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CHAPTER 5 SUGGESTED SOLUTIONS

SOLUTION TO MULTIPLE CHOICE QUESTIONS 5.1 5.2 5.3 5.4 5.5 (a) (d) (e) (b) (c) 5.6 5.7 5.8 5.9 5.10 (d) (b) (c) (b) (e) 5.11 5.12 5.13 5.14 5.15 (b) (c) (b) (d) (e)

END OF CHAPTER QUESTIONS

5.1
An Act of Parliament called the Companies Act, which was introduced in 1973, governs reporting by management to the shareholders. One of its major objectives is to ensure that company directors do not withhold information which shareholders are entitled to know. The first reference in this Act to generally accepted accounting practice is made when it states that ‘the annual financial statements of a company shall, in conformity with generally accepted accounting practice, fairly present the state of affairs of the company and its business as at the end of the financial year concerned and the profit or loss of the company for that financial year’. When this legislation was tabled in Parliament, accountants in South Africa were faced with the question: ‘What is generally accepted accounting practice?’ As there was no easy answer to the question, the South African Institute of Chartered Accountants (SAICA) started working on defining the term ‘generally accepted accounting practice’. The result is that a number of ‘statements of generally accepted accounting practice’ have been published, which assist accountants when preparing financial statements of companies. The SAICA will continue to produce more statements as new problems in financial reporting are identified. Examples of the topics that have required attention, include how to report on Non Current assets, how to report sales of inventory and how to report on investments. Each has resulted in a statement of generally accepted accounting practice, usually referred to as a GAAP statement. When the need for a specific standard relating to financial reporting is identified by the APC (Accounting Practices Committee, which is a committee of the South African Institute of Chartered Accountants), an exposure draft or discussion paper is circulated to all interested partners for comment. When consensus is reached, the proposed standard is submitted to the APB (Accounting Practices Board) for acceptance. The APB is a board with representation from the Public Accountants' and Auditors' Board, the JSE, Die Afrikaanse Handelsinstituut, the Chamber of Mines, the Association of Chambers of Commerce, the Federated Chambers of Industries and the Steel and Industry Federation. Its basic objective is to establish and procure recognition and acceptance of what the Board considers is or should be generally accepted accounting practice. Once the APB has accepted the proposed standard, it attains the status of generally accepted accounting practice.

5.2
The auditors of financial statements are required to state that it their opinion, financial statements “fairly present” the financial performance and the financial position of the company in accordance with generally accepted accounting practice. The auditors are thus passing an opinion on the profit (performance) for the year and the assets and liabilities (position) at a moment in time (the reporting date). In order to establish what is “fair”, a benchmark is needed, because reporting is not a totally objective activity. The benchmark is generally accepted accounting practice, that is, the practices of financial accountants that are commonly used and accepted. Most of these have been codified in GAAP statements, which must therefore be observed. When comparing “generally accepted accounting practice” to “true” values, especially as they relate to the valuation of assets, the values will be different. Another way of looking at this is that accountants do not purport to report on true values. The values offered by accountants in financial statements are based on a set of principles. Investors, or other users of financial statements need to understand the GAAP principles, and use the data base presented in financial statements to estimate “true” value.

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5.3
1. The entity concept Financial statements measure and report the results of operations of specific entities which are separate and distinct from the owners of the entity. By understanding and applying this concept, the personal transactions of the owners will not be recorded or mixed up with the transactions of the business itself. 2. The historic cost concept The original price paid for an asset is called its ‘historic cost’. From the date of purchase, the asset is used and depreciation is deducted from the historic cost. The purpose of the depreciation is to record an amount which reflects the usage of the asset. The asset is reported in the balance sheet at its historic cost less the depreciation which has been deducted since the date it was purchased.. 3. The going concern concept Because financial statements are presented periodically during the life of a business, the financial results and position of that business has to be established on a particular day, the accounting date. The financial position of a business would have to be reported differently if it was expected that the business intends to cease its operations. However, most businesses operate as if they intend to continue operations indefinitely, and in preparing the financial statements it may therefore be assumed that this is the intention, unless specifically stated to the contrary. 4. The matching concept If goods are sold during one accounting period, but payment is only received in the next accounting period, in which period should that amount be treated as profit? If expenses, such as telephone, electricity or rent are incurred in one accounting period, but only paid in the next period, in which period should the amount be treated as an expense? This and similar questions are resolved by applying the matching concept. The matching concept states that revenues and costs are recognised in the period in which they are earned or incurred, and not in the period in which the money is received or paid 5. The prudence concept The word prudence implies being careful, cautious or wise. It is not considered good business practice to anticipate income if there is a strong likelihood that it will not be received. The prudence concept states that income should only be recognised when received in the form of cash or if it exists in the form of other assets, which the business is reasonably certain will eventually become cash and when provision has been made for all known expenses and losses. 6. The materiality concept The materiality concept therefore states that financial statements should disclose all items which are substantial enough to affect evaluations and decisions.

5.4
At the time of purchase, an estimate must be made of the period over which the vehicle will be used and of the amount which will be received on disposal of the vehicle at the end of its useful life to the business. The depreciation policy of the business will then be applied to the depreciable amount. Using the example of a vehicle purchased for R200 000, the following could be the facts after three years. Estimated useful life 5 years [Assume] Estimated disposal value R50 000 [Assume] Depreciation policy 20% p.a. straight line [Assume] Therefore depreciable amount R150 000 (R200 000 – R50 000) Amount to be written off each year R30 000 (20% of R150 000) Amount written off over three years R90 000 (3 x R30 000) Value (historic cost) reported in Balance Sheet R110 000 (R200 000 – R90 000)

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5.5
Once an entrepreneur, or anyone else, starts a business, the capital investment (R100 000) in this case, is treated as if it belongs to a different person (the business). The owner however still has a claim against the business for the amount. It is similar to a loan to the business, except that it bears more risk (if the business fails, it may not be able to repay the entrepreneur, who will suffer the loss of his/her capital investment). The business is thus an entity on its own and all exchanges of money or value between it and the owner must be treated as if a separate person (entity) exists. Examples of these are drawing of cash in the form of dividends or capital repayments. Thus no owner of a business should ever mix private and personal transactions with those of the business. Only if this principle is observed, is it possible to correctly determine the profit of the business, as an entity, over a period.

5.6
 Historic Cost: The machine was purchased at an earlier date for an amount greater than R400
000, and has been depreciated since the date of purchase. GAAP permits the reporting of the asset at Cost less Accumulated Depreciation. The fact that it could be sold for R450 000 is not relevant to the historic cost principle.

 Going concern concept: The business is expected to continue its operations and each year the
machine will continue to be depreciated. The effect of this is that each year a portion of the cost of the machine will be written off against income, to reflect the part of the cost matched to that year. If the business was not expected to continue its existence, then the asset should be revalued to reflect the value which could be realised on liquidation of the machine, namely R450 000

 Prudence concept: The financial reports, if they must reflect estimates, will rather reflect a
conservative figure, than report optimistic figures. The effect of this is that depreciation estimates might be conservative (writing off a higher amount each year, and thus reporting the book value at a lower value). Another (obvious) reason why the selling (realisable) value of the machine will be higher is because of inflation, over a period of years.

5.7
The Administrative Expenses account will record all payments made for this account, as well as any credit transactions. For the financial year, the matching concept requires that all accruals (amount expended for this account, but not yet recorded) and all prepayments (amounts recorded, but which will only be “used” in the following financial period). The amount reflected in the Income Statement for Administrative Expenses for the period, will be the amount which was incurred for the period in order to generate the Revenue which was realised. [Expensed incurred are matched against Revenue earned during the financial period– NOT Expenses recorded against Revenue received]

5.8
The amount of R5 400 owing (a credit in Telephone Expense account) at the beginning of the financial year, was expensed (written off using the matching concept) during the previous year. The payment of R98 000 during the year (a debit in the Telephone Expense account), includes paying, during the current year, R5 400 for a previous year expense. The net effect of these two entries is an amount of R92 600 for current year telephone expenses incurred. As the business has incurred a further expense of R8 500, (which has not yet been paid), it requires a further debit to the Telephone Expense account , giving a new balance of R101 100, which is the expense incurred during the year to be matched against the Revenue earned. The amount of R101 100 will therefore be reported in the Income Statement as the expense for the year, and the amount of R8 500 will be reported in the Balance Sheet as a creditor, who, at that moment in time, is owed R8 500. This amount will be paid early in the new financial year.

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5.9
 Historic Cost concept: Under the historic cost principles, the Investment will be recorded at its cost
of R700 000. In addition to reporting the Investment at its cost, it is customary, to indicate in a note what the value is on Balance Sheet date. This is important information for the users of the financial statements.

 Prudence concept: This would dictate that the amount reported should not be re-valued to the
higher value of R900 000. However, if the value was lower than cost of R700 000, prudence would require the investment to be shown at the lower value.

5.10
This error in the financial reports is so small at R90, that the materiality concept would permit the error to remain unchanged in the report. It will be of no consequence to any of the users of financial statements or affect any decision, which may be made on the basis of the information. It should be noted that from a financial recording perspective, the error may well be corrected for the purpose of ensuring that all internal records are accurate.

5.11
The following are all possible types of shares which may be issued:  Ordinary shares (par value or no par value) Ordinary shareholders are the effective owners of the company and their shares confer the following rights:  to attend the shareholders' meeting of the company;  to elect a board of directors;  to share in the company's profits by way of dividends, and  to share in any surplus assets on liquidation of the company.

 Preference shares (par value or no par value)
Preference shares may, in exactly the same way as ordinary shares, be shares with a par value or shares of no par value. Preference shareholders have preferential rights over ordinary shareholders with regard to the receipt of a dividend, as dividends on preference shares must be paid before dividends on ordinary shares can be paid. Preference shares are characterized by a Non Current dividend rate. Preference shareholders do not normally, in terms of the articles of association, have a right to vote at shareholders' meetings. They may have preference with regard to the repayment of capital on liquidation before ordinary shareholders are paid out. There are a number of classes of preference shares, the most common of which are the following:  cumulative preference shares  participating preference shares  convertible preference shares  redeemable preference shares.

5.12
Par value shares: These are shares which have a nominal value, for example R1.00, stated on the face of the share certificate. No par value shares: Such shares do not have a nominal value and are issued at a price which is considered appropriate by the directors of the company. Once the ordinary shares have been issued, the factor of par value or no par value becomes of little or no interest to shareholders. The shares will trade at a market value and dividends are paid per share, and are not based on a consideration of any par value.

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5.13
 Cumulative preference shares: The dividend accumulates in the event of a period during which 
dividends are not paid. No dividend may be paid to ordinary shareholders until the accumulated dividend has been paid to the preference shareholders Participating preference shares: These shares, apart from being entitled to a fixed dividend, will also carry a clause indicating some share of profits granted to ordinary shareholders. Preference shareholders thus benefit in receiving a fixed dividend, but also sharing in the fortunes of the company. Convertible preference shares: These shares may be converted into ordinary shares at some fixed future date, at a price agreed at the date of issue. The shareholder usually has the option to convert, that is they may choose not to convert (in the event of the ordinary shares not doing well, they may decide not to convert) Redeemable preference shares: This is the only form of share which allows for the capital to be returned to the shareholder at a future date. It is thus similar to a loan.

5.14
A company usually has growth as one of its objectives. In order to grow, it required additional capital from investors. Investors have different needs and objectives. Some are seeking investments with a high degree of certainty (low risk), while others may be prepared to take on more risk in the hope of achieving a higher return. Financial managers, wanting to raise capital design different financial instruments (types of shares), in order to appeal to a wider sector of the investment community, and thus attract more capital, albeit in various forms.

5.15
The term 'distributable reserve' in defined in statute, as any amount which has been carried to reserves and which may, in accordance with generally accepted accounting practice and legal principles, be taken to the credit of the income statement and distributed by way of dividend, and does not include any amount retained by way of providing for any known liability. The paragraph does not define non-distributable reserves, but merely states that non-distributable reserves shall be construed in accordance with the definition of distributable reserves. The disclosure of an item as a non-distributable reserve in the balance sheet provides an indication to shareholders and lenders that the company may not, and does not intend to, distribute the funds thus classified. This means that they may never be paid out in the form of dividends to the shareholders. Amounts listed under distributable reserves may, however, be paid out in the form of dividends.

5.16
A reserve is often considered to be an amount of money set aside somewhere. It is not. A reserve is simply profits that have been made by a company (as a result of operations, or as a result of holding assets which increase in value), and which have not be distributed (hand back to) to the investors. As these assets are reported in the Balance Sheet, the amounts must also be shown as belonging to the shareholders (otherwise the Balance Sheet would not “balance”). Reserves thus indicate value belonging to the shareholders, but it is not necessarily in the form of cash. Most usually it is invested in all the assets of the business.

5.17
A company may decide to take out long term loans or to issue Debentures.

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5.18
A debenture is a long-term loan from the public raised in small amounts such as R10 or R100, usually at a fixed rate of interest and with specified repayment terms. It is issued as a form of debt in order to raise funds for the long-term financing of the business operations of a company. Debentures may be issued at a discount or at a premium because they are usually registered at a particular interest rate, while the interest rate in the market fluctuates from time to time. In order to ensure that the debentures remain attractive, the debentures must offer the lender a return equivalent to that which can be obtained from similar financial instruments in the market place at that time. In order to achieve this return, debentures are often offered at a discount or at a premium. Debenture-holders who hold secured debentures have the assurance that in the event of the company experiencing financial hardship, the amount which the debenture-holder has lent to the company is secured by an asset such as land and buildings. This is not the case if debentures are unsecured.

5.19
Depreciation expense account is a nominal account. It represents the portion of the depreciable amount of an asset which is allocated to depreciation during a financial year. It thus represents the cost incurred by the business during the year for the use of an asset in earning income. As it is a nominal account, it is written off at the end of each financial year to the profit and loss account and the balance in the account at the beginning of each financial year will thus be nil. Accumulated depreciation account is a real account which is credited whenever depreciation expense is debited. As it is a real account, the balance in the accumulated depreciation account is not written off annually to the profit and loss account - rather, the annual depreciation change is "accumulated" in the accumulated depreciation account. Consequently, as an asset becomes older and more depreciation is written off, the balance in the accumulated depreciation account becomes larger. The net book value of the asset therefore becomes smaller, as book value is represented by the original cost less accumulated depreciation at the point in time when the financial position of the business is being reported.

5.20
As with all predictions, an estimate of future events is essential. The estimate that is required in this case is the rand amount of debtors who are unlikely to be able to settle their debts. When making predictions, the most common method is to use historical data in order to estimate the future. The assumption underlying this approach is that all other things remaining equal, the past will be repeated in the future. In addition to this, however, expected economic conditions should also be taken into account. For example, during a recession or before an expected recession it is likely that bad debts will increase rather than decrease. The data most frequently used to predict bad debts is a list of debtors, usually in the form of an age analysis, in which debtors are analysed by period and amount outstanding. Varying percentages for estimated doubtful debts can then be applied to the different categories of debtors. Alternative methods include the application of a single percentage to total debtors or to credit sales for the financial year.

5.21
The accrual basis of accounting recognises revenue as income when the criteria of performance, measurability and collectibility have been met. For most business operations, the delivery of the goods or provision of the services and the invoicing take place virtually simultaneously. As both parties are acting in good faith, the revenue is recognised as having been earned at that point. All recorded sales, both cash and credit, are therefore reflected in the income statement at the end of a period. Despite the recognition of all credit sales as revenue, it is widely known that, given the vagaries of business and the fact that no credit control system is infallible, certain of the revenue recognised will not ultimately be received in cash, that is, some debtors will default.

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At the end of a financial period, the risk of default is dependent upon the amount owed by debtors at that time. Some proportion of the debtors' amount - based on previous experience, knowledge of the debtors and predicted economic circumstances - must be set aside, in accordance with the concept of prudence, for the eventuality of non-payment by some debtors. Such a provision for doubtful debts also accords with the matching concept, as the amount, which may not be collected in the subsequent accounting period, is, in reality, a loss, which relates to the financial period in which the sale took place. For these reasons, a provision for doubtful debts must be created at each reporting date.

5.22
Robson Ltd
a) Original Plant and Machinery Calculation of depreciation for the year ended 30 June 20.1 Cost on 1 Jan 20.1 R120 000 Residual value R10 000 Depreciable amount R110 000 Amount written of each full financial year R110 000/10 R11 000 Additional plant and machinery: Cost on 1 Dec 20.4 Residual value Depreciable amount Depreciation 7 Months (63000/6) x (7/12) New plant manufactured: Cost (15 000 + 38 000) Depreciation 2 months R53 000 x 0,25 x 2/12 Total Depreciation for the year ended 30 June 20.4 R11 000 + R6 125 + R2208 b) R19 333 R53 000 R2 208 R66 000 R3 000 R63 000 R6 125

Income statement of Robson Ltd for the year ended 30 June 20.1 Income Depreciation Balance sheet at 30 June 20.1 Non CurrentAssets COST 120,000 66,000 53,000 239,000 ACCUMULATED DEPRECIATION 38,500 6,125 2,208 46,833 BOOK VALUE 81,500 59,875 50,792 192,167 xxx 19 333

Note to the balance sheet Plant and machinery is depreciated on a straight-line basis to reduce the assets to their estimated residual values, as follows: Acquired before 30 June 20.1 10 % p.a. Acquired during the current year 162/3% p.a. Manufactured 25% p.a.

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Workings: Book value of Plant and Machinery purchased on 1 January 20.1 Book value on 30 June 20.4 = R120 000 –(11 000 x 3½ years) = R120 000 – R38 500 = R81 500

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5.23
a) Fedoc Distributors Ltd General journal of Fedoc Distributors Ltd 20.0 Jul 1 Motor vehicles 30000 Bank 30000 Purchase of new vehicle Dec 1 Equipment 18000 Creditors' control (Quip Ltd) 18000 Purchase of equipment on credit 20.1 Jun 30 Depreciation 55 450 Accumulated deprec. on buildings 4000 Accumulated deprec. on motor veh. 18 000 Accumulated deprec. on equipment 33 450 Depreciation for the year as per accounting policies c) 20.1 Jun 30 Profit and loss Depreciation Closing transfer of depreciation d) Notes: 1. 55 450. 55 450

b)

Balance sheet at 30 June 20.1 Non Current assets Non Current assets COST

Note 1

758 550 BOOK VALUE 365,000 85,000 308,550 758,550

ACCUMULATED DEPRECIATION 25,000 65,000 169,450 259,450

Land and Buildings Motor Vehicles Equipment

390,000 150,000 478,000 1,018,000

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5.24
a) General journal of Sharkey (Pty) Ltd for January 20.1 3 7 Bad debts 500 J Gone 500 Account written off as bad Bank 140 Bad debts 560 S Shaky 700 Received 20c in the R1 from insolvent estate Bad debts 260 M Maybe 260 Account written off as bad L Lazarus 360 Bad debts recovered 360 L Lazarus, previously written off reinstated as a debtor Bank 360 L Lazarus 360 Account settled Bank 7160 Debtors 7160 Cash received from debtors (7 300 - 140) Debtors (specified individually) 8600 Sales 8600 Credit sales for the month Profit and loss 960 Bad debts recovered 360 Bad debts expense Closing transfer (500 + 560 + 260 - 360)

11 14 14 31 31

b)

31

1320

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5.25
Gemini Financial Brokers Limited
a) AND b) General Ledger
Ordinary share capital 20.1 Feb 1 Balance 22 Bank Longterm loan 20.1 Feb 1 Balance Investments 20.1 Feb 20.1 Feb 1 Balance 1 Balance b/d 127,500 Office equipment

b/d 100,000 10,000

b/d

20,000

20.1 Feb

1 3 9 19 22

Mar

1

b/d 15,000 Accumulated depreciation - office equipment 20.1 Feb 28 Depreciation Bank 20.1 Balance b/d 16,208 Feb 5 Wages Div. received 4,800 7 Electricity Serv. rendered 9,650 12 Wages Comm. earned 4,679 15 Cons. stores Ordinary share 21 Wages capital 10,000 23 Salaries 26 Rent Feb 28 Balance 45,337 Balance b/d 22,870 Services rendered 20.1 Feb 1 Balance 9 Bank Commission earned 20.1 Feb 1 Balance 19 Bank Dividends received 20.1 Feb 1 Balance 3 Bank Salaries

3,000 700 642 700 1,435 1,350 16,340 1,300 22,870 44,337

c/d

b/d 293,800 9,650 303,450 b/d 84,630 4,679 89,309 4,800 4,800 9,600

b/d

20.1 Feb

1 Balance 23 Bank

b/d 188,345 16,340 204,685 Rent b/d 5,500 1,300 6,800 Wages 23,000 700 700 1,350 25,750

20.1 Feb

1 Balance 26 Bank

20.1 Feb

1 5 12 21

Balance Bank Bank Bank

b/d

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Electricity 20.1 Feb 1 Balance 7 Bank b/d 7,457 642 8,099 Consumable stores 20.1 b/d 120,220 Feb 28 Consumable stores 1,435 onhand 113,115 Interest on loan

20.1 Feb

1 Balance 15 Bank

8,540

20.1 Feb 28 Accrued expenses 3,600 Consumable stores on hand 20.1 Feb 28 Cons stores 8,540 Depreciation 20.1 Feb 28 Acc Dep. 3,000 [Off Equip] Accrued expenses 20.1 Feb 28 Interest on loan
c)

3,600

Post adjustment trial balance at 28 February 20.1 Debit Credit Ordinary share capital 110,000 Long-term loan 20,000 Investments 127,500 Office equipment 15,000 Acc dep: Equipment 3,000 Bank 22,870 Services rendered 303,450 Commission earned 89,309 Dividends received 9,600 Salaries 204,685 Rent 6,800 Wages 25,750 Electricity 8,099 Consumable stores 113,115 Interest on loan 3,600 Consumable stores on hand 8,540 Depreciation 3,000 Accrued expenses 3,600 538,959 538,959

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d)

Income statement for the year ended 28 February 20.1 Income Services rendered Commission earned Dividends received Less: Expenses Salaries Rent Wages Electricity Consumable stores Interest on loan Depreciation Net income Equity and Liabilities Shareholders' equity Share capital Retained income Long term loan Assets Non Current assets Investments Net current assets Current assets Stock Bank Less Current liabilities Accrued expenses 402,359 303,450 89,309 9,600 365,049 204,685 6,800 25,750 8,099 113,115 3,600 3,000 37,310

Balance sheet at 28 February 20.1 147,310 110,000 37,310 20,000 167,310 1 12,000 127,500 27,810 31,410 8,540 22,870 3,600 3,600 167,310 NOTE 1 Office equipment Cost Accumulated depreciation 15,000 3,000 Book value 12,000

e)

Return on equity = 37 310/100000 = 37,3% OR = 37 310 / 167 310 = 22,3% Note that conceptually, ROE should be calculated on the amount invested at the beginning of the period. If additional capital is injected, the weighted average of the capital investment over the period should be used. As the additional amount of R10 000 was invested very close to the end of the year, the first calculation of around 37% is quite accurate. In practice, analysts tend to use the second calculation (the equity at the end of the period). While this is not conceptually appealing, the most significant issue is that the formula chosen be used consistently over the years for comparison.

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f)

The market value of the company's investments may have changed There may have been a change in key personnel The economic climate may have changed Competitors may have entered the company's market Demand for the services of the company may have changed These factors will affect the value of the business and its future prospects. The level of income earned by the company is adequate to cover the interest expense, without incurring a loss. The company is, furthermore, sufficiently liquid to pay the interest due. No guarantee exists, however, that the company will still be liquid enough to repay the loan on 30 April 20.4.

g)

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5.26
Namesor (Pty) Limited: General ledger
Bank 10 Sept 1 Balance b/d 2 Commission rec 17 6 Commission rec 17 8 Debtors 22 Oct 1 Balance Share capital 11 b/d 12,160 2,500 4,800 2,000 21,460 15,590 Sept Stock of stationery 12 Sept 1 Balance 1 Creditors Office equipment 13 Sept 1 Balance 1 Creditors 5 Creditors Motor vehicle 14 Sept 1 Balance Property 15 1 Balance Mortgageloan 16 b/d 21 435 150 585 7,395 4,500 950 12,845 8,100 1 Balance b/d Sept 3 Creditors 4 Advertising 9 Salaries 10 Telephone 30 Balance 21 18 19 20 c/d 4,650 150 900 170 15,590 21,460

40,500

b/d 21 21

b/d

Sept

b/d

131,000 Sept 1 Balance 1 Balance 2 Bank 6 Bank 7 Debtors b/d b/d 10 10 22 60,000 68,100 2,500 4800 2,000 77,400

Commission received 17 Sept

Sept

Advertising 18 1 Balance 4 Bank Salaries 19 1 Balance 9 Bank Telephone 20 1 Balance 10 Bank

b/d 10

730 150 880 7,400 900 8,300

Sept

b/d 10

Sept

1,380 170 1,550 Creditors (Office Suppliers Limited) 21 Sept 3 Bank 10 4,650 30 Balance c/d 950 5,600

b/d 10

Sept

1 Stationery 1 Equipment 5 Equipment 1 Balance 8 Bank

12 13 13 b/d 10

Oct Debtors (JStreet) 22 Sept 7 Commission rec c) Trial balance at 30 September 20.0 17 2,000 Sept

150 4,500 950 5,600 950 2,000

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Bank Share capital Stock of stationery Office equipment Motor vehicle Property Mortgage loan Commission received Advertising Salaries Telephone Creditors

Fol. 10 11 12 13 14 15 16 17 18 19 20 21

Debit 15,590 585 12,845 8,100 131,000

Credit 40,500

60,000 77,400 880 8,300 1,550 178,850 950 178,850

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5.27
Rolling Lawns (Pty) Ltd General ledger of Rolling Lawns for April 20.1
Apr 1 3 11 28 Balanceb/d Serv. rendered Serv. rendered Serv. rendered Bank 9,540 Apr 1,678 2,500 2,879 1 4 7 9 15 17 28 Telephone 56 Machinery 483 Consumable stores 253 Advertising 20 Repairs 732 Wages 769 Loan:Standard Bank 2,500 Interest on loan 2,300 Fuel 152 Office equipment 900 Stationery 75 30 Balancec/d 8,657 16,597

May Apr

1 Balanceb/d 1 Balanceb/d

16,597 8,657

Cash float 50 Share capital Apr 1 Balanceb/d 10,000

Apr Apr

1 Balanceb/d 1 Balanceb/d 4 Bank

Vehicles 24,653 Machinery 11,500 483 11,983 Office equipment 900 Loan:Standard Bank 2,000 Apr 1 Balanceb/d 23,000 25,000 May 1 Balanceb/d Telephone 2,682 56 2,738 25,000 25,000 23,000

Apr Apr

30 Bank 28 Bank 30 Balancec/d

Apr

1 Balanceb/d 1 Bank

Apr

Consumable stores expense 1 Balanceb/d 2,890 7 Bank 253 3,143 1 Balanceb/d 9 Bank Advertising 703 20 723 Repairs 682 732 1,414

Apr

Apr

1 Balanceb/d 15 Bank

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Wages Apr 1 Balanceb/d 17 Bank 2,596 769 3,365 Interest on loan 2,500 2,500 5,000 Fuel Apr 1 Balanceb/d 28 Bank 560 152 712 Stationery 109 75 184 Services rendered Apr 1 Balance b/d 3 Bank 11 Bank 28 Bank 23,465 1,678 2 500 2,879 30 522

Apr

1 Balanceb/d 28 Bank

Apr

1 Balanceb/d 28 Bank

c)

Trial balance of Rolling Lawns (Pty) Ltd at 30 April 20.1 Bank Cash float Share capital Vehicles Machinery Office equipment Loan:Standard Bank Telephone Consumable stores expense Advertising Repairs Wages Interest on loan Fuel Stationery Services rendered Debit 8,657 50 24,653 11,983 900 23,000 2,738 3,143 723 1,414 3,365 5,000 712 184 63,522 30,522 63,522 Credit

10,000

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d)

Income statement of Rolling Lawns for the six months ended 30 April 20.1 INCOME Services rendered EXPENSES Telephone Consumable stores Advertising Repairs Wages Interest on loan Fuel Stationery Net income for the period 30,522 30,522 17,279 2,738 3,143 723 1,414 3,365 5,000 712 184 13,243

Balance sheet at 30 April 20.1 Equity and Liabilities Shareholders' equity Share capital Retained income Longterm liabilities 20% loan Assets Non Current assets Vehicles Machinery Office equipment Current assets Bank Cash float 23,243 10,000 13,243 23,000 23,000 46,243 37,536 24,653 11,983 900 8,707 8,657 50 46,243

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5.28
BALANCE SHEET OF GALACTIC ON 31 MARCH 20.6 ASSETS Non Current Assets At cost Accumulated Deprec Investment in Wonder Ltd Net Current Assets Current Assets Inventory (302 500 + 3 400) Debtors (421 000 - 400) Expenses Prepaid Current Liabilities Bank Overdraft Creditors Expenses Accrued (Interest) Receiver for Tax Shareholder for Dividends EQUITY AND LIABILITIES Ordinary Shareholders Share Capital Retained Income Long-term Debentures 170,000 510,000 340,000 100,000 302,100 729,700 305,900 420,600 3,200 427,600 127,700 216,000 2,700 11,200 70,000 572,100 512,100 100,000 412,100 60,000 572,100

INCOME STATEMENT OF GALACTIC FOR THE YEAR ENDED 31 MARCH 20.1 Sales Less : Cost of Sales Gross Profit Less: Expenses Salaries Administrative Expenses Operating Expenses Bad Debts Depreciation Profit before interest and tax Interest on debentures Net Profit before Taxation Taxation Net Profit after tax Beginning retained earnings Ending retained earnings 995,000 454,700 540,300 349,000 199,300 88,900 29,100 1,700 30,000 191,300 10,800 180,500 23,400 157,100 325,000 412,100

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5.29
Post Adjustment Trial Balance of Cotton Knitters Ltd at 31 March 20.3 Ordinary shares of R1 150,000 Retained Income 429,230 12% Debentures 50,000 Vehicles 236,000 Accumulated Depreciaiton on Vehicles 101,800 Bank 35,770 Creditors 267,830 Debtors (548900-900) 548,000 Investment in Associate company 165,000 Inventory 542,900 Interest Payable * 3,000 Stationery on hand * 1,750 Salaries Payable* 1800 SARS for Tax 51900 Sales 1,674,340 Cost of Sales 674,200 Salaries Payable (98650+1800) 239,620 Administrative Expenses (98650-1750) 96,900 Operating Expenses 34,500 Bad Debts (2560+900) 3,460 Interest on Debentures (3000+3000) 6,000 Taxation Expense 98,600 47,200 Depreciation (20% x R236000) 2,729,900 2,729,900

INCOME STATEMENT OF COTTON KNITTERS FOR THE YEAR ENDED 31 MARCH 20.3 Sales Less : Cost of Sales Gross Profit Less: Expenses Salaries Administrative Expenses Operating Expenses Bad Debts Depreciation Profit before interest and tax Interest on debentures Net Profit before Taxation Taxation Net Profit after tax Beginning retained earnings Ending retained earnings 1,674,340 674,200 1,000,140 421,680 239,620 96,900 34,500 3,460 47,200 578,460 6,000 572,460 98,600 473,860 429,230 903,090

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BALANCE SHEET OF COTTON KNITTERS ON 31 MARCH 20.3 ASSETS Non Current Assets At cost Accumulated Deprec Investment in Associate Net Current Assets Current Assets Inventory Debtors Expenses Prepaid Current Liabilities Bank Overdraft Creditors Expenses Accrued (Interest) Receiver for Tax Shareholder for Dividends

134,200 236,000 -101,800 165,000 803,890 1,092,650 542,900 548,000 1,750 288,760 -35,770 267,830 4,800 51,900

1,103,090

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5.30
Unisex Hairstylists Limited a)
Trial balance of Unisex Stylists Limited at 31 March 20.1 REAL ACCOUNTS Share capital Vehicles Accumulated depreciation on vehicles Furniture Accumulated depreciation on furniture Equipment Accumulated depreciation on equipment Stock of consumable stores Non Current deposit: Santambank Debtors Cash at bank Long-term loan from Standard Bank Creditors Accrued expenses NOMINAL ACCOUNTS Electricity and water Salaries and wages Advertising Interest on loan Rent paid Stationery Telephone Fee income Repairs Depreciation Bank charges Consumable stores 80,000 84,600 20,000 30,000 600 21,000 6,200 3,450 10,000 740 8,397 5,000 3,740 2,460 1,341 17,927 2,349 550 12,370 491 609 92,886 1,906 12,390 876 1,890 210,886

210,886

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b) and c)

Income statement of Unisex Stylists Limited for the year ended 31 March 20.1 Fee income 92,886 Expenses 52,699 Electricity and water 1,341 Salaries and wages 17,927 Advertising 2,349 Interest on loan 550 Rent paid 12,370 Stationery 491 Telephone 609 Repairs 1,906 Depreciation 12,390 Bank charges 876 Consumable stores 1,890 Net Profit 40,187 Balance sheet of Unisex Stylists Limited at 31 EQUITY AND LIABILITIES Shareholders' equity 120,187 Share capital 80,000 Retained income 40,187 Long-term liability 5,000 Current liabilities 6,200 Creditors 3,740 Accrued expenses 2,460 131,387 ASSETS Non Current assets Note 1 108,800 Investments Fixed deposit: Santambank 10,000 Current assets 12,587 Stock of consumable stores 3,450 Debtors 740 Cash at bank 8,397 131,387 NOTE 1 Vehicles Furniture Equipment Cost AccDep Bookvalue 84,600 20,000 64,600 30,000 600 29,400 21,000 6,200 14,800 135,600 26,800 108,800

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5.31
a)
Taurus Financial Brokers Limited Journal of Taurus Financial Brokers Limited for February 20.1 3 Bank 7,560 Investment revenue 7,560 Income received from investments 5 Wages 700 Bank 700 Wages paid for the week 7 Utilities expense 442 Bank 442 Payment for electricity 9 Bank 8,450 Fee revenue 8,450 Income received for services rendered 12 Wages 700 Bank 700 Wages paid for the week 15 Consumable stores 1,565 Bank 1,565 Payment for petrol 17 Creditors 1,200 Bank 1,200 Payment to creditors 19 Bank 3,590 Fee revenue 3,590 Received a cheque for commission 21 Wages 1,550 Bank 1,550 Wages paid for the remainder of month 22 Bank 12,000 Share capital 12,000 12 000 additional shares issued 23 Salaries 18,340 Bank 18,340 Salaries paid for the month 28 (i) Rent expense 500 Accrued expenses 500 February rent payable Accrued income 200 Rent revenue 200 February rent receivable (ii) Depreciation 3,000 Accumulated depreciation 3,000 on office equipment. Depreciation of office equipment for the year (15 000 x 20%) (iii) Accrued income 2,685 Investment revenue 2,685 Interest receivable on investments (iv) Salaries 2,300 Wages 2,300 Correction of incorrect entry (v) Utilities expense 296 Accrued expenses 296 February 20.1 electricity and water bills due (vi) Interest on loan 9,000 Accrued expenses 9,000 Interest due for the year (50 000 x 18%) (vii) Consumable stores on hand 5,250 Consumable stores 5,250 Consumable stores on hand at 28 February 20.1 (viii)Taxation paid 18,350 Taxation owing 18,350 Company tax due for the year (ix) Dividends 5,000 Shareholders for dividends 5,000 Dividend declared on shares issued before 15 February 20.1

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b)

Ledger of Taurus Financial Brokers Ltd Feb 1 3 9 19 22 Balance b/d Investment revenue Fee revenue Fee revenue Share capital Bank 30,708 Feb 7,560 8,450 3,590 12,000 5 7 12 15 17 21 23 28 Wages Utility expense Wages Consumable stores Creditors Wages Salaries Balance c/d 700 442 700 1,565 1,200 1,550 18,340 37,811 62,308

Mar

1 Balance

b/d

62,308 37,811 Investment revenue Feb 3 Bank 28 Accrued income Wages 33,000 Feb 700 700 1,550 35,950 33,650

7,560 2,685 10,245 2,300

Feb

1 5 12 21

Balance Bank Bank Bank

b/d

28 Salaries

Feb

1 Balance 23 Bank 28 Wages

Salaries b/d 288,345 18,340 2,300 308,985 b/d Utilities expense 8,457 442 296 9,195 Fee revenue Feb 1 Balance 9 Bank 19 Bank b/d 515,230 8,450 3,590 527,270 5,250

Feb

1 Balance 7 Bank 28 Accrued expenses

Feb

1 Balance 15 Bank

Consumable stores b/d 28,720 Feb 28 Consumable stores 1,565 30,285 Creditors 1,200 Feb 12,800

Feb

17 Bank

1 Balance

b/d

14,000

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Share capital Feb

1 Balance 22 Bank

b/d 100,000 12,000 112,000

Feb

1 Balance 28 Accrued expenses

b/d

Rent expense 5,500 500 6,000 Rent revenue Feb 28 1 Balance Accrued income b/d 2,200 200 2,400 500 296 9,000 9,796

Accrued expenses Feb 28 Rent expense Utilities expense Interest on loan Accrued income 200 2,685 2,885 Depreciation Feb 28 Accum. depreciation on office Equip 3,000

Feb

28 Rent revenue Investment revenue

Accumulated depreciation on office equipment Feb 28 Depreciation Feb Feb Feb 28 Accrued expenses 28 Consumable stores 1 Balance 28 Taxation owing Interest on loan 9,000 Consumable stores on hand 5,250 Tax paid b/d 6,200 18,350 24,550 Taxation owing Feb 28 Taxation paid Dividends Feb 28 Shareholders for dividends 5,000 Shareholders for dividends 20.1 Feb 28 Dividends

3,000

18,350

5,000

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c)

Taurus Finanical Brokers Limited Post-adjustment trial balance at 28 February 20.1 Share capital 112,000 Long-term loan @ 18% 50,000 Office equipment 15,000 Accumulated depreciation:Equipment 3,000 Investments 257,000 Consumable stores on hand 5,250 Debtors 8,500 Accrued income 2,885 Bank 37,811 Creditors 12,800 Accrued expenses 9,796 Shareholders for dividends 5,000 Taxation owing 18,350 Fee revenue 527,270 Investment revenue 10,245 Rent revenue 2,400 Rent expense 6,000 Wages 33,650 Salaries 308,985 Utilities expense 9,195 Consumable stores 25,035 Interest on loan 9,000 Depreciation 3,000 Tax paid 24,550 Dividends 5,000 750,861 750,861
d)

Closing transfers of Taurus Financial Brokers Limited for February 20.1 28 Fee revenue Rent revenue Investment revenue Profit and loss Closing entry i.r.o. of income accounts Profit and loss Rent expense Wages Salaries Utilities expense Consumable stores Interest on loan Depreciation Tax paid Closing entry in respect of expense accounts Profit and loss Retained income Closing of profit and loss to retained income Retained income Dividends Closing of dividends to retained income 527,270 2,400 10,245 539,915 419,415 6,000 33,650 308,985 9,195 25,035 9,000 3,000 24,550

120,500 120,500

5,000 5,000

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28

Feb

1 5 12 21

Balance Bank Bank Bank

b/d

Wages 33,000 Feb 700 700 1,550 35,950 Salaries 288,345 Feb 18,340 2,300 308,985

28 Salaries 28 Profit and loss

2,300 33,650 35,950

Feb

1 Balance 23 Bank 28 Wages

b/d

28 Profit and loss

308,985 308,985 9,195 9,195 527,270 527,270

Feb

1 Balance 7 Bank 28 Accrued expense

b/d

Utilities expense 8,457 Feb 28 Profit and loss 442 296 9,195 Fee revenue 515,230 Feb 28 Profit and loss 8,450 3,590 527,270 Consumable stores 28,720 Feb 28 Consumable stores 1,565 on hand Profit and loss 30,285 Rent expense 5,500 Feb 28 Profit and loss 500 6,000 Rent revenue 2,400 Feb 28 2,400 1 Balance Accrued income b/d

Feb

1 Balance 9 Bank 19 Bank

b/d

Feb

1 Balance 15 Bank

b/d

5,250 25,035 30,285 6,000 6,000 2,200 200 2,400 3000

Feb

1 Balance 28 Accrued expenses

b/d

Feb

28 Profit and loss

Feb

28 Accum Dep on office Equip 28 Accrued expenses 1 Balance 28 Taxation owing b/d

Depreciation Feb 28 Profit and loss 3,000 Interest on loan 9,000 Feb 28 Profit and loss Tax paid 6,200 Feb 18350 24550 Dividends Feb 5,000 28 Profit and loss

Feb Feb

9,000 24,550 24550

Feb

28 Shareholders for dividends 28 Profit and loss

28 Retained income

5,000

Feb

Investment revenue 10,245 Feb 3 Bank 28 Accrued income 10,245

7,560 2,685 10,245

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FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS

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Feb

28 Rent expense Wages Salaries Utilities expense Consumable stores Interest on loan Depreciation Tax paid Retained income

Profit and loss 6,000 Feb 28 Fee revenue Rentrevenue 33,650 Investmentrevenue 308,985 9,195 25,035 9,000 3,000 24,550 120,500 539,915 Retained income 5,000 Feb 28 Profit and loss 115,500 120,500 Mar 1 Balance

527,270 2,400 10,245

539,915 120,500 b/d 120,500 115,500

Feb

28 Dividends Balance

c/d

e)

Taurus Financial Brokers Limited Income statement for the year ended 28 February 20.1 INCOME 539,915 Fee revenue 527,270 Rent revenue 2,400 Investment revenue 10,245 EXPENSES 394,865 Salaries 308,985 Rent expense 6,000 Wages 33,650 Utilities expense 9,195 Consumable stores 25,035 Interest on loan 9,000 Depreciation 3,000 NET INCOME BEFORE TAXATION 145,050 TAXATION 24,550 NET PROFIT TO SHAREHOLDERS 120,500 ORDINARY DIVIDENDS 5,000 RETAINED INCOME AT END OF YEAR 115,500

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f)

Taurus Financial Brokers Limited Balance sheet at 28 February 20.1 EQUITY AND LIABILITIES Shareholders' equity 227,500 Share capital 112,000 Retained Income 115,500 Long-term liabilities Long-term loan @ 18% Current liabilities Creditors Accrued expenses Shareholders for dividends Taxation owing ASSETS Non Current assets Office equipment Cost Less Accumulated Depreciation Investments Current assets Consumable stores on hand Debtors Bank Accrued income 50,000 50,000 45,946 12,800 9,796 5,000 18,350 323,446 12,000 12,000 15,000 3,000 257,000 54,446 5,250 8,500 37,811 2,885 323,446
g) The return on equity earned by the shareholders amounts to 120 500 / 227 500 = 53% This would appear to be a very favourable return for shareholders, considering that it is the first year of operation. The company has paid out a dividend of R5 000; thus indicating the intention to retain most of its profits in the business for future growth. The return on the investment which the company has made amounts to 10 245 / 257 000 = 4,0% which is lower than the interest of 18% payable on the long-term loan. It is not clear, however, whether there has been any capital growth in the value of the investments; if there has been no capital growth, the investment could be utilized better by redeeming the long-term loan.

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h)

Alternative method 1 Treat the "Consumable stores" account as an asset account.
Consumable stores 28,720 Feb 28 Consumable stores 1,565 expense Balance 30,285 5,250

Feb

1 Balance 15 Bank

b/d

c/d

25,035 5,250 30,285

Mar Feb

1 Balance

b/d

Consumable stores expense 28 Consumable stores 25,035 Feb 28 Profit and loss

25,035

Alternative method 2 (as used in the solution) Treat the "Consumable stores" account as an expense account. Consumable stores 28,720 Feb 28 Consumable stores 1,565 on hand Profit and loss 30,285

Feb

1 Balance 15 Bank

b/d

5,250 25,035 30,285

Feb

28 Consumable stores

Consumable stores on hand 5,250

i)

(1) Investments - these are stated at cost and there is no indication of the market value. It is, therefore, difficult to assess whether the amount reflected in the balance sheet is over- or undervalued. The prudence concept requires the amount to be written down if the market value is lower than the cost. (The same reasoning applies in the case of consumable stores.) (2) Office equipment - this is stated at net book value and is unlikely to reflect its actual value. It is difficult to assess whether it is over- or under-valued because of the lack of information.

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5.32
a)

Wetwell (Pty) Limited General journal of Wetwell (Pty) Ltd for April 20.1 (Narrations have been omitted) April 30 Consumable stores expense 112 3,165 Stock of consumable stores 4 3,165 Accrued income 9 2,750 Service income 104 2,750 Prepaid expenses 10 1,428 Insurance 106 1,428 Stationery on hand 11 439 Stationery 107 439 Stationery 107 235 Salaries and wages 103 235 Electricity and water 108 345 Telephone 109 208 Accrued expenses 12 553 Depreciation 113 22,625 Accumulated depreciation on equipment XX 10,000 Accumulated depreciation on motor vehicles (5685 + 6940) XX 12,625 Deferred expenditure 15 42,533 Research and development 111 42,533 Taxation 114 26,450 Receiver of Revenue 16 26,450 Dividends 115 17,600 Shareholders for dividends 17 17,600

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b)

General ledger of Wetwell (Pty) Ltd Note: The closing journal entries from part (d) have also been entered in the ledger accounts which follow. Note: The general journal folio numbers have not been inserted in the above accounts. This should be done as soon as each amount is posted from the general journal to a general ledger account.
Share capital 1 20.1 Apr 30 Balance b/d 110,000 Bank 2 20.1 Apr 30 Balance b/d 31,257 Equipment 3 20.1 Apr 30 Balance b/d 50,000

20.1 Apr 30 Balance

May

1 Balance

Stock of consumable stores 4 20.1 b/d 3,525 Apr 30 Consumable stores expense Balance c/d 3,525 b/d 360 Motor vehicles 5

3,165 360 3,525

20.1 Apr 30 Balance

b/d

64,380 Creditors 6

20.1 Apr 30 Balance

b/d

28,690 Debtors 7

20.1 Apr 30 Balance

b/d

46,830

20.1 Apr 30 Balance a 20.1 Apr 30 Service income

Provisional tax payments 8 20.1 b/d 23,700 Apr 30 Receiver of Revenue Accrued income 9 2,750 Prepaid expenses 10

23,700

20.1 Apr 30 Insurance

1,428 Stationery on hand 11

20.1 Apr 30 Stationery

439 Accrued expenses 12

20.1 Apr 30 Electricity and water Telephone

345 208 553

Accumulated depreciation on equipment 13 20.1 Apr 30 Depreciation 10,000

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Accumulated depreciation on motor vehicles 14 20.1 Apr 30 Depreciation 12,625 Deferred expenditure 15 20.1 Apr 30 Research and development

42,533 Receiver of Revenue 16 20.1 Apr 30 Taxation 23,700 c/d 2,750 26,450 May 1 Balance Shareholders for dividends 17

20.1 Apr 30 Provisional tax payments Balance

26,450

b/d

26,450 2,750

20.1 Apr 30 Dividends

17,600 Retained income 18 20.1 17,600 Apr 30 Profit and loss c/d 57,759 75,359 b/d 57,759 Rental 101 20.1 20.1 31,500 Apr 30 Profit and loss

20.1 Apr 30 Dividends Balance May 1 Balance

75,359 75,359

20.1 Apr 30 Balance b/d

31,500

20.1 Apr 30 Balance

Advertising 102 20.1 b/d 17,983 Apr 30 Profit and loss Salaries and wages 103 20.1 b/d 82,377 Apr 30 Stationery Profit and loss 82,377 Service income 104 20.1 358,000 Apr 30 Balance Accrued income 358,000 Directors' fees 105

17,983

20.1 Apr 30 Balance

235 82,142 82,377

20.1 Apr 30 Profit and loss

b/d 355,250 2,750 358,000

20.1 Apr 30 Balance

b/d

40,000 Apr

30 Profit and loss

40,000

20.1 Apr 30 Balance

Insurance 106 20.1 b/d 14,850 Apr 30 Prepaid expenses Profit and loss 14,850

1,428 13,422 14,850

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20.1 Apr 30 Balance Salaries and wages

Stationery 107 20.1 b/d 1,548 Apr 30 Stationery on hand 235 Profit and loss 1,783 Electricity and water 108 20.1 b/d 11,780 Apr 30 Profit and loss 345 12,125 Telephone 109 20.1 b/d 1,590 Apr 30 Profit and loss 208 1,798 Motor vehicle expenses 110 20.1 b/d 7,420 Apr 30 Profit and loss

439 1,344 1,783

20.1 Apr 30 Balance Accrued expenses

12,125 12,125

20.1 Apr 30 Balance Accrued expenses

1,798 1,798

20.1 Apr 30 Balance

7,420

20.1 Apr 30 Balance

Research and development 111 20.1 b/d 65,200 Apr 30 Deferred expenditure Profit and loss 65,200

42,533 22,667 65,200

Consumable stores expense 112 20.1 20.1 Apr 30 Stock of consumable Apr 30 Profit and loss stores 3,165 Depreciation 113 20.1 Apr 30 Profit and loss 10,000 12,625 22,625 Taxation 114 20.1 Apr 30 Receiver of Revenue 26,450 Apr Dividends 115 20.1 17,600 Apr 30 Retained income 30 Profit and loss

3,165

20.1 Apr 30 Accumulated deprec. on equipment Accumulated deprec. on motor vehicles

22,625

22,625

26,450

20.1 Apr 30 Shareholders for dividends

17,600

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20.1 Apr 30 Rental Advertising Salaries and wages Directors' fees Insurance Stationery Electricity & water Telephone Motor vehicle expenses Research and development Consumable stores expense Depreciation Taxation Retained income
c)

Profit and loss 20.1 31,500 Apr 30 Service income 17,983 82,142 40,000 13,422 1,344 12,125 1,798 7,420 22,667 3,165 22,625 26,450 75,359 358,000

358,000

358,000

Wetwell (Pty) Ltd Post-adjustment trial balance at 30 April 20.1 Fol Debit Credit Real accounts Share capital 1 110,000 Bank 2 31,257 Equipment, at cost 3 50,000 Stock of consumable stores 4 360 Motor vehicles, at cost 5 64,380 Creditors 6 28,690 Debtors 7 46,830 Provisional tax payments 8 23,700 Accrued income 9 2,750 Prepaid expenses 10 1,428 Stationery on hand 11 439 Accrued expenses 12 553 Accumulated depreciation on equipment 13 10,000 Accumulated depreciation on motor vehicles 14 12,625 Deferred expenditure 15 42,533 Receiver of Revenue 16 26,450 Shareholders for dividends 17 17,600 Nominal accounts Rental 101 31,500 Advertising 102 17,983 Salaries and wages 103 82,142 Service income 104 358,000 Directors' fees 105 40,000 Insurance 106 13,422 Stationery 107 1,344 Electricity and water 108 12,125 Telephone 109 1,798 Motor vehicle expenses 110 7,420 Research and development 111 22,667 Consumable stores expense 112 3,165 Depreciation 113 22,625 Taxation 114 26,450 Dividends 115 17,600 563,918 563,918

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d)

General Journal of Wetwell (Pty) Ltd for April 20.1 Apr 30 Profit and loss Rental Advertising Salaries and wages Directors' fees Insurance Stationery Electricity and water Telephone Motor vehicle expenses Research and development Consumable stores expense Depreciation Taxation 30 Service income Profit and loss Retained income Dividends Receiver of Revenue Provisional tax payments 282,641 31,500 17,983 82,142 40,000 13,422 1,344 12,125 1,798 7,420 22,667 3,165 22,625 26,450 358,000 358,000 17,600 17,600 23,700 23,700

Profit and loss 75,359 Retained income 75,359 Once the amounts above and in part (a) have been posted to the ledger accounts, the folio numbers of the accounts should be inserted in the general journal.
e)

Income statement of Wetwell (Pty) Ltd for the year ended 30 April 20.1 Service income Less: Expenses Rental Advertising Salaries and wages Directors' fees Insurance Stationery Electricity and water Telephone Motor vehicle expenses Research and development Depreciation Consumable stores expense Net income before taxation Taxation Net profit after taxation Dividends Retained income for the year 358,000 256,191 31,500 17,983 82,142 40,000 13,422 1,344 12,125 1,798 7,420 22,667 22,625 3,165 101,809 26,450 75,359 17,600 57,759

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f)

Balance sheet of Wetwell (Pty) Limited at 30 April 20.1 EQUITY AND LIABILITIES Shareholders' equity 167,759 Share capital 110,000 Retained income 57,759 Current liabilities 49,593 Creditors 28,690 Accrued expenses 553 Receiver of Revenue 2,750 Shareholders for dividends 17,600 217,352 ASSETS Non Current assets 91,755 Equipment 40,000 At cost 50,000 Less Accumulated Depreciation 10,000 Motor vehicles 51,755 At cost 64,380 Less Accumulated Depreciation 12,625 Deferred expenditure 42,533 Current assets 83,064 Stock (360 + 439) 799 Debtors 46,830 Accrued income 2,750 Prepaid expenses 1,428 Bank 31,257 217,352
g) The company's results reflect a positive start for the business. The net profit percentage (after tax) of 21.1% (75 359/358 000) should be compared to percentages achieved by other companies in the same business in order to assess the results more objectively. The treatment of the research and development expenditure has a material impact on the results (see (h) for further comments). h) In determining the expense for the year for research and development, the amount of R21 200, which was in respect of research done, has been written off during the year. This is in line with the prudence concept as it is difficult to estimate accurately any future income which will arise from the research alone. Andries has estimated future income from implementing the new method and, consequently, the expenditure on developing the method (R44 000) will be split over the periods during which income is expected to be earned. Expected income from Development 20.1 R20 000 20.2 R350 000 20.3 R230 000 Total R600 000 Amount spent or Research to be written off each year. This year = R21 200 Amount spent on Development to be matched to expected benefit. This year = R44 000 Research write off = 20 000/600 000 x R44 000 = R1 467 Deferred write off = R44 000 – R1 467 = R42 533

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39

i)

Points that should be considered, which will affect the usefulness of the financial statements:  inflation (use of historic costs)  estimates  judgements  first year of operating makes comparisons difficult.

j)

 Depreciation - estimating the useful lives of assets.  Research and development - estimating future income which will arise from the new   
technique. Accrued expenses - estimating the amount of expenses incurred at year-end. Non Current assets - estimating their residual value (if any). Taxation - although the accountant has established the tax liability precisely, this is unusual because in practice, this is normally an estimated amount. The final assessment by the Receiver of Revenue is normally made a considerable time after the year-end.

k) Net income represents the amount which has been earned by the company over the financial period. This is used to measure the performance of the company. The net income after tax is the amount that the directors have available to distribute to shareholders. Net income thus represents the return by the company on its activities. Dividends represent the return to the shareholders on their investment. The amount of dividends distributed may be the same as net income, but this is unlikely. Normally, a portion of the company's earnings is retained for future growth of the company. l) Book value of a share = = = Net asset value / Number of shares 167 759 / 220 000 76c per share

The market value of the share will depend on the perception by the public of the future of the company. Depending on this perception, the market value may differ from the book value.

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40