SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE

TEST 1: 29 AUGUST 2017

ACCOUNTING 102 (ACCT102 P2 W2)

INTERNAL EXAMINERS:
DR M MKHIZE,
MR S RATHNASAMY CA(SA)
MR L DEODUTT

INTERNAL MODERATOR:
MS K GURR CA(SA)

TOTAL: 60 MARKS DURATION: 90 MINUTES (1.5 HOURS)

INSTRUCTIONS TO CANDIDATES:
1. This question paper consists of FIVE numbered pages, including this page.
2. There are 2 questions in this paper.
ANSWER BOTH QUESTIONS
3. Answer all questions in one booklet. You must commence each question on a new
page. All parts of each question must be answered.
Do not write your name on the booklets.
4. Answers must be written in blue or black ink only. Answers written in pencil will not
be marked
5. Show all workings and follow all rounding instructions. The use of non-programmable
calculators is permitted – cellular phones and smart watches are strictly prohibited

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Question One (35 Marks: 53 Minutes)

IGNORE VALUE-ADDED TAX

Virginia Active-wear Limited (‘the company’) started operations on 1 January 2014 and
manufactures, sells and distributes gym clothing to retail clothing stores throughout
South Africa. The company as well as the industry has experienced fast growth,
especially over the last two years, as a result of worldwide health awareness
campaigns. The company has been investing in assets to satisfy market demands for
its clothing.

You are the company’s accountant and are busy preparing the financial statements
for the year ended 31 December 2016. The following transactions relating to land and
buildings occurred during the 2016 financial year:

Property

On 1 March 2015 the company bought a property in Mooi River, Kwa-Zulu Natal where
its warehouse, distribution and sales staff would be located (no manufacturing takes
place at these premises). The purchase price was R12 million, of which 40% was
allocated to land and the balance to the building. The company took out a loan at
Barkleys Bank to pay the purchase price, transfer fees of R1.2 million as well as
additional legal costs of R250 000 which were necessary to register the property.

As the building was not in a condition to be used immediately as intended by

management, R1.2 million was spent on renovating it for use by rebuilding internal
offices and installing network cabling. The additional building work was completed on
31 March 2015 and the building was ready for use, as intended by management on
this date. The staff moved in on 15 April 2015. The building initially had an expected
useful life of 20 years with a residual value of nil.

The property was revalued on 1 January 2016 to its fair market value of R18 million,
of which R7.2 million (40%) related to the value of the land. On 1 January 2016 it
became apparent that the building would last longer than the 20 years initially
estimated and the estimated useful life was revised and increased by an additional 20
years (i.e. 40 years useful life in total). The residual value of the building was also
reassessed and estimated to be R1.5 million.

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KoolDry T-shirts and machinery:
One of the company’s new products is the T-shirt design called the KoolDry which was
launched in July 2016. The T-shirt is designed to keep its user sweat free and cooler
for longer as a result of its high performance micro fibre polyester fabric. The
manufacture of the T-shirt requires a specialised soaking machine that treats the fabric
in order to create the KoolDry effect.

On 15 January 2016 the company ordered a specialised soaking machine (“Soaker

4.0”) required for the process stated above. The Soaker 4.0 was ordered from an
American manufacturer at a cost of $500 000 (Dollars). This one of a kind machine
will be used for the sole purpose of manufacturing the KoolDry T-shirts. The machine
was shipped “free on board shipping point” on 15 February 2016 and arrived at the
Durban Harbour on 31 May 2016. Full payment of $500 000 was made to the
American supplier on 15 June 2016.

The exchange rates of Dollars ($) to Rands (R) during 2016 were as follows:

Date Dollar ($) Rand (R)

15 January 2016 1 16.45
15 February 2016 1 15.87
31 May 2016 1 15.80
15 June 2016 1 15.29

The following costs were incurred as a result of the arrival of the new machine:

- Import duties of R110 000.

- A transport company charged Virginia Active-wear R85 000 to transport the
machine to the manufacturing plant based in Pietermaritzburg, Kwa-Zulu Natal.
- An engineer was required to prepare the site, install and test the machine at a
cost of R45 000.
- Advertising costs of R50 000 were incurred to market the new design to
potential customers.
- The machine was ready and available for use on 1 July 2016.
- As a result of the time taken to prepare the site, install and test the new
machine; the design and marketing division incurred an operating loss of
R26 000 for the month of July 2016.

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During November 2016, management of Virginia Active-wear Ltd were concerned over
talks of Chinese suppliers who claimed that they were able to produce the exact same
KoolDry T-shirt at a much cheaper price than any retail clothing store in South Africa.

The Chinese suppliers claim that there is absolutely no difference between the original
KoolDry and the replicas produced by them. The T-shirts were already being
distributed by the Chinese suppliers to hawkers and vendors in various cities around
South Africa.

In light of the above, an impairment test was conducted on the Soaker 4.0 machine
during December with the following results as at 31 December 2016:

- The machine had a value in use of R 3 000 000.

- Virginia Active-wear would be able to sell the machine for a price of R3 020 000
but would incur R50 000 in transporting the machine to the customer.

It is Virginia Active-wear’s intention to keep the Soaker 4.0 machine until the end of its
useful life.

The estimated useful life of 5 years with nil residual value, for the Soaker 4.0 machine,
has remained unchanged.

Additional Information:

- The company has always applied the revaluation model to all its property and
machinery.

REQUIRED:
Show ALL workings and round off to the nearest rand

Question One Marks

(a) Prepare the Property, Plant and Equipment reconciliation note to
the Statement of Financial Position of Virgin Active-wear Limited as
at
31 December 2016.
35.0
You are specifically required to show the split between Cost and
Accumulated Depreciation at each reporting date.

Accounting policy notes, comparatives figures and total columns

are not required.

Total for Question One 35.0

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Question Two (25 Marks – 37 Minutes)

IGNORE TAXATION

You are the newly appointed financial accountant of NTM Cellular Ltd (“NTM”), a large
cellular phone retailer in Kwa-Zulu Natal. You are busy preparing the financial
statements for the year ended 30 June 2017 and discovered that the following matter
below has not been included in the financial statements, due to uncertainty as to how
to treat it.

Marketing Campaign

NTM has acquired an exclusive right to market the new Samyung Galactic SS
smartphone in the Kwa-Zulu Natal region. During June 2017, the company embarked
on a R5 million marketing campaign in an attempt to create awareness of the product
before its launch in South Africa during August 2017.

During a directors meeting held in July 2017 Mr. Mark Shutter, the CEO of NTM, stated
the following: “I have no doubt that NTM will achieve record sales during the next
financial year. The Samyung Galactic SS smartphone will be the main driving force
behind the record sales because; it is like no other; and everyone will want one. I
therefore believe that the amount expended on the marketing campaign during June
2017 should be recognised as an asset in the financial statements of NTM.”

REQUIRED:

Question Two Marks

With reference to the Conceptual Framework, prepare a
memorandum to Mr Mark Shutter clearly explaining why you agree
or disagree with his statement of recognising the amount spent on 22
the marketing campaign as an asset in the draft financial statements
for the year ended 30 June 2017.

Included in your answer should be the necessary journal entry to 3.0

record the amount incurred on the marketing campaign.

Total for Question Two 25

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