Department of Accounting

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Faculty of Economics and Management Sciences Department of Accounting FINANCIAL ACCOUNTING 211 EXAMINATION 29 MAY 2009 Maximum time: 2 hours (120 minutes) Maximum marks: 80 Internal examiners Prof J

1 Faculty of Economics and Management Sciences Department of Accounting FINANCIAL ACCOUNTING 211 EXAMINATION 29 MAY 2009 Maximum time: 2 hours (120 minutes) Maximum marks: 80 Internal examiners Prof J E Myburgh / Ms J S Goodey External examiners Ms S Griesel / Ms H C Verster "Important information" 1. The results of examinations and supplementary examinations for first year students only will be displayed on the notice boards next to the Human Sciences Building. The results for first, second and third year, as well as postgraduate students will be available on the MTN line and Student online Services (SOS). esults will be mailed to individual candidates after the examination period. esults will be available at telephone number and also on the Intranet address: Student online Services. LECTUES AND ADMINISTATIVE STAFF WILL NOT GIVE CANDIDATES THEI ESULTS PESONALLY O PE TELEPHONE. 2. Supplementary examinations are not granted automatically, but are subjected to current departmental policy. 3. Supplementary examinations take place from June Timetables to determine the date, time and venue of the supplementary examinations are available on: 3.1 Noticeboards at the main entrance to the Merensky Library; 3.2 Students online Services (SOS); or 3.3 MTN telephone number University of Pretoria (all rights reserved)

2 PEUSAL OF EXAMINATION SCIPTS Perusal implies the right of students to verify their results and that the framework of the marking memorandum be made available to them for perusal. All communication with students arising from the perusal and feedback process will be handled in writing on the prescribed form. Lecturers will not debate the allocation of marks with students, but will obviously be prepared to correct possible marking mistakes. The perusal of examination scripts is available to all students. The following procedure for perusal is to be followed: Students requesting perusal must present a valid student card before the script and a copy of the evaluation framework used during the marking process, will be handed over to the student. PEUSAL WILL ONLY BE ALLOWED ON THE FOLLOWING DATES AND TIMES: DAY DATE LOCATION TIME THUSDAY 11 JUNE 2009 EMS :00 12:00 THUSDAY 11 JUNE 2009 EMS :00 15:00

3 QUESTION 1 (14 marks, 21 minutes) The following information was obtained from the preliminary financial statements of DOLPHIN LIMITED for the year ended 31 December 20X8: Office building at carrying amount Machinery at carrying amount Trade debtors Insurance premium paid in advance Other financial assets (Investments) Profit before tax Additional information: 1. The profit before tax was calculated after the following, amongst others, were taken into account: Fine charged by the South African evenue Service (SAS) for the late submission of the income tax return assessment Dividends received Donations paid (not deductible for tax) Insurance premiums for the year Depreciation on office building Depreciation on machinery esearch costs Allowance for credit losses provided Bad debts written off The tax base of machinery was on 31 December 20X8, after a wear and tear allowance of was allowed by the SAS. 3. The SAS does not grant a wear and tear allowance on office buildings. 4. On 1 January 20X8 machinery with a carrying amount of and a tax base of was sold for This transaction was not taken into account in the calculation of profit before tax. 5. The company has treated the total research costs of incurred and paid during the year, as an expense. The SAS has indicated that research costs will be allowed as a deduction over a period of four years on the straightline basis. 6. The SAS grants an allowance of 25% per annum of the allowance for credit losses. The allowance for credit losses was created during the current year and a complete list of doubtful debts was presented to the SAS. 7. Included in bad debts written off is in respect of a loan to an employee who had been declared insolvent and could not repay the loan. 8. The tax rate for companies remained constant at 28% for the past two years. 1

4 EQUIED: a) Calculate the taxable income, current tax payable and the deferred tax movement of Dolphin Limited for the year ended 31 December 20X8 in accordance with Statements of Generally Accepted Accounting Practice. Start your calculation with the accounting profit given in the question. (11.5) b) Disclose the Income tax expense note that will accompany the financial statements of Dolphin Limited for the year ended 31 December 20X8 in accordance with Statements of Generally Accepted Accounting Practice. A tax reconciliation is not required. (2.5) NOTE: - Show all calculations clearly. - Comparative amounts are not required. 2

5 QUESTION 2 (15 marks, 22.5 minutes) LA AFIQUE LIMITED is a manufacturing company and the following information for the year ended 31 December 20X7 is available: Information from the Statement of comprehensive income: 20X7 20X6 Gross profit Dividends received Profit on disposal of land (not taxable) Other expenses ( ) ( ) Profit before tax Income tax expense ( ) (71 400) Profit for the year Additional information: 1. Information regarding the manufacturing of finished goods: Normal capacity is units per annum, but only units were produced during the year ended 31 December 20X7 of which units were sold. There were no finished goods on hand on 1 January 20X7. Fixed production overhead costs amounted to and the variable production overhead costs of included which was abnormal waste. Finished goods are valued according to the first-in-first-out method, while raw materials used in the production of the products mentioned above are valued using the weighted average cost method. Accept that the raw material cost is 12,50 per unit and labour cost 4,50 per unit. 2. Included in "other expenses" for the year ended 31 December 20X6 in the administrative section of the company, is an amount of in respect of water and electricity. On enquiries made during 20X7 about the abnormally large amount, the municipality explained that the amount was based on the meter reading of units of water and electricity consumed in the administrative section of the company. After further enquiries during the 20X7 financial year, the municipality discovered that the meter reading during 20X6 was recorded incorrectly and confessed to over invoicing La Afrique Limited by The auditors were asked to correct the error and the SAS agreed to adjust the tax assessment for 20X6. 3. The company tax was 28% for the past two years. 3

6 EQUIED: a) Calculate the amount at which finished goods will be presented in the statement of financial position of La Afrique Limited on 31 December 20X7 in accordance with the requirements of IAS 2 Inventories. (5) b) Disclose the following notes that will accompany the financial statements of La Afrique Limited for the year ended 31 December 20X7 in accordance with Statements of Generally Accepted Accounting Practice: Accounting policy note in respect of inventories Correction of error (10) NOTE: - Ignore value aded tax (VAT) 4

7 QUESTION 3 (21 marks, 31.5 minutes) The following lease agreements were concluded by PENGUIN LIMITED on 1 January 20X6: 1. An operating lease agreement to obtain an office building at per month for the first 4 years and thereafter at per month for a total lease period of ten years. 2. A finance lease agreement to lease a tree felling machine over a period of four years at an instalment of per annum payable in arrears commencing on 31 December 20X6. The estimated useful life of the machinery is four years. The cost price of the machine which was brought into use on 1 January 20X6 amounts to The effective interest rate is 17,52% per annum implicit to this lease agreement. The directors of Penquin Limited are of the opinion that the company will take up the option to purchase the machine for 5% of the market price at the end of the lease term. Additional information: 1. Profit before tax and before the above lease transactions were taken into account, was for the current year ended 31 December 20X6. 2. Depreciation on the machine is written off on the straight-line method over useful life of the machinery. 4. The following amortisation table is provided: (Assume as correct) Payment Interest Capital Balance 1 January 20X December 20X December 20X December 20X December 20X EQUIED: a) Journalise only the transactions relating to the finance lease of the tree felling machine (including cash transactions) of Penguin Limited for the year ended 31 December 20X6. (6) NOTE: - Journal narrations are not required. - Ignore any tax implications. b) Disclose only the following notes of Penguin Limited for the year ended 31 December 20X6, in accordance with Statements of Generally Accepted Accounting Practice: Profit before tax (3) Long-term borrowings / Finance lease liability (including reconciliation) (8) Operating lease commitments (4) NOTE: - Accounting policy notes are not required. - Comparative amounts are not required. 5

8 QUESTION 4 (19 marks, 28.5 minutes) HAPPY LANDS LIMITED manufactures diving equipment and is also involved in research for improved diving equipment. The following information in respect of the machinery of the company for the year ended 31 December 20X8 was presented to you. Balances in respect of machinery on 1 January 20X8: Machinery at cost price Accumulated depreciation on machinery Additional information: 1. The following rates and methods of depreciation are applicable: Machinery 15% straight-line Vehicles 20% reducing balance 2. Machinery with a cost price of was ready for use as intended by management on 1 January 20X6. On this date it was estimated that equipment will have no residual value at the end of its useful life. 3. A new machine was purchased on 1 September 20X8 at an invoiced price of Import duties on the machine amounted to and initial delivery and handling costs amounted to Pre-production expenses that were not directly related to the acquisition and installation of the machine amounted to The machine was available for use as intended by management on 30 September 20X8. Management estimated that the machine will have no residual value at the end of its useful life. 4. The delivery vehicle was purchased at a cost price of on 1 January 20X7 and was sold for on 30 June 20X8. The vehicle was available for use as intended by management on 1 January 20X7 and the estimated residual value at the end of its useful life was The remaining useful lives and depreciation methods of all the above mentioned assets were revised on 31 December 20X8 and there were no changes. 6. No other transactions in respect of the property, plant and equipment of the company took place during the year. 7. A patent was purchased on 1 July 20X6 for when the useful life was estimated at five years with no residual value. Due to a new patent registered during the year, the fair value of the patent was determined on 31 December 20X8 as and the agent s commission would amount to 2% of the selling price. The value in use at year end was

9 8. esearch on a diving suit with a better fit made from a new fabric started during the year and was successfully completed on 30 June 20X8 at a cost of Development of the product commenced on 1 July 20X8 and the costs were as follows: 1 July - 31 October 20X8: November - 31 December 20X8: The development costs met all the requirements for capitalisation in terms of IAS 38 Intangible assets as from 1 November 20X8. It is estimated that the development will be completed during February 20X9. 9. All of the above amounts exclude VAT. 10. Assume all amounts are material. 11. Ignore any tax implications. EQUIED: a) Calculate the carrying amount of the new machine on 31 December 20X8. (2.5) b) Prepare the following notes to the financial statements of Happy Lands Limited on 31 December 20X8, in accordance with Statements of Generally Accepted Accounting Practice: Property, plant and equipment Intangible assets (16.5) NOTE: - The total column is not required. - Comparative amounts are not required. - Accounting policy notes are not required. - Show all calculations clearly and make use of cross-references. - ound all amounts off to the nearest and. 7

10 QUESTION 5 (11 marks, 16.5 minutes) The following independent cases are presented to you: 1. On 31 August 20X7, Ape Limited deposited on an eight month fixed deposit account at Standard Bank. Interest is earned at 9% per annum and is receivable on 1 May 20X8. 2. Baboon Limited, a second-hand car dealer, sold a delivery van on 1 November 20X7 on credit. As from 30 November 20X7, the customer had to pay three equal monthly instalments of each. The instalments included the following interest: Instalment Instalment Instalment The cost price of the delivery van was The periodic inventory system is in use. 3. Civet Limited is a commercial airline. The following information concerns two local flights which are already fully booked on 31 October 20X7 as they are scheduled to leave during peak periods, namely, 25 December 20X7 and 1 January 20X8: Departure date Date payments were received Amount received 25/12/20X7 10/10/20X /01/20X8 30/11/20X EQUIED: a) Calculate, for each of the situations above, the amount of revenue that should be recognised in the annual financial statements of the respective companies for the year ended 31 December 20X7. Give reasons based on IAS 18, evenue to substantiate your answers. (7) b) Journalise the above transactions in the general journal of the respective companies to recognise the revenue for the year ended 31 December 20X7. Journal narrations are not required. (4) 8

UNIVERSITY OF PRETORIA

UNIVERSITY OF PRETORIA FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES Department of Accounting FINANCIAL ACCOUNTING 311 EXAMINATION - JUNE 2003 Internal Examiners Ms J Pienaar / Ms H C Verster External Examiner