FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accounting

DEPARTMENT Department of Accountancy
CAMPUS APK
MODULE NAME Accounting 200
MODULE CODE ACC200
SEMESTER First
ASSESSMENT OPPORTUNITY, Assessment 1,
MONTH AND YEAR March 2023

ASSESSMENT 10 March 2022 SESSION 09:00-10:53

DATE
ASSESSOR(S) Prof M Malan; Mr Z Mayet, Ms T Mokgatle
MODERATOR(S) Ms A Gazi-Babana, Ms Z Patel
DURATION 113 minutes TOTAL MARKS 75

NUMBER OF PAGES OF QUESTION PAPER (Including cover 8

page)

Question Marks Minutes Coloured paper

Question 1: Conceptual framework 25 marks 38 minutes Blue
Question 2: PPE 30 marks 45 minutes Red
Question 3: Intangible assets 20 marks 30 minutes White

Page 1 of 8
INFORMATION/INSTRUCTIONS:
___________________________________________________________________________
• There are 3 questions, and you must answer all of them.
• Make sure that your student number is clearly written on all pages and that your exam
number appears in the left-hand corner of every page.
• Answer each question separately on the correct coloured paper as indicated.
• Read the questions carefully and answer only what is required.
• Number your answers clearly and correctly as per the question paper.
• Please cross out any open sections on the paper.
• You do not have to hand-in the question paper.

COMPANY INFORMATION:
___________________________________________________________________________

In this assessment, the same company, Prevail (Pty) Ltd will be used for all 3 questions. Each
question should still be considered separately and answered on the coloured paper as indicated
on the cover page.

The company information for this assessment is as follows:

Prevail (Pty) Ltd (“Prevail”) is domiciled (situated) in South Africa with its headquarters in
Grabouw, Western Cape. Prevail is a bicycle manufacturing company who supplies the local and
international market. Prevail invests heavily in research when designing and manufacturing their
bicycles, components and accessories. Prevail’s focus is on pushing technologies to its limits to
develop the fastest bicycles and bicycle products without compromising quality and comfort.
Prevail has a financial year-end of 31 December 2022 and applies International Financial
Reporting Standards (IFRS) in its financial statements.

Page 2 of 8
QUESTION 1 – Conceptual Framework (25 MARKS)

Sponsorship of ‘Cycling Buddies’

Cycling Buddies is a youth development racing cycling team for underprivileged kids based in
Paarl in the Western Cape.

On 1 November 2022, Prevail reached an agreement with Cycling Buddies to be one of the main
sponsors of Cycling Buddies. The sponsorship agreement is from 1 November 2022 – 31 October
2024 (i.e. 2 years). On 1 November 2022, Prevail sponsored bicycles and accessories to Cycling
Buddies.

The reason for Prevail’s sponsorship is to create brand awareness to the general public via
Cycling Buddies with the intention of improving future sales. Cycling Buddies has a significant
social media presence with many followers. Under the sponsorship agreement, Cycling Buddies
is obligated to regularly post social media content with the items sponsored by Prevail, thus
resulting in an increase in future sales.

Donation of bicycles to Swellendam Primary School

On a recurring basis, Prevail donates bicycles to a pre-selected school/s to encourage the sport
of cycling and promote healthier living amongst the youth. On 1 July 2022, Prevail identified
Swellendam Primary School to be the recipient of the bicycle donation. Prevail donated 20
bicycles to Swellendam Primary School on 1 July 2022. These bicycles have a total cost price of
R100 000. The bicycles are not required to be returned by Swellendam Primary School.

The financial accountant believes the 20 bicycles should continue to be recognised as inventory
in the financial statements of Prevail because the bicycles have not been sold and hence no
revenue can be recognised (which will therefore skew the gross profit figure).

Cash prize received from the Pedal Power Association (“PPA)

The PPA is a public benefit organisation based in the Western Cape that is committed to
promoting cycling and the interests of cyclists. On 1 December 2022, Prevail won the “Caring for
the Community” award from the PPA and received a cash prize of R200 000. This amount is
significant in the context of Prevail’s financial statements. Prevail has correctly recognised the
cash prize as income in its statement of profit or loss for the year ended 31 December 2022 but
there is no qualitative disclosure of this prize elsewhere in the financial statements.

Page 3 of 8
 Total
QUESTION 1 – REQUIRED

1.1 Discuss whether the sponsorship agreement with Cycling Buddies meets the
definition of an asset in terms of the Conceptual Framework for Financial Reporting 8
2018.
1.2 With regards to the 20 bicycles donated to Swellendam Primary School:
a. Indicate whether you agree or disagree with the financial accountant that these
bicycles should continue to be recognised as inventory for the year ended 31 5
December 2022. Your solution should be limited to the derecognition guidance
in the Conceptual Framework for Financial Reporting 2018 only.
b. Assuming that the inventory should be derecognised, identify and discuss 8
which fundamental and enhancing qualitative characteristic(s) will be impacted
if Prevail recognises the donated bicycles as inventory in its financial
statements for the year ended 31 December 2022.
1.3 In terms of the Conceptual Framework for Financial Reporting 2018, discuss with
reasons, whether the cash prize received from the Pedal Power Association has been
sufficiently presented and disclosed in Prevail’s financial statements for the year
4
ended 31 December 2022.
Note: You are not required to discuss the recognition of the prize as an income in
the statement of profit or loss as you may assume that this has been done correctly.
Total for Question 1 25

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QUESTION 2 – Property, plant and equipment (PPE) (30 MARKS)

You are provided with the following information regarding items of PPE of Prevail at 31 December
2021:
Land Building Vehicles
Carrying amount at 31 Dec 2021 1 500 000 4 428 000 ?
- Gross carrying amount 1 500 000 4 920 000 ?
- Accumulated depreciation - (492 000) ?

Land and buildings

The land and the building were acquired on 1 January 2020. The original cost of the land at that
date amounted to R1 390 000 (excl. VAT). Land is measured using the revaluation model and is
revalued at the beginning of every year. At 1 January 2021, the fair value of the land was
determined as R1 500 000, while at 1 January 2022, the fair value of the land was R1 420 000.
The buildings are measured using the cost model and depreciated at 5% per annum using the
straight-line method to a nil residual value.
Delivery vehicles
Prevail purchased two identical second-hand delivery vehicles from We-Buy-Cars on 1 July 2019.
The vehicles were purchased for R394 450 (incl. VAT) each and were identified as delivery vehicle
001 and delivery vehicle 002 respectively on the asset register. It is Prevail’s accounting policy to
depreciate delivery vehicles based on the number of kilometres travelled as shown below:

Kilometres travelled for the period

Date
Delivery vehicle 001 Delivery vehicle 002
1 Jul 2019-31 Dec 2019 25 000 15 500
1 Jan 2020-31 Dec 2020 45 000 45 600
1 Jan 2021-31 Dec 2021 25 800 23 500
1 Jan 2022-31 March 2022 13 000 0
1 Jan 2022-30 Sept 2022 0 33 400
1 Oct 2022-31 Dec 2022 0 12 300

It is estimated that both vehicles will be able to travel until they reach 250 000 kilometres. The
vehicles have a nil residual value.
During the year, the need for a bigger delivery vehicle was identified and delivery vehicle 001 was
exchanged for delivery vehicle 003 on 31 March 2022 from a nearby company, Delta Ltd. The fair
values for delivery vehicle 001 and delivery vehicle 003 are R245 000 (excl. VAT) and R269 000
respectively (excl. VAT). The same residual value and total kilometres travelled also applies to
delivery vehicle 003 as with vehicles 001 and 002. Delivery vehicle 003 travelled 56 700
kilometres from 1 April 2022 to 31 December 2022.
On 30 September 2022, the engine of delivery vehicle 002 seized (stopped working) and had to
be replaced with a new engine. At the acquisition of delivery vehicle 002, Prevail did not identify
separate components for the delivery vehicles. A new engine was purchased on 1 October 2022
for R143 750 (incl. VAT) cash, which is deemed to be material. Assume that the original engine

Page 5 of 8
had a similar cost to the new engine. It is estimated that the new engine will have to be replaced
after the vehicle travelled for a total of 150 000 kilometres. The new engine has no residual value.
Manufacturing machine
To assist with the manufacturing of the new Vanquish helmet (see question 3), Prevail decided to
purchase a new manufacturing machine from one of the leading bicycle manufacturers in the
Netherlands. The machine was imported and installed at the manufacturing facility in Grabouw
on 1 August 2022.
The details of the costs incurred to prepare the machine for use are (all amounts include VAT and
were paid in cash unless otherwise stated):

Cost R
Cost paid to the supplier in the Netherlands 258 750
Import tax (excl. VAT) 29 000
Cost paid to transport company to deliver machine at the facility in Grabouw 29 900
Invoice paid to consulting engineer for assistance with the assembly of the 13 800
machine
Staff training provided by the consulting engineer 7 500
Initial operating losses incurred 10 200

The machine was ready and available for use on 1 September 2022 and will have a useful life of
4 years with no residual value. The machine will have to be dismantled at the end of its useful life
at a cost of R85 000 (excl. VAT). Assume an applicable discount rate of 9% per annum.

Total
QUESTION 2 – REQUIRED

2.1 Prepare the journal entries of Prevail (Pty) Ltd to account for the transactions relating
to all the assets for the year ended 31 December 2022.

Please note:
30
• Round all amounts to the nearest Rand;
• Show all your calculations as marks are awarded for these;
• Journal narrations are not required;
• The financial statement affected by each journal entry must be shown.
Total for Question 2 30

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QUESTION 3 – Research for Prevail’s new helmet (the Vanquish) (20 MARKS)
Ignore VAT for this question.

In lieu of Prevail’s mission to develop the fastest bicycle accessories, Prevail has invested heavily
in the design of their latest helmet – the Vanquish. Prevail’s research has been focused on
aerodynamics, comfort, ventilation and aesthetics of the Vanquish helmet.

The helmet was researched and developed between 1 February 2022 and 31 August 2022 and
the following costs (all paid in cash) were incurred during the period:

Description Amount (R) Date incurred

Research into different types of helmets and whether a 350 000 1 Feb-31
market for new helmets do exist March 2022
Further market research through surveys of top cyclists 95 000 1 Feb-31
March 2022
Design costs for different models of the outer shell of the 80 000 1 April-30 Aug
helmet 2022
Design costs for the inner liner of the helmet to absorb any 40 000 1 April-30 Aug
impact effectively 2022
Fees for specialist developers to build the new helmet 700 000 1 April – 30
Aug 2022
Administrative costs incurred during the development phase 135 000 1 April – 30
Aug 2022
Advertising and promotional costs 25 000 1 Aug-31 Dec
2022
Testing costs 50 000 1 August 2022

After research was conducted, Prevail determined that it will be feasible to develop the new
Vanquish helmet and started with that development on 1 April 2022. Prevail had adequate surplus
funds to finance the development of the new Vanquish helmet, enough space in the building
where the helmets can be manufactured and specialist developers. It was determined at the start
of the development phase that Prevail will be able to use their developed prototype to manufacture
Vanquish helmets that will be sold to cyclists.

Prevail started with commercial production of the new Vanquish helmet on 1 September 2022.
The launch of the new helmet occurred at the end of September and it was well received within
the biking community. In December, high sales of the new helmet were recorded by Prevail. It is
the company policy to measure intangible assets using the cost model and they have estimated
that development cost should be amortised over a useful life of 4 years.

Total
QUESTION 3 – REQUIRED

3.1 Discuss the appropriate accounting treatment to account for all the costs incurred in
the research and development of the new Vanquish helmet in the financial statements
16
of Prevail (Pty) Ltd for the year ended 31 December 2022.

Page 7 of 8
 Your discussion should address initial recognition and measurement as well as
consider the criteria for development costs to be capitalised in terms of paragraph 57
of IAS 38 Intangible assets.
3.2 Provide the journal entries to account for any intangible asset arising from question
3.1 in respect of the new helmet for the year ended 31 December 2022.

Please note:
4
• Round all amounts to the nearest Rand;
• Show all your calculations as marks are awarded for these;
• Journal narrations are not required;
The financial statement affected by each journal entry must be shown.
Total for Question 3 20

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