2020

ACCOUNTING 2A

UNIT 1
QUESTION BANK
QUESTION 1

AC Entity, uses the perpetual inventory system, purchased trade inventories for R226 000 on cash
The trade inventories were received on 1 March 2019
Required

 Discuss using the definitions in the conceptual framework how inventory should be recognised
QUESTION 1 (

Solution:

 Identify the issue: Think of the supporting journal for the transaction assist in identifying the issue
relevant to the scenario.

 The credit is simple, the bank account should be credited. The issue therefore lies in the debit leg
of the journal. Two possible debits should be considered – an asset or an expense.

 Consider whether the cost should be treated as an asset or an expense

 As the definition of an expense is a decrease in assets, the asset option would be considered first
and that an expense would be proven by disproving an asset. Every asset eventually becomes
an expense (either through impairment, depreciation, sale etc.). Remember, the definition of an
expense is effectively “… decreases in assets…” – this reinforces the approach to be followed.

 The definition is now applied to the information in the question

An asset is a present economic resource(1) controlled by the entity as a result of past events(1). .
An economic resource is a right that has the potential to produce economic benefits(1). .

A right:
 AC Entity has a present legal right of ownership

Potential to produce economic benefits:

 Has the potential to produce economic benefits when AC Entity sells the trade inventories to
customers at a profit in order to generate cash flow.
 However, Potential means that it does not need to be certain (or expected), or even likely, that the
economic benefits will arise (1). Only one circumstance (or outcome) that will produce economic
benefit is needed to satisfy this element of the definition (1).

Control:

 Yes, by means of contract.

 AC Entity controls the economic resource (trade inventories) since it has the present ability to
direct the use of the trade inventories and obtain the economic benefits that may flow from it.
 AC Entity has the present ability to direct the use of the trade inventories as it has the legal right to
sell the inventories to customers for a profit.

Past event:
 The past events are the ordering of inventories by AC Entity and delivery by Payable L.

The item therefore meets the definition of an asset.

Question 2

Scenario:

DTSV, a broadcasting company recently started a business. To be able to obtain material to broadcast
in the future, a once-off payment of R10 million cash was paid in advance, giving the broadcasting
company the right, protected by contract, to receive television program material in future to broadcast.
The right can be transferred or sold at market value. How should the amount be treated in terms of the
Conceptual Framework?
Solution:

 Identify the issue: Think of the supporting journal for the transaction assist in identifying the issue
relevant to the scenario.

 The credit is simple, the bank account should be credited. The issue therefore lies in the debit leg
of the journal. Two possible debits should be considered – an asset or an expense.

 Consider whether the cost should be treated as an asset or an expense

 As the definition of an expense is a decrease in assets, the asset option would be considered first
and that an expense would be proven by disproving an asset. Every asset eventually becomes
an expense (either through impairment, depreciation, sale etc.). Remember, the definition of an
expense is effectively “… decreases in assets…” – this reinforces the approach to be followed.

 Now consider the detail of the scenario:

An item will be recognised in the financial statements if it:

(a) meets the definition of an element of the financial statements and
(b) meets the recognition criteria for recognition per the conceptual framework.

 The definition is now applied to the information in the question

 An asset is a present economic resource controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits.

A right:
 DSTV has a right which is to receive future program material
Potential to produce economic benefits:
 It need not be certain, or even probable, that the right will produce economic benefits. In at least
one circumstance, DSTV will receive income from the broadcasting of the future program
material.
Control:
 Yes, by means of contract. The entity can choose how to use these rights and can obtain any
economic benefits that flow from them. The entity is therefore able to restrict access to these
benefits by other parties (i.e. other parties cannot get access to the same program material).
Past event:
 Yes, the signing of the broadcast contract.

The item therefore meets the definition of an asset.

The recognition criteria

 The recognition criteria should be considered:

 Recognition is appropriate if it results in both relevant  information about assets, liabilities,
equity, income and expenses and a faithful representation of those items since the aim is to
provide information that is useful to investors, lenders and other creditors.
Would recognition result in relevant information about assets, liabilities, equity, income and
expenses?
 This right would be qualitatively material to the entity as users would need to know that such
broadcasting rights exist. Not recognizing this as an asset, would mean that the full amount
would be expensed in the current period. However, that would not provide the most predictive
value in the future. The right is present and exists, so there is no existence uncertainty.
The right can also be transferred or sold confirming that there is reasonable probability of an
inflow of economic benefits.and

Would recognition result in a faithful representation?

 Yes, the amount is known so there is no measurement uncertainty.

This amount meets the definition of an asset and qualifies to be recognised in the financial statements 
Question 3

AC Entity had its delivery vehicle repaired with Payable M. The repairs were completed on 3 March 20.7
at a cost of R11 000 and it was agreed with the service provider that payment will take place within 30
days.
Required

 Discuss using the definitions in the conceptual framework how the payable should be recognised
Question 3

Definition of Liability Application – payable

Obligation As a result of the completion of the repairs by
Payable M in accordance with the contract 
and to the satisfaction of AC Entity, Payable M
has a legally enforceable right to claim from
AC  Entity and AC Entity has a legally
enforceable obligation towards Payable M which
AC Entity has no practical ability to avoid.
Transfer of an economic resource AC Entity has an obligation to transfer an
economic resource in the form of cash  to
extinguish the obligation to Payable M.
Past event The satisfactory completion of the repairs on
3 March 20.7 in accordance with the contract is
the past event that gave rise to the present,
legal obligation of AC Entity.

Therefore would meet the definition of a liability interms of the new conceptual framework