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 INSTUCTIONS: Maximum time : 4 hours (240 minutes) Maximum marks : 160 "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. 2. The results for first, second and third year, as well as postgraduate students will be available on the MTN line and Students Online (SOS). esults will be mailed to individual candidates after the examination period. esults will be available at telephone nr. 083 123 1111 also on the Intranet address: http://www.up.ac.za, students online. 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. The supplementary examination take place on 30 November 2010. Timetables to determine the time and place of the supplementary examinations are available on: 3.1 Noticeboards at the main entrance to the Merensky Library; 3.2 Students Online (SOS); 3.3 MTN telephone nr. 083 123 1111. University of Pretoria (all rights reserved)
QUESTION 1 43 marks EGALITE LIMITED, a manufacturing company, makes use of the perpetual inventory system and has a year end of 31 October. VAT and settlement discount can be ignored. The company maintained a constant gross profit percentage of 60%. Further information: 1. The following balances, inter alia, appeared in the post-closing trial balance of Egalite Limited: Post-closing trial balance as at efer 31 October 20X10 31 October 20X9 etained earnings (127 123) (45 600) Share capital 3?? Investments 4? 9 000 5% Loan to director 5-20 000 Long-term loans 6?? Machinery at carrying amount 7?? Vacant stand 8 240 506 240 506 Vehicle 8 374 025 262 912 Cost price 500 000 360 000 Accumulated depreciation (125 975) (94 088) Bank 19 992 (11 378) Trade receivables 63 200 56 800 Provisional tax payments 47 800 - Inventories (merchandise) 38 000 33 000 Pre-paid amounts (insurance) 3 600 2 400 Allowance for credit losses (2 840) (3 020) Trade payables (59 400) (73 000) Current tax payable (58 508) (13 600) Owners for dividends? (39 360) 2. The profit for the year ended 31 October 20X10 was calculated after the following items, inter alia, were taken into account: Sales (net) 960 000 Bad debts 2 800 ental expense : buildings 132 000 Donations of inventories to the local orphanage 1 500 1
3. Egalite Limited was incorporated on 1 April 20X6 with the following shares: Number of Class shares Conditions shares 300 000 Ordinary shares None 200 000 7% edeemable preference edemption in 2 equal halfyearly shares payments within 3 year of issue 150 000 6% Preference shares Cumulative and convertible On 1 November 20X6 after all the necessary procedures were followed and completed, the following shares were issued and alloted: Number of Class shares Price fully paid shares 120 000 Ordinary shares 3 per share 90 000 7% edeemable preference shares 2,20 per share 50 000 6% Preference shares 2,50 per share All dividends declared at the annual general meeting on 31 October 20X9 were paid to the registered shareholders on 13 November 20X9. On 1 July 20X10, the first redemption of the 7% edeemable preference shares at 2,20 per share took place. The full amount owing to the shareholders were paid to them. To obtain the funds to finance the redemption, the company issued and allotted 34 540 new ordinary shares at 3,00 each on 1 July 20X10. Excess application monies were refunded to unsuccessful applicants. On 31 October 20X10, a dividend of 10 cents per share was declared to all registered ordinary shareholders. These dividends will be paid to the registered shareholders on 15 November 20X10. 4. For investment purposes Egalite Limited purchased 5 000 ordinary shares on 1 August 20X6 in Afrikom Limited at 2,00 per share on the JSE Limited. No other shares were purchased or sold since then. During the year ended 31 October 20X10, Afrikom Limited declared and paid the following dividends: Dividend Date of cheque received Dividend per share Interim 1 April 20X10 5 cent per share Final 6 November 20X10 6 cent per share At closing time on 31 October 20X10, Afrikom Limited s shares traded on the JSE Limited at 2,20 per share. 2
5. The loan to the director was granted to him on 31 October 20X8 to be repaid once-off on 31 October 20X10. The market related interest rate of 5% per annum, compounded annually, is payable annually on 31 October. All payments were received to date. 6. The loan from SA Bank was obtained on 1 November 20X9. The instalments on the loan for the following 5 years amount to 13 586, to be paid at the end of every 6 months. The first payment is payable on 30 April 20X10. Interest is calculated at 12% per year, compounded half-yearly. All instalments were paid to date. 7. Machinery for the manufacture of the products was purchased on 30 September 20X7 and was for available use a month later. The following information was obtained from the asset register: Purchase price esidual value Useful life 400 000 60 000 200 000 units Financial year 01/11/20X7 31/10/20X8 01/11/20X8 31/10/20X9 01/11/20X9 31/10/20X10 Units produced 20 000 units 30 000 units 40 000 units 8. A second hand delivery vehicle was purchased for cash on 30 October 20X10. According to the conditions of the purchase contract the availability of the vehicle to be used will depend on the pre-delivery service that resulted in the vehicle only to be available as from 1 November 20X10. EQUIED: The company owns a vacant stand and no other fixed assets. The company rents the property and building from where it operates its business. 1. Present only the operating and financing section of the statement of cashflows of Egalite Limited for the year ended 31 October 20X10 according to Statements of Generally Accepted Accounting Practice. (35) Note: - Comparative amounts are not required. - Notes are not required. - ound all calculations to the nearest AND. 2. Prepare the reconciliation of profit before tax with cash generated from activities. (7) Note: - Comparative amounts are not required. - ound all amounts to the nearest AND. 3
QUESTION 2 36 marks CUPS FO AFICA manufactures polystyrene cups and lids used in the fast food industry. The entity uses the periodic inventory system and the financial year ends on 28 February. VAT can be ignored. The following information was, inter alia, obtained from the accounting records of the entity: Balances as at: 28/02/20X9 28/02/20X10 Direct raw material plastic on hand 343 950 409 500 Finished goods at transfer price on hand: Cups Lids 429 000 128 700 522 162 156 648 Allowance for unrealised profit 50 700? Totals as at: 28/02/20X10 Telephone expense 30 000 ental expense 240 000 Electricity 72 000 Salaries and wages: Direct labour Indirect labour Administration 416 730 78 000 230 000 Sundry expenses 55 000 Settlement discount allowed 60 992 Additional information: 1. Due to the short manufacturing cycle the entity does not have any work in progress at the beginning or the end of the financial year. 2. The entity used the same constant factory profit percentage as during the previous year. 3. On 1 March 20X7, the entity purchased 2 injection moulding machines. One to manufacture polystyrene cups (CUPX8) and the other to manufacture polystyrene lids (LIDX10). The purchase price for the CUPX8 machine was 9 200 000 and the installation cost amounted to 136 600. The purchase price of the LIDX10 machine was 3 800 000 and the installation cost amounted to 90 250. Both machines were installed and available for use on 1 April 20X7 as intended by the owner. Depreciation is calculated in accordance with the production unit method. The current residual value of both machines after 10 years is estimated to be 20% of their total cost prices. 4
4. The manufacturing capacity of the machines is as follows: CUPX8 LIDX10 Units manufactured per day 20 100 units 25 200 units Manufacturing days per year 247 days 247 days Estimated years of production 10 years 10 years 5. During the year ended 28 February 20X10 both machines nearly operated and produced the products according to their annual capacity, except for the following days on which no production took place: - 21 working days during December 20X9 when the factory was closed due to an unusual strike by the factory workers and, - 6 working days during February 20X10 when the LIDX10 machine was out of order. 6. Both machines use the same liquid plastic as its direct raw material. The polystyrene cups use 10 ml of plastic per cup and the lids use 5 ml of plastic per lid in the manufacturing process. During the year the average price for the plastic used in the manufacturing process was 50 per litre. No spillage takes place during the injection moulding production process. (1 000 ml = 1 litre) 7. The cups are sold in boxes of 100 cups per box and the lids are sold in boxes of 1 000 lids per box. The same kinds of boxes are used for the cups and the lids and are purchased for 1 per box. There were no unused boxes on hand at the beginning or the end of the financial year ended 28 February 20X10. 8. The production overheads are allocated at 40% of the primary costs. 9. The surface area of the building rented is 3 000 square metres. 750 square metres is used for administration purposes while the rest of the building is occupied by the factory. The factory uses 90% of the electricity and 25% of the telephone expenses during the manufacturing process while only 10% of the sundry expenses can be allocated to the factory. 10. A gross profit percentage of 15% was maintained during the year. Settlement discount allowed is accounted for according to the gross method. 5
EQUIED: 1. Present the production cost statement of Cups for Africa for the year ended 28 February 20X10. [14,0] Note: - ound the calulations to the nearest CENT. - ound the final answers to the nearest AND. 2. Present only the trading section of the statement of comprehensive income of Cups for Africa for the year ended 28 February 20X10, in accordance with Statements of Generally Accepted Accounting Practice. [18,0] Note: - Notes are not required. - Comparative amounts are not required. - ound the final answers to the nearest AND. 3. Present the general journal entries regarding the allowance for unrealised profit account of Cups for Africa for the year ended 28 February 20X10. [4,0] Note: - Journal narrations are not required 6
QUESTION 3 38 marks HIKES PAADISE CLOSE COPOATION sells hiking bags to the public. The entity s head office is located in Pretoria and there are independent branches located in all the major cities in South Africa. All the branches may set their own selling prices. The head office purchases most of the merchandise from China and then issues it to the branches at cost plus a constant mark-up (levy percentage). The head office themselves does not sell any merchandise. Some branches also purchase hiking bags from local suppliers, but the head office charges the same levy on these purchases as what they charge on items supplied by them. The financial year of the entity ends on 30 June 20X10 and the periodic inventory system is used. Vat can be ignored. The following information relates only to the transactions between the head office and the Cape Town branch: Extract of balances as at 30 June 20X10 20X10 HEAD OFFICE CAPE TOWN BANCH D C D C Inventories on hand 1 July 20X9 18 000 24 500 Allowance for unrealised profit for Cape Town branch 2 625 Goods to Cape Town branch 462 000 Goods from Head Office? Head Office account 47 650 Cape Town branch account 108 200 Local purchases 73 000 Purchases 458 000 eturns to Head Office 1 550 eturns from Cape Town branch - Administration fee 12 000 11 000 Allowance for settlement discount allowed 285 Sales -? Profit on sale of shares in 95 000 Kilimanjaro Tours Limited Settlement discount allowed 1 950 ental expense 24 000 48 000 Salaries 150 000 - Insurance 18 000 Loss on theft of vehicle 2 200 7
Additional information: 1. The Cape Town branch makes an initial gross profit percentage of 40% on all its sales. 2. The Cape Town branch donated merchandise with a selling price of 7 333 to a charity organisation. Head office has approved this donation as it improves the entity s image. This transaction has not been recorded as yet. 3. The Cape Town branch only made 2 returns of hiking bags during the year ended 30 June 20X10 to head office. The first set of hiking bags, with a transfer price of 850, never reached head office as the entity s vehicle was high jacked on route to Pretoria. The head office insures all inventories but due to the average clause applicable to the insurance contract, only 90% of the value of the lost merchandise was in fact paid out. The head office has only recorded the loss on the vehicle at this stage. 4. The manager at the Cape Town branch took 2 hiking bags, with a total selling price of 450, for himself. The head office did not approve this transaction even though the branch considered this as the manager s bonus for the year. This transaction has not been recorded as yet. 5. The head office is only notified about the total purchases made locally by the branches at the end of each year, where after the necessary adjustments are made for these purchases. This information has not been accounted for as yet. 6. The head office is responsible for paying all normal salaries and charges a fixed administration fee to all branches on the last day of every month to cover all administration costs. 7. The head office does not carry any loss due to early settlement terms and therefore the Cape Town branch decided not to allow for settlement discounts on early payment from 1 June 20X10 anymore. 8. Goods in transit on 30 June 20X10 to the: - Cape Town branch at the transfer price 28 000 - Head Office at the transfer price 700 These goods were only received on 3 July 20X10 by the respective parties. 9. Inventories on hand according to a physical inventory count on 30 June 20X10: - at the Cape Town branch at selling prices 20 400 - at the head office at cost price 63 500 10. An amount was transferred from Cape Town branch to head office on 30 June 20X10 but was not reflected in the head office s bank account and had therefore not been accounted for as yet. 11. Income tax must be recognised at 28%. 8
EQUIED: 1. Prepare the following accounts, in the Cape Town Branch s books of Hikers Paradise Close Corporation for the year ended 30 June 20X10: - Head office account. - Purchases account. (9,5) Note: - Correct contra ledger account descriptions must be used. - ound final amounts calculated to the nearest AND. - Accounts must be closed off properly. 2. Prepare the following accounts, in the head office s books of Hikers Paradise Close Corporation for the year ended 30 June 20X10: - Cape Town Branch account. - Allowance for unrealised profit account. - Purchases account. (10,0) Note: - Correct contra ledger account descriptions must be used. - ound final amounts calculated to the nearest AND. - Accounts must be closed off properly. 3. Present the consolidated statement of comprehensive income of Hikers Paradise Close Corporation for the year ended 30 June 20X10, in accordance with the Close Corporations Act and the Guide on Close Corporations issued by SAICA and Statemens of Generally Accepted Accounting Practice. (18,5) Note: - ound final amounts calculated to the nearest AND. - Notes are not required. - Comparative amounts are not required. 9
QUESTION 4 44 marks MEDICINES MANUFACTUES LIMITED, a listed company with a financial year end of 30 June, manufactures medicines for sale to hospitals and chemists. The following balances and details have been obtained from the financial records of the company: 1. Property, plant and equipment efer Carrying amount at 30 June 20X6 1.1 &1.4 3 461 362 Stand 123 Midrand (undeveloped) at revaluation Land and buildings at revaluation 1.2 1.3 400 000 3 061 362 Motor vehicles - at cost 1 July 20X5 Plant and equipment - at cost 30 June 20X6 Accumulated depreciation - 1 July 20X5 1.5 1.6 1.1 500 000 11 100 000 - plant and equipment 4 600 000 - motor vehicles 187 500 Further information: 1.1 The accounting policy of the company and current estimated residual values of its property, plant and equipment used to calculate depreciation is as follows: plant and equipment - at 20% per annum according to the straight line method. All plant and equipment items are estimated to have a current estimated residual value of 10% of its original cost price which remained unchanged since date of purchase. motor vehicles - at 25% per annum according to the reducing balance method. Assume the estimated residual value as insignificant. land and buildings - at 2% per annum according to the straight line method. Land will not be depreciated. Land and buildings should be revalued every 4 years. 1.2 The undeveloped stand 123 situated in Midrand was acquired 5 years ago when the company had the intention of constructing a factory in the area. 1.3 The land and buildings reflected in the accounting records at 3 061 362 comprised of stand 999 osslyn with factory buildings thereon which are encumbered by a first mortgage bond for a loan from Big Lenders Bank. The total amount outstanding in favour of the mortgage bond at 30 June 20X6 is 3 million of which 350 000 is repayable during the next financial year. 10
Land and buildings comprise of the following: Stand 999 originally purchased on 1 July 20X1 1 100 000 Factory buildings - construction completed and available for use on 1 July 20X2 1 961 362 1.4 On the 1 July 20X5 land and buildings were revalued for the first time by Nikwina, a professional valuer, to the current market value in active markets. This resulted in the value of land increasing with 150 000 and a total revaluation surplus of 368 000. The total useful life of buildings remained unchanged at revaluation date. Land and buildings are recognised as separate classes of assets. 1.5 On 31 March 20X6 one of the company's delivery vehicles was written off in an accident on the Ben Schoeman Highway. The vehicle had an original cost price of 150 000 and a carrying amount of 93 750 on 1 July 20X5. 1.6 During the year the company purchased 2 new plants for the factory at a total cost of 600 000. Both plants were put into operation on 30 April 20X6. 2. Investments The company has the following investments on 30 June 20X6: 2.1 20 000 Ordinary shares in Pills (Proprietary) Limited which were purchased 5 years ago at 1,20 per share. The directors of Medicines Manufacturers Limited have valued these shares at 1,50 each on 30 June 20X6. During the year dividends of 10 000 were received in respect of this investment. 2.2 150 000, 15% edeemable preference shares were purchased on 1 October 20X5 at 3,00 each. The directors have valued these shares in Sticky Syrups Limited at 3,05 each on 30 June 20X6. The directors of Sticky Syrups Limited have declared a dividend on 30 June 20X6 in respect of these shares which will only be paid on 15 July 20X6. No accounting entries have yet been made in the accounting records of Medicines Manufacturers Limited in respect of this dividend on 30 June 20X6. These shares shall be redeemed once-off on 30 September 20X9. 2.3 A fixed deposit of 150 000 at Double Your Money Bank which earns interest at 18% per annum. The interest on this loan was accounted for. The fixed deposit matures on 30 June 20X9. 11
2.4 A savings account with Lolly Bank earning interest at 15,5% per annum. The interest on this loan was accounted for. The balance in respect of this investment is 120 000 on 30 June 20X6. The cash invested will be utilised to pay the deposit on the purchase of a new delivery vehicle during the first 3 months of the financial year ended 30 June 20X7. 3. Inventories 3.1 Inventories comprise the following on 30 June 20X6: Direct raw materials 350 000 Work-in-progress 200 000 Finished goods (including 15% mark-up) 390 000 940 000 Inventories are valued on a first-in, first-out basis. 3.2 Included in the finished goods amount of 390 000 is an amount of 70 000 in respect of cough syrups manufactured during the last two months of the financial year. The marketing department has estimated that they will only be able to sell these syrups for 60 000 (gross) because of a competitor which has recently entered the market. A commission of 10% on the selling price of these items is payable to the medical sales agents. 4. Other debit balances The following balances appear in the general ledger on 30 June 20X6: Trade debtors 350 000 Prepaid insurance 10 000 Petty cash 5 000 Provisional tax payments during the year 150 000 5. Other credit balances The following balances appear in the general ledger on 30 June 20X6 Trade creditors 280 000 Allowance for credit losses 20 000 Bank overdraft 150 000 Accrued expenses 50 000 Current tax payable 390 000 Owners for dividends 80 000 12
EQUIED: Present only the Asset section of the statement of financial position of Medicines Manufacturers Limited as at 30 June 20X6 with accompanying notes in accordance with Statement of Generally Accepted Accounting Practice. Note: - The total column of the notes is not required. - The accounting policy note is not required. - Comparative amounts are not required. - ound calculations to the nearest AND. - Negative marking will be applied in respect of any information provided not required as per above. 13