Department of Accounting

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1 Faculty of Economic and Management Sciences Department of Accounting FINANCIAL ACCOUNTING 121 FK 121 EXAMINATION - 3 NOVEMBE 2007 Maximum marks: 80 Maximum time: 120 Minutes Internal examiners FK 121 Lecturers External examiner Prof J Myburgh Important Information 1. The results of examinations and supplementary examinations for first year students will be displayed on the notice-boards next to the Human Sciences Building. The results for second and third year, as well as postgraduate students will only be available on the MTN line and Intranet at student online. esults will be mailed to individual candidates after the examination period. esults will be available at telephone nr and also on the Intranet address: student online. LECTUES AND ADMINISTATIVE STAFF WILL NOT GIVE CANDIDATES THEI ESULTS PESONALLY O PE TELEPHONE. 2. Supplementary examinations are not granted automatically, but are subject to current Departmental policy. 3. Supplementary examinations take place from 26 November 3 Desember 2007, timetables are available. 3.1 Students should consult the notice-boards at the main entrance to the Merensky Library to determine the date, time and place of their supplementary examinations; 3.2 Timetables will also be available on the Intranet: student online; or 3.3 MTN telephone nr

The following information was acquired from the financial records of atatouille for the year ended 31 October 2007: 1. Purchases 1/11/2006 31/10/2007 Cash 187 000 Credit 238 000 2.

2 INSTUCTIONS Number the questions clearly. All amounts must be rounded off to the nearest and. Show all calculations fully and systematically. QUESTION 1 (10 marks; 15 minutes) émy the rat, owner of atatouille, suspected that one of his employees was stealing. He requested you to determine whether there is any inventory deficit. The following information was acquired from the financial records of atatouille for the year ended 31 October 2007: 1. Purchases 1/11/ /10/2007 Cash Credit Sales 1/11/ /10/2007 Total eturns 1/11/ /10/2007 From debtors The perpetual inventory system is in use. 2. The value of inventory on 1 November 2006 was at cost price. 3. A physical inventory count on 31 October 2007 showed inventory as The gross profit percentage on sales is 20%. 5. During the year émy took inventory with a selling price of from the entity for his own use. 6. émy also donated inventory, cost price , to the Chefs-in-training charity organisation during the year. a. The first-in-first-out method (FIFO) and the weighted average method are two methods of inventory valuation. Name two other methods. (2) b. Show the inventory account on 31 October 2007, properly closed off, to determine whether there was any inventory deficit. (8) FK 121 Examination

3 QUESTION 2 (20 marks; 30 minutes) The financial clerk of Dexter s Lab is currently busy preparing the financial statements for the year ended 31 December 2006 and asked for your assistance. The following information was obtained from the office of the financial manager, who had mysteriously disappeared after an extended holiday in the Bahamas. DEXTE S LAB Pre-adjustment trial balance as at 31 December 2006 Debit Credit Capital Drawings Land Buildings (Purchased 1/10/2006) Equipment Accumulated depreciation on equipment (1/1/2006) % Loan: Forencix Bank Fixed deposit Inventory Debtors control Creditors control Bank Gross profit Interest on fixed deposit Salaries and wages Stationery Water and electricity Telephone Interest expense The depreciation policy of the entity is as follows: Buildings: 2.5% per annum on the straight-line method; and Equipment: 25% per annum on the diminishing balance method. 2. Equipment acquired on 31 October 2004 for 6 000, was damaged during a flood at the warehouse on 1 September The insurance company paid by cheque to settle the claim. The damaged equipment was sold to a nearby pawn shop for 200 cash. The accumulated depreciation on the damaged equipment amounted to (rounded off) on 1 January No entry has yet been made for this transaction. 3. Inventory is valued according to the weighted average method. Some of the inventory is totally outdated and although it was purchased for 3 750, it can only be sold in a market related transaction for FK 121 Examination

4 4. After careful consideration of the age analysis of the debtors list, it was determined that an amount of must be written off as irrecoverable and to create an allowance for credit losses amounting to The owner, Dexter, married his high-school sweetheart, ita during December He decided to buy all the assets and liabilities of her business for on 31 December 2006, to expand Dexter s Lab. The following is the summarised balance sheet of ita etailers as at 31 December 2006: Balance sheet as at 31 December 2006 ASSETS Non-current assets Vehicles at carrying amount Brand name Current assets Inventory EQUITY AND LIABILITIES Capital Current liabilities Creditors Bank overdraft The purchase price was settled as follows: from the business account of Dexter s Lab. The balance from Dexter s personal bank account. The purchase transaction was not recorded in the books of Dexter s Lab. 6. The fixed deposit was invested at Justfin Bank on 1 February 2005 at an interest rate of 15% per annum. 7. The loan was obtained on 1 March 2005 and is repayable in three equal annual instalments as from 1 March A mortgage bond over Dexter s Lab s land and buildings secures the long-term obligation. Interest is payable in arrears every six months on 28 February and 31 August of every year. All the payments have been accounted for correctly during the year. a. At what value will the following items be disclosed in the income statement of Dexter s Lab for the year ended 31 December 2006: Depreciation Finance cost (4½) b. Complete the Assets section of the balance sheet of Dexter s Lab as at 31 December (Notes are not required. Show all calculations.) (12) c. Prepare the notes to the financial statements, regarding the non-current liabilities, of Dexter s Lab for the year ended 31 December (3½) FK 121 Examination

5 QUESTION 3 (20 marks, 30 minutes) This question consists of two unrelated sections. SECTION A (10 marks) On 1 January 2006, Sabi Limited was registered with the following authorised share capital: ordinary shares of no par value (NPV) % preference shares with a par value of 3 each After an initial issue of shares to the founders of the company and the public in February 2006, Sabi Limited issued a prospectus on 2 January 2007, offering the following shares to the public: ordinary shares at 2.50 each % preference shares at 3.50 each The following share transactions took place during 2007: 25 Jan eceived applications for ordinary shares. eceived applications for % preference shares. 2 Feb Sabi Limited allotted the maximum number of ordinary and 10% preference shares and refunded the unsuccessful applicants. ecord the transactions with regard to the issue of the shares in the general journal of Sabi Limited for January and February FK 121 Examination

6 SECTION B (10 marks) Lang and Lee are in partnership and trade as Cosmic Traders. They share profits and losses in the ratio of 2:1 respectively. The financial year-end of the partnership is 30 June They decided to admit Lyman to the partnership as from 1 July It was agreed that Lyman will contribute in cash to the partnership to acquire ¼ interest in the net assets of the new partnership. Lang and Lee will relinquish Lyman s ¼ share in the profits and losses in the ratio of 2:1 respectively. The new partnership will continue trading as Cosmic Traders. The following items appeared in the preliminary balance sheet of Cosmic Traders as at 30 June 2005: Property, plant and equipment (Comprising of land only) Inventories Trade receivables Cash and cash equivalents Capital: Lang Capital: Lee General reserve Trade payables In preparation for the change in the ownership structure of Cosmic Traders, the following valuations were made: Land at fair value, Allowance for credit losses, Goodwill, Note: The partners do not use a revaluation account. Enter the transactions needed to prepare for the admission of Lyman as a partner, in the general journal of Cosmic Traders on 30 June FK 121 Examination

7 QUESTION 4 (15 marks; 22½ minutes) This question consists of two unrelated sections. SECTION A (7 marks) Laurel and Hardy are members of Comedy CC, with interests in the entity of 60% and 40% respectively. The following information was obtained from the books of Comedy CC on 30 June 2007, the end of the financial year: Members contributions etained earnings (1 July 2006) Loan to Laurel Profit before tax Land South African evenue Service (provisional tax payments) The following items were not taken into account in the calculation of the profit before tax: Salaries paid to members, Interest on the loan to Laurel at 8% per annum. 2. Income tax must be provided at 30%. Assume that the taxable income and the accounting income are equal of the profit must be distributed to members of the profit share of Laurel must be transferred to his loan account. The balance of the profit distribution has to be paid out to members. Calculate the total investment by members by preparing the Statement of members net investment of Comedy CC for the year ended 30 June Note: Show a total column only and do not split it between individual members. FK 121 Examination

8 SECTION B (8 marks) Centurion oad unners Club approached you to help them exercise control over the annual membership fees. The following information is available: 1. The club had 200 registered members on 1 April 2006, the beginning of the financial year new members joined during the period 1 April 2006 to 31 March The club s constitution included the following stipulations: All new members pay an entrance fee of per member. When a member terminates his membership, 50% of the membership fee paid for that year is refundable. 4. Extract from the balance sheet as at 31 March 2006: Membership fees of were receivable (5 members). Membership fees of 600 were received in advance (3 members). 5. Some members membership fees in respect of the current financial year ending 31 March 2007, were still outstanding on 31 March Membership fees of received during the current financial year, included 600 in respect of the period ended 31 March 2006, as well as the membership fees of 6 members, for the following financial year. 7. Management decided that all membership fees for the year ended 31 March 2006, which were still outstanding by 31 March 2007, must be written off as irrecoverable. 8. During the current financial year, 4 members resigned from the club. All of these members had paid their membership fees in full for the current year. Prepare the membership fees account for the year ended 31 March 2007 in the general ledger of Centurion oad unners Club, properly balanced or closed off. FK 121 Examination

9 QUESTION 5 (15 marks; 23 minutes) Big Diamond Buyers Limited recently registered the company on the local securities exchange. The financial statements did not meet the requirements and you were asked to assist them with specific tasks. The following information was provided to you: Big Diamond Buyers Limited Extract from the balance sheet as at 28 February Ordinary share capital Share premium? etained earnings Trade debtors Trade creditors Bank dr cr Petty cash Loan: Kimberley Bank (20% p.a.) South African evenue Service (Income tax) cr cr Shareholders for dividends Information extracted from the income statement for the year ended 28 February 2007 evenue (cash sales are 25% of total sales) Profit before tax Income tax expense for the year An interim dividend was declared and paid on 1 August 2006,?. 2. A final dividend was declared on 28 February 2007, but not paid. 3. The company s authorised share capital consists of ordinary shares of 3 each. 4. Ordinary shares were issued at 3,60 on 1 March a. Prepare the following accounts in the general ledger of Big Diamond Buyers Limited for the year ended 28 February 2007: Appropriation Shareholders for dividends (5) b. The sections Cash flows from operating activities and Cash flows from investing activities were completed correctly. Complete the rest of the cash flow statement of Big Diamond Buyers Limited for the year ended 28 February (Commence with Cash flows from financing activities ) (8) c. Calculate the debtors collection period (in days) for (Assume a year has 300 working days) (2) FK 121 Examination

Department Accounting

Faculty of Economics and Management Sciences Department Accounting FINANCIAL ACCOUNTING FK 100 EXAMINATION - 13 NOVEMBE 2010 Internal Examiners M. oode, J. Friedrichs, M. Gerber External Examiner S. Coetzee