DEPARTMENT OF ACCOUNTANCY

Accounting 22
2022

Unit 3: Statement of Changes in Equity

QUESTION
BANK
QUESTION 3-A (15 MARKS)

Charles Ltd is a publisher of academic books supplying these books to universities across the country.
The following balances appeared in the records for the reporting period ended 29 February 2012:

R
Ordinary Share Capital (1/3/2011) (R5.375) 1 075 000
15% Cumulative non-redeemable Preference Shares (R1) 570 000
Retained Earnings (1/3/2011) 320 000
Profit for the period (before depreciation on office equipment) 250 000

Additional information:

 The accountant failed to write off depreciation on the office equipment for the current and previous
reporting periods. The cost of the office equipment amounted to R250 000 and depreciation is
written off at 20% p.a. using the straight-line method.

 On 1 November 2011, Charles Ltd issued 100 000 ordinary shares at R5.75 each. On the same
day 150 000 preference shares were issued at par.

 On 25 February 2012 an ordinary dividend of R0.055 cents per share was declared and approved
at the annual general meeting.

 Assume a tax rate of 28%.

REQUIRED:

Prepare the statement of changes in equity for Charles Ltd for the current reporting period ended
29 February 2012 in accordance with the Companies Act and IFRS.

Note: Notes and comparative amounts are NOT required.

Total column is NOT required.
Ignore DEFERRED TAX implications.

SOURCE: ASS2-Q1-2012
QUESTION 3-A (SUGGESTED SOLUTION)

Charles Ltd
Statement of changes in equity for the reporting period ended 28 February 2012

Ordinary Preference Retained

Total
share capital share capital earnings
Balance - beginning of period 1 075 000 420 000 320 000 1 815 000
  
Prior period error (50 000 - 14 000) (36 000) (36 000)
Adjusted balances 1 075 000 420 000 284 000 1 779 000
Issue of shares 575 000 150 000 725 000
 
(100 000 x
R5.75)
Profit for the period (250 000 - 36 000) 214 000 214 000

Ordinary dividend (300 000* x 0.055) (16 500) (16 500)


Preference dividend (420 000 x 15%) + (150 000 x 15% x (70 500) (70 500)
4
/12) 
Balance - end of period 1 650 000 570 000 411 000 2 631 000

___
(15)

Calculations:
Depreciation (250 000 x 20%) = 50 000
Tax on depreciation (50 000 x 28%) = 14 000
Amount net of tax = 36 000

(1 075 000/5.375) + 100 000

QUESTION 3-B (38 MARKS)

BigBricks Limited is a retailer and manufacturer of building bricks in Johannesburg. The following
accounting records for the reporting period ended 31 December 2013 have been provided to you before
any of the matters below were taken into account.

Note Amount
Ordinary share capital (01/01/2013) 1 and 60 000
2
Preference share capital (01/01//2013) 1 and 40 000
3
Retained earnings (01/01/2013) 3 120 500
Profit for the year 7 1 333 000

Additional Notes:
1. BigBricks Ltd’s authorised and issued share capital on 1 January 2013 is as follows:

Authorised share capital

100 000 ordinary shares with a par value of R1 per share
20 000 10% non-redeemable preference shares with a par value of R5

Issued share capital

60 000 ordinary shares issued at R1 per share
8 000 10% non-redeemable preference shares issued at par

2. In order to raise capital, BigBricks Ltd issued 20 000 additional ordinary shares to the public on 10
April 2013. Proceeds from the share issue amounted to R20 000. Costs incurred to issue the
shares were R3 000.

3. In addition 10 000 of the preference shares were issued on the 25 May 2013 at par.

4. At a board meeting held on the 2 December 2013, the following issues were discussed:

• The directors declared a dividend of R0.50 per share. The dividend was paid on the
31 December 2013.

• Machinery acquired on 1 January 2011 for R575 000 (including 15% VAT) and previously
depreciated at 20% on the reducing balance method would now be depreciated on the units
production method. The total number of units that these machinery can produce before it
should be replaced is estimated to be 1 200 000 units. The following is a production
summary obtained for the machinery:

Financial Period Units Produced

1 January 2011 – 31 December 2011 120 000
1 January 2012 – 31 December 2012 300 000
1 January 2013 – 31 December 2013 320 000
Total 740 000

5. The following items were identified after the reporting period end of 31 December 2013, but before
the date the financial statements were authorised for issue on 22 February 2014.

• While assessing the bad debts of the company, it was noted that bad debts has not been
provided for 31 December 2012. The amount of bad debts for 31 December 2012 amounted
to R133 000.

QUESTION 3-B (CONTINUED)

6. During the financial year a building collapsed on a building site where one of BigBricks’ contractors
worked a construction contract for a big Law firm. The law firm sued the contractor for damages
caused which amounted to R900 000.

As a result of this, the contractor sued BigBricks’ for loss of income for the same amount as one of
their experts believed that the bricks used were faulty. The lawyers of BigBricks are of the opinion
that the contractor has reasonable grounds to sue BigBricks and BigBricks will therefore probably
be liable for loss of income if the court case succeed.

7. Profit for the period amounted to R1 333 000 before any of the above notes were taken into
account.

8. Buildings were revalued for the first time on 30 June 2013. The appraisers valued the buildings at
R2 400 000. The buildings were acquired on 1 August 2012 for R2 000 000.

9. Assume a tax rate of 28%.

REQUIRED:

a) Explain the difference between a change in estimate and a prior period error by making reference
to IAS 8 Accounting policies, change in estimates and errors (3)

b) Discuss the recognition and measurement of issue number 6 above in terms of IAS 37 Provisions,
contingent liabilities and contingent assets. (5)

c) Prepare the Statement of Changes in Equity of BigBricks Ltd for the reporting period ended 31
December 2013 (22)

d) Disclose the following notes to the financial statements of BigBricks Ltd for the reporting period
ended 31 December 2013.

• Change in accounting estimate (3)

• Prior period error (5)
___
(38)

(Source: ASS2-Q1-2014)
QUESTION 3-B (SUGGESTED SOLUTION)

a)
Change in accounting estimate Prior period error
 Results from new information or new  omissions from, and misstatements ✓ in,
developments that wasn’t available on the the entity’s financial statements for one or
date of original estimate ✓ more prior periods arising from
 a failure to use, or misuse of, reliable
information that was available ✓ when
financial statements for those periods were
authorised for issue

 Prospective application: Account for  Retrospective Application: The comparative

elements in the F/S in the current and future information on the financial statements get
periods on the new estimate. ✓ adjusted retrospectively. ✓

__
5 max (3)

b)
Present obligation

i. BigBricks Ltd has a present obligation (legal obligation ✓) to compensate the contractor
for the loss of income✓

ii. Past event: The collapse of the building due to faulty bricks and the contractor suing
BigBricks as a result.✓

Recognition criteria
a. It is probable that there will be an outflow of economic resources since the lawyers
are of opinion that the court case will succeed and that BigBricks would be liable to
compensate the contractor.✓

b. Reliable estimate exists for the loss of income suffered by the contractor = R900 000.✓

Conclusion

Therefore a provision should be recognized at year end for an amount of R900 000. ✓

__
6 max (5)
QUESTION 3-B (SUGGESTED SOLUTION - CONTINUED)

c)
BigBricks Limited
Statement of Changes in Equity for the reporting period ended 31 December 2013
Preference
Share Revaluation Retained
share Total
capital reserve ✓ earnings
capital
Balance - beginning of period – 1 60 000 3 120 500
January 2013 ^ 40 000 - ^ 3 220 500
(95 760)
Correction - prior period error (A1) ✓P (95 760)
Restated balance - beginning of
period ✓ 60 000 40 000 - 3 024 7403 124 740
Profit for the period (A3) 564 557 564 557
Revaluation of plant 400 000 400 000
Issue of shares
(20 000 x R1) + (10 000 x R5) 20 000✓ 50 000✓ 70 000
Share issue costs (3 000) ✓P (3 000)
Dividend paid:
Ordinary (80 000 x R0.50) (40 000) ✓
Preference (40 000 x 10%) + (6 917) ✓P
(50 000x10% x 7/12) ✓ (49 000)
Balance - end of period – 31
December 2013 80 000 90 000 400 000 3 539 380 4 109 380

R
A1 Prior period error – bad debts
Bad debts (133 000)
Tax expense (133 000 x 28%) 37 240 ✓
Net amount (95 760)

A2 Change in accounting estimate - depreciation

Cost 575 000
Less: VAT (575 000 x 15/115) (75 000)
Depreciable amount 500 000

Depreciation: old basis

Year 1: 1 January 2011 – 31 December 2011 (500 000 ✓ x 20%) 100 000
Year 2: 1 January 2011 – 31 December 2012 (500 000 - 100 000 x 20%) 80 000 ✓P
Accumulated depreciation – 31 December 2012 180 000

Carrying amount - 1 January 2013 (500 000 – 180 000) 320 000 ✓P
Depreciation: new basis (320 000 x 320 000/780 000✓)
Carrying value/remaining useful life *units produced for the year 131 282 ✓P

Increase in depreciation ((320 000 x 20%) – 131 282) (67 282) ✓P

Decrease in tax expense (67 282 x 28%) 18 839 ✓P
Net decrease in profit for the period (48 443)
A3 Adjusted profit for the period
Profit for the period – given 1 333 000
Less: net depreciation adjustment (A2) (48 443) ✓P
Less: Legal Provision (Legal Costs) (900 000 x 72%) ✓ (648 000) ✓P
564 557

26.5 max (22)

___
(40)

d) BigBricks Ltd
Notes to the financial statements for the reporting period ending 31 December 2013

1. Change in accounting estimate

Depreciation on machinery changed after the method of calculating depreciation was

changed from the reducing balance method to the units-production method.✓ The effect for
the current and future periods was as follows:

Increase in depreciation (67 282)✓P

Decrease in tax expense 18 839✓P
Decrease in profit for the year (48 443)
___
(3)

2. Prior period error

Bad debts has not been provided for 31 December 2012. The amount of bad debts for 31
December 2012 amounted to R133 000. The effect for the period ended 31 December 2012
was as follows: ✓

Increase in bad debts (133 000)✓P

Decrease in tax expense 37 240✓P
Decrease in profit for the year (95 760)✓P

Decrease in Accounts Receivable (133 000)✓P

Decrease in Tax payable 37 240✓P
Decrease in Equity (95 760)✓P
___
7 max(5)
QUESTION 3-C (30 MARKS)

1. Amageni Ltd’s authorised and issued share capital on 1 July 2012 is as follows:

Authorised share capital

100 000 ordinary shares with a par value of R1 per share
20 000 10% non-redeemable preference shares with a par value of R10

Issued share capital

50 000 ordinary shares issued at R2 per share
8 000 10% non-redeemable preference shares issued at par

2. In order to fund a capital expenditure project Amageni Ltd issued 10 000 additional ordinary shares
to the public on 8 March 2013. Proceeds from the share issue amounted to R20 000. Costs
incurred to issue the shares were R2 800. In addition 12 000 preference shares were issued on the
1 May 2013 at par.

3. At a board meeting held on the 15 June 2013, the following issues were discussed:

• The directors declared a dividend of R0.50 per share. The dividend was paid on the 30 June
2013.

• Machinery acquired on the 1 July 2010 for R460 000 (including 15% VAT) which had
previously been depreciated at 15% on the declining balance method would be depreciated
on the straight-line method as of the beginning of this year. The total useful life of the
machinery was originally estimated at 10 years. This is expected to remain unchanged.

4. You discover that inventory of R35 000 which was sold on 30 June 2012 was included in the
balance of inventory on the 30 June 2013.

5. The balance of retained earnings on 1 July 2012 is R870 000.

6. Profit for the period amounted to R278 000.

7. Buildings were revalued for the first time on 1 April 2013. The appraisers valued the buildings at
R2 500 000. The buildings were acquired on 1 August 2010 for R1 998 000.

8. Assume a tax rate of 28%.

REQUIRED:

a) Journalise all the share and dividend transactions for the reporting period ended 30 June 2013. (10)

a) Prepare the Statement of Changes in Equity for the period ended 30 June 2013 (20)
___
(30)

(Source: ASS2-Q1-2013)
QUESTION 3-C (SUGGESTED SOLUTION)
a)

8 Mar 2013 Dr Bank 20 000 ✓

Cr Ordinary share capital (10 000 x R1) 10 000 ✓
Cr Share premium (R20 000 – R10 000) 10 000✓
Proceeds from issue of ordinary shares at a
premium

Dr Share issue costs ✓ 2 800

Cr Bank 2 800 ✓
Payment of share issue costs

Dr Share premium ✓ 2 800

Cr Share issue costs 2 800 ✓
Write off of share issue costs to share premium

1 May 2013 Dr Bank 120 000✓

Cr Preference share capital ✓ 120 000
Proceeds from issue of preference shares at par

15 Jun 2013 Dr Dividend paid ((50 000 + 10 000) x R0.50) 30 000 ✓

Cr Ordinary shareholders for dividend ✓ 30 000
Ordinary dividend declared

30 Jun 2013 Dr Ordinary shareholders for dividend ✓ 30 000

Cr Bank ✓ 30 000
Ordinary dividend paid

Dr Dividend paid ✓ (8 000 x R10 x 10%✓) + 10 000

(12 000 x R10 x 10% x 2/12 ✓)
Cr Bank 10 000
Preference dividend paid
__

16 max (10)
QUESTION 3-C (SUGGESTED SOLUTION - CONTINUED)
b)
Amageni Limited
Statement of changes in equity for the period ended 30 June 2013
Share Pref Share Revaluation Retained Total
Capital Capital✓ Reserve earnings
Balance – beginning of
period 100 000✓ 80 000✓ - 870 000✓ 1 050 000
Correction – prior period
error (A1) (25 200) ✓P (25 200)
Restated balance –
beginning of period (A2) ✓ 100 000 80 000 - 844 800 ✓P 1 024 800
Profit for the period (A3) 283 202✓P 283 202
Revaluation of plant 502 000✓ 502 000
Issue of shares
(10 000 x R2)✓+ (12 000 x
R10) ✓ 20 000 120 000 140 000
Share issue costs (2 800) ✓ (2 800)
Dividend paid
(60 000 ✓ x R0.50) +
(80 000 x 10%) ✓ + (120 000
x 10% x 2/12) ✓ (40 000) ✓ (40 000)
Balance – end of period 120 000 200 000 502 000 1 085 202 1 907 202

__
27 max (20)
___
(30)

R
A1 Prior period error – inventory
Cost of sales (35 000) ✓
Tax expense (35 000 x 28%) 9 800 ✓
Net amount (25 200)

A2 Restated Retained Earnings (870 000 – 25 200✓P) 844 800

A3 Change in accounting estimate - depreciation

Cost 460 000
Less: VAT (460 000 x 15/115) (60 000)
Depreciable amount 400 000

Depreciation: old basis

Year 1: 1 July 2011 – 30 June 2011 (400 000 ✓ x 15%) 60 000
Year 2: 1 July 2011 – 30 June 2012 (400 000 – 60 000 x 15%) 51 000 ✓
Accumulated depreciation – 1 July 2012 111 000 ✓P
∴ 2 years depreciated
10 – 2 = 8 years remaining
QUESTION 3-C (SUGGESTED SOLUTION - CONTINUED)

Carrying amount – 1 July 2012 (400 000 – 111 000) 289 000 ✓P
Remaining useful life 8 years ✓
Therefore: Depreciation: new basis (289 000/8) 36 125 ✓P

Decrease in depreciation ((289 000 x 15%) – 36 125) 7 225 ✓

Increase in tax expense (7 225 x 28%) (2 023) ✓P
Net increase in profit for the period 5 202
Profit for the period - given 278 000
Adjusted profit for the period 283 202