School of Accountancy

Department of Accounting

QUESTION BANK
CACC021
MODULE 1: THE CONCEPTUAL
FRAMEWORK
STUDENT NAME:
STUDENT NUMBER:

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QUESTIONS DESCRIPTION PAGE

C1 Class Question 1 3

C2 Class Question 2 4

1 Conceptual Framework (CF) 5

2 Definitions and recognition criteria of CF 7

3 Definitions and recognition criteria of CF 8

4 Definitions and recognition criteria of CF 10

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CLASS QUESTION 1

Farm Co (Pty) Ltd (hereafter Farm Co) is a large farming operation that owns a farm in the Limpopo
Province in South Africa. Farm Co has a 31 December year end and purchased the farm that they
operate on in 2015 for a total cost of R 37 000 000. Due to the droughts in the previous year and a
severe hailstorm that caused a lot of damage to the crops, Farm Co has suffered losses for the past
two years. The directors of Farm Co has decided that in order to boost profits for the next year, the
company has to purchase a new machine that will enable them to wash and sort potatoes much
quicker than before. It is the hope of the directors that this quicker process will save the company
both time and money.

Since Farm Co is experiencing cash flow problems, the directors need to obtain a loan from the
bank to enable them to buy the new machinery. However, the statement of financial position shows
large liabilities that is more than the assets and therefore the bank declined Farm Co’s loan
application. After looking at the financial statements, the directors all agreed that the biggest asset
that the farm owns – the river that runs through the farm – does not appear on the statement of
financial position. Farm Co also has three boreholes that supply water for their farming activties.

REQUIRED:

Discuss the recognition of the river in the financial statements for the financial reporting period ended
31 December 2019 with reference to the Conceptual Framework.

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CLASS QUESTION 2

Account Co (Pty) Ltd (hereafter Account Co) is a large accounting firm that employs over 2 000
accountants. The accountants employed by the company provides accounting services for a large
customer base. The directors of Account Co has decided that since their business is expanding
rapidly, they should purchase a larger office building so that all of their accountants can have their
own offices.

The directors need to obtain a loan from the bank to enable them to buy the new office building.
However, the statement of financial position shows large liabilities that is more than the assets and
therefore the bank declined Account Co’s loan application. After looking at the financial statements,
the directors all agreed that the biggest asset that their company owns – the 2 000 well educated
and experienced accountants – does not appear on the statement of financial position. All of the
accountants are paid a fixed monthly salary. It is the policy of Account Co that every employee
signs an annual contract that specifies (among other terms) that they are employed for the next 12
months.

One of the directors disagreed with the recognition of the employees as an asset. He was of the
opinion that since the company has to pay salaries to the employees on a monthly basis, the
employees are actually a liability of the company.

REQUIRED:

Discuss the recognition of the employees in the financial statements with reference to the
Conceptual Framework.

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QUESTION 1
SOURCE: QUESTION 1 [CACN021 – TEST 1 (2016)]
TOTAL MARKS: 23 MARKS
PART A
Woodpecker Ltd bought a farm in the Witels Mountain area that is suitable for growing pine trees.
They paid R1million for the farm and immediately started to develop the land. This involved making
roads to the various planting areas, dividing the farm into sections, and creating fire and windbreaks.
Holes were also dug and young trees planted and fertilized. This was done at a cost of R100 000
per hectare.
After the trees had been planted they had to be watered and weeds had to be controlled. The trees
also had to be pruned to ensure that they grow straight and tall. This was an ongoing operation with
costs being continually incurred.
After a period of about 10 years the trees should be ready for harvest and should yield a return in
excess of 20% per annum on the costs incurred to establish them.
During the financial year ended 31 December 2015, Woodpecker developed 10 hectares at a cost
of R1 million and spent R300 000 on watering and maintaining the trees.
The accountant reflected the cost of R1, 3 million as an expense in the statement of comprehensive
income. The financial director, however, feels that there are enough reasons to justify treating the
R1, 3 million as an asset in the statement of financial position as at 31 December 2015.
REQUIRED:
Discuss whether you agree with the accountant, by making reference to the Conceptual [11]
Framework. Should you disagree with the accountant, please discuss and provide an
alternative accounting treatment of the costs.
(Source: Accounting standards)

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PART B
You are the auditor of Dishonest Henry's Spare Dealers Limited. During the course of the audit of
the financial statements for the year ended 31 December 2015, Dishonest Henry (the CEO) asked
for your advice in accounting for the following matter:
In August 2015 the company sold a fleet of luxury and SUV vehicles to Ayanda Asset Management
Limited, at a price of R5 million, to be paid in full in early November 2015. With a tear in his eye,
Dishonest Henry informs you that the amount has not been received, and that Ayanda Asset
Management Limited was placed under curatorship during late November 2015.
Dishonest Henry has been notified by the curator that only 20c in the Rand will be recovered.
The accountant has not recorded the effect of Ayanda Asset Management Limited being placed
under curatorship in the general ledger.
Dishonest Henry is of the opinion that the event does not affect the statement of financial position
nor the statement of comprehensive income and that a note disclosure in the financial statements
will be adequate.
REQUIRED:
a) Write a memo to Dishonest Henry, explaining how the matter should be dealt with in [10]
the accounting records, in terms of The Conceptual Framework.
b) Provide the journal entries that should be processed in the accounting records of [2]
Dishonest Henry's Spare Dealers Limited for the year ended 31 December 2015 to
account for the matter raised.

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QUESTION 2
SOURCE: QUESTION 1 [CACN021 – TEST 1 (2017)]
TOTAL MARKS: 11 MARKS
Mankweng Construction (Pty) Ltd is a construction company based in Sovenga. The company was
established back in 2002 by its now Managing Director (MD) and sole shareholder, a qualified civil
engineer (Mr Moreki 40). Financial reporting period end on 31 December. Mr Moreki has a son
(Moreki Junior 20) whom he is currently grooming to take over the reins of the Financial Manager,
later Financial Director once he qualifies as a CA (SA). Moreki Junior will eventually become the MD
upon retirement of his father at the age of 60. Moreki Junior will be enrolling for his second year B
Com Accounting at University of Western Cape (UWC).
The following transactions took place in Mankweng Construction during 2016 financial reporting
period:
Bendor Ext. 100
During March 2016, The Board of Directors (BoD) of Mankweng Construction approved
R100 000 000 project to build 661 mixed-income household units, including institutional units, free-
standing clustered units, townhouse units and individual bonded units at Bendor Ext. 100. Bendor
is one of the upmarket suburbs in Polokwane. In terms of the BoD resolution, the construction of the
houses must commence on 1 April 2016 and be concluded on 31 December 2018. All 661 houses
will be available for sale to the public immediately after completion. All the construction activities
(architectural work, accounting and legal fees) were officially started on 1 April 2016 and the
expenditure was incurred starting from 1 May 2016.
XYZ Loan (IAS 23: Borrowing costs)
In order to commence with the construction of mixed income household project, Mankweng
Construction consulted Venda Building Society (XYZ) bank for a loan. XYZ had agreed to borrow
Mankweng construction a loan amount of R50 000 000 effectively from 1 June 2016. The loan will
be payable once the project is complete on 31 December 2018. The loan will bear an interest at a
nominal rate of 12.50% per annum payable in arrears. Mankweng Construction has been obtaining
loans from XYZ for the past 10 years and they have an excellent credit record.

REQUIRED:
a) Discuss the definition and recognition criteria of the XYZ loan in terms of the [11]
Conceptual Framework. Include journal entry to be passed on initial recognition in
your discussion. Narration is required.

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QUESTION 3
SOURCE: QUESTION 1 [CACN021 – SICK TEST (2017)]
TOTAL MARKS: 28 MARKS
Dalmada Paramedics (Pty) Ltd (hereafter Dalmada) is a healthcare professional, predominantly in
the pre-hospital and out-of-hospital environment, and working mainly as part of emergency medical
services based in Dalmada Polokwane. The company’s financial reporting period end is 31
December.
The company had the following transactions during the 2016 financial reporting period:
Consumables on hand (IAS 2 Inventories)
The company had the following consumables on hand at year end:

No Description Quantity Amount

1. Advanced life support packs 25 154 700
2. Basic life support packs 20 26 600
3. Fully loaded pre-filled packs 30 13 650
4. Hard cases 40 209 560
5. Heating pack 50 3 900
6. Induced hypothermia induction cases 10 3 705 000
7. Mass casualty and fire rehab 45 3 960 000
8. Temperature and climate control 35 36 400
9. Transportation and immobilization 60 222 300
Totals 315 8 332 110

Appointment of Chief Financial Officer (Conceptual Framework and IAS 38 Intangibles)

On 2 January 2016, the company appointed the new Chief Financial Officer Ms Wangketsetsa
Sogiba (the CFO). The newly appointed CFO was awarded South Africa’s Business Women of the
year award for 2015. The company incurred the following costs when appointing the new CFO:

No Description Amount
1. Reallocation costs for her and her family from Cape Town to Polokwane 120 000
2. Hotel accommodation for the first month for her and her family: 150 000
3. A new car Audit A4 to thank her for signing the contract 450 000
Total 720 000
Management is of the opinion that the costs of R720 000 for appointing Ms Sogiba should be
capitalised as an intangible asset and be amortised over a period of 5 years as per the term of her
employment contract in order to account for her skill and experience. Management is of the view
that the value of R720 000 will be recovered within the next 5 years as the company will enjoy future
economic benefits from her skill and experience.

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Other information
The company has the following accounting policies:

Asset Accounting policy Useful life

Borrowing costs Capitalised in terms of IAS 23 According to applicable standard
borrowing costs
Inventory Not identified Not applicable
Buildings  Revaluation model. 42 years, straight line method
 Every second year at the beginning
of the year.
 Gross Replacement method
Motor vehicles Cost model 8 years, straight line method
Helicopters Cost model 15 years, straight line method
Parking area Cost model 40 years, straight line method
Intangible assets Cost model 5 years, straight line method

REQUIRED:
d) Write a memo advising management of Dalmada on how to account for inventory in [14]
terms of the following standards:
 Materiality in terms of the Conceptual Framework;
 Materiality in terms of IAS 1 (Presentation of Financial Statements), and
 IAS 2 (Inventories).
→ Initial recognition and measurement
→ Subsequent measurement and
→ Disclosures
Calculations are not required.
Presentation. [1]
e) Discuss with reference to the Conceptual Framework and IAS 38 Intangible assets [13]
whether the cost of acquiring the CFO’s skill should be capitalised or expensed.

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QUESTION 4
SOURCE: QUESTION 3 [CACN021 – TEST 1 (2018)]
TOTAL MARKS: 12 MARKS
East Thirty-Two Ltd (hereafter E32) is a mining company based in Witbank, Mpumalanga Province,
South Africa. E32 specialises in the extraction of coal. The financial reporting period end of E32 is
30 September.
On 1 October 2016, the company appointed a new Chief Executive (Dr Frank Pitjadi) on a five-year
contract term. E32 acquired the following assets (cash) that will be for exclusive use of its Chief
Executive (CE) as per the terms of employment contract:
5 bedroom house R4 800 000
S-Class Mercedes-Maybach R2 850 000
Total R7 650 000
The monthly salary of Dr Pitjadi as per the employment contract is R205 000 per month subject to
annual performance appraisal as well as general increase as determined by the company’s
remuneration committee.
REQUIRED:
a) Discuss how the salary expense of R205 000 to the Chief Executive (Dr Pitjadi) should [11]
be recognised in the accounting records of E32 in terms of the Conceptual
Framework.
Effective and efficient communication: Logic [1]

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