QUESTION 3 (44 MARKS)

(52 MINUTES)
Theory, journal entries and presentation
On 31 December 20.7, the last day of the current reporting period, the following balances,
amongst others, appeared in the records of AC (Pty) Ltd:
Fol Dr Cr
Receivable A D1 64 000
Trade inventories A20 438 200
Bank A30 424 000
Cost of sales U1 3 383 000
Doubtful debts U11 58 200
Bank charges U15 55 220
Rent income I4.1 75 000
Interest income on favourable bank balance I4.2 8 910

Additional information
1 On 25 June 20.7, AC (Pty) Ltd signed a rental agreement whereby an unutilised
portion of AC (Pty) Ltd’s buildings is rented out to Lessee X. The lease agreement
inter alia stipulates the following:
 The lease term is 18 months and starts on 1 July 20.7.
 A refundable rent deposit of R15 000 is payable by Lessee X on 1 July 20.7.
 The lease payment is R10 000 per month and is payable on the first day of every
month.
Lessee X honoured the obligations as set out in the lease agreement.
2 The bank statement for the month ended on 31 December 20.7 was received from the
bank on 3 January 20.8. The bank statement reflects the following transactions,
amongst others, which have not yet been recognised in AC (Pty) Ltd’s accounting
records:
 On 30 December 20.7, Receivable A made a direct electronic payment of R36
000 into AC (Pty) Ltd’s bank account.
 Interest on AC (Pty) Ltd’s favourable bank balance was accounted for by the
bank and amounts to R1 090.
 Bank charges accounted for by the bank against AC (Pty) Ltd’s bank account
amounts to R5 020.
 On 30 December 20.7, a direct electronic payment of R6 000 was received from
AB Executors, the liquidators of Receivable J’s insolvent estate. Receivable J’s

1
 debt of R24 000 has previously been written off. The liquidation distribution is 25c
in the Rand.
3 AC (Pty) Ltd uses the perpetual inventory system. On 31 December 20.7, the entity’s
inventory system indicated that certain trade inventory items’ cost exceeds the
estimated sales price thereof with R32 200. The write-down was authorised, but still
has to be recognised in the records of AC (Pty) Ltd.
4 The financial statements for the reporting period ended 31 December 20.7 will
probably be approved for distribution on 28 February 20.8.

REQUIRED:
a) With reference to the definition of a liability, motivate whether the rent deposit which
AC (Pty) Ltd received in accordance with the lease agreement, should be recognised
as a liability. (12)
Note the following in respect of (b), (c) and (d) below:
 VAT should not be accounted for.
 Journal narrations are not required.
 The effect that the transaction has on the accounting equation (A = L + E), has to be
shown. (It is not necessary to indicate the classification of the equity component that
would be affected.)
b) Journalise the adjustment that should be recognised in respect of rent income as at
31 December 20.7 in the records (general journal) of AC (Pty) Ltd. (3)
c) With reference to additional information 2 provide journal entries to recognise the
transactions reflected in the December 20.7 bank statement, in the records (general
journal) of AC (Pty) Ltd. (12)
d) Provide a journal entry to recognise the write-down of trade inventories in the records
(general journal) of AC (Pty) Ltd for the reporting period ended 31 December 20.7. (3)
e) After taking into account the journal entries in (b), (c) and (d) above, present the
balances of the accounts in the appropriate financial statements of AC (Pty) Ltd for the
reporting period ended 31 December 20.7. (14)
Note: General ledger accounts are not required.
Show all calculations clearly. (Informal T-accounts may, if necessary, be
used as calculations.)

2
QUESTION 3
a) Reasons why rent deposit received satisfies the definition of a liability
Definition of a liability
A liability is a present obligation of the
entity (1)
to transfer an economic resource (1),
as a result of past events (1).
Conclusion
(SUGGESTED SOLUTION)
Application – rent deposit received
In accordance with the lease agreement, AC
(Pty) Ltd has a legally enforceable duty or
responsibility to Lessee X (1) since the
refundable deposit has to be repaid to Lessee X
at the end of the lease agreement (1) which AC
(Pty) Ltd will have no practical ability to avoid at
the end of the lease term. (1)
AC (Pty) Ltd has an obligation to transfer an
economic resource (1) in the form of cash to
extinguish the obligation. (1)
The payment of the refundable deposit amount
on 1 July 20.7 in accordance with the loan
agreement (1), is the past event that gave rise to
the present obligation of AC (Pty) Ltd (1).
This is the date when AC (Pty) Ltd has already
received the economic benefits in the form of the
refundable deposit amount (1) and as a
consequence will have to transfer an economic
resource in the form of cash (1).
Therefore, the rent deposit received satisfies the
definition of a liability (1)
13 max [12]
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b) Journal entry – adjustment of rent income in AC (Pty) Ltd’s records
Note: To earn a mark in the journal, both the accounts and the amount have to be correct. If
the date is wrong, -1 mark. To earn a mark in the accounting equation, all the entries under
A=L+E have to be correct.
J1
20.7 Dr Cr
31 Dec Rent income (P/L) 15 000 (1)
Rent deposit (received) (SFP) 15 000 (1)
Recognise refundable rent deposit received on 1 Jul
20.7
R75 000 – (R10 000 x 6 = R60 000) = R15 000

Assets = Liabilities + Equity Classification

0 = +15 000 + -15 000 (1) Retained earnings – income
(Rent income – decrease)
[3]

c) Journal entries – transactions on the December 20.7 bank statement in AC (Pty)

Ltd’s records
Note: To earn a mark in the journal, both the accounts and the amount have to be correct. If
the date is wrong, -1 mark. To earn a mark in the accounting equation, all the entries under
A=L+E have to be correct.
J1
20.7 Dr Cr
30 Dec Bank (SFP) 36 000 (1)
Receivable A (SFP) 36 000 (1)
Partially derecognise Receivable A due to payment
received

Assets = Liabilities + Equity Classification

+36 000 = 0 + 0 (1)
- 36 000

4
J2
20.7 Dr Cr
31 Dec Bank (SFP) 1 090 (1)
Interest income (P/L) 1 090 (1)
Recognise interest income received on favourable
bank balance

Assets = Liabilities + Equity Classification

+1 090 = 0 + +1 090 (1) Retained earnings – income
(Interest income)

J3
20.7 Dr Cr
31 Dec Bank charges (P/L) 5 020 (1)
Bank (SFP) 5 020 (1)
Recognise bank charges for December 20.7

Assets = Liabilities + Equity Classification

- 5 020 = 0 + - 5 020 (1) Retained earnings – expense
(Bank charges)

J4
20.7 Dr Cr
31 Dec Bank (SFP) 6 000 (1)
Doubtful debts (P/L) 6 000 (1)
Recognise the liquidation dividend deposited by
AB Executors i.r.o. Receivable J previously written-off

Assets = Liabilities + Equity Classification

+6 000 = 0 + +6 000 (1) Retained earnings – expense
(Doubtful debts – decrease)
[12]

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d) Journal entry – write-down of trade inventories in AC (Pty) Ltd’s records
Note: To earn a mark in the journal, both the accounts and the amount have to be correct. If
the date is wrong, -1 mark. To earn a mark in the accounting equation, all the entries under
A=L+E have to be correct.
J1
20.7 Dr Cr
31 Dec Loss with write down of inventories to NRV (P/L) 32 200 (1)
Trade inventories (SFP) 32 200 (1)
Recognise the write-down of the cost of certain
inventory items to the estimated sales price thereof

Assets = Liabilities + Equity Classification

- 32 200 = 0 + - 32 200 (1) Retained earnings – expense
(Cost of sales)
[3]
e) Presentation
Note: 1. If expenses are not in brackets, -1 mark. 2. If amounts are not presented next to the
correct line items, -1 mark. 3. If the student earns all the marks in respect of a specific line
item, but the total of the line item is incorrect, -1 punt.
AC (PTY) LTD
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20.7
R
Revenue XXX
Cost of sales (3 383 000 + 32 200) (3 415 200) (1)
Gross profit XXX
Other income (75 000 – 15 000 = 60 000) + (8 910 + 1 090 = 10 000) 70 000 (2)
Distribution costs
Administrative costs (58 200 – 6 000)  + (55 220 + 5 020)  (112 440) (2)
Other expenses
//
Profit for the year XXX

[5]

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Note: 1. If items are not presented next to the correct line items, -1 mark. 2. If the student
earns all the marks in respect of a specific line item, but the total of the line item is incorrect,
-1 punt.
AC (PTY) LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.7
R
ASSETS
Current assets (1)
Inventories (438 200 – 32 200) 406 000 (1)
Trade receivables (64 000 – 36 000) 28 000 (1)
Cash and cash equivalents (424 000 + 36 000 + 1 090 – 5 020 + 6 000) 462 070 (4)

EQUITY AND LIABILITIES

Current liabilities (1)
Trade- and other payables 15 000 (1)

[9]
Total for (e) [14]