DEPARTMENT OF ACCOUNTANCY

ACCOUNTING 300 / S3BCTQ2

FINAL ASSESSMENT OPPORTUNITY

13 November 2019

INFORMATION

ASSESSORS: MS A GAZI-BABANA (UJ) MS Y KULIK (UJ)

MS E DU TOIT (NUST) MS M COETZER (UJ)
MR K TRIEGAARDT (BDO)

MODERATORS: PROF A MOHAMMADALI-HAJI (UJ)

MS W TERBLANCHE (UFH)

READING TIME: 37 MINUTES

WRITING TIME: 188 MINUTES

MARKS: 125

 THE INFORMATION CONSISTS OF 10 PAGES AND 3 QUESTIONS (front page included).

 SILENT NON-PROGRAMMABLE CALCULATORS ARE ALLOWED.
 SHOW ALL CALCULATIONS.
 START EVERY PART TO A QUESTION AT THE TOP OF A PAGE.
 IF PENCIL OR TIPPEX OR ERASABLE PENS WERE USED ON THE ANSWER SHEET, IT DOES NOT
QUALIFY FOR REMARKING.
 SCRATCH OUT OPEN SPACES AND EMPTY PAGES.
 THIS IS AN OPEN BOOK ASSESSMENT – ALL FIVE VOLUMES OF ‘A Guide Through IFRS’ AND THE
SEPARATE ‘Conceptual Framework’ MAY BE USED DURING THE ASSESSMENT, AS WELL AS
OFFICIAL COPIES OF STANDARDS AND ILLUSTRATIVE EXAMPLES ISSUED BY THE IASB.
BOOKS AND OTHER INFORMATION MAY ONLY BE FLAGGED, HIGHLIGHTED AND UNDERLINED;
NO WRITING MAY BE ON THE PAGES. NO OTHER MATERIAL IS PERMITTED.
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q1-2019

QUESTION 1 (40 MARKS)

Background

Dot Com Limited (hereafter “Dot Com” or “the company”) is a technology company listed dually
on the Johannesburg Stock Exchange (JSE) and the Namibian Stock Exchange (NSX).
Dot Com has been listed on both exchanges since its inception in 2010 and its financial year
end is on 31 December.

Dot Com is the brain child of Joseph Zwane CA(SA). During Joseph’s studies he identified a
gap in the market for well developed applications (hereafter apps) which could assist students
significantly during their studies. Dot Com specialises in selling ready to use over-the-counter
apps as well as the development of specific apps that Universities request them to develop.
The development of apps developed based on university’s specificification takes place in Dot
Com’s head office situated in Gwen Lane, Sandton, Gauteng, South Africa.

Some of their most popular over-the-counter apps sold to students are:

 “Dot Com – The study planner”

 “Dot Com – The summary and mind-map generator”
 “Dot Com – Financial calculators made easy”

Dot Com has contracts with seven South African Universities and two Namibian Universities
that require of them to develop university specific apps that they sell to the Universities.

They also have small outlets at each of the contracted Universities where students can
purchase over-the-counter apps and hardware products. Approximately 25% of Dot Com’s
profits are generated by selling smaller hardware products such as USB sticks, laptop
chargers and wireless mice in these outlets.

You have been appointed as a consultant to advise Dot Com on the following complex
transaction they entered into:

Development of app for the University of Jozi (UJozi)

In July 2017, UJozi approached Dot Com to develop a very specialised app (named “Star
Achievers”) for them. Star Achievers cannot be used by any other university due to the highly
specialised nature thereof, and Dot Com has no alternative use for the app either.

You may assume that Dot Com early adopted IFRS 15 Revenue from Contracts with
Customers, and that all five steps prescribed in IFRS 15 to recognise revenue had been
considered and correctly interpreted on 1 August 2017, being the date that both parties signed
the contract.

2
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q1-2019

QUESTION 1 continued

Extract from the contract between UJozi and Dot Com:

Section: Contract details:

2(c) Dot Com will commence with the development of Star Achievers on 15 August 2017.
The estimated completion date is 31 March 2018.

The total contract price is R2 000 000 payable on a percentage of completion basis over
3(a) the period of the contract.

 The percentage of completion method will be calculated using an output method

based on the modules of the app developed. Star Achievers consists of 5
modules. Every completed module represents 20% of the final app.

By 31 December 2017, Dot Com had completed three of the five modules. However, they only
received a payment of R800 000 from UJozi, as UJozi has been experiencing some cash flow
problems and were not able to pay anymore at that stage. However, management has
confirmed that UJozi always settles their accounts (based on past experience), and no loss
allowance needs to be raised against the account balance.

Unfortunately, the 2017 financial year was not a good year for Dot Com either. In an attempt
to increase their reported revenue, the new senior accountant, Pearl Mbali, was instructed by
the Financial Director to account for the transaction with UJozi as follows for the financial year
ended 31 December 2017:

Dr Bank (SFP) 800 000

Dr Receivables (SFP) 1 200 000
Cr Revenue (P/L) 2 000 000
Accounting for revenue from the UJozi contract

Dr Income Tax Expense (P/L) 560 000

Cr Deferred Tax (SFP) 560 000
Accounting for taxation on revenue from UJozi contract
(R2 000 000 x 28%)

The Financial Director argued that the above journals constituted a fair reflection of the
contract with UJozi, as the contract had been signed prior to year-end and UJozi has an
unconditional obligation to pay Dot Com for Star Achiever’s full contract price.

This misstatement was only discovered in 2018 whilst the auditors were finalising the audit of
the 2018 annual financial statements, and is considered to be material.

3
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q1-2019

QUESTION 1 continued

Additional Information:

 Assume a corporate tax rate of 28% and capital gains tax inclusion rate of 80% for all
financial periods.

 You may ignore VAT for this part of the question.

 In terms of the Income Tax Act, revenue is taxed on the earlier of receipt or accrual.

4
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q2-2019

QUESTION 2 (45 MARKS)

This question is a continuation of the Dot Com Limited scenario; for the purposes of this
question you may assume that all matters noted in question 1 have been correctly accounted
for in the information provided below, i.e. you do not need to update this question for the
matters noted in question 1.

Dot Com was founded as an application development company. However, due to their market
being limited to students registered at universities in South Africa and Namibia, they soon
realised that opportunities for growth were limited. Dot Com decided that in order to expand
the business, they needed to develop more useful apps for students and also provide useful
content.
Dot Com decided to extend its offering of apps to students by creating an app which would
contain exam level questions and answers for students to use during the learning process.
However, due to the extensive number of courses offered by universities, Dot Com soon
realised that it would be a tremendous project to compile the necessary questions and
answers themselves. Dot Com realised that if they purchased a publisher, it would be simpler
to digitise the existing questions contained in textbooks and exercise books, and just create
an application to house the content.

Clickbait purchases Know-it-All

Dot Com identified Know-it-All (Pty) Limited (hereafter “Know-it-All”), a struggling printer and
publisher, as a potential investment. Dot Com saw value in Know-it-All as it publishes books
for the widest range of university courses.
Unfortunately, another entity – Clickbait (Pty) Limited (hereafter “Clickbait”) – was also in the
market to purchase Know-it-All. Clickbait’s business model is to produce affordable laptops,
cell phones and tablets (collectively referred to as electronic devices). These electronic
devices are pre-loaded with the latest attention-grabbing apps and marketed to young adults.
Due to the popularity of their products, Clickbait has an on-campus store in every university in
South Africa.
Know-it-All also distributes magazines on topics such as fashion, sports and celebrity news
and Clickbait saw an opportunity to make their devices more attractive by including these
magazines on the electronic devices in a digital format.
Dot Com did some calculations and based on the value they could unlock from the academic
material published by Know-it-All, they offered the shareholders a price of R15 000 000 for all
of the shares of Know-it-All.
However, Clickbait could unlock more value from Know-it-All’s magazines and Clickbait
offered to purchase 187 500 shares from Know-it-All’s shareholders, at a cash price of
R12 500 000. To sweeten the deal, Clickbait promised to pay an additional amount of
R5 000 000 on 31 March 2020 to the shareholders of Know-it-All if the EBITDA of Know-it-All
remained above R3 000 000 for three years. The fair value of the contingent consideration in
1 January 2017 was calculated to be R3 200 000. The fair value has remained unchanged.

The shareholders of Know-it-All accepted Clickbait’s offer on 1 January 2017 and

transferred the shares on the same date.

5
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q2-2019

QUESTION 2 continued

Know-it-All owns a factory that it no longer uses and subsequently rents it out. This building
is accounted for as an investment property. The building had a carrying amount of
R10 000 000 on 1 January 2017 and a fair value of R12 000 0000. Know-it-All did not adjust
the fair value of the factory building at the date of acquisition, but correctly recorded the
investment property at a fair value of R13 000 000 at year end (31 December 2017).
All other assets and liabilities were considered to be fairly valued in the books of Know-it-All
at 1 January 2017.

Dot Com purchases Clickbait

Joseph Zwane was depressed when the deal to purchase Know-it-All fell through. After taking
a trip to a remote island to clear his head, he realised that both Dot Com and Clickbait were
targeting young adults. By including Dot Com’s applications on Clickbait’s devices, they would
capture the full attention of young adults currently enrolled at universities. Dot Com could also
use Clickbait’s presence in the remaining South African universities to unlock that market for
its existing apps.
Dot Com approached the shareholders of Clickbait. Due to the success of including the
magazine content on the electronic devices, profits at Clickbait were up and the shareholders
were only willing to sell a controlling stake of 300 000 shares for R50 000 000. Dot Com
financed the acquisition with a loan from their bank. The purchase agreement was concluded
on 31 December 2017 and Dot Com took control of the shares on the same date.
All assets and liabilities were fairly valued in the books of Clickbait at 31 December 2017.

Intergroup transactions: Dot Com and Clickbait

From 1 April 2018, Clickbait started to purchase smaller hardware items from Dot Com.
These smaller items were grouped with the electronic devices and sold in the on-campus
stores. Total sales from Dot Com to Clickbait amounted to R4 300 000 for the 2018 year.
At year-end, Clickbait had R600 000 worth of these electronic devices on hand in its stores.
Dot Com makes a gross profit of 20% on intergroup sales.
On 30 June 2018, a delivery truck with a carrying amount of R150 000 was sold by Dot Com
to Clickbait for a cash consideration of R70 000 (representing a fair market value on the
disposal date). The truck had a remaining useful life of 2 years on the acquisition date with no
residual value. The loss on disposal is considered to be an indication of impairment for the
group as envisaged in IAS 36 Impairment of Assets, and the disposal value indicates the
recoverable amount of the truck. The original cost of the truck was R375 000.

Dot Com purchases Sharp

Dot Com acquired a 35% shareholding in Sharp (Pty) Limited (hereafter “Sharp”) on
1 July 2016 and exercises significant influence over Sharp. The purchase consideration was
settled in cash of R1 500 000, and all assets and liabilities were considered to be fairly valued
at that date.

6
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q2-2019

QUESTION 2 continued
Extracts from the group entities financial statements at 31 December

The separate financial statements of each company in the group have been prepared and
signed off.

2018 2017 2016

R R R
Dot Com – stand-alone results
Stated Capital (issued at R1 per share) 1 000 000 1 000 000 1 000 000
Retained Earnings (closing balance) 73 000 000 56 000 000 45 125 000

Sharp
Profit after tax 1 700 000 1 600 000 1 400 000*

Clickbait
Stated Capital (issued at R1 per share) 500 000 500 000 500 000
Retained Earnings (closing balance) 28 500 000 19 500 000 7 500 000

Know-it-all
Stated Capital (issued at R1 per share) 250 000 250 000 250 000
Retained Earnings (closing balance) 8 067 500 7 500 000 9 900 000
Profit/(loss) after tax 700 000 (2 400 000) 900 000
* This profit was earned evenly throughout the year.

Dividend policies
The investors of Dot Com expect dividends and Dot Com paid a dividend of 87c per share
during the 2018 financial year (73c per share in 2017). The management of both Sharp and
Clickbait and have a policy not to declare dividends, but rather to reinvest profits in further
research and development. Know-it-All declared its first dividend of 53c per share on
31 December 2018.

7
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q2-2019

QUESTION 2 continued

Accounting policies
 It is Dot Com’s policy to measure non-controlling interests at the acquisition date at
their proportionate share of the acquiree’s identifiable net assets.
 Investments in subsidiaries are carried at cost in the separate financial statements.
 Investment property is carried on the fair value model per IAS 40 Investment Property.
 Property, plant and equipment is accounted for under the cost model per
IAS 16 Property, Plant and Equipment and is depreciated on a straight-line basis.

Additional information

 Ignore VAT for the purposes of this question.

 The corporate tax rate is 28% and the capital gains tax (CGT) inclusion rate is 80%.

8
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q3-2019

QUESTION 3 (40 MARKS)

This question is a continuation of the Dot Com Limited scenario; for the purposes of this
question you may assume that all matters noted in question 1 and 2 have been correctly
accounted for in the information provided below, i.e. you do not need to update this question
for the matters noted in question 1 or 2.

Import of servers

During the financial year ended 31 December 2018, Dot Com’s management team decided to
import a new series of servers on which they intend to store and run all application related
software.

Five HPE ProLiant ML350 Gen9 Performance Xeon servers were ordered from Hewlett
Packard Enterprises’s (HPE) on 1 March 2018. HPE’s head office is based in California,
United States of America. The price of one server is $9,050.

The servers were shipped and delivered to Dot Com on 30 April 2018. Import costs and duties
of R12,000 were incurred by Dot Com, a software technician was paid R15,000 to install the
server and re-engineer the company’s network structure, and R10 000 was paid to train staff
on maintaining the new network. The installation was completed, and all these costs paid in
cash, on 31 May 2018, at which time the servers were brought into use by Dot Com.

Dot Com settled their account with HPE on 31 July 2018.

Dot Com noted that the exchange rates were not stable and decided to enter into a 3-month
forward exchange contract with United Bank on 30 April 2018 for the full value of the purchase
order to manage their risk exposure. Dot Com did not incur any costs to enter into the contract.
It was agreed that the contract will be net settled.

The relevant spot and forward exchange rates are as follows:

Date Spot rate 3-month 1-month

forward rate forward rate
1 March 2018 14.21 13.80 13.95
30 April 2018 14.30 14.17 14.25
31 May 2018 14.58 14.35 14.47
30 June 2018 14.08 13.92 14.01
31 July 2018 14.60 14.32 13.52

Dot Com accounts for servers using the cost model under IAS 16 Property, Plant and
Equipment, and depreciates the servers over a useful life of three years to a zero residual
value.

9
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q3-2019

QUESTION 3 continued
New application development and funding

On 1 July 2018, Dot Com was approached by the University Up The Road to develop a new
application that will integrate with their online e-learning system, to enable lecturers to set
online quizzes for continuous assessment more efficiently, which can be rolled out with ease
and answered by students on any devices. The application has to be able to run on Android
and Apple devices. They approached Dot Com after hearing how well the app developed for
UJozi (see question 1) was performing in practice.

To fund the development of the new software, Dot Com issued the following two financial
instruments on 30 September 2018. Neither of these instruments were designated as
financial liabilities at fair value through profit or loss:
1) 50 000 R35 12% compulsory convertible preference shares were issued at the face
value of the instruments (at fair value). No transaction costs were incurred on the issue
of these shares. These preference shares will be converted into 200 000 Dot Com
ordinary shares after four years. Mandatory dividends on these shares are paid to the
shareholders on a semi-annual (six-monthly) basis. A market related rate of return for
similar preference shares on the issue date with no conversion option is 13%.

2) 3 500 R400 15% debentures were issued at a premium of 10% (representing fair value
of these instrument on the issue date). Returns are paid on a quarterly basis. To issue
these debentures, Dot Com incurred transaction costs of R25 000. The debentures will
be redeemed in two years’ time, at the face value of the instruments. It is anticipated
that the revenue from the software will be stable by this stage, enabling Dot Com to
fund the redemption.

As the software development was still in the research phase on 30 September 2018, all
proceeds from the issue of the above two instruments, less the transaction costs incurred,
were re-invested by Dot Com in a portfolio of listed shares. The entire portfolio of shares was
designated as fair value through OCI, as Dot Com did not want to present the fair value
movement on these shares in their operating results. On 30 November, when the fair value of
the full portfolio was R3 315 000, Dot Com sold 20% of the shares at fair value to fund the
initial development costs.

On 31 December 2018, the fair value of the remaining shares in the portfolio was calculated
to be R2 710 000.

Additional information

 Ignore VAT, income tax, and deferred tax for the purposes of this question.

10
 DEPARTMENT OF ACCOUNTANCY

ACCOUNTING 300 / S3BCTQ2

FINAL ASSESSMENT OPPORTUNITY

13 November 2019

REQUIRED

ASSESSORS: MS A GAZI-BABANA (UJ) MS Y KULIK (UJ)

MS E DU TOIT (NUST) MS M COETZER (UJ)
MR K TRIEGAARDT (BDO)

MODERATORS: PROF A MOHAMMADALI-HAJI (UJ)

MS W TERBLANCHE (UFH)

READING TIME: 37 MINUTES

WRITING TIME: 188 MINUTES

MARKS: 125

 THE REQUIRED CONSISTS OF 4 PAGES AND 3 QUESTIONS.

(front page included).
 SILENT NON-PROGRAMMABLE CALCULATORS ARE ALLOWED.
 SHOW ALL CALCULATIONS.
 START EVERY PART TO A QUESTION AT THE TOP OF A PAGE.
 IF PENCIL OR TIPPEX OR ERASABLE PENS WERE USED ON THE ANSWER SHEET, IT DOES NOT
QUALIFY FOR REMARKING.
 SCRATCH OUT OPEN SPACES AND EMPTY PAGES.
 THIS IS AN OPEN BOOK ASSESSMENT – ALL FIVE VOLUMES OF ‘A Guide Through IFRS’ AND THE
SEPARATE ‘Conceptual Framework’ MAY BE USED DURING THE ASSESSMENT, AS WELL AS
OFFICIAL COPIES OF STANDARDS AND ILLUSTRATIVE EXAMPLES ISSUED BY THE IASB.
BOOKS AND OTHER INFORMATION MAY ONLY BE FLAGGED, HIGHLIGHTED AND UNDERLINED;
NO WRITING MAY BE ON THE PAGES. NO OTHER MATERIAL IS PERMITTED.
COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q1-2019
2

QUESTION 1 (40 MARKS)

a) Critically evaluate the two journal entries passed by Pearl Mbali for the financial (13)
year ended 31 December 2017 relating to the contract with UJozi. You are required
to refer to all relevant IFRSs, including IFRS 15 Revenue from Contracts with
Customers, where appropriate, to support your answers.

You are expected to structure your answer as follows:

Comment: Justification:

 

Communication skills: clarity of expression and table format (1)

b) Provide the relevant note disclosure required in terms of IAS 8 Accounting Policies, (10)
Changes in Accounting Estimates and Errors to appropriately disclose the
misstatement of revenue in relation to the UJozi contract, which will have to be
disclosed in the annual financial statements for the year ended 31 December 2018.

c) With reference to only Chapter 4 of the Revised Conceptual Framework, discuss (7)
the validity of the Receivable of R1 200 000 raised by Pearl Mbali on
31 December 2017.

Communication skills: clarity of expression; responded to required appropriately (1)

d) Assume, for only this section of the question, that UJozi holds a controlling (4)
interest in Dot Com Ltd in terms of IFRS 10 Consolidated Financial Statements.

You are required to discuss what the impact of the contract to develop an app for
UJozi would be on the consolidated financial statements, if Dot Com Ltd was a
subsidiary of UJozi.

Note:

 You need not refer to any amounts/values in this part of the question.
 You are only required to provide high-level guidance on the overall impact
on the consolidated financial statements.

e) Discuss whether Pearl Mbali was acting ethically when processing an incorrect (4)
journal entry based on instructions from the Financial Director. Your discussion
should be based on an appropriate ethical framework and include an appropriate
recommendation for alternative actions that Pearl could have considered.

TOTAL FOR QUESTION 1 [40]

COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q2-2019
3

QUESTION 2 (45 MARKS)

This question is a continuation of the Dot Com Limited scenario; for the purposes of this
question you may assume that all matters noted in question 1 have been correctly accounted
for in the information provided below, i.e. you do not need to update this question for the
matters noted in question 1.

a) Briefly discuss how the disposal of the truck from Dot Com Limited to (4)
Clickbait (Pty) Limited on 30 June 2018 would be accounted for from a group
perspective. You are required to include the pro-forma journal entry that would
be required on consolidation as part of your answer.

b) Prepare the consolidated statement of changes in equity for the Dot Com Group (39)
Limited for the year ended 31 December 2018.

 Comparatives are required.

 Total columns are not required, however the total rows reflecting the
balances of the statement of changes in equity accounts are required.
 You may assume that all transactions above were correctly recorded in
the separate financial statements.
 You may assume that a shareholding of at least 51% constitutes control
as defined in IFRS 10 Consolidated Financial Statements.

Communication skills: IAS 1 presentation; neat and logical workings (2)

TOTAL FOR QUESTION 2 [45]

COURSE: ACCOUNTANCY 300 / S3BCTQ2
ASS6-Q3-2019
4

QUESTION 3 (40 MARKS)

This question is a continuation of the Dot Com Limited scenario; for the purposes of this
question you may assume that all matters noted in question 1 and 2 have been correctly
accounted for in the information provided below, i.e. you do not need to update this question
for the matters noted in question 1 or 2.

You may ignore tax for the purposes of this question.

a) Discuss whether the forward exchange contract with United Bank is a (4)
derivative financial instrument as defined.

b) Prepare all the journal entries in respect of the five servers acquired from HPE, (12)
the related creditor account, as well as the forward exchange contract with
United Bank for the SIX MONTHS ENDED 30 JUNE 2018. You should include
the initial recognition as well as the subsequent measurement entries during
this period.

Notes
 Journal narrations and dates are required
 Round all values to the nearest Rand.
 Show all calculations as marks will be awarded for the calculations
Communication skills: journal narrations, clear calculations (1)

c) Discuss how the compulsory convertible preference shares should be (8)

classified and measured on initial recognition, with reference to the appropriate
guidance from IAS 32. Support your discussion with appropriate calculations,
as relevant.

 Show all calculations as marks will be awarded for the calculations

Communication skills: clarity of expression (1)
d) Calculate all the relevant amounts to be included in the statements of profit or (13)
loss (SPL) and other comprehensive income (SOCI) for the financial year
ended 31 December 2018 in respect of ALL the financial instruments that you
can identify from the information provided in question 3.
As part of your solution you are required to identify the relevant income or
expense(s) in respect of the financial instruments and clearly indicate if the
amount will be recorded in SPL or SOCI.
Communication skills: clarity of expression, clear calculations (1)

TOTAL FOR QUESTION 3 [40]