HFAC130 1 Jan June2023 FA1 Memo LVN V2 20230203

HIGHER EDUCATION PROGRAMMES
MEMORANDUM
Academic Year 2023: January-June
Formative Assessment 1: Financial Accounting 1 (HFAC130-1)
NQF Level, Credits: 5, 20
Weighting: 20%
Assessment Type: Open book
Examiner: L. van Niekerk
Educator: L. van Niekerk
Due Date: 31 March 2023
Total: 100 marks
Instructions:
• This memorandum consists of five (5).
• It is based on units 1- 4 (Chapters 4-6) of your textbook.
• All of the questions are compulsory.
• Show all your calculations.
1 HFAC130-1-Jan-June2023-FA1-Memo-LVN-V2-20230203
QUESTION 1 (16 marks)
1.1 (3 marks)
AVAILABLE MARKS: 4 MAXIMUM MARKS: 3
• Yes✓, Bob has a liability.

• By taking delivery of the inventory, on 1 November 2022 = the past event that led to the
obligation (until delivery occurs, Bob had no obligation to make payment).✓
• As from 1 November 2022, Bob has a present obligation that his business cannot
practically avoid as he is legally required to make the payment of R1 000 once the
inventory has been delivered.✓
• Paying the R1 000 is a transfer of an economic resource.✓
1.2 (2 marks)
• No✓, Bob does not have a liability.

• Having to legally be required to thank someone (the supplier) does not lead to a transfer
of economic resource.✓
• Usually, the business will settle obligations in cash (transfers of economic resources) if
there is an obligation of payment present, Bob paid for the inventory in cash on delivery,
therefore there is no present obligation to transfer cash.✓
1.3 (4 marks)

• The length of time to payment may impact the measurement of the liability, but it does
not change the fact that there is a liability that should be recognised✓ to show users of
the financial statements relevant and faithfully represented information of his financial
position.✓
• Bob has a present obligation that his business cannot practically avoid as he is legally
required to make the payment once the inventory is delivered.✓
• Taking delivery of the inventory, on 1 December 2022, creates a past event that leads to
the obligation.✓
1.4 (4 marks)
• No✓, Bob does not have a liability.

• Bob has not taken delivery of the inventory. This will only happen in two months’ time.✓
• Taking delivery is the past event that leads to the obligation (until delivery occurs, Bob
has no obligation to make payment).✓
• Despite having contracted or committed to taking delivery of the inventory, this is a future
obligation✓, not a present obligation✓, and therefore Bob cannot recognise the R2 500
as a liability until the inventory has been delivered.✓
1.5 (3 marks)

• To have an obligation, you do not necessarily have to have a legal obligation;✓ you just
need an obligation that you cannot practically avoid.✓ Bob cannot avoid paying a
bonus after he has made the announcement to his staff members.✓
• Practically, if there has been an announcement to employees that the payment will be
made, despite not having to pay this legally, not paying it would lead to his employees
possibly resigning;✓ if he does not make the payment, it probably means that
practically he is obliged to make the payment. ✓
• Having made the announcement to pay R10 000 for completed work is the past event✓
that led to the obligation to his employees.
Learning outcomes:
• Understand the purpose of the conceptual framework.
• Know how to apply the definition of elements (i.e. asset, liability, equity, income,
expense).
• Understand the accrual concept.
Reference: Chapter 4 Page 105 – 138.
--- End of Question 1 ---
NOTES TO GRADER: The student could explain a term in different manners. The
memorandum gives a few examples of how the student could have explained the term. Make
sure to give marks accordingly, if what the student answered makes sense and agrees to
what the accrual concept means.
2.1 (2 marks)
• The accrual concept means that transactions are reported/recorded when the
transactions happen✓, i.e. when assets/liabilities change and not necessarily when the
related cash flow occurs. ✓
OR
• We recognise income and expenses when assets/liabilities change✓ even if we have not
received or paid the cash.✓
OR
• Accrual refers to an entry made in the books of accounts related to the recording of
revenue or expense paid✓ without any exchange of cash.✓
2.2 (8 marks)
Element
Type of Accrual Description of the Accrual
Allocation
1. Deferred revenue, also known as unearned revenue,
Income Liability✓ refers to advance payments a company receives for
received in products or services that are to be delivered or
advance performed in the future. The company that receives the
prepayment records the amount as deferred revenue, a
liability, on its balance sheet.✓
2. Accrued revenue is revenue that has been earned by
Income accrued Receivable providing a good or service, but for which no cash has
/ Asset✓ been received. Accrued revenues are recorded as
receivables on the balance sheet to reflect the amount of
money that customers owe the business for the goods or
services they purchased.✓
3. Prepaid expenses are payments made in advance for
Prepaid Asset✓ goods and services that are expected to be provided
Expenses or used in the future.
A prepaid expense is an asset on a balance sheet that
results from a business making advanced payments for
goods or services to be received in the future.✓
4.
An accrued expense, also known as accrued liabilities, is
Accrued Liability✓
an accounting term that refers to an expense that is
Expenses
recognized on the books before it has been paid. The
expense is recorded in the accounting period in which it is
incurred. Accrued expenses represent liabilities on the
balance sheet.✓
NOTES TO GRADER:
• Students will receive a mark if the correct account was either debited/credited.
• For example, in the first transaction students had to debit telephone expenses with
R7 500. The student will receive ✓1/2 (half) mark for accurately debiting telephone
expenses AND ✓ (one) mark for journalising the correct amount, which is the R7 500 in
this instance.
• Make sure to award ALL AVAILABLE marks for (W) Workings of amounts where
necessary.
2.3.1 (2 marks)
Description (Element) Debit Credit

1. Telephone expense (Expense)✓1/2 7 500✓
Accrued expenses (Liability)✓1/2 7 500✓
2.3.2 (7 marks)
AVAILABLE MARKS: 7.5 MAXIMUM MARKS: 7

2. Bank (Asset)✓1/2 50 000✓
(Penny payment received in your bank account)
Trade receivables (Asset)✓1/2 10 000(W1)
(W1): (5 000✓ + 5 000✓)
(Rent for Nov & Dec of R5 000pm for 2 months paid, no
longer outstanding)
Deferred Revenue (Liability)✓1/2 40 000(W2)
(W2): (50 000✓ – 5 000✓ – 5 000✓)
(Rent income received in advance for future rental income,
not due to your business yet.)
2.3.3 (8 marks)

3. Electricity Expense (Expense)✓1/2 44 500(W3)
(W3): (17 800✓ x R2.50✓)
(Buying 17800 units @ R2.50 per unit.)
Bank (Asset)✓1/2 44 500✓©
3. Prepaid Expense (Asset)✓1/2 24 375(W4)
(W4): (9 750✓ x R2.50✓)
(Electricity balance left at year end of 9750 units @ R2.50 =
R24 375 (value not used yet…will carry over to next year)
Electricity Expense (Expense)✓1/2 24 375✓©
OR / ALTERNATIVE
3. Prepaid Expense (Asset)✓1/2 24 375(W4)
(W4): (9 750✓ x R2.50✓)
(Electricity balance left at year end of 9750 units @ R2.50 =
R24 375 (value not used yet…will carry over to next year)
Electricity expense (Expense)✓1/2 20 125(W5)
(W5): (17 800✓ - 9 750✓) x R2.50✓
(Only expensing the units that we used for this current financial
year: Electricity used in December 17800units minus balance left
9750 = 8050 units used @R2.50 per unit = R20 125)
Bank (Asset)✓1/2 44 500(W3)
(W3): (17 800✓ x R2.50✓)
IMPORTANT NOTES TO GRADER: “ALTERNATIVE METHOD OF ANSWERING”
Students tend to confuse journal entries with T-accounts. IF a student answered question
2.3 by means of making use of T-accounts, try to accommodate them by still allocating marks
if the correct account was debited/credited. For completeness purposes, the T-accounts are
attached for these cases/situations.
Transaction 1: Telephone expense
Telephone expense account
Accrued Expense 7 500✓
Profit and Loss 7 500
7 500 7 500
Accrued expenses (liability)

Balance carried forward 7 500 Telephone bill December 7 500✓
7 500 7 500
Transaction 2: We want to see the student allocating the R50 000 bank amount received, splitting
R10 000 to trade receivables and the remaining R40 000 must be shown as a liability
Rental income (Income account)
Penny Receivable November Rent 5 000

Profit and loss 10 000 Penny Receivable December Rent 5 000
10 000 10 000
Bank (Asset)
Penny 50 000✓
50 000 50 000
Trade receivables (Asset)

Penny November Rent 5 000 Bank (Rent received) 10 000✓
Penny December Rent 5 000
10 000 10 000
Deferred Revenue (Liability)
Bank (Advance rent received) 40 000✓
Balance carried forward 40 000
40 000 40 000
Transaction 3: As long as the student showed the expense for the current year amounted to R20
125, then they can be awarded the mark
Electricity expense account
Bank 44 500 Prepaid expense 24 375✓
Profit and Loss 20 125✓
44 500 44 500
Bank (Asset)
Bought prepaid elect 44 500✓
Balance C/F 44 500
44 500 44 500
Prepaid Expense (Asset)

Bank/Electricity 24 375✓
Balance C/F 24 375
24 375 24 375
Learning outcomes:
• Recognise assets and liabilities, income and expenses.
expense).
Learning outcomes:
• Understand what adjusting journal entries are.
• Understand why it is important to process adjusting entries.
• Adjust accounting information to reflect the financial position and performance of a
business more accurately.
• Understand the implications of the accrual basis.
3.1 (10 marks)

Cost per unit = R39 088 (W1) ✓© / 321 (W2)✓© = R121.77 average cost per unit✓©
R121.77✓© x 49✓ = R5 967✓© cost of closing stock at 31 January 2022.
Workings:
(W1): R24 000 ✓1/2+ R11 520✓1/2 – R1 152✓1/2 + R4 720✓1/2 = R39 088
(W2): 200✓1/2 + 90✓1/2 - 9✓1/2 + 40✓1/2 = 321 units
(Summary of information given to help compile workings)

Date Description Units Unit Cost Total Cost
1 Opening inventory 200 R120 R24 000

5 Purchases 90 R128 R11 520
10 Purchases returns (9) R128 (R1 152)
19 Purchases (R4 400 + R320) 40 R118 R4 720
321 R39 088
3.2 (3 marks)
The 49 units in the closing stock would consist of the following:

40 units purchased on 19 Feb R4 720 ✓
9 units purchased on 5 Feb (9✓ x R128✓) R1 152
R5 872
3.3.1 (4 marks)
NOTE TO GRADER:
• Note that there are more marks available as the student could explain it either in very
much detail or very little detail. Only award the maximum of marks per item.
Perpetual system
• The perpetual system is a recording system✓ that keeps track of inventory at any
time✓. Every time inventory is purchased or returned by clients, the inventory general
ledger account is increased. When inventory is sold or returned to the supplier, the
inventory general ledger account is decreased. ✓
• When we sell goods during the period, we transfer the cost of the goods sold out of the
inventory general ledger account to the costs of sales expense account. ✓
• The cost of sales expense in the general ledger will show the correct cost of all
inventory sold to date. ✓
Periodic system
• The periodic system is a recording system✓ that calculates the inventory balance only
at the end of each accounting period. ✓
• Under the periodic system, the inventory general legder account does not reflect the
actual inventory that is available for sale. ✓
• The general ledger accounts for cost of sales and inventory are adjusted only at the
end of the period. ✓
3.3.2 (2 marks)
• The FIFO cost allocation method: With this cost allocation method, we assume that
the stock we bought first (First In) are the stock we sell first (First Out). We make this
assumption to help us calculate a cost price to allocate to the stock being sold. ✓
• The weighted average cost allocation method: The weighted average method is
another way to calculate how much of the total cost of inventory is allocated to each sold
unit. ✓
3.3.3 (4 marks)
FIFO and a perpetual recording method

• FIFO✓, because the cost of the toys in closing inventory will be the cost of the last
purchases made. Old inventory will be sold first so that you do not end up sitting with old
stock. ✓
• When we use the perpetual method✓, we recognise the cost of sales expense every time
we make a sale as the inventory asset account is adjusted perpetually. ✓
Learning outcomes:
• Knowing what is meant by the term “inventory”.
• Knowing when to recognise inventory.
• Knowing at what cost to recognise inventory initially.
• Understanding how to record inventory on the periodic recording method.
• Understanding how to measure inventory by calculating the cost of goods sold
and inventory on the weighted average method.
• Knowing when to derecognise inventory and how to record these transactions.
Reference: Chapter 6 pages 191 – 242.
4.1 (5 marks)
AVAILABLE MARKS: 6.5 MAXIMUM MARKS: 5
Current closing (given) 55 000✓1/2

ADD back: FOB destination (R4 800✓ x 100/150✓) 3 200
Damaged inventory (R5 000✓ - (R5 100✓- R450✓) (350)
Adjusted closing inventory balance 57 850✓©
4.2 (5 marks)
Date Account Debit (R) Credit (R)

31 Dec 22 Inventory (SFP asset) ✓1/2 3 200 ✓1/2
Cost of sales (P/L) decrease ✓1/2 3 200 ✓1/2
Step 1: FOB date is after year-end, R4 800 x 100/150. Remove from sales and include as
inventory at year-end.
Damaged inventory: Cost vs Net realisable value

Current cost of inventory R5 000
Net realisable value = estimated selling price less costs = R5 100 – R 450 = R4 650
Write down because cost R5 000 exceeds the net realisable value of R4 650.
Write down = R5 000 – R4 650 = R350

31 Dec 22 Inventory (SFP asset) ✓1/2 450 ✓1/2
Bank (with repairs expense paid) ✓1/2 450 ✓1/2
Step 2: The company spent money to repair the current damaged inventory, the value of
the damaged inventory will increase with the cost of the repairs.
31 Dec 22 Cost of sales expense (P/L) ✓1/2 350 ✓1/2
Inventory (SFP asset) ✓1/2 350 ✓1/2
Step 3: Write down of inventory to the lower of net realisable value of cost to sell.
4.3 (2 marks)
Peppy Traders (Pty) Ltd Statement of financial position as at 31 December 2022✓
Current Assets
Inventory (55 000 + 3 200 – 350) 57 850✓©
Total assets 57 850
Learning outcomes:
• Knowing what is meant by the term “inventory”.
• Knowing when to recognise inventory.
• Knowing at what cost to recognise inventory initially.
• Understanding how to record inventory on the periodic recording method.
• Understanding how to measure inventory by calculating the cost of goods sold
and inventory on the weighted average method.
• Knowing when to derecognise inventory and how to record these transactions.
Reference: Chapter 6 pages 191 – 242.
5.1 (13 marks)
Definition and recognition:

An asset is:
• A present economic resource ✓
• controlled✓ by the entity;
• resulting from past events.✓
An economic resource is defined as:

• A right✓ that has the potential to produce economic benefits.
Assets will be recognised if the information provided by the elements is useful for the user.✓
An element will be recognised if the information which is provided is relevant✓ and a faithful
representation.✓
Application:
• Land is a present economic resource.✓

• Nonna has the right to use the land, as per verbal agreement between her and her father
(the landowner).✓
• There is the potential to produce economic benefits through the inflow of cash (or another
economic resource) when classes are given on that premises/land/property.✓
• The land is not controlled through legal ownership, the title deed is still registered in
Mister F’s name, Nonna’s Father.✓
• There was a past event. Nonna and her father, Mister F has a verbal agreement that she
may use the land for her business.✓
• Because Nonna can use this land to host her classes, she will gain an inflow of economic
benefits.✓
• Is the information provided relevant? Yes, potential investors will use the financial
statements to decide to invest in Nonna’s business or not.✓
• Is the information provided a faithful representation? Yes, the land was revalued at
R3 500 000 by independent professional valuators, Value Max (Pty) Ltd. ✓
Conclusion:
Should the asset be recognised in the statement of financial position? No. ✓

All the requirements have not been met, Nonna will not be able to present the land of
R3 500 000 in her financial statements. ✓
5.2 (9 marks)
A liability is a present obligation✓ of the business to transfer an economic resource✓ as a

result of a past event(s).✓
• Nonna’s Nurds (Pty) Ltd does have a present obligation to settle the outstanding invoice
received from the supplier, Value Max (Pty) Ltd, as they have already received the
services from the supplier which was to have the land and buildings revalued for the
financial year ended 31 December 2022.✓
• Nonna’s Nurds (Pty) Ltd does not have the obligation or responsibility to practically avoid
the payment of the invoice✓ to the supplier as the services have been received, and the
invoice therefore which is in the name of Nonna’s Nurds (Pty) Ltd.✓
• To transfer economic resources – Nonna’s Nurds (Pty) Ltd will settle the present
obligation by transferring cash to Value Max (Pty) Ltd.✓
• The past event, being the valuation performed of the land and buildings and receiving
the valuation report from Value Max (Pty) Ltd.✓
• In conclusion, the invoice received from Value Max (Pty) Ltd to revalue the land and
buildings in the 2022 financial year, will be recorded as a liability at the 31 December
2022 financial year end.✓
Learning outcomes:
• Understand the purpose of the conceptual framework.
• Understand the going concern concept, which is the basic assumption that
underlies the preparation of all financial reports.
• Realise that information in financial reports should have certain qualitative
characteristics that assist financial reports in achieving their objective.
• Understand how qualitative characteristics enhance the usefulness of financial
reports.
expense).
• Recognise assets and liabilities, income and expenses.
Reference: Chapter 4 Page 105 - 138

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HIGHER EDUCATION PROGRAMMES

• Yes✓, Bob has a liability.

• No✓, Bob does not have a liability.

• Yes✓, Bob has a liability.

• No✓, Bob does not have a liability.

• Yes✓, Bob has a liability.

--- End of Question 1 ---

Description (Element) Debit Credit

Description (Element) Debit Credit

Description (Element) Debit Credit

Accrued expenses (liability)

Rental income (Income account)

Penny Receivable November Rent 5 000

Trade receivables (Asset)

Prepaid Expense (Asset)

--- End of Question 2 ---

3.1 (10 marks)

R121.77✓© x 49✓ = R5 967✓© cost of closing stock at 31 January 2022.

(Summary of information given to help compile workings)

1 Opening inventory 200 R120 R24 000

The 49 units in the closing stock would consist of the following:

FIFO and a perpetual recording method

--- End of Question 3 ---

Current closing (given) 55 000✓1/2

Date Account Debit (R) Credit (R)

Damaged inventory: Cost vs Net realisable value

Date Account Debit (R) Credit (R)

Peppy Traders (Pty) Ltd Statement of financial position as at 31 December 2022✓

Total assets 57 850

--- End of Question 4 ---

5.1 (13 marks)

Definition and recognition:

An economic resource is defined as:

• Land is a present economic resource.✓

Should the asset be recognised in the statement of financial position? No. ✓

A liability is a present obligation✓ of the business to transfer an economic resource✓ as a

--- End of Question 5 ---

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