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 Ms D Pretorius (UNISA) "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 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. Results will be mailed to individual candidates after the examination period. Results will be available at telephone no. 083 123111 also on the Intranet address: http://www.up.ac.za, student online LECTURERS AND ADMINISTRATIVE STAFF WILL NOT GIVE CANDIDATES THEIR RESULTS PERSONALLY OR BY TELEPHONE. 2. Supplementary examinations are not granted automatically, but the results obtained are considered individually to determine whether a supplementary examination should be granted. 3. Supplementary examinations take place from 25 June to 2 July 2003. 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. Timetables will also be available on the Intranet: http://www.up.ac.za, student online. 4. It is essential that the examination timetables on the examination notice board between the Merensky and the Old Chemistry building, is consulted two weeks prior to the commencement of the examinations, in order to ascertain whether any changes or amendments have been effected.
PERUSAL OF EXAMINATION AND RE-EXAMINATION SCRIPTS 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 errors. 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. Students will not be allowed to carry any stationery on them during perusal. PERUSAL WILL ONLY BE ALLOWED ON THE FOLLOWING DATE AND TIME: DAY DATE LOCATION TIME TUESDAY 24 JUNE 2003 EB 2-150 13:00 15:00 2
QUESTION 1 (25 MARKS, 37 MINUTES) Rapid Builders Limited successfully tendered for the building of a new block of flats in Hatfield for Joost Limited. The construction work commenced on 1 September 2002 and is expected to be completed by 31 January 2004 at a total estimated cost of R7 000 000. The contract price is R9 000 000. Rapid Builders Ltd is a newly established company and due to the capital nature of this project, Rapid Builders Ltd borrowed R2 000 000 from Joost Ltd to assist with the initial cash flow of this project. Rapid Builders Ltd need to repay the loan on 1 April 2003. Joost Ltd does not charge any interest on this loan. On 1 October 2002 the money was transferred to the bank account of Rapid Builders Ltd. Rapid Builders Ltd incurred the following expenses for the year ended 28 February 2003: R Material bought 775 500 Material on hand 75 000 Labour 551 500 Rental of equipment 257 500 Sub-contractors 355 250 Administrative expenses 134 000 Additional information: 1. Included in the material on hand is specific tailor made bedroom doors to be used in this project. The total cost of these doors is R25 250. At year-end none of these doors has yet been used in the project. 2. In December 2002 the labourers went on strike for two weeks due to a wage dispute. As a result thereof, Rapid Builders Ltd did not complete the first phase of the project in time and incurred a penalty of R30 000. 3. Retention monies are calculated at 5% of work certified. 4. Rapid Builders Ltd calculate the stage of completion with reference to the contract cost incurred to date relative to the total estimated contract cost. 5. By 28 February 2003 progress certificates to the value of R1 650 000 was issued to Joost Ltd. On 25 March 2003 the first progress payment of R400 000 was received from Joost Ltd. 3
REQUIRED: Disclose the above transactions in the annual financial statements and the notes thereto of Rapid Builders Limited for the year ended 28 February 2003. Your answer should comply with Statements of Generally Accepted Accounting Practice. Note: - Ignore tax. - Round off all amounts to the nearest Rand. - Accounting policy notes and comparative figures are not required. 4
QUESTION 2 (40 MARKS, 52 MINUTES) Beckham Limited is a manufacturer of soccer balls. The following is an extract from the fixed asset register of Beckham Ltd at 31 March 2002: Cost Accumulated Carrying amount depreciation R R R Factory building 1 000 000 187 500 812 500 Equipment 410 000 179 375 230 625 Machinery 320 000 144 000 176 000 Delivery vehicles 340 000 116 000 224 000 Additional information: 1. On 1 April 2002 Beckham Ltd decided to follow the allowed alternative accounting treatment with regard to factory buildings as it will result in fairer representation. On 1 April 2002 the net replacement value of the factory building amounted to R1 255 000. The remaining useful life remained unchanged. It is not the company s accounting policy to realise revaluation surplusses through use. 2. Beckham Ltd depreciates its assets according to the following depreciation methods and rates (as per the fixed asset register on 31 March 2002): Method Annual rate Factory building Straight-line 5% Equipment Diminishing balance 25% Machinery Straight-line 15% Delivery vehicles Straight-line 20% On 1 April 2002 Beckham Ltd decided to change the depreciation method used for equipment from the diminishing balance method to the straight-line method, applying a rate of 20% per annum, to be in line with the wear and tear allowances granted by the South African Revenue Services (SARS). 3. The wear and tear allowances granted by SARS agree with the depreciation methods and rates applied by Beckham Ltd. 4. On 1 February 2003 all the access roads to Montagu were flooded by the worst rainstorm in decades. When the flood occurred, one of the company s delivery vehicles, with a cost of R200 000 and a carrying amount of R140 000 on 31 March 2002, was on those particular roads. The delivery vehicle was swept away in this flood. Fortunately for Beckham Ltd the delivery vehicle was comprehensively insured and the full replacement value of R175 000 was paid out to the company. The purchase transaction for the replacement of the delivery vehicle was only finalised on 1 March 2003 at a cost of R175 000. This delivery vehicle was immediately brought into use. 5
5. Assume a tax rate of 30%. REQUIRED: Disclose the above transactions in all the applicable notes to the annual financial statements of Beckham Limited for the year ended 31 March 2003. Your answer should comply with Statements of Generally Accepted Accounting Practice. Note: - Accept all amounts as material. - Accounting policy notes are not required. - You may ignore the notes regarding income tax and deferred tax. - Round off all amounts to the nearest Rand. 6
QUESTION 3 (30 MARKS, 45 MINUTES) On 1 July 2000 Audinco Limited, a dealer in expensive German motor vehicles sold a vehicle with a cost of R250 000 to a client in terms of an instalment credit agreement. The following conditions are, inter alia, contained in the contract: Selling price R300 000 Deposit (payable immediately) R50 000 Effective interest rate 17% Instalments (payable annually in arrears on 30 June for 5 years) R65 310 Guaranteed residual value R40 000 Additional information: 1. On 1 July 2000 the management of Audinco Ltd estimated the unguaranteed residual value of the vehicle at R50 000. 2. On 1 July 2001 the prime interest rate increased by 1% and Audinco Ltd had no choice but to increase the interest rate in the instalment credit agreement to 18%. The annual instalment increased to R67 199. 3. The South African Revenue Services grants a Sec 24-allowance for the duration of the instalment credit agreement to Audinco Ltd. 4. Assume a tax rate of 30%. 5. You can ignore Value Added Tax. 6. There are no other temporary differences, other than those indicated in the question. REQUIRED: a) What is the difference between a guaranteed and an unguaranteed residual value and indicate how both the lessee and the lessor in their calculations will take these values into account? (4 marks) b) Disclose all information relating to the instalment credit agreement in the annual financial statements of Audinco Limited for the year ended 30 June 2002. Your answer should comply with Statements of Generally Accepted Accounting Practice. Accounting policy notes and comparative figures are not required. Ignore taxation. (14 marks) 7
c) Calculate the current taxation of Audinco Limited for the year ended 30 June 2002. The profit before taxation, before taking any of the abovementioned information into account, amounts to R400 000. (6 marks) d) Disclose deferred taxation in the balance sheet and the notes to the balance sheet of Audinco Limited for the year ended 30 June 2002. Your answer should comply with Statements of Generally Accepted Accounting Practice. Comparative figures are not required. (6 marks) Note: - Round off all amounts to the nearest Rand. 8
QUESTION 4 (25 MARKS, 38 MINUTES) This question consists of two independent parts. PART A (13 marks) Zita Limited is a new company that undertakes, inter alia, research and development projects. There is uncertainty relating to the accounting treatment of research and development costs and the financial manager approached you to gain clearance regarding certain aspects. REQUIRED: a) Define the term intangible asset in terms of AC 129. (6 marks) b) May subsequent costs incurred in respect of existing and recognised intangible assets be capitalised, in terms of AC 129, and if so, under which circumstances may such capitalisation be done? (3 marks) c) Shortly discuss, with reference to AC 129, the possible allowed accounting treatments in respect of intangible assets after the date of initial recognition. (4 marks) PART B On 1 April 2002 Happy-Go-Lucky Limited leased buildings from Dazzler Limited, a dealer in photographic equipment, in terms of an operating lease agreement. The cost of the asset amounts to R2 000 000 (excluding VAT). The agreement provides for 48 monthly instalments of R7 000 each (excluding VAT) and thereafter 12 monthly instalments of R6 000 each (excluding VAT) payable annually in arrears on 31 March. Dazzler Ltd also undertook to place the buildings at the disposal of Happy-Go-Lucky Ltd at no consideration for another 12 months. In exchange Happy-Go-Lucky Ltd undertook to clean the buildings themselves before moving in. The amount associated 9
with the cleaning amounted to R8 000 (excluding VAT). The company decided to amortise these costs over the lease period. Both the lessee and the lessor are registered VAT vendors. Happy-Go-Lucky Ltd uses the buildings for qualifying purposes. Assume a rate of 14% for VAT purposes. REQUIRED: a) Journalise the above-mentioned information in the records of Happy-Go-Lucky Limited for the year ended 31 March 2003. Journal narrations are not required. Ignore taxation. (9 marks) Note: - Round off all amounts to the nearest Rand. b) Shortly discuss, with reference to AC 135, the accounting treatment of the above-mentioned buildings in the records of Dazzler Limited for the year ended 31 March 2003. (3 marks) 10