FACULTY OF ACCOUNTING AND INFORMATICS

Department of Financial Accounting

Department of Finance & Information Management

2020
Online Test 3
Financial Accounting 2 – Module 1

INSTRUCTIONAL
PROGRAMME: ND: Accounting (FAI DIACC1; FAI NDACF1)
ND: Accounting (ECP) (FAI NDACF1)
ND: Cost & Management Accounting (FAI NDCMA3)
ND: Cost & Management Accounting (ECP) (FAI NDCAF2)
ND: Taxation (FAI NDTAX3)
ND: Taxation (ECP) (FAI NDTXF1)
ND: Internal Auditing (FAI DIIAU1; FAI NDIAU3)
ND: Internal Auditing (ECP) (FAI NDIAF1)
ND: Office Management & Technology (NDOMT2; NDOMN1)
INSTRUCTIONAL OFFERING: Financial Accounting 2 – Module 1
SUBJECT CODE: (FACA201; FACC213; FCTN211)
DATE: 18 August 2020
DURATION: 60 minutes
TOTAL MARKS: 50
NUMBER OF PAGES: 12 (Including Cover)
EXAMINERS: Mr S Mkhwanazi, Mr B Ngiba; Mr R Mbhele; L Bhebhe

MODERATOR: R Scott

INSTRUCTIONS:
1. Answer all the questions in English.
2. Use of arithmetic calculator is permitted.
Question Description of topic Marks Time
(minutes)
1 Provisions, contingencies, and events after 50 60
reporting period
50 60

1
QUESTION 1
Obligation event
On 24 December 2019, the following information on Stanger Limited was discussed
during the directors’ meeting:
 The directors of the company have decided to pay bonuses to company
employees.
 A decision was made by the directors of the company to purchase new
equipment in 4 years’ time;
 Legislation has recently been passed by government, indicating that one of
the company plants must be dismantled;
 The company has a branch in Zimbabwe; future losses are expected from this
branch.
Based on the above information, you are required to respond to the following true or
false statements about obligations events: -
Statement 1
The directors’ decision to pay the bonus to the employee can be regarded as a
present obligation:
A True
B False
(2 mark)
Statement 2
The directors’ decision to purchase new equipment cannot be recognized as a
present obligation:
A True
B False
(2 mark)
Statement 3
Recent legislation passed by government requires dismantling of one of the
company’s plants. This will be regarded as a present obligation:
A True
B False
(2 mark)
Statement 4
Future losses expected to be incurred by the company at their branch in Zimbabwe
cannot be classified as a present obligation for the company:
A True
B False
(2 mark)

2
PART B
Reliable estimate
The following information was extracted from accounting records of Showe Limited
for the year ended 31 December 2019:
 Showe Limited sells goods to customers, also providing a refund policy.
Customers not satisfied with goods purchased have the right to return the
item for a full refund.
 During the year ended 31 December 2019, the company had sales of
R200 000.
 At the year-end it has been reliably estimated that some 5% of the sales for
the company will be returned (This is based on past experience). Customers
will all be provided with a full refund on returned goods.
You are required to use the above information to answer the following multiple-
choice questions about pure liability, provision or contingent liability, or whether the
refund policy should be ignored:

Statement 5
The first component of the definition of liability is that an obligation must have
occurred. Therefore, based on the above information, the obligation has occurred
because:
A The company has recognized the sales.
B Because of the refund policy the company provides, the company has the
obligation to refund all customers who return purchases.
C This legal obligation can be written into the contract of sale or through an
established pattern of past practices of refunding.
D All of the above.
(2 marks)
Statement 6
With regard to the above situation, the reason to believe that there is an expected
outflow of future economic benefits is as follows:
A Although there is a refund policy, the company is not obliged to make
this a cash refund.
B Because of the refund policy, it is expected that the company must
refund all customers who return goods.
C All of the above.
D None of the above.
(2 marks)

3
Statement 7
The recognition criteria states that ‘it is probable that the outflow of future economic
benefits can be reliably estimated’ has been met with regard to the above situation:
A This recognition criterion has not been met.
B It has been indicated that 5% of sales will be returned for refunds.
Therefore, the extent of the liability can be reliably measured.
C All of the above.
D None of the above.
(2 marks)
Statement 8
The above scenario can be treated in the financial statements of Showe Limited, for
the year ended 31 December 2019, as:
A Pure liability.
B Contingent liability.
C Provision.
D None of the above.
(2 marks)
Statement 9
Use the above information. However, now assume that it is not possible to estimate
the possible returns − this includes the related refunds. This situation should be
treated in the financial statements of Showe Limited for the year ended 31 December
2019 in this way:
A The liability will be recognized in the financial statements for the
company.
B The contingent liability must be disclosed in the statement of financial
position.
C No liability will be recognized in the financial statements for the
company
D The contingent liability should be disclosed in the notes to the financial
statements (but no liability should be recognized).
(2 marks)

4
PART C
FUTURE EVENTS
The following information was taken from Zimbili Limited for the year ended 31
December 2019:
 The company owns a large number of nuclear plants around the country;
 The last nuclear plant owned was dismantled by the company at the cost of
R1000 000. The company is expecting to use the same technology to dismantle
the current nuclear plant. The current dismantling will be achieved at the slightly
reduced cost of R700 000. Such reduced cost of dismantling the nuclear plant
can be associated with the experience that has been gained by such
dismantling conducted in the past.
 When such dismantling is correctly conducted, a completely new technology
may be available. This could result in the cost of dismantling the plant being
further reduced by R100 000.
You are required to use the above information to answer the following multiple-
choice question about future events:
Statement 10
With regard to the above situation, the provision should be measured in the books of
Zimbili Limited for the year ended 31 December 2019 in this way:
A The provision should be measured at R1000 000.
B It should be measured at R700 000.
C It should be measured at R500 000.
D None of the above.
(2 marks)

5
PART D
GUARANTEES
The following information was taken from accounting records of Siyaphumelela
Limited (retail company). Such relates to the financial year-end of 31 December 2019.
Siyaphumelela Limited is a retail company selling goods to customers and providing
a guarantee. Various scenarios are theorized on who should raise the provision for
costs of meeting future guarantees:
(i) Siyaphumelela Limited provides a guarantee to its customers.
(ii) The manufacturing company supplying Siyaphulela Limited also provides a
guarantee to customers. This means that Siyaphumelela Limited is not liable in
any way for guarantees to customers.
(iii) The manufacturing company providing the guarantee has noted that
Siyaphumelela Limited also provides a guarantee. Such a guarantee will be
provided by Siyaphumelela Limited, irrespective of whether the manufacturing
company honours its guarantee.
(iv) Assume that the manufacturing company, together with the retail company −
Siyaphumelela Limited − are providing the joint guarantee. Therefore, it is
expected that the two companies will share the costs of providing the
guarantee. Therefore, both companies are jointly and severally liable, accepting
responsibility for the guarantee.
(v) Although the manufacturing company and Siyaphumelela Limited provide a
joint guarantee, with both companies sharing relevant costs, Siyaphumelela
Limited is not liable for the amount that the manufacturing company may fail to
pay.
You are required to use the above information to answer the following multiple-choice
questions about the guarantee:
Statement 11
With regard to the scenario in (i) above, the transaction should be treated in this way:
A The retailer should raise the contingent liability.
B The manufacturer should raise the provision.
C The retailer has the obligation, and therefore the provision must be
raised.
D None of the above.
(2 marks)

6
Statement 12
With regard to the scenario in (ii) above, the transaction should be treated in this
way:
A The retailer should raise the provision.
B The manufacturer has the obligation; therefore they should raise the
provision: the retailer should not raise the provision.
C All of the above.
D None of the above.
(2 marks)
Statement 13
With regard to the scenario in (iii) above, the transaction should be treated in this
way:
A The manufacturer must raise the provision for the full cost of provision.
B The retailer must raise the provision for the full cost of provision.
C The retailer must also recognize the separate reimbursement of the
asset. This will be conducted to the extent that the retailer is certain to
receive the reimbursement.
D Only B and C are correct.
(2 marks)
Statement 14
With regard to the scenario in (iv) above, the transaction should be treated in this
way:
A It is expected that the portion of the cost that will be paid by the retailer
will be recognized as a provision.
B The portion of the cost that is expected to be paid by the
manufacturing company will be recognized as a contingent liability in
the books of the retail company.
C The portion of the cost that is expected to be paid by the manufacturer
will be disclosed as contingent liability. This will be conducted in case
the manufacturing company does not honour his obligations.
D All of the above.
(2 marks)
Statement 15
With regard to scenario (v) above, the transaction should be treated in this way:
A The manufacturing company should raise the full provision.
B It is expected that the portion of the amount that the retailer will pay
will be recognized as the provision.
C The portion of the amount that the manufacturer is expected to pay
cannot be recognized as a contingent liability by the retailer.
D Only B and C are correct.
(2 marks)

7
PART E
REIMBURSEMENT
During the year ended 31 December 2019, the following information was taken from
the accounting records of Nkandla Limited: -
 Nkandla Limited, a retail business, has a policy offering their customers a
guarantee;
 It is estimated that it will cost the company R100 000 to ensure that the
guarantee obligation has been fulfilled;
 However, the supplier of Nkandla Limited also offers a guarantee to all its
retail companies (this includes the guarantee to Nkandla Limited).
You are required to use the above information to answer the following multiple-
choice questions about guarantee reimbursement (Assume that the entire amount
will almost certainly be received by the business from the supplier).
Statement 16
The journal entry prepared by Nkandla Limited on the cost of fulfilling the guarantee
for the year ended 31 December 2019 will be:
A Debit: Provision for guarantee (L) R100 000
Credit: Guarantee expense ( E ) R100 000
B Debit: Guarantee expense (E ) R100 000
Credit: Provision for guarantee (L) R100 000
C Debit: Provision for guarantee (L) R100 000
Credit: Guarantee reimbursement (A) R100 000
D None of the above.
(2 marks)
Statement 17
The journal entry prepared by Nkandla Limited on provision for guarantee
reimbursements for the year ended 31 December 2019 will be:
A Debit: Guarantee reimbursement income (I) R100 000
Credit: Guarantee reimbursement (A) R100 000
B Debit: Guarantee reimbursement (A) R100 000
Credit: Guarantee expense ( E) R100 000
C Debit: Guarantee reimbursement (A) R100 000
Credit: Guarantee reimbursement income (I) R100 000
D None of the above
(2 marks)

8
PART G
RESTRUCTURING COSTS
The following information was taken from accounting records of Armstrong Limited
for the year ended 31 December 2019:
 Armstrong Limited decided to close its clothing factory. This happened within
6 months before the year-end;
 However, Armstrong Limited had to announce its intention a few days before
the year-end;
 Armstrong Limited had to announce the detailed formal plan which included
the expected costs of closure. Expected costs of closure include the following
detailed information:
 In the expected costs of closure, a retrenchment package of R1 000
000 was included;
 This also included retraining staff members relocated to other factories.
It is expected that this will cost the company R600 000;
 The expected cost of closure will also include the loss on sale of
factory assets of R90 000.
You are required to use the above information to answer the following multiple-
choice question:
Statement 18
The journal entry prepared by the company on the provision for restructuring costs
for the year ended 31 December 2019 will be:
A Debit: Retrenchment package R1 000 000
Credit: Restructuring costs R1 000 000
B Debit: Restructuring costs (E ) R 1 000 000
Credit: Provision for restructuring costs ( L) R1 000 000
C All of the above.
D None of the above.
(2 marks)
Statement 19
Costs of retraining staff members of R600 000, and loss on sale of R90 000, should
not be a part provided for:
A The retraining of the staff is the future operating costs, and can be
avoided.
B The loss on sale of the assets may indicate that there is need to impair
the assets at the year end.
C None of the above.
D A and B are both correct.
(2 marks)

9
PART H
EVENTS AFTER THE REPORTING PERIOD – VARIOUS
You are provided the following information on Mlokothwa Limited for the year ended
31 December 2019:
The company was in the process of finalizing their financial statements for the year
ended 31 December 2019. The following events then occurred. This information had
to be available to the company between the dates of 01 January 2020 and 28 February
2020. This is the time period in which the financial statements for the company were
authorized for issue. Therefore, these are the scenarios that were provided to you:-
(i) A debtor owing Mlokothwa Limited R120 000 at the year-end was in financial
difficulties. Therefore, Mlokothwa Limited had to process the credit loss
adjustment of R30 000; this was against this debtor’s account. In January,
however, a debtors’ lawyer indicated that they would be paying 30% of the
debtor’s amount;
(ii) Another debtor owed Mlokothwa Limited an amount of R150 000 at the year-
end. His company’s factory was destroyed in a labour strike in December 2019.
This debtor was declared insolvent. It is expected that this debtor will only pay
60% of the amount owing. Mlokothwa Limited was not aware of this debtor’s
situation on 31 December 2019;
(iii) Inventory with the carrying value of R100 000 at the year-end was sold for only
R80 000. This sale of the inventory took place on 10 January 2020. Goods sold
at the lower price had been damaged in a flood in June 2019;
(iv) The current tax expense of R30 000 had been incorrectly debited to the
revenue account. This error took place during the year ended 31 December
2019;
(v) Mlokothwa Limited had to declare the dividend of R30 000 on 20 February
2020.
You are required to use the above information to answer the following multiple-choice
questions on events after the reporting period:
Statement 20
With regard to the scenario in (i) above, this event will be treated thus in the financial
statements of the Mlokothwa Limited for the year ended 31 December 2019:
A As an adjusting event.
B As a non-adjusting event.
C As a liability.
D None of the above.
(2 marks)

10
Statement 21
With regard to the scenario in (ii) above, the journal entry recording the impairment
of receivables will be stated thus:
A Debit: Credit losses (E ) R60 000
Credit: Receivables (A) R60 000
B Debit: Impairment asset (A) R60 000
Credit: Receivables: Allowance for credit losses (-A) R60 000
C Debit: Impairment loss (E ) R60 000
Credit: Receivables: Allowance for credit losses (-A) R60 000
D None of the above.
(2 marks)
Statement 22
With regard to the scenario in (iii) above, the write-down of the inventory to the net
realizable value will be entered thus in the journal:
A Debit: Inventory (A) R20 000
Credit: Inventory write-down (E ) R20 000
B Debit: Inventory (A) R20 000
Credit: Trade payables (L) R20 000
C Debit: Inventory write-down (E ) R20 000
Credit: Inventory (A) R20 000
D None of the above.
(2 marks)
Statement 23
With regard to the scenario in (iv) above, the journal entry to correct the error will be:
A Debit: Revenue (I) R30 000
Credit: Income tax expense (E ) R30 000
B Debit: Income tax expense (E ) R30 000
Credit: Revenue (I) R30 000
C All of the above.
D None of the above.
(2 marks)
Statement 24
With regard to scenario in (v) above, this event will be treated in the records of
Mlokothwa Limited for the year ended 31 December 2019 as a:
A Non-adjusting event.
B Adjusting event.
C Liability.
D None of the above.
(2 mark)

11
Statement 25
With regard to the scenario in (i) above, the amount that will be recorded for further
impairment of receivables will be:
A R30 000
B R54 000
C R84 000
D None of the above.
(2 mark)

12