FINANCIAL ACCOUNTING 3A: FAC33A3

FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accounting
DEPARTMENT Commercial Accounting
CAMPUS(ES) SWC
MODULE NAME Financial Accounting 3A
MODULE CODE FAC33A3
SEMESTER First
ASSESSMENT OPPORTUNITY, Final Assessment 3
MONTH AND YEAR

ASSESSMENT DATE SESSION

ASSESSOR(S) Mrs S. Adam
Ms L. Mbhalati
Mrs C. Chetty
MODERATOR(S) Mr T. Mutshutshu (Internal)
Ms K.Gurr (External)
DURATION 3 hours TOTAL MARKS 100

NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 9

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FINANCIAL ACCOUNTING 3A: FAC33A3

Question 1 [10 marks]

PART A
Fashion Limited is a retail company that sells affordable clothes aimed at teenagers
and young adults. The company’s year-end is 31 December.

During 2022, Fashion Limited suffered losses amounting to R400 000 due to
increased competition from imported fashion items. Fashion Limited have estimated
that if sales don’t increase in 2023, the estimated losses will amount to R500 000 in
2023.

The bookkeeper has recognised both the R400 000 loss and the anticipated loss of
R500 000 for 2023, in the 2022 financial statements.

The accountant is of the opinion that the anticipated losses for 2023 should not be
recognised in the 2022 financial statements.

REQUIRED:

1.1 Discuss, in terms of the Conceptual Framework, whether the anticipated loss for
2023 of R500 000 meets the definition of an expense in the financial statements
of Fashion Limited for the year ending 31 December 2022. (5 marks)

1.2 Assuming the definition of an expense is met, discuss whether the anticipated
loss for 2023 of R500 000 meets the recognition criteria in the financial statements
of Fashion Limited for the year ending 31 December 2022. (4 marks)

PART B

Zama Limited is a distributor of stationery to schools in South Africa. The financial

manager prepared the financial statements for the year ended 31 December 2022.
When reviewing the financial statements, you have observed the following:

1. The Statement of Financial Position has not been prepared yet for the reporting
period.
2. Depreciation has been recorded as R38 000 instead of R83 000 in the
Statement of Comprehensive Income.

REQUIRED:

1.3 List two characteristics of faithful presentation that have not been complied with
as a result of items (1) and (2) above. (1 mark)

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Question 2 [25 marks]

Foodjie Limited is a large retail business that sells gourmet food ingredients to the
upper middle class target market in South Africa. Foodjie Limited is a vendor for VAT
purposes. Foodjie Limited has a year end of 31 December.

Foodjie Limited bought a fridge on 1 September 2020 for a cost of R115 000 (incl
VAT). Foodjie Limited also paid delivery costs of R2 000 (incl VAT) for delivery and
R3 000 (incl VAT) for installation. The fridge was delivered on the 1 October 2020 and
was available for use on the 1 November 2020. The fridge has a useful life of 7 years
and a residual value of R20 000 (excl VAT).

When preparing the financial statements for the year ended 31 December 2021 and
2022 management were of the opinion that the fridge may be impaired and decided to
perform an impairment test.

The following estimates were available on 31 December 2021:

• The fair value of the fridge was R90 000 (excl VAT) and the cost of disposal
was R5 000 (excl VAT)
• Value in use: R82 000
The following estimates were available on 31 December 2022:
• The fair value of the fridge was R81 000 (excl VAT) and the cost of disposal
was R4 000 (excl VAT)
• Value in use: R76 000
The accountant correctly calculated the historical carrying amount on 31 December
2022 as R78 240.17.

REQUIRED:
2.1 Prepare the property, plant and equipment note and the profit before tax note for
Foodjie Limited for the year ended 31 December 2021. (16 marks)

COMPARATIVES ARE NOT REQUIRED

ROUND TO TWO (2) DECIMAL PLACES
SHOW ALL WORKINGS

2.2 Prepare journal entries for Foodjie Limited for the year ended 31 December 2022.
(9 marks)
JOURNAL NARRATIONS ARE NOT REQUIRED
CLASSIFICATIONS ARE REQUIRED
ROUND TO TWO (2) DECIMAL PLACES
SHOW ALL WORKINGS

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FINANCIAL ACCOUNTING 3A: FAC33A3

Question 3 [15 Marks]

NEM Limited is a manufacturing entity based in Randburg. On 1 April 2021, the entity
started research and development of a new product. The entity incurred R200 000 in
research costs and R800 000 development costs on the same date. During the
development phase, the entity manufactured samples which were distributed to
customers, the feedback was positive. The entity has done research and found that
the product is in demand, and it will generate revenue of R10 000 000 per annum.
On 1 June 2021 the entity incurred, R2 300 000 to register the patent for this product.
The patent was regarded as available for use on the same date.
The company will sell this product online. The online store started operating on 1 July
2022 and there are customers already on the waiting list to get the product.
Management estimates the useful life of the patent at 10 years with no residual value.
The entity has a 30 June reporting date.

REQUIRED:
3.1 Discuss, with reference to IAS 38 Intangible Assets, the correct accounting
treatment for each of the two costs incurred listed below, in relation to the new product
for the reporting period ended 30 June 2021. (13 marks)

1.Research cost R200 000

2. Development cost R800 000

3.2 Prepare the journal entry relating to the patent in the books of NEM Limited for
the year ended 30 June 2022. (2 marks)

JOURNAL NARRATIONS ARE NOT REQUIRED

IGNORE VAT.

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Question 4 [15 Marks]

Wright Limited is a manufacturing company based in Majakaneng. During the current
reporting period, 2022, the company decided to expand their operations by
constructing a new plant to cater for its growing market. The plant will take a
substantial period of time to get ready. To fund the project, the company obtained a
R20 000 000 loan from ABJA bank on 1 April 2022. The construction of the venue
started on 1 July 2022. The capital amount on the loan will only be payable after 2
years once the plant is completed and is generating income (which will be in 2 years’
time), however, the interest of 15% on the loan is payable annually.

Apart from the loan from ABJA, the company has an overdraft facility to the value of
R2 500 000 that can also be utilised for the construction should the need arise. The
interest rate on the overdraft is 2% monthly. Since there was still enough cash to cover
the construction costs in the current year, the overdraft was utilized to pay salaries on
30 November 2022.The estimated costs for the construction of the venue is
R20 000 000. As of 31 December 2022, construction costs of R18 000 000 have been
paid as follows:

- 1 July 2022 R15 000 000

- 30 November 2022 R3 000 000

On 1 September 2022, there was a heavy storm in the area that made it impossible
for construction to continue for two months, construction resumed on 1 November
2022.

All surplus funds were invested in a money market account at a rate of 5% per annum.
The company has a 31 December year end.

REQUIRED:

4.1 Calculate the amount of interest that should be capitalised for the year ended
December 2022 in terms of IAS 23 Borrowing costs. (8 marks)

4.2 Calculate the finance costs to be included in the statement of comprehensive

income of Wright Limited for the year ended 31 December 2022. (5 marks)

4.3 When does the capitalisation of borrowing costs end as per IAS 23 Borrowing
costs? (2 marks)

ROUND ALL AMOUNTS TO THE NEAREST RAND.

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Question 5 [15 Marks]

Health Fanatics Limited is a recently incorporated company that started during the
COVID-19 pandemic to provide various health and fitness services to customers all
over South Africa. Health Fanatics Limited has a year end of 30 June. The company
has been performing well in the last 3 years and has entered into the following
transactions:

Transaction 1: Equity Instruments

On the 1 July 2022 the company invested in a pool of equity instruments. The initial
investment was R989 000. Transaction costs of R20 000 were incurred on that date
and paid in cash. The investments had a collective fair value of R1 132 000 by 30 June
2023. Dividends declared and received during the current financial year amounted to
R112 000. The board of directors were not happy with the performance of the
investment pool and sold the entire pool on 30 June 2023 at fair value. The policy of
the company is to disclose the movements in fair value through profit or loss.

Transaction 2: Debentures
The company issued debentures on the 1 July 2020 with the following details:
Issue price at fair value (1 July 2020): R1 234 000
Transaction costs (1 July 2020): R23 000
Maturity date: 30/06/2023
Coupon payment (payable in arrears on 30 June each year) R143 000
Redemption amount R1 129 297
The effective interest rate was correctly calculated at 9%

REQUIRED:
5.1 Complete the following table, identify and state how the Company would classify
the financial instrument for each transaction in their respective financial statements as
per International Financial Reporting Standards (IFRS 9).
(3 marks)
Transaction Company X Company Y
Company X issues 100 000
debentures to Company Y
Company X bought 2 000
shares in Company Y
Company Y borrowed
R300 000 from ABBA Bank

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5.2 Prepare ALL the journal entries to recognise Transaction 1 (Equity Instruments)
in the financial statements of Health Fanatics Limited for the year ended 30 June 2023.
(6 marks)

SHOW ALL CALCULATIONS

JOURNAL NARRATIONS ARE NOT REQUIRED
SHOW CLASSIFICATIONS CLEARLY
IGNORE VAT

5.3 Present Transaction 2 (Debentures) in the Statement of Financial Position of

Health Fanatics Limited for the year ended 30 June 2023. (6 marks)
COMPARATIVES ARE REQUIRED

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Question 6 [20 Marks]

African Logistics Limited has been operating for several years and is well known for
excellent logistics services. The company has a year end of 31 December.

Lease Contract 1:
The company obtained a new contract and needed a truck to provide logistics
services. African Logistics Limited has leased a vehicle on 1 January 2022 from
Enormous Limited for a period of three years. An initial deposit of R100 000 was
payable and thereafter payments of R489 000 are made on 31 December every year.
The effective interest rate implicit in the lease is 16% per annum.

The lease agreement gives the lessee the option to purchase the vehicle at the end of
the lease term and African Logistics Limited does not intend to take up this option.

The estimated useful life of the vehicle is five years, with an estimated residual value
of R0. Similar vehicles would be depreciated on a straight-line basis.

Lease Contract 2:
Due to the increased administration demand, the company entered into a contract with
Mac Limited for the lease of a printing machine on 1 January 2022.

The period of the lease is for five years, however both parties have the right to
terminate the lease without a penalty on the anniversary of the commencement of the
lease. African Logistics Limited is reasonably certain that it will cancel the lease after
a year as the administration demand would decrease significantly.

The cost to install the machine at African Logistics Limited’s premises is not material.

REQUIRED:
6.1. Prepare the journal entries in the accounting records of African Logistics Limited
for Lease Contract 1 for the year ended 31 December 2022. (10 marks)
SHOW ALL CALCULATIONS
ROUND OFF TO THE NEAREST RAND
JOURNAL NARRATIONS ARE NOT REQUIRED
SHOW CLASSIFICATIONS CLEARLY
IGNORE VAT

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6.2. Prepare a lease disclosure note of African Logistics Limited as at 31 December

2022, showing the disclosure of Lease Contract 1, in accordance with International
Financial Reporting Standards (IFRS). (4 marks)
COMPARATIVES ARE REQUIRED

6.3 Discuss, in terms of IFRS 16 Leases, how African Logistics Limited should account
for the lease contract in Lease Contract 2. (6 marks)

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