UNIVERSITY EXAMINATIONS

July 2021

FAC2601

Financial Accounting for Companies

100 marks
2 hours

This paper consists of eight (8) pages.

Instructions:

1. This paper consists of THREE (3) questions.

2. All questions must be answered.

3. Basic calculations, where applicable, must be shown.

4. Each question attempted must commence on a new (separate) page.

5. PROPOSED TIMETABLE: (Avoid deviating from this as far as possible.)

Question Time in
no Subject Marks minutes
1 Multiple choice questions 10 12
2 Statement of Financial Position and relevant notes 40 48
3 Statement of Profit or Loss and Other Comprehensive 50 60
Income with relevant notes
TOTAL 100 120

Download this paper as soon as it has been accessed.

Remember to complete and adhere to the Honesty Declaration.

Please upload your submission in PDF-format: a single file not larger than 20Mb, before the
expiry of the available time.

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 2 FAC2601
JULY 2021

QUESTION 1 (10 marks) (12 minutes)

This question must be answered in your examination answer book. Each question has only one
correct answer. The marks per question are indicated in brackets at the end of each question.

(a) Which one of the following statements regarding the criteria for a revenue contract to be met are
correct, according to the requirements of IFRS15, Revenue from contracts with Customers?

1) The contract must have commercial substance.

2) The collection of the consideration must be probable.
3) Each party to the contract has the unilateral enforceable right to terminate a wholly unperformed
contract without compensating the other party.
4) The contract must be approved by all the parties of the contract.
5) The payment terms for goods or services must be identifiable.

1. 1, 2, 3 and 4
2. 1, 3, 4 and 5
3. 1, 2, 4 and 5
4. 2, 3, 4 and 5
(2)

Questions (b) and (c) are based on the information below.

Hi-Prized Ltd sold goods to the value of R100 000 on credit to a customer on 7 April 2017. In terms of
High-Prized Ltd’s credit policy, customers are promised a 5% discount, provided they pay within 10 days
after the date of sale. Based on historical information, the entity estimates that 80% of its customers
settle their accounts within 10 days after the date of sale.

The customer obtained control of the asset on 10 April 2017, and paid his account on 20 April 2017.

(b) With regards to the above transaction, how much revenue should Hi-Prized Ltd recognise
according to IFRS15, Revenue form Contracts with Customers?

1. R76 000
2. R95 000
3. R100 000
4. R105 000
(2)

(c) With regards to the above transaction, what amount should Hi-Prized Ltd recognise as trade
debtors, before payment by the customer is made? Your answer must be in accordance with
IFRS15, Revenue from Contracts with Customers:

1. R76 000
2. R95 000
3. R100 000
4. R105 000
(2)

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JULY 2021
QUESTION 1 (continued)

(d) Based on the information below, at what amount should the lease liability be recognised at
inception of the lease contract by Newsroom Ltd, according to IFRS 16, Leases? (Round off to the
nearest Rand.)

1. R8 106 611
2. R10 800 000
3. R12 000 000
4. R9 322 611

Newsroom Ltd entered into a contract with Copyright Ltd to lease a specialised printing machine on
1 January 2018. The contract meets the definition of a lease in terms of IFRS 16, Leases. The following
terms apply to the contract:

Lease term 10 years

Initial payment R1 200 000
Instalment payable monthly in areas R90 000
Useful life of printer 12 years
Lessee’s incremental borrowing rate on 1 January 2018 6% per annum
Legal fees (incurred by Newsroom Ltd) R16 000
(2)

(e) Based on the information below, at what amount should the right of use of the asset be recognised
at inception of the lease contract by Quality Manufacturers Ltd, according to IFRS16, Leases?
(Round off to the nearest Rand.)

1. R16 520 000

2. R11 000 000
3. R11 030 000
4. R12 030 000

On 1 March 2018, Quality Manufacturers Ltd entered into a contract with Precision Ltd to lease a
machine. The contract meets the definition of a lease in terms of IFRS 16, Leases. The following
information pertains to the lease and the asset:

Cost price of machine (in a cash purchase) R11 000 000

Lease liability as inception of the lease R10 000 000
Initial lease payment R2 000 000
Total lease instalments R14 520 000
Legal fees (incurred by Quality Manufacturers Ltd) R30 000
(2)

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JULY 2021
QUESTION 2 (40 marks) (48 minutes)

BLUE WATERS LTD

The following list of balances is an extract from the trial balance of Blue Waters Ltd on 30 June 2017:
Debit/
(Credit)
R
Land at cost (refer to note 2) ............................................................................................. 2 000 000
Buildings at cost (refer to note 2) ...................................................................................... 2 400 000
Machinery at cost (1 July 2016) (refer to note 2)............................................................... 6 445 313
Furniture and equipment at cost (1 July 2016) (refer to note 2) ........................................ 900 000
Accumulated depreciation:
- Furniture and equipment (1 July 2016) (refer to note 2) ................................................. (90 000)
Ordinary share capital (1 000 000 Ordinary shares) ......................................................... (1 000 000)
Retained earnings (1 July 2016) ....................................................................................... (200 000)
12% Long-term loan (JB Bank) (refer to note 1) ............................................................... (700 000)
Trade and other receivables.............................................................................................. 750 000
Trade and other payables ................................................................................................. (500 000)
Inventories (refer to note 3) ............................................................................................... ?
Cash and cash equivalents ............................................................................................... 550 000

Additional information:

1. The following information regarding the long-term loan is available:

1.1 The long-term loan from JB Bank originated on 1 July 2014 and is repayable in ten equal annual
instalments with the first repayment commencing on 2 January 2015. Interest is calculated at
12% per annum and is payable bi-annually on 31 December and 30 June each year. However, for
the current financial year both bi-annual interest payments are outstanding and need to be
provided for.

2. The following information regarding property, plant and equipment and investment property is
available and all transactions for the current year still need to be accounted for.

2.1 All the machinery was purchased on 1 July 2014. The company provides for depreciation on
machinery at 20% per annum using the reducing balance method.

2.2 Land and buildings consist of a factory building and offices situated on Erf 413, Lonehill Park
Tshwane and is owner occupied. The building was ready for use on 1 August 2013 and occupied
on 1 September 2013 and is depreciated over its estimated useful life of 20 years. On 1 July 2016,
Mr Acker, a sworn appraiser, revalued the land at a fair value of R2 500 000.

2.3 On 30 September 2016, equipment with a cost price of R280 000 that has already been
depreciated by R28 000 at the beginning of the current financial year, was traded in at a profit of
R20 000 as part payment for new equipment costing R320 000. The new equipment has a residual
value of R50 000. The residual values of all the other furniture and equipment are R nil.

2.4 On 1 July 2016, Blue Waters Ltd acquired land at a cost of R700 000, and the building thereon at
a cost of R800 000. Improvements to the floor space of the building amounted to R300 000 for the
year. Repairs and maintenance costs to the building amounted to R100 000. The building will be
used to generate rental income. On 30 June 2017, Mr Acker revalued the land at fair value at an
amount of R750 000 and the building at R1 100 000.

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JULY 2021
QUESTION 2 (continued)

3. Inventories on hand at year-end are 300 units at a cost of R30 each. The units can be sold for
R32 each. Commission on sales of all units is paid to sales personnel at 10% of the gross selling
price. The entity has a contract to supply a customer with 80 of these units at R38 each (after the
deduction of commission) on 30 June 2017.

4. Profit for the current year after tax and all the adjustments above have been taken into account
amounted to R986 200.

5. The following is an extract of the accounting policies of Blue Waters Ltd:

- Owner-occupied land is accounted for in accordance with the revaluation model.

Revaluations are made with sufficient regularity to ensure that the carrying amount does not
differ materially from the fair value at year-end.

- Owner-occupied buildings are depreciated over the estimated useful life of 20 years.

- Investment property is accounted for in accordance with the fair value model.

- Machinery, furniture and equipment are accounted for in accordance with the cost model.

- Depreciation on machinery is accounted for at 20% per annum according to the reducing
balance method. Depreciation on furniture and equipment is accounted for at 10% per annum
using the straight-line method.

6. All the amounts exclude Value Added Tax (VAT).

7. Land and buildings are regarded as separate classes of assets.

8. All amounts are material.

REQUIRED:
Marks
(a) Prepare the Property, plant and equipment note to the annual financial statements of
Blue Waters Ltd as at 30 June 2017 in compliance with International Financial
Reporting Standards (IFRS). 27

(b) Prepare the note on Investment property to the annual financial statements of
Blue Waters Ltd as at 30 June 2017 in compliance with International Financial
Reporting Standards (IFRS). 6

(c) Calculate the amount for inventories that should be disclosed in the statement of
financial position of Blue Waters Ltd as at 30 June 2017 to comply with the
requirements of International Financial Reporting Standards (IFRS). 7
[40]
Please note:

The total column of Property, plant and equipment note is not required.

Comparative figures are not required.

Show all calculations.

Round all amounts to the nearest Rand.

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JULY 2021

QUESTION 3 (50 marks) (60 minutes)

The following balances were extracted from the accounting records of Sport Gear Ltd for the financial
year ended 28 February 2019:
R

Revenue ............................................................................................................................... 19 100 000

Cost of sales......................................................................................................................... 9 266 550
Administrative expenses:
Bank charges ....................................................................................................................... 7 423
Salaries and wages including director’s remuneration ......................................................... 2 850 000
Advertising............................................................................................................................ 25 562
Auditors’ remuneration:
- Fees for audit ..................................................................................................................... 15 000
- Expenses ........................................................................................................................... 2 500
Other operating expenses (including finance costs, depreciation and lease payments) ...... 4 870 000
Other operating income ........................................................................................................ 420 000
Proceeds on sale of motor vehicle ....................................................................................... 90 000
Machinery and equipment at carrying amount (28 February 2019) ..................................... 580 000
(Additional information 3 and 4)
Motor vehicles at cost (28 February 2019) (Additional information 3 and 4) ........................ 470 000
Land and buildings at cost (28 February 2018) (Additional information 2 and 3) ................. 2 800 000
Inventory (Additional information 1)...................................................................................... 950 000
Long-term loan from Help Bank (Cr) (28 February 2019) (Additional information 6) ........... 900 000
(Additional information 3 and 4)
Income tax expense (after all adjustments have been taken into account).......................... 550 000

Additional information:

1. At year-end the closing inventory had a cost price of R 950 000. The net realisable value was 90%
of the cost price. The adjustment was not recorded in the balances above.

2. The factory buildings are situated on Erf 63, Pretoria East, consisting of a factory and office
buildings. The land was acquired on 31 July 2014 at a cost of R1 000 000 and buildings were
acquired at the same date at a cost of R 1 800 000. During the current year additions were made
to the building at a cost of R500 000 and were completed on 30 November 2018. The buildings
are occupied by the owners. The land was revalued on 1 March 2017 at a net replacement value
of R1 400 000 by Mr S Smith, a sworn appraiser.

3. Non-current assets are depreciated as follows:

 Machinery and equipment at 20% according to the diminishing balance method.

 Buildings at 2% according to the straight-line method.
 Motor vehicles at 20% according to the straight-line method.

4. A motor vehicle with a cost price of R150 000 and on which R30 000 depreciation was already
written off at the beginning of the current financial year was sold on 1 August 2018. The proceeds
of R90 000 on the sale of the motor vehicle has been incorrectly recorded as the profit on the
motor vehicle in other income. On the same date of the sale a new vehicle was purchased at a
cost of R200 000. No transactions occurred involving machinery and equipment during the current
year.

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JULY 2021
QUESTION 3 (continued)

5. Sport Gear Ltd entered into a non-cancellable lease on 1 July 2018 to lease 3 photocopying and
printing machines for the use of the company. The contract is a lease in terms of IFRS 16.

The following information is applicable to the lease contract:

 The initial lease term is 3 years. An initial payment of R6 000 was made. The lease payments
are R2 500 per month for the first 6 months. The lease payments thereafter are R1 500 per
month until the end of the three years. All actual lease payments made by Sport Gear Ltd are
included in the operating expenses above.

 Sport Gear Ltd has the option to extend the lease term by a further two years at R1 000. At
the commencement of the lease term Sport Gear Ltd is reasonably certain that it will exercise
the option to extend the lease term by a further two years.

 5% of every lease payment goes towards covering the maintenance costs incurred by and is
to be paid for by the lessor. These values are similar to those with costs for similar
maintenance services rendered by third parties.

 Sport Gear Ltd elected to apply the recognition exemption in respect of low value assets to
this lease agreement (IFRS 16.5). Sport Gear Ltd accounts for the lease and non-lease
components separately (IFRS 16.12).

6. The long-term loan from Help Bank was entered into on 1 March 2016. The capital portion of the
loan is repayable in 8 equal instalments starting on 31 August 2017. Interest, calculated at 15%
per annum is payable bi-annually on 31 August and 28 February of each year.

7. Included under salaries and wages are the following payments to directors and prescribed officers:

Salaries
R
 Financial director (Mr S Moolloo) ................................................................................ 250 000
 Managing director (Mrs H Kirsen) ............................................................................... 180 000
 General secretary (Mr T Reuben) ............................................................................... 140 000
 Chairman of the board (Mr H Beseti)............................................................................ 40 000

Travelling allowance

 Managing director (Mrs H Kirsen) ................................................................................. 10 000

Entertainment allowance

 General secretary (Mr T Reuben) ................................................................................... 5 000

Pension contributions .......................................................................................................... 60 000

(The total annual pension contributions amounted to R30 000 per annum per executive director.
Sport Gear Ltd pays 50% of these contributions on behalf of the executive directors)

The directors of Sport Gear Ltd were paid R700 per meeting for attending director’s meetings and
four meetings were held during the year. The managing director is also a chairman of
Sub Sport (Pty) Ltd a subsidiary of Sport Gear Ltd and received a remuneration of R20 000 for the
financial year ended 28 February 2019.

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JULY 2021
QUESTION 3 (continued)

On the last day of the financial year T Reuben was relieved of his duties as general secretary of
Sport Gear Ltd and as a result received R50 000.

REQUIRED:
Marks

Prepare the Statement of Profit or Loss and Other Comprehensive Income and the profit
before tax note as well as the note on director’s remuneration for the year ended
28 February 2019. Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS). 50
[50]
Please note:

Ignore the note on accounting policy.

Comparative figures are not required.

Show all calculations.

©
UNISA 2021

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