of the oven from
Johannesburg to the factory in Cape Town. The transport service was provided
on 1 May X1, but the transport company was only paid on 31 December X1.
– The oven had to be lubricated with special oil before it could be turned on.
This oil cost R65 000 (VAT exclusive).
• The oven is expected to produce chips for a period of 5 years. The company started
to produce chips with the oven on 1 July X1, which was the first day that the oven
was ready for use.
1. Calculate the depreciation expense for the oven for the year ended 31 August X1
using the straight line method. (3 marks)
2. Calculate the depreciation expense for the oven for the year ended 31 August X2
using:
a) Straight line method (1 mark)
b) Diminished balance method at a rate of 20% per annum. (2 marks)
3. Prepare the journal entry/entries for the transport costs of R80 000 on 1 May X1.
Provide a brief explanation to support the element you have chosen to debit.
4. What is meant by the following terms? (3 marks)
a) Capitalisation of costs.
b) Residual value. (1 mark)

Sunday Blues Ltd is a company that makes and sells recreational electronic equipment.
You have been provided with an extract of the company’s notes to the financial
statements for the year ended 31 August X2. The company is a registered VAT vendor.
Sunday Blues Ltd
Notes to the financial statements
Note 1:
Accounting policy note
Depreciation methods
The company depreciates property, plant and equipment at the following rates
estimated to write off the asset to its residual value over the estimated useful life:
Equipment – 15% straight line with a residual value of R500 000 (VAT exclusive)
Buildings – 5% diminished balance.
1.2 The company uses the revaluation model for land and the cost model for
equipment and buildings.

Note 2:
Property, plant and equipment
The marketing manager has provided you with the following estimates for equipment
on 31 August X2:
• Value in use on 31 August X2 – R3 175 000.
• Net selling price on 31 August X2 – R4 175 000.
• The company sold all its buildings on 1 August X2. The buildings were sold for R23
000 000 (VAT inclusive).
• The fair value of the land was estimated at R24 000 000 (VAT exclusive) on 31
August X2. The net selling price of the land was estimated at R21 000 000.
1. Prepare the reconciliation note for equipment and land that is required to be
shown in the notes to the financial statement for the year ended 31 August X2.
Show all workings. No total column is required. (11 marks)
2. Prepare all the general journal entries required to record the disposal of the
buildings in the General Ledger. (9 marks)
3. Briefly explain why the company has not depreciated the land. (2 marks)

Scenario one (12 marks: 14 minutes)
The business Pick Well and Pay buys and sells foodstuffs. You have been provided
with a list of assets purchased during the year ended 31 December X0, as well as how
the accountant has shown these assets in the financial statements.
• Purchase of fresh vegetables and meat intended to be sold to customers (R450 000).
• Shown as property, plant and equipment, because these assets are tangible. All
tangible assets are disclosed as PPE.
• Purchase of computers to be used in the accounting department of Pick Well and
Pay (R379 000).
• Shown as inventory because computers help to run the business. Any cost that
helps to run the business can be considered as getting the inventory into the
condition and location for use as intended by management and is therefore part of
inventory.
• Purchase of shelving and equipment to be used in the Pick Well and Pay stores to
store and display the food (R989 000).
• Shown as an intangible asset.
• Purchased property costing R1 million in Constantia to rent to tenants and earn
rental income.
• Shown as inventory, because it is an asset that generates income for the business.
Discuss whether you agree with the accountant’s conclusions, using the theory you
have learnt so far.
Scenario two (4 marks: 5 minutes)
Affordable Cars makes and sells motor vehicles. During the year ended 31 August X1,
the company made the following purchases:
1 January X1:
Ordered a conveyor belt and related machinery to be used in the factory to help and
transport the vehicles along the various assembly departments.
13 April X1:
Paid R13 800 000 VAT inclusive for the conveyor belt.
30 April X1
Supplier shipped the conveyor belt and equipment FOB (destination).
30 June X1:
The conveyor belt arrived in Cape Town harbour.
On 13 April X1, the bookkeeper processed the following entry:

Discuss whether you agree with the bookkeeper’s journal entry, using the theory you
have learnt so far.
Scenario three (6 marks: 7 minutes)
You purchase a machine and pay for the machine by giving the supplier a property
with a fair value of R1 500 000. The property has a net carrying amount of R900 000. The
machine has a fair value of R1 400 000. Ignore VAT.
The bookkeeper has prepared the following journal entry for the purchase of the
machine.
DR Machine (asset) 1 400 000

CR Bank 1 400 000
have learnt so far.
If you disagree with the bookkeeper’s journal entry, prepare:

• The correct journal entry for the above purchase of the machine.
Scenario four (5 marks: 6 minutes)
A business purchases equipment on 1 January X1. Because of financial constraints, the

business organises with the supplier to take delivery on 1 January X1, but to pay R2 700
000 on 31 December X1. Ignore VAT. A fair market interest rate is 10%.
The bookkeeper has prepared the following journal entry for the purchase of the
machine.

have learnt so far.
If you disagree with the bookkeeper’s journal entry, prepare the correct journal entry
for the above purchase of the equipment.
Scenario five (9 marks: 11 minutes)
Assume VAT of 15% and that the business is a registered VAT vendor.
We run a business that makes and sells high fashion clothing. The current financial
year-ends 31 October X2. We purchased a large sewing machine for R3 220 000 (VAT
inclusive) on 1 January X2 for cash.
We had to incur the following costs in respect of the machine over January to March X2
(all were paid in cash):
• R11 400 transports costs to deliver the sewing machine to the factory.
• Wages of R16 000 for the workers to offload and move the machine.
• R28 500 for a part that will allow the machine to produce at a faster rate over its
useful life and R6 384 to paint the machine so that it will look prettier in the factory.
We could have used the machine regardless of its colour.
The business started using the sewing machine in production on 1 April X2.
The bookkeeper prepared the following entries for these transactions:
1 January X2 Debit Credit

DR Machine 3 220 000
CR Bank 3 220 000
January to March X2
DR Transport (expense) 10 000
DR Wages (expense) 16 000
DR Repairs (expense) 25 000
DR Paint expense 5 600
DR SARS (VAT) 5 734

CR Bank 62 284
Discuss whether you agree with the accountant’s journal entries, using the theory you
have learnt so far.
If you disagree with the accountant’s journal entries, prepare the correct journal entries
for the above purchase of the machine.
Scenario six (12 marks: 14 minutes)
You own a company that makes surfboards.
1 April X2: You purchase a machine that is used to make the surfboards for R3 450 000
(including VAT). Your company has a December year-end and is a registered VAT
vendor.
You expect to use the machine for a period of 4 years, after which you can sell the
machine for R100 000. The depreciation method to be used is straight line. The machine
is ready for use on 1 April X2.
On 1 February X3, you purchase a part for the machine costing R90 000 (excluding
VAT). This part is expected to increase the number of surfboards the machine will
produce over its estimated life.
On 1 July X3, you spend another R45 000 (excluding VAT) on replacing certain parts of
the machine that had worn down. These parts are replaced every year.
Show your accountant how the machine would be disclosed on the face of the statement
of financial position on:
• 31 December X2.
• 31 December X3.
QUESTION 11.6 (B) [QUESTION BY JOHAN HEFER] [Solution on page

237]

Sport Motors Ltd owns a factory in the industrial area of East London. They are
registered for VAT at the standard rate of 15%. Their financial year-end is 31 December.
The factory comprises of three buildings. The factory was bought for R3 000 000 on 1
January X2 and is depreciated at 10% per annum on the straight line basis.
During the X8 financial year, a fire broke out in one of the three buildings, On 1 April,
the following damages were reported:
a) The spray booth and equipment that cost R500 000 with an accumulated
depreciation at 31 December X7 of R500 000 was destroyed.
b) Other equipment that cost R200 000 with an accumulated depreciation of R125 000
at 31 December X7 was damaged, a salvage value of R10 000 (excluding VAT) was
paid by a scrapyard on 15 April.
c) One of the buildings that comprise 30% of the total factory buildings was
destroyed.
The insurers only paid out R517 500 as the business was under-insured.
The factory and equipment was replaced as follows:
a) The building was rebuilt with the following costs incurred and paid cash:
Raw materials R600 000 excluding VAT

Labour R100 000
Architect and project management fees R200 000 (Non-vat vendors)
The building work was completed on 31 July.

b) A new spray booth was imported from China. The booth and equipment cost $25
000 at an exchange rate of $1:R10. Import and transport costs of R100 000 was
incurred and the installation costs were R50 000, no VAT. An opening party was
held that cost R30 000 to celebrate the booth being ready for use on 31 August. All
these costs were paid cash.
c) The other equipment was replaced at a cost of R287 500 (including VAT) on 31
August purchased on credit.
The depreciation methods and rates for the new and repaired assets are:
a) The new factory building is to be depreciated over the remaining useful life of the
original factory buildings.
b) The spray booth is to be depreciated on the straight line method at 20% per annum.
c) The other equipment is to be depreciated as before on the straight line method at
25% per annum.

1. Prepare the general journal entries for all the transactions that occurred during the
X8 financial year in the records of Sport Motors Ltd. Narrations are not required.
All calculations should be rounded to the nearest rand.
QUESTION 11.7 (A) [QUESTION BY JOHAN HEFER] [Solution on page

238]
An aircraft manufacturer, Big Planes Ltd, has just finished building an aircraft for the
use of the company. The following costs are incurred:
1. The wages of staff working on the aircraft R100 000. These costs were allocated to
salaries and wages in the accounting records.
2. The company bought the spare parts and other materials from a company in the
United States for $50 000. The exchange rate when the parts were paid for was
$1:R10. They also had to pay R20 000 for shipping and import costs.
3. The engines for the aircraft was purchased from a South African company for R200
000 (excluding VAT).
4. The costs of testing the new aircraft was R57 000.
5. They also used the services of a professional aircraft designer for which they paid
R75 000. The aircraft designer is not registered for VAT.
Prepare the journal entries for purchase and manufacture of the aircraft.
QUESTION 11.8 (C) [QUESTION BY JOHAN HEFER] [Solution on page

238]
PART A
Boris is a Russian oil millionaire. He came to South Africa and bought a large office
building in Sandton on 1 January X5 for R10 million (excluding VAT) cash. He is
registered for VAT in South Africa; the VAT rate is currently 15% and uses a 31
December year-end.
The building was being depreciated over 20 years on the straight-line method with a
residual value of R2 million.
On 30 June X7, a staff member of the tenant on the top floor left a cigarette in a rubbish
bin that caused a large fire that destroyed the whole top floor of the building. Ten per
cent of the building was destroyed by the fire. The tenant is liable for the damage and
has to pay Boris R1 500 000 (excluding VAT) for the damages caused.
On 1 August X7, the builders start to rebuild the top floor and the following costs are
incurred:
a) Architects fees R11 500 (including VAT).
b) R500 000 (excluding VAT) to the building contractor.
c) R50 000 non VAT supplies for other building expenses that should be capitalised
but was originally allocated to Repairs and Maintenance.
In addition to the above, R1 000 000 (excluding VAT) was paid to replace the roof of the
building. All repairs to the building were completed on 31 October X7.
The roof must now be separately depreciated over 10 years on the straight line method
to a zero residual value. The replacement of the top floor must be depreciated over the
remaining portion of the original estimated useful life. The residual value of the
building is now R1 800 000 and the replaced part of the building is R60 000.
PART B
The tenant whose offices were destroyed was Inflammable Chartered Accountants Inc.
In the fire all of their office and computer equipment was destroyed. Due to the fire
being caused by someone smoking in a non-smoking building, the insurers will not pay
out any damages. The details of their office and computer equipment, which had no
residual value, at 1 January X7 was:
There were no other additions or disposals of property, plant and equipment during the
year.
1. Prepare the general journal entries for all the transactions that occurred during the
X7 financial year in the records of Boris.
Prepare the general journal entries of Inflammable Chartered Accountants Inc. for
2. the disposal of the office and computer equipment.
All calculations should be rounded to the nearest rand.

240]
Davey Jones Ltd started operating on 1 July X8. The company purchased the following
assets:
1. Land was purchased on 2 July X8 for R500 000 on a mortgage bond from a non-
VAT vendor.
2. Equipment was purchased on 31 July X8 for R140 000 (excluding VAT) on credit.
3. Motor vehicles that cost R172 500 (including VAT) were purchased on 30
September X8 and paid for with cash.
4. The following costs were incurred during July X8 in the construction of a factory
building and paid cash:
a) Labour costs of R60 000.
b) Architect’s fees, R35 000 (the architect is not a VAT vendor).
c) Fees to the construction company, R250 000 (excluding VAT).
d) Specialised air-conditioning system (to be included in the cost of the factory)
$36 000 at an exchange rate of $1:R8.
e) Opening function for the factory, R30 000 on 31 July when the factory was
brought into use. This transaction had no VAT consequence.
5. On 31 March X9 a vehicle purchased on 1 July X8 that cost R86 250 (including VAT)
was involved in an accident and had to be scrapped. R74 750 was received from the
insurance company.
6. Motor vehicles are depreciated on the straight line method over four years to their
estimated residual value equal to 10% of their cost. Equipment is depreciated at
20% per annum on the straight line method. Land is not depreciated, but factory
buildings are depreciated at 10% per annum on the straight line method.
7. Due to a nuclear power station being built near the property, the land and
buildings should be impaired by 10% of the current book value.
Prepare the journal entries for the above transactions in the general journal of the
company.

241]
Zinzi’s Furniture Store (Pty) Ltd’s abridged trial balance at 31 December X7 was as
follows:
Dr/(Cr)
Office equipment at cost 10 000
Accumulated depreciation on office equipment (5 000)
Furniture and fittings at cost 15 000
Accumulated depreciation on furniture and fittings (4 500)
Motor Vehicles: Isuzu bakkie 150 000
Accumulated depreciation on motor vehicles (75 000)
The following are the transactions that occurred during the financial year ended 31
December X8:
1. Zinzi’s Furniture purchased the building they leasing on 01 January X8 for a price
of R100 000 and transfer duties of R10 000. Another R20 000 was used for
improvements to the building. The building will be depreciated over 20 years with
a residual value of R0.
2. On 30 June X8, the Isuzu bakkie was involved in an accident and had to be
scrapped. The insurance paid out an amount of R120 000. A new bakkie was
bought on 31 July X8 for R180 000.
3. Furniture is depreciated at 10% per annum on the straight line method, motor
vehicles over four years on the straight line method and office equipment at 30%
per annum on the diminishing balance method.
You may ignore value added tax (VAT).
1. Prepare the journal entry to record the transaction in number (2) above. (4 marks)
2. Prepare the PPE reconciliation note at 31 December X8. (13 marks)
QUESTION 11.11 (B)

Ug Traders is a company in Epping that imports material and clothing from Uganda.
The business has a financial year-end of 31 December. The business uses the cost model
for the measurement of vehicles and the revaluation model for the measurement of
land.
Extract: Pre-adjustment Trial Balance for the year ended 31 December 2011
DR CR
R R
Vehicles ?
Accumulated depreciation: Vehicles ?
On 1 July 2008, Ug Traders purchased vehicles costing R950 000, which has a residual
value of R350 000. The vehicles will be used evenly over its estimated useful life of 5
years.
On 31 December 2011, the vehicle had a value in use amounting to R520 000 and could
be sold for R550 000 if R40 000 was spent on refurbishing.
Show how, where and at what amount the information provided in the transactions
above will be reported on the statement of comprehensive income for the year ended 31
December 2011 and the statement of financial position as at 31 December 2011. Where
necessary, you are expected to use the information provided in the extract from the
business records provided above. You are not required to indicate the impact of income
and expenses on accumulated profit.
You are not expected to provide full statement headings for each section of the question.
The following statement heading abbreviations are acceptable for this question: SoFP
and SoCI (please ensure that your abbreviations, if used, are clearly identifiable).
Show all workings.
QUESTION 11.12 (B)


AA Advertising manufactures advertising and promotional items. It has a financial
year-end of December. The company is not VAT registered.
A licence to manufacture a new product line was purchased. This however led to some
of the current machinery of the factory becoming obsolete. This had the following
impact in the 2007 financial year:
Machine A: This machine cost R125 000 when it was purchased on 1 January 2005. At
that time it had an estimated useful life of 10 years. Machine A’s estimated useful life
was changed from 10 to 5 years.
Machine B: This machine is a packing machine that cost R320 000 when it was
purchased on 1 January 2005. Its useful life was estimated at 4 years. Machine B was
scrapped on 31 December.
Machine C: This machine was purchased in 01 January 2004 for R1 000 000. It had an
estimated useful life of 5 years. Machine C was sold to a rival company for R300 000 on
30 September 2007 for cash.
Machine N, with an estimated useful life of 8 years, was installed and started operating
on 1 December 2007. The following costs were incurred:
1. Purchase price of parts for the machine £15 000 at an exchange rate of £1:R15 in
cash.
2. Import duties of R10 000 paid cash.
3. Transport and delivery costs R50 000 paid cash.
4. Installation costs R15 000 paid cash.
5. Testing of the machine R20 000 paid cash.
6. Employee and client launch party R40 000.
None of the machines had a residual value and all machines are depreciated on the
straight line method.
The business owned two trucks to which the following information pertains:
The bodies are depreciated over 5 years on the straight line method and the engines
over 3 years on the straight line method.
The business also has passenger vehicles with a cost price of R150 000 (accumulated
depreciation R60 000) that is depreciated on the diminished value method at 50% per
annum.
The business also has furniture and fittings to the value of R20 000 (accumulated
depreciation R8 000) that is depreciated at 20% on the straight line method.
a) Prepare general journal entries for the transactions in property, plant and
equipment during the 2007 financial year to record the various transactions stated
above. Deal with the transactions for each asset individually.
b) Prepare the non-current asset notes as they would appear in the annual financial
statements for the year ended.
QUESTION 11.13 (B)

Dube Dangerous Chemicals Ltd has a December year-end.
Extracts from the post-adjustment trial balance for the year ended 31 December 2007 is
as follows:
Plant and equipment – Cost 200 000

Plant and equipment – Accumulated depreciation (100 000)
Vehicles – Cost 150 000
Vehicles – Accumulated depreciation (131 250)
Office equipment – Cost 20 000
Office equipment – Accumulated depreciation (13 333)
A decision was made to sell plant and equipment with a total cost of R50 000 and
accumulated depreciation of R18 750 on 30 September 2007. The plant and equipment
were withdrawn from service, but have not yet been sold. Current depreciation has not
been accounted for.
Office equipment to the value of R50 000 was purchased on 30 June 2007.
Vehicles are depreciated over 5 years on the straight line method, plant and machinery
over 8 years on the straight line method and office equipment 30% on the diminishing
balance method.
Prepare the non-current asset notes in the annual financial statements of the company
for the year ended 31 December 2007.
QUESTION 11.14 (B)

PQF Plastic Moulders makes plastic bottles for use by various other manufacturers for
their products. It has a financial year-end of December. The company is not VAT
registered.
The company leases a factory in the industrial area of Kimberly and has the following
machine:
Machine Y: This machine cost R650 000 when it was purchased on 1 January 2005. Its
useful life was estimated at 10 years. The machine has no residual value and is
depreciated on the straight line method.
The following occurred in the year ended 31 December 2007:

1. Machine Y’s estimated useful life was changed from 10 to 6 years.
2. Machine W, with an estimated useful life of 5 years, was installed and started
operating on 1 December 2007. The following costs were incurred:
a) Purchase price of parts for the machine $100 000 at an exchange rate of $1:R7 in
cash.
b) Import duties of R50 000 paid cash.
c) Site preparation costs R65 000 paid cash.
d) Transport and delivery costs R50 000 paid cash.
e) Installation costs R15 000 paid cash.
f) Testing of the machine R20 000 paid cash.
g) Marketing brochures for new products R6 000 paid cash.
a) Prepare general journal entries for the transactions in property, plant and
equipment during the 2007 financial year to record the various transactions stated
above. Deal with the transactions for each asset separately. (11 marks)
b) Describe the difference in the treatment of VAT at the acquisition of property, plant
and equipment by a vendor and a non-vendor. (2 marks)
QUESTION 11.15 (B)

Alexander Engineering is a small factory that manufactures machinery. Alexander

Engineering is registered for value added tax and the VAT rate is 15%.
During the financial year ended 31 October 2008, the following transactions took place
with regards to the factory’s property, plant and equipment:
1. The depreciation methods and the opening balances at 1 November 2007 for the
property, plant and equipment accounts were as follows:
2. On 31 May 2008, a spark set off a fire in the factory. Luckily there was only
superficial damage to the factory buildings and other assets. The machinery of the
company was however damaged beyond repair. A cheque for R456 000 was
received on 30 June from the insurance company in settlement of the claim.
3. Machine D was purchased for R287 500 (including VAT) on 1 July. This machine
was paid in cash and will be depreciated over 8 years on the straight line basis.
4. Thereafter they manufactured a piece of machinery (Machine E) they required for
their business. The following expenses were incurred and where applicable paid
for in cash:
R
Cost of spare parts (VAT Inclusive) 172
500
Internal labour on the project (Already included in salaries and wages) 30
000
Payment to construction company for alterations to the building to 50

accommodate new machine (VAT exclusive) 000
New air conditioning system for new machine (VAT Inclusive) 17
250
Cost of testing the new machine (VAT Exclusive) 25
000
Architect’s fees (Non-VAT vendor) 5
000
The machine was brought into use on 30 September 2008. It has an expected useful life
of five years and a residual value of R15 000. It will be depreciated using the straight
line basis.
a) Record the transactions pertaining to the property, plant and equipment for the
financial year ended 31 October 2008 in the general journal of the company.
Narrations are not required. (23 marks)
b) A machine was built for a client at a cost of R250 000 and was on hand at the end of
the year. The bookkeeper is unsure if it should be classified as inventory or
property, plant and equipment in the financial statements. Discuss each of these
types of asset briefly and why the machine would or would not qualify in that
category. (6 marks)
5. Cash flow statement (4 marks)
QUESTION 11.16 (C)

Ignore VAT
Health First (Pty) Ltd (Health First) is based in Gauteng, where it manufactures and
distributes a face cream called “Look twenty years younger”. The business has a year-
end of 30 September. The following information was contained in the non-current asset
register on 1 October 2011:
Property, plant and equipment (PPE) as at 1 October 2011
PPE consists of vehicles and machinery. All items of PPE are measured using the cost
model.

Vehicles Machinery
Gross carrying amount ? R4 000 000
Accumulated depreciation R3 923 500 ?
Total residual value R1 625 000 R540 000
General
1. The statement of financial position of Health First as at 30 September 2011 showed
an increase in the PPE line item of R475 000 from 2010 to 2011. The production
manager commented, “I see that PPE increased from 2010 to 2011 by R475 000. This
must mean that Health First purchased PPE for R475 000 during the 2011 financial
year.”
Vehicles
2. All vehicles owned by the business on 1 October 2011 had been bought on 1 April
2008 and were ready for use on that date. Vehicles are depreciated on the straight
line basis at 20% p.a.
3. On 15 September 2012, one of Health First’s truck drivers was making a delivery to
a client in Cape Town. The driver had to adandon the truck as a bad fire due to the
drought was sweeping through the area. The truck, along with other cars stuck on
the highway were destroyed. The damaged truck had cost R903 750 and had a
residual value of R186 000. A decision was immediately taken to scrap the
damaged truck and replace it with a new one.
4. On 30 September 2012, the new delivery truck was delivered to the premises of
Health First in Gauteng. The purchase price was R1 260 000, 30% of which was paid
on delivery. 25% was to be settled within a year, and the remainder of the purchase
price was to be settled over a period of more than a year i.e. on 30 September 2013.
The new delivery truck had a residual value of R278 000 and was ready for use on
15 October 2012, following the installation of an anti-hijacking device costing R5
890. The anti-hijacking device has the same estimated useful life as the truck itself,
which is 5 years.
5. Health First provides staff with transport to and from their homes on a daily basis.
On 30 September 2012, the carrying amount of the minibus used for this purpose
was R135 000, the value in use was R131 000 and the net selling price was R131 800.
6. Other than those mentioned above, there were no acquisitions or disposals of
vehicles during the 2012 financial year.
7. The market-related interest rate for vehicles is 8% p.a.
Machinery
8. On 1 October 2011, the business had two machines. On that date, one machine was
sold for a profit of R150 000. This machine had a carrying amount on the date of
sale of R950 000. On 20 September 2011, in advance of the sale, the business had
accepted a deposit of 10% of the purchase price. The balance was received on 31
October 2011.
9. The other machine is nicknamed “Forever Young”. This machine is depreciated
using the straight line method. Its cost was R2 750 000. It had been purchased and
was ready for use on 1 March 2009. At that point, its residual value was thought to
be R350 000 and its estimated useful life was expected to be 10 years. On 30
September 2012, the production manager informed the financial accountant that the
machine had been “sweated too hard”, and would therefore need to be replaced
sooner than expected. According to his estimates, the total estimated useful life is
in fact six years, and the residual value is R285 000.
10. On 30 September 2012, in order to reduce some of the stress on “Forever Young”, a
new machine was purchased.
11. The carrying amount of all machinery on 30 September 2012 amounted to R7 100
000.
1. Refer to additional information 1. Explain whether you agree with the production
manager’s statement. Include reasons as to why you agree or disagree. (3 marks)
2. Calculate the gross carrying amount of vehicles on 1 October 2011. (3 marks)
3. Prepare all the general journal entry/ies necessary to record the scrapping of the
damaged delivery truck on 30 September 2012. Ignore dates and narrations.
4. Describe and briefly explain how the accounting treatment of the (9 marks)
damaged delivery truck would affect the operating activities section of the
statement of cash flows of Health First for the year ended 30 September 2012. The
business uses the indirect method. Your answer should include amounts. (4 marks)
5. Prepare the general journal entry/ies that would have been prepared on 30
September 2012 by Health First in respect of the new delivery truck. Ignore dates
and narrations. (5 marks)
6. Prepare the PPE reconciliation note for vehicles only for the year ended 30
September 2012. (13 marks)
QUESTION 11.17 (A)

Red Africa (Pty) Ltd is a business in Cape Town that sells kayaks (small boats) and also
offers two-hour kayak trips during whale season. On 1 January 2012, the business
purchased five kayaks for R2 000 each with the intention of selling them to customers.
On 24 January 2012, the directors of Red Africa (Pty) Ltd realised that they needed two
more kayaks for the kayak trips, and so they decided to convert two of the kayaks
purchased on 1 January for use on the kayak trips. The conversion was completed on 1
February, and the kayaks were ready for use on that day. The cost of conversion was R1
000 in total, which was paid on 1 February. The kayaks would be used evenly for 3
years, after which they could be sold for R250 each. Due to an unusually rainy
February, the kayaks were first used on a boat trip on 1 March 2012.
1. Prepare the general journal entry(ies) required on 1 February 2012. Ignore dates
and narrations. (3 marks)
2. Briefly justify why you have debited the particular account used in your answer to
number 1 above. (2 marks)
3. Indicate how the two converted kayaks would appear in the statement of financial
position as at 31 December 2012 (year-end). (5 marks)
QUESTION 11.18 (B)

Ignore VAT.
Clean Solution Ltd is a cleaning company that specialises in offering cleaning services
to large office blocks and shopping malls. The year-end of the company is 31 December.
All PPE is measured using the cost model. Assume a market-related interest rate of
15%.
1. On 1 January 2009, the business purchased three high-powered vacuum cleaners.

These machines arrived and were ready for use on 1 January 2009. Clean Solution
Ltd paid the supplier, as agreed, a total amount of R1 897 500 on 31 December 2009.
Payment was made after a period of more than a year. At that point, the machines
were expected to be used evenly over their estimated useful life of eight years, and
their residual value was R100 000 each.
2. On 1 January 2011, each machine had a powerful extractor added to it. The three
extractors cost R80 000 each and do not have a residual value. On 1 January 2011,
the machines also had their annual service amounting to R50 000 per machine.
3. On 1 January 2011, it was agreed that the addition of the extractors has changed the
estimates relevant to depreciation. The estimated useful life of the machines has
been extended by four years. The extractors will last as long as the machines
themselves. The new residual value is R120 000 per machine.
4. On 31 December 2011, one machine had been left on overnight near the water
feature, and had suffered water damage. The estimated value in use of the machine
amounted to R90 000 and the fair value less costs to sell amounted to R250 000.
There are no signs of impairment of the other two machines.
1. Refer to point (1) of the additional information:

a) Provide the carrying amount of the vacuum cleaners on 1 January 2009.
b) Show your workings for your answer to number (1a). (1 mark)(½ mark)
c) Explain, with reference to IAS16 PPE, your answer to (1a). (2 marks)
2. Refer to points (1) and (2) of the additional information:
a) Provide the carrying amount of the vacuum cleaners on 1 January 2011.
b) Show your workings for your answer to number (2a). (4 marks)(½ mark)
c) Explain, with reference to IAS16 PPE, your treatment of both items of
subsequent expenditure described in point 2 of the additional information.
3. Refer to points (1 – 4) of the additional information: (4 marks)
a) Show how the statement of comprehensive income for the year ended 31
December 2011 will be affected by the vacuum cleaners. (3 marks)
b) Show your workings for your answer to number (3a). (5 marks)
QUESTION 11.19 (A)

Hlonipha uLifeboy Ltd (Lifeboy) is a company that manufactures helicopters from its
premises in Port Elizabeth (PE). The company has a 30 November year-end.
On 1 July 2012, Lifeboy entered into an agreement with Chopper Plc, a company based
in London, for the purchase of a machine that it intended to use in the production
process.
The terms of the agreement were as follows:

1. The machine would be delivered on 30 October 2012 to the PE Harbour and the
purchase price of R15 000 000 will be payable on delivery.
2. Late payment will attract a penalty of 10% of the purchase price of the machine.
3. The machine will be shipped, FOB shipping point, from London on 15 October
2012.
Lifeboy was concerned about the heavy storms that have been affecting the Indian and
Atlantic Oceans and that the machine might be lost at sea. Lifeboy decided to take out
insurance with You Will Need US Insurers to guard against this risk. The premium
charged for the service by the insurers amounted to R400 000 and is payable on 30
October 2012.
The machine was loaded onto a ship in London on 15 October 2012 and arrived in PE
on 30 October 2012. Lifeboy paid the amount owing to the supplier as required by the
agreement. The machine was transported on the same day to Lifeboy’s factory by HDT
Couriers at a cost of R10 000. The machine has a useful life of 20 years and a residual
value of R500 000.
The machine is specialised in nature and had to be installed by experts. The experts
started working on the machine on 31 October 2012.
The experts took 30 days to complete the installation after which the machine was ready
for use. The experts were paid R500 000 for the installation.
Lifeboy only started using the machine on 1 January 2013 as their employees had to
attend a training course on how to use the machine.
1. Indicate date on which Lifeboy should start depreciating the asset. (1 mark)
2. Indicate the date on which the risk and rewards of ownership transfer to Lifeboy.
3. Calculate the cost at which the asset will be recorded in the accounting (1 mark)
records of Lifeboy for the year ended 30 November 2012. Give a brief explanation
for the inclusion of each amount in the cost of the asset. (9 marks)
4. How would your answer for number (2) have differed if Lifeboy did not pay the
supplier on the date of delivery? (2 marks)

COMPANIES


With regards to the old Companies Act, what was understood by the term ‘‘share
premium’’?

The company Home Desires Limited wants to purchase some plant and equipment to
use to expand operations. The directors have decided that the best way to finance this
investment in plant is with a share issue. They have taken a resolution to issue 100 000
Class A shares at an issue price of R5 per share. The offer is made to the public on 1
April X4. On 1 May X4 (the closing date for the application of shares), 90 000 Class A
shares had been applied for by members of the public. The directors issued the shares
on 10 May X4.
The directors employed Rand Merchant Bank (RMB) to underwrite the share issue at a
5% commission. The commission was still owing to RMB on 31 December X4. The
underwriter’s commission was to be written off to Class A share capital. At 31
December X4, no entries had been processed to record the commission.
An extract from the notes to the statement of financial position as at 31 December X3 is

set out below:
Authorised share capital
500 000 Class A shares
Issued share capital

1. Prepare all the general journal entries to record the application and issue of the
Class A shares. Show all dates. Narrations are not required. (7 marks)
2. Calculate the commission owing to RMB as at 31 December X4. (2 marks)
3. Prepare the general journal entry(ies) that should be processed by Home Desires
Limited on 31 December X4 to record the underwriter’s commission. Show all
dates. Narrations are not required. (3marks)

Ignore dividend tax, Company tax at 28%.
A company called Design Clothing Ltd makes and sells fashionable clothing. You have
been provided with an extract of the financial statements and are required to answer
certain questions. Ignore VAT.
Design Clothing Ltd

Extract of statement of financial position as at 31 December X2
X2 X1
Equity and liabilities
Equity 120 600 000 79 600 000
Share capital: Class A 12 000 000 10 000 000
Share capital: Class B 2 800 000 1 500 000
Revaluation surplus 1 800 000 1 100 000
Retained earnings 104 000 000 67 000 000
Liabilities 180 454 000 21 812 000

Long-term loan (15%) 80 000 000 20 000 000
Debentures 100 000 000 1 000 000
Trade payables 450 000 800 000

Bank overdraft 4 000 12 000
Note:
An extract of the authorised and issued share capital of the company as at 31 December X2:

15 000 000 Class A shares
300 000 Class B shares: no voting rights, right to a fixed distribution of 10% of the face value of R5
prior to Class A distributions.
200 000 Class B shares
The class B shares issued during X2 were issued at an issue price of R15 on 1 January
X2. The share issue costs relating to the class B shares issued in the X2 year amounted to
R50 000.
Share issue costs incurred in X2 amounted to R500 000 relating to the class A shares.
There were 10 000 000 shares in issue at the beginning of the year. No share issue costs
were incurred when the class A shares were first issued five years ago.
The directors declared class A dividends of 10 cents per share on 31 December X2. This
was the only class A dividend declaration during the year. Class B dividends had been
declared in X2.
1. Provide the financial worth of the company as shown in the financial statements on
31 December X2. (1 mark)
2. a) Calculate the share issue price for the Class A shares issued on 1 November X2.
(Assume no share costs for earlier share issues). (5 marks)
b) Prepare the general journal entries for the Class B share issue in X2. Assume
applications were received on 15 September X2 and shares were issued on 1
November X22. The share issue was 20% oversubscribed. However, the
directors decided not to issue the oversubscribed shares. (5 marks)
3. Prepare the Dividend: Class A and Dividend: Class B accounts in the General
Ledger for the year ended 31 December X2. Closing entries should be shown.
4. Calculate the profit after taxation for the year ended 31 December X2. (3 marks)
5. Calculate the income tax expense that would appear in the statement of (3 marks)
comprehensive income for the year ended 31 December X2. Assume that taxable
income is equal to profit before tax. (3 marks)

Assume a company tax rate of 28% and dividends tax of 20%.
Enlightened Distributors Ltd was incorporated on 1 April X7 with class A share capital
of R10 million invested by the founders of the company. The issue price of these shares
was R1. The directors were authorised to issue 20 million shares.
In July X8, the directors applied for a securities exchange listing and on approval,
offered 5 million shares to the public at an issue price of R2. Expenses relating to the
listing and offer totalled R50 000, excluding commission to the underwriters. The offer
was underwritten by BOEE Merchant Bank, for a commission of 5%. The closing date
for applications was 30 September X8. By that date, fully-paid-up applications for 5 065
547 shares had been received. Shareholders were registered on 31 October X8, and the
excess cash received was returned to shareholders in proportion to their holdings.
Commission and related expenses were paid on 1 November X8.
Year ended 31 March X8 Year ended 31 March X9

Profit before tax 2 500 000 3 308 000
Dividends: Interim − 2c
Final − 3c
• The interim dividend was declared on 20 September X8 and paid on 25 October X8

to shareholders registered on 30 September X8. Amounts owing to SARS was paid
on the same day.
• The final dividend was declared on 2 May X9 to shareholders registered on 31
March X9.
• No shareholders are SA resident companies.
1. Prepare all the journal entries relating to the class A share issue, which would have
been processed in the X9 financial year. (8 marks)
2. Prepare the statement of changes in equity for the year ended 31 March X9.
3. What is the value of total shareholders equity at 31 March X9? (1 mark)(11 marks)
4. Prepare the journal entries relating to the dividends declared and paid for in the X9
financial year (ignore narrations). (5 marks)

Assume a company tax rate of 28% and a dividend tax of 20%.
Pay & Pick Ltd is a company that buys and sells a wide range of foods at competitive
prices. The company is a registered VAT vendor and has an August year-end. You have
been provided with a statement of financial position as at 31 August X2.
Pay & Pick Ltd

Statement of financial position on 31 August X2
X2 X1
Share capital: Class A (X2: 30 000 000 shares; 123 000 000 98 000 000
X1: 20 000 000 shares)
Retained earnings ?? 160 000 000
Loan (15%) 8 000 000 9 000 000
Total equity and liabilities ?? 267 000 000
Total assets 489 000 000 267 000 000
Pay & Pick Ltd

Extract of notes to the statement of financial position on 31 August X2
a) Share issue costs of R 750 000 were incurred in X2.
b) The share issue was made on 1 December X1 and the shares were allotted on 31
December X1.
c) Dividends of 10 cents per share were declared on 31 August X1. These dividends
were paid on 1 December X2.
1. According to the financial statements, indicate Pay & Pick Ltd’s net asset value as
at 31 August X1. (2 marks)
2. According to the financial statements, indicate Pay & Pick Ltd’s net asset value at
31 August X2. Show all workings. (3 marks)
3. Explain whether the net asset value of the company increased or decreased during
the X2 year. Support your answer with calculations. (2 marks)
4. Calculate the retained earnings amount that should be shown on the statement of
financial position on 31 August X2. (3 marks)
5. Briefly explain what is meant by the term ‘‘retained earnings’’. (1 mark)
6. The total assets of the company increased by R222 000 000 between X1 and X2.
Show how the company financed the increase in the assets. (4 marks)
7. Calculate the price per share at which the Class A shares were issued during the
current year (X2). (4 marks)
8. Prepare all the general journal entries required to record:
8.1 The issue of the Class A shares during the current year (X2). (6 marks)
8.2 The dividend declaration on 31 August X2. Assume 60% of the shareholders
are SA resident companies. (2 marks)
9. Should dividends be recognised as an expense? Support your answer by referring
to the definitions and , if relevant, recognition criteria in the conceptual framework.
10. Briefly explain the following terms: (4 marks)
a) Authorised share capital.
b) Issued share capital.
c) Equity. (5 marks)

247]
Assume a dividend tax rate of 20%.
Scenario 1
Dog’s Breakfast Dogfood Ltd decided to raise further capital and therefore they invited
the public to subscribe for 100 000 Class A shares at R5 each. Subscriptions and
applications for 90 000 shares were received. The directors decided to allot the shares.
Underwriting commission of 5% was paid to the underwriters.
Scenario 2
Seventh Heaven Sweets Ltd. invited their shareholders to subscribe for 15 000 Class A
shares at R1.30 per share. Applications and funds for 15 000 shares were received. The
directors decide to allot the shares.
Scenario 3
Printers Limited is incorporated with 100 000 Class A shares. Twenty thousand shares
were offered for R900 000. Applications amounting to R1 200 000 were received. The
company decided to allot the shares originally offered.
Scenario 4
Deep Mine Mining Ltd has issued 50 000 Class A shares to the public. The directors of
the company declared a dividend of R1.50 per share. 20% of the company shareholders
are SA resident companies.
Prepare the journal entries in the general journal for each of the above scenarios.
Narrations are not required.

248]
Junk Limited is incorporated with 50 000 shares of no par value. Twenty thousand
shares were offered for R1 000 000. Applications were received for R1 500 000. The
company decided to allot the shares.
Prepare the relevant journal entries to reflect the above information.
QUESTION 12.7 (B)

Assume a company tax rate of 28% and a dividend tax rate of 20%.

Fidelio Ltd is a small record company. They have a December financial year-end.
The equity of Fidelio at 1 January 2008 comprised the following:
Share capital Class A 1 250 000

15% Class B shares of R2 each 200 000
Revaluation surplus 100 000
The authorised share capital of the company is 2 million Class A Shares and 500 000
15% Class B shares of R2 each.
Issued Class A shares at 31 December 2007 amounted to 1000000 and 100000 Class B
shares as at 31 December 2007.
The following transactions occurred during the year ended 31 December 2008:
1. 300 000 ordinary shares were issued at R3 per share on 30 April 2008.
2. 100 000 15 Class B shares were issued at R2 each on 1 January 2008.
3. Share issue expenses to the value of R50 000 were written off to the Share Capital:
Class A account.
4. The directors are authorised by special resolution, dated 1 December 2008, to issue
100 000 Class A shares of R1 before 31 December 2009.
5. An interim Class A dividend of R0.30 per share was declared on 31 March 2008.
6. A final Class A dividend of R0.20 per share was declared on 31 December.
7. 30% of the shareholders are South African resident companies.
8. The total comprehensive income for the year was equal to R800 000.
9. There was a revaluation of the company’s land and buildings equal to R200 000.
10. The company tax charge of R160 000 should be accrued for the current financial
year.
11. The company received an assessment from the South African Revenue Services for
the 2007 year of assessment. The assessment stated that a refund of R40 000 was
due to the company. The balance on the South African Revenue Services account at
1 January 2008 was a debit of R10 000. All prior tax years, except for 2007, had been
finalised before 1 January 2008.
1. Prepare the statement of changes in equity for the year ended 31 December 2008.
2. Prepare the share capital note to the annual financial statements for the(12 marks)
year ended 31 December 2008. (5 marks)
3. Calculate the company tax charge for the 2008 year of assessment. (4 marks)
QUESTION 12.8 (A)

IGNORE: Dividends Tax
Zinzi’s Furniture Store (Pty) Ltd is a store in Butterworth. As part of a black economic
empowerment deal, Big Stores Ltd has approached Zinzi to act as a franchise of their
Small Stores brand.
Zinzi’s Furniture Store (Pty) Ltd’s abridged trial balance at 31 December 2007 was as
follows:
Dr / (Cr)
Share capital – Class A (1 000 shares) (1 000)
Retained earnings (50 000)
SARS (Income tax) 10 000
The profit to date was R80 000. The authorised share capital of the company was 200
000 Class A shares and 10 000 5% cumulative Class B shares.
The following transactions occurred during the financial year ended 31 December 2008:
1. The agreement between Big Stores Ltd and Zinzi’s will commence on 1 January
2008.
2. Zinzi’s Furniture will issue Big Stores Limited 50 000 Class A shares at R1.50 per
share and they will also issue 50 000 Class A shares to the current shareholders of
the company at R1 per share. All these shares were issued and paid during the
year.
3. Zinzi’s Furniture will offer 1 000 5% cumulative Class B shares at R50 to the
Butterworth community. 900 shares were subscribed and paid for during the year.
4. The estimated company taxation expense for the year was R15 000 and provisional
tax of R10 000 was paid for the year. The tax liability for the previous year had been
R6 000 and was settled during the current year.
5. A Class A dividend of 10c per share was declared on 31 December 2008 but had not
been paid. The Class B share dividend declared and paid on the same day.

Prepare the journal entries to record the above entries in the accounting records of
a)
Zinzi’s Furniture Store (Pty) Ltd, closing entries are not required. (10 marks)
b) Prepare the statement of changes in equity for the year ended 31 December 2008.
c) Calculate the company tax payable/receivable on 31 December 2008. (6 marks)
(2 marks)
QUESTION 12.9 (C)
A South African international bank, Hard Times Bank Ltd, has come under severe
pressure due to the international crises in the financial sector. This is specifically due to
their exposure to the United States mortgage bond market and thus they have had to
generate some cash to be able to weather the storm.
The following balances appeared in their trial balance at 31 December 2008, amongst
others:
Dr Cr
Allowance for doubtful debts 10 000 000
Loan: Mr Big Bucks 10 000 000
Land and buildings 25 000 000
Share capital – Class A 6 000 000
8% R5 Cumulative Class B shares 5 000 000
Revaluation surplus Nil
Retained earnings 15 000 000
The following steps were taken by the management of Hard Times to help alleviate the
cash flow situation:
1. A major shareholder, Mr Big Bucks, lent the company R10 000 000, repayable at the
end of ten years. The interest at 10% on the loan is repayable annually in arrears on
1 January each year. The full amount of the loan was received on 1 October 2008
and is secured by the property of the company. Interest has not been accounted for
and there were no other long-term liabilities.
2. The company offered 3 million 5% Class B shares to the public at R4. They received
and banked applications for 2.5 million shares and allotted the shares on
31/12/2008. No dividend is payable on these shares until 31 December 2009. The
balance has not been transferred from the application and allotment account.
3. The company increased the allowance for doubtful debts to R15 000 000.

Other information that pertains to the reporting period is:
1. The property of the company was revalued by Mr D. Davis, a sworn appraiser to
R30 000 000. Revaluations are accounted for in the revaluation surplus.
2. The authorised and issued share capital of the company is as follows:
Authorised Issued
(No. of (No. of shares)
shares)
Class A 10 million 5 million
5% Class B: R4 5 million 2.5 million (incl. the current year
each allotment)
8% Class B: R5 2 million 1 million
each
3. The total dividends paid during the year are:

a) The 8% Class B shares dividend was declared and paid.
b) Class A dividends of 50 cents per share were declared and paid. You may
ignore dividend tax.
4. The company received an assessment from the South African Revenue Services for
the 2007 tax year. This assessment indicated that a payment of R200 000 was due.
The balance on the SARS account for the 2007 year is a credit of R250 000.
5. The final taxable income for the current year is R20 000 000 with the current tax rate
at 29% and provisional tax payments of R7 500 000 were made during the year.
a) Prepare the journal entries to record the above entries in the accounting records of
Hard Times Bank Ltd, closing entries are not required. (17 marks)
b) Calculate the accounting profit after tax of Hard Times Bank Ltd for the year ended
31 December 2008.Assume a profit (before additional information) of R20 000 000.
c) Prepare the statement of changes in equity for the year ended 31 (3 marks)
December 2008. (8 marks)
d) Prepare the share capital and long-term liability notes at 31 December 2008. The
reconciliation of shares issued is not required. (7 marks)
e) Calculate the tax payable/receivable on 31 December 2008. (4 marks)
QUESTION 12.10 (A)

Ignore dividends tax

Assume a tax rate of 28%
Blue Jay Limited’s authorised and issued share capital is as follows:

100 000 8% Class B shares of R2 each.
The Receiver of Revenue balance represents the estimated company tax liability for 2015
of R52 000. A payment of R48 500 as per 2015 assessment as well as provisional tax
payment of R30 000 for 2016 had been paid during December 2016 and the total
payment posted to the Receiver of Revenue (2006).
The accountant has estimated the 2016 taxation charge to be R42 000.
The directors have recommended that the final Class B dividend for the year accrued, as
well as an class A dividend of 60 cents per share.
Prepare the general journal entries required to process the transactions above.
QUESTION 12.11 (B)

Ignore vat.
Assume an income tax rate of 28% and dividend tax of 20%.
Toy Town Ltd is a company that owns several successful toy stores around South
Africa. The company has a June year-end. You have been provided with their
summarised statement of financial position as at 30 June X4 and have been asked to
assist in the preparation of the full set of financial statements for the year ended 30 June
X4.

a) The notes to the statement of financial position as at 30 June X4 showed that Toy
Town Ltd had an authorised share capital of:
50 000 000 class A shares
12 000 000 R2 12% Class B shares
Class A shares: Voting rights, no right to a fixed distribution
Class B shares: No voting rights, right to a fixed, cumulative distribution.
b) The new issue of 3 125 000 Class A shares took place on 31 May X4 and was
underwritten by Risky Business for a commission of 8%. The share issue was
undersubscribed and Risky Business had to take up 25% of the shares offered to the
public. Share issue costs (excluding underwriters commission) of 88 cents per share
issued, were incurred. The total cash received from the share issue (before share
issue expenses and the underwriter’s commission) was R15 625 000.
c) The new issue of Class B shares were allotted on 1 February X4. On 15 January X4,
the closing date for applications, the offer had been oversubscribed by 30%.
d) Class A dividends of 20 cents per share were declared on 1 May X4. Dividends
were paid on 10 July X4. Toy Town Ltd did not receive dividends during the X4
financial year.
e) The profit for the year after income tax but before dividends tax amounted to R164
500 000.
1. Prepare all the general journal entries that would have been processed by Toy
Town Ltd to record the share issue. With respect to the share issue costs and
underwriter’s commission you are ONLY required to provide the entries for the
payment of the share issue costs and underwriter’s commission. Provide dates.
Ignore narrations.
2. Prepare the dividends declared account as it would appear in the General Ledger
of Toy Town Ltd for the year ended 30 June X4.
3. Calculate the total taxation expense that would appear in the income statement of
Toy Town Ltd for the year ended 30 June X4. Assume profit before tax equals
taxable income.
4. Prepare the statement of changes in shareholders equity for the year ended 30
June X4. You are not expected to provide a TOTAL column.
QUESTION 12.12 (B)

Assume that all parties are VAT vendors.
Assume an income tax rate of 28% and dividend tax rate of 20%.
Trains R Us Limited is a public company that manufactures and sells toy trains to
wholesalers as well as having their own stores which sell toy trains direct to the general
public. You have been provided with the following information for the current financial
year ended 28 February X5:
Extract from the statement of financial position of Trains R Us as at 28 February X5:
Extract from notes to the statement of financial position as at 28 February X5:

Class B shares: No voting rights, right to a fixed distribution
2 000 000 10% Class B shares (Face value of R2 each).

500 000 10% Class B shares.
1. After extensive research of the international toy train market, the directors decided
to expand operations into Perth, Australia. Their intentions were to open retail
outlets for their toy trains in order to test the market before setting up a
manufacturing plant, which would supply toy trains to wholesalers and other retail
toy shops in the country. The directors decided to raise the capital needed for this
expansion through a share issue. On 1 June X4, 1 500 000 class A shares were
offered to the public at an issue price of R9. The share issue was underwritten by
Riskless Underwriters. The contract between Trains R Us Ltd and Riskless
Underwriters stated an agreed commission of 6% (excluding VAT) and that such
commission would be paid in cash on the day that the shares were allotted.
Applications for the shares closed on 31 July X4. 80% of the shares were applied for
by the public. The shares were allotted by the company on 15 August X4. Share
issue costs (excluding underwriter’s commission) amounted to R82 800 (including
VAT) and were paid in cash on 16 August X4. The directors decided to keep profits
at a maximum for all costs relating to the share issue.
2. On 30 June X4, the directors declared a dividend of 40 cents per share. There were
no dividends owing to the Class B shareholders on this date. Each year, for the last
5 years, the company’s dividends for the whole financial year have been declared
on this date.
3. Dividend income earned from South African companies amounted to R425 000 for
the year ended 28 February X5. Only R360 000 of this amount had been received by
28 February X5.
4. The profit before tax for the year ended 28 February X5 amounted to R15 028 071
(this figure includes the dividend income). Taxable income for the financial year
ended 28 February X5 amounted to 90% of profit before tax.
5. The revaluation surplus is in respect of land.
1. Calculate the net asset value of the company on 29 February X4 and 28 February
X5. (2 marks)
2. Prepare the share Capital Account for class A as it would appear in the General
Ledger of Toy Town Ltd for the year ended 28 February X5. (7 marks)
3. Show how the proceeds and related costs from the Class A share issue would have
been recorded in the Cash Flow Statement of Trains R Us Ltd for the year ended28
February X5. (3 marks)
4. Calculate the number of Class B shares that were issued during the year. (2 marks)

5. Prepare all the general journal entries that should have been processed to record:
5.1 The total dividends declared and paid during the X4 financial year. (4 marks)
Assume all shareholders are SA resident companies.
5.2 The income tax incurred for the year ended 28 February X5. (4 marks)
6. Prepare the accumulated profit General Ledger Account as it would appear in the
General Ledger of Toy Town Ltd for the year ended 28 February X5. (5 marks)
QUESTION 12.13 (B)

Ignore VAT.
Assume a company income tax rate of 28%.
Bright Beginnings Ltd is an educational toy company based in Cape Town. The
company distributes its products to various wholesalers and retailers across southern
Africa. You are part of the team drawing up the financial statements for the company
and have been provided with the following information:
Bright Beginnings Ltd Extract from the statement of financial position as at 30

September X8
X8 X7
R R
Current assets
Inventory 1 436 000 1 393 000
Trade receivables 589 000 779 000
Prepaid water & electricity expense 13 900 12 300
2 038 900 2 184 300
Equity
Share capital: Class B 300 000 300 000

Retained earnings ? 12 604 500
Revaluation surplus ? 800 000
? 19 804 500
Current liabilities
Accrued interest expense 15 000 20 000
Accrued rent expense 6 210 ?
Shareholders for dividends ? 560 000
SARS (Dividend & income tax) 425 000 385 000
? ?
Extract from notes to the financial statements as at 30 September X8:

Class B shares: No voting rights, right to a fixed distribution.
500 000 10%, R3 Class B shares.

100 000 10%, R3 Class B shares.
1. In order to fund an expansion of operations into West Africa, the directors decided,
for the first time since X1, to issue Class A shares. The share issue of Class A shares
in X1 was the only other share issue that had occurred since incorporation. The
shares issued this year had been issued at R30 each. The share issue in the current
year were offered to the public on 1 July X8 and the closing date for applications
was 31 July X8. The share issue was underwritten by Explore Africa Bank and was
oversubscribed by 35%. Shares were issued to the successful applicants on 5
August X8 and the unsuccessful applicants were refunded on the same date.
Underwriter’s commission amounting to R390 000 and other share issue costs
amounting to R125 000 were paid on 15 August X8.
2. The only Class B share issue during the life of the company took place on 1 August
X0.

On 1 August X8, the directors declared a dividend of 650 cents per Class A share.
3. The two most recent dividend declarations in prior years were on 1 August X7 and
1 August X4. It is company policy to pay dividends three months after declaration
date.
4. The only investment held by Bright Beginnings Ltd is 45 000 ordinary shares in
Toys R We Ltd, a listed South African company. Dividends of 330 cents per share
were declared by Toys R We Ltd on 30 June X8.
5. On 1 October X7, the allowance for doubtful debts account had a balance of R41
000. Of the total trade receivables that were written off during the year ended 30
September X8, R28 000 related to sales that had been made in the current year, and
R23 750 related to sales made in the prior financial year. The accountant reliably
estimated that only 95% of the total on the Debtors’ List on 30 September X8 was
recoverable.
6. According to the accounting policy note, Bright Beginnings Ltd measures land on
the revaluation model. An independent valuation indicated that land with a fair
value of R5 million on 1 October X7 had a fair value of R3 800 000 at 30 September
X8. Land is not depreciated.
7. Bright Beginnings Ltd rents retail space from a landlord in Cape Town. The rental
agreement states that monthly rental payments are made in arrears on the first day
of each month. All rental payments during the year ended 30 September X8 were
made on time. The monthly rental payments increased by 8% on 1 April X8 (that is,
March was the first month that cost a greater amount). The bookkeeper records all
rental payments as rent expense.
8. Net operating costs for the year ended 30 September X8 included the following:
Bad debts expense ?

Depreciation expense 263 450
Profit on sale of non-current asset 35 700
Salaries and wages expense 2 160 000
Water and electricity expense 240 000
Rent expense ?
Dividend income ?
Impairment expense ?
9. Profit before taxation for the year ended 30 September X8 was correctly calculated
as R4 105 000. Taxable income is equal to 90% of profit before taxation. Interest
payments for the year ended 30 September X8 amounted to R220 000.

1. Prepare the general journal entry (ies) to record all entries relating to the under
writer’s commission and other share issue costs. Ignore dates and narrations.
2. (6 marks)
2.1 Calculate the total dividends that were declared during the financial year
ended 30 September X8. (3 marks)
2.2 Calculate the amount that would appear in the cash flow statement of Bright
Beginnings Ltd for dividends paid for the year ended 31 December X4.
3. (1 mark)
3.1 Prepare the general journal entry (ies) to record income tax for the financial
year ended September X8. Show dates. Ignore narrations. (6 marks)
3.2 Indicate the amount that will appear in the statement of comprehensive
income of Bright Beginnings Ltd for taxation expense for the financial year
ended September X8? (1 mark)
4. Prepare the general journal entry (ies) to record the revaluation of land on
September X8. Ignore dates and narrations. (2 marks)
5. Prepare the rental expense account as it would appear in the General Ledger of
Bright Beginnings Ltd for the year ended September X8. All relevant reversals and
adjustments need to be shown. Show all dates. (6 marks)
QUESTION 12.14 (A)

1. Explain the difference between the role of a shareholder and the role of a director in
a company. (2 marks)
2. Explain the distinction between the primary and the secondary markets for shares.
In which market(s) does the JSE Ltd operate? (3 marks)
3. What does it mean if an owner of a business has “limited liability”? (1 mark)
4. On 1 August 2012, Company X offered 100 000 Class A shares for R3 each to the
public. An underwriter agreed to underwrite the issue for a commission of 2%.
Other share issue costs amounting to R10 000 were paid when the shares were
issued on 15 September 2012. In the annual financial statements for the year ended
31 December 2012, Share Capital: Class A was reported as R500 000. Prepare the
share capital: Class A account as it would appear in the General Ledger of
Company X for the 2012 financial year. No dates are required. (4 marks)
QUESTION 12.15 (A)

Assume a dividend tax rate of 20%
Julian Ltd: Extract of statement of financial position as at 30 June 2011

Equity:
Share capital: Class A R140 000
Share capital: Class B R1 150 000
Authorised share capital:

500 000 Class A shares: Voting rights and no right to a fixed distribution.
1 000 000 Class B shares: No voting rights, the right to a fixed cumulative distribution of
15% of a face value of R2, preferred to Class A distributions.
• 400 000 Class B shares were issued on 1 July 2008. Share issue costs amounted to
R50 000. There were no other issues of Class B shares before 1 March 2012.
• On 1 March 2012, the company issued another 100 000 Class B shares, for the same
issue price as the Class B shares that had been issued on 1 July 2008. Share issue
costs were R20 000.
• On 30 June 2012, the company declared a Class B dividend. The most recent
dividend before this had been declared on 30 June 2009. No shareholders are SA-
resident companies.
• On 30 June 2012, 80% of the Class B shareholders were South African resident
companies. This was not expected to change before the last day to register.
1. Calculate the issue price of the Class B shares issued on 1 March 2012.
2. Prepare the journal entry to record the declaration of Class B dividends on 30 June
2012. Ignore dates and narrations.
QUESTION 12.16 (C)

Assume that VAT applies to all share issue costs at a rate of 15%.
Assume that all relevant parties are VAT vendors.
Assume that VAT is still owed to/from SARS at year-end.

Assume a dividends tax rate of 20%.
Vietnam Jewels Ltd sells precious stones and beads imported from South-East Asia.
The company has a year-end of 30 September. On 1 October 2011, Vietnam Jewels had
250 000 Class A shares and 50 000 Class B shares in issue. Class B shares have a
preferred right to a cumulative fixed distribution of 6% p.a. of a face value of R5.
During the year ended 30 September 2012, the following transactions occurred:
1. On 1 May 2012, Vietnam Jewels offered 40 000 Class B shares to the general public.
On 15 June 2012, the closing date for applications, the share issue was
undersubscribed by 20%. The total amount received was R238 000. The shares were
issued on 30 June 2012. Share issue costs amounting to R32 000 (VAT exclusive)
were paid on the same day.
2. On 15 July 2012, Vietnam Jewels offered 80 000 Class A shares to the general public
at an issue price of R16 per share. The share issue was underwritten by Thai
Underwriters at an agreed commission of 5% (VAT exclusive). On 15 August 2012,
the closing date for applications, the share issue was oversubscribed by 10%. The
directors decided to issue the oversubscribed shares. On 1 September 2012, the
shares were issued to the public. Other share issue costs, excluding the
underwriter’s commission, amounted to R28 750 (VAT inclusive). All relevant
share issue costs were paid on 15 September 2012.
3. On 30 September 2012, Vietnam Jewels declared a Class A dividend amounting to
35c per share, to be paid on 13 October 2012. Vietnam Jewels had last declared a
dividend on 30 September 2009. 40% of the Class A shares are owned by South
African registered companies. All Class B shareholders are individuals.
1. Show how transaction (2) will be reported in the statement of comprehensive

income and statement of changes in equity for the year ended 30 September 2012
and in the statement of financial position as at 30 September 2012. Be sure to show
any effect of the transaction on the bank account and on the SARS (VAT) account.
See further guidance on the next page. (12 marks)
2. Show how transaction (3) will be reported in the statement of comprehensive
income for the year ended 30 September 2012 and in the statement of financial
position as at 30 September 2012. Be sure to show any effect of the transaction on
the retained earnings account. See further guidance on the next page. (15 marks)
Further guidance:
For each financial statement indicated, show only the line item(s) that would be
affected by the transaction, and the amount at which the affected line item(s) would
be reported. In addition, for the statement of financial position, indicate the section in
which the line item(s) would appear. Column headings for the statement of changes in
equity are required, but opening and closing balances and the total column are NOT
required for the statement of changes in equity.
If there is no effect on a particular statement, state “no effect” in your answer for that
statement.
You are not expected to write out the title of each financial statement in full. The
following abbreviations are acceptable (for this question only): SOCI, SCE and SOFP.

PARTNERSHIPS, AND A BRIEF NOTE ON CLOSE
CORPORATIONS (CCs)


1. Mark and John started a water delivery business together in the form of a Close
Corporation (CC). Mark contributed cash at incorporation of R5 000 and John a
scooter to the value of R3 000. The profit sharing ratio was agreed to be 1:1, and
salaries for work done in the business were paid to Mark and John of R61 000 and
R5 500 respectively. Profits for the year amounted to R50 000, and a distribution of
R30 000 was agreed upon and paid on the last day of the year. Mark is an avid
theatre-goer and therefore withdraws all his amounts immediately, while John has
another job and leaves his share in the CC on short-term loan.
2.1 Process the journal entry to record the receipt of capital at incorporation of the
CC.
2.2 Process the journal entry to record the salaries paid by the CC to each of John
and Mark.
2. Briefly discuss whether a distribution of a CC is different from a dividend paid by a
company.
3. Briefly explain why a member would choose to contribute at the incorporation of a
CC through a member’s loan account rather than a member’s contribution (share
capital) account.

Assume value added tax at 15%
Ms Chandra Bing and Mr Jayson Bang were both rugby fanatics and on 1 January X8
they formed a partnership, Remembering the Best, selling rugby memorabilia. The
business uses the perpetual method for recording inventory. The partnership agreement
provided for the following:
• The partners contributed R150 000 each into the partnership’s bank account.
• Additional capital contributions are permitted over the life of the partnership.
• The partners earn interest on their Capital Accounts at 13% p.a. The interest on
capital accrues annually.
• The partners earn no interest on their Current Account balances. However, interest
at 25% p.a. is charged on any drawings made by the partners during the year.
• Jayson and Chandra will both work full time for the partnership and earn salaries
of R15 000 each per month. The salaries are paid in cash at the end of each month.
• Chandra will also perform a number of administrative functions for which she will
earn an additional salary of R5 000 per month. The salary is paid in cash, monthly
in arrears.
• A profit-sharing ratio of 3:2 between Chandra and Jayson respectively was agreed
to.
During the current financial year the partnership’s bookkeeper, Mr BG Habanga,

accepted a job with a competitor. Chandra and Jayson have asked you to help close off
their books for the year ended 31 December X9.
You have been provided with an extract of the trial balance that Mr BG Habanga had
been working on, as well as additional information. The partners have informed you
that the trial balance was prepared BEFORE recording any transactions with the
partners for the current financial year.
Remembering the Best

Extract of the trial balance as at 31 December X9
Dr Cr
Capital Account: Chandra Bing 150 000
Capital Account: Jayson Bang 150 000
Current Account: Chandra Bing (at 01/01/09) 10 000
Current Account: Jayson Bang (at 01/01/09) 50 000
Profit and Loss Account 1 200 000
PPE: Land and buildings 2 000 000
Accumulated depreciation: Land and buildings 52 021
Inventory 50 000
Transactions with partners during the current financial year:

• On 1 February, Chandra withdrew R25 000 from the partnership’s bank account to
pay off her increasingly large personal debt.
• On 30 March X9, Jayson contributed his personal Apple laptop to the partnership.
On this date it was reliably valued at R15 000.
• Jayson withdrew R10 000 from the partnership’s bank account to pay for his
personal telephone account, which had spiralled out of control since a close friend
had moved to England.
a) There had been a sudden increase in the demand for Blue Bulls memorabilia, so the
partnership placed an order for 55 specially-designed rugby shirts from a
manufacturer in Pretoria. The order was placed on 20 December X9 (FOB shipping
point) and payment of R60 per shirt (VAT inclusive) was due 30 days after
delivery. On 31 December X9, the shirts were loaded onto a plane. Transport costs
amounting to R600 (VAT inclusive) were paid in cash on 31 December X9. The
shirts arrived at Cape Town airport on 1 January X0. The shirts needed to be
unpacked onto the display shelves before they could be sold. An employee took 2
hours to unpack the shirts. He was paid in cash and was paid R10 per hour. Mr BG
Habanga had not yet processed any entry with respect to the purchase of the rugby
shirts.
b) Credit sales amounting to R700 were made during the year to Mr Z Coomer. Mr
Coomer lost all of his money by participating in a Bulgarian pyramid scheme and
has been declared insolvent. His estate paid the partnership 30c in the rand to settle
his debt.
Chandra and Jayson had numerous contacts in the rugby world, so the partnership
grew to be an extremely successful business. On 1 March X0, their main competitor,
Rugby Forever CC, offered Jayson and Chandra R1 800 000 for the partnership.
Chandra and Jayson agreed to the sale, but renegotiated a purchase price of R2 200 000.
The deal was finalised on 1 April X0, and Mr V Madfield, the only member of Rugby
Forever CC, paid the partners the R2 200 000 on 10 April X0 in his personal capacity.
The CC considered 10% of the purchase price to be an additional capital contribution by
its only member, Mr V Madfield.
On 1 April X0, the net asset value of Remembering the Best partnership amounted to R1
200 000. All the assets and liabilities were considered to be fairly valued except for the
following:
• The office from which the partnership operated was considered to be worth R50
000 more than its carrying value.
• The partnership had unrecognised brands to the value of R80 000.
• R5 000 owed to the partnership by a customer for items sold in March X9 was
considered doubtful. The partnership had already raised an allowance amounting
to 40% of the debt.
• Included in inventory was a range of Western Province rugby balls that had a total
cost R2 000. Rugby Forever CC indicated that these rugby balls were an unpopular
item and would need to be sold below cost. Rugby Forever CC considered them to
be worth 60% of their cost.
1. Prepare the appropriation account and current account of Remembering the Best
for the year ended 31 December X9. You are not required to prepare the total
column. (12 marks)
2. Prepare all the general journal entry(ies) required to record point (a) of the
additional information. Provide dates, but ignore narrations. (8 marks)
3. Prepare the general journal entry(ies) that would have been processed to record the
information regarding Mr Z Coomer provided in the additional information (point
(b)). (5 marks)
4. Calculate the goodwill, if any, which would be recognised in the books of Rugby
Forever CC with respect to purchasing the partnership. (5 marks)
5. Prepare the general journal entry(ies) that would have been processed in the books
of Rugby Forever CC when the debt to the partnership was settled. (2 marks)

You have been approached by the accountant of Chancis CC, a close corporation and
registered VAT vendor owned by Ms Chandra and Mr Francis. Chancis CC is an
investment business which specialises in acquiring the assets and liabilities of small
businesses that show earnings potential. The accountant wants your advice about how
to deal with a number of transactions during the year ended 30 November X8.
Chancis CC
Statement of financial position (extract) as at 30 November X8
X8 X7
R R

Equity:
Members’ contributions 20 000 20 000
Revaluation surplus ? 0
Accumulated profit 470 000 250 000
Liabilities:
Long-term loan from member: Ms Chandra 2 000 000 600 000
Short-term loan from member: Mr Francis 34 000 47 000
Information contained in the founding statement:

• Each member contributed R10 000 at the formation of Chancis CC, on 1 December
X0.
• Members’ interests are: Ms Chandra 60% and Mr Francis 40%.
• Interest is allowed on members’ capital at 12% per annum.
• Interest is allowed on long-term loans from members at 15% per annum.
• There is no interest relating to short-term loans from members.
• Each member is to be paid a regular salary of R10 000 per month.
• A further salary amounting to R4 000 per month is payable to Mr Francis at year-
end, provided that the business has generated sufficient profit during the year.
Selected transactions during the year ended 30 November X8:

1. Chancis CC purchased land on 1 December X7 from Mr Michael. Mr Michael, who
is not VAT registered, agreed to give Chancis CC extended credit terms, so the
payment was due on 30 November X8. The market-related interest rate was 20%
per annum. Chancis CC measures land using the revaluation model. On 30
November X8, the date of revaluation, the fair value of the land was R1 200 000. On
the same day, Chancis CC paid R900 000 to Mr Michael in full settlement for the
land.
2. On 30 November X8, Chancis CC authorised a profit distribution of R300 000. On
that day, Ms Chandra was paid her share of the distribution in cash, and Mr
Francis’ share of the distribution was settled with inventory.
3. On 30 November X8, it was decided that sufficient profits had been earned by
Chancis CC for Mr Francis to be paid the additional salary referred to in the
founding statement.
4. During September X8, Chancis CC entered into negotiations with the owners of
Andovan Partnership. On 1 October X8, having performed a comprehensive
financial analysis of the partnership, Chancis CC acquired the assets and liabilities
of Andovan. On 1 November X8, on behalf of Chancis CC, Ms Chandra paid the
owners of Andovan an amount of R1 400 000 in full settlement for the acquisition.
This amount has been credited to Ms Chandra’s long-term loan account. This was
the only movement in Ms Chandra’s long-term loan account for the year ended 30
November X8.
The following information has been extracted from the financial statements of Andovan
Partnership for the year ended 30 September X8:
Andovan Partnership
Statement of financial position (extract) as at 30 September
X8 X7
R R
Assets:
Property, plant and equipment 600 000 500 000
Inventory 45 000 50 000
Bank 15 000 20 000
Total assets 740 000 660 000
Liabilities:
Bank loans 100 000 300 000
Accrued expenses 12 000 16 000
Total liabilities 132 000 346 000
Andovan Partnership
Statement of comprehensive income (extract) for the year ended 30 September
X8 X7
R R
Revenue 2 000 000 1 200 000
Profit 400 000 180 000
On 30 September X8, the fair value of Andovan’s property, plant and equipment was
estimated to be R720 000. The allowance for doubtful debts of R12 000 was considered
to be undervalued by R5 000, and accrued expenses were overvalued by R2 000. All
other assets were considered to be fairly valued.
1. Refer to transaction (1) above.

Prepare all general journal entries for the year ended 30 November X8 in respect of
the land purchased on 1 December X7, including the payment on 30 November X8.
Ignore narrations. (7 marks)
2. Refer to transaction (2) above.
Prepare the journal entry(ies) to record the profit distribution of R300 000 on 30
November X8. Ignore dates and narrations. Journal entries relating to dividend tax
are not required. (7marks)
3. Refer to the information contained in the founding statement, and to transactions
(1), (1), (2), and (3) above.
3.1 Prepare the statement of other transactions with members of Chancis CC for
the year ended 30 November X8. (9 marks)
3.2 Identify, compare and explain the accounting treatment of interest on capital
and interest on long-term loans. Your answer should refer to any relevant
definition(s). (4 marks)
4. Prepare the general journal entry(ies) in the books of Chancis CC to record the
purchase of the assets and liabilities of Andovan Partnership on 1 October X8.
(8 marks)
QUESTION 13.4 (C) [QUESTION BY JOHAN HEFER] [Solution on page

254]
Mr B Collie and Mr R Daschund own a small charter airline called Canine Charters.
Their financial year-end is 31 May and they share profits equally. The partners can only
withdraw amounts from their current accounts if agreed on by all partners.
They admitted Ms A Mutt to the partnership on 1 June X7 on the following terms:

1. Ms Mutt must deposit R250 000 into the partnership bank account on 1 June X7
which will be allocated to her Capital Account.
2. Mr B Collie will receive a salary of R50 000 per annum and Mr Daschund R60 000.
Ms Mutt will receive 10% interest on the balance of her Capital Account per
annum.
The remaining profits or losses will be shared in a 2:2:1 ratio.
3. All assets and liabilities are valued fairly and no revaluations are required except

for land with a carrying value of R90 000 which has to be revalued to R290 000.
4. The goodwill of Collie and Daschund is valued at R50 000 and should not be
included in the records of the partnership.
The final balances on Mr Collie and Mr Daschund’s equity accounts in the financial
statements for the year ended 31 May X7 are as follows:
Collie Daschund
R R
Capital Accounts 500 000 500 000
Current Accounts 65 150 74 320
The partners’ drawings were:

Collie R60 000, Daschund R50 000, and Mutt R25 000 for the financial year ended 31
May X8.
The net profit of the partnership for the year ended 31 May X8 was R600 667.
Prepare the statement of changes in equity for the year for the partnership, including
the movements pertaining to the admission of Ms Mutt, starting with Ms Mutt having a
nil balance in her Capital and Current Accounts. (15 marks)

255]
Poker, Blackjack and Roulette are in a partnership.
On 31 October X9, the partnership’s trial balance was as follows:
Dr Cr
Capital Account: Poker 85 000
Capital Account: Blackjack 62 000

Capital Account: Roulette 10 000
Current Account: Poker 25 000
Current Account: Blackjack 20 000
Current Account: Roulette 15 000
Drawings: Poker 80 000
Drawings: Blackjack 80 000
Drawings: Roulette 50 000
Property 150 000
Plant 85 000
Inventories 35 000
Trade Accounts Receivable 25 000
Bank 50 000
Trade Accounts Payable 18 000
Long-term loan: Blackjack 100 000
570 000 570 000
The partnership agreement of the partnership makes the following provisions:

a) Poker, Blackjack and Roulette will share profits in 2:2:1 ratio, however Blackjack
will not share in any losses which will be shared equally by the remaining partners.
b) Poker and Roulette will receive salaries of R100 000 per annum each and Blackjack
R70 000.
c) All partners will receive interest at 7% on their Capital Account balances.
d) All partners will pay interest at 15% on any debit balance in their Current Account.
There will be no interest payable on drawings accounts but they must be closed off
to the Current Accounts at the end of each year.
e) Blackjack will loan the partnership R100 000 which will bear interest at 10% per
annum. The interest for the current year has not been calculated. The loan is
secured by the property of the partnership. Interest is accrued to his Current
Account.
There was no movement on the current of Capital Accounts of the partners during the
current year. In October X9, Blackjack and Roulette have a huge fight over some money
Blackjack loaned Roulette.
Blackjack decides to withdraw from the partnership effective 31 October X9, the
financial year-end of the partnership, on the following terms:
a) Property will be revalued to R250 000.
b) Goodwill will be valued at R80 000 and must not be shown in the accounting
records of the partnership.
c) Poker and Roulette will share profits and losses equally.
d) Fifty percent of Blackjack’s interest in the partnership will be transferred into his
Loan Account and the balance paid out in cash. The loan will continue for the next
five years on the same terms.
On 5 November X9 Roulette is declared insolvent due to gambling debt. The following

pertains to the dissolution of the partnership:
• No trading occurred between 31 October and 5 November.
• The assets of the partnership realised the following:
Property R225 000
Plant 60 000
Inventories 15 000
• The partnership received a discount of R2 000 for early settlement of trade accounts
payable.
• Blackjack indicated that no interest is due on the loan as the loan was settled within
30 days of the prior month. No entry had been passed for interest on the loan.
1. Prepare the General Ledger Accounts to show the dissolution of the partnership
starting with the balances on 1 November X9 after the withdrawal of Blackjack
from the partnership. (20 marks)
QUESTION 13.6 (C)

PART A
Climate Storm partnership is a business owned by the partners, Sunshine Storm and
Climate Mugadza. The partnership prides itself in being in the business of selling
environmentally friendly products. The partnership has a 28 February financial year-
end.
Climate Storm partnership

Extract: Statement of financial position as at 28 February 2011
“R”
Equity
Capital Account: Storm 420 000
Capital Account: Climate 900 000
Current Account: Storm 425 320
Current Account: Climate 505 730
The statement of comprehensive income before taking into account the information
below showed a profit of R1 230 400.
1. Climate is paid a regular annual salary of R250 000 for the services he renders to
the partnership. Storm is paid an annual salary of R150 000 depending on
partnership profits.
2. Storm obtained a loan from the partnership. Interest income of R30 600 was earned
on this loan.
3. On 1 September 2011, Storm increased his capital contribution by contributing an
item of property, plant and equipment with a fair value of R380 000. Depreciation
on this item has been correctly accounted for in the statement of comprehensive
income.
4. Climate withdrew R50 000 cash from the partnership on 1 June 2011. Interest on
drawings is charged at 8% per annum.
5. Partners are paid interest on capital at a rate of 7.5% per annum.
6. Storm and Climate share the remaining profits in a ratio of 2:1.
1. Prepare the statement of changes in equity of Climate Storm partnership for the
year ended 29 February 2012. The total column is not required. (19 marks)
2. Assume that the partnership recognises the current accounts of the partners as a
liability to the business. Explain when the partnership would choose to do this and
indicate whether it would affect the statement of changes in equity prepared by the
business. (5 marks)
PART B
On 1 March 2012, Sunny Weather approached the partners to acquire the partnership.
The intention is to convert the partnership into a private company named Heavy Rain
(Pty) Ltd. The partners agreed to the sale and an agreement was drafted and signed on
1 March 2012.
The terms of the agreements stated the following:

• The fair value of Climate Storm’s property, plant and equipment has been noted to
be R120 000 higher than its carrying amount.
• Trade receivables are considered to be overstated by R8 000.
• Climate Storm had created a brand which was never recognised in their book.
Sunny Weather has valued the brand at R190 000.
• Sunny Weather will pay R4 510 000 for Climate Storm partnership on 1 March 2013.
The fair market interest is 10% per annum.
1. Calculate the goodwill amount arising from the sale of the partnership on 1 March
2012. (7 marks)
2. Explain why Climate Storm partnership could not recognise the brand which they
created in their financial statement. Use any relevant definition and recognition
criteria as per the conceptual framework to support your answer. (9 marks)
3. Give reasons why Heavy Rain (Pty) Ltd would be allowed to recognise the brand
in their books. (1 mark)
4. Name one main ratio Sunny Weather could have used to analyse the viability of the
acquisition of the partnership. (2 marks)
5. Sunny Weather wanted the financial end of Heavy Rain (Pty) Ltd to coincide with
his wedding anniversary. However, Silva Cloud the accountant discouraged him
saying that the 28 February financial year coincided with the tax year which will
reduce the nightmare of preparing separate financial statements for tax and
accounting purposes.
5.1 State when companies are required to pay tax to the South African Revenue
Services. (1 mark)
QUESTION 13.7 (C)

Ignore VAT (except in part 4 of the question)
Cambodian Furnishings imports carved wooden furniture from South-East Asia.

Profits are appropriated between the two partners, Cam and Bode, according to interest
on capital, interest on drawings, and a profit-sharing ratio of 5:4 respectively. The
partnership’s activities during the year ended 30 September 2012 included the following
transactions:
1. Both partners, in accordance with the partnership agreement, were paid a regular
monthly salary amounting to R15 000 each per month.
2. On 1 October 2011, the partnership paid R48 000 for a 2-year insurance policy.
3. On 1 February 2012, Bode borrowed R50 000 from the partnership. The partnership
agreement indicates that interest on loans from partners is allowed at 8% p.a. and
interest on loans to partners is charged at 10% p.a. Bode repaid the debt on 30
September 2012.
4. On 1 April 2012, Cam withdrew R10 000 cash from the partnership. This amount
represented the interest on capital that had accrued to her during the six months
ended 1 April 2012. The partnership agreement indicates that interest on drawings
is charged at 5% per annum.
5. The partnership uses the revaluation model for land. The fair value of the land had
increased by R14 000 over the year ended 30 September 2012.
6. The following information was extracted from the post-adjustment trial balance of
Cambodian Furnishings as at 30 September 2012:
R
Property, plant and equipment (PPE) 365 000
Accumulated depreciation: PPE 65 000
Inventory 31 000
Prepaid operating expenses 34 000
Bank overdraft 60 000
On 1 October 2012, the partners of Cambodian Furnishings agreed to sell their entire
business (that is, all assets and liabilities) to Angor Traders for R550 000 cash. Angor
Traders considers the fair value of PPE to be R320 000, and brands to be worth R70 000.
The acquirer also believes that a total of R12 000 of trade receivables is uncollectible,
and that inventory is undervalued by R5 000.
1. Briefly explain why, as part of equity, the statement of financial position of a

partnership will include Current Accounts, whereas the statement of financial
position of a company will include the line item retained earnings. (2 marks)

2. For transactions (1) to (5), briefly indicate whether each transaction affects the
profit for the year ended 30 September 2012 of the partnership Cambodian
Furnishings. If the transaction does affect the profit for the year, indicate whether
profit will increase or decrease, by how much, and why profit is affected. If the
transaction does not affect the profit for the year, briefly indicate why not.
3. Refer to transaction (6). (11 marks)
3.1 Calculate the goodwill acquired by Angor Traders on 1 October 2012. (7 marks)
3.2 Describe and explain the conditions necessary for goodwill to be recognised.
Your answer should include a brief definition of goodwill. (3 marks)
3.3 Calculate by how much the sale of Cambodian Furnishings will increase or
decrease the amount to which Cam is entitled from the partnership. (4 marks)
4. For each item in Column A in the table below, indicate whether this item could
appear on the financial statement shown next to it in Column B, for the business
form shown in Column C. If the specified item could appear, briefly describe the
condition(s) under which the item would appear. If the specified item could not
appear, briefly explain why.
QUESTION 13.8 (B)

On 1 July 2009, Dheny and Saran, both engineers, purchased the sole South African
agency to import and sell solar inverters, which convert the output of solar panels from
direct current (DC) into alternating current (AC). Dheny and Saran each contributed
capital of R25 000. They have made no further capital contributions. On 1 February
2010, Dheny and Saran invited Merka to join their partnership. Merka did not make a
capital contribution, but instead lent the partnership R60 000 at an interest rate of 8%
per annum. The interest is paid annually and there are no fixed repayment terms. The
business is registered VAT vendor, uses the periodic method to account for inventory,
and applies a consistent mark-up on cost of 40%. Merka had an overdrawn (that is,
debit) Current Account balance at 1 July 2011 of R12 300.
The partnership agreement includes the following:

1. Interest on Capital Account balances is allowed at 10% per annum.
2. Dheny and Saran work full-time in the business, and are each paid a regular annual
salary of R40 000. Merka has her own separate business and consults to the
partnership when required. Her annual salary of R20 000 is authorised at the end of
each year only if there are sufficient profits to pay her salary.
3. No interest is charged on drawings.
4. Remaining profits and losses are shared in the ratio of 3:1:2 (Dheny:Saran:Merka).
Profit for the year ended 30 June 2012 amounts to R274 000 before accounting for any
transactions with the partners during the year:
1. Dheny, Saran and Merka were all paid their salaries for the year (see point (2)
above).
2. In addition to their salaries, Dheny and Saran each withdrew cash of R10 000 and
Merka withdrew R2 000 in cash.
2. On 1 February 2012, Merka took one of the solar inverters to use at home. The
selling price of an inverter is R19 600 excluding VAT.
a) Calculate the net profit for the year ended 30 June 2012. (4 marks)
b) What amount of the profit that you calculated in part (a) will be shared in the
profit- sharing ratio? (2 marks)
c) Prepare Merka’s Current Account for the year ended 30 June 2012. Ignore dates.
(6 marks)
QUESTION 13.9 (B)
Colour-me-Happy is an interior design business in Cape Town. Mark and Chris have
been in partnership, sharing profits 3:2, for a number of years. The partnership has a
financial year-end of 30 June. On 1 July 2012, the assets and liabilities of Colour-me-
Happy were sold to a competing business for R600 000.
Trial balance of Colour-me-Happy
Trial balance of Colour-me-Happy as at 30 June 2012

Debit Credit
R R
Profit & loss 350 000

Interest on capital 22 500
Interest on drawings 9 000
Drawings – Mark 52 800
Current Account – Chris 117 000
Current Account – Mark 6 000
Capital Account – Chris 180 000
Capital Account – Mark 24 000
Property, plant, equipment (PPE) 360 000
Accumulated depreciation – PPE 88 300
Inventory 244 500
Bank 22 500
805 300 805 300
All identifiable assets and liabilities of the partnership were fairly valued at 30 June
2012, except that PPE had a fair value of R250 000 and receivables amounting to R7 000
were considered unlikely to be collected.
1. Calculate the value of goodwill at 1 July 2012. (4 marks)

2. Calculate the amount that Chris should receive on the sale of the partnership.
(6 marks)
QUESTION 13.10 (A)
Ben, Adriaan and Lloyd are in a partnership sharing profits and losses in a 5:3:2 ratio.
The following balances have been extracted from the trial balance of the partnership at
29 February 20x2:
Dr Cr
Capital Account
Ben 180 000
Adriaan 168 000
Lloyd 123 000
Current Account
Ben 25 350
Adriaan 15 860
Lloyd 6 350
The business had generated a profit of R35 950 (before taking in to consideration the
transactions below.
The following transactions still has to be accounted for:

1. The partnership agreement states that interest at 7.5% per annum should be
accrued to each partner based on the balance in their Capital Accounts.
2. The salaries of Adriaan, R18 000, and Lloyd, R15 000, in their capacities as owners
still need to be accounted for. The salaries are payable if the business generates
sufficient profit
3. All relevant transactions with partners are accounted for in their Current Accounts.
1. Calculate the profit that should be distributed to each partner based on the
requirements of the partnership agreement.
2. Prepare the Current Accounts for all partners as they would appear in the General
Ledger as at 29 February 20x2.

STATEMENT OF CASH FLOWS

Ignore dividends tax.
The following reconciliation of profit before tax and after interest to cash flows from
operations of Dragonfly Ltd has been correctly prepared for the year ended 30 June X5:
Profit before tax R362 000

Adjustments:
Depreciation 72 000
Decrease in inventories 32 000
Increase in allowance for doubtful debts 6 000
Increase in trade payable 67 200
Increase in trade receivable (36 000)
Profit on sale of fixed assets (40 000)
Cash generated from operations R482 400
1. Cash sales for the year amounts to R1 268 000 and credit sales to R2 540 000.
2. The average mark-up used during the year was 40% on cost.
3. The tax charge for the year amounted to 30% of the profit before tax.
4. In addition to paying the balance of tax owing at 1 July X4, the company paid
provisional tax during the year of R60 000.
5. The company declared a final dividend of R48 000 on the last day of the financial
year (an increase of 20% over the previous year’s final dividend). An interim
dividend of R32 000 had been declared and paid during the financial year.
Shareholders are not offered the option of receiving shares in lieu of dividends. The
balance on the shareholders for dividend account in the ledger at 30 June X5
amounted to R48 000 (credit).
6. The following ledger balances at 1 July X4 are available:
Trade payable (Creditors’ Control) 24 800
SARS (tax owing) 52 000
The following ledger balances at 1 July X5 are available:

Inventory on hand R104 000
Trade receivables (Debtors’ Control) 126 000
7. Profit on sale of fixed assets is the only ‘‘other income’’ for this year. This has been
included in net operating costs [see point (8) below].
8. Net operating costs amounted to R726 000 for the year. This includes interest
expense of R19 200.
9. The company borrowed R160 000 on 1 October X4 at an interest rate of 16% per
annum, payable six monthly in arrears, commencing on 1 April X5.
1. Prepare the operating activities section of the statement of cash flows (direct
method) for the year ended 30 June X5. (Notes are not required.) (21 marks)
2. What information is revealed by the cash flows from operating activities section of
a statement of cash flows? Briefly discuss. (4 marks)

Inspired Consultants (Pty) Ltd is a company started by Trish Lord to provide personal
development and leadership interventions in large corporations. The accountant of the
business, Kgomotso Mabena, has recently taken maternity leave and has left an
incomplete set of accounts in her office. The financial statements are to be presented to
potential investors at a conference at the end of June, and you have been asked to
ensure that the information presented to these investors is accurate and complete.
Below is a list of all the information you will need to complete your task.

List of General Ledger balances at 31 May
Account X5 X4
Share capital (represented by 180 000 class A shares) ( 360 000) ( 360 000)
Accumulated profit (30 204.4) (16 454.4)
Vehicles 256 055 256 055
Computer and office equipment 555 600 555 600
Accumulated depreciation on vehicles (35 534) (35 534)
Accumulated depreciation on equipment (52 877) (52 877)
Investments 102 000 40 000
Trade receivable 91 290 35 000
Trade payable (38 129) (41 000)
Consumable stores asset 4 667 −
Bank and cash 193 500 ( 260 039.6)
Interest-bearing borrowings (95 000) ( 107 000)
Revenue from services rendered (1 046 433) ( 755 600)
Interest expense 10 400 17 850
Investment income (7 720) (4 000)
Prepaid insurance 12 300 −
Rental income (15 990) −
Employment costs 445 149.4 490 000
Computer software expense 116 820 190 000
Administration expenses 45 550 48 000
Stationery asset 12 556 −
Note:
( ) denotes a credit balance
1. The borrowings are represented by a loan negotiated two years earlier with

Investec Bank at an interest rate of 15%. The balance outstanding at 31 May X4 was
R107 000. Repayments of R6 000 are made every four months. The first repayment
for the X5 financial year was made on 30 September X4. The repayment due on 31
May X5 was paid only on 4 June X4.
2. The investment details are as follows:
Investment Interest Time held Timing of interest

amount rate receipts
R40 000 10% 1/01/X4 − current 31st of each month
day
R62 000 12% 1/08/X5 − current After every 6 months
day
3. All assets are depreciated at 20% on the straight-line basis. Vehicles have an
estimated residual value of R45 660 and equipment has an estimated residual value
of R60 300. On 1 January X5, computer equipment costing R15 000 was transferred
into the business in exchange for 4 740 class A shares. The equipment had a useful
life of 5 years and a residual value of R1 200 when it was purchased on 1 January
X3. No entries in the accounting records were processed to reflect the acquisition,
and the residual value has not been included in the estimate for all other
equipment.
4. The company started renting out part of its office premises from 1 June X4 to a
small trading business for a monthly rental of R1 230.
5. The business is insured by Old Mutual against any loss of assets and claims from
third parties. The policy was upgraded on 1 April X5. Monthly premiums of R600
had been paid prior to this date. Premiums increased by 5% because of the
upgrade. On 10 April X5, the company decided to pay all the premiums for the
period 1 April X5 to 1 February X6. All insurance payments are debited to an asset
account called prepaid insurance.
6. The following stocks are on hand at 31 May X5:
Consumable stores R 890

Stationery R5 234
7. On 1 October X4, 50 000 new class A shares were issued at a price of R3.40 per
share. This was the only share issue (other than the shares issued in relation to the
computer equipment acquired on 1 January X5 − see point (3)) since the inception
of the company. The accountant did not process the share issue in the accounting
records. When preparing the bank reconciliation, the bank balance in the
company’s records was adjusted to reflect the money received on the issue, but no
other entry was made in the records.
1. Prepare the adjusting journal entries required at 31 May X5 arising from points (1)
to (6) of the additional information. You may ignore the journal entry(ies) relating
to the acquisition of the computer equipment and the related share issue, but all
other adjusting journal entries must be processed. (27 marks)
2. Prepare the statement of cash flows of Inspired Consultants (Pty) Ltd for the year
ended 31 May X5, using the direct method. (36 marks)

The statement of comprehensive income and a schedule reconciling cash flows from
operating activities to net income are provided below (R in millions) for Mike Sap
Computers:
Mike Sap Computers

Statement of comprehensive income For the year ended 31 December X0
Sales 150
Less: Cost of goods sold (90)
Gross margin (gross profit) 60
Less: Operating expenses (43)

Salaries expense 20
Insurance expense 10
Depreciation expense 5
Bad debt expense 2
Interest expense 6
17
Profit on sale of equipment 12
Loss on sale of land (3)
Net income before tax 26
Income tax expense (13)
Net income after tax R13
Mike Sap Computers

Reconciliation of net income (accrual accounting) to net cash flows (cash basis)
from operating activities
Net income 13
Adjustments for non-cash effects:
Decrease in trade receivables 5
Profit on sale of equipment (12)
Increase in inventory (6)
Increase in trade payables 9
Increase in salaries payable 3
Depreciation expense 5
Decrease in prepaid insurance 2
Loss on sale of land 3
Increase in income tax payable 9
Net cash flows from operating activities R31
Calculate each of the following amounts for Mike Sap Computers:

1. Cash received from customers during accounting period.
2. Cash paid to suppliers of goods during the accounting period.
3. Cash paid to employees during the accounting period.
4. Cash paid for insurance during the accounting period.
5. Cash paid for income taxes during the accounting period.


The financial statements of Censored Limited for the year ended 31 December X9 have
been presented below. The financial director has volunteered for early retirement and
will be unable to complete the financial statements in time for the audit. You have been
hired to complete the financial statements and comment on the results for the period
under review.
Censored Limited
Extracts from the statement of comprehensive income
X9 X8
Turnover 2 570 000 2 305 000
Cost of goods sold (1 080 000) (908 000)
Investment income 78 000 35 000
Operating expenses (1 243 000) (1356 000)
Interest on long-term borrowings (30 000) (50 000)
Censored Limited
Statement of financial position at 31 December X9
ASSETS X9 X8
Non-current assets 1 655 000 1 430 000
Current assets 353 500 243 000

Bank 124 500 4 000
Inventory 160 000 189 000
Total assets 2 008 500 1 673 000
EQUITY AND LIABILITIES

Share capital and reserves
Share capital − Class A (X9: 600 000 shares; X8: 500 000 shares) 870 000 630 000
Retained earnings 806 500 600 000

Non-current liabilities 250 000 350 000
Current liabilities 132 000 93 000

South African Revenue Services 12 000 8 000
Total equity and liabilities 2 008 500 1 673 000
a) Included in investment income are dividends of R10 000 received during the year.
The only other income from outside investments is interest. No dividends were
paid or declared during X9.
b) The amount disclosed for non-current assets is made up as follows (all amounts in
R’000):
c) During the year, plant with a cost of R256 000, vehicles with a cost of R800 000, and
equipment with a cost of R400 000 were sold. The plant had been purchased two
and a half years earlier and was expected to be used for five years in the generation
of income. The vehicles had been purchased four years earlier and had estimated
useful lives of 8 years at the time of purchase. The cost of equipment sold was R400
000, while accumulated depreciation on the equipment sold was R250 000.
d) On 1 June X9, 100 000 Class A shares were offered to the public at an issue price of
R2.60. The issue was undersubscribed by 20 000 shares. The underwriters were
Millennium Merchant Bank, who negotiated a commission of 5% of the total issue
price for services provided. The shares were issued on 1 August X9. Share issue
expenses of R7 000 were paid, together with commission of R13 000, on 15 August
X9.
e) Long-term borrowings of R200 000 were repaid during the year. Some of these
borrowings were replaced with new long-term borrowings, of which R10 000 is
repayable in the year X10, and has been transferred to trade payables.
f) Included in operating expenses are:
Profit on disposal of vehicle R3 200

Loss on disposal of plant R18 500
Profit on disposal of equipment R6 800
Interest expense R5 500
1. Prepare the journal entries, which would have been processed for the issue of Class
A shares, including any closing entries. (NO narrations are required.) (8 marks)
2. Prepare the statement of cash flows for the period ended 31 December X9 using the
direct method. (No notes, reconciliation or comparatives are required.) (37 marks)
3. Explain why cash flow information is important to users of financial statements.
4. Explain the differences in the presentation of financial statements (5 marks)
between companies and organisations formed without a profit motive. (5 marks)
QUESTION 14.5 (C)

Ignore VAT
Assume dividends tax rate of 20%.
Assume income tax rate of 28%.
Go Green Ltd (Go Green) is a company situated in Mqanduli in the Eastern Cape. The
company produces and sells dual energy (electricity and solar energy) products and
appliances. The company was incorporated a number of years ago and has 31 October
year-end.
Provided below is an extract of the statement of financial position for the 2012 and 2011
financial years.
Statement of financial position of Go Green Ltd as at 31 October

2012 2011

R R
Assets
Non-current asset
Property, plant and equipment ? 10 190 000
Investments 1 170 000 720 000
Current assets
Prepaid expense 123 700 254 300
Trade receivables 8 892 500 8 362 100
Inventory 7 219 200 7 788 800
Bank ? 3 110 700
SARS: Income tax - 532 100
Total assets ? 30 958 000

Equity
Share capital: Class B ? 3 024 000
Retained earnings 8 372 150 9 782 800
Revaluation surplus 400 000 -
Liability
Loan 2 500 000 ?
Non-current liabilities
Accrued expenses 91 400 72 500
Accrued interest ? 25 000
SARS: Income tax 733 200 -

Trade payables 2 982 700 2 456 700
? ?
1. Class A shares have voting rights but no right to a fixed dividend.
Class B shares have no voting rights but have a right to fixed cumulative dividend
distribution.
2. Go Green issued a prospectus (invite to the public to buy shares) to the public on 1
March 2012. The company offered 250 000, R20 15% Class B shares at face value.
The share issue was underwritten by Franc Bank at a commission of 5%. By 15
April 2012, the closing date for the applications, only 80% of the shares had been
applied for by the public. The shares were issued on 30 April 2012. Share issue costs
of R45 000 excluding the underwriters commission were paid on the same date.
3. The only loan owed by Go Green on 1 November 2011 had been granted by Franc
Bank on 1 February 2008. The loan is repayable in four equal annual installments
commencing on 1 February 2009. Interest is charged at 16% per annum and is
payable half-yearly in arrears commencing on 1 August 2008. All payments were
made on their respective dates.
4. On 1 February 2012 Go Green took out a further loan with Green Bank in order to
finance the expansion into alternative energy sources. The loan amount is payable
over three year in six equal half-yearly (every six months) installments
commencing on 1 August2012. Interest on the loan is charged at 12% per annum
and is payable half-yearly in arrears commencing on 1 August 2012.
5. The following property, plant and equipment reconciliation appeared in the notes
to the financial statements of Go Green:

• Land is accounted for on the revaluation model. Land was revalued for the first
time during the current year. No land was sold during the current year.
• Buildings are accounted for on the cost model and are depreciated on a straight line
basis with no residual value. All buildings on hand on 1 November 2011 were
acquired on 1 May 2004. The current year additions were ready and available for
use on 1 August 2012. No buildings were sold during the current year.
• Equipment is accounted for on the cost model and is depreciated. An item of
equipment which had been previously used on the production of a discontinued
production line, had a carrying amount of R740 000 at 31 October 2012. The benefits
to be derived from its use at 31 October 2012 amounted to R690 000. This item
could also be sold for R750 000 after minor modifications costing R70 000 are made.
Another item of equipment was traded in at a profit of R90 400. There were no
other sales or acquisitions other than those mentioned above.
6. During the current year an amount of R68 000 was received from Solar Glass, (a
debtor) whose account was previously written off. The accountant correctly
accounted for the bad debts in the current year amounting to R535 000. The
accountant further estimated that the allowance for doubtful debts would decrease
by an amount of R248 000.
7. Operating profit correctly calculated as reflected on the statement of
comprehensive income amounted to R9 539 200. Taxable income is correctly
calculated at R8 842 500.
8. Go Green received dividends amounting to R180 000 from South African resident
companies.
9. On 31 July 2012, the directors declared a Class A dividend of 172.5 cents per share.
40% of Go Green Class A shareholders are South African resident companies. On
declaration, Go Green had 1 500 000 and 415 000 issued Class A and Class B shares
respectively. Go Green’s last dividend declaration was on 31 October 2010.
Dividends and related taxes are paid one month after declaration.
1. Refer to additional information 2.

Prepare the journal entry/ies that would have been processed in the books of Go
Green on 15 April 2012. Narrations are required. (5 marks)
2. Explain why you have chosen to credit the relevant account in question 1 above.
Use any relevant definition and recognition criteria as per the IFRS Framework to
support your answer. (6 marks)
3. Prepare the closing entry/ies required to close off the share issue cost incurred as a
result of the share issue. (4 marks)
4. Prepare the loan account as it would appear in the books of Go Green for the year
ended 31 October 2012. (8 marks)

5. Calculate and show where interest expense will be disclosed in the statement of
comprehensive income of Go Green for the year ended 31 October 2012. (7 marks)
6. Prepare the bad debts expense account as it would appear in the books of Go Green
for the year ended 31 October 2012. (3 marks)
7. Calculate the dividends tax incurred by Go Green during the 2012 financial year.
8. Briefly explain whether there is a difference between profit before tax and (8 marks)
taxable income. (2 marks)
9. Prepare the operating activities and investing activities sections of the Statement
of cash flows for the year ended 31 October 2012 using the indirect method.
(30 marks)
QUESTION 14.6 (C)
Ignore VAT.
Assume company income tax at a rate of 28%.
Assume dividends tax at a rate of 20%.
Natural Cures Ltd is a business based in Noordhoek that buys and sells natural
medicine. The company has a year-end of 30 June. The directors are thinking of
purchasing an organic farm in the Elgin area but they are not sure whether the business
will be able to afford it. You have been provided with the following information:
Natural Cures Ltd: Extract of the statement of comprehensive income

for the year ended 30 June 2012
R
Sales 2 068 718
Cost of sales (1 090 688)
Gross profit 978 030
Net operating costs (358 821)
Operating profit 619 209
Net finance costs ?
Profit before tax ?
Taxation (160 400)
Profit for the year ?
Natural Cures Ltd: Extract of the statement of financial position
as at 30 June
2012 2011
R R
Current assets
Inventory 215 430 187 507
Prepaid operating expenses 11 500 13 300
Bank 0 443 145
Equity
Share capital: Class A ? 1 500 000
Retained earnings ? 1 567 714
Revaluation surplus ? 51 667
Loans 250 000 180 000
Current liabilities
Accrued interest expense ? ?
SARS (Income tax) 46 463 31 033
Accrued operating expenses 4 500 6 800
Natural Cures Ltd: Extract of the notes to the financial statements

for the year ended 30 June 2012
1. On 1 March 2012, Natural Cures Ltd offered a number of Class A shares to the
public at an issue price of R11. The share issue was underwritten for an agreed
commission of 5%. Applications for the share issue closed on 30 April 2012. The
share issue was 20% oversubscribed and the directors decided to issue all shares
applied for (including the oversubscription). The shares were issued on 15 May
2012. Share issue costs, excluding the underwriter’s commission, amounted to R84
900. All share issue costs (including the underwriter’s commission) were paid in
cash on the day that the shares were issued.
2. On 2 January 2012, the directors declared the only dividend for the financial year at
a rate of 35 cents per share. At that time, 40% of the company’s shareholders were
SA-resident companies. The dividend and dividends tax were paid on 1 February
2012.
3. The outstanding loan is being repaid over a period of 10 years. Repayments of R30
000 are made every 6 months on 1 October and 1 April. Interest, charged at 9% per
annum, is paid every 6 months in arrears on 30 September and 31 March. This was
the only loan raised by the company until 30 June 2012, on which date an
additional loan was raised at 7% per annum.
4. Natural Cures Ltd has been renting a factory for the last three years. Rent is paid in
advance by Natural Cures Ltd on the last day of the preceding month, that is, the
rental for April is paid on 31 March. The rental contract states that rent increases by
10% on 1 January each year. Prepaid rent at year-end is included in the prepaid
operating expenses figure on the statement of financial position. The amount of
prepaid rent expense on 30 June 2011 was R3 630.
5. Net operating costs includes the effect of:
Depreciation expense 46 000

Profit on sale of non-current asset 23 500
Rent expense 45 738
Dividend income 42 000
6. The company earned interest income of R5 000 during the year ended 30 June 2012.
The financial director has chosen to include this figure in the calculation of the “net
finance costs” on the statement of comprehensive income.
1. Prepare the general journal entry(ies) required to record the payments of the
dividend and dividends tax on 1 February 2012. Ignore dates and narrations.
2. Explain how the payments of the dividends tax will be reported in the (5 marks)
statement of cash flows of Natural Cures Ltd for the year ended 30 June 2012.
Indicate clearly which line item(s) of the statement of cash flows will be affected, by
how much, and why. (3 marks)
3. Prepare the operating activities section of the statement of cash flows of Natural
Cures Ltd for the year ended 30 June 2012. The company uses the direct method
and reports all cash flows relating to interest, tax and dividends in the operating
activities section. (25 marks)
4. Prepare the rent expense account as it would appear in the General Ledger of
Natural Cures Ltd for the year ended 30 June 2012. Show dates. Do not show each
payment of rent as a separate entry; rather summarise all payments in one entry.
5. Prepare the financing activities section of the statement of cash flows for (5 marks)
Natural Cures Ltd for the year ended 30 June 2012. You do not need to provide a
title or heading. (10 marks)
QUESTION 14.7 (B)

Ignore VAT.
You volunteer at a community service organisation that has assigned you to help an
Internet cafe in Gugulethu to prepare its financial statements for the year ended 30
September 2012. The business, GoogleEthu, makes most of its income by selling time on
computers to its customers. The business also sells computer accessories, for which it
uses the periodic inventory system.
PART A
The business’s sole proprietor, Alatha, provides you with an extract of the statement of
financial position as at 30 September 2011 (you have no reason to believe that it is
incorrect):
GoogleEthu: Statement of financial position (extract)

as at 30 September 2011
R
Current assets:
Inventory 15 000
Prepaid rent expense 2 000

Current liabilities:
Income received in advance 43 000
Alatha has a little bookkeeping experience and therefore he has kept the books of the
business this year, but would like your help with some year-end adjustments. You
should assume that the following extract of the pre-adjustment trial balance is correct
unless told otherwise:
GoogleEthu: Pre-adjustment trial balance (extract)

as at 30 September 2012
DR CR
Sales income – computer time 180 000
Sales income – computer accessories 50 000
Purchases 28 000
Profit on sale of equipment 4 500
Interest income 700
Bad debts recovered 400
Operating expenses 46 000
Inventory (1 October 2011) 15 000
Prepaid rent expense (1 October 2011) 2 000
Loan 73 500
Income received in advance (1 October 2011) 43 000
1. GoogleEthu sells computer time according to the following price structure:
Description Cost
per
hour
Pay later Customers pay within 30 days after using a computer; R60 per
maximum credit is for 5 hours. hour
Pay now Customers simply pay cash when they use a computer R50 per
hour
Pay in Customers buy a coupon which entitles them to 5 hours, to R40 per
advance be used within 6 months of purchase. hour
Alatha knows how to record credit sales, so “pay later” sales were recorded as sales
income on the date of providing the service, and receipts of cash from these sales
were credited to trade receivables. He has also recorded all bad debts and bad
debts recovered correctly.
Alatha credited all receipts from “pay now” and “pay in advance” customers to the
“sales income – computer time” account. During the year ended 30 September
2012, GoogleEthu sold 800 “pay in advance” coupons, and “pay in advance”
customers spent 4 250 hours on GoogleEthu’s computers. 1 000 of these hours were
for coupons purchased in the year ended 30 September 2011. Alatha was surprised
to discover that a total of 75 hours of computer time sold in the prior year were
never used and had therefore expired.
2. GoogleEthu buys computer accessories on credit, but sells them strictly for cash.
On 30 September 2012, computer accessories costing R12 000 were on hand, though
some had become obsolete, and could only be sold for R300, despite costing
GoogleEthu R500.
3. On 31 January 2012, GoogleEthu raised a loan for the first time. The amount
borrowed was R100 000. The terms of the loan are that every six months, starting
on 31 July 2012, GoogleEthu is to repay one-fifth of the loan, plus the interest
relating to the previous six months. Alatha was not sure how to record the payment
on 31 July 2012, so he debited the entire payment to the loan account.
4. The business has been renting premises for the last two years. Alatha is unsure how
to record rental payments, and so he has passed no entries with respect to rent
expense. He tells you: “I know my rent expense for the year is R24 000, because my
monthly rent has been R2 000 all year. I always have to pay the next month’s rent at
the end of each month, and the landlord put the rent up to R2 500 for October
2012.”
5. Operating expenses in the trial balance includes the following:

Maintenance expense 6 000

1. Prepare the adjusting journal entry(ies) necessary to report the correct sales
income for the 800 “pay in advance” coupons sold during the year ended 30
September 2012. Ignore dates and narrations. (5 marks)
2. Explain why it is correct to recognise the element that you credited in your answer
to part 1 above. Your answer should refer to the relevant definition and
recognition criteria from the IFRS Framework. (7 marks)
3. Describe the effect of the 75 hours of computer time sold in the prior year that were
never used and therefore expired, on the statement of comprehensive income for
the year ended 30 September 2012. Explain your answer, referring to the relevant
definition from the IFRS Framework. If there is no effect, explain why not. (3 marks)
4. Prepare the operating activities section of the statement of cash flows of
GoogleEthu for the year ended 30 September 2012, using the direct method.
Interest cash flows are reported in the operating activities section. (14 marks)
QUESTION 14.8 (C)

Assume dividends tax of 20% and a company tax rate of 28%.
Soap Suds Ltd is a public company that manufactures a wide variety of bath and
shower products and accessories. The company has a year-end of 31 December. The
company’s main manufacturing plant is situated in Paarden Eiland in Cape Town.
Clients are spread across Africa and include Woolworths, Home Etc and Mr Price
Home Zone. You have been provided with the following information for the financial
year that ended on 31 December X4:

Class A shares: Voting rights, no right to a fixed distribution.
1. On 1 September X4, 300 000 class A shares were offered to the public at R22 each.
The share issue was underwritten by Smarty Bank for an agreed commission of 7%.
Applications for the shares closed on 31 October X4. 90% of the shares were applied
for by the public. The shares were allotted by the company on 1 December X4.
Share issue costs, excluding the underwriter’s commission, amounted to R139 800.
All share issue costs (including the underwriter’s commission) were paid in cash on

the day that the shares were allotted. The number of class A shares in issue at 31
December X4 amounted to 3 300 000.
2. On 30 June X4, the directors declared an interim dividend of 25 cents per share. On
20 December X4, the directors declared a final dividend of 40 cents per share. Forty
percent of shareholders are SA resident companies.
3. Soap Suds Ltd had not earned any dividend income during the X4 financial year.
4. Profit for the year after finance costs but before taxation, amounted to R18 650 400.
This was equal to taxable income for the current financial year.
5. Soap Suds Ltd hired Mr Conservative, an independent valuator, to revalue the
company’s land. The last valuation took place on 31 December X2 and showed that
the land had a fair value of R5 950 700. Mr Conservative submitted a report to Soap
Suds Ltd on 31 December X4 that reflected a fair value for land of R5 500 000.
According to the accounting policy note regarding PPE, Soap Suds Ltd has always
applied the revaluation model for land. Land is not depreciated.
6. A portion of the plant and machinery that had originally been purchased for R900
000 on 1 June X2 was sold for R670 000 (cash) on 1 November X4. Plant and
machinery is depreciated at 15% per annum on the straight line method. The plant
and machinery that was sold had a residual value of R250 000. No other plant and
machinery had been purchased or sold during the X4 financial year.
7. The total depreciation expense for vehicles for the year ended 31 December X4
amounted to R400 000.
8. Soap Suds Ltd rents out a part of the factory in Paarden Eiland to a small business
enterprise that manufactures candles. Rent is received in advance on the last day of
each month. The rental agreement states that the monthly rental is increased by 8%
on 1 April each year.
9. Income from the sale of goods for the current financial year amounted to R62 500
490. 80% of income from the sale of goods is represented by credit sales. Soap Suds
Ltd applies a 40% mark-up on selling price.
10. Included in the statement of financial performance of Soap Suds Ltd for the year
ended 31 December X4 were net operating costs amounting to R5 653 246. This
amount included, amongst others, the following items:
R
Rental income ?
Profit/loss on sale of plant and machinery ?
Depreciation 1 890 655
11. There was no profit or loss on the sale of investments.

12. The share price of the company as at 31 December X4 amounted to R55.99.

1.
1.1 Prepare the general journal entry that would have been processed by Soap
Suds Ltd to record the cash received for the applications for shares during the
month of October X8. Ignore dates and narrations. (2 marks)
1.2 Refer to your answer in 1.2 above. Identify what accounting element you
credited. Explain why you credited this element. Your answer MUST include
full definitions and recognition criteria contained in the accounting
framework. (7 marks)
2. Prepare the shareholders for dividends account as it would appear in the General
Ledger of Soap Suds Ltd for the year ended 31 December X4. (5 marks)
3. Refer to point (5) of the additional information.
Prepare all the general journal entries that would have been processed by Soap
Suds Ltd for the year ended 31 December X4 to record the information in point (5)
of the additional information. Ignore dates and narrations. (4 marks)
Prepare all the general journal entries that would have been processed by Soap
Suds Ltd for the year ended 31 December X4 to record the information in point (6)
of the additional information. Ignore dates and narrations. (6 marks)
Prepare the rent income account as it would appear in the General Ledger of Soap
Suds Ltd for the year ended 31 December X4. All relevant reversals and
adjustments need to be shown. Show all dates. You do not need to show each bank
entry separately. (6 marks)
6. Prepare the statement of changes in equity of Soap Suds Ltd for the year ended 31
December X4. You are NOT required to provide a TOTAL column. (9 marks)
7. Prepare the operating activities section of the cash flow statement of Soap Suds
Ltd for the year ended 31 December X4 on the indirect method. (15 marks)
8. Refer to your answer in 5 above. Fully explain WHY you have treated rent received
in advance in the way that you have. Include in your explanation the amount of the
rental payments, as well as the amount of rent income, that you calculated in
number (5) above. (3 marks)
QUESTION 14.9 (C)

Ignore vat.

Assume a company tax rate of 28%.
Central Cement Ltd specialises in limestone-based cement products. The company

imports limestone from Namibia and then processes it at a factory in Epping. You have
been provided with the following financial information for the year ended 29 February
X8:
Statement of financial position of Central Cement Ltd as at 29 February X8

X8 X7
R R
ASSETS
Non-current assets
Property, plant and equipment (PPE) ? 2 298 200
Investments 550 000 0
Current assets
Inventory 196 225 210 949
SARS (Income tax) 29 931 0
Prepaid operating expenses 26 250 17 500
Accrued dividend income 40 000 0
Bank ? 0
Total assets ? 2 587 583
EQUITY
Share capital: Class A ? 800 000
Class A 150 000 shares(28/02/08)
Share capital: Class B 500 000 500 000
Revaluation surplus 400 000 120 000
Retained earnings ? 212 656

LIABILITIES
Loan 500 000 300 000
Current liabilities
Shareholders for dividends ? 0
SARS (Income tax) 0 71 750
Accrued operating expenses 18 375 13 000
Total equity and liabilities ? 2 587 583
Statement of financial performance of Central Cement Ltd for the year ended 29
February X8
R
Sales 4 322 500
Cost of sales expense (2 082 500)
Net operating costs (1 102 500)
Operating profit 1 137 500
Interest expense (68 125)
Profit before tax 1 069 375
Taxation expense ?
Profit for year ?
1. Land is measured using the revaluation model. Machinery and vehicles are
measured using the cost model.

The PPE reconciliation note to the financial statements for the year ended 29
2. February X8 contained the following information:
Land Vehicles Machinery

Gross carrying amount at 1 March X7 1 500 000 450 000 820 000
Gross carrying amount at 29 February X8 2 100 000 450 000 ?
3. Land is not depreciated. The company’s only vehicle was purchased on 1 March X4
and has an estimated useful life of 180 000 km and no residual value.
Information relating to the depreciation of the company’s two machines is as follows:
4. There were no disposals of land during the year ended 29 February X8. There were
no acquisitions or disposals of vehicles during the year. The following information
includes all acquisitions and disposals of machinery in the year:
4.1 To make the cement finer, an additional part was imported and installed into
Machine B. The new cement is expected to be more popular, and thus to
improve profitability. The additional part was installed on 1 April X7, and on
this date the purchase price of R228 000 and import duties of R22 800 were
paid. An additional R30 000 was spent to train employees to use the new part
correctly. The training was completed and paid for on 1 May X7. On this date,
installation costs of R7 500 were also paid, and the new part was ready for use.
The new part extended the estimated useful life of Machine B to a total of 6
years. The directors decided to account for the change in Machine B’s
estimated useful life from 1 May X7. The residual value of Machine B is
unchanged. The new part will last for the new remaining useful life of Machine
B, and has no residual value.
4.2 On 1 July X7, the company paid for unexpected repairs and maintenance on
Machine B amounting to R125 000. The annual maintenance check was also
performed on 31 December X7, at a cost of R350 000.
4.3 On 1 November X7 the company sold Machine A for R260 000 cash.
5. On 29 February X8, the company’s vehicle was in a minor accident. By that date,
the vehicle had been driven for 85 000 km, of which 15 000 km was in the current
year. The value in use of the vehicle was R220 000. The vehicle could be sold for
R240 000 if repairs amounting to R8 000 were done. The business intends to
continue using the vehicle without doing these repairs. There has been no change
in the estimated useful life or the residual value of the vehicle.

6. Authorised share capital includes 3 million Class A shares. On 1 August X7, 200 000
ordinary shares were offered to the public at R12 each. The share issue was
underwritten by Otonga Bank for an agreed commission of 4%. Applications for
the shares closed on 31 October X7. The issue was oversubscribed by 20%. On 1
January X8, the shares were issued by the company, and any unsuccessful
applications were refunded. Share issue costs (excluding the underwriter’s
commission) amounted to R240 000. The share issue costs and the underwriter’s
commission were paid in cash on the day that the shares were allotted. Class A
shares have voting rights and no right to a fixed distribution.
7. Authorised share capital includes 500 000 R10 15% Class B shares. The Class B
shares were issued at R10 on 31 December X4. Class B shares have no voting rights
and have the right to a fixed cumulative distribution.
8. The company successfully negotiated a loan of R295 000 on 1 December X7. This
was the only loan raised by the company during the year ended 29 February X8.
9. Net operating costs include the following:
R
Depreciation expense ?
Profit/Loss on sale of machine ?
Insurance expense 60 400
Distribution and selling expenses 345 800
Impairment expense ?
Dividend income: Nama Ltd 120 000
10. On 1 March X7, Central Cement Ltd purchased shares in Nama Ltd, a listed South
African company at a cost of R550 000. No other long-term investments were
purchased or sold during the year ended 29 February X8.
11. On 31 December X7, the directors declared a Class A dividend of 40 cents per
share. The company had last declared a dividend on 31 December X5. The
dividends were paid on 31 January X8. All shareholders in the company were
individuals.
12. Taxable income for the financial year ended 29 February X8 amounted to 110% of
profit before tax.
Prepare the statement of cash flow for Central Cement Ltd on the indirect method for
the year ended 29 February X8. Show all calculations clearly.
QUESTION 14.10 (C)

Ignore dividends tax.
Tikka Billa Ltd is a public company that sells children’s educational puzzles, games
and activity books. You have been provided with the following information for the
current financial year ended 30 June X5:
Extract from the statement of financial performance of Tikka Billa for the year ended
30 June X5
Refer to additional info
Sales 12 412 308
Less: Cost of sales 6 544 128
Less: net operating costs 8 2 152 925
Operating profit 3 715 255
Less: Finance costs 3&4 ?
Less: Taxation ?
Profit for the year ?

1. Class A shares have voting rights and no right to a fixed distribution. On 1
February X5, 800 000 Class A shares were offered to the public at an issue price of
R18. The share issue was underwritten by Dare Underwriters for an agreed
commission of 5%. Applications for the shares closed on 31 March X5. 75% of the
shares were applied for by the public. The shares were allotted by the company on
15 May X5. Share issue costs, excluding the underwriter’s commission, amounted
to R63 900. All share issue costs (including the underwriter’s commission) were
paid in cash on the day that the shares were allotted.
2. On 30 June X5, the directors declared a dividend of 35 cents per share.
3. A long-term loan of R1 200 000 was granted to Tikka Billa Ltd by Third National
Bank on 1 July X3. Capital repayments of R50 000 are made every 6 months on 1
January and 1 July. Interest is paid every 4 months in arrears on 1 November, 1
March and 1 July.
4. Finance costs shown in the Statement of Financial Performance relate to the long-
term loan that Tikka Billa Ltd has with Third National Bank.
5. During the year, Tikka Billa disposed of computer equipment and a vehicle. The
details of the assets sold are as follows:
Computer equipment is depreciated at 25% per annum on the reducing

(diminishing) balance method and vehicles at 20% per annum on the straight line
method. All assets were sold for cash.
6. On 30 June X5, an independent valuation showed that land of R2 600 000 owned by
Tikka Billa Ltd had a fair value of R2 850 000. According to the accounting policy
note regarding PPE, Tikka Billa Ltd adopts the revaluation model for land. Land is
not depreciated.
7. All purchases of inventory are made on credit. Sales consist of cash sales, 35%, and
credit sales, 65%.
8. Included in net operating costs are the following items:
Loss on sale of asset ?

Depreciation 312 867
Profit on sale of asset ?
Investment income 423 000
Note:
The depreciation amount included in net operating costs is for all items of PPE that were depreciated during the
current financial year and includes the depreciation expense for the assets disposed of during the year.
Prepare the statement of cash flows for Tikka Billa Ltd on the direct method for the
year ended 30 June X5. Show all calculations clearly.

FINANCIAL ANALYSIS

Read the following information and answer the questions:

1. Company A has a return on equity of 18%. What could you compare this figure to
in order to decide whether this was an adequate return? (1 mark)
2. Company B had an increase in sales revenue of 15%. What general figure would
give us an indication of whether the business was performing adequately with
regard to sales revenue? (1 mark)
3. Briefly explain why the bank would be interested in the debt ratio when deciding
whether to lend businesses money. Indicate how this ratio is calculated, what the
ratio indicates, and why it is of interest to the bank. (4 marks)
4. Mention TWO indicators of possible financial difficulty. (2 marks)
5. The statement of cash flows offers us information regarding the sustainability of
the business. What should the cash from operations be able to cover in order for the
business to be sustainable? (4 marks)

Ignore ALL taxes.
Peas Partnership, a music-recording business, was started in 2001 by its two partners,
Stacy and William, with a profit-sharing ratio of 3:1 respectively. The partnership’s

accountant prepared the following statement of financial position as at 31 December
2009:
Statement of financial position of Peas Partnership as at 31 December 2009

R
Assets
Non-current assets
Equipment 1 900 000
Current assets
Bank 220 000
Total assets 2 310 000

Equity
Capital − Stacy 100 000
Capital − William 200 000
Liabilities
Bank loan 1 000 000
Current liabilities
Current Account − Stacy 450 000
Current Account − William 60 000
Total equity and liabilities 2 310 000
1. The partnership’s profit for the year ended 31 December 2009 was R1 500 000.
Relevant information from the pre-closing trial balance of Peas Partnership on 31
December 2009 is shown below:

CR
Revenue R8 000 000
Accumulated depreciation − equipment 500 000
2. A music producer named Mr Combs was interested in purchasing Peas

Partnership.
On 31 December 2009, Mr Combs employed a valuation expert to determine the
fair values of the identifiable assets of the partnership. The expert considered the
fair value of the equipment to be R1 800 000, and estimated that debtors would
settle only R180 000 of the outstanding trade receivables. The valuation expert
determined that the partnership had generated brands worth R2 000 000.
3. After obtaining this information from the valuation expert, Mr Combs conducted a
thorough financial analysis. For the ratios, Mr Combs used the profit figure of R1
500 000, but to make his ratio analysis most relevant, Mr Combs adjusted the
figures from the statement of financial position so that the asset and equity figures
used for his ratio calculations were based on the fair values of identifiable assets.
He compared the results of his analysis to averages for other businesses in the
music-recording industry. A selection of these industry average ratios is presented
below:
Return on equity 46.1%

Total asset turnover 2.34 times
Net margin 9.3%
Equity multiplier 2.12 times
4. On 31 December 2009, Mr Combs made an offer to purchase the assets and

liabilities of Peas Partnership for an amount of R3 000 000. On 1 January 2010, the
partners accepted the offer to purchase the business, and so Mr Combs formed a
company, Pea Diddy (Pty) Ltd, which acquired the assets and liabilities of Peas
Partnership on 10 January 2010. On this date, Mr Combs paid the purchase
consideration directly to Stacy, who paid a portion to William on 12 January 2010.
5. Mr Combs considered R500 000 of the amount paid to be for his 1 000 Class A
shares in Pea Diddy (Pty) Ltd, and the remainder to be a long-term loan to the
company. Mr Combs decided that the company should continue to use the set of
accounting records that the partnership had always used.

1. Perform a Du Pont analysis on Peas Partnership as at 31 December 2009, as follows:
a) Calculate return on equity, total asset turnover, net margin and the equity
multiplier for Peas Partnership, using asset and equity figures based on the fair
values of identifiable assets. (8marks)
b) Comment briefly on how each of these ratios compares with the industry
average, and what this indicates about Peas Partnership. (6 marks)
Please note the following requirements:

• Your answer to part (a) should clearly show the total asset and total equity figures
that you have used to calculate the ratios.
• In your answer to part (a), round off your ratios to the same number of places as
the industry average ratios.
• When answering part (b), present your comments with a separate heading for each
ratio.

269]
You are an investment banker. The following financial information has been presented
to you as a prospective investment opportunity:
Extracts from the Trial Balance of Financial Meltdown Ltd at 31 December X8:
X8 R`000
Revenue 50 000
Gross profit 10 000
Credit purchases 20 000
Total assets 5 000
Total liabilities 5 500
Current assets 1 625
Inventories 500
Current liabilities 1 800
Average trade accounts payable 2 700

The bank uses the following basis to make investment decisions for the sector this
company operates in:
a) Net profit percentage of at least 5%
b) Solvency ratio of at least 1:1
c) Acid test ratio of at least 1:1
d) Supplier payment period of less than 60 days.
Calculate the required ratios and comment on whether or not you would support an
investment in Financial Meltdown Ltd based on each of the ratios individually.
(10 marks)
QUESTION 15.4 (A)
The statement of comprehensive income and statement of financial position of The Spar
Group Ltd for the year ended 30 September 2011 are provided at the end of this
question. The Spar Group is a grocery chain, which, according to the company website,
has three store formats: SPAR for neighbourhood shopping, SUPERSPAR for one-stop,
competitively priced, bulk shopping, and KWIKSPAR for everyday convenience. The
Spar Group listed on the Johannesburg Stock Exchange in 2011.
1. Briefly explain what you understand by the term “working capital cycle”. (2 marks)
2. Calculate the working capital cycle of The Spar Group for the year ended 30
September 2011. (6 marks)
3. Assume the share price was 9 847 cents as at 30 September 2011 and 9 160 as at 30
September 2010.
a) Calculate the price earnings ratio for the years ended 30 September 2011 and
2010. (2 marks)
b) Briefly explain what the change in the PE ratio could indicate about the
company. (2 marks)
4. Assuming that The Spar Group had 171 936 604 issued shares as at 30 September
2011.
a) What is the term that is commonly used to define the market valuation of a
company? (1 mark)

Calculate the net asset value and the market valuation of the business as at 30
b) September 2011. (2 marks)
c) Briefly indicate why the net asset value and the market valuation of a company
can differ. (2 marks)

QUESTION 15.5 (B)
After helping Alatha prepare the financial statements for the year ended 30 September
2012, you receive the following email from him:
From: alatha@googleethu.co.za
To: [your email]
Subject: Thanks and request for help with Du Pont
Date: 29 October 2012
Dear [your name],
Thanks so much for helping me prepare the latest financial statements. I really appreciate your help, and am so
pleased with the results. I took quite a big risk in January when I borrowed money to buy ten new computers,
but it seems to have paid off as the business has earned significantly more revenue and profit than last year.
I have heard that a Du Pont analysis can be a really useful exercise for understanding one’s business
performance, and so I have calculated the ratios below.
2012 2011
Return on equity (ROE) 64.8% 46.3%
Total asset turnover (TAT) 1.6 times 1.9 times
Net margin (NM) 13.5% 11.6%
Equity multiplier (EM) 3.0 times 2.1 times
Unfortunately, I really do not know what these ratios mean, or how to use them to understand anything about
how my business’s performance and risk profile have changed since the 2011 financial year. Would you be able
to help me understand them, please?
Thanks and regards,

Alatha
Reply to Alatha’s email. You may assume that the comments in the first paragraph of
his email and also that his ratio calculations are correct. Your reply should include
comments about the business’s overall performance and also about the particular
aspects of the business measured by each of the ratios he has calculated. Your answer
should look like an email and should use a professional tone. You may use the
abbreviations shown above for each ratio. (10 marks)

NON-PROFIT ORGANISATIONS AND CLUB ACCOUNTING

Given below is an extract of the post-closing trial balance of the Helpmekaar Society at
31 December X1:
Debit Credit
Accumulated fund 56 857
Stanley Saki Fund 111 500
Fund investment income received in advance 3 000
Fund investments: 18% Participation mortgage bonds 100 000
Savings account 14 500
i) The annual income of the Stanley Saki Fund is to be used as follows:
Bursary awards: 50%
General purposes: 30%
Re-investment: 20%
ii) A photocopy of the savings account passbook:

iii) Interest on the participation mortgage bonds is received from Acbac Participation
Bond Managers Ltd, quarterly in advance on 28 February, 31 May, 31 August and
30 November. The rate of interest was increased from 18% p.a. to 18.9% p.a. with
effect from 1 December X2. The investment was made in June X1.
iv) On 30 June X2, the Moravia Trust made a grant of R10 000 to the Society with the
stipulation that the capital plus any income therefrom should be used for the
acquisition of refrigeration equipment to benefit the community.
Included in payments made by the Society were the following:
X2
Oct 1 Deepfreeze unit R5 000
Dec 31 Various: Bursary awards R12 000
v) These amounts had been debited to the Moravia Trust Fund and Stanley Saki Fund
accounts respectively.
vi) The draft financial statements for the year ended 31 December X2 reflected the
following:
Net surplus for the year R13 143

Stanley Saki Fund 99 500
Moravia Trust Fund 5 000
Equipment, at carrying value 18 700
Cash at bank – current account 16 473
Cash at bank – savings account 40 375
These balances are stated before any adjustments arising from points (i) to (v) above.
vii) The Society depreciates its fixed assets at 20% p.a. on the reducing balance.

Prepare at 31 December X2:
1. The equity and liabilities (funds employed) section of the statement of financial
position, together with the relevant notes (reflecting the movement during the
year), and (7 marks)
2. The fund investments as they should be disclosed in the statement of financial
position. (60 marks)
Show all workings clearly.

The following abridged statement of financial position of The Social Club is provided:
The Social Club

Statement of financial position at 30 September X2:
R
Accrued subscriptions 765
Restaurant inventory 12 800
Bank 15 200
28 765
Accumulated Fund 21 965
Subscriptions in advance 200
Restaurant suppliers 3 800
Unredeemed R2 coupons 2 800
28 765
The receipts and payments for the year ended 30 September X3 were as follows:
R
Receipts

Subscriptions received 31 915
R2 coupons sold (at a 15% discount) 61 200
Payments
General club expenditure 40 000
1. A mark-up of 40% on sales price was maintained on restaurant sales.
2. 1 300 R2 coupons expired during the year ended 30 September X3 (before they
could be exchanged for restaurant goods).
3. At 30 September X3, the following balances were available:
Restaurant inventory 3 300
Unredeemed coupons 9 400
Prepare the restaurant trading account for the year ended 30 September X3. Show all
workings. (10 marks)
QUESTION 16.3 (A)

Given below is a summary of the Cashbook of Pinehills Club for the year ending 31
December X1:

b) The assets of the club were valued at 31 December X0 as follows:
Equipment 12 000
Furniture 3 600
Fixed Deposit: Last Bank 6 000
The club is providing for depreciation as follows:

Equipment at 15% p.a. (straight line)
Furniture at 10% p.a. (straight line)
c) The local municipal sports department donated R150 000 to the club on 1 July X1,
encouraging club members to register for a qualification in sport.
In terms of the donation:
40% of the donated amount plus any income there from is to be used for the
acquisition of training equipment for the club, and 60% is to be set aside for a
bursary fund.
Only the interest income accumulated from the fund is to be used to provide
bursaries to club members registering for a sports diploma at an accredited
educational institution. The R150 000 was deposited on 1 July X1 into a special
transmission account, which attracts interest at 16% p. a. The club awarded
bursaries to the value of R10 000 to deserving students.
There were no entries passed to record this donation.
1. Open the following accounts in the ledger: Bursary Fund Investment, Bursary
Fund, Bursary Expense and Bank accounts to record the information that relates to
the bursary donation (balance the accounts properly). (12 marks)
2. Prepare a Bar Income and Expenditure statement for the year ended 31 December

X1. (8 marks)
3. Prepare a General Income and Expenditure statement for the year ended 31
December X1. (10 marks)
Note:
Since no entries were passed during the year relating to the bursary donation, they must all be adjusting entries
at 31 December X1.
QUESTION 16.4 (A)

The New Elite Club prepares accounts annually to 31 December. Just prior to the
accounts being prepared for X2, the club treasurer was appointed the country’s
ambassador to Bananaland. The club committee approaches you to assist with the
preparation of the X2 accounts.
The following information relating to the bar and restaurant was extracted from the
club’s bank statements for the year ended 31 December X2:
Deposits credited by bank

1 January to 30 April R37 800
1 May to 31 December R105 200
Cheques paid by bank

1 January to 30 April: Restaurant and bar purchases R35 100
1 May to 31 December: Restaurant and bar purchases R76 000
1 January to 31 December: Crockery and cutlery R1 787
Glasses (for bar) R4 617
The following information is also available:

a) There were no outstanding deposits at either 31 December X1 or 31 December X2.
An amount of R4 000 deposited on 30 April was credited by the bank on 2 May.
b) All sales are made for cash only and takings are banked after the payment of
salaries as follows:
Bar R750 per month
Restaurant 1 600 per month
c) There were no cash shortages during the year.
d) All purchases are paid for by cheque, and the club has no creditors.
e) Cheques drawn in favour of bar suppliers but unpaid by the bank: At 31 December
X1: R1 500
At 31 December X2: 2 500
These cheques were subsequently paid in January X2 and X3 respectively.
f) During the first period restaurant purchases were R3 600 greater than bar
purchases, while in the second period payments by the bank to bar suppliers were
R10 000 greater than those to restaurant suppliers.
g) Inventory on hand at 31.12.X1 30.4.X2
Bar R3 400 2 500
Restaurant 1 400 2 000
No inventory count was performed on 31 December X2.
h) Mark-up percentages achieved by the club are as follows:
1 Jan to 30 April 1 May to 31 December
Bar 33% on cost price 33% on selling price
Restaurant 40% on selling price 100% on cost price
There were no inventory shortages throughout the year.
i) During the period May to December, bar and restaurant sales were equal in
amount.
Prepare the club’s bar and restaurant income and expenditure statements for the
periods: 1 January to 30 April, and
1 May to 31 December.

INCOMPLETE RECORDS AND OTHER ACCOUNTING ISSUES

A burglary took place during the evening of 10 August X1 at the premises of Fashion
World. In addition to a quantity of clothing, all the cash on the premises was stolen.
Inventory had been counted on 31 July X1 and valued at cost at R97 620. Inventory
costing R33 900 was found on the premises following the burglary. The normal mark-up
on cost amounts to 33 1/3%. However, from 5 August this had been changed to a gross
margin on sales of 20%. (All the selling prices had been adjusted accordingly.)
Following a scrutiny of the accounting records, the following information was extracted
on 31 July X1:
Cash on hand R300
Bank balance R19 874 (favourable)
Sales to customers
Cash sales Credit sales
1 August to 4 August R4 290 R18 750
5 August to 9 August R4 930 R24 240
10 August R770 R3 600
a) Cash takings for the period 1 August to 9 August had been banked.
b) Credit customers had settled balances owing of R48 300 with cheques amounting to
R47 600.
c) Cheques totalling R51 200 had been paid to creditors.
d) Petty cash is maintained using the imprest system, with a float of R200. On 1
August the float had been restored by a payment from the bank amounting to R74.
Petty cash payments from 1 August to 10 August amounted to R106.
e) Wages amounting to R2 600 had been paid by cheque on 8 August.
f) During the burglary, inventory (included in the R33 900) with a cost price of R15
000 was damaged. On further investigation, it was established that these goods
could be sold for R17 800 if repairs and modifications of R1 600 were undertaken.
1. Calculate the amount of cash and cost of inventory that were stolen. (15 marks)
2. Calculate the balance on the bank account in the accounting records on the evening
of 10 August X1. (7 marks)

THE PURPOSE OF ACCOUNTING
A = E + L (ACCOUNTING EQUATION)
SOLUTION 2.1 (A)

1. As at a particular point in time.
The statement of financial position takes a ‘photograph’ of the business at specific
date (usually the end of the year). The statement represents the assets, liabilities
and equity on that date. (2 marks)
2. The Cash Flow Statement shows how the business used or generated cash over a
period.
(Cash inflows and outflows of the business). (1 mark)
3.
a) The purchase of a vehicle using cash is merely the exchange of one asset for
another (increase in vehicles (asset) and decrease in bank (asset)).
There is consequently no increase in the NAV of Company A so income is not
recognised.
b) The cash sale results in an increase in assets (cash), no change in liabilities and
no increase in assets of the same amount. This has resulted in an increase in
the NAV of Company A and as this transaction is NOT as a result of a
transaction with the owner i.e. not a contribution by the owner.
Income is recognised. (5 marks)
SOLUTION 2.4 (B)


PART A
1. The statement of financial positions shows the assets of the business and how the
assets have been funded. (1)
2. R25 000 + R10 000 = R35 000 profit made for the year (1)
3. False (1). An expense is a decrease in net asset value (equity) not due to a
transaction with the owner (½). Although drawings leads to a decrease in NAV, the
decrease is due to a transaction with the owner i.e. a distribution and is therefore is
not recognised as an expense (½) and will not be reported in the statement of profit
or loss and other comprehensive income.
4. The entity concept treats a business as distinct and separate from its owners
(personal transactions of the owners are treated separately from those of the
business). (1)
PART B
Assets (bank) will decrease by R3 000 (½). No other asset is affected. Liabilities are not
affected (½). Equity (NAV) decreases by R3 000 and this is not due to transactions i.e. a
distribution to the owners (½). The decrease in NAV is recognised as an expense
(wages) of R3 000 (½).
PART C
1. Zero.
2. Cash outflow of R1 500.
3. Only the change in bank will be reflected.
SOLUTION 2.5
PART A
1. The owner deposited R10 000 cash into the business bank account (1). A financing
decision (1) was being made.
2. The owner was not wealthier (1) after the transaction that took place on 2 February
2013. The owner had taken personal assets and simply moved them into the
business (½).
3. The business could have purchased inventory on credit (1). This means that the
business would only pay at a later date (1) for the inventory purchased.
4. The main objective of a business is to maximise the owner’s wealth (1).
5. R8 000 (sales income) – R3 000 (cost of sales expense) = R5 000 profit (1).
PART B

SOLUTION 2.6

THE PRACTICE OF ACCOUNTING
RECORDING INFORMATION: JOURNALS AND LEDGERS
SOLUTION 3.1 (B)

AB Traders Trial balance as at 28 February X8

Debit Credit
Bank 10 000
Trade receivables [44 600 – 4 500] 40 100
Inventory [71 200 – 1 700 + 500] 70 000
General expenses [24 200 + 1 100] 25 300
Stationery expense [3 400 + 1 700] 5 100
Wages 23 400
Repairs and maintenance expense [14 800 – 500] 14 300
Capital 247 900
Land and buildings 180 000
Drawings 43 500
Bank charges 300
412 000 412 000
SOLUTION 3.2
1 The Entity Concept refers to keeping the financial records of the transactions of a
business separate from the financial records of the transactions of the owner. (1)
3.
3.2 Liabilities increase, no change in assets, therefore net assets decrease (1). This is
not a due to a transaction i.e. a distribution to the owner, so an expense is
recognised. (1)
6. Statement of Changes in Equity for the year ended 28 February 2013
Capital Accumulated Profit

Balance 1 March 2012 W1 110 000 W2 73 000
Profit for the year (1m) 1 000
Total comprehensive income 1 000
Additional capital 40 000
Drawings (1) (24 000)
Transactions with the owner 40 000 (24 000)
Balance 28 February 2013 (½m) 150 000 50 000
W1: 150 000(½) - 40 000(½) = R110 000

W2: 200 000 (½m Q2) – 40 000 (½) – 1 000 (½) + 24 000 (½) = R183 000 - R110 000 (½m)
1 – format
7. 3.1 – No effect (1) as both the debit and credit amounts have been correctly posted
and although the debit entry was posted to the wrong account, this will not
adversely affect the balancing of the trial balance. (1)
3.2 – Yes (1) this error will impact on balancing the trial balance because the credit
amount of R459 made to the trade payables account does not equal the debit
amount posted to the inventory account of R549 (1)
3.3 – No effect as the same amount was posted to the both the debit and credit sides
(1) and even though the entries were made on the incorrect sides, this will not
adversely affect the balancing of the trial balance. (1)
SOLUTION 3.3

SOLUTION 3.4
1 4 marks

2. 9 marks
3. 2 marks
4.1 6 marks
4.2. 3 marks
5. 9 marks
Income statement of Olympic Dreams for the year ended 31 July 2012

(258 000 + 500 - 50)
Less: Cost of sales expense (143 180)
(143 000 + 200 - 20)
Gross profit 115 270
Salaries and wages expense (44 000)
Rent expense (R17 600+ 1 600 ) (19 200)
Stationery expense (750)

Operating profit 51 320
Interest expense (11 063)
(10 313 + 750 )
Profit for the period 40 257
6. 10 marks
Statement of changes in equity of Olympic Dreams for the year ended July 2012
Capital Accumulated profit

Balance at 1 August 2011 300 000 85 000
Profit for the year - 40 257
Total comprehensive income 125 257
Capital raised 8 500 -
Drawings - (40 300)
(40 000 + 300)
Transactions with owner 8 500 (40 300)
Balance at 31 July 2012 308 500 84 957
7. 7 marks
Extract of statement of financial position of Olympic Dreams as at 31 July 2012
ASSETS
Current assets 250 020
Bank (given) 155 000

Trade receivables (25 000 + 500 – 50 ) 25 450
Inventory (from 4.1) 67 020
Stationery asset (from 4.2) 950
Rent Asset / Prepaid expense (from 2.1) 1 600

THE CONCEPTUAL FRAMEWORK
SOLUTION 4.1 (C)

1. The decision concerning the treatment of the expenditure of R50 000 depends on
how much of this amount meets the definition and recognition criteria of an asset
as defined in the CONCEPTUAL framework.
An asset is a present economic resource controlled by the business as a result of
past events. An economic resource is a right that has the potential to produce
economic benefits. Control is the present ability to direct the use of an economic
resource and obtain the economic benefits that may flow from it.
The scratch cards are the present economic resource. The business has the exclusive
right to sell the scratch cards, selling the scratch cards has the potential to generate
cash. The business has the present ability to direct the use of the scratch cards and
obtain any benefit flowing from the cards. No one else has any rights to the scratch
cards. The past event was that the business had the scratch cards printed.
The expenditure meets the definition of an asset, but before it is recognised as an
asset in the financial statements, it must meet the recognition criteria.
An asset is recognised if such recognition provides users of the financial statements
with relevant information and a faithful representation of the underlying
transaction.
The existence of the scratch cards with the potential to produce economic benefit
has predictive value for decision makers, thereby providing relevant information.
Presenting the scratch cards at what it cost the business to print them, would fairly
represent the transaction.
The recognition criteria are met, so R50 000 expenditure would be recognised as an
asset. (8 marks)
2. Journal entries

The liability for prize money of R48 000 is raised because, based on the conditions
of issue, on average, every card sold will result in a prize of R1.20 (R60 000/50 000).
The sale of 40 000 cards will, therefore, provide prizes totalling R48 000 (40 000 x
R1.20). By 31 December X0, R10 000 in prizes has not been paid out in respect of
these cards. Should this be shown as a liability in the financial statements at 31
December X0?
A liability is a present obligation of the business to transfer an economic resource as

a result of past events. An obligation is a duty or responsibility that the business
has no practical ability to avoid.
The business has received economic benefit (the cash from selling the scratch cards)
and will have to transfer an economic resource (cash) if a winning scratch card was
sold. Not paying the winnings is likely to have a significantly negative impact on
the ability to sell scratch cards in the future (i.e. there is no practical ability to avoid
paying).
The R10 000 meets the definition of a liability, in order to recognise it as a liability
in the financial statements, the recognition criteria, must be met.
A liability is recognised if such recognition provides users of the financial

statements with relevant information and a faithful representation of the
underlying transaction.
The existence of obligation with the potential to transfer economic benefit has
predictive value for decision makers, thereby providing relevant information.
Presenting the liability at an estimated amount of R10 000 would fairly represent
the transaction provided prudence has been applied in arriving at the amount.
Prudence does not allow for liabilities or expenses to be understated. Preparers of
financial statements are being prudent by being cautious when making judgments
under conditions of uncertainty.
The amount of R10 000 should therefore be disclosed as a liability in the financial
statements. (16 marks)
SOLUTION 4.2 (A)

1. Going concern.
Financial statements are prepared under assumption that the entity will continue to
operate in foreseeable future with no intention or need to liquidate.
2. Recognition is the process of incorporating in the financial statements items that
meet the definition and recognition criteria.
3. Information is faithfully represented if it is complete, neutral and free from error.
4. Information is relevant if it is capable of make a difference in the economic
decisions made by users.
5. Measurement is the process of determining the monetary amount at which the
elements in the financial statements are recognised and carried at.
SOLUTION 4.3 (B)

1. To record the financial position of the business at a point in time (that is, its net
asset value).
2. The delivery vehicle meets the asset definition. The vehicle is a present economic
resource controlled by the business due to past events. The vehicle is a present
economic resource. The business has the right to use or sell the delivery vehicle.
The delivery vehicle already has the potential to generate cash (future economic
benefit) indirectly, as it is used in the business, or directly, if it is sold. The delivery
vehicle is controlled by the business as it has the ability to decide what to do with
the vehicle, and will obtain the economic benefits from whatever she decides. No
one else has any rights to the vehicle. The past event was that the business took
delivery of the vehicle.
Remember the asset is recognised if it results in relevant information that is a
faithful representation of the transaction. The existence of a vehicle with the
potential to produce economic benefit has predictive value for decisionmakers,
thereby providing relevant information. Presenting the vehicle at what it cost the
business would fairly represent the transaction. This vehicle is an asset as the
recognition criteria are met.
3. A liability is a present obligation of the business to transfer an economic resource as
The business has received economic benefit (inventory) and will have to transfer an
economic resource (cash) to pay for the inventory. Not paying for the inventory is
likely to have a significantly negative impact on the ability to purchase inventory in
the future (i.e. there is no practical ability to avoid paying).
Trade payables meets the definition of a liability, in order to recognise it as a
liability in the financial statements, the recognition criteria, must be met.
The existence of an obligation with the potential to transfer economic benefit has
Presenting the liability at the amount required to settle the obligation would fairly
Trade payables should therefore be disclosed as a liability in the financial
statements.
4. Assets recorded at purchase price, i.e. cost, and reflected as such on the statement
of financial position. The amount recognised on the statement of financial position
will not change with changes in the fair value of the asset.
SOLUTION 4.4 (A)

PART A (2 marks)
The transaction will be recorded as drawings because it is a transaction with the owner
and not the business.
There will be no effect on profit as it is not a business expense.
PART B (4 marks)
a) The postage stamps could be recorded as an expense. Although the stamps do meet
the definition of an asset, the stamps are shown not as an asset, but as an expense.
GAAP is applied only in all material respects, to the extent that a decision of a user
would be affected. Therefore, because the user would not change his economic
decision if the R5 stamps were shown as an expense instead of an asset, this
treatment is acceptable. This concept is known as materiality.
b) The stationery would be recorded as an asset, not an expense. The stationery is a
present economic resource of the business and has the potential to generate
economic benefit.
PART C (2 marks)
Financial statements represent the transactions of the business. From the perspective of
the business, capital is a source of funds provided by the owner.
The statement of financial position represents the source of funding (owner and outside
borrowers) and the resources (assets) acquired with the funding.
SOLUTION 4.5 (C)

1. 1.1 Transaction (c).
Liabilities (Income received in advance/unredeemed vouchers) have
decreased.
There is no change in assets or another liability.
Net asset value has therefore increased.
This is not due to a transaction with the owner, so income is recognised on 1
January 2012.
1.2 (Any of these answers). (4 marks)
Transaction (a)
Net asset value has increased by R100 000. However, this is due to a
transaction with the owner, so no income will be recognised.
Transaction (b)
Assets (bank) increased by R100 000 and liabilities increased by the same
amount.
There is no change in net asset value.
So no income can be recognised.
Transaction (d)
Assets (bank) increased and assets (trade receivables) decreased.
There is no change in net asset value.
So no income can be recognised.
2. 2.1 The GPS system has the potential to produce economic benefit as it enables the
business to avoid cash outflows as it allows the delivery truck to get to its
destination quicker (save petrol as the truck will be able to take the most direct
route and save time so more deliveries will be able to be made). (3 marks)
2.2 Damaged inventory. The inventory has the potential to produce economic
benefit as it has the potential to be sold for cash. (3 marks)
3. Control is the present ability to direct the use of an economic resource and obtain
the economic benefits that may flow from it. This means that the business has the
right to decide what to do with the economic resource and is able to prevent others
from directing the use or obtaining the benefits (positive or negative) that flow
from the resource.
3.1 No control. The business has only paid a deposit; the machine has not been
delivered as yet, so assuming FOB destination the business does not, as yet,
have present ability to direct the use of the machine or to obtain the economic

benefits that may flow from it.
3.2 Control is transferred. The business has the right to decide what to do with the
economic resource and is able to prevent others from directing the use or
obtaining the benefits (positive or negative) that flow from the resource. While
the supplier still needs to install the machine, the business has the present
ability to direct how the machine is used and benefit from it.
3.3 Control is transferred. The past event is when the machine was delivered. The
economic reality of the transaction supersedes the legal ownership. The
business has the right to decide what to do with the economic resource and is
able to prevent others from directing the use or obtaining the benefits (positive
or negative) that flow from the resource.
3.4 Control of the right to use the machine is transferred. The right to use the
machine is controlled by the business, for the duration of the rental period,
because during this time, only the business (and not the rental company) can
decide how the machine will be used in the business and can prevent anyone
else from using the machine, and will obtain the benefits of its use. (8 marks)
4. 1. 29 June 2011. (1 mark)
2. A liability for income received in advance/deposit will be recognised if it
meets the liability definition and recognition criteria. A liability is a present
obligation of the business to transfer an economic resource as a result of past
events. An obligation is a duty or responsibility that the business has no
practical ability to avoid.
The business has received economic benefit (cash) and will have to transfer an
economic resource (inventory or resources to settle obligation). Not providing
the service/inventory for which the deposit relates to is likely to have a
significantly negative impact on the ability of the business to provide services
or inventory in the future (i.e. there is no practical ability to avoid paying).
Income received in advance/deposit meets the definition of a liability, in order
to recognise it as a liability in the financial statements, the recognition criteria,
must be met.
The existence of an obligation with the potential to transfer economic benefit
has predictive value for decision makers, thereby providing relevant
information. Presenting the liability at the amount required to settle the
obligation would fairly represent the transaction.
Trade payables should therefore be disclosed as a liability in the financial
statements.
On 29 July 2011 the income received in advance/deposit meets the liability
definition and recognition criteria. (8 marks)

ADJUSTMENTS
SOLUTION 5.1 (A)

1. Adjusting journal entries adjust/change the amount in the General Ledger at the
end of the financial year to ensure that the correct amounts will be reported in the
financial statements.
Closing entries close off all adjusted income and expenses/losses and gains to
equity – that is, accumulated profit or revaluation surplus.
Adjusting journal entries are process before closing entries. (2 marks)
2. a) False.
The carrying amount of a non-current asset measured on the cost model is the
cost – accumulated depreciation – accumulated impairment.
b) False.
Depreciation does not intend to show a decrease in the market value of an
asset. Depreciation is the systematic allocation of the depreciable amount of an
asset over its estimated useful life.
c) False.
Since the payment period is more than one year, the asset, on the date of
acquisition, must be recorded at the present value of the future cash payment
of R1 500 000. (6 marks)
SOLUTION 5.2 (C)

1.
28 Feb X2

a) Dr Vehicle (A) 44 000
Cr Capital (E) 44 000
Owner contributed vehicle
31 Jan X3
c) Dr Salaries and wages (P/L) 500 000
Cr Bank (A) 500 000
Paid employees for work done
(8 marks)
2. a)
1 May X2
Dr Bank (A) ½ 75 000
Cr Income received in advance (L) (½) 75 000
R10 000 x 15 clients x 50%
Advance payments received for the Cape to Cairo tour
(3 marks)
b)
30 Jun X2
Dr Bank (A) (½) 65 000
Cr Sales (P/L) 65 000
15 – 2 = 13 (½) X R10 000 x 50% (½)
30 Jun X2
Dr Trade receivable (A) 10 000
Cr Sales (P/L) (½) 10 000
2 x R10 000 x 50% (½)
30 Jun X2
Dr Income received in advance (L) (½) 75 000

Cr Sales (P/L) 75 000
(7 marks)
c)
Total sale income

65 000 (½) (m) + 10 000 (½) (m) + 75 000 (½) (m) = 150 000 (½) for
correct answer
(2 marks)
d)
Dr Bad debts (P/L) 10 000

Cr Trade receivable (A) 10 000
(5 marks)
Bob and Twiggy owed the business R10 000 on 31 January X3 in respect of the
Cairo tour, and this was shown as an asset – trade receivable (½). The trade
receivable balance is an asset, i.e. an economic resource which is a right that has the
potential to produce economic benefit: the cash received when the trade receivables
pay. If Bob and Twiggy are no longer expected to pay i.e. there is no potential to
produce benefit, the amount that Bob and Twiggy owe should no longer be
recognised as an asset – trade receivables (assets, decreased). This amount will be
recognised as an expense – bad debts (a decrease in equity not due to a distribution
to the owner).

c) The transaction resulted in liabilities increases by R10 000 (½) and bank asset
decreasing by R890 000. (½) The net asset value of the business has decreased
by R900 000 This is not due to a transaction with the owner i.e. it is not a
distribution to the owner. An expense (interest expense) is recognised.
5. (2 marks)
African Experience Statement of comprehensive income for the

year ended 31 January X3
Pamphlets expense (½) (R750 000 x 75%) 562 500 (½)
African Experience
Statement of financial position as at 31 January X3
Current assets (½)
Pamphlets (R750 000 x 25%) 187 500 (½)
The printing costs of R750 000 were paid on 31 August X2, bank asset account
decreases (½). R562 500 of these costs refers to pamphlets that have already been
distributed to the public. These pamphlets are no longer an economic resource to
the business as they have been consumed and no longer have the potential to
generate benefit. As such, to the extent of the portion of the printing costs relating
to pamphlets already used (R562 500), the bank asset decreases, which results in a
decrease in the net asset value decreases. The decrease is not due to a distribution
to the owner so an expense (printing costs) is recognised, which is reported in the
statement of profit or loss and other comprehensive income.
To the extent that the pamphlets are still on hand on 31 January X3 (R187 500), this
amount meets the asset definition and recognition criteria (½). The pamphlets on
hand are an economic resource which is a right that has the potential to produce
economic benefit, the business has the exclusive right to sell or direct the use of the
pamphlets and benefit from such decision. The pamphlets are expected to be
used in the short term, which is why they are shown as a current asset on the
statement of financial position. (½) (6 marks)
6.
African Experience Statement of comprehensive income for the

year ended 31 January X3 (½)
Sales (½) 12 600 000 (½) + 300 000 (½) + 150 13 050
000 (½) 000
Expenses 2 657
500
Interest expense (½) 900 000 (½)
Salaries and wages 500 000 (½)
expense (½)
Pamphlets expense (½) 562 500 (½)
Water and electricity 65 000 (½)
expense (½)
Petrol expense (½) 400 000 (½)
Repairs expense (½) 220 000 (½)
Bad debts 10 000
Profit (½) 10 392 500

– 1 for each statement of financial position item included in the statement of
comprehensive income. (10 marks)
7.
African Experience Statement of financial position as at 31 January

X3 (½)
Equity 22 636 500
for correct answer
Capital (½) 10 500 000 (½) + 44 000 (½) 10 544 000
Accumulated profit (½) 3 750 000 (½) + 10 392 500 12 092 500
– 2 050 000)
(6 marks)
8. The question is whether the repairs of R1 000 000 meet the liability definition and
recognition criteria (½). A liability is a present obligation of the business to transfer
an economic resource as a result of past events. An obligation is a duty or
responsibility that the business has no practical ability to avoid. In this case the
repairs are planned to be carried out only in X4 and therefore have not yet been
done (½). As such, the business has no obligation to the repair company for the R1
000 000, because this obligation would arise only when the repair work was carried
out (½). The actual carrying out of the repairs would be the past event (½) that
would result in an obligation for the business of R1 000 000. The business should
therefore not recognise a liability (½). As no liability is recognised, the net asset
value would not have decreased and no repairs expense should be shown ✓. The
manager was therefore incorrect (½) in wanting to process this journal entry on 31
January X3. (5 marks)
9. The owner’s claim of the business is the net asset value or the residual assets that
remain once the liabilities have been covered (1½). The owner’s claim on the
business increased (½) between financial years ended 31 January X2 and 31 January
X3. This is evident as the equity (or residual assets) increased (½) from R12 200 000
to R23 526 500, an increase of R11 326 500 (½). As this is an increase in net assets,
once liabilities have been covered, this surplus of assets accrues to the owner. ✓
(3 marks)
SOLUTION 5.3 (C)
1. The period is 1 January X1 to 31 December X1. (1 mark)
2. On 31 December X1. (1 mark)
3. Profit is the net increase in financial worth or net asset value due to transactions not
with the owner. The profit in X0 was R1 692 000 and in X1, R3 824 000. (4 marks)
4. Retained earnings on 31 December X1 were R29 202 000. Profit is the increase in the
net asset value caused by changes in assets or liabilities over the current period (1
January to 31 December). Retained earnings is the total increase in net asset value
caused by business activities since the business started. It is the total of all income
and expenses less drawing since the business started trading. (4 marks)
5. Profit is recorded in the Profit and Loss Account. All income and expense accounts
are closed off to this account at the end of the year. (1 mark)
6. a) R44 037 000, and this is called equity or financial worth. (3 marks)
b) Net assets (assets – liabilities) = R44 037 000 (R53 902 000 – R9 865 000).
7. The net asset value of the business increased in X1. This is shown by the (1 mark)
increase in the equity from R32 178 000 to R44 037 000. This was caused by
transactions not with the owner (profit) by R3 824 000 and the owner making an
additional net capital contribution of R8 035 000 and drawings of R3 635 000.
8. a) (4 marks)
(3 marks)
b)
Please note: The asset method was used to record all cash payments. Therefore
the January X1 rental would not have been reversed out of the prepaid rental
account. All the payments would have been debited to the prepaid rental
account during the year. At the end of the year we would have reversed the
balance on the prepaid rental to the expense account and then raised the
accrual for December X1. (5 marks)
R 45 000 3 11 = R495 000

INVENTORY
SOLUTION 6.1 (A)

1.
Cost per unit = 158 400/200 = R792

R792 x 50 = R39 600 (3 marks)
2.

1. 85 ½ + (85 x 7%) ½ + (400/20) = 111 (R110.95) (2 marks)
2. Cost = 111 (/f)
NRV = 90 – 10 = 80
Write-down = 111 – 80 = 31/unit
SOLUTION 6.2 (B)

1.
2.
4 x R15 = R60 (½)
2 x R8 = R16 (½) [W1]
10 x R12 = R120 (1)
Carrying amount = R196
W1
Cost = R15
NRV = R11 – 3 = R8 (recognise at R8) (1) (3 marks)
3.
10 x R14 = R140
30 x R15 = R450
10 x R12 = R120
50 R710
R710 (½) /50 (½) units = R14.20 x 16 (1) on hand = R227.20 (2 marks)
SOLUTION 6.3 (B)

1. R5 700
2. R10 900
3. R8 950
4. R11 490
5. R910
SOLUTION 6.4 (C)

1.
(6 marks)
2.
Opening balance 240 000

Purchases: 840 000
Purchase price 620 000
Import duties & transport costs 220 000
Sales: (935 000)
Theoretical closing inventory 145 000 (240 + 840 - 935)
(5 marks)
4.
DR Cost of sales expense (P/L) 10 700

CR Inventory (A) 10 700
145 000 – 134 300 = R10 700 (3 marks)

5.
DR Bad debts expense (P/L) 28 000

CR Trade receivables (A) 28 000
R40 000 x 70% = R28 000
DR Bad debts expense (P/L) 16 100

CR Allowance for doubtful debts (-A) 16 100
(R350 000 – 28 000) x 5/100 = R16 100 (6 marks)
6.
Income statement of Zambian Zebras for the year ended 31 March

2012
Bad debts expense (R28 000 + R16 100) R44 100
Statement of financial position of Zambian Zebras as at 31 March

2012
Current assets:
Trade receivables (R350 000 – 28 000 –16 100) R305 900
(4 marks)
7. • “FOB” stands for “Free on Board”.
• “FOB shipping point” means that the purchaser recognises the goods as their
asset from the moment that the goods are loaded onto the transport. The seller
derecognises the goods i.e. the goods are no longer an asset to the seller (the
seller recognises a sale).
• This is relevant for accounting purposes, because this represents the date of
sale (from the seller’s point of view)/because assets meet the asset definition
(from the purchaser’s point of view), and therefore are eligible to be recognised
at that point (provided the recognition criteria are met).
(2 marks)

VALUE ADDED TAX (VAT)
SOLUTION 7.1 (A)

1.
(8 marks)
2.
When would there Reason

be no VAT?
If Pets Paradise were Non-VAT vendors do not charge VAT on their sales (and
not a VAT vendor (½) cannot claim inputs on their expenses and purchase) (½)
If the sale was an This type of sale is zero-rated (and VAT is levied at 0%) (½)
export sale (½)

(2 marks)
Bonus:
• Interest expense
• Salaries/wages
• Import duties. (1 mark for any valid expense that does not attract VAT)
SOLUTION 7.2 (B)

1.
DR Bad debts (100 – 30) 70

DR SARS (VAT) (70 x 15%) 10.50
CR Trade receivables (Vera Slow) 80.50
To write off Vera’s account
DR Trade payables (About Wright) 200

CR Trade receivables (About Wright) 200
To settle About Wright’s account by offsetting
(5 marks)
2.
(4 marks)
3.

(2 marks)
4.
(2 marks)

BANK RECONCILIATION STATEMENTS
SOLUTION 8.1 (C)

1.
(13 marks)
2.
Debit Balance according to bank statement (5 600) 1

Less: Unpresented cheques (4 100) 1
Add: Outstanding deposit 4 200 1

Add: Correction of error (800 x 2) 1 600 2
Balance according to bank account (3 900) 1
(6 marks)
3.
Incorrect profit 76 870

Depreciation (31 500 + 20 000) W1 (51 500) 2
Consumable stores expense (200) 1
Consumable stores on hand 2 200 1
Interest prepaid W2 1 280 1
Wages (3 300) 1
Bank charges (180) 1
Interest on overdraft (250) 1
Prepaid electricity 900 1
Tour income received in advance (4 000) 1
21 820
(10 marks)
W1: (R110 000 - 10 000)/5 = R20 000
W2: Interest 48 000 x 16% x 2/12 = 1 280
4. (28 marks)
Assets
Non-current assets
Land 210 000 1
Vehicles (W3) 30 000 3½
Equipment 62 500 2½
Furniture 21 000 2
Current assets
Trade receivables (W4) 23 440 2
Consumable stores on hand 2 200 1
Prepaid electricity (W5) 900 3
Prepaid interest (W6) 1 280 1
Equity
Capital 200 000 1
Retained profit (R50 000 + R21 820 - 25 000) 46 820 1
Loan (W1) 48 000 2
Current liabilities
Trade payables (W2) 11 600 3
Tour income in advance 4 000 1

SOLUTION 8.2 (C)
1.
Dr Inventory (A) 22 000

Dr SARS (VAT) (A) (22 000 x 15/100) 3 300
Cr Bank (22 000 x 115/100) 25 300
(4 marks)
2.
Dr Trade receivables (A) 3 876

Cr Bad debts recovered (3 876 x 100/115) 3 370
Cr SARS (VAT) (L) (3 876 x 15/115) 506
(4 marks)
3. R57 + R376 = R433 – R68 = R365 x 100/115 = R318.39
-½ if answer includes interest expense of R560.
(2 marks)
4. (12 marks)
5. (5 marks)
-½ if figure is subtracted instead of added, and vice versa (but if R40 800 is

positive, the numbers added above should be SUBTRACTED, and vice versa).
SOLUTION 8.3 (B)

(4 marks)

INTRODUCING CREDIT: TRADE PAYABLES
SOLUTION 9.1 (B)

1. The purpose of a bank reconciliation note is to verify the bank amount reported on
the financial statements the business.
The two differences are timing and adjusting differences.
A timing difference is a difference in the time between when the business and the
bank record information.
An adjusting difference relates to transactions that the business is not aware of until
receiving the bank statement (3 marks)
2. A bank reconciliation compares and reconciles information prepared by two
separate entities i.e. the company and the bank.
A debtors reconciliation compares and reconciles information prepared by the
same entity i.e. the company only. (2 marks)
3.
3.1.
Dr Bank 2 500
Cr Trade Receivables 2 500
3.2. No journal entry required. As it is an error made by the bank the amount
appears in the bank reconciliation statement.
3.3. No journal entry required. This amount would appear in the bank
reconciliation statement as an unpresented cheque.
3.4.
Dr Bank charges expense 126
Cr Bank 126
(10 marks)
4. Creditors’ reconciliation of Sole Mate as at 30 June 2012
Trade payables as at 30 June 2012 105 206
Incorrect Purchases amount posted 180
(R3 425 - R3 245)
Interest on overdue account 64
(R1 600 x 8% x 6/12)
Correct trade payables balance 105 450
Total of creditors list on 30 June

109 836
2012
64 (carry down same
Interest on overdue account
amount)
Casting error (400)
Credit amount incorrectly posted (4 050)
(R4 500 – R450)
Correct creditors list 105 450
(9 marks)

THE OTHER SIDE OF CREDIT: TRADE RECEIVABLES AND
WORKING CAPITAL MANAGEMENT
SOLUTION 10.1 (B)

1.
Dr Cr
Dr Bad debts (1) (65 892 x 100/115) (E) 57 297
Dr SARS (VAT) (1) (65 892 x 15/115) (A) 8 595
Cr Trade receivables (1) (A) 65 892
(4 marks)
2.
(4 marks)
3.

W1: R487 920 x 15/115
W2: R428 400 x 15/100
W3: R969 000 (½) x 15/115
Workings:
W1 487 920 (½) x 15/115 (½) = 63 642
W2 428 400 (½) x 15% (½) = 64 260
W3 969 000 (½) x 15/115 (½) = 126 391 (12 marks)
4. Sales income does not include VAT (1), as the VAT Azure Enterprises charges on
their selling price is paid over to SARS. (½)
The credit to VAT is a liability as it meets the definition and recognition criteria of a
liability in terms of the CONCEPTUAL framework. (1)
A liability is a present obligation of the business to transfer an economic resource as

The business has received economic benefit (cash from the sale) and will have to
transfer an economic resource (cash to SARS) to settle the legal obligation to pay
VAT over to SARS. The sale of the goods is the past event. Not providing the cash
to SARS is likely to have a significantly negative impact on the ability of the
business to continue operating in the future (i.e. there is no practical ability to avoid
paying).
A credit to the VAT account meets the definition of a liabilty, in order to recognise
it as a liability in the financial statements, the recognition criteria, must be met.


The existence of an obligation with the potential to transfer economic benefit has
Presenting the liability at the amount required to settle the obligation would fairly
SARS (VAT) should therefore be disclosed as a liability in the financial statements.

(6 marks)

PROPERTY, PLANT AND EQUIPMENT (PPE)
SOLUTION 11.1 (B)

Machinery
Opening balance accumulated depreciation and carrying value
Motor vehicles depreciation expense p.a. = 350 000/10 = 35 000

O/B Accumulated depreciation motor vehicles = 52 500
Therefore MVs have been depreciated for 1.5 years (52 500/35 000).
As all assets were acquired on the same date, we need to depreciate machinery for 1.5
years up until 1 July X3:
Year 1: Depreciation machinery = 600 000 × 20% × 6/12 = 60 000
Year 2: Depreciation machinery = ( 600 000 – 60 000) × 20% = 108 000
Therefore O/B accumulated depreciation = 60 000 + 108 000 = 168 000
Therefore Opening Carrying value Machinery = 600 000 – 168 000 = 432 000
Depreciation expense current year

432 000 x 20% = 86 400
Impairment test
CV machine as at 30 June X4 = 432 000 – 86 400 = 345 600
Recoverable amount = higher of value in use and net selling price
= 250 000
Therefore impairment = 345 600 – 250 000 = 95 600
Motor vehicles
Cost, depreciation expense current year, and C/B accumulated depreciation
(Hasty only)
Opening balance motor vehicles contains both delivery vehicles.

Therefore: Cost Hasty = 350 000 – 150 000 = 200 000
Opening CV Hasty (date of change in estimate) = 297 500 – 127 500 = 170 000
Need to depreciate Hasty’s CV over its remaining useful life:
Revised estimated useful life of Hasty = 5 years = 60 months

Useful life already used up (allocated to depreciation) = 18 months
Remaining useful life of Hasty = 42 months
Therefore depreciation Hasty for current year = 170 000 × 12/42 = 48 571
Therefore accumulated depreciation Hasty at 30 June X4 = 30 000 + 48 571 = 78 571
Closing CV Hasty at 30 June X4 = 170 000 – 48 571 = 121 429

OR 200 000 – 78 571 = 121 429
3. Non-current assets (2 marks)

PPE 371 429
PPE reconciliation note
Machinery Motor Vehicles
Carrying value as at 1 July X3 432 000 297 500

– Cost 600 000 350 000
– Accumulated Depreciation ( 168 000) (52 500)
Movements
– Depreciation expense (86 400) (48 571)
– Disposal of motor vehicle at CV – ( 127 500)
– Impairment (95 600) –
Carrying value as at 30 June X4 250 000 121 429

– Cost 600 000 200 000
– Accumulated Depreciation ( 254 400) (78 571)
– Accumulated Impairment (½A) (95 600)) –
4. A revaluation surplus would appear on in the statement of financial position.

(2 marks)
5. At the statement of financial position date, the company needs to ensure that no
asset is stated at an amount that is higher than its recoverable amount . Recoverable
amount refers to the maximum future economic benefit that the item of property,
plant and equipment can generate. This is the higher of the value in use (the benefit
generated from using the asset and selling it at the end of its useful life) and the fair
value less costs to sell (the benefit generated from selling the asset).
PPE:
The maximum future benefits (recoverable amount) that can be derived from PPE will
be the higher of the benefits through use (VIU) or benefits through sale (FV less costs to
sell). If the carrying value of PPE exceeds its recoverable amount, then the PPE must be
written down (impaired) to its recoverable amount and an impairment expense is
recognised.
Inventory:
Benefits can be derived only from selling inventory; therefore the maximum future
benefits will be the net benefits from sale (NRV). If the cost of inventory exceeds its
NRV, the inventory must be written down (impaired) to its NRV. An expense (cost of
sales) is recognised. (6 marks)
SOLUTION 11.2 (C)

PART 1
1. (75 marks)

Workings:
W1
Depreciation for X1
(R840 000 – 20 000)/5 × 6/12 = R82 000
W2 X2
Depreciation for 1 January X2 to 31 July X2
(R840 000 – 20 000)/5 × 7/12 = R95 666
W3 X2
Depreciation for 1 August X2 to 31 December X2
Carrying value
R905 000 – 177 666 (accumulated depreciation to date) = R727 334.
Depreciable amount
R727 334 – 20 000 = R707
334
Remaining useful life

Total useful life: 5 × 12 60
months
W3 X2
Used to date* 13
months
Remaining useful life 47
months
Calculation of months used

1 July X1 to 31 December X1 6 months

1 January X2 to 31 July X2 7 months
Total used 13
months
Depreciation = R707 334/47 × 5 (1 Aug X2 to 31 Dec X2) = R75 248
W4 X3
Depreciation for X3:
R707 334 / 47 × 12 = R180
595
W5 X4
To calculate depreciation for X4, you have to realise that there has been a
change in estimate.
1 Jan X1 Original estimate of useful life 5 years

1 Jan X4 Revised estimate of useful life 8 years
Useful life 8 years × 12 96

months
Used portion* (30)
months
Remaining useful life on 1 Jan X4 using the revised estimate of useful life 66
months
* Used portion calculation:
1 July X1 to 31 December X1 6 months
1 Jan X2 to 31 December X2 12
months
1 Jan X3 to 31 December X3 12
months
USED 30
months
Depreciation X4
Carrying value: R905 000 – 433 509 (accum dep) = R471
491
Depreciable amount
R471 491 – 20 000 = R451 491
Depreciation
451 491 / 66 × 12 = R82 089
W6 X6
Impairment
Carrying value 31 December X6
R905 000 – 679 776 = R225 224
Future benefits 160 000
Impairment expense R65 224
W7 X7
Depreciation for X7
Carrying value = R905 000 – 679 776 – 65 224 =R160 000
Remaining useful life
Total life 96
months
Used (30 + 12 + 12 + 12) 66
months
Remaining useful life 30
months
Depreciable amount
(R160 000 – 20 000) / 30 * 12 = R56 000
2. Disclosure in the X4 annual financial statements (AFS) (13 marks)
Excellent it’s Friday Pty Ltd:

Statement of comprehensive Income for the period ended 31 December X4
Notes
Net operating costs (depreciation) 2 R82 089
Excellent It’s Friday Pty Ltd/:

Statement of financial position as at 31 December X4
Notes
Total assets
Property, plant and equipment 3 R389 402
Excellent it’s Friday Pty Ltd:

Notes to the annual financial statements
Note 1: Accounting policies

The plant and machinery is depreciated from its depreciable amount to its residual
value over a useful life of 8 years on the straight-line basis.
Note 2: Change in estimate

The useful life of Machine A in plant and machinery was re-estimated at 8 years instead
of the 5-year estimate originally made on acquisition on 1 January X1.
Gross
Decrease in depreciation (increase in profit) in the current year 98 506
Increase in depreciation (decrease in profit) in future years 98 506
Workings (not part of the note but for study purposes)
Depreciation would have been – based on the original estimate (5 years) 180 595
Depreciation due to the change in estimate (to 8 years) 82 089
Effect of the change a decrease in depreciation and increase in profit 98 506
Note 3: Property, plant and equipment
Plant and machinery

1 January X4
Carrying amount R471 491
Cost R905 000
Accumulated Depreciation ( 433 509)
Movements during the year
Depreciation 82 089
Closing balance 31 December X4 389 402
Cost R905 000
Accumulated depreciation ( 515 598)
SOLUTION 11.3 (A)

1. Straight-line method (3 marks)
Cost of the oven

Purchase cost 12 000 000 (13 800 000 x 100 / 115) (1)
Transport 80 000 ½
Lubrication oil 65 000 ½
Total cost 12 145 000
Depreciation
12 145 000 × 20% × 2/12 404 833 (1)
2. a) Straight-line method (1 marks)
Depreciation
12 145 000 × 20% 2 429 000 (1)
b) Diminished balance method (2 marks)
Cost 12 145 000

Less X1 depreciation 404 833 ½
Net carrying amount 11 740 167 ½
X2 depreciation 2 348 033 11 740 167 x 20% (1)
3. (3 marks)
DR Oven (asset) ½ 80 000

CR Other payables (liability) ½ 80 000
DR SARS (VAT) (80 000 × 15%) 12 000

CR Other payables 12 000
The PPE oven account is debited as the transport expenditure was incurred before the
asset was brought into use. (½ mark) This is initial expenditure and is capitalised to the
asset account if it is directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by
management. (½ mark)
The transport expense is needed for the oven to be at the factory so that we can use it.
(½ mark) This expenditure is so closely related to producing benefits from the oven that
the transport expenditure meets the asset definition and should be recognised as such.
(½ mark)
4. a) Capitalisation of costs means that the costs are treated as an asset. The costs are
added to the asset account (½ mark)
b) Residual value is the amount you expect to receive for an asset at the end of its
useful life. In most cases this would be the expected sales proceeds less the
selling costs. (½ mark)
SOLUTION 11.4 (B)

1. (11 marks)

Workings 1: Equipment
Equipment – depreciation
10 500 000 – 500 000
= 10 000 000 × 15%
= 1 500 000 + 3 750 000 ½
= R5 250 000 – Accumulated depreciation balance
Equipment – impairment
Carrying amount 31 August X2 = 5 250 000 ½ (R10 500 000 – R5 250 000)
Recoverable amount = 4 175 000
Impairment = 1 075 000
Workings 2: Land
Fair value = R24 000 000 – R17 500 000 = 6 500 000
2.
Dr Depreciation ½ 1 155 313

Cr Accumulated depreciation ½ 1 155 313
Dr Accumulated depreciation ½ 3 948 488

Cr Asset disposal account ½ 3 948 488

Dr Asset disposal account ½ 28 000 000
Cr PPE: Buildings ½ 28 000 000
Dr Bank (23 000 000/115 × 100) ½ 20 000 000

Dr Loss on disposal expense ½ 4 051 512

(9 marks)
Workings:
Depreciation to date of sale: 25 206 825 × 5% × 11 / 12
= 1 155 313
Accumulated depreciation on date of sale: 28 000 000 – 25 206 825 = R2 793 175
= 2 793 175 + 1 155 313
= R 3 948 488
3. Depreciation is the systematic allocation of the depreciable amount of an asset over

its estimated useful life The land does not have a limited useful life and therefore
there is no cost to using this asset. (2 marks)
SOLUTION 11.5 (C)

Scenario one (12 marks: 14 minutes)
a) Incorrect. Not all tangible assets should be regarded as PPE. The classification will
depend on how the company intends to use the asset. In this case the vegetables
and meat are bought with the intention to sell during the ordinary course of
business. These items therefore should be regarded as inventory.
b) Incorrect. Inventory is an asset bought with the intention to sell during the ordinary
business activities. The computers are bought with the intention to be used to help
with the administration of the company. They are tangible and the company
expects to use the computers during more than one period. The computers should
therefore be regarded as PPE.
c) Incorrect. The shelves and equipment can be touched and seen (have a physical
nature) and are therefore tangible assets. Intangible assets are assets that have no
physical nature.
d) Incorrect. The ordinary business of the business is to sell foodstuffs and not to
purchase property. As such the purchase of the property in this case should not be
regarded as inventory. The intention of the company is to earn rental income from
the property and as such the property should be classified as an investment
property.
Scenario two (4 marks: 5 minutes)
The journal entry is incorrect.
An asset is recognised when the asset definition and recognition criteria are met. An
asset is a present economic resource controlled by the business as a result of past events.
An economic resource is a right that has the potential to produce economic benefits.
Rights include the right to receive cash or the right to receive goods or services.
On 13 April X1, the business has the right to receive the equipment. This is an exclusive
right controlled by the business that has the potential to produce economic benefit. The
business will not recognise equipment on this date but would recognise a receivables
asset.
Correct entries
13 April X1
Dr Trade receivables 13 800 000
Cr Bank 13 800 000
30 June X1
Dr PPE: Equipment 12 000 000
Dr VAT 1 800 000
Cr Trade receivables 13 800 000
VAT input is claimed only when the company receives a tax invoice. A supplier can
generate an invoice only when the product is complete and delivered.
Scenario three (6 marks: 7 minutes)
Incorrect. PPE is initially recorded at cost. Cost is the fair value of the asset that you give
as consideration for the purchase. Fair value is the price that will be paid between
knowledgeable, willing parties in an arm’s-length transaction.
The asset that was given in consideration for the machine was a property with a fair
value of R1 500 000. This is therefore the cost of the machine.
Correct journal entry

Debit Credit
Dr Machine 1 500 000
Cr Property 900 000
Cr Profit on sale 600 000
The asset is recorded at cost on initial recognition. At subsequent measurement dates

we would question whether the cost or revaluation model is used, whether to
depreciate or impair.
If the company is registered for VAT, there may be VAT consequences.
Scenario four (5 marks: 6 minutes)
Incorrect. PPE is always recorded at cost on initial recognition – If the payment period is
expected to be more than one year, the consideration will be the present value of the
amount to be paid. The R2 700 000 includes payment for the equipment as well as
payment for interest charged for the delay in payment.
The equipment should be recognised at the present value of the deferred payment of R2
454 545 (R2 700 000 × 100%/110%), and the difference of R245 455 should be recognised
as an interest expense.
1 January X1
DR Equipment (asset) 2 454 545
CR Other Payables (liability) 2 454 545
31 December X1
DR Interest expense 245 455
CR Other payables (liability) 245 455
DR Other payables 2 700 000

CR Bank 2 700 000
Scenario five (9 marks: 11 minutes)
1 January X2
Incorrect. The company is a registered VAT vendor and will claim the input VAT paid
on the machine back from SARS. The VAT of R3 192 000 is not part of the cost of the
machine.
1 January X2: Correct entry

DR Machine (asset) 2 800 000
DR SARS(VAT) 420 000
CR Bank 3 220 000
January to March X2: Correct entry
DR Machine (asset) (transport) 10 000
DR Machine (asset) (wages) 16 000
DR Machine (asset) (part) 25 000
DR Paint expense 5 600
DR SARS (VAT) 5 734
CR Bank 62 284
The journal entry was incorrect. Transport of R10 000 and wages of R16 000 had been
recorded as an expense. These costs were necessary to bring the machine to the location
and condition for it to be operated in the manner intended by management. As such,
these costs met the definition of an asset (being closely linked to the potential economic
benefits produced by the machine), and should be recorded as part of the cost of the
machine (capitalised). The part costing R25 000 was also incorrectly expensed for the
same reason.
The paint expense was treated correctly as an expense as it was not necessary to get the
asset to the location and condition necessary for it to be operated in the manner
intended by management.
Scenario six (12 marks: 14 minutes)
The company starts using the machine on 1 April X2.

X2
Workings
Cost 3 000 000
Depreciable amount 2 900 000
(3 000 000 - 100 000)
Depreciation X2 (2 900 000/4 x 9/12) 543 750
Statement of financial position as at 31 December X2

PPE: Machine (3 000 000 – 543 750) 2 456 250
X3
Depreciable amount 2 900 000

Depreciation to 1 Feb (1 month) 2 900 000/4 × 1/12 60 417
Capitalised cost 1 February X1 90 000

New carrying amount to allocate over remaining useful life
= 3 000 000 – 543 750 – 60 417 + 90 000
= 2 485 833
New depreciable amount
2 485 833-100 000 × 11/38 690 635
Remaining useful life: 4 × 12 = 48 months – 9 – 1 = 38
Therefore depreciation expense in X3 statement of comprehensive income
= R751 052 (60 417 + 690 635)
In the statement of financial position as at 31 December X3:
PPE: Machine (2 485 833 – 751 052) R1 734 781
SOLUTION 11.6 (B)

SOLUTION 11.7 (A)

DR Aircraft (Wages) 100 000

DR Aircraft (Spare parts) (50 000 × 10) 500 000

DR Aircraft (Shipping) 20 000
DR Aircraft (Engine) 200 000
DR Aircraft (Testing) 57 000
DR Aircraft (Designer) 75 000
DR SARS (VAT) (200 000 × 15%) 30 000
CR Bank 982 000
SOLUTION 11.8 (C)

1.

Workings Total Mark
W1) (10 000 000 – 1 000 000 – 2 000 000 + 200 000) × 5% 360 000 3
W2) (560 000 − 60 000)/(17 × 12 + 2) × 2 4 854 2½
W3) 1 000 000/10 × 2/12 16 667 1½
SOLUTION 11.9 (B)


W1: Factory buildings

SOLUTION 11.10 (A)
1. (4 marks)
2. Property, plant and equipment (13 marks)

COMPANIES
SOLUTION 12.1 (A)


A share premium arises when par value shares are issued at a price greater (1) than the
registered nominal value of the shares. A share premium is the difference between the
issue price (½) of the share and the par value (½) of the share.

1. (7 marks)
2. Underwriter’s commission = 100 000 x R5 = R500 000 x 5% = R25 000. (2 marks)

3. (3 marks)

SOLUTION 12.2 (B)
1. R120 600 000 (1 mark)

2. a) Number of new shares
= 12 000 000 ½ (in issue at year-end) – 10 000 000 ½ (in issue at beginning of
year)
= 2 000 000 shares ½
Increase in share capital class A

= R12 000 000 ½ (C/B) + R500 000 (1) (share issue costs) – R10 000 000 ½ (O/B)
= R2 500 000 ½
Issue price = R2 500 000/2 000 000 shares

= R1.25 each (5 marks)
b)
Debit Credit
15 September X2
DR Bank ½ 1 620 000
CR Applications and allotment ½ 1 620 000
1 November X2
DR Applications and allotment ½ 1 620 000
CR Share capital: Class B ½ ½ 1 350 000
CR Bank ½ 270 000
Increase in class B shares

= R2 800 000 (C/B) + R50 000 (share issue costs) – R1 500 000 (O/B)
= R1 350 000 ½

Number of class B shares issued in X2
= R1 350 000 / R15
= 90 000 shares ½
Cash received
= 90 000 x R15 x 120/100
= R1 620 000 ½ (5 marks)
3. (3 marks)
4. R104 000 000 ½ (retained earnings – closing balance) – R67 000 000 ½ (Retained
earnings – opening balance) + R 1 200 000 ✓ (dividends: class A) + R 100 000 ✓
(dividends: class B)
= 38 300 000 (3 marks)
5. R38 300 000 x 28% / 72%

= R14 894 444 (3 marks)
SOLUTION 12.3 (B)

1.

3. Total shareholders’ equity = 19.45m + 3.98176m = R23 431 760 (1 mark)

SOLUTION 12.4 (C)
1. R267 000 000 – R9 000 000
= R258 000 000 (2 marks)
2. R489 000 000 – R8 000 000
= 481 000 000 (3 marks)
3. Increased in net asset value of R223 000 000. (2 marks)
4. R489 000 000 – R8 000 000 – R123 000 000
= R358 000 000 (3 marks)
5. Profits (or increase in the company’s net asset value) retained in the company, not
yet distributed to shareholders (1 mark)
6. Net proceeds of R25 million from the shares issued during X2, profits retained in
the company of R198 million and a repayment of its loan of R1 million (4 marks)
7. (R1 23 000 000 - R98 000 000) + R 750 000 (share issue costs written off to share
capital account)
= R25,75m
Number of shares issued: 30m − 20m
= 10 million shares
Price per share

= R25 750 000/10 000 000
= R2,575 (4 marks)
8.

9.
10. Dividends are distributions to shareholders of the company’s profits. The

Conceptual Framework defines expenses as “Decreases in assets or increases in
liabilities that result in decreases in equity, other than distributions (drawings) to
owners, are considered to be expenses”.
Dividends are therefore specifically excluded from the definition of an expense.
11. a) Authorised share capital: (4 marks)
Maximum amount of share capital that can be issued. Specified in the
memorandum of association
b) Issued share capital:
Number of shares actually issued
c) Equity:
Equity is the amount that is left after liabilities have been deducted from
assets. It is the amount representing the owner’s claim on the business and it
therefore belongs to the owner. It is the residual amount of the assets after
settling any claim against the assets. (5 marks)
SOLUTION 12.5 (B)

Scenario 1
DR Bank (90 000 x 5) 450 000
CR Application and allotment 450 000
DR Bank (10 000 x 5) 50 000
CR Share capital – Class A 500 000
DR Application and allotment 500 000
DR Underwriters commission (500 000 x 5%) 25 000
CR Payables/Bank 25 000
DR Share capital – Class A 25 000
CR Underwriter’s commission 25 000
Scenario 2
DR Bank (15 000 x 1.30) 19 500
Scenario 3
DR Bank 1 200 000
CR Application and allotment 1 200 000
CR Bank 300 000
Scenario 4
DR Dividends (50 000 x 1.50) 75 000
CR SARS (dividends tax) R75 000 × 80% × 20% 12 000
CR Shareholders for dividend 63 000
SOLUTION 12.6 (A)

DR Bank 1 500 000

CR Application and allotment 1 500 000
DR Application and allotment 1 000 000
CR Share capital – Class A 1 000 000
CR Bank 500 000

PARTNERSHIPS AND A BRIEF NOTE ON CLOSE
CORPORATIONS
The partner’s current accounts can be recognised as current liabilities to the partnership
(if the agreement allows the partners the right to withdraw these funds whenever they
require). The current accounts (if the funds can only be withdrawn if all partners agree)
could be recognised as part of the equity of the partnership.
SOLUTION 13.1 (A)

2.
2.1. Journal entry to record the receipt of capital at incorporation of the CC.
(2 marks)
2.2. Journal entry to record the salaries paid by the CC to each of John and Mark.
(2 marks)
3. It is no different; it is just given a different name. The principle is that it is a

distribution to equity holders, not an expense.
4. A member would have an equal claim on the other assets of the company on
liquidation through a loan account, whereas the claims of the other creditors would
have to be settled first should the contribution be in the form of a member’s
contribution. (2 marks)
SOLUTION 13.2 (C)

1. (12 marks)
Workings:

2. (8 marks)
3. (5 marks)
Dr Bank (700 * 0.30) 210

Dr Bad debts expense 426
(700 * 0.70) * 100/115
Dr SARS (VAT) 64
(700 * 0.70) * 15/115
Cr Trade receivables 700
4. (5 marks)
5. Dr Remembering the Best 2 200 000 (2 marks)
Cr Members contribution 220 000

Cr Long-term loan from member/Members Loan 1 980 000

SOLUTION 13.3 (C)
1. (7 marks)
-½ for wrong/missing dates (max penalty 1 mark)
2. (7 marks)
3.
3.1

(9 marks)
• To qualify for the marks allocated to the line items, the items must have
been categorised correctly.
• To qualify for the marks to the right of the columns, the amounts must be
split correctly between the members.
3.2 The following points should be made (2 marks):

• The interest on capital is treated as a distribution. (½)
• The interest on long-term loans is treated as an expense. (½)
• The definition of an expense is a decrease in net asset value (½) not due to
transactions with the owner. (½).
The following points may be made (Max 2 marks):
• The payment of cash is a decrease in net asset value in both cases. (½)
• In the case of the interest on capital, the business is transacting with the owner in
her role as owner (½) (because the interest is paid in respect of capital contributions
that the owner will not recoup unless the business is profitable (½)), and so interest
on capital is not an expense. (½) Rather, it is treated as a distribution.
• In the case of the interest on the long-term loans, the business is transacting with
the owner in her role as a lender. (½) (4 marks)
4.

(8 marks)
SOLUTION 13.4 (C)

W1: Profit Calculation:
Profit for the period 600 667

Salaries (110 000)
Interest (24 000)
Net loss/Profit (466 667)
Split 2:2:1 (186 667):(186 667):(93 333)
W2: Goodwill calculation:

R50 000@1:1 = 25 000:25 000
R50 000@ 2:2:1 = 20 000:20 000:10 000
W3: Interest calculation: R240 000 x 10% (15 marks)

SOLUTION 13.5 (B)
1. (20 marks)

STATEMENT OF CASH FLOWS
SOLUTION 14.1 (B)

1. (21 marks)
Workings:
W1
OR

Therefore total cash received from customers: 1 268 000 + 2 504 000 = 3 772 000
W2
OR
Operating costs paid:

2 620 800 + 668 800 = 3 289 600
W3 Taxation paid:
52 000 + 60 000
W4 Dividends paid:
The final dividend of R40 000 declared on 30 June X3 would have been paid during the
X4 financial year as well as the interim dividend of R32 000 declared during the X4
financial year.
Therefore total dividends paid = R40 000 + R32 000 = R72 000
2. The cash flow from operating activities is the main source of cash for a business
and is generated from the normal trading activities of the business. It reveals the
ability of the business to convert its accrual basis profits (statement of
comprehensive income) to cash in order to pay its:
• Normal non-discretionary business operating expenses.
• Interest.
• Suppliers of inventory (grantors of short-term credit).
• Taxation.
It will also be able to evaluate its ability to make new investments without borrowing.
(4 marks)
SOLUTION 14.2 (C)
1. (27 marks)

Workings:
W1 Calculation of interest expense
W2 Calculation of interest income

W3 Depreciation on equipment held at beginning of year
(R555 600 – R60 300) X 20% = R99 060
Depreciation on equipment invested by owner:

Cost of equipment to business = CV at date invested by owner
= [(15 000 – (2 x 2 760)] = 9 480
Therefore depreciation this year = (9 480 – 1 200) X 5/36 = 1 150
Total depreciation = 99 060 + 1 150 = 100 210
W4
Monthly premiums = R600 for 10 months
= R6 000
Upgraded amount = R600 X 1.05 = R630 for 2 months
Insurance expense = R7 260
= R1 260
2. (36 marks)
Inspired Consultants (Pty) Ltd

Cash flow statement for the year ended 31 May X5
Cash flow from operating activities
Cash received from customers (W1) 1 006 133 (6)
Cash paid to suppliers and employees (W2) ( 645 913.4) (8)
Cash generated from operations 360 219.6
Interest received (calculated in part 1) 7 720 (1)
Interest paid (calculated in part 1) (10 400) (1)
Cash inflow from operating activities 357 539.6
Cash flow from investing activities

Acquisition of investments (calculated in part 1) ( 102 000 – 40 000) (62 000) (1)

Cash outflow from investing activities (62 000)
Cash flow from financing activities

Proceeds from share issue (50*3.4) 170 000 (2)
Repayment of loan (6 000*2) (12 000) (1)
Cash inflow from financing activities 158 000
Net increase in cash and cash equivalents during the year 453 539.6
Cash and cash equivalents at the start of the year ( 260 039.6)
Cash and cash equivalents at the end of the year 193 500
(2 marks)
Workings:
W1
W2
Employment costs 445 149.4

Computer expenses 116 820
Admin Expense 45 550
Stationery 7 322
Consumable stores 3 777
Insurance 7 260
625 878.4
SOLUTION 14.3 (B)

1. R153 (1) [(R150 (½) + 5 (½) ] – 2 (½) (2½)

2. R87 (1) [(R90 (½) + 6 (½)] – 9 (½) (2½)
3. R17 (½) [(R20(½) – 3 (½)] (1½)
4. R8 (1) [(R10 (½) – 2 (½)] (2)
5. R4 (½) [(R13 (½) – 9 (½)] (1½)
[10]
SOLUTION 14.4 (C)

1. (8 marks)
2. (37 marks)
Statement of cash flows for the year ended 31 December X9

R
Cash flows from operating activities
Cash received from customers (W1) 2 551 000 (3)
Cash paid to suppliers and employees (W2) (1 472 000) (9)
Cash generated from operations 1 079 000
Add: Investment income (Interest income and Dividend income) 78 000 (2)
Interest paid (Finance charges) (35 500) (1)
Taxation paid (W3) (84 500) (5)
Net cash flows from operating activities 1 037 000
Cash flows from investing activities (W4)

Acquisition of plant and machinery (1 056 000) (2)
Acquisition of equipment (400 000 + 600 000 – 500 000) (500 000) (2)
Acquisition of motor vehicles (130 000) (2)
Proceeds on sale of plant and machinery 109 500 (3)
Proceeds on sale of equipment (400 000 + 6 800 – 250 000) 156 800 (3)
Proceeds on sale of motor vehicles 403 200 (3)
Net cash flows from investing activities (1 016 500)
Cash flows from financing activities

Net proceeds from issue of shares 240 000 (2)
Loans raised (W5) 60 000 (4)
Loans repaid (200 000) (1)
Net cash flows from financing activities 100 000
Cash and cash equivalents for the year 120 500

Cash and cash equivalents at the beginning of the year 4 000
Cash and cash equivalents at the end of the year 124 500
Workings:
W1 Cash received from customers
W2 Cash paid to suppliers

Payments to trade payables:
Cost of sales = Opening inventory + Purchases − Closing inventory
So purchases = Cost of sales – Opening inventory + Closing inventory

= 1 080 000 – 189 000 + 160 000
= 1 051 000
Payments for other expenses:

Operating expenses per I/S 1 243 000
Adjust for non-cash expense:
Depreciation (783 000) (2)
(R586 000 + 130 000 + 67 000)
Add: Profit on disposal of vehicle R3 200
Less: Loss on disposal of plant (R18 500)
Add: Profit on disposal of equipment R6 800
Less: Interest Expense R5 500
Cash operating expenses R446 000
Cash paid to suppliers and employees = 446 000 + 1 026 000
W3 Calculation of taxation paid
Turnover 2 570 000

Less: Cost of goods sold (1 080 000)

Add: Investment income 78 000
Less: Operating expenses (1 243 000)
Less: Interest on long-term borrowings (30 000)
Net income before tax 295 000
Taxation (30% of net income) 88 500

3. Information about the cash flows is useful to a wide range of users in their
assessment of the entity’s ability to generate cash (1) and its application of that cash
in various activities, (1) including the replacement (1) and expansion (1) of
operating capacity (investment in fixed assets), the changes in capital structure (1)
(shares issued and loans raised or repaid), payments to shareholders and SARS (1)
in the form of dividends and tax respectively, among others. The profit reported by
companies is not necessarily all realised in cash, because of credit sales and credit
purchases. It is important to measure the cash flows during the period to identify
how well cash has been managed. (5 marks)
4. Companies are required to present financial statements in accordance with
generally accepted accounting practice. These statements are subject to audit and
must fairly present the results of operations and financial position. Because
companies are funded by shareholders, the capital invested by shareholders is
referred to as share capital. Shareholders require a return on the capital invested by
them, and it is the objective of the directors of the company to maximise the return
on shareholders’ investments. In an organisation which has no profit motive, there
is no risk capital and no objective of maximising return. The financial statements of
these entities would report the surplus or deficit resulting from their activities
during the period and any funding would be reported as accumulated funds, not
as capital. There are fewer regulatory requirements for these kinds of entities.
(Maximum of 5 marks for a reasonable comparison)

FINANCIAL ANALYSIS
SOLUTION 15.1 (A)

1. • What you could get in the bank (no risk) (1 mark)

• Benchmark for similar companies
• Return on an investment with similar risk profile
• Last year’s result.
2. • Inflation. (1 mark)
3. • Total debt/Total assets (4 marks)

• Indicates per rand of assets what has been funded by debt
• If business is liquidated, what is the likelihood of the bank getting their money
back?
• Gives an indication of how far liquidation value can fall from carrying value
and still be sufficient for the bank to be paid.
4. • Current/acid ratios (2 marks)

• Heavy short-term borrowing
• Non-current assets funded by short-term debt
• Low cash flow ratios
• Increased days inventory on hand, collection and/or payment period
• Decreasing profits
• High gearing.
5. • Non-discretionary spend (4 marks)

• Interest (dividend does not need to be declared)
• Taxation
• Maintaining capacity (replacement of assets) – don’t need to spend on
expanding capacity.
SOLUTION 15.2 (B)
1a. (8 marks)
W1. Adjusted total assets

Total assets per SOFP 2 310 000
Overvaluation of equipment (R1.9m – R1.8m) (100 000)
Overvaluation of trade receivables (R190 000 – R180 000) (10 000)
Brands not recognised 2 000 000
Adjusted total asset value 4 200 000
W2. Adjusted total equity

Adjusted total asset value minus liabilities
(R4.2m – R2.01m) 2 190 000
OR Equity per SOFP plus adjustment in
W1 (R300k + R1 890k) 2 190 000
1b. Return on equity (ROE): (6 marks)

• Return on Equity (ROE) is the ultimate measure of business performance, as it
measures the extent to which the business has achieved its objective of maximising
owners’ wealth.
• Peas Partnership (PP) has performed better than the industry average.
• This suggests that PP is a successful business with strong earnings potential.
Total asset turnover (TAT):

• Total asset turnover (TAT) measures the asset efficiency of a business.
• PP appears to be considerably less efficient than the average business in its sector.
PP should perhaps consider selling off surplus assets, and/or sweating assets
• harder.
• The low TAT may be a result of the fact that the analysis of PP has been performed
recognising the fair value of brands, whereas the fair value of brands may not have
been included in total assets for other businesses in the industry.
Not Margin (NM):

• PP’s net margin is much better than the average business in its industry.
• The better margins performance may be the result of very good cost control.
• The better margins performance may also be the result of a better quality product
being sold at a higher price.
• Note that there is generally an inverse relationship with TAT: the reason revenues
may be comparatively low is because margins are comparatively high. This may
justify the apparent inefficiency. [This point may appear under TAT.]
EM:
• This measures a business’s leverage.
• PP takes much less advantage than the average business in its industry of the
opportunity to leverage returns to owners through the use of debt.
• PP is much less exposed to financial risk than the average business in its industry.
• Perhaps Mr Combs should consider using greater amounts of debt to finance this
business.
Other reasonable answers will earn marks.
SOLUTION 15.3 (A)

Calculation and comment Marks

Net profit % 1.5
4 000/50 000 = 8%
Qualifies 0.5
Solvency ratio
Total assets: Total liabilities 1.5
5 000:5 500
0.909:1
Does not qualify 0.5
Acid test ratio
Current assets – Inventory: Current liabilities 2
1 625 – 500:1 800
1125:1800
0.625:1
Does not qualify 0.5
Supplier payment period 2
2 700/20 000 x 365 = 49 days
Qualifies 0.5
Due to the fact that they do not qualify in 2/4 categories, the bank should not invest. 1
10

NON-PROFIT ORGANISATIONS AND CLUB ACCOUNTING
SOLUTION 16.1 (C)

1.
(7 marks)
2. (60 marks)
Fund investments R120

945
Participation mortgage bonds 100
000
Savings account 20
945
(R3 150 has been transferred to another asset account as it forms part of the current
year’s fund income.)

Notes:
Accumulated fund
Balance, beginning of the year 56 857
Add: Net surplus [W3] 17 173
Transfer from Moravia Trust Fund 5 000
Balance, end of year R79 030
Stanley Saki Fund

Balance, beginning of the year 111 500
Interest income [W2] 20 350
131 850
Less: Awards: Bursaries 10 175
General purposes 6 105 (16 280)
Balance end of year R115 570
Moravia Trust Fund
Grant received 10 000
Interest income (R250 + 125) 375
Less: Disbursement (5 000)
Balance, end of the year [W1] R5 375
Workings:
W1 Moravia Trust Fund
Grant, 30 June X2 10 000

Interest on R10 000 10% p.a. for 3 months 250
Less: Disbursement 1 October (5 000)
Interest on R 5 000 10% p.a. for 3 months 125
R5 375

W2 Stanley Saki Fund
Income: Received in advance 1.1.X2 3 000

(Participation bonds) Add: Receipts: 28.2 4 500
Receipts: 31.5 4 500
Receipts: 31.8 4 500
Receipts: 30.11 4 725
Less: In advance at 31.12.X2 (R4 725 x 2/3) (3 150) 15 075
Savings account
Interest credited 31.12.X2 2 650
Less: Interest on Moravia Trust Fund investment (as above) (R250 + 125) (375) 2 275
R20 350
Apportioned as follows:
Bursaries (R20 350 x 50%) (R10 175)
General purposes (R20 350 x 30%) (6 105)
Re-investment (R20 350 x 20%) (4 070)
W3 Net surplus
Given 13 143
Add: Award – Stanley Saki Fund (W2) 6 105
19 248
Less: Bursaries (R12 000 – 10 175) 1 825
Depreciation (5 000 x 20% x 3/12) 250 (2 075)
R17 173
General Ledger of Helpmekaar Society accumulated fund

Jan 1 Balance 56 857
Moravia Trust Fund 5 000
Dec 31 I & E (Net surplus) 17 173
79 030

SOLUTION 16.2 (B)

INCOMPLETE RECORDS AND OTHER ACCOUNTING ISSUES
SOLUTION 17.1 (B)

1. (15 marks)
Calculation of cash on hand (amount stolen) on 10 August X1

Cash on hand – 31 July X1 R300 (1)
Add: Cash sales on 10 August X1 770 (1)
Petty cash on hand (200 - 106) 94 (2)
Cash on hand – 10 August X1 – stolen R1 164 (1)
[5]
Calculation of cost of inventory stolen on 10 August X1

Inventory count - 31 July X1 R97 620 (1)
Less: Cost of inventory sold

1 August to 4 August (R4 290 + 18 750) x ¾ (17 280) (2)
5 August to 9 August (R4 930 + 24 240) x 80/100 (23 336) (2)
10 August (R770 + 3 600) x 80/100 (3 496) (2)

Inventory on hand - 10 August X1 53 508
Less: Inventory salvaged (33 900) (1)
Inventory adjustment (NRV or cost) Nil (1)
Cost of inventory stolen R19 608 (1)
[10]
2. (7 marks)
CALCULATION OF BANK ACCOUNT BALANCE AT 10 AUGUST X1

Balance – 31 July X1 R19 874 (1)
Add: Cash takings banked (R4 290 + 4 930) 9 220 (1)
Cheques from credit customers 47 600 (1)
Less: Cheques to credit suppliers (51 200) (1)

Petty cash cheque (74) (1)
Wages cheque (2 600) (1)
Balance – 10 July X0 R22 820 (1)

Glossary
A
Accounting − a communication system designed to keep a record of the financial effect
of transactions arising from the activities of the business
Accrued income − income that has been earned but has not, as yet, been received
Asset − an asset is a present economic resource controlled by the business as a result of
past events. An economic resource is a right that has the potential to produce
economic benefits.
B
Bank statement − a summary of all transactions with the bank over a certain period of
time. The transactions are recorded from the bank’s point of view. In other words,
the bank statement is a summary of your account in the bank’s books
Budget − a formal plan that shows how we are going to use our resources to achieve
our goals. It helps to decide how the resources of the business are going to be used
to achieve the long-term plan (strategy) of the business
Business − an organisation that uses resources, such as land, labour or equipment, to
produce a good or service, usually with the intention of generating a surplus from
the activity, after paying all costs
Business risk − the risk reflected in the operations of the business
C
Cash equivalents − short-term deposits that are convertible into cash within three
months
Closing entries − transactions that allow all income and expense accounts to have the
balance in the account netted off to zero
Consignment stock − inventory that a business sends to an agent to sell on its behalf
Co-ordination − the integration of activities to make sure that resources are used most
efficiently to achieve specified objectives
Corporate governance − the control and management of a company, having regard to
the interests of shareholders and all other stakeholders
Cost − a sacrifice, or opportunity given up, to receive something of value
Cost of inventory − all costs of purchasing the inventory, any conversion costs (if
required), and any other cost which we spend in bringing the inventory to a place
and condition where it can be sold
Credit limit − the maximum amount of credit that is granted to a particular customer.
Once customers have purchased goods to their credit limit, they are able to

purchase again on credit only once they have made a cash payment
Credit rating − the ability a business has to repay debt. This is based on the current
financial position of the business, its credit history, and its ability to generate cash
in the future
Credit terms − these indicate a customer’s credit limit, the maximum repayment time,
any discounts for early payment, and penalties that will be incurred on late
payments
Creditworthiness − the ability the business has to make repayments as specified in the
credit terms allowed to the business. This decision is based on the credit history
and credit rating of the business
Current asset − an asset that has the potential to produce economic benefits within one
year after the financial year-end
D
Debt − a liability
Depreciable amount − the cost of the asset less the estimated residual amount
Disclosure − the presentation of relevant and reliable information relating to the
activities of a business
E
Earnings per share − the profit attributable to Class A shareholders divided by the
number of Class A shares
Earnings yield − the relationship between the company’s share price and earnings per
share
Economy − the system that enables resources to be moved to satisfy individual material
desires
Equity − a residual. The total assets of a company minus all liabilities of the company
equal the equity of the company
Executive summary − an overview that provides the reader with enough of the
important information without having to read the full document. The reader gets a
good idea of the main points and conclusions of the document without being
caught up in the detail
Expense − decreases in assets or increases in liabilities that result in decreases in equity,
other than distributions (drawings) to owners
F
Feasibility − the degree to which something can be carried out, achieved or put into
effect
Finance − the funding for a business, which is essential to enable the business to operate
and which must be managed very carefully
Financial analysis − a process that extracts relevant information about a business from
all the information that is available and converts it into a more useful format
Financial information − information expressed in a numeric format that is of a financial
nature. It can be divided into monetary and non-monetary information
Financial risk − the risk faced by a business as a result of the choice of how much debt
or equity funding (financing structure) to use
Financing activities − activities that change the capital structure of a business (changes
in equity and non-current liabilities)
FOB shipping point − the supplier is free of any risk relating to goods once the goods
are loaded onto the transport
G
General purpose financial statements − financial statements prepared for the general
information needs of different types of users, such as investors, creditors and tax
authorities (SARS)
Goodwill − the extra amount that a purchaser of an existing business will pay over and
above the fair value of the net assets of that business for the perceived future value
of that business
Gross profit − the portion of the sales value that is left once you have deducted the cost
of inventory sold
I
Income before tax − income after expenses but before tax. This is also called operating
profit
Inflation − the purchasing power of the currency of a country decreases over time
Interest-bearing borrowings − debt on which interest is payable
Internal controls − a set of policies, procedures and practices that business owners use
to achieving the objectives and goals of the business
International Financial Reporting Standards (IFRS) − standards issued by the
International Accounting Standards Board (IASB)
Investments − assets that have been purchased with the intention of earning a return in
the form of dividends or interest, as well as increases in the value of the asset
Issued share capital − the actual number of shares or amount of share capital that the
company has issued to shareholders
J
Jointly and severally liable − in a partnership, all the partners can be held liable, either
together or individually, for the debts of the partnership
L
Liability − a liability is a present obligation of the business to transfer an economic
resource as a result of past events. An obligation is a duty or responsibility that the
business has no practical ability to avoid.
Liquidation − selling all the assets, settling all the liabilities, and distributing what is
left to the partners, in this case, or, in the case of a company, to the shareholders
Liquidity − a measure of how easily short-term assets can be converted into cash in
order to settle short-term obligations
M
Management − staff members appointed to help run a business
Management information − information (both financial and non-financial) that is in a
format that meets the needs of people inside the business − the managers
Market − any channel that enables transactions between buyers and sellers
Mark-up − the difference between the normal selling price per unit and the normal cost
per unit
Mark-up percentage − the percentage that is added to the cost price of inventory to
calculate the selling price
Master budget − co-ordinates all financial projections in the organisation’s individual
budgets into a single organisation-wide set of budgets for a set time period
Material information − information is material if its omission or misstatement could
influence the economic decisions of users
Memorandum of Incorporation (MOI) − the document that sets out rights, duties and
responsibilities of shareholders and directors
Monetary information − financial information expressed in terms of currency (rands)
Mortgage bond − a long-term loan where the borrower agrees to certain property
acting as security for the loan
N
Net realisable value − a calculation of what net future economic benefits will flow into
the business when the inventory is sold
Non-current assets − assets that have the potential to produce economic benefits over a
much longer period, usually more than one year after the period end
Non-financial information − numeric information that is not of a financial nature
Non-monetary information − financial information that is not expressed in terms of
rands, such as financial ratios, percentages, quantities, and so on
Non-profit organisation − a trust, company or other association usually established for
a public purpose, the income from which is not distributable to its members
O
Objective of financial analysis − to assess the overall financial performance and
current position of a business and use this information to evaluate the quality of the
decisions made by management to determine the expected future earnings and
understand better the associated risks
Operating profit − income after expenses but before tax. This is also called income
before tax

P
Partnership − an organisation consisting of between two and twenty persons who
strive to achieve a common goal
Prepaid expense − an amount that has been paid but has not been used as yet
Profit − what is earned after the total expenses of a business have been deducted from
the total revenue and all other income has been added
Profit attributable to Class A shareholders − income after tax available for distribution
to shareholders
Profit-sharing ratio − can be defined as the agreed-upon ratio according to which the
profits that the partnership has made will be shared among the partners
Q
Qualitative information − information not expressed in numeric terms
Quantitative information − information expressed in numeric format. It can be divided
into financial and non-financial information
R
Reconciliation − ensuring that a set of information from one source agrees with the
same information that has been generated by another independent source
Recoverable amount − the maximum possible benefit that can be obtained from an
asset, measured by the greater of the value in use or the net selling price
Return on investment (ROI) − a percentage calculated as the profit divided by the total
investment. It shows how what the percentage return is on every R1 invested
Revenue − all gains from the ordinary activities of the business
Risk − the probability that an expected outcome will not be realised, or that an action
will produce an unpleasant outcome, not in line with expectations
S
Source document − the point of original entry of a transaction, which should provide
the information necessary to record the transaction accurately
Sunk costs − costs already incurred that cannot be recovered
Synergy − the working together of two things to produce an effect greater than the sum
of their individual effects
T
Tangible assets − assets that have physical substance; you can touch and see them
Trial balance − a list of all the accounts in the general ledger and their final (or closing)
balances
Turnover − revenue from sales and services (trading activities)
U
Unlimited liability − if a partnership is unable to pay its debts, the creditors can claim
the personal assets of the owners of the business
V
Value − an estimation of the worth of something

Key concepts
A
accounting
accounting model
accounting policy note
accrual accounting
accrued income
accumulated depreciation account
accumulated funds account
accumulated impairment account
accumulated profit
accrued income
adjusting differences
adjusting journal entries
applications and allotment account
arrear cumulative Class B dividends
arrear fixed dividend
asset
asset class
asset definition and recognition criteria
asset disposal account
asset management
asset utilisation measures
audit
auditors
authorised share capital
B
bad debt expense
balance
bank charges
bank deposit slip
bank overdraft
benefit
books of first entry
break-up valuation

budget
business
business entity
businesses
business risk
C
capital
capital contribution
capital gains tax
capital investment
capital market
carrying value of an asset
cash basis
cash equivalents
cash flows from operating activities
cash flows from operations
cash receipts journal
catch-up method
certificate of incorporation
certificate to commence business
chart of accounts
Code of Corporate Practices and Conduct (‘‘King Code’’)
collection agent
common base-year financial statements
common size financial statements
Companies Act 71 of 2008
comparability (of information)
component approach
comprehensive income
consignment stock
Constitution of the Republic of South Africa, 1996
consumption
consumption tax
contra account
co-ordination (of activities)
corporate governance
correcting journal entry
cost
cost allocation method
cost model
cost of sales expense
cost plus method
coupons
creditors’ payment period
credit
creditor
creditors list
creditors’ repayment period
credit sales invoice
credit terms
creditworthiness
current account
current assets
current cost
current liabilities
current ratio
D
days inventory on hand debenture
debit
debit balance
debit card payment
debit order
debt
debt−equity ratio
debtors’ collection period
deficit units
delivery note
demand and supply
deposits
depreciation
depreciation account
depreciable amount
differential reporting
diminishing balance method
disclosure
disclosure requirements
discounting cash flows to present value
dividend tax
double entry principle
double entry system
drawer
drawings
duties and responsibilities of auditors
E
earnings per share
earnings yield
economic decision-makers
economic decisions
economic development
economic growth
economic substance (economic reality)
economics
economy
EFT payment
elements of the financial statements
entity concept
equity investors
equity multiplier ratio
estimated life of an asset
ethical business standards
exchange
executive summary
expenses
exports
Extensive Business Reporting Language (XBRL)
extractive activities
F
face value
fair value
fair value reporting
faithful representation
feasibility
FIFO (first in, first out) method
finance
financial analysis
financial indicators
financial information
financial institutions
financial period
Financial Reporting Standards Council (FRSC)
financial reports
financial risk
financial statements
financial year
fixed asset register
fixed asset turnover ratio
fixed dividend shares
FOB destination
FOB (free on board) shipping point
forfeited coupons
founding statement
framework
fundamentals of economics
future economic benefits
G
gearing
general ledger
generally accepted accounting practice (GAAP)
general purpose financial statements
going concern basis
goodwill
gross carrying amount
gross profit
gross profit margin
H
hire purchase agreements
human resources
I
IAS 2, Inventory
IAS 7
IAS 8, Accounting for Changes in Estimates
IAS 16, Property, Plant and Equipment
IAS 18, Revenue
IAS 36, Impairment of Assets
IAS 40, Investment Properties
IFRS for SMEs
impairment loss
imports
incremental budget
independent review
indexed statements
inherent goodwill
internal goodwill
instalments
interest
interest-bearing borrowings
interest rate
intermediaries
intermediation
internal control system
International Accounting Standards Board
International Financial Reporting
Standards (IFRS)
inventory
inventory account
inventory turnover ratio
investment property
investments
invoice
issued share capital
J
jointly and severally liable
juristic person
K
King Code (Code of Corporate Practices and Conduct)
L
lease agreements
legal person
lender
leverage
liability
liquidation
liquidation account
liquidity
loss on sale account
M
management
management information
manufacturing activities
market
market-to-book ratio
mark-up on cost
mark-up on sales
master budget
matching concept
material error and bias
material information
material omissions
means of payment
Memorandum of Incorporation (MOI)
monetary information
money market
money supply
mortgage bond
moving weighted average
N
natural person
net asset value
net margin on sales
net working capital
non-cash flow expenses
non-current assets
non-current liabilities
non-financial information
non-government organisations
non-monetary information
non-profit companies
no par value shares
O
one period
operating cycle
operating profit
order

ordinary operating income
organisation
other comprehensive income
owner-occupied property
P
partnership
partnership agreement
past event
payee
periodic method
perpetual method
perpetual succession
personal liability company
post-adjustment trial balance
pre-adjustment trial balance
premium on redemption
prepaid expense
present obligation
present value
price−earnings ratio
private company
private sector
production
profit
profitability
profit and loss
profit and loss account
profit attributable to Class A shareholders
profit companies
profit on sale account
profit ratio
profit-sharing ratio
provisional tax
public company
public sector
purchased goodwill
purchases account
Q
qualitative information
quantitative information
quick ratio
R
ratios
recognition criteria
reconciliation
reconciling items
recoverable amount
reliable measurement
replacement cost
reporting date
residual value
resources
responsible corporate activities
restricted transferability
retail activities
retained profit
return on assets
return on equity
return on investment
revaluation model
revaluation surplus
revenue
right of pre-emption
risk
risk management
roles and responsibilities of management and directors
S
SAICA (South African Institute of Chartered Accountants)
sales income
sales journal
scrip dividend
service activities
settlement discount
share capital
shareholder
shareholder activism
share issue expenses
share price
shares
simple weighted average
sole proprietership
source document
sources of finance
South African Revenue Service (SARS)
specialised journals
specific identification method
standards of directors’ conduct
statement of cash flows
statement of changes in shareholders’ equity
statement of comprehensive income
statement of financial position
Statement of Income and Expenditure
statement of members’ net investment
Statement of Receipts and Payments
state-owned enterprise
stop order
straight-line depreciation method
strategic plan
STRATE (share transfer records all totally electronic)
subscriptions in advance
subscriptions in arrears
subsidiary ledger
sum of digits method
sunk costs
support asset
surplus
surplus units
sustainability
sustainable business practices
T
T-accounts
tangible assets
taxation
tax collection system
tax invoice
theoretical closing inventory
time value of money
timing (reconciling) differences
total asset turnover
trade discount
trade payables
trade payables account
trade receivables
trade receivables account
trading account
transactions
trend analysis
triple bottom line
turnover
turnover measures
U
uncertainty
unlimited liability
unredeemed coupons account
useful life of an asset
V
value
value added tax (VAT)
value added tax (VAT) vendor
value in use
VAT registration number
VAT return
vision
vision statements
W
weighted average method
wholesaler
working capital
working capital cycle
X
XBRL (Extensive Business Reporting Language)
Z
zero-based budget

zero-rated goods

Table of contents
Cover
Title
Copyright
Contents
INTRODUCTION
ABOUT THE AUTHORS AND CONTRIBUTORS
QUESTIONS
5 Adjustments
6 Inventory
12 Companies
SELECTED SOLUTIONS
2.1
2.4
2.5
2.6
3.1
3.2
3.3
3.4
4.1
4.2

4.3
4.4
4.5
5 Adjustments
5.1
5.2
5.3
6 Inventory
6.1
6.2
6.3
6.4
7.1
7.2
8.1
8.2
8.3
9.1
10.1
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
11.10
12 Companies
12.1
12.2
12.3
12.4
12.5
12.6
13.1
13.2
13.3
13.4
13.5
14.1
14.2
14.3
14.4
15.1
15.2
15.3
16.1
16.2
17.1
GLOSSARY
KEY CONCEPTS
Guide
Cover
Contents
Page List
i
ii
iii
iv
v
vi
vii
viii
1

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285


Financial Accounting The Question Book - Revised 5th Edition

Uploaded by

Copyright:

Available Formats

You might also like

Financial Accounting The Question Book - Revised 5th Edition

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Financial Accounting The Question Book - Revised 5th Edition

Uploaded by

Copyright:

Available Formats

******ebook converter DEMO Watermarks*******

******ebook converter DEMO Watermarks*******

******ebook converter DEMO Watermarks*******

******ebook converter DEMO Watermarks*******

The questions are graded A (objective test − easy), B (tutorial − intermediate), or C

About the authors and contributors

Riley Carpenter is a lecturer in the College of Accounting at the University of Cape

******ebook converter DEMO Watermarks*******

QUESTION 2.1 (A) [Solution on page 188]

QUESTION 2.2 (A)

******ebook converter DEMO Watermarks*******

QUESTION 2.3 (B)

******ebook converter DEMO Watermarks*******

QUESTION 2.4 (B) [Solution on page 188]

QUESTION 2.5 (B) [Solution on page 189]

******ebook converter DEMO Watermarks*******

QUESTION 2.6 (C) [Solution on page 190]

The following transactions occurred during January 20x1:

******ebook converter DEMO Watermarks*******

******ebook converter DEMO Watermarks*******

QUESTION 3.1 (B) [Solution on page 191]

The following balances appeared on 28 February X8 in the ledger of AB Traders:

******ebook converter DEMO Watermarks*******

Prepare a corrected trial balance as at 28 February X8.

QUESTION 3.2 (B) [Solution on page 191]

Amounts of assets and liabilities at 28 February 2013

******ebook converter DEMO Watermarks*******

QUESTION 3.3 (B) [Solution on page 193]

******ebook converter DEMO Watermarks*******

Record the above transactions in the General Ledger of the business.

QUESTION 3.4 (C) [Solution on page 194]

******ebook converter DEMO Watermarks*******

QUESTION 3.5 (C)

Trial balance of Zamakulungisa as at 30 November 2011

QUESTION 3.6 (B)

The following transactions occurred during December X7:

1. Prepare the general journal entries required to record each transaction.

QUESTION 3.7 (B)

Trial balance of Andrea’s Photography as at 31 May X7

******ebook converter DEMO Watermarks*******

Prepare the journal entries required to record the transactions above.

Question 3.9 (C)

Landscaping Delight is a sole proprietor offering landscaping services, mainly in

The following transactions took place in April:

******ebook converter DEMO Watermarks*******

1. Enter the opening balances on 1 April X1 in the general ledger of Landscaping

******ebook converter DEMO Watermarks*******

QUESTION 4.1 (C) [Solution on page 196]

******ebook converter DEMO Watermarks*******

QUESTION 4.2 (A) [Solution on page 197]

QUESTION 4.3 (B) [Solution on page 198]

Answer the following questions:

******ebook converter DEMO Watermarks*******

QUESTION 4.5 (C) [Solution on page 199]

******ebook converter DEMO Watermarks*******

******ebook converter DEMO Watermarks*******

QUESTION 4.7 (C)

Moedverloor Farm is currently experiencing severe financial difficulties. Currently they

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*

ebook converter DEMO Watermarks*