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 http://www.up.ac.za, student online. esults will be mailed to individual candidates after the examination period. esults will be available at telephone nr. 083 123 1111 and also on the Intranet address: http://www.up.ac.za, 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: http://www.up.ac.za, student online; or 3.3 MTN telephone nr. 083 123 1111.
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 1/11/2006 31/10/2007 Cash 187 000 Credit 238 000 2. Sales 1/11/2006 31/10/2007 Total 440 925 3. eturns 1/11/2006 31/10/2007 From debtors 17 000 1. The perpetual inventory system is in use. 2. The value of inventory on 1 November 2006 was 64 600 at cost price. 3. A physical inventory count on 31 October 2007 showed inventory as 102 000. 4. The gross profit percentage on sales is 20%. 5. During the year émy took inventory with a selling price of 31 875 from the entity for his own use. 6. émy also donated inventory, cost price 13 600, 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 - 2007 1
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 320 000 Drawings 3 000 Land 150 000 Buildings (Purchased 1/10/2006) 200 000 Equipment 38 000 Accumulated depreciation on equipment (1/1/2006) 7 200 25% Loan: Forencix Bank 60 000 Fixed deposit 25 000 Inventory 19 800 Debtors control 76 200 Creditors control 15 400 Bank 12 400 Gross profit 146 900 Interest on fixed deposit 3 000 Salaries and wages 3 000 Stationery 6 800 Water and electricity 5 300 Telephone 1 750 Interest expense 11 250 552 500 552 500 1. 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 2006. The insurance company paid 2 800 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 1 688 (rounded off) on 1 January 2006. 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 2 500. FK 121 Examination - 2007 2
4. After careful consideration of the age analysis of the debtors list, it was determined that an amount of 1 500 must be written off as irrecoverable and to create an allowance for credit losses amounting to 6 450. 5. The owner, Dexter, married his high-school sweetheart, ita during December 2006. He decided to buy all the assets and liabilities of her business for 45 000 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 80 000 Brand name 30 000 Current assets Inventory 13 500 123 500 EQUITY AND LIABILITIES Capital 38 500 Current liabilities Creditors 60 000 Bank overdraft 25 000 123 500 The purchase price was settled as follows: 10 000 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 2006. 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 2006. (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 2006. (3½) FK 121 Examination - 2007 3
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: 1 000 000 ordinary shares of no par value (NPV) 500 000 10% 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: 200 000 ordinary shares at 2.50 each 200 000 10% preference shares at 3.50 each The following share transactions took place during 2007: 25 Jan eceived applications for 160 000 ordinary shares. eceived applications for 210 000 10% 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 2007. FK 121 Examination - 2007 4
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 2005. They decided to admit Lyman to the partnership as from 1 July 2005. It was agreed that Lyman will contribute 75 000 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) 90 000 Inventories 34 000 Trade receivables 26 000 Cash and cash equivalents 20 000 Capital: Lang 80 000 Capital: Lee 40 000 General reserve 30 000 Trade payables 20 000 In preparation for the change in the ownership structure of Cosmic Traders, the following valuations were made: Land at fair value, 130 000 Allowance for credit losses, 2 600 Goodwill, 21 600 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 2005. FK 121 Examination - 2007 5
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 800 000 etained earnings (1 July 2006) 120 000 Loan to Laurel 20 000 Profit before tax 180 000 Land 600 000 South African evenue Service (provisional tax payments) 27 000 1. The following items were not taken into account in the calculation of the profit before tax: Salaries paid to members, 84 000. 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. 3. 35 000 of the profit must be distributed to members. 5 000 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 2007. Note: Show a total column only and do not split it between individual members. FK 121 Examination - 2007 6
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. 2. 35 new members joined during the period 1 April 2006 to 31 March 2007. 3. The club s constitution included the following stipulations: All new members pay an entrance fee of 1 000 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 1 000 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 2007. 6. Membership fees of 46 400 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 - 2007 7
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 2007 2007 2006 Ordinary share capital 1 460 000 740 000 Share premium? 150 000 etained earnings 236 000 174 400 Trade debtors 105 000 95 300 Trade creditors 63 500 60 500 Bank 53 500 dr 15 800 cr Petty cash 500 800 Loan: Kimberley Bank (20% p.a.) 420 000 470 000 South African evenue Service (Income tax) 25 000 cr 12 800 cr Shareholders for dividends 160 000 114 000 Information extracted from the income statement for the year ended 28 February 2007 evenue (cash sales are 25% of total sales) 1 200 000 Profit before tax 488 000 Income tax expense for the year 146 400 1. 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 1 000 000 ordinary shares of 3 each. 4. Ordinary shares were issued at 3,60 on 1 March 2006. 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 2007. (Commence with Cash flows from financing activities ) (8) c. Calculate the debtors collection period (in days) for 2007. (Assume a year has 300 working days) (2) FK 121 Examination - 2007 8