2021 Accounting 100 Assessment Opportunity 1 Question 1

QUESTION 1 (20 MARKS)

(24 MINUTES)
Zamathusi is a well-known Youtuber. Her YouTube channel predominately focuses on
makeup and hair tutorials. She is notorious for reviewing makeup products and showing her
subscribers how to achieve certain looks with them. As a result of her vast experience with a
various number of makeup brands, she has decided to start her own makeup line and sell
her products to the public.
She launched her online business, MakeHer (Pty) Ltd (hereafter referred to as MH), in
August 2020 with an annual year-end in July.
The following matters relate to the year ended July 2021:
Matter 1
MH entered into a contract on 1 September 2020 to purchase a machine on credit. On that
day, the supplier estimated that the machine will cost R40 000. The purchase price was
subject to change due to modifications needed on the machine. The cost of these
modifications was unknown at the date of purchase of the machine. The modifications will be
completed by the supplier before they invoice MH.
On 15 September 2020, the machine was delivered to the premises of MH. On the date of
delivery, the modifications were complete, but the amount was still unknown. On 25
September 2020 the supplier sent an invoice stipulating that the cost of modification to the
machine amounted to R15 000. MH is expected to pay the supplier on 15 November 2020.
Matter 2
On 17 December 2020, MH paid Zogue Magazine R2 000 for a half-page advertisement in
their January 2021 issue.
REQUIRED:
With reference to Matter 1:
a) Discuss, in terms of the Conceptual Framework (2010), whether the contract MH
entered into can be recognised as at 15 September 2020.
(17)

b) How would your answer to (a) above change if the date in question were 25
September 2020?
(2)
With reference to Matter 2:
c) Show the effect of the transaction on the accounting equation.
(1)
2021 Accounting 100 Assessment Opportunity 1
QUESTION 1
a) Discuss, in terms of the Conceptual Framework (2010), whether the contract MH
entered into can be recognised as at 15 September 2020.
Definition of a liability
A liability is a present obligation
of the entity (1)
Arising from past events (1)
And the settlement of which is
expected to result in an outflow
from the entity of resource
embodying economic benefits.
(1)
Recognition criteria of a liability Application – Supplier
An item that meets the definition
of a liability is recognised only if it
satisfies both the following
recognition criteria: (1)
It is probable that future
economic benefits associated
with the item will flow out of the
entity; and (1)
The item has a cost or value that
can be measured reliably (1).
Question 1
(SUGGESTED SOLUTION)
Application – Supplier
 The amount payable to the supplier is a present
obligation for MH because:
 The contract that MH entered into is legally
binding. (1)
 The past event is when the two parties entered
into a contract and the machine was delivered
(1) on 1 September 2020. (1)
 Future economic benefits are expected to flow
out of the entity when MH pays the supplier on
15 November 2020. (1)
 As set out above, the amount payable to the
supplier satisfies the definition of a liability.(1)
 It is more likely than not (1) that; the entity will pay
back the amount payable as it is legally bound by
the contract. There is no proof that suggests
that the entity will have liquidity problems in
the short-term (1).
 The amount payable to linked to the machine
being bought. In order to establish the value of
the supplier loan, the supplier needs to determine
the cost of the machine (1). On 15 September,
the cost of the modification is still unknown (1).
Therefore, the supplier cannot determine the full
cost of the machine. The liability therefore cannot
be measured reliably (1).
2021 Accounting 100 Assessment Opportunity 1 Question 1

The recognition criteria have not been met. The liability can therefore not be recognized on
15 September 2020 (1).
c) How would your answer to (a) above change if the date in question were 25
September 2020?

The recognition criteria would be met on 25 September 2020 (1). This is because the full
cost of the machine would be determinable giving the liability a value (1).
c) Show the effect of the transaction on the accounting equation.

Assets Liability Equity

- 2 000 - 2 000
(1)