Tutorial letter 201/1/2012 Financial accounting for companies (FAC2601) FAC2601

Transcription

1 FAC60/0//0 Tutorial letter 0//0 Financial accounting for companies (FAC60) FAC60 Semester Department Financial Accounting Dear Student Enclosed please find information regarding the examination, group visits as well as the solution to assignment 03/0. Contact details of the module are as follows: Telephone number: FAC60@unisa.ac.za Bar code

2 Please use the following or SMS numbers for administrative related enquiries: Description of enquiry Short SMS code address Applications and registrations Assignments Exams Study material Student accounts 3954 myunisa mylife Graduations For further assistance you can contact the College Information Coordinator: Ms Portia Ngcobo Telephone number: CEMSenquiries@unisa.ac.za With kind regards, LECTUES: FINANCIAL ACCOUNTING FO COMPANIES (FAC60) ANNEXUE A: EXAMINATION ANNEXUE B: GOUP VISITS ANNEXUE C: SOLUTION TO ASSIGNMENT 03//0 ANNEXUE D: LEASES FAMEWOK AND EXAMPLES

3 FAC60/0/ ANNEXUE A: EXAMINATION PLEASE NOTE: The syllabus for this module has changed for 0 and you are going to be examined on the new work. (i) We would like to draw your attention once more to tutorial letter 30 on examination technique and we would like to stress a few items: Number all your answers clearly. Answer each question on a new page. Please do not answer two questions on the same page. Keep to the time table. When the time for a question is over you must carry on with the next question. You cannot afford to leave out a question. Write neatly and structure your work so that it is easy to read. It is important to answer what is asked from you so that you do not do unnecessary work and thus waste valuable time. Work though all your study material and do not just concentrate on old exam papers. (ii) The examination consists of a two hour paper counting a total of 00 marks. The whole syllabus can be tested in this paper. Here are some tips to improve your future studies (these tips are based on what the students did wrong in previous exams). emember this is not a summary of what to study, it is just guidelines for the examinations: TAKE NOTE: Please take note of the changes to termininology that is used for the financial statements. Statement of profit or loss and other comprehensive income (Statement of comprehensive income (SoCI)): Know how to do calculations on finance cost and show CALCULATIONS clearly. emember to show/calculate other comprehensive income. Note on profit before tax: Know how to disclose different disclosable items on this note and show calculations in brackets.. Statement of financial position (SoFP): Show all calculations. This can be done in brackets next to the item or reference it back to your calculation on another page, but remember to reference your work. Study how the notes on financial statements are disclosed and show calculations separately on these notes if necessary. Notes are not just calculations, it is extra information for the users of the statements and is disclosable. Property, plant and equipment (PPE) is always one entry in the SoFP. The total you get in the note on PPE must be the same as the total in the SoFP. You get a principal mark for having the same amount. emember to give the extra information regarding the description of the property just underneath the note on PPE. 3. Statement of changes in equity: Know how to calculate opening balances. You can only improve your knowledge on this topic by exercising this type of questions under examination conditions. Please note that dividends are normally declared at the end of the financial year after all relevant transactions were accounted for. ead what the question asks you to do and always show all your calculations with specific reference to all the types of dividends (eg. ordinary dividends, cumulative preference dividends and preference dividends). 3

4 4. Theory: Please study all relevant questions in assignment 3 and study guide, refer to text book as well where necessary. 5. Leases: Always show all calculations. If a financial calculator was used, show all steps. (eg. identify amount used for present value, interest, etc.). If the formula was used, show all steps and workings. 4

5 FAC60/0/ ANNEXUE B: GOUP VISITS FIST SEMESTE Group visits will once again be conducted this year. The dates are as follows: PETOIA Date: 3 April 0 Venue: Exam Hall Theo van Wijk Building Unisa Main Campus Time: 8:30 :00 DUBAN Date: 3 April 0 Venue: Durban egional Office 30 Stanger Str Durban Time: 8:30 :00 CAPE TOWN Date: 3 April 0 Venue: Parow egional Office 5 Jean Simonis Str Parow Time: 8:30 :00 FLOIDA Date: April 0 Venue: Gencor Auditorium 3 rd floor, B Block Florida Campus Time: 8:30 :00 5

6 ANNEXUE C: SOLUTION TO ASSIGNMENT 03/0 SOLUTION VULA LIMITED EXTACT FOM THE STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 8 FEBUAY 006 Notes evenue Cost of sales ( ) Gross profit Other operating income Distribution cost Administrative expenses Other operating expenses ( ) ( ) ( ) ( ) Finance cost [( x 5% x 6/) + ( x 5% x 6/)] (Calculation ) (55 000) Profit before tax Income tax expense ( ) Profit for the year VULA LIMITED NOTE FO THE YEA ENDED 8 FEBUAY 006. Profit before tax is disclosed after taking the following items into account, amongst others: Income Profit on sale of noncurrent asset Income from subsidiaries Dividends Interest Income from other financial assets Listed investments Dividends Unlisted investments Dividends Expenses Directors remuneration Executive directors Emoluments ( ) Less: Paid by subsidiary (5 00) Total paid by company Nonexecutive directors Emoluments ( ) Less: Paid by subsidiary (48 400) Total paid by company

7 FAC60/0/ SOLUTION (continued) Depreciation ( ) Auditors remuneration Fees for audit Expenses Loss on sale of noncurrent asset Calculations. Directors remuneration Executive Nonexecutive Vula Ltd Bolo Ltd Vula Ltd Bolo Ltd A Salary Entertainment allowance Fees for attending meetings B Salary Entertainment allowance Fees for attending meetings C Salary Fees for attending meetings D Fees for attending meetings E G Fees for attending meetings Salary Salary Fees for attending meetings

8 SOLUTION (continued). Finance cost Longterm loan Total payments payable (according to question (note 0)) 0 Less: Payments made up to 8/0/006 Payments outstanding 8 Outstanding loan as per list of balances = 8 payments One payment is thus / Loan at end of year Plus: One payment made during the year Loan at beginning of year Outstanding amount /3/005 3/8/ Outstanding amount /9/005 8// Finance charges is calculated at 5% on the above two amounts 3. Depreciation 3. Buildings Cost price Depreciation (% x ) Plant and machinery Cost price Depreciation (5% x ) Furniture and equipment Carrying amount 8//006 ( ) Carrying amount 8//005 ( x 00/90) Depreciation (0% x ) Or Cost price /9/ Less: Depreciation (/9/004 8//005) (0% x x 6/) Carrying amount 8//

9 FAC60/0/ SOLUTION (continued) MAKING PLAN Marks Statement of comprehensive income evenue Cost of sales Other operating income Distribution cost Administrative expenses Other operating expenses Finance cost Income tax expense Note Profit on sale of noncurrent asset Income from subsidiary Income from other financial assets 3 Executive directors remuneration Emoluments 3 / Paid by subsidiary Nonexecutive directors remuneration Emoluments / Paid by subsidiary Depreciation 3 Auditors remuneration Fees for audit Expenses Loss on sale of noncurrent asset Total 30 9

10 SOLUTION LAST ESOT LIMITED EXTACT FOM THE STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 9 FEBUAY 008 Notes evenue ( x 00 / 4) Cost of sales ( ) Gross profit Other income ( ) Administrative expenses Distribution cost Other operating expenses (68 000) (354 50) [ (5% x x 6/) (5% x x 6/)] Finance cost ( ) (5 750) Profit before tax Income tax expense (4 950) Profit for the period LAST ESOT LIMITED NOTE FO THE YEA ENDED 9 FEBUAY 008. Profit before tax is disclosed after taking the following, amongst others, into account: Income Fair value adjustment [ x 0,50(3,00,50)] Profit on sale of noncurrent asset [ ( )] Income from subsidiary Dividends Interest Income from other financial assets Listed investments Dividends Expenses Directors remuneration Executive directors Emoluments [ ( x 5 000)] Pension (managing director) Nonexecutive directors Emoluments [ ( x 5 000)] Pension (chairman) Auditors remuneration Fees for audit Expenses Depreciation (calculation )

11 FAC60/0/ SOLUTION (continued) Calculations:. Depreciation. Depreciation on equipment Carrying amount 8//008 Cost price ( x 00 / 40) or ( x 5/) Depreciation (0% x 0 000). Depreciation on motor vehicles.. Vehicle sold Carrying amount 8//007 Depreciation /3/007 3/8/007 (0% x x 6/) Carrying amount 3/8/007.. est of vehicles Carrying amount 9//008 ( ) Carrying amount /3/007 (00/80 x ) Depreciation /3/007 9//008 (0% x ) Total depreciation ( ) MAKING PLAN Marks Statement of comprehensive income evenue Cost of sales Other income 3 Administrative expenses Distribution expenses Other operating expenses Finance cost Income tax expense Note Fair value adjustment Profit on sale on noncurrent asset Income from subsidiary Income from financial assets Directors remuneration 3 Auditors remuneration Depreciation 3 Total 5

12 SOLUTION 3 VISION LIMITED STATEMENT OF CHANGES IN EQUITY FO THE YEA ENDED 8 FEBUAY 006 eserve for increased replacement cost of noncurrent assets Share capital 0% Cumulative preference % Noncumulative preference Surplus on revaluation etained share capital share capital of assets earnings Total Balance March Comprehensive Income for the year Dividends (calculation ) Preference cumulative Preference noncumulative Ordinary Capitalisation shares issued ( /6) x,5 Share issue expenses written off Transfer to reserve (60 000) (66 000) (40 000) (60 000) (66 000) (40 000) (50 000) (5 000) (5 000) (90 000) Balance 8 February Calculation Dividends Cumulative preference ( x 0% x years) Noncumulative preference ( x %) Ordinary ( x 0c) Note. Calculation of dividends in cents is done on the number of shares while the calculation of dividends as a percentage (%) is done on rand () values. MAKING PLAN Marks Statement of changes in equity Share capital ordinary shares 3½ % Noncumulative preference share capital ½ 0% Cumulative preference share capital ½ Surplus on revaluation of assets ½ eserve for increased replacement cost of noncurrent assets ½ etained earnings ½ Total 0

13 FAC60/0/ SOLUTION 4 TIO LIMITED STATEMENT OF CHANGES IN EQUITY FO THE YEA ENDED 30 JUNE 006 Ordinary share capital Marktomarket reserve % Cumulative preference share capital Surplus on evaluation of assets eserve for replacement of assets etained earnings Total Balance July Comprehensive income for the year Shares issued January 006 Shares issued 3 March 006 Capitalisation shares issued Share issue expenses written off Transfer to replacement reserve Dividends declared* Preference shares Ordinary shares (60 000) (6 000) (6 000) (70 000) (39 060) (39 060) (90 000) (90 000) Balance 30 June *Dividends Preference (% x x years) (% x x 6 months) Ordinary ( ) shares x 0c Note. Calculation of dividends in cents is done on the number of shares while the calculation of dividends as a percentage (%) is done on rand () values. MAKING PLAN Marks Statement of changes in equity Ordinary share capital 8 % Cumulative preference share capital 3 Surplus on revaluation of assets eserve for replacement of assets etained earnings Total 6 3

14 SOLUTION 5 5. TIO LIMITED NOTES FO THE YEA ENDED 30 JUNE NONCUENT LIABILITIES Longterm liability Secured % Longterm loan Less: Shortterm portion transferred to current liabilities (0 000) The loan is secured by a first mortgage bond over fixed property. Interest is calculated at % per annum. The capital portion is repayable in five equal annual instalments from 30 April TIO LIMITED NOTES FO THE YEA ENDED 30 JUNE 006. Property, plant and equipment Land Buildings Machinery Furniture and equipment Total Carrying amount July Cost Accumulated depreciation (0 000) (00 000) (8 000) (48 000) evaluation Disposal at carrying amount Additions at cost Depreciation (0 000) (75 000) ( 50) (8 350) ( 50) (03 350) Carrying amount 30 June Valuation/Cost Accumulated depreciation (30 000) (75 000) (4 600) (47 600) Land and buildings are situated on erf 350, George and consist of an office block. It was revalued on 3 October 005 by mr Black, a sworn appraiser, at replacement value of

15 FAC60/0/ SOLUTION 5 (continued) 5.3 TIO LIMITED EXTACT FOM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 006 Notes ASSETS Noncurrent assets Property, plant and equipment Investment in subsidiary Current assets Inventory Trade and other receivables Other financial assets ( ) Cash and cash equivalents Total assets Calculations:. Property, plant and equipment. Buildings Depreciation current year (% x ). Machinery Carrying amount 30 June 006 given Carrying amount 30 June 005 (5 000 x 00/75) Cost 30 June 004 ( x 00/75) Depreciation current year ( x 5%) Depreciation previous year ( x 5%) Furniture and equipment Cost 30 June 006 given Cost of addition 3 March 006 (5 000) Cost of disposal 3 March Cost 30 June Depreciation current year New computer [( ) x 0% x 3/] 600 Computer sold (5 000 x 0% x 9/) 750 emaining equipment ( x 0%) Total Accumulated depreciation on disposal ( ) Carrying amount of disposal ( ) 50 Accumulated depreciation 30 June 005 ( )

16 SOLUTION 5 (continued) MAKING PLAN Marks Statement of financial position Property, plant and equipment Investment in subsidiary Inventory Trade and other receivables Other financial assets Cash and cash equivalents Note on property, plant and equipment Land Buildings Machinery Furniture and equipment Details of property Note on longterm loan Gross amount Shortterm portion ate of interest Security epayment conditions ½ ½ ½ Total 4 ½ ½ ½ 4 7 6

17 FAC60/0/ SOLUTION 6 PUCO LIMITED EXTACT FOM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 006 ASSETS Notes Noncurrent assets Property, plant and equipment Investment in subsidiary Current assets Inventories Trade and other receivables Other current assets Total assets PUCO LIMITED NOTES FO THE YEA ENDED 30 JUNE 006. Property, plant and equipment Furniture and equipment Land Buildings Plant and machinery Total Carrying amount July Cost Accumulated depreciation ( ) (00 000) ( ) evaluation Additions at cost ( ) Disposals at carrying amount Depreciation capitalised Depreciation (0 000) ( 600) ( ) (5 500) (59 500) (5 500) ( 600) ( ) Carrying amount 30 June Valuation/cost Accumulated depreciation (0 000) ( ) ( 000) ( ) Land and buildings comprise of erf 33, Sunward Park, with factory buildings and an office block. The land was revalued during 006 by mr Value, a sworn appraiser, at replacement value. 7

18 SOLUTION 6 (continued). Investment in subsidiary Shares at cost Loan to subsidiary Inventories Consist of: aw materials Work in progress Finished goods Other current assets Listed investments Preference shares in Thakalaka Ltd at fair value (0 000 x,50) Ordinary shares in Sugar Ltd at fair value ( x 3) Calculations. Buildings. Additions Direct cost given Depreciation capitalised Depreciation current year ( x % x 6/) Plant and machinery. Cost opening balance ( ) Depreciation current year ( x 0%) Depreciation capitalised ( x 3/) Accumulated depreciation closing balance ( ) Furniture and equipment 3. Depreciation on machinery traded in current year ( x 0% x 9/) Accumulated depreciation on machinery traded in ( ) Carrying amount of machinery traded in ( )

19 FAC60/0/ SOLUTION 6 (continued) 3.4 Depreciation of equipment on hand current year [( x 0%) + ( x 0% x 3/)] Total depreciation current year ( ) Cost closing balance ( ) Accumulated depreciation closing balance ( ) 000 MAKING PLAN Marks Statement of financial position Property, plant and equipment Investment in subsidiary Inventories Trade and other receivables Other current assets Notes Property, plant and equipment evaluation of land Additions to buildings Depreciation buildings Plant and machinery at cost opening balance Depreciation capitalised Depreciation plant and machinery Accumulated depreciation plant and machinery closing balance Additions to furniture and equipment Disposals of furniture and equipment Depreciation furniture and equipment Furniture and equipment at cost closing balance Accumulated depreciation furniture and equipment closing balance Note on situation of land and buildings Investment in subsidiary Shares Loan Inventories aw materials Work in progress Finished goods Other current assets Listed Unlisted Total 30 9

20 SOLUTION 7 PUCO LIMITED STATEMENT OF CHANGES IN EQUITY FO THE YEA ENDED 30 JUNE 006 Balance July 005 Ordinary share issued on 3 March 006 Noncumulative preference shares issued on April 006 Preliminary expenses written off Share issue expenses written off Capitalisation shares issued [( /0) x ] Comprehensive income for the year ( ) Dividends declared: Cumulative preference shares (6% x x years) Noncumulative preference shares (8% x x 3/) Ordinary shares ( x 5c) Ordinary share capital % Cumulative preference share capital 8% Noncumulative preference share capital Surplus on revaluation of noncurrent assets etained earnings Total (30 000) ( 000) ( ) (60 000) (4 000) (30 000) ( 000) (60 000) (4 000) (8 500) (8 500) Balance 30 June MAKING PLAN Marks Statement of changes in equity Ordinary share capital 5 6% Cumulative preference share capital 3 8% Noncumulative preference share capital Surplus on revaluation of noncurrent assets etained earnings 5 Total 6 0

21 FAC60/0/ SOLUTIONS 8 8. Elements of cost The cost of a PPEitem comprises: (a) its purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates. (b) any costs 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. (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. This obligation can arise either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 9. Examples of costs that are not costs of a PPEitem are: (a) costs of opening a new facility; (b) costs of introducing a new product or service (including costs of advertising and promotional activities); (c) costs of conducting business in a new location or with a new class of customer (including costs of staff training); and (d) administration and other general overhead costs. 0. Derecognition The carrying amount of a PPEitem shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of a PPEitem shall be included in profit or loss when the item is derecognised. Gains shall not be classified as revenue from the sale of goods and services.

22 SOLUTIONS 8 (continued). (a) Change in accounting policy When an item of PPE is revalued for the first time it is considered to be a change in accounting policy. It is therefore treated as a normal revaluation. Only the effect of the change on the figures for the current year is shown, as replacement values applicable to previous years are not readily available. (b) esidual value esidual values of assets should be reviewed at least at each financial yearend. If necessary the residual values should be adjusted and the disclosure requirements with regard to a change in accounting estimate should be complied with. (c) Estimated useful life If necessary the amended remaining useful life should be used and the disclosure requirements with regard to a change in accounting estimate should be complied with. (d) Determination of replacement value Assets can be revalued according to the net replacement value or the gross replacement value. Gross replacement value is the replacement cost (market value) of a similar, new asset. Net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition.. Change in fair value of a financial asset A gain or loss arising from a change in the fair value of a financial asset or financial liability that is not part of a hedging relationship shall be recognised as follows: (a) A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be recognised in profit or loss. Profit or loss Debit Investment Credit Fair value adjustment Debit Fair value adjustment Credit Investment Profit Loss

23 FAC60/0/ SOLUTIONS 8 (continued) (b) A gain or loss on a notheldfortrading financial asset shall be recognised directly in equity through the statement of changes in equity. Profit or loss Debit Investment Credit Marktomarket reserve Debit Marktomarket reserve Credit Investment Profit Loss 3. evaluation of an asset net replacement value basis Carrying amount end of Net replacement value evaluation surplus Journal Accumulated depreciation Equipment at cost Equipment at revaluation evaluation surplus evaluation of equipment on the net replacement value vasis Dr Cr Net replacement value basis Step : Step : The net replacement value of is regarded as the cost to replace the asset currently with a similar asset of the same age and condition. Calculate the amount that must be transferred to the revaluation surplus (revalued amount carrying amount of asset on revaluation date). Net replacement value Carrying amount evaluation surplus

24 SOLUTIONS 8 (continued) Step 3: Journalise the revaluation Journals Asset at revaluation Asset at cost Accumulated depreciation evaluation surplus evaluation of asset on net replacement value basis Depreciation (90 000/6) Accumulated depreciation Depreciation for the year based on revalued amount 5. evaluation date: January 0.3 Net replacement value: The asset is year old at January 0.3 (80 000/6 = ; / = year) or January 0. January 0.3 = year The revaluation surplus at this date is: Dr Cr Cost Accumulated depreciation (30 000) Carrying amount at January Net replacement value January 0.3 (60 000) evaluation surplus at January The accumulated depreciation and cost of the asset is written back and the asset is shown at the revalued amount. Journals Accumulated depreciation Asset at revaluation Asset at cost evaluation surplus evaluation of asset on the net replacement value basis Depreciation (60 000/5) Accumulated depreciation Depreciation for the year based on revalued amount Dr Cr

25 FAC60/0/ SOLUTIONS 8 (continued) 6. Definition evenue evenue is: the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity that results in increases in equity, excluding the contributions of equity participants. 7. Disclosure in respect of revenue The following should be disclosed in the financial statements: The accounting policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services. The amount of each significant category of revenue recognised during the period, including revenue arising from: the sale of goods; the rendering of services; interest; royalties; dividends. The amount of revenue arising from the exchange of goods or services included in each significant category of revenue. In terms of the Fourth Schedule to the Companies Act, the following items should be disclosed separately: income from investments, distinguishing between listed and unlisted investments and between interest, dividends and other specified income; the aggregate amount of income from subsidiaries, stating whether dividends, interest, fees or other specified income; and the aggregate amount of turnover for the accounting period and the basis upon which turnover has been determined. 8. Measurement evenue evenue will be measured as follows: At fair value of the consideration received or receivable. At fair value which is the amount for which an asset could be exchanged or a liability settled, between knowledgeable willing parties in arms length transaction. 5

26 SOLUTIONS 8 (continued) 9. ecognition evenue evenue will be recognised when it is probable that future economic benefits will flow to the entity and it can be measured reliably. 0. Sale of goods (i) (ii) Bill and Hold sales: evenue recognised when buyer takes title and it is probable that delivery will be made. Goods shipped subject to conditions: (a) Installation and inspection: evenue recognised when buyer accepts delivery and installation and inspection process are complete or immediately upon delivery when installation process is simple. (b) Consignment sales: evenue recognised when goods are sold by the recipient to a third party. (c) COD: evenue recognised when delivery has been made and cash is received. (iii) (iv) (v) (vi) (vii) (viii) (ix) Lay away sales: evenue recognised when buyer makes final payment or significant deposit is received. Order when payment is received in advance for goods not presently held in inventory: evenue recognised when goods are delivered to buyer. Sale and repurchase agreements: The terms of agreement need to be analysed to determine if the seller has transferred the risks and rewards of ownership. Sales to intermediate parties: evenue recognised when risks and rewards of ownership have passed to buyer. Subscriptions: evenue recognised on a straightline basis over the period of the agreement. Instalment sales: evenue attributable to sales price, exclusive of interest recognised on date of sale. Interest element recognised on time proportion basis. eal estate sales: evenue recognised when legal title passes to the buyer.. endering of services (i) Installation fees: evenue recognised by reference to stage of completion unless incidental; then recognised when goods are sold. (ii) Service fees included in price of product: Service fees is deferred and recognised over the period during which the service is performed. (iii) Advertising commissions: evenue recognised when advertisement appears before public. Production commissions recognised by reference to the stage of completion of project. (iv) Insurance agency commissions: evenue recognised on the effective commencement or renewal dates of the related policies. (v) Admission fees: evenue recognised when the event takes place. 6

27 FAC60/0/ SOLUTIONS 8 (continued) (vi) (vii) (viii) (ix) Tuition fees: evenue recognised over the period of instruction. Initiation, entrance and membership fees: evenue recognition depends on the nature of the service provided, for example if the fee permits only membership or include other services as well. Franchise fees: evenue recognised on a basis that reflects the purpose for which the fees were charged. Development of customised software: evenue recognised by reference to stage of completion.. License fees and royalties: evenue recognised in accordance with the substance of the agreement, this may be on straightline basis over the life of the agreement. MAKING PLAN Marks Elements of cost Examples of cost not cost of PPE Derecognition (a) Change in accounting policy (b) esidual value (c) Estimated useful life (d) Determination of replacement value Change in fair value of a financial asset evaluation of an asset Determination of replacement value Determination of replacement value evenue definition evenue disclosure evenue measurement evenue recognition evenue recognition sale of goods evenue recognition rendering of services evenue recognition other Total 0 7

28 SOLUTION 3 SALSA LIMITED NOTES FO THE YEA ENDED 8 FEBUAY Profit before tax is stated after taking the following items into account: Income Income from: Sale of motor vehicles Other income: Dividends received from an unlisted investment Expenses Depreciation ( ) Operating lease payments: Buildings (calculation ) Loss on litigation settlement Income tax expense Current tax expense (calculation 3) Commission prepayment Commission prepaid in terms of an operating lease agreement (calculation ) Less: Current portion to be expensed in statement of comprehensive income over next months (7 00 / 3) ( 400) Operating lease agreement The company entered into an operating lease agreement for the premises they are presently occupying. The lease agreement was entered into on July 9.6 for a 3 year period. The payment terms are: Initial payment initially 36 monthly instalments per month 8

29 FAC60/0/ SOLUTION 3 (continued) The future minimum lease payments are: Up to year to 5 years x = x 6 = Calculations. Operating lease building Initial payment Instalments (5 000 x 36) Equalisation of lease payments (89 000/36) 5 50 Lease payments for the year (5 50 x 8) Commission prepayment Commission paid Expensed through statement of comprehensive income (7 00 x 8 / 36 ) 7 00 ( 600) Prepaid portion Income tax expense Current tax 9% (5 00 x 9%) MAKING PLAN Marks Notes to financial statement Profit before tax note: Income from sale of motorvehicle Other income Depreciation Operating lease payments 3½ Loss on litigation settlement ½ Income tax expenses ½ Commission prepayment 3 Operating lease agreement 6½ Total 8 9

30 SOLUTION 4 a) The nominal rate is calculated on a financial calculator PV = FV = 0 n = 6 ( x 3) PMT = Comp i =,77338% per half year = 3,54676% nominal interest rate per year b) Amortisation table Cash price Instalment Instalment Instalment 3 Instalment 4 Instalment 5 Instalment 6 Instalment Interest Capital Balance Nil c) Journal entries 0.4 Jun 30 Property, plant and equipment Longterm liability Finance lease Finance charges Longterm liability Finance lease Bank Depreciation Accumulated depreciation 0.5 Jun 30 Finance charges Longterm liability Finance lease Bank Depreciation Accumulated depreciation 0.6 Jun 30 Finance charges Longterm liability Finance lease Bank Depreciation Accumulated depreciation Dr Cr MAKING PLAN Marks Finance lease agreement Nominal interest rate per year 4 Amortisation table Journal entries 0 Total 35 30

31 FAC60/0/ SOLUTION 5 LUXUY TAVEL LIMITED NOTES FO THE YEA ENDED 3 DECEMBE 0.. Profit before tax Profit before tax is stated after taking the following into account: Depreciation [( )/5] Interest paid on lease agreement ( ) Property, plant and equipment Leased assets: Limousines Additions ( ) Depreciation (83 00) Carrying amount at 3 December Cost price Accumulated depreciation The limousines serve as security for a finance lease agreement. (efer note 5) (83 00) 4. Longterm borrowing Longterm borrowing under finance lease agreement Total borrowing (refer to amortisation table) Current portion payable within months transferred to current liabilities ( ) (89 63) The above liability is secured by a finance lease agreement over leased vehicles (refer note 4). The effective interest rate is 7,99% per annum. The loan is repayable in 8 equal biannual instalments of payable in arrears, commencing on 30 June 0.. 3

32 SOLUTION 5 (continued) econciliation between the total minimum lease payments at 3 December 0. and their present value: Up to year 5 years Total Amount at statement of financial position date Finance cost (66 487) 9 00 (67 60) ( ) Present value x = = x 4= = MAKING PLAN Marks Notes to the financial statements Profit before tax notes 3 Property, plant and equipment 4 Longterm borrowing 9 Total 6 3

33 FAC60/0/ SOLUTION 6 6. PMT = n = 0 i = 0 FV = 0 PV =? = PMT = n = 0 i = 0 PV = 0 FV =? = PV = 00 i = 5 = 0,4 n = PMT = 0 FV =? = 05,6 00 = 5,6% 6.4 PV = 00 FV = 07 n = PMT = 0 i =? = 3,44 x = 6,88% 6.5 PV = 000 FV = n = PMT = 0 i =? = 9,59% 6.6 PV = 00 i = 8 4 = 4,50 n = 4 PMT = 0 FV =? = 9,5 00 = 9,5% 33

34 SOLUTION 6 (continued) 6.7 PV = 000 FV = i = 8 =,50 PMT = 0 n =? = 73,79 months 6.8 PV = FV = n = 6 9 / = 6,75 PMT = 0 i =? = 8,5% 6.9 PV = i = 8 4 = 4,5 n = 5 x 4 = 0 PMT = 0 FV =? = PMT = n = 5 i = 5 FV = 0 PV =? = PV = 500 i = 5 =,5 FV = 500 x = PMT = 0 n =? = 55,8 months 6. FV = n = 0 i = 5 PV = 0 PMT =? = 4 95, 34

35 FAC60/0/ SOLUTION 6 (continued) 6.3 Step n = 3 i = 6 PV = PMT = 000 FV =? = 737,98 Step n = i = 6 PV = 737,98 PMT = 0 FV =? = 3 76,06 MAKING PLAN Marks 6. Present value 3 6. Future value Effective interest rate Nominal interest rate Interest rate Effective interest rate Time period Interest rate Future value Present value 3 6. Time period 4 6. Payment Future value 5 Total 44 35

36 SOLUTION 7 (a) FV = 0 n = 6 years i = 8% Pmt = 000 per year PV =? = 9 45,76 Answer: C (b) n = i =,5% (8%/) PV = 00 PMT = 0 FV =? = 9,56 = 9,56 00 = 9,56% Answer: B (c) n = 6,5 PV = 000 PMT = 0 FV = 4 78 =? = % Answer: B (d) FV = PMT = 0 i = 4% (6%/4) n = (3 x 4) PV =? = 4 983,88 Answer: C (e) n = 3 i = 0% PV = 0 PMT = 000 FV =? = Answer: B

37 FAC60/0/ SOLUTION 7 (continue) (f) Future value n = 8 i = 0% PV = 0 PMT = 00 FV =? = 54 79, 0 Answer: B (g) n = 4 ( X 4) i = 4% (6% 4) PV = 00 PMT = 0 FV =? = 6,99 = 6,99 00 = 6,99% Answer: D MAKING PLAN Marks 7 (a) Present value 3 7 (b) Effective interest rate 4 7 (c) Interest rate 3 7 (d) Present value 4 7 (e) Future value 3 7 (f) Future value 3 7 (g) Effective interest rate 5 Total 5 37

38 ANNEXUE D: LEASES FAMEWOK AND EXAMPLES LEASES (Only Lessees) Dear students, It came under our attention that there is still allot confusion regarding leases. The main problems identified are the following:. The students can t distinguish between the two different types of lease Operating lease And Finance lease.. The students don t know their theory and mix up the accounting treatment of the types of leases. We will try to make it easier with this illustration, but please also refer to your study guide and text book for further examples as this is a basic guideline to assist you. LEASES Finance lease Operating lease Definition: All substantial risks and rewards incidental to ownership of the asset are transferred to the lessee. Definition: All substantial risks and rewards incidental to ownership of the asset are remains with the lessor. Accounting treatment: ecognise asset and lease liability at the lower of fair value of the asset or the present value of the minimum lease payments Journal entry: Accounting treatment: DO NOT recognise asset or liability Journal entry: NONE Dr Cr Asset Lease liability 38

39 FAC60/0/ Accounting treatments continue... Depreciation must be provided for over the useful life of the asset or over the lease term if shorter than the useful life if the is uncertainty about whether ownership of the asset will be transferred at the end of the lease term Dr Cr Journal entry: Depreciation Acc depreciation Monthly payment of lease instalment: Payments are apportioned between finance costs and capital. The split between capital and finance portion is calculated using a financial calculator and amortisation table (See study guide and text book for use of calculator).finance cost are recognised as a expense in the Profit or loss statement and the Capital portion is a reduction of the liability Dr Journal entry: Lease liability Accounting treatments continue... DO NOT recognises depreciation as there is no asset recognise in the accounting records of the lessee with an operating lease. Journal entry: NONE Monthly payments of lease installment: ent expense must be recognized in the statement of profit or loss and other comprehensive income on a straight line basis over the lease term. Take note that the difference between the cash flows and the expense in the statement of profit or loss and other comprehensive income, results in an accrued or prepaid expense and must be disclosed in the statement of financial position. Dr Journal entry: Lease expense (P/L) Dr/Cr Prepaid expenses (SFP)/ Accrued expense (SFP) Cr Bank Dr Cr Finance costs Bank 39

40 Disclosure in financial statements of the lessee: Statement of financial position: Asset : Noncurrent assets Lease liability : Noncurrent liabilities Current portion of lease liability Current liabilities Notes Property plant and equipment, long term borrowings Please refer to your study guide, tutorial letters and text book for detailed examples. Disclosure in financial statements of the lessee: Statement of financial position: Current asset/liability: Accrued or prepaid expense (If applicable). Statement of profit or loss and other comprehensive income: Operating lease expense Notes to the financial statements Statement of profit or loss and other comprehensive income: Finance cost Notes PLEASE TAKE NOTE: Use this as a guideline. Work through your study material and text book and add detail to this basic framework. Do the questions and refer to this basic framework. 40

41 FAC60/0/ EXAMPLE Finance lease: Apple Ltd entered into a lease agreement with Blackcherry Ltd on January 0.0. The lease agreement is classified as a finance lease. The financial year end of Apple Ltd is 3 December. The lease agreement has the following terms: Term: 5 years Instalments: Interest rate: 5 000, payable annually in arrears on 3 December..0535% per annum The contract determines that Apple Ltd has an option to obtain ownership of the asset at the end of the term at a nominal amount. It is, however, uncertain on initial recognition whether the option will be exercised. If Apple Ltd does not pay the instalments as agreed, Blackcherry Ltd can recover the asset. The asset has a cash selling price of at the commencement of the lease. At this date, the useful life is estimated at 5 years. equired: Account for the finance lease in the financial statements of Apple Ltd. SOLUTION:. Die asset is classified as a finance lease.. Die asset must be recognised in the financial records of Apple Ltd as well as a finance lease liability in the statement of financial position. 3. Depreciation must also by write down on the asset. 4. The monthly payment of the lease instalments is split between a capital and a finance cost portion (Use a financial calculator for this). The finance costs are recognised as an expense in the statement of profit or loss and other comprehensive income and the capital position is accented for as a deduction of the lease liability. CALCULATIONS: Initial recognition on January 0.0: Dr Cr Machine (SFP) Finance lease liability (SFP) The asset and the liability must on initial recognition be recorded at the fair value of the asset, or the present value of the minimum lease payments, if lower than the fair value. Calculation of the present value (PV): PMT = 5 000, n = 5, i =.0535%, FV = 0 PV = (rounded) Fair value = The asset and liability must therefore be recognised initially at

42 Depreciation must be written of annually on the asset: The asset is recognised at The estimated useful life is 5 years. Therefore / 5 = per year Dr Cr Depreciation (P of L) Accumulated depreciation (SFP) Accounting treatment once the first instalment is paid on 3 December 0.0: Dr Cr Finance lease liability (SFP) 4 5 Finance cost (P of L) Bank (SFP) The split between the capital and interest portion must be calculated by using a financial calculator and setting up an amortisation table. After calculating it should look like this. (efer to the text book pg 80 for an illustration on the use of a calculator): Year Installment Interest Capital Balance 90, ,848 4,5 75, ,4 5,858 59, ,3 7,769 4, ,089 9,9, ,689,3 0 Accounting treatment once the second instalment is paid on 3 December 0.: Dr Cr Finance lease liability (SFP) Finance costs (P of L) 9 4 Bank (SFP)

43 FAC60/0/ DISCLOSUE: STATEMENT OF FINANCIAL POSITION AS ON 3 DECEMBE 0.0 ASSETS Noncurrent assets Property plant and equipment ( ) Current assets EQUITY AND LIABILITIES EQUITY NONCUENT LIABILITY Finance lease liability ( ) CUENT LIABILITY Current portion of finance lease liability ( Portion payable in the next months) STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 3 DESEMBE 0.0 Sales Cost of sales Gross profit xxxxx (xxxxx) xxxxx Expenses Other expenses xxxxx Finance cost Notes to the financial statements:. Profit before tax Profit before tax is stated after taking into account the following items: Depreciation

44 3. Property, plant and equipment Carrying amount beginning of the year Cost Accumulated depreciation Movements: Additions Depreciation Carrying amount end of the year Cost Accumulated depreciation (8 000) 5. Longterm borrowing Total liability under finance lease agreement Current portion payable within year (5 858) Longterm portion of finance lease liability The above liability is secured by machinery under a finance lease agreement. The loan bears interest at a rate of.0535% per annum and is repayable in 5 equal instalments of commencing 3 December 0.0. The period of the lease is 5 years. econciliation between the total of minimum lease payments at 3 December 0.0 and their present value: Up to year to 5 years Total Amount at statement of financial position date Finance cost (9 4) (5 009) (4 5) Present value

45 FAC60/0/ EXAMPLE Operating lease: The following information is available in respect of a machine acquired by Apple Ltd from BlackCherry Ltd, in terms of an operating lease. The cash price of the machine is The lease term is from January 0.6 to 3 December 0.8. The monthly lease payment is 500 for the first 4 months and thereafter 50. equired: Account for the operating lease in the financial statements of Apple Ltd. SOLUTION: efer to the framework for guidance. The lease is classified as an operating lease.. The machine is NOT recognised as an asset in the records of Apple Ltd because it is an operating lease. Also, NO operating lease liability is recognised.. NO depreciation is written off on the asset as no asset was recognised. 3. ONLY the expense must be recognised in the statement of profit or loss and other comprehensive income. Take note that the expense must be recognised on the straightline basis. This means that if the instalments differ from year to year, it must be equalised. The difference between the cash flow and the expense in the statement of profit or loss and other comprehensive income will result in an accrued or prepaid expense that must be disclosed in the statement of financial position. Calculations: Equalise lease instalments: Lease payments first 4 months ( 500 x 4) = Lease payments next months (50 x ) = / 36 = 750 per month Annual prepayment January 0.6 to 3 December 0.7: For months ( 750 x ) 000 Actually paid ( 500 x ) Prepayment per annum

46 Shortfall January 0.8 to 3 December 0.8: For months ( 750 x ) 000 Actually paid (50 x ) Shortfall JOUNALS: Year ended 3 December 0.6 Dr Cr Operating lease expense (P or L ) 000 Prepayment (SFP) Bank (SFP) Year ended 3 December 0.7 Operating lease expense (P or L ) 000 Prepayment (SFP) Bank (SFP) Year ended 3 December 0.8 Operating lease expense (P or L ) 000 Bank (SFP) Prepayment (SFP) DISCLOSUE: STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 3 DECEMBE 0.6 Sales Cost of sales Gross profit xxxxx (xxxxx) xxxxx Expenses Other expenses ( Operating lease expense are included here)

47 FAC60/0/ Notes to the financial statements: Profit before tax. Profit before tax is disclosed after the following items are taken into account: Operating lease expense on machinery 000 Paid for the year Prepayment (9 000). Operating lease obligations The total of the future minimum lease payments covers the following periods: Not later than year ( 500 x ) Later than year but not later than 5 years ( 50 x ) Later than 5 years Note that the actual cash amounts paid and not the equalised amounts are used in note. STATEMENT OF FINANCIAL POSITION AS ON 3 DECEMBE 0.6 ASSETS Noncurrent assets Property, plant and equipment xxxxxx Current assets Prepaid expense FAC60_0_TL_0 E.doc 47