NOVEMBER 2021 MAIN EXAMINATION

TAKE HOME ASSESSMENT QUESTION PAPER

PROGRAMME Bachelor of Commerce Degree

MODULE Accounting 3

INSTRUCTIONS TO CANDIDATES:
1. This is an official assessment of REGENT BUSINESS SCHOOL, and all assessment rules

apply.

2. Students are required to carefully read and fully understand the questions before answering

them.

3. Students must answer the questions fully but concisely and as directly as possible using

sufficient research and application.

4. Students should follow all specific instructions for individual questions (e.g., “list”, “in point

form”, “show all workings”).

5. The mark allocation is there to show you the weighting and length of each question.

6. Students are required to answer questions as instructed to.

DATE: 25 November 2021 TIME: 08h30 - 13h45

DURATION: 5.15 Hour MARKS: 100

QUESTION ONE [20]
Harvest Limited, a farming company who farm strawberries was awarded a government grant of
R100 000 on the 1 January 2020 to purchase an updated machine for strawberry cleaning costing
R225 000. As strawberries are soft and delicate to handle, it is important to have the right equipment
for this process in order not to damage the strawberries.
The machine was purchased on the 1 March 2020 and had a useful life of 5 years with a residual
value of R50 000. The company uses the straight-line method for depreciation.
The grant was received because of compliance with certain conditions in the prior year. All
conditions attached to the grant, except for the acquisition of the machine
had all been met on date of receipt.

Required:
Provide the general journal entries for the above transactions for the years ended 28 February 2020
and 28 February 2021. The company recognises government grants using a direct method i.e.
directly as grant income in profit or loss.

QUESTION TWO [28]

Macaroni Limited has an investment property which it purchased at a cost of R20million on the 1st of
January 2018. Macaroni Limited used this property for their admin division from date of purchase till
the 31st of December 2019. Macaroni Limited found a more suitable smaller property for their admin
division and will take occupation from the 1st of January 2020. Macaroni Limited entered into an
operating lease with Cheese Limited for Cheese Limited to lease the purchased building from the 1st
of January 2020.

The building was to be used as an office block for Cheese Limited. The 5-year lease was entered
into on the 1st of January 2020 and has the following terms:

- Lease rentals of a R100 000 per month payable in advance on the 1st day of each month
- Macaroni Limited is responsible for the maintenance of the building

The fair value of the investment property at 31st of December 2020 was R25 million.

During the 2020-year, Macaroni Limited incurred R350 000 expenditure on the property as follows:
- R25 000 to replace on the globes in the building which blew during a power surge after
loadshedding – 31 August 2020

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- R175 000 to build an extra parking floor to rent out to Macaroni Limited (under an operating
lease) who leases a building next door however has run out of parking space – 30 September
2020
- Damages to the lift system from the loadshedding – the lift system was quite outdated and
therefore cannot be repaired. The lift system had to be replaced at a cost of R150 000. The FV
of the damaged lift was R27 000. – 30 September 2020

Macaroni Limited accounts for investment property using the fair value model and property, plant
and equipment using the cost model. Buildings classified as property, plant & equipment are
depreciated on the straight line method to nil residual values over an expected life of 20 years.

Required:
Prepare the journal entries to record the above transactions in the books of Macaroni Limited for the
year ended 31st December 2020. (Please include dates, narrations and workings as marks are
awarded).

QUESTION THREE [12]

PART A
Comp X Limited operates a factory which makes computer chips for mobile phones.
It purchased a machine on 1 July 2017 for R80 000 which had a useful life of ten years and is
depreciated on the straight-line basis. The machine was revalued to R81 000 on 1 July 2020 and
there was no change to its useful life at that date.
A fire at the factory on 1 October 2020 damaged the machine leaving it with a lower operating
capacity.
The accountant considers that Comp X Limited will need to recognise an impairment loss in relation
to this damage.
The accountant has ascertained the following information on 1 October 2020:
(1) The carrying amount of the machine is R60 750.
(2) An equivalent new machine would cost R90 000.
(3) The machine could be sold in its current condition for a gross amount of R45 000. Dismantling
costs total an amount of R2 000.
(4) In its current condition, the machine could operate for three more years which gives it a value in
use figure of R38 685.

Year end is 31 December.

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What is the total impairment loss associated with Comp X Limited’s machine on 1 October
2020?
(5)

PART B
As at 30 September 2019 Damasque’s property in its statement of financial position was:

Property at cost (useful life 15 years) R45 million

Accumulated depreciation R6 million

On 1 April 2020, Damasque Limited decided to sell the property.

The property is being marketed by a property agent at a price of R42 million, which was considered
a reasonably achievable price at that date.
The expected costs to sell have been agreed at R1 million.
Recent market transactions suggest that actual selling prices achieved for this type of property in the
current market conditions are 10% less than the price at which they are marketed.
At 30 September 2020 the property has not been sold.

At what amount should the property be reported in Damasque’s statement of financial

position as at 30 September 2020? (7)

QUESTION FOUR [20]

Discuss whether each entity shall list a provision or not. Please include justification for your answer
and answer the questions in terms of IAS 37.

Entity A
The entity unconditionally guarantees its product, which it has produced using the same technique
for many years, against mechanical defects for one year from the date of sale.

Entity B
The entity guarantees its product, which it has produced using the same technique for many years,
against mechanical defects for one year from the date of sale, provided the purchaser completes
and submits a guarantee card within two weeks of the date of purchase.

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Entity C
The entity expects to undertake major repairs and maintenance to its factory building in 10 years’
time and has therefore decided to provide for this by creating a provision for major maintenance
evenly over the next ten years.

Entity D
The entity is a small-scale diamond miner whose mining concession stipulates that the environment
must be restored upon completion of the mining operation.

Entity E
The entity is a large-scale diamond miner (listed on the JSE) whose mining concessions were
granted prior to the recently enacted environmental legislation and therefore contains no legal
obligation to restore the environment. Due largely to the actions of various local and international
environmental groups, the company issued a formal statement voluntarily undertaking to restore the
environment. This prompted the national government to issue new lucrative concession go the
company, conditional upon it fulfilling its voluntary environmental undertakings.

Entity F
The entity is a diversified manufacturing company. One of the company’s divisions is expected to
make significant operating losses in the next financial year. Management wishes to provide for these
losses in the current financial year.

QUESTION FIVE [20]

1. What is the definition of an intangible asset? (3)

2. What are the recognition criteria of an intangible asset? (2)

3. On the 1 January 2020, Granite Limited, acquired the popular brand, Caesarstone
for an amount of R3 500 000 which was paid in full on this date. Legal fees of
R150 000 were spent in acquiring this brand. The legal fees were paid on the 31st of
March 2020.
Staff training on the brand and its operations amounted to R100 000. Training took
place in March and April 2020 to allow for trading from the 1st of June 2020. Sales of
this brand commenced from the 1 June 2020.

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Required:

5.3.1 Discuss with reason whether Caesarstone Limited can be recognized as an Intangible
asset with reference to IAS 38. (10)

5.3.2 What is the correct accounting treatment for Caesarstone Limited in the financial
statements of Granite Limited. (5)

END OF QUESTION PAPER

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