AFE

Assignment 1

Question 1

a)

How the transaction of the purchase of Equipment should be recognized?

Definition and recognition criteria- conceptual framework:

Asset. An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

An asset is recognized in the balance sheet when it is probable that the future economic benefits will
flow to the entity and the asset has a cost or value that can be measured reliably.

Application:

The purchased equipment is a crucial part of , Shampapi (Pty) Limited’s operations. It consists of physical
items used in the production of goods.

From an accounting perspective, the purchased equipment is considered an asset because it has value
and can generate future economic benefits. These benefits have come in the form of increased
productivity or revenue generation for Shampapi (Pty) Limited . As such, equipment is recorded on the
company’s balance sheet as a long-term asset.

Having valuable equipment can help te business secure financing or loans since lenders view them as
collateral that they can seize if necessary. Furthermore, owning state-of-the-art equipment
gives businesses a competitive edge by increasing efficiency and improving product quality.

The recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.

Equipment plays a vital role in many aspects of running a successful business – from generating revenue
to securing financing – making it an essential asset that should not be overlooked when
managing finances.

Presented in the financial statements

An item of property, plant and equipment should initially be recorded at cost.

Equipment is on the balance sheet. It is listed under “Noncurrent assets”. Noncurrent assets are added
to current assets, resulting in a “Total Assets” figure.

Equipment also depreciates over time due to wear and tear from use or obsolescence caused
by advancements in technology. This decrease in value must be accounted for through depreciation
expenses on the income statement.

b)
 Recognize

Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset
or an increase of a liability has arisen that can be measured reliably. This means, in effect, that
recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a
decrease in assets (for example, the accrual of employee entitlements or the depreciation of
equipment). [F 4.49]

A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying
economic benefits will result from the settlement of a present obligation and the amount at which the
settlement will take place can be measured reliably. [F 4.46]

Application:

Salaries and wages of a company's employees working in nonmanufacturing functions (e.g. selling,
general administration, etc.) are part of the expenses reported on the company's income statement.
Under the accrual method of accounting, the amounts are reported in the accounting period in which
the employees earn the salaries and wages. A salary is a fixed amount paid to an employee over a
predetermined period of time; it is not based on the number of hours worked or number of units
produced, and so should not change from period to period, unless a pay raise or reduction is
implemented.

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some
contracts to buy or sell non-financial items. IFRS 9 requires an entity to recognize a financial asset or a
financial liability in its statement of financial position when it becomes party to the contractual
provisions of the instrument. At initial recognition, an entity measures a financial asset or a financial
liability at its fair value plus or minus, in the case of a financial asset or a financial liability not at fair
value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of
the financial asset or the financial liability.

Present and disclose

The salaries and wages expense is presented on the income statement, usually within the operating
expenditure section. Linking a salaries & wages module into an income statement module will provide
the income statement with the value of salaries and wages incurred in each time period of the model.

When a company borrows money from its bank, the amount received is recorded with a debit to Cash
and a credit to a liability account, such as Notes Payable or Loans Payable, which is reported on the
company's balance sheet. The cash received from the bank loan is referred to as the principal amount.
Question 2

Issue

The issue is whether the costs of developing the Planting (N$ 3 000 000) and the maintenance costs
(N$ 833 927) should be treated as an asset or an expense.

Planting development costs

Definition of an asset

 a resource controlled by the entity;

 resulting from a past event;
 from which future economic benefits are expected to flow to the entity

Applying the asset definition to the planting development costs

 The development costs are a resource controlled by the entity as the roads, fire and wind breaks
are on land owned by the entity. The plantation is under the control of the entity and is
being developed and maintained by the company.
 The past event is the development of the plantation.
 Future economic benefits are expected to flow to the entity from the harvesting of the trees.

All the elements of the definition of an asset are therefore met.

Recognition criteria for an asset

Before an asset may be recognised as an asset, it must meet the recognition criteria:
 The inflow of future economic benefits must be probable.
 The item must have a cost/value that can be measured with reliability.
Application of the recognition criteria to the plantation development costs

 Although there is a significant time delay between incurring the costs of developing the
plantation and when the plantation can be harvested and finally render a return (future
economic benefits), this ten year period is normal within the forestry industry and does not
detract from the probability of an inflow of future economic benefits. In other words,
experience in the forestry industry suggests that the future sale of trees is probable
otherwise the forestry venture would not have been entered into.
 The cost of N$3 000 000 (N$200 000 per hectare x 15 hectares) is known.

Conclusion
The costs of developing the planting meets the definition and recognition criteria of an asset and
may be recognised as a ‘plant asset’
Question 3

a)

Statement of profit or loss and other comprehensive income for the year ended 31 December 2022

Sales 11400000

Cost of sales 7600000

Gross profit 3800000

Less expenses 2984150

Distribution expenses +600000 1206000

Administrative expenses +78750 726750

Other operating expenses +204000 409400

Interest on mortagage loan paid 240000

Inland revenue: normal tax (provisional tax payments) 402000

Net profit before tax 815850

Tax expense 261072

Net profit after tax 554778

Other comprehensive income

Fair value gain on land 1400000

Gain on share convertion 650000

General reserve 22600

Total comprehensive income 2627378

b)

Statement of financial position as at 31 December 2022.

Assets
Land and buildings (at cost) 7000000
Office equipment (at cost) 560000
Delivery vehicles (at cost) 2400000
Accumulated depreciation on office equipment (245000+78750) -323750
Accumulated depreciation on delivery vehicles (960000+600000) -1560000
 Trade debtors (1955000-204000) 1751000
Allowance for credit losses -87550
Inventory 1840000
Cash and cash equivalents 2200000

Total assets 14095850

Equity and liabilities

Equity
Capital – ordinary 4000000
Capital - preference + 600000 1000000
Retained earnings +815850 3455850
General reserve +22600 860000

Liabilities
8% mortgage loan from investec -240000 2760000
Trade creditors 20000
Dividend payable 2000000
Total equity and liabilities 14095850

Question 4
 a)

Statement of Financial Position as at 31 December 2021 for Katwitwiltd

Assets

Land and buildings at valuation 190500

Furniture and fittings 9400
Motor vehicles 115200
Plant and machinery 214400
Investments (rundu couriers) 137000

Accounts receivable 103500

Cash and cash equivalents 9500
Inventories 142100

Total assets 921600

Equity and liabilities

Equity
Share capital 450000
12% redeemable preference shares 100000
10% debentures (as per amortization table) 39000
Share premium 16000
Retained income 189500

Libialities
Unclaimed dividends 2400
10% long-term loan -5000 25000
Accounts payable -3600 30000
General reserve 18000

Total equity and liabilities 921600

b)

KatwitwiLtd

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED

31 December 2021 (EXTRACTS)
i)

1.1. The reporting entity

…
1.2. Statement of compliance
The financial statements have been prepared in accordance with International Financial
Reporting Standards.

ii)

2. Statement of significant accounting policies

The financial statements have been prepared generally on the historical cost convention. The
significant accounting policies are set out below. These policies are consistent in all material
respects with those applied in the previous year.

iii)
3. Long term borrowings
The long term loan was advanced to the business on 1 January 2020, the business has been
given a grace period of 2 years in the repayment of the loan. Interest on the loan for 2021 is
N$ 3000, 10% of amount borrowed.

iv)
4. Share capital
200 000 ordinary shares of N$5 each 90 000 authaurised and ordinary shares of N$5 each 50
000 have been issued. 10% redeemable preference shares at N$ 2 each authorized and all the
redeemable preference shares have been issued.