Mpetsi Traders 25 MARKS

Mpetsi Traders (Pty) Ltd, (‘Mpetsi’), is a company trading in the buying and selling of
cleaning products and is situated in the Pretoria region. Mpetsi have been expanding the
business and has become known for the quality products that the entity sells. The entity was
established in 2002 and has been a registered value-added-tax (VAT) vendor since its
inception date. The financial year end of the entity is 30 June.

You may assume a VAT rate of 14% on all transactions regardless of the transaction date.
All merchandise are acquired from other registered VAT vendors. Stock records are
maintained by using a perpetual inventory system and the value of stock items are
determined on the first-in-first-out method. Mpetsi also has the policy to create allowance for
settlement discounts, where appropriate.

The financial manager, Mr David Ismail, became very ill during the last week of June 2018
and have asked you, a first year trainee, to assist him in preparing the statement of financial
position of the entity and to also gain some experience in the preparation of financial
statements.

Mr Ismail send the following e-mail to you:

From: David Ismail

Best first year trainee

Please study the following information, and if need be, please do not hesitate to contact
me should you need my assistance. Although the doctor booked me off from work, I am
available on my e-mail.

Amounts receivable:

On 30 June 2018, the debtors control account had a balance of R513 000. During the
years of trading Mpetsi established a good relationship with the majority of its clients that
conducts business on a regular basis with Mpetsi. As from the beginning of the 2018
financial year Mpetsi introduced an 8% settlement discount should clients settle their
accounts within 25 days from invoice date. 80% of the total outstanding debtors represent
regular clients and on 30 June they all still qualified for the 8% settlement discount.

Included in the remaining 20% balance of outstanding debtors is an amount of R79 800,
owed by a client called Hofstein (Pty) (Ltd). This account has been outstanding since
March 2017. On 30 June 2017, Mpetsi did not create an allowance for a credit loss on this
account. Management has now decided to write off this account as irrecoverable. This
entry must still be recorded.
The remainder of the 20% balance is owed by Ceble Industries Ltd (‘Ceble’). Ceble had
not been a client of Mpetsi for longer than a year. It came to the attention of Mpetsi that
Ceble is experiencing serious financial difficulty, especially taking in to account that the
entity had to retrench three quarters of their workforce and that the share price of Ceble
has decreased in value from R44 per share to R5.50 per share. From newspapers the
story told is that a very well-known auditing firm has issued a qualified audit report on the
latest financial statements to Ceble. I have already discussed the matter with
management and it was agreed that the accounting records must be adjusted by creating
an allowance for credit loss on the outstanding balance of this account.

On 30 June 2018, Mpetsi was expecting a VAT refund from the South African Revenue
Services (SARS) amounting to R68 000. On the same date auditors from the SARS paid
Mpetsi a routine audit. The auditors found that Mpetsi claimed VAT on a double cab Isuzy
delivery vehicle. Documentation of the vehicle is 100% in order, however, the vehicle is
not seen as a delivery vehicle for VAT purposes and VAT was wrongfully claimed. We
have no choice than to amend our accounting records. The cost price (excluding VAT)
paid in cash for the said vehicle amounted to R375 000, and the transaction occurred on
1 April 2018.

Property, plant and equipment consist of the following:

Land and buildings

Land and buildings are not depreciated and was purchased on 2 January 2018 and was
properly recorded at R1 500 000.

Vehicles

Vehicles had a carrying value of R875 000 at year end. The correct depreciation charge
was processed for the year. Vehicles are initially recorded at cost and subsequently
measured at cost less accumulated depreciation. Depreciation on vehicles are provided
for at year end by application of the straight line method at 25% per annum. Vehicles are
deemed to have no residual values.

Equipment

Equipment had a carrying value on 1 July 2017 amounting to R80 000. Equipment is
initially recorded at cost and subsequently measured at cost less accumulated
depreciation. All equipment was purchased 1 July 2014, and the estimated residual value
was R10 000. Equipment is depreciated annually by application of the reducing balance
method at 15% per annum.
Loan:

Land and buildings were financed by a loan that was acquired from NBSS Bank. The loan
amount was paid into Mpetsi’s bank account on the same date the land and buildings was
acquired. The loan carries a fixed interest rate of 8% per annum and is settled by payment
of bi-annual instalments of R223 544 each, which includes capital and interest, as from
30 June 2018. The debit order for the payment due 30 June 2018 only appeared on the
bank statement on 2 July 2018, due to the fact that 30 June was on a Saturday and debit
orders only go through on a normal business day. No accounting entries were passed to
record the payment as yet, because cash flow hasn’t taken place before year end.

Payments due:

Total credit invoices received and still outstanding on 30 June 2018 amounted to
R232 560. This amount is owed to only two creditors namely Billy Jo Products and
Sammy Clean Suppliers, both sole proprietors. The amount owed to Billy Jo Products
amounted to R162 792. Mpetsi negotiated with Billy Jo Products to receive a settlement
discount of 5% should Mpetsi settle their account within 30 days of invoice date. On
30 June 2018 Mpetsi still qualified for the said discount. Mpetsi has never missed out on
the 5% settlement discount. Billy Jo Products is the only supplier granting such settlement
discount.

On 25 June 2018, I have authorised a payment to Yellow Insurers for payment of the
insurance premium amounting to R6 840 which will cover the period 1 July 2018 to
31 December 2018. The payment does reflect on the bank statement on 29 June 2018,
however I have not yet recorded the transaction in the accounting records of Mpetsi.

On 30 June 2018, the bank account as per accounting records in the general ledger of
Mpetsi showed a favourable balance of R400 000.

Investment:

Mpetsi had surplus cash available on 30 June 2017 and management decided to invest
R200 000 with STAN Bank at an interest rate of 7.5% per annum. All interest for 2018 in
terms of the investment have been received and properly recorded. The investment
expires on 31 December 2018.

Inventory:

On 30 June 2018, after a physical stock count was done it was found that inventory on
hand was worth R45 000.

Regards
David Ismail
(Financial manager)
 Marks
Sub- Total
REQUIRED
total
a) Prepare the statement of financial position of Mpetsi Traders as at 22
30 June 2018. Comparative figures and the equity section of this
statement are not required. The accounting policy and other notes to
the statement of financial position are also not required. Show all your
calculations clearly.

Communication skills – Lay-out and structure 3 25

TOTAL MARKS 25