TITLE HET: BCOM ACCOUNTING

SUBJECT FINANCIAL ACCOUNTING 2A

SUBJECT CODE FNA 210
TEST/EXAM SUPP EXAM MEMO
SEMESTER 1ST
DATE WRITTEN 04 AUG 2016

TOTAL MARKS 120

DURATION 2 HOURS
PASS MARK 50%
WEIGHTING 60%
EXAMINER NKOSINATHI MKHIZE
MODERATOR BONGIWE MSOMI/TELISA SINAYHAKH

REQUIREMENTS:

Learner Requirements: Stationery and Examination Book

Equipment Requirements: None

This paper consists of:

1. Section A 30 marks
2. Section B 40 marks
3. Section C 50 marks

Please answer ALL questions.

PLEASE READ THE ASSESSMENT RULES AND REGULATIONS THAT FOLLOW

Learners are warned that contravening any of the examination rules or disobeying the
instructions of an invigilator could result in the examination being declared invalid.
Disciplinary measures will be taken which may result in the students’ expulsion from
Damelin.

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ASSESSMENT RULES AND REGULATIONS

Please ensure that you have read and fully understand the following assessment rules and
regulations prior to commencing with your assessment:

1. To be permitted access to the examination, a learner must arrive with:

- an Identity Document or other official proof of identity (for example,
- a student card, passport or driver's licence card with photo); and
- the required exam stationery.
2. No learner may enter the examination room more than 30 minutes after the
examination sitting has commenced and no candidate may leave the room less than
one hour after the examination sitting has commenced.
3. No extra time will be allowed should a student arrive late.
4. All learners must sign the Attendance Register for the examination on arrival.
5. It is the responsibility of learners to familiarize themselves with the examination rules
prior to sitting for the examination.
6. All examinations are to be written on the date and time officially stipulated by the
College.
7. It is the responsibility of learners to ensure that they are writing the correct paper and
that the question paper is complete
8. Cell phones must be switched off prior to entering the exam venue. Cell phones and
wallets may be placed under candidates' chairs rather than at the front of the room.
9. Learners may not handle cell phones or wallets during the exam.
10. No weapon of any description may be taken into the assessment room.
11. All personal belongings are to be placed at the front of the examination room. Personal
belongings brought to the examination are at the owner's risk.
12. Smoking is not permitted and learners will not be allowed to leave the examination
room in order to smoke
13. Once the examination has commenced, all conversation of any form between
candidates must cease until after candidates have left the room, after the examination.
14. Only the official College examination book, as supplied by the College, may be used.
15. Learners must ensure that their student number is written on the answer book.
16. Learners are responsible for ensuring that they follow the instructions in the
examination for submitting their answers.
17. Please read the instruction appearing on the examination paper carefully
18. The number of every question must be clearly indicated at the top of every answer.
19. No pages may be torn out of the answer book. All question papers and scrap paper
must be handed to the invigilator after the examination.
20. Learners finishing earlier are to leave the examination room as quietly as possible on
the instruction of the invigilator, and may not talk until outside the building where the
examination is being written.
21. Only under exceptional circumstances will a learner be permitted to leave the
examination room during the examination, and if the invigilator gives permission.

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SECTION A [30 Marks]

Question 1 (30 marks)

IAS 1 Presentation of financial statements prescribes the basis for presentation of general
purpose financial statements to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other entities. It sets out
structure and minimum requirements for their content.

Required

1.1 State the objective of IAS1 Presentation of financial statements (10)

The objective of IAS 1 Presentation of financial statements is to provide the basis for
preparation of general purpose financial statements to ensure comparability both with
the entity’s financial statements of previous periods and with the financial statements
of other entities. It sets the overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for their
content.

1.2 List the five components that make up a complete set of financial statements (10)

 Statement of comprehensive income

 Statement of financial position
 Statement of changes in equity
 Statement of cash flows
 Notes to the financial statements

1.3 List six possible classes of ‘’other comprehensive income’’ (5)

 Changes in revaluation surplus

 Remeasurements of defined benefits plans
 Gains and losses from translating foreign operations
 Gains and losses on investments in equity instruments measured at fair value
 The effective portion of gains and losses on hedging instruments in a cash flow
hedge
 For liabilities designated as at fair value through profit and loss, the amount of the
change in fair value that is attributable to changes in the liability’s credit risk.

1.4 List any five general features of financial statements as outlined in IAS 1 Presentation of
financial statements (5)

 Fair presentation and compliance with IFRS

 Going concern
 Accrual basis of accounting
 Materiality and aggregation
 Offsetting
 Frequency of reporting
 Comparative information
 Consistency of presentation

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SECTION B [40 Marks]

QUESTION 2 [Property, Plant and Equipment] (40 MARKS)

Wood Ltd commenced in 2014 with the manufacturing of wood products at a new plant. The
plant was purchased in January 2014 for R700 000. During January 2014, some equipment
was installed and other equipment was modified.

Installation and modification costs incurred amounted to R130 000.

Form security reasons a fence was erected at the plant at a cost of R20 000.

The plant was ready for use on 1 February 2014. An opening function was held in the plant
on 15 February 2014 at a cost of R50 000 in order to entertain customers and to introduce
the new products to be manufactured at this plant. Production only commenced on 1 March
2014.

The plant has a useful life of 10 years and the residual value was estimated at R200 000.
Expected scrapping costs amount to R140 000 (discount present value of scrapping costs
equals to R100 000). Assume that the provision for the scrapping costs will be raised in
accordance with IAS 37.

At the end of August 2014 heavy rain caused severe damage to the houses of the
employees in the region. Management granted special leave to all the employees of the
plant to attend to all the repair of their houses. The plant stood idle during September 2014.

The company’s year end is 31 December.

Required

a. Calculate the cost of the plant (14)

b. Calculate the depreciable amount of the plant (8)
c. Calculate depreciation for the year ended 31 December 2014. (10)
d. Calculate the carrying amount of the plant on 31 December 2014. (8)
Your answer must comply with requirement of Statements of Generally Accepted Accounting
Practice.

Solution

a. Cost R
Purchase price 700 000
Installation 130 000
Fence (1) 20 000
Opening function (2) -
Scrapping costs (3) 100 000
950 000
1) Refer to IAS 16.11
2) Refer to IAS 16.19
3) Refer to IAS 16.16 (c)
b. Depreciable amount R
Cost 950 000
Residual value (200 000)
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 750 000

c. Depreciation R
Depreciation for the year (1) 68 750
(1) 750 000/10 x 11/12 = 68 750 (refer to IAS 16.55). Depreciation of an asset begins
when it is available for use (1 February 20.4). Depreciation does not cease when the
asset becomes idle (September 20.4).

d. Carrying amount R
Accumulated depreciation 950 000
Carrying amount at 31 December 2014 (68 750)
881 250

SECTION C [50 Marks]

Question 3 Property Plant and Equipment (50 marks)

The Managing Director of Super Smart Limited has requested you in your position as
Financial Director to explain certain of the basic principles governing the accounting
treatment of three issues included in the Annual Financial Statements for the year ended 31
December 2012. As members of the board of directors are not accountants they are not
aware of the regulations imposed by International Financial Reporting Standards. (IFRS).
You have only recently received the statements and have yet to review whether the
accounting treatment is correct according to IFRS. Critically examine the following issues.
a. Included in the non-current assets of the company is a milling and grinding machine that
was constructed by Super Smart at a cost of R400,000. The machine was completed and
available for use on 1May 2012. The machine was first used for production purposes on 31
May 2012.

The R400 000 carrying value is made up as follows:

Labour Costs R100 000
Administration Overheads R70 000
Depreciation of Machinery utilized in the construction of the Milling Machine R80 000
Raw Materials of R150 000 (this includes the cost of Materials destroyed by striking workers
worth R20 000).

b. The factory building had been repainted during the current financial year at a cost of R300
000.
The cost had been capitalized to the buildings on the grounds that the building was looking
shabby and it was necessary to keep the building in good repair.

c. A corporate Jet aircraft had been purchased For R3 500 000 during the current financial
year. The cost of the Jet in the financial statements was listed at R4 250 000. The Managing
Director did not understand why an inspection cost of R750 000 had been capitalized. The
next inspection was due to be carried out in three years’ time.

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Required
Write a report to the Managing Director explaining whether the accounting treatment is
correct in terms of IAS16 or whether corrections need to be made. All definitions must be
discussed and presented.

Solution

Definitions of Non-current assets, recognition criteria, and the measurement of the assets
should all be stated.
The answer should be in the form of a memo. If not 5 marks should be deducted.
a) All costs incurred in bringing the asset to a condition for it to capable of operating in a
manner intended by management should be capitalized.

However the following costs may not be capitalized:

The R20 000 materials destroyed – All unnecessary wastage is not allowed to be capitalized
according to IAS16.
Administration costs of R70 000 – Unless it can be proved that these costs can be directly
linked to the manufacture of the mill.
Further the capitalization of all of the other costs is correct as all the other costs were
necessarily incurred in bringing the asset to a condition enabling it to be used.
The mill may be depreciated from the date when it first becomes available for use and
therefore the mill should be depreciated from 1 May 2012.

b) Repainting of the factory building: IAS16 makes no distinction in principle between the
initial cost of acquiring an item and the day to day expenditure on it.

The cost of an item of property plant and equipment is recognized as an asset if and only if:
It is probable that future economic benefits associated with the item will flow to the entity.
The cost of the item can be measured reliably
In terms of paragraph 7 an entity does not recognize in the carrying amount of any item of
property plant and equipment the costs of the day-to-day servicing of the item. Rather these
costs are recognized in profit and loss as incurred.
Therefore the repairs to the building should be expensed.

c) Each part of an item of property plant and equipment with a cost that is significant in
relation to the total cost of the item is required to be capitalized; however that cost should be
depreciated separately over the period the inspection covers. It is therefore necessary to
include the cost of the inspection as a part of the cost of the aircraft.

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