DEPARTMENT OF ACCOUNTANCY

FINANCIAL ACCOUNTING

SCC4000

ASSESSMENT 1 - 2021

INFORMATION

ASSESSORS: M.D Ramaru

MODERATORS: L Maunzagona

READING TIME: 22,5 MINUTES

WRITING TIME: 112,5 MINUTES

MARKS: 75

 THE INFORMATION CONSISTS OF 5 PAGES AND 1 QUESTION.

(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’ 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: SCC 4000 /ASS 1-2021

QUESTION 1 (75 MARKS)

You have recently been appointed as the new Accountant for WHY (We Help You) Limited, a diversified
company with interest in property as well as the supply of computer related items and other IT related
services.

You have undergone the necessary training required before commencing with the job. On the 2nd week at
the company you received the following email from the CFO of the company, Bill Bezos whom you report
to.

WELCOME EMAIL FROM BILL BEZOS TO NEW ACCOUNTANT

From: Bill Bezos

Sent: Monday 1 February 2021, 7:45 AM
To: New Accountant
Subject: Welcome
Attachment: Trial Balance year ended 31 December 2020

Hi there
Welcome aboard. It’s your first week at WHY (We Help You) Limited and we are so excited to have you join
the team and I believe you are excited to start working. It is even more interesting that you join us during
these times of dealing with the Covid-19 pandemic!

Your role as an accountant is very important to the overall financial reporting as I will be relying on your
expertise to get the numbers right. It is great that you start this week because we have just finalized our
trial balance (which I attach on this email) and we are ready to start preparing the financial statements
for the 2020-year end which I will greatly appreciate your assistance with. You will report directly to me
and I will do a final review of your work before it is reported in higher structures in the company.

In addition, I would like you to assist me with the treatment of revenue for a contract that we entered into
with Solid-state for the supply of computer equipment and services. I would just like to confirm if I have
accounted for the contract correctly especially on step 2 to step 4. I trust that your knowledge is still fresh
since you finished your studies recently.

I attach 2 documents to this email:

1. Attachment 1: The trial balance of the company for the year ended 31 December 2020
2. Attachment 2: The terms of the contract entered between WHY Ltd and Solid-state.

Please note that this is confidential information at this stage.

Feel free to shout, if you need any clarification or assistance.

All the best, Cheers .

Regards
Bill Bezos
CFO: WHY Ltd

Attachments to email: 1. Trial Balance year ended 31 December 2020

2.Terms and conditions of contract for supply of computer equipment to Solid State
COURSE: SCC 4000 /MAIN EXAM-2020

Attachment 1- Trial balance

WHY Ltd Trial balance at 31 December 2020

Debit Credit

Ordinary share capital 3 000 000

Retained earnings 2 035 500

Revaluation surplus (31/12/2019) 350 000

Land: (31/12/2019) 1 250 000 -

Investment property: Fair value (31/12/2019) 7 500 000 -

Plant & Equipment: Cost 3 000 000 -

Plant & Equipment: Accumulated depreciation (31/12/2019) - 1 200 000

Patent: Cost 1 650 000 -

Patent: Accumulated Impairment (31/12/2019) - 165 000

Long term Borrowings - 7 800 000

Accounts Receivable 1 012 500 -

Inventory 3 337 500 -

Bank and cash 640 500 -

Deferred Tax asset 190 000 -

Tax receivable 230 000 -

Accounts payable - 1 410 000

Sales - 12 937 500

Cost of sales 8 212 500 -

Rent income - 750 000

Salaries expense 1 470 000 -

Bad debts expense 94 500 -

Marketing expense 150 000 -

Repairs and maintenance 45 000 -

Rent expense 180 000 -

Other costs 355 500 -

Interest expense 330 000 -

29 648 000 29 648 000

Page 3 of 5
COURSE: SCC 4000 /MAIN EXAM-2020

Additional information:

1. The ordinary share capital consists of 3 000 000 ordinary shares of R1 par value
2. R750 000 of the borrowings are repayable on 31 July 2021
3. Land is the only asset class that is accounted for using the revaluation model. It was
discovered towards the end of the year that the area in which the Land is located has been
infested with criminal activities that it has become less desirable for people to purchase land
in that area. There is no solution in sight for this problem. After finding this out WHY called in
a property valuator to come and value the land and it was found that the fair value of this
property is R750 000 and the Value in use was calculated at R820 000.
4. WHY Limited measures its investment property using the fair value model. The fair value of
the investment property at 31 December 2020 is R8 100 000. This property was purchased
3 years ago at a cost of R5 700 000.
5. The Plant and equipment was purchased on 1 January 2018 at a cost of R3 000 000.
Depreciation on plant and equipment is recognized on the straight-line method. On
acquisition, the directors estimated the useful life to be five years with no residual value.
During the current year, the directors reassessed the estimated useful life to be eight years
in total with no residual value.
6. The patent was purchased on 1 July 2014 at a cost R1 650 000. The directors have
determined that the patent has an indefinite useful life. The recoverable amount of the patent
at 31 December 2020 is assessed at R1 395 000.
7. An amount of R45 000 of the marketing expense included on the draft trial balance has been
paid in advance in respect of the 2021 financial period.
8. WHY Limited classifies expenses according to their function. Management categorize the
functions of the business into areas of sales, administration and research & development.
- Salaries of R675 000 relate to the administration” function and R795 000 to the research
and development function.
- The bad debts, marketing and depreciation/impairment on plant & equipment and land
relate to the administration function.
- The repairs and maintenance, rent and impairment on patent relate to the research and
development function.
- The other costs are individually not material and R243 000 relates to the administration”
function and R112 500 to the research and development function.
9. Interest of R30 000 for December 2020 has not yet been paid
10. Current income tax of R549 000 has been correctly calculated but has not been recorded
(journalized) or paid
11. The balance for deferred tax was sitting at R245 000 (deferred tax asset) as at 31 December
2019 and R190 000 (deferred tax asset) as calculated in the current year ended 31
December 2020, however deferred tax implications on investment property, plant and
equipment and land has not been accounted for yet in the current year.
Land was purchased at a cost of R900 000 in 2010.
The South African Revenue Service (SARS) grants an allowance on plant and equipment in
accordance with section 12C of the Income Tax Act on a 40:20: 20:20 basis which is not
apportioned for part of a year.
The normal income tax rate is 28% and the capital gains tax inclusion rate is 80%. Ignore
any Value-Added Taxation (VAT).
12. Dividends of R782 500 were declared and paid at year end, 31 December 2020.
13. A capitalization issue of one share for every twenty held was authorized by the directors and
approved by the shareholders at a special general meeting held during November 2020 The
capitalization issue has not yet been recorded.

Page 4 of 5
COURSE: SCC 4000 /MAIN EXAM-2020

Attachment 2

WHY Limited sold some hard drives to a Cape town based company called Solid-state. WHY Limited
and Solid-state are long standing business partners and for that reason should Solid-state require
hard drives, they are procured exclusively from WHY Limited.

WHY Limited and Solid State entered into the following agreement:

- Contract date: 22 December 2019

- Contract price R3 million
- Contract obligations:
o Supply of hard drives
o Installation of the hard drives at the Cape Town head office of the company and
o Providing maintenance services for three years whereby WHY limited will be
expected to provide backup whenever needed.

The three year maintenance plan is very popular with all WHY Limited customers. The stand alone
prices for the various components were as follows: hard drives are R480 000, the installation
process is R1 260 000 and the three year maintenance is R1 980 000.

Delivery and installation information:

The hard drives were delivered to the Cape Town head-office on 28 December 2019 but were unable
to use them until the WHY Limited installation team arrived at the offices to install them.

The installation team arrived and completed the installation on 9 January 2020

The contract price (R3 000 000) was payable by Solid State in instalments as follows:

- Half of the total contract price (R1 500 000) was to be paid on 28 December 2019 and it
was duly received on the due date.
- The balance of the contract price is due in two equal instalments on 31 December 2020
and 31 December 2021.

WHY Ltd offers the option of to pay in instalments to all its customers.

The contract does not contain a significant financing component.

Page 5 of 5