FAC2601/QUESTION BANK

DEPARTMENT OF FINANCIAL ACCOUNTING

FAC2601: FINANCIAL ACCOUNTING FOR COMPANIES

FAC2601 QUESTION BANK

(SEMESTER 1 & SEMESTER 2)

Mr F Montgomery
Mr A Eysele
Mr C Mkefa
Mrs K Siyila

Module Telephone Number: 012 429 4238

Module E-mail Address: fac2601@unisa.ac.za

Open Rubric
 FAC1601/QUESTION BANK

CONTENTS

LU 1: Introduction to company financial statements...................................................... 3 

LU 2: The Framework of accounting .................................... Error! Bookmark not defined. 
LU 3: Presentation of annual financial statements – IAS 1 Error! Bookmark not defined. 
LU 4: Inventory – IAS 2 ......................................................... Error! Bookmark not defined. 
LU 5: Property, Plant and equipment – IAS 16 .................... Error! Bookmark not defined. 
LU 6: Investment Property – IAS 40 ..................................... Error! Bookmark not defined. 
LU 7: Leases – IAS 17 ............................................................ Error! Bookmark not defined. 
LU 8: Financial instruments – IFRS 9, IAS 32, IAS 39 ......... Error! Bookmark not defined. 
LU 9: Revenue from contracts with customers – IFRS 15.. Error! Bookmark not defined. 

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 FAC2601/QUESTION BANK

LU 1: INTRODUCTION TO COMPANY FINANCIAL STATEMENTS

MULTIPLE CHOICE QUESTIONS

Answer the following multiple choice questions. Indicate your choice by selecting only 1, 2, 3 or 4
for each question answered.

1. Which one of the following statements with regards to the Companies Act 71 of 2008 is
incorrect?

1. The Memorandum of Association was previously (Companies Act 61 of 1973) known as

the Memorandum of Incorporation.
2. The capital of a company is not divisible and it is therefore impractical to open a capital
account for each member.
3. A company is a legal entity that is incorporated in terms of the Companies Act 71 of 2008
and it is independent of its owners.
4. Public companies may be listed on the Johannesburg Stock Exchange which promotes
the marketability of their shares.

2. The authorised share capital is:

1. The total number of shares issued to shareholders.

2. The total amount of paid up share capital by shareholders.
3. The maximum share capital mentioned in the Memorandum of Incorporation.
4. Always equal to the ordinary share capital.

SHARE TRANSACTIONS
Questions 3 to 5 are based on the following information:

The following information regarding share capital in the accounting records of Mulan Ltd was
obtained on 28 February 2014:
R
Ordinary share capital at date of incorporation...................................................................... 3 000 000
Proceeds on 1 000 000 ordinary shares issued – 31 August 2013 ....................................... 1 300 000
10 000 12% Cumulative preference shares .......................................................................... 200 000

Additional information:
a) 2 400 000 Ordinary shares were issued at incorporation on 1 March 2011, while the
cumulative preference shares were issued on 1 March 2012.

b) The following decision was made by the directors and must still be recorded:

A capitalisation issue of shares must be made on 31 December 2013 to ordinary shareholders

in the ratio of one ordinary share, at R1.50, for every 5 ordinary shares held.

c) An ordinary dividend of 10c per share was declared by the company to shareholders
registered on 28 February 2014. No dividends were declared or paid by the company in the
previous financial year.

3. The number of ordinary shares issued to the public before the capitalisation issue is:

1. 1 000 000 shares

2. 4 000 000 shares
3. 3 400 000 shares
4. 3 000 000 shares

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4. The number of ordinary shares capitalised is:

1. 200 000 shares

2. 800 000 shares
3. 680 000 shares
4. 600 000 shares

5. The amount of ordinary shares capitalised is as follows:

1. R 300 000
2. R1 200 000
3. R1 020 000
4. R 900 000

6. Which one of the following statements with regards to the Conceptual Framework for Financial
Reporting is correct?

1. The scope of the Framework is broader than that of the Conceptual Framework for
Financial Reporting.
2. Fundamental qualitative characteristics in the Conceptual Framework for Financial
Reporting are less critical than the enhancing qualitative characteristics.
3. For information to be useful it must be both relevant and faithfully represented.
4. Special purpose financial reports are not in the scope of the Conceptual Framework for
Financial Reporting.

LU 1: Solutions:
1.1 1 (Refer to par. 1.2 of Learning unit 1 – MO001)
1.2 3 (Refer to par. 1.5.2 of Learning unit 1 – MO001)
1.3 3 3 400 000 shares
1.4 3 680 000 shares
1.5 3 1 020 000
1.6 3 (Refer to par. 7.1.3 of Chapter 1 – Introduction to IFRS, 6th edition)

CALCULATIONS:
R
3. (2 400 000 + 1 000 000) = 3 400 000 shares
4. (3 400 000/5) = 680 000 shares
5. (680 000 x 1,5) = 1 020 000

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 FAC2601/QUESTION BANK

LU 2: THE FRAMEWORK OF ACCOUNTING

2.1 Which one of the following options does not define the expense element according to the
Conceptual Framework for Financial Reporting, 2010?

1. Increase in assets.
2. Decrease in economic benefits.
3. Increase in liabilities.
4. Decrease in equity, other than distributions to owners.

2.2 Which one of the following statements regarding the qualitative characteristics of annual
financial statements according to the Conceptual Framework for Financial Reporting, 2010, is
correct?

1. The fundamental qualitative characteristics of annual financial statements are relevance

and materiality.
2. Materiality and relevance would ensure faithful representation.
3. Materiality plays an important role when evaluating the relevance of information.
4. Faithful representation implies that information is accurate in all respects.

2.3 Which one of the following options does not describe liabilities according to the Conceptual
Framework for Financial Reporting?

1. A present obligation.
2. Arising from past events.
3. The settlement of which will result in an outflow of resources embodying economic
benefits.
4. The settlement of which will result in an inflow of resources embodying economic benefits.

LU 2: Solutions:
2.1 1 (Refer to par. 8.3.6 of Chapter 1 – Introduction to IFRS, 6th edition)
2.2 3 (Refer to par. 7.1.1 and 7.1.2 of Chapter 1 – Introduction to IFRS, 6th edition)
2.3 4 (Refer to par. 8.2.2 of Chapter 1 – Introduction to IFRS, 6th edition)

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 FAC1601/QUESTION BANK

LU 3: PRESENTATION OF ANNUAL FINANCIAL STATEMENTS – IAS 1:

Question 3.1 (31 marks) (38 minutes)

The following information was extracted from the accounting records of Jupiter Ltd for the financial
year ended 28 February 2015:
R
Total sales (refer additional information 1) ......................................................................... ?
Cost of sales ...................................................................................................................... 5 600 000
Administrative expenses .................................................................................................... 4 340 000
Bank charges .............................................................................................................. 24 000
Salaries and wages (refer additional information 2) .................................................... 4 000 000
Advertising costs ......................................................................................................... 220 000
Auditors‘ remuneration
- Fees for audit .......................................................................................................... 70 000
- Fees for forensic work ............................................................................................ 10 000
- Travelling expenses ............................................................................................... 16 000
Distribution costs ................................................................................................................ 536 000
Other operating expenses (including finance costs and depreciation) .............................. 740 000
Other operating income (refer additional information 4) .................................................... 76 000
Provisional tax paid ............................................................................................................ 960 000
Preliminary expenses ......................................................................................................... 15 000
Proceeds on sale of motor vehicle ..................................................................................... 170 000
Land at cost (refer additional information 6) ...................................................................... 900 000
Equipment at carrying amount (refer additional information 7) .......................................... 96 000
Motor vehicles at cost (refer additional information 7) ....................................................... 480 000
Accumulated depreciation – Motor vehicles (refer additional information 7) ..................... 120 000
Investments (refer additional information 5) ....................................................................... 335 000
Long-term loan (refer additional information 3) .................................................................. 90 000
Income tax expense (assume as correctly calculated) ...................................................... 818 380

Additional information

1. The total sales of Jupiter Ltd for the financial year ended 28 February 2015, consists of the
following:
R
- Cash sales to customers (inclusive of VAT)........................................................ 11 400 000
- Credit sales to customers (exclusive of VAT)...................................................... 4 000 000

2. Salaries and wages paid by Jupiter Ltd for the year ended 28 February 2015, include the
following payments made to top management:
R
Salaries
- Mr A: Managing director.................................................................................. 480 000
- Mrs B: Chairman of the board ........................................................................... 240 000
- Mr C: Marketing manager ............................................................................... 360 000
- Mr D: Financial director ................................................................................... 400 000
Travelling allowance – Managing director .................................................................. 24 000
Entertainment allowance – Marketing manager ......................................................... 12 000
Pension payments
- Managing director .............................................................................................. 48 000
- Chairman of the board ....................................................................................... 24 000

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Question 3.1 - continued

The directors in top management were paid R10 000 each for attending board meetings.
The managing director of Jupiter Ltd is also the chairman of the board of Jupiter Ltd’s
subsidiary, from whom he has received the following for the 2015 financial year:

R
Salary ............................................................................................................................ 150 000
Travelling allowance ...................................................................................................... 10 000

Mr C is also the managing director of Jupiter Ltd’s subsidiary for which he received a salary
of R180 000 for the 2015 financial year.

3. The long-term loan was incurred on 1 January 2007 and the capital portion is repayable in
five equal annual instalments starting 31 August 2011. Interest is calculated at 12% per
annum and is paid at the end of each financial year. All applicable instalments have been
paid to date.

4. Other operating income consists of:

R
Dividends received from the following companies:
- Neptune (Pty) Ltd ................................................................................................. 24 000
- Mercury Ltd .......................................................................................................... 40 000
Interest received from Neptune (Pty) Ltd ..................................................................... 12 000
76 000

5. Investments consist of:

R
5.1 Investment in Neptune (Pty) Ltd 45 000

The total issued share capital of Neptune (Pty) Ltd is R40 000 and consists of ordinary
shares issued at R2 each. Jupiter Ltd owns 12 000 shares in Neptune (Pty) Ltd that were
bought for R45 000. The directors’ are of the opinion that the fair value of the investment at
the 2015 year end remained unchanged.

R
5.2 Investment in Mercury Ltd 250 000

Jupiter Ltd owns 100 000 of the 2 400 000 issued ordinary shares in Mercury Ltd, purchased
for R250 000. The shares of Mercury Ltd are traded on the JSE Ltd and the market value on
28 February 2014 was R2,50 per share. The market value on 28 February 2015 was R3 per
share and no adjustments for the increase in value have yet been made in the accounting
records for the current financial year. These shares were purchased for speculative
purposes.
R
5.3 Investment in Pluto (Pty) Ltd 40 000

Jupiter Ltd owns 5 000 of the 20 000 issued ordinary shares of Pluto (Pty) Ltd, purchased on
1 May 2014 for R40 000. This investment is designated as a financial asset at fair value
through other comprehensive income. According to the directors, the market value of the
shares was R12 per share on 28 February 2015. This adjustment must still be recorded in
the accounting records.

6. The land was purchased in the current financial year. The directors revalued the property to
its fair value of R1 million at year end.

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 FAC1601/QUESTION BANK

Question 3.1 – continued

7. The non-current assets are depreciated according to the following rates and methods:

Motor vehicles - 20% per annum using the reducing balance method.
Equipment - 20% per annum using the straight-line method.

One of the motor vehicles with a carrying amount of R160 000 on 28 February 2014, was
sold on 31 August 2014. No vehicles were purchased during the year. Only the proceeds of
the sale and the depreciation for the period up to date of sale were recorded.

All the equipment was purchased on 1 March 2012 and no other sales or purchases of
equipment has occurred since then.

REQUIRED:

1. Prepare the statement of profit or loss and other comprehensive income of Jupiter Ltd for the
financial year ended 28 February 2015, complying with the requirements of International
Financial Reporting Standards (IFRS). (14)

Ignore comparative figures and notes.

Show all calculations.

2. Show the note “profit before tax” that should accompany the statement of profit or loss and
other comprehensive income of Jupiter Ltd for the financial year ended 28 February 2015.
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS). (17)

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 FAC2601/QUESTION BANK

SOLUTION 3.1

1. JUPITER LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 2015

Notes R
Revenue (Note 1) ................................................................................................ 14 000 000
Cost of sales ........................................................................................................ (5 600 000)
Gross profit........................................................................................................... 8 400 000
Other income 152 000
(36 000 (Note 1) + 40 000 (Note 2) + 50 000 (Note 1) + 26 000 (Note 1)) ..........
Administrative expenses ...................................................................................... (4 340 000)
Distribution cost.................................................................................................... (536 000)
Other operating expenses (740 000 – 16 200) (Note 2) ...................................... (723 800)
Finance costs [(12% x 180 000 x 6/12) + (12% x 90 000 x 6/12)] ........................... (16 200)
Profit before tax.............................................................................................. 1 2 936 000
Income tax expense ............................................................................................. (818 380)
Profit for the year.................................................................................................. 2 117 620
Other comprehensive income........................................................................... 120 000
- Financial assets at fair value through other comprehensive income – fair
value adjustment [(5 000 x R12) – R40 000].................................................... 20 000
- Revaluation surplus (R1 000 000 – R900 000) ................................................ 100 000
Total comprehensive income for the year ....................................................... 2 237 620

2. JUPITER LTD
NOTES FOR THE YEAR ENDED 28 FEBRUARY 2013

1. Profit before tax is disclosed after taking the following, amongst others, into account:
R
Revenue
Revenue consist of:
Continuing operations – Turnover (Calculation 1) ................................................... 14 000 000

Other income
Financial asset at fair value through profit or loss – fair value adjustment
[100 000 x 0,50 (R3,00 – R2,50)] ............................................................................ 50 000

Profit on sale of non-current asset

[170 000 – (160 000 – 16 000 Depreciation)] .......................................................... 26 000

Income from subsidiary:

- Dividends ............................................................................................................. 24 000
- Interest................................................................................................................. 12 000

Income from financial assets:

Listed investment
- Dividends ............................................................................................................. 40 000

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SOLUTION 3.1 - continued

Expenses
Auditors’ remuneration............................................................................................. 96 000
- Fees for audit....................................................................................................... 70 000
- Fees for forensic services.................................................................................... 10 000
- Expenses – Travelling cost.................................................................................. 16 000

Staff costs ................................................................................................................ 4 000 000

Depreciation (Calculation 2) .................................................................................... 118 000

2. Remuneration of directors and prescribed officers

Less: Paid
Director’s * Other Pension by
fees Salary benefits fund subsidiary Total
Name R R R R R R
Executive
directors
Mr A .................. 10 000 630 0001 34 000 48 000 (160 000) 562
000
Mr D .................. 10 000 400 000 410
000

Non-executive
directors
Mr B .................. 10 000 240 000 24 000 274
000

Prescribed
Officers
Mr C .................. 540 0002 12 000 (180 000) 372
000
Total .................. 30 000 1 720 000 46 000 72 000 (340 000) 1 618
000
1
480 000 + 150 000
2
360 000 + 180 000

* Other benefits:
Entertain-
Travelling ment
Name allowance allowance Total
R R R
Mr A .................. 34 0001 34 000
Mr C .................. 12 000 12 000
1.
24 000 + 10 000

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 FAC2601/QUESTION BANK

SOLUTION 3.1 - continued

Calculations:

1. Revenue R

Cash sales to customers (11 400 000 x 100/114) ........................................................ 10 000 000
Credit sales to customers ........................................................................................ 4 000 000
Total sales ................................................................................................................ 14 000 000

2. Depreciation

2.1 Depreciation on equipment

Carrying amount 28/2/2015 ................................................................................... 96 000
Cost price (96 000 x 100/40) of (96 000 x 5/2) ........................................................... 240 000
Depreciation (240 000 x 20%) ............................................................................... 48 000

2.2 Depreciation on motor vehicle

2.2.1 Vehicle sold

Carrying amount 28/2/2014 ................................................................................. 160 000
Depreciation 1/3/2012 – 31/8/2012 (R160 000 x 20% x 6/12) .............................. 16 000
Carrying amount 31/8/2014 ................................................................................. 144 000

2.2.2 Remainder of vehicles

Carrying amount 28/2/2015 (480 000 – 120 000 – 144 000 (sold)) .................... 216 000
Carrying amount 1/3/2014 (216 000 x 100/80) ....................................................... 270 000
Depreciation 1/3/2014 – 28/2/2015 (270 000 x 20%) .......................................... 54 000
OR 216 000 x 20/80

2.3 Total depreciation (48 000 + 16 000 + 54 000) ................................................... 118 000

5. Finance cost:
Loan 28-2-2015 R90 000 (R90 000 x 100/20 = 450 000 ÷ 5 = 90 000)
Interest 1-3-2014 – 31-8-2014 (R180 000 x 12% x 6/12) .......................................... 10 800
Interest 1-9-2014 – 28-2-2015 (R90 000 x 12% x 6/12) ............................................ 5 400
16 200

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 FAC1601/QUESTION BANK

QUESTION 3.2 (17 marks) (20 minutes)

The following information was obtained from the accounting records of Cornerstone Ltd on
31 March 2015:
R
Share capital – Ordinary shares ...................................................................................... 1 200 000
– 10% Cumulative preference shares ....................................................... 850 000
Retained earnings (1 April 2014) .................................................................................... 651 000
Office building at cost ...................................................................................................... 350 000
Accumulated depreciation – office building (1 April 2014) .............................................. 70 000
Investment in Brickwork Ltd ............................................................................................ 300 000
Mark-to-market reserve (1 April 2014) ............................................................................ 100 000

Additional information

1. Cornerstone Ltd was incorporated on 1 April 2012 with an authorised share capital of:

- 500 000 Ordinary shares

- 300 000 10% Cumulative preference shares.

2. 300 000 Ordinary shares were issued at R4 each at incorporation. On 1 July 2012, 100 000
cumulative preference shares were issued at R7,48 each.

On 1 August 2014, Cornerstone Ltd issued 12 000 10% cumulative preference shares at
R8,50 per share.

3. The following transactions relating to the equity of the company must still be recorded in the
current financial year:

3.1 100 000 Ordinary shares were issued on 5 April 2014 at R5 each. Share issue expenses
amounted to R1 000. The share issue expenses must be written off against retained
earnings.

3.2 On 1 May 2014, a capitalisation issue of one new ordinary share for every five ordinary
shares held was made from available profits, at R7,50 per share.

3.3 Total profit after tax for the year, after the correct depreciation has been calculated and
accounted for, was R536 700.

4. An office building was acquired on 1 April 2012 for R350 000. The building is depreciated at
10% per annum according to the straight-line method.

Cornerstone Ltd adopted the policy to revalue office buildings every two years after initial
recognition.

The company revalued the office building at the beginning of the current financial year at
gross replacement cost. The cost of a similar new building on 2 April 2014 was determined to
be R375 000. This revaluation has not yet been recorded.

5. On 1 October 2013, Cornerstone Ltd purchased 50 000 ordinary shares of Brickwork Ltd at a
cost price of R4 per share. The investment was designated as a financial asset at fair value
through other comprehensive income. Brickwork Ltd has an issued ordinary share capital of
500 000 ordinary shares.

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 FAC2601/QUESTION BANK

QUESTION 3.2 (continued)

The market value of the ordinary shares in Brickwork Ltd on the JSE Ltd was as follows:

31 March 2014 R6 per share

31 March 2015 R7 per share

The fair value adjustment of this investment for the current year has not yet been recorded.

6. On 20 March 2015, a final dividend of 12c per ordinary share was declared by
Cornerstone Ltd.

No dividends were declared or paid by Cornerstone Ltd in the previous financial year.

REQUIRED:

Prepare the statement of changes in equity of Cornerstone Ltd for the financial year ended
31 March 2015 in agreement with the requirements of International Financial Reporting Standards
(IFRS).

Ignore comparative figures.

Show all calculations.

The total column of the statement of changes in equity can be ignored.

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 FAC1601/QUESTION BANK

SOLUTION 3.2

CORNERSTONE LTD
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2013

Share Revaluation
Share capital – surplus –
capital – cumulative property, Mark to
ordinary preference Retained plant and market
shares shares earnings equipment reserve Total
R R R R R R
Balance at 1 April 2014 1 200 000 748 000 651 000 - 100 000 2 699 000
Total comprehensive income for
the year:
Profit for the year 536 700 536 700
Other comprehensive income 20 000 50 000 70 000
Issue of shares
- Ordinary shares 500 000 500 000
- Preference shares 102 000 102 000
- Capitalisation 600 000 (600 000) -
Dividends
- Preference shares (156 400) (156 400)
- Ordinary shares (57 600) (57 600)
Share issue expenses (1 000) (1 000)
Balance at 31 March 2015 2 300 000 850 000 372 700 20 000 150 000 3 692 700

Calculations

1. Issued shares

Ordinary shares issued (100 000 shares x R5) 500 000

2. Capitalisation of shares

Ordinary shares capitalised [(100 000 + 300 000) shares  5 x R7,50] 600 000

3. Revaluation of office buildings

Revaluation surplus [(375 000 x 0.8) – (350 000 x 0.8)] 20 000

OR
[375 000 – (375 000 x 10% x 2)] – [350 000 – (350 000 x 10% x 2)]

4. Fair value adjustment

Fair value adjustment of investment [(50 000 x (7 – 6)] 50 000

5. Dividends

Preference dividends Previous year: (748 000 x 10%) 74 800

Current year: (748 000 x 10%) 74 800
(102 000 x 10% x 8  12) 6 800
Ordinary dividends [(80 000 + 400 000] x 12 cents 57 600

6. Cumulative preference shares issued:

12 000 x R8,50 102 000

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 FAC2601/QUESTION BANK

Question 3.3 - (41 marks) (49 minutes)

The following information was taken from the accounting records of Highway Ltd, a listed company,
for the financial year ended 30 June 2015:
Additional
information R
Ordinary share capital (shares issued at R2 per share) .............................. 800 000
13% Long-term loan (cr) .............................................................................. 10 125 000
Retained earnings (01/07/2014) .................................................................. 530 000
Income (revenue) ......................................................................................... 5 200 000
Other income ............................................................................................... 4 14 000
Other expenses............................................................................................ 6 & 10 510 000
Administrative expenses .............................................................................. 7&8 980 500
Investments at cost ...................................................................................... 9 242 000
Loan to Railroad Ltd..................................................................................... 5 70 000
Income tax expense (assume correct) ......................................................... 175 000

Additional information

1. Highway Ltd maintains an annual gross profit percentage of 40% on turnover.

2. Highway Ltd leases its offices in terms of an operating lease agreement. The lease expired on
30 June 2014 and the company entered into a new operating lease agreement on
1 July 2014 to rent a new fully furnished office.

Extracts from the lease agreement:

Start date : 1 July 2014
End date : 30 June 2017
Escalation: 8% per year

The total monthly rent at the start of the lease agreement will be R25 000 (excluding VAT).

The lease expense was recorded in the financial records by the new but inexperienced
accountant (additional information 6).

3. Highway Ltd entered into an operating lease agreement in the previous financial year to
acquire machinery and equipment.

Extracts from the lease agreement:

Start date : 1 July 2013
End date : 30 June 2016
Escalation: 10% per year

The total monthly rent at the start of the lease agreement is R5 000 (excluding VAT).

The lease expense was recorded in the financial records by the new but inexperienced
accountant (additional information 6).

4. The following is, amongst others, already included in “other income”:

Dividends received: R
Railroad Ltd ............................................................................................................ 1 000
Runway Ltd (additional information 9.1) ................................................................. ??
Runway Ltd declared and paid a dividend of 15c per share on 30 June 2015.

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 FAC1601/QUESTION BANK

Question 3.3 - continued

R
Interest received:
Current bank account ............................................................................................. 350
Trade and other receivables ................................................................................... 325
Railroad Ltd (additional information 5) ................................................................... ??

5. The loan to Railroad Ltd was granted on 31 August 2014 at an interest rate of 9% per annum
to help expand their operations. The interest is payable monthly in arrears. No capital
payments are due until 30 June 2017.

6. The following are, amongst others, already included in “other expenses”:

R
Interest paid – long-term loan ..................................................................................... ??
Interest paid – bank overdraft ..................................................................................... 1 600
Credit losses ............................................................................................................... 25 000
Operating lease expenses:
- Office ..................................................................................................................... 300 000
- Machinery and equipment ..................................................................................... 66 000

7. “Administrative expenses” consists of the following:

R
Salaries and wages (additional information 8) ........................................................... 900 000
Auditors’ remuneration – travel .................................................................................. 3 000
Auditors’ remuneration – audit fees ............................................................................ 15 000
Marketing expenses ................................................................................................... 7 500
Water and electricity ................................................................................................... 42 000
Repairs and maintenance .......................................................................................... 18 000

8. Salaries and wages of Highway Ltd include, amongst others, the following gross
remuneration that was paid to directors and prescribed officers:
R
8.1 Managing director – Mr Delta ..................................................................................... 350 000
Marketing manager – Mr Ecco ................................................................................... 150 000
Chairman of the board (non-executive) – Mr Charlie ................................................. 120 000
General secretary – Mr Alfa ....................................................................................... 90 000

Each of the directors also received compensation of R1 500 per meeting attended during the
year. Four board meetings were held during the year and all the directors attended all the
meetings.

The chairperson and managing director have the use of company cars which may also be
used for private purposes. The total benefits (per car) for the use of such cars are estimated
at R80 000 per year, of which 35% was for private use and 65% for business purposes.

The annual pension fund contributions (total personal- and company contributions) amount to
R50 000 per year per director and R25 000 per prescribing officer. The company pays
70% of these contributions on behalf of its directors and prescribing officers.

8.2 The following directors also received remuneration from the subsidiary of Highway Ltd:
R
Chairman of the board (non-executive) – Mr Delta .................................................... 110 000

8.3 A pension of R110 000 was paid to Mrs Juliet. (She is the widow of a former executive
director of Highway Ltd.)

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 FAC2601/QUESTION BANK

QUESTION 3.3 (continued)

9. Investments consist of the following:

9.1 40 000 Ordinary shares in Runway Ltd purchased at R2 per share during the current year.
Transaction costs amounted to R4 000. The total issued share capital of Runway Ltd
consists of 800 000 ordinary shares. Runway Ltd’s shares traded on the JSE on
30 June 2015 at R2,45 per share. This investment is designated as a financial asset through
other comprehensive income.

9.2 20 000 Ordinary shares in Railroad Ltd purchased at a cost price of R46 000. The total
issued share capital of Railroad Ltd consist of 25 000 ordinary shares. Railroad Ltd’s shares
traded on the JSE at R2,30 per share on 30 June 2015.

9.3 35 000 Ordinary shares in Waterway Ltd, purchased on 1 July 2013 at R3,00 per share.
Transaction cost amounted to R2 800. The total issued ordinary share capital of
Waterway Ltd consists of 600 000 ordinary shares. These shares traded on the JSE on
30 June 2014 at R3,20 per share and R4,20 per share on 30 June 2015. These shares were
purchased as a speculative investment.

9.4 No entries were made in respect of the fair value adjustments of the above mentioned
investments for the current financial year.

10. The 13% long-term loan originated on 31 May 2010 and the capital portion was repayable in
8 equal annual instalments beginning on 31 December 2012. Interest is payable bi-annually
on 31 December and 30 June.

REQUIRED:

Prepare the statement of profit or loss and other comprehensive income and the relevant notes
thereto of Highway Ltd for the year ended 30 June 2015 in compliance with the requirements of
International Financial Reporting Standards (IFRS).

Ignore comparative figures and the note on accounting policies.

Show all calculations. [41]

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SOLUTION 3.3

a) HIGHWAY LTD
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 30 JUNE 2014
Notes R
Revenue 5 200 000
Cost of sales (60% x 5 200 000) OR (5 200 000 – 2080 000) (3 120 000)
Gross profit (40% x 5 200 000) OR (5 200 000 – 3 120 000) 2080 000
Other income (14 000 + 35 000) 49 000
Other expenses (510 000 – 17 875 – 1 600 + 24 640 + 200) (515 365)
Administrative expenses (980 500)
Finance cost (17 875 + 1 600) (19 475)
Profit before tax 613 660
Income tax expense (175 000)

Profit for the year 438 660

Other comprehensive income 14 000
Fair value adjustment on financial assets through other comprehensive
income (calc 2) 14 000
Total comprehensive income for the year 452 660

HIGHWAY LTD
NOTES FOR THE YEAR ENDING 30 JUNE 2014
1. Profit before tax
Profit before tax includes the following disclosable items:
R
Income:
Revenue from sale of goods 5 200 000
Income from subsidiary (Railroad Ltd)
- Dividends received 1 000
- Interest received (70 000 x 10/12 x 9%) 5 250
Income from other financial assets:
- Listed investment – dividends received (40 000 x 0.15) 6 000
Fair value adjustment on financial assets (calc 3) 35 000

Expenses: R
Staff costs 900 000

Auditors remuneration
- Audit fees 15 000
- Expenses 3 000

18
 FAC2601/QUESTION BANK

2. Remuneration of directors and prescribed officers:

Less: Paid
Directors Other Pension by sub-
Name fees Salary benefits fund sidiaries Total
Executive directors
Mr Delta 116 0001 350 000 28 0002 35 0003 (110 000) 419 000

Non-executive directors
Mr Charlie 126 0005 28 0002 35 0003 189 000

Prescribed officers
Mr Ecco 150 000 17 5004 167 500
Mr Alfa 90 000 17 5004 107 500

Past director
Mrs Juliet 110 000 110 000
Total 242 000 590 000 56 000 215 000 (110 000) 993 000

*Other benefits:

Name Travel Total

Mr Delta 28 000 28 000
Mr Charlie 28 000 28 000

1. (1 500 x 4) + 110 000 = R116 000

2. R80 000 x 35% = R28 000
3. R50 000 x 70% = R35 000
4. R25 000 x 70% = R17 500
5. (1 500 x 4) + 120 000 = R126 000

Calculations

1. Interest on long term loan:

Balance of loan at the end of the year R125 000

Number
Total payments that have to be made 8
Payments already made
31/12/2012 1
31/12/2013 1
31/12/2014 1
Payments left on 30/06/2014 5
Outstanding balance at year end as per list of balances R125 000
125 000/5 = R25 000 per instalment
Loan balance end of the year R125 000
Plus 1 payment made during the year R25 000
Loan balance beginning of the year R150 000

Outstanding balance:
01/07/2014 – 31/12/2014 R150 000
01/01/2015 – 30/06/2015 R125 000
Finance costs:
R150 000 x 6/12 x 13% = R9 750
R125 000 x 6/12 x 13% = R8 125
Total R17 875

19
 FAC1601/QUESTION BANK

SOLUTION 3.3 (continued)

2. Fair value adjustment on financial assets through other comprehensive income:

R
Cost price beginning of current financial year: 40 000 shares x R2 = 80 000
Transaction cost 4 000
Fair value at initial recognition 84 000

Fair value at year end: 20 000 shares x R2,45 98 000

Fair value adjustment for the 2015 financial year 14 000

3. Fair value adjustment on financial assets through profit or loss:

R
Fair value at 30 June 2014 : 35 000 shares x R3,20 = 112 000
Fair value at 30 June 2015 : 35 000 shares x R4,20 = 147 000
Fair value adjustment for the 2015 financial year: 35 000

4. Operating lease – Office building

Equalise lease payments:

R
1st year R25 000 x 12 300 000
2nd year (R25 000 x 1.08) x 12 324 000
3rd year (R27 000 x 1.08) x 12 349 920
973 920

R
R973 920 / 3 = 324 640
Already recognised 300 000
Additional recognition 24 640

5. Operating Lease – Machinery & equipment

Equalise lease payments:

R
st
1 year R5 000 x 12 60 000
2nd year (R5 000 x 1.10) x 12 66 000
3rd year (R5 500 x 1.10) x 12 72 600
198 600

R
R198 600 / 3 = 66 200
Already recognised 66 000
Additional recognition 200

6. Interest on loan to Runway Ltd

R
R70 000 x 9% x 10/12 5 250

20
 FAC2601/QUESTION BANK

LU 4: INVENTORY – IAS 2:
QUESTION 4.1

Bikeride Ltd is a bike manufacturer and dealer. The following extract was taken from the trial
balance at 31 December 20.14:
R’000
Sales 180 000 000
Purchases – raw materials (components) 300 000
Purchases – second-hand bikes 32 360
Labour costs – hourly paid employees
- Factory staff 360 000
- Administration and selling staff 100 000
Salaries and commissions
Factory staff 140 000
Administrative and sales staff 285 000
Depreciation 150 000
Interest paid 128 000
Dividends received 49 000
Other expenses 121 000
Income tax 41 002 726

Manufacturing process

The normal capacity of the factory is 10 000 motor bikes per year. As a result of significant
labour stayaways during the second half of the year, actual production for the year was 80%
of normal production levels. The company has a “no work no pay” policy for employees paid
at hourly rates. Staff who were paid salaries on a monthly basis did not take part in the
stayaways.

Inventories at 31 December
20.13 20.14
R’000 R’000
Raw materials, at cost 15 000 24 500
Work in progress at cost 80 000 211 800

The demand for the product is so high that all manufactured bikes are sold as soon as the
production process is completed.
Dealerships
The following information relates to second-hand bikes traded:
Date of Purchase
Motor price Date of sale Estimated selling price
purchase
Bike (excluding at year end (excluding
number VAT) VAT)
20.13 20.14
R’000 R’000
216 30/10/20.13 80 - 70 80
217 30/04/20.13 110 30/06/20.14 130 -
218 30/11/20.13 160 - 180 170
219 – 425 During 20.14 32 000 During 20.14 - -
426 30/06/20.14 155 - - 170
427 25/11/20.14 205 - - 250

21
 FAC1601/QUESTION BANK

The only second-hand motor bike inventories on hand at 31 December 20.13 were
motorbike numbers 216, 217 and 218.

Sales staff earns a commission of 10% of the selling price (excluding VAT).

REQUIRED

(a) Prepare the statement of profit or loss and other comprehensive income of Bikeride Ltd for
the year ended 31 December 20.14.

• Round off all amounts to the nearest Rand.

• Your answer must comply with International Financial Reporting Standards (IFRS).

22
 FAC2601/QUESTION BANK

Solution 4.1

(a) Bikeride LTD

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR

THE YEAR ENDED 31 DECEMBER 20.14
R’000
Revenue 180 000 000
Cost of sales (110 000 + 32 000 000 + 750 700 + 58 000 (C4) - 9) (32 918 691)
Gross profit 147 081 309
Other income 49 000
Other expenses (121 000 + 100 000 + 285 000)) (515 000)
Finance cost (128 000)
Profit before tax 146 487 309
Income tax expense (41 002 726)
PROFIT FOR THE YEAR 105 484 583
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 105 484 583

CALCULATIONS

C1. Opening inventory - second hand vehicles

(Lower of cost or NRV) Carrying
NRV amount
Cost 20.13 20.13
R’000 R’000 R’000
216 80 63* 63
217 110 117# 110
218 160 162@ 160
333

* (70 000 – (70 000 x 10%)

# (130 000 – (130 000 x 10%)
@ (180 000 – (180 000 x 10%)

C2. Closing inventory =

secondhand vehicles Carrying
CA NRV amount
20.14 20.14
R’000 R’000 R’000
216 63 72* 72
218 160 153# 153
426 155 153# 153
427 205 225@ 205
583
* (80 000 – (10% x 80 000))
# (170 000 – (10% x 170 000))
@ (250 000 – (10% x 250 000))

23
 FAC1601/QUESTION BANK

C3. Closing balances (Alternative calculation)

Raw Finished
Description materials WIP products Second hand vehicles
R’000 R’000 R’000 R’000
Opening balances 15 000 80 000 [C1] 333 000
216 63 000
217 110 000
218 160 000
Purchases 300 000 32 360 000
Overheads
Fixed
Salaries
(140 000 x 80%) 112 000
Depreciation
(150 000 x 80%) 120 000
Variable 360 000
To WIP (balancing) (290 500) 290 500
To finished products
(balancing) (750 700) 750 700
Bikes written off to
net realisable value (9)
Reversal of vehicle
inventory writedown 9
Sold (750 217 (110 000)
700) 219-425 (32 000 000)
Closing Balances 24 500 211 800 - 583 000
Given Given Given [C2]

C4 Under-recovery
Salaries and commissions – factory staff (140 000 – (140 000 * 80%)) = 28 000
Depreciation (150 000 – (150 000 * 80%)) = 30 000

24
 FAC2601/QUESTION BANK

Question 4.2

Mayola Limited, situated at Mlungisi in Queenstown, is a manufacturer of office furniture. The Chief
Financial Officer provides you with the following information relating to the year ended 31
December 20.15:

Raw material

The cost of raw material purchased during the year was R495 000 and the transport cost thereof
was R2 000.

According to the stock count conducted, the cost of raw material was R120 000 and R90 000 on 31
December 20.14 and 31 December 20.15, respectively. However, the net realisable value of raw
material as at 31 December 20.15 was R80 000.

Manufacturing

The manufacturing cost of fixed and variable overheads for the year ended 31 December 20.15
was R250 000 and R276 000, respectively.

According to the stock count conducted, the cost of work in progress was R82 500 and R130 500
on 31 December 20.14 and 31 December 20.15, respectively. However, the net realisable value of
work in progress as at 31 December 20.15 was R100 000.

Finished goods

According to the stock count conducted, the cost of finished goods was R220 000 and R115 000
on 31 December 20.14 and 31 December 20.15, respectively. The net realisable value of finished
goods as at 31 December 20.15 was R110 000.

Sales and distribution

3 000 units were sold at R500 per unit during the year ended 31 December 20.15.

Additional information

 The entity’s planned fixed manufacturing costs and units manufactured at full capacity were
R240 000 and 4 000 units, respectively.
 Raw material, work in progress and finished goods are accounted for according to the first-in,
first-first-out method

25
 FAC1601/QUESTION BANK

REQUIRED

1. Disclose the note on inventory to the financial statements of Mayola Limited for the year ended
31 December 20.15 in accordance with the requirements of International Financial Reporting
Standards. Comparative amounts are required.
2. Prepare the statement of profit or loss and other comprehensive income of Mayola Limited for
the year ended 31 December 20.15 in accordance with the requirements of International
Financial Reporting Standards.

26
 FAC2601/QUESTION BANK

Solution 4.2
1. Inventories
Inventory comprises of the following
20.15 20.14
R R
Raw material 80 000 120 000
Work in progress 100 000 82 500
Finished goods 110 000 220 000

290 000 422 500

2. MAYOLA LIMITED
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20.15
R
Revenue (3 000 x 500) 1 500 000
Cost of sales (W1) (1 155 500)
Gross profit 344 500

Workings

1. Cost of sales
Raw Work in Finished
material progress goods
R R R
Opening inventory 120 000 82 500 220 000
Purchases/Transfers 495 000 527 000 935 000
(i)
Other costs 2 000 456 000 -
Closing inventory (90 000) (130 500) (115 000)

527 000 935 000 1 040 000

(ii)
Inventory written off to net realisable value 45 500
(iii)
Under recovery on fixed overheads 70 000

Cost of sales 1 155 500

(i) [(240 000/4 000) x 3 000] + 276 000 = 456 000

(ii) (90 000 – 80 000) + (130 500 – 100 000) + (115 000 – 110 000) = 45 500
Introduction to IFRS, par. 9.3: raw materials to be incorporated in the finished are written
down below cost if the product is expected to realise below cost.
(iii) 250 000 – [(240 000/4 000) x 3 000] = 70 000

27
 FAC1601/QUESTION BANK

LU 5: PROPERTY PLANT AND EQUIPMENT – IAS 16:

QUESTION 5.1 (31 marks) (37 minutes)

The following information was taken from the accounting records of Hawk-eye (Pty) Ltd, a
manufacturing company on 31 December 2014:
R
Land at valuation (additional information 1) .......................................................................... 800 000
Factory buildings at cost (additional information 1) ............................................................... 960 000
Motor vehicles at carrying amount (31/12/2013) (additional information 2 & 3) .................... 420 000
Crane at cost (additional information 1 & 2) .......................................................................... 480 000
Equipment at cost (31/12/2013) (additional information 2 & 3) ............................................. 360 000
Accumulated depreciation:
- Motor vehicles (31/12/2013) ............................................................................................. 280 000
- Crane (31/12/2013) ........................................................................................................... 120 000
- Equipment (31/12/2013) ................................................................................................... 120 000
Investments at cost (additional information 5) ...................................................................... 32 000
Loan (additional information 6) ............................................................................................. 25 000
Inventories (additional information 4) .................................................................................... 390 000
Trade and other receivables ................................................................................................. 627 200
Bank overdraft....................................................................................................................... 168 000
Trade and other payables ..................................................................................................... 195 000
Prepaid lease expenses ........................................................................................................ 4 600

Additional information

The financial manager supplied you with the following information in respect of transactions that
occurred during the 2014 financial year that must still be accounted for:

1. Land and buildings are owner occupied and consist of a factory building on erf 135,
Boksburg. The land was acquired on 1 March 2013 for R380 000. Factory buildings, at a cost
of R960 000, were erected during the current financial year. The company withdrew its crane
from production for a period of 5 months during which it was used in the process of erecting
the factory building. The withdrawal was not taken into consideration in determining the cost
of R960 000 for the erection of the building. The building was completed on
31 December 2014. The land was revalued on 31 December 2014 at net replacement value
by Mr J Armstrong, an independant sworn appraiser.

2. Non-current assets are depreciated as follows:

- The crane was acquired on 1 October 2012. It is depreciated using the straight-line
method over a period of 60 months.
- Equipment: 20% per annum using the reducing balance method.
- Vehicles: 20% per annum using the straight-line method.
- Buildings: 2% per annum using the straight-line method.

3. The following transactions in respect of non-current assets occured during the year:
- On 30 June 2014 a delivery vehicle with a cost price of R60 000, on which R30 000
depreciation had already been written off at 1 January 2014, was sold for R50 000. A new
delivery vehicle costing R102 600 (VAT included at 14%) was purchased on the same
date to replace the old vehicle. Hawk-eye (Pty) Ltd is registered as a VAT vendor.

- The company decided to buy additional equipment for the business. It was estimated that
the equipment would have a residual value of R10 000. The cost price of the equipment
was R150 000 1 July 201(date of purchase).

28
 FAC2601/QUESTION BANK

QUESTION 5.1 - continued

4. Inventories at cost price on 31 December 2014 consist of the following:

- Raw materials R140 000

- Work in progress R200 000
- Finished goods R50 000

At 31 December 2014, the directors of the company determined that the net realisable value
of the inventories was as follows:

- Raw materials : 5% below cost

- Work in progress : 5% above cost
- Finished goods : 5% below cost

5. Investments consist of the following:

- 7 000 Ordinary shares in White-tip Ltd purchased for R15 000. These shares are
classified as a “financial asset at fair value through profit or loss” and were purchased for
speculation purposes. The issued share capital of White-tip Ltd consists of 200 000
ordinary shares. These shares are traded on the JSE Ltd and the fair value of the shares
was R3,00 each on 31 December 2014.

- 5 000 Preference shares in Eagle-wing Ltd purchased for R17 000. The issued preference
share capital of Eagle-wing Ltd consists of 20 000 preference shares. These shares are
traded on the JSE Ltd and the fair value of the shares was R4,00 each on 31 December
2014. These shares are classified as a “financial asset at fair value through other
comprehensive income”.

6. The loan consists of the following:

- Loan to Wing-back (Pty) Ltd to the amount of R25 000. Interest is calculated on the loan
at 15% per annum and is paid annually in arrears. The loan is secured by a first mortgage
bond over the company’s property. The loan is repayable in total on 31 December 2018.

REQUIRED:

Prepare only the “Asset” section of the statement of financial position as well as the property,
plant and equipment note (PPE note) thereto, of Hawk-eye (Pty) Ltd at 31 December 2014, in
agreement with the requirements of International Financial Reporting Standards (IFRS).

Comparative figures are not required.

The accounting policy note is not required.

All amounts exclude VAT (where appropriate), except where otherwise indicated.

Ignore the total column in the PPE note.

29
 FAC1601/QUESTION BANK

SOLUTION 5.1

HAWK-EYE LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012

Notes R
ASSETS
Non-current assets ..................................................................................................... 2 780 000
Property, plant and equipment .................................................................................... 1 2 735 000
Financial asset at fair value through other comprehensive income .................................. 20 000
Loan .............................................................................................................................. 25 000
Current assets ............................................................................................................. 1 033 300
Inventories .................................................................................................................... 380 500
Trade and other receivables ......................................................................................... 627 200
Financial asset at fair value through profit or loss......................................................... 21 000
Prepaid expenses ......................................................................................................... 4 600
Total assets ................................................................................................................. 3 813 300

HAWK-EYE LTD
NOTES AT 31 DECEMBER 2012

1. Property, plant and equipment

Machinery
Motor and
Land Buildings vehicles Crane equipment Total
R R R R R R
Carrying amount
1/1/2014 ........................ 380 000 - 420 000 360 000 240 000 1 400 000
Cost.............................. 380 000 - 700 000 480 000 360 000 1 920 000
Accumulated
depreciation ................. - - (280 000) (120 000) (120 000) (520 000)
Depreciation................... - - (143 000) (56 000) (62 000) (261 000)
Additions to cost ............ - 960 000 90 000 - 150 000 1 200 000
Disposals at carrying
amount ......................... - - (24 000) - - (24 000)
Depreciation capitalised. - 40 000 - (40 000) - -
Revaluation .................... 420 000 - - - - 420 000
Carrying amount
31/12/2014 .................... 800 000 1000 000 343 000 264 000 328 000 2 735 000
Cost/Valuation ............. 800 000 1000 000 730 000 480 000 510 000 3 520 000
Accumulated
depreciation ................. - - (387 000) (216 000) (182 000) (785 000)

The land, erf 135 situated in Boksburg, was revalued on 31 December 2014 at net replacement
value by an independent appraiser.

Calculations:

1. Motor vehicles
R
1.1 Cost at 1 January 2012

Carrying amount at 31 December 2011 ................................................................... 420 000

Accumulated depreciation at 31 December 2011 .................................................... 280 000
700 000

30
 FAC2601/QUESTION BANK

SOLUTION 5.1 - continued

1.2 Depreciation for the year

(R700 000 x 0,2 x 6 ÷ 12) + (700 000 – 60 000 + 90 000) ....................................... 143 000

1.3 Cost at 31 December 2012

Cost at 1 January 2012 ............................................................................................ 700 000

Sales at cost ............................................................................................................ (60 000)
Purchases at cost (102 600 x 100/114)........................................................................ 90 000
730 000

1.4 Accumulated depreciation on motor vehicle sold:

30 000 + (60 000 x 0,2 x 6 ÷ 12) .............................................................................. 36 000

2. Crane

2.1 Depreciation for the year

R480 000 ÷ 5 years.................................................................................................. 96 000

2.2 Depreciation capitalised

R96 000 x 5 ÷ 12...................................................................................................... 40 000

Thus, R40 000 debited to buildings

3. Equipment

3.1 New equipment – depreciation

Cost price ................................................................................................................. 150 000

Residual value ......................................................................................................... (10 000)
140 000
Depreciation: (150 000 – 10 000) x 0,2 x 6 ÷ 12 ...................................................... 14 000

3.2 Old equipment – depreciation

(360 000 – 120 000) x 0,2 = 48 000

3.3 Total depreciation

48 000 + 14 000 = 62 000

4. Inventory

Lower of cost or NRV R

Raw materials: 140 000 x 0,95 133 000
Work in progress: 200 000
Finished goods: 50 000 x 0,95 47 500

31
 FAC1601/QUESTION BANK

SOLUTION 5.1 - continued

5. Investments

5.1 Current assets

7 000 x 3 = 21 000

5.2 Non-current assets

5 000 x 4 = 20 000

32
 FAC2601/QUESTION BANK

QUESTIONS 5.2 - (45 marks) (54 minutes)

The following information was taken from the accounting records of Jackel Ltd, on
31 December 2014:
Additional R
information
Land at valuation............................................................................................. 1 800 000
Office buildings at cost .................................................................................... 1 1 960 000
Investment property ........................................................................................ 2 3 500 000
Motor vehicles at carrying amount (31/12/2013) ............................................. 3&4 750 000
Machinery at cost (31/12/2013) ...................................................................... 1, 3 & 4 840 000
Furniture and fittings at carrying amount (31/12/2014) ................................... 3&4 310 000
Accumulated depreciation:
- Motor vehicles (31/12/2013) ....................................................................... 530 000
- Machinery (31/12/2013) .............................................................................. 315 000
Investments at cost ......................................................................................... 5 39 000
Trade and other receivables ........................................................................... 6 442 000
Bank ................................................................................................................ 103 000
Trade and other payables ............................................................................... 98 500

Additional information

The information in respect of transactions that occurred during the 2014 financial year is as follows:

1. On 1 March 2013, Jackel Ltd acquired land, erf 308 Midstream, at a cost of R600 000 with
the intention to build an office block thereon. The building will be owner occupied. Jackel Ltd
commenced erecting the building during the current financial year.

Total cost incurred on the building up to 31 December 2014, was as follows:

R
Material ................................................................................................................... 1 300 000
Professional fees ..................................................................................................... 110 000
Labour cost ............................................................................................................. 550 000
Total costs ............................................................................................................... 1 960 000

The company withdrew one of its machines from production for a period of 4 months during
which it was used in the process of erecting the office building. The office building was
completed and ready for use on 30 November 2014. The land was revalued on
31 December 2014 at net replacement value by Mrs C Collins, an independent sworn
appraiser.

It is company policy to revalue and account for land and buildings according to its net
replacement values at the end of every second year.

2. Jackel Ltd acquired the following property for investment purposes on 30 June 2014:
R
Land: Erf 448, Parkview .......................................................................................... 1 000 000
Buildings thereon .................................................................................................... 2 500 000
3 500 000

The property is let to Hide Ltd in terms of an operating lease agreement.

33
 FAC1601/QUESTION BANK

QUESTION 5.2 (continued)

During the current financial year the following costs were incurred on the property:
R
- Improvements to the building to extend rentable floor capacity
(completed 1 December 2014) ......................................................................... 450 000
- Repairs and maintenance ................................................................................. 75 000

These transactions have not yet been recorded in the accounting records of Jackel Ltd.

The company accounts for the property using the fair value model. On 31 December 2014,
Mr Z Mathews, a sworn appraiser, valued the property based on market evidence at the
following values:
R
Land .............................................................................................................. 1 100 000
Buildings ........................................................................................................ 2 900 000

3. Other transactions in respect of property, plant and equipment that took place during the year
are as follows:

- On 30 September 2014, a motor vehicle was sold for R170 000. The cost price and
accumulated depreciation on this vehicle at the beginning of the current financial year
was R250 000 and R62 500 respectively. A new vehicle costing R315 000 was
purchased on the same date to replace the old vehicle.

- The company purchased an additional machine for the business on 1 October 2014. It
was calculated that the machine would have a residual value of R8 000 at the end of its
useful life. The cost price of the machine is R448 000. This machine was not used in the
construction of the new office building. This transaction has not yet been recorded in the
accounting records of Jackel Ltd.

- All furniture and fittings were purchased on 1 January 2013. No furniture or fittings were
purchased during the current financial year.

4. Property, plant and equipment are depreciated as follows:

- Machinery: According to the straight-line method over a period of 60 months.

- Furniture and fittings: 20% per annum according to the reducing balance method.
- Motor vehicles: According to the straight-line method over the asset’s useful life of
5 years.
- Buildings: 2% per annum according to the straight-line method.

5. Investments consist of the following:

- 22 000 Ordinary shares in Hamper Ltd purchased for R39 000. These shares were
classified as a financial asset through profit or loss, purchased for speculation purposes.
The issued share capital of Hamper Ltd consists of 800 000 ordinary shares. Each share
carries one vote. These shares are traded on the JSE at R3,50 per share on
31 December 2014.

6. The directors decided to write off R75 000 bad debts for the current financial year. This
transaction has not yet been recorded in the accounting records of Jackel Ltd.

34
 FAC2601/QUESTION BANK

QUESTION 5.2 (continued)

REQUIRED:

Prepare the “Asset” section of the Statement of Financial Position as well as the Property, Plant
and Equipment and Investment Property notes of Jackel Ltd at 31 December 2014. Your answer
should comply with the requirements of International Financial Reporting Standards (IFRS).

Comparative figures are not required.

The accounting policy note is not required.

All amounts exclude VAT (where appropriate), except where otherwise noted.

Ignore the total column in the Property, Plant and Equipment note. [45]

35
 FAC1601/QUESTION BANK

SOLUTION 5.2

JACKEL LTD
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014
R
ASSETS
Non-current assets
Property, plant and equipment 4 561 390
Investment property 4 000 000

Current assets
Trade and other receivables 367 000
Financial asset at fair value through profit or loss 77 000
Bank 103 000

Total assets 9 108 390

JACKEL LTD
NOTES AT 31 DECEMBER 2014

1. Property, plant and equipment

Furnitur
Motor e
Land Building vehicles Machinery and Total
s fittings
R R R R R R
Carrying amount 1/1/2014 600 000 750 000 525 000 387 500
Cost 600 000 1 280 840 000 484 375
000
Accumulated depreciation (530 000) (315 000) (96 875)
Movements for the year:
Depreciation (3 360) (259 250) (134 000) (77 500)
Additions at cost 1 960 315 000 448 000
000
Disposals at carrying amount (150 000)
Depreciation capitalised 56 000 (56 000)
Revaluation 200 000
Carrying amount 800 000 2 012 655 750 783 000 310 000 4 561
31/12/2014 640 390
Cost/Valuation 800 000 2 016 1 345 1 288 484 375
000 000 000
Accumulated depreciation (3 360) (689 250) (505 000) (174 375)

2. Investment property

Land and
Buildings Total
R R
Carrying amount 1/1/2014
Movements for the year:
Additions: cost on acquisition 3 500 000
Additions: subsequent expenditure capitalised 450 000
Fair value adjustment 50 000
Carrying amount 31/12/2012 4 000 000

36
 FAC2601/QUESTION BANK

SOLUTION 5.2 (continued)

Calculations

1. Motor vehicles

1.1 Cost at 1 January 2014 R

Carrying amount at 31 December 2013 750 000

Accumulated depreciation at 31 December 2013 530 000
1 280 000

1.2 Depreciation for the current financial year R

Vehicle sold:
250 000 x 0,2 x 9/12 37 500

New vehicle purchased:

315 000 x 0,2 x 3/12 15 750

Remainder of vehicles:
(1 280 000 – 250 000) x 0.2 206 000

Total depreciation 259 250

1.3 Cost at 31 December 2014 R

Cost at 1 January 2012 1 280 000

Cost price of vehicle sold (250 000)
Purchases at cost 315 000
1 345 000

1.4 Accumulated depreciation of motor vehicle on date of sale R

62 500 + (250 000 x 20% x 9/12) 100 000

1.5 Carrying amount of motor vehicle on date of sale R

250 000 – 100 000 150 000

1.6 Accumulated depreciation on 31 December 2014 R

Accumulated depreciation beginning of the year 530 000

Depreciation for the year 259 250
Less: Accumulated depreciation of vehicle sold (100 000)
Accumulated depreciation end of year 689 250

37
 FAC1601/QUESTION BANK

SOLUTION 5.2 (continued)

2.  Machinery 
 
2.1 Depreciation for the year (old) R

840 000 / 5 years 168 000

2.2 Depreciation capitalised R

168 000 x 4/12 56 000

2.3 Depreciation on new machinery R

Cost price 448 000

Residual value (8 000)
440 000
Depreciation: 440 000 x 20% x 3/12 OR 440 000 / 60 x 3 22 000

Total depreciation :
- Old machinery: (168 000 – 56 000) 112 000
- New machinery 22 000
134 000

3. Buildings

3.1 Depreciation on buildings R

(1 960 000 + 56 000) x 2% x 1/12 3 360

4. Furniture and equipment

4.1 Depreciation R

Carrying amount 31/12/2014: 310 000

Carrying amount 01/01/2014: (310 000 x 100/80) 387 500

Depreciation for the year:

387 500 – 310 000 = 77 500
OR
387 500 x 20% = 77 500

4.2 Accumulated depreciation beginning of the year R

Cost price of asset:

387 500 x 100/80 484 375
484 375 x 0.2 96 875
OR
484 375 – 387 500 96 875

38
 FAC2601/QUESTION BANK

SOLUTION 5.2 (continued)

5. Investments

5.1 Current assets R

22 000 x R3,50 77 000

6. Trade and other recevables

R
442 000 – 75 000 367 000

39
 FAC1601/QUESTION BANK

LU 6: INVESTMENT PROPERTY – IAS 40:

QUESTION 6.1

NewsNetwork Ltd is a news publishing company, situated in the northern suburbs of

Johannesburg. The company has a December year-end.

The following details are available regarding certain assets of the company:

Printing plant

NewsNetwork Ltd owns a printing plant that is used to print all its publications. The property was
purchased on 30 September 20.10 for R3 000 000 (land: R1 000 000; building: R2 000 000). The
property was available for use, as intended by management, on acquisition date and was also
brought into use on this date. A residual value of R500 000 was allocated to the building. The
useful life of the building was estimated to be 25 years.

On 31 December 20.11, the property was revalued for the first time. The net replacement value of
this property was determined to be R3 550 000 (land: R1 250 000; building: R2 300 000). The
residual value and remaining useful life of the property remained unchanged. No decision has
been made by the company to sell this property.

Administration building

This property was bought by NewsNetwork Ltd for its own administrative purposes on 1 February
20.11 for R1 400 000 (land: R500 000; building: R900 000). The property was available for use, as
intended by management, on acquisition date and was also brought into use on this date. On 1
February 20.11, it was determined that the building had an estimated useful life of 30 years, with
no residual value. The estimated useful life and residual value remained unchanged.

During October 20.11, NewsNetwork Ltd was approached by another company about the
possibility of leasing the administrative building from NewsNetwork Ltd. After discussions, the
board of directors of NewsNetwork Ltd changed their original intension regarding the building and
vacated the building on 31 October 20.11. The building was ready to be leased out from
1 November 20.11. A six year operating lease contract, effective from 1 November 20.11, was
concluded. NewsNetwork Ltd will, in future, rent offices for its own administrative purposes.

The respective net replacement values and fair values of this administrative building were as
follows:
31 October 20.11 31 December 20.11
R R
Land 530 000 540 000
Building 920 000 935 000

Office block

NewsNetwork Ltd owns an office block which is leased out to CDDNews Ltd for their administrative
purposes. The property was purchased on 1 March 20.11 for R1 600 000 (land: R600 000;
building: R1 000 000). The fair value of this property on 31 December 20.11 was determined to be
R2 050 000 (land: R700 000; building: R1 350 000).

40
 FAC2601/QUESTION BANK

Additional information:
1. It is the accounting policy of the company to account for investment property according to
the fair value model.

2. It is the accounting policy of the company to provide for depreciation according to the
straight-line method over the assets’ estimated useful lives. Depreciation for the year is
calculated on the most recent revalued amounts.

3. All the net replacement values and fair values of assets were determined by Mr Nkuli, an
independent sworn appraiser. Mr Nkuli has recent experience in the location and category
of the property being valued. The net replacement values and the fair values were
determined with reference to current market prices on an arm’s length basis of similar
properties in the same area.

4. Assume all amounts to be material.

REQUIRED

Disclose the following notes to the annual financial statements NewsNetwork Ltd for the year
ended 31 December 20.11:

(b) Property, plant and equipment

(c) Investment property

(d) Accounting policy notes are not required.

(e) Show all calculations.
(f) Round off all amounts to the nearest rand.
(g) Ignore comparative information.
(h) Ignore all tax and VAT implications.
• Your answer must comply with International Financial Reporting Standards (IFRS).

41
 FAC1601/QUESTION BANK

SOLUTION 6.1

NewsNetwork Ltd
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.11

1. Property, plant and equipment

Land Building Total
R R R
Carrying amount at the beginning
1,000,000 1,985,000 2,985,000
of year
Cost 1,000,000 2,000,000 3,000,000
Accumulated depreciation (calc 1) - (15,000) (15,000)
Additions 500,000 900,000 1,400,000
Revaluations (calc 2) 280,000 433,289 713,289
Depreciation (calc 3) - (98,289) (98,289)
Transfer to Investment property (530,000) (920,000) (1,450,000)
Carrying amount at the end of the
1,250,000 2,300,000 3,550,000
year
Gross carrying amount 1,250,000 2,375,789 3,625,789
Accumulated depreciation - (75,789) (75,789)
1. [(2 000 000 – 500 000) / 25] x 3/12 = 15 000
2. [(2 300 000 – (2 000 000 – 15 000) – 75 789 (calc 3)] = 390 789 + (920 000 - (900 000 – 22
500 (calc 3)) = 42 500] = 433 289
[(1 250 000 – 1 000 000) = 250 000 + (530 000 – 500 000) = 30 000] = 280 000
3. [(2 300 000 – 500 000) / 285 months x 12 months = R75 789 + (900 000 / 360 months x 9
months = 22 500)] = 98 289

Valuations were performed on 31 December 2011 by an independent sworn appraiser.

2. Investment property Land Building Total
R R R
Carrying amount at the beginning
of year - - -
Additions 600,000 1,000,000 1,600,000
Transfer from property, plant and
equipment 530,000 920,000 1,450,000
Fair value adjustment (calc 4 and
5) 110,000 365,000 475,000
Carrying amount at the end of the
year 1,240,000 2,285,000 3,525,000

The valuation was performed on 31 December 2011 by a sworn appraiser.

4. [(540 000 – 530 000) = 10 000 + (700 000 – 600 000) = 100 000] = 110 000
5. [(935 000 – 920 000) = 15 000 + (1 350 000 – 1 000 000) = 350 000] = 365 000

42
 FAC2601/QUESTION BANK

Question 6.2

Ndzabela Limited acquired land and building at a cost of R1 500 000 and R2 000 000, respectively
on 31 December 20.14 with an intention to lease to Peterson Limited. The cost of clearing and
improving of the building was R500 000. The property was ready for use on 1 January 20.15. All
investment properties, subsequent to initial measurement, are measured using the fair value
model.
The rental on operating lease was R150 000 per annum from 1 January 20.15.
The land and building were valued at current market value of R1 600 000 and R2 550 000,
respectively by an independent sworn appraiser, Pieterse, on 31 December 20.15.

REQUIRED

1. Prepare the asset section of the Statement of Financial Position of Ndzabela Limited as at
31 December 20.15 in accordance with the requirements of International Financial
Reporting Standards.
2. Disclose the following notes to the financial statements of Ndzabela Limited for the year ended
31 December 20.15 in accordance with the requirements of International Financial Reporting
Standards:
 Investment property

43
 FAC1601/QUESTION BANK

Solution 6.2

QUESTION BANK – INVESTMENT PROPERTY SOLUTION

MARAISANE LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.15
Note R
ASSETS
Non-current assets
Investment property 1 4 150 000

Notes for the year ended 31 December 20.15

1. Investment propert
Land Buildings Total
R R R
Carrying amount at the beginning of the year 1 500 000 2 500 000 4 000 000
Fair value adjustments
(1 600 000 – 1 500 000) 100 000 100 000
(2 550 000 – 2 500 000) 50 000 50 000

1 600 000 2 550 000 4150 000

Land and buildings were valued at current market value to R1 600 000 and R2 550 000,
respectively by an independent sworn appraiser, Pieterse, on 31 December 20.15.

44
 FAC2601/QUESTION BANK

LU 7: LEASES – IAS 17:

QUESTION 7.1 (20 marks)(24 minutes)

1. Els Limited, a manufacturing concern, has a 28 February financial year end. Els Limited
entered into an operating lease agreement on 1 March 2013 whereby a machine with a cost
price of R250 000 is leased from a finance company. The period of the lease is 3 years and
the lease payments are payable monthly in arrears.

The following terms apply to the above lease:

Instalment payable: months 1 - 24 R8 000 per month

months 25 - 36 R7 400 per month

2. Els Limited leased a second machine from Steyn Limited from 1 March 2013 according to a
finance lease agreement. The conditions of the finance lease agreement are as follows:

The period of the lease is 4 years, ending on 28 February 2017. The cost of the machine was
R80 000. A half-yearly instalment of R12 600 is payable in arrears on 31 August and
28 February each year.

The following amortisation table was correctly compiled by the accountant to assist you:

Date Instalment Capital Interest Balance

R R R R
80 000
31 Aug 2013 12 600 8 200 4 400 71 800
28 Feb 2014 12 600 8 700 3 900 63 100
31 Aug 2014 12 600 9 200 3 400 53 900
28 Feb 2015 12 600 9 700 2 900 44 200
31 Aug 2015 12 600 10 200 2 400 34 000
28 Feb 2016 12 600 10 800 1 800 23 200
31 Aug 2016 12 600 11 400 1 200 11 800
28 Feb 2017 12 600 11 800 800 -

3. Machinery is depreciated at 25% per year according to the straight-line method.

REQUIRED:

a) Show all the journal entries per year in the accounting records of Els Limited for the full
duration of the operating lease agreement in order to comply with the requirements of
International Financial Reporting Standards (IFRS).

All dates and calculations must be shown.

Ignore income tax implications.

No journal narrations are required.

b) Show only the journal entries for the financial year ending 28 February 2014 in the accounting
records of Els Limited in order to account for the finance lease agreement in accordance with
the requirements of International Financial Reporting Standards (IFRS).

All calculations must be shown.

Ignore income tax implications.

45
 FAC1601/QUESTION BANK

No journal narrations are required.

SOLUTION 7.1

a) Equalisation of operating lease payments:

R
Installments – months 1 – 24 (R8 000 x 24) 192 000
Installments – months 25 - 36 (R7 400 x 12) 88 800
Total payments over lease term 280 800

R
Equalisation of lease term pere month (R280 800 / 36) 7 800
OR
Equalisation of lease payments per year (R280 800 / 3) 93 600

Actual payments: Month 1 – 24: (R8 000 x 12) 96 000

Equalised payments 93 600
Prepaid expense 2 400

Actual payments: Month 25 – 36: (R 7 400 x 12) 88 800

93 600
Deferrred payment agains prepaid expenses 4 800

Journal entries:

a)

28 February 2014 R / Dr R / Cr
Operating lease expense (SPL) 93 600
Prepayments (SFP) 2 400
Bank (SFP) 96 000

28 February 2015
Operating lease expense (SPL) 93 600
Prepayments (SFP) 2 400
Bank (SFP) 96 000

28 February 2016
Operating lease expense (SPL) 93 600
Prepayments (SFP) 4 800
Bank (SFP) 88 800

46
 FAC2601/QUESTION BANK

SOLUTION 7.1 - continued

b) Journals for the year ended 28 February 2014:

28 February 2014 R / Dr R / Cr
Machinery (SFP) 80 000
Financial lease liability (SFP) 80 000

Financial Lease liability (SFP) calculation 1 16 900

Interest expense (SPL) calculation 2 8 300
Bank (SFP) calculation 3 25 200

Depreciation (SPL) calculation 4 20 000

Accumulated depreciation: Machinery (SFP) 20 000

Calculations:
R
1. R8 200 + R8 700 (from table) 16 900
2. R4 400 + R3 900 (from table) 8 300
3. R12 600 x 2 (from table) 25 200
4. Depreciation: R80 000 / 4 20 000

47
 FAC1601/QUESTION BANK

QUESTIONS 7.2 (21 marks) (25 minutes)

Sailfish Ltd is a company with a 28 February year end, which operates in the fishing industry. The
company’s main activities are the catching, processing and canning of deep sea fish. Sailfish Ltd
entered into the following lease agreements:

Agreement 1 and 2

Sailfish Ltd rents vehicles and equipment in terms of operating lease agreements.

Extracts from the operating lease agreements are as follows:

Multi Bank:
- Assets leased – 9 vehicles
- Period of lease – 1 July 2010 to 30 June 2015
- Initial payment – R31 500 (for all 9 vehicles) paid on 1 July 2010
- Monthly lease payments payable in arrears – R3 500 per vehicle from the inception of the lease
agreement

Zero Bank:
- Assets leased – office equipment
- Period of lease – 1 January 2011 to 31 December 2014
- Monthly lease payments payable in arrears – R2 000 from inception of the lease agreement

On termination of the lease agreement with Zero Bank the company made a cash offer of R20 000
(fair value) for the office equipment and the offer was accepted on 31 December 2014.

Depreciation is written off on vehicles and office equipment, according to the straight-line method
using the following rates:

Vehicles - 25% per annum

Office equipment - 20% per annum

Agreement 3

The following information applies to the lease:

Sailfish Ltd entered into a lease agreement on 1 March 2014 whereby a machine with a cost price
of R825 000 is leased from a finance company in terms of a finance lease agreement. The period
of the lease is 5 years and the lease payments are payable monthly in arrears. A nominal interest
rate of 10% per annum is applicable on the lease. Sailfish Ltd will obtain ownership of the machine
at the end of the lease term on payment of a nominal amount.

The machine will be depreciated over its expected useful life of 5 years according to the
straight-line method.

The financial manager compiled the following correct amortisation table, but has not yet recorded
any journal entries in the accounting records for the current financial year.

48
 FAC2601/QUESTION BANK

QUESTION 7.2 (continued)

Year end Interest Capital Instalments Balance

R R R R
825 000
28/02/2015 76 475 133 871 210 346 691 129
28/02/2016 62 456 147 889 210 346 543 240
28/02/2017 46 971 163 375 210 346 379 864
28/02/2018 29 863 180 483 210 346 199 382
28/02/2019 10 964 199 382 210 346 -

REQUIRED:

Journalise the above transactions (including cash transactions) in the accounting records of
Sailfish Ltd for the financial year ended 28 February 2015 to account for the agreements.

Journal narrations are not required.

Show all calculations.

49
 FAC1601/QUESTION BANK

SOLUTION 7.2

Agreement 1 and 2
Dr Cr
Journal entries R R

Year end 28 February 2015

Multi Bank

Operating lease expenses [(R3 500 x 9) x 12] 378 000

Bank 378 000

Operating lease expenses 6 300

Operating lease expenses deferral (R384 300 – R378 000) 6 300

Zero Bank

Operating lease expenses (R2 000 x 10) 20 000

Bank 20 000

Office equipment 20 000

Bank 20 000

Depreciation (R20 000 x 20% x 2/12) 667

Accumulated depreciation 667

Calculations:
1. Equalising of operating lease payment – Multi Bank
R
Initial payment 31 500
Total monthly lease payments [(R3 500 x 9 x 12) x 5] 1 890 000
1 921 500
Thus per month: 1 921 500/60 = R32 025
Thus per year: R32 025 x 12 = R384 300
OR 1 921 500/5
Agreement 3
Dr Cr
Machinery – finance lease asset 825 000
Finance lease liability 825 000

Finance lease liability 133 871

Finance cost 76 475
Bank 210 346

Depreciation (calculation 1) 165 000

Accumulated depreciation on leased asset 165 000

Calculations
1. Depreciation
R825 000 / 5 years = R165 000 per year

50
 FAC2601/QUESTION BANK

LU 8: FINANCIAL INSTRUMENTS – IFRS 13, IAS32, IAS 39:

QUESTION 8.1

The financial directors of SW Investments Ltd (SW) and Excel Ltd (Excel) requested you to explain
to them how the following financial instruments should be classified in the financial statements of
SW and the financial statements of Excel in terms of IAS 32 Financial Instruments: Presentation.
All the transactions below occurred during the year ended 31 December 20.13.

Transaction 1

On 1 January 20.13 SW purchased 100 000 shares in Excel. These were acquired at fair value on
transaction date.

Transaction 2

On 1 December 20.13 SW obtained a short-term loan of R20 000 from Excel and is required to
repay the total loan within 90 days. The loan is still outstanding on 31 December 20.13.

Transaction 3

On 1 December 20.13 SW obtained a short-term loan of R20 000 from Excel and is required to
settle the total loan within 90 days in as many shares as equal to R20 000. The loan is still
outstanding on 31 December 20.13.

Transaction 4

On 31 December 20.13 SW issued 1 000 redeemable cumulative preference shares to Excel at an

issue price of R1 per preference share. The dividend rate is an 8% cumulative preference dividend
per annum calculated on the issue price. All accumulated (unpaid) dividends will roll up until
redemption date. The redemption of preference shares will take place on 31 December 20.15 at
R1,20 per share.

Transaction 5

On 31 December 20.13 SW issued 1 000 cumulative compulsory convertible preference shares to

Excel at an issue price of R1 per preference share. On 31 December 20.15, the conversion date,
each preference share will automatically be converted into two ordinary shares. The dividend rate
is an 8% cumulative preference dividend per annum calculated on the issue price. All accumulated
(unpaid) dividends will roll up until conversion date. (Please note that the above transaction is not
examinable but given for completion purposes).

REQUIRED

Provide an explanation to the financial directors of SW Ltd and Excel Ltd of how the
above mentioned financial instruments should be classified in their respective financial
statements for the year ended 31 December 20.13 in accordance with
IAS 32 Financial instruments: Presentation.

Please note:

• You are not required to include calculations in your explanation.

• Ignore the effect of the time value of money in the scenarios above.

51
 FAC1601/QUESTION BANK

Solution 8.1:

Suggested solution

Transaction 1
SW’s financial statements (investor):

The investment in shares will be classified as a financial asset since SW holds the equity
instrument of another entity (IAS 32.11) (3.2 Financial Asset).

Excel’s financial statements (issuer):

The shares issued will be classified as equity instruments since it is a contract that evidences
a residual interest in the assets of Excel after deducting its liabilities (IAS 32.11) (3.4 Equity
instruments).

Transaction 2
SW’s financial statements:

A loan payable will be recognised as a financial liability as SW has a contractual obligation

to deliver cash to Excel within 90 days (IAS 32.11) (3.3 Financial Liability).

Excel’s financial statements:

A loan receivable will be recognised as a financial asset in the records of Excel as it

represents a contractual right to receive cash from SW (IAS 32.11) (3.2 Financial Asset).

Transaction 3

SW’s financial statements:

In terms of the agreement, SW has no contractual obligation to deliver cash or another

financial asset to settle the loan.
SW is however required to settle the loan with its own shares (equity instruments). It is
important to note that the fact that SW is required to deliver its own equity instruments does
not automatically classify the loan as an equity instrument (IAS 32.21) (32.18).
It is essential to determine the substance of the contract. In other words, is the number of
shares to be issued by SW in terms of the contract fixed or variable (IAS 32.21) (32.16)?
The amount that SW needs to settle remains fixed at R20 000. However, the number of shares
that SW will need to deliver to settle the loan varies (the number of shares issued on delivery
date is dependent on the share price of the ordinary shares).
The contract will therefore be settled by delivering a variable number of SW’s own shares in
exchange for a fixed amount. Accordingly the loan payable is a financial liability (IAS 32.11).

Excel’s financial statements:

A loan receivable will be recognised as a financial asset as it meets the definition of a

financial asset (Excel receives an equity instrument from another entity) (IAS 32.11).

52
 FAC2601/QUESTION BANK

Transaction 4
SW’s financial statements (issuer):

The two cash flow streams (components) related to preferences shares (i.e. the payment of
preference dividends and the payment of the principal amount) are considered separately for
classification purposes (IAS 32.15).
Principal amount
When assessing the substance of the agreement between SW and Excel, it is clear that SW
has a contractual obligation to deliver cash to Excel on 31 December 20.15 (the preference
share agreement contains a mandatory redemption feature) (IAS 32.18(a)).
The principal amount therefore contains a financial liability.

Dividends
It has to be determined if SW has a contractual obligation to make dividend payments to
assess if the dividend component of this agreement is equity or a financial liability.
Cumulative dividends accumulate (accrue) if the company does not earn sufficient profits to
declare and pay a preference dividend i.e. if the dividend is not declared in one year it will be
carried forward to successive years.
Since this preference share agreement contains a redemption feature, all accumulated
(unpaid) dividends will roll up until redemption date and will have to be paid on
31 December 20.15 when the preference shares are redeemed.
Therefore based on the substance of this transaction, SW has a contractual obligation to
declare and pay all preference dividends on or before 31 December 20.15.
In light of the above the preference dividends contain a financial liability.

Conclusion
The preference shares are classified as a financial liability (IAS 32.11 and IAS 32.18a).
Take note that the dividends paid to Excel will be recognised in profit or loss as finance costs
since the classification of the financial instrument determines how the related payment will be
treated in the financial statements.

Excel’s financial statements (holder)

The investment in the preference shares will be classified as a financial asset in the records
of Excel.

Transaction 5 – Not examinable

SW’s financial statements (issuer):

The two cash flow streams (components) related to preferences shares (i.e. the payment of
preference dividends and the payment of the principal amount) are considered separately for
classification as equity or a financial liability (IAS 32.15).

Principal amount
The substance of this agreement between SW and Excel contains a compulsory conversion
feature that will force SW to convert the preference shares into ordinary shares on 31
December 20.15.
Therefore in terms of the agreement, SW has no contractual obligation to deliver cash or a
financial asset to Excel on conversion date.
SW is however required deliver its own shares (equity instruments) to Excel on conversion
date.
The substance of the contract determines that SW has to deliver a fixed number of ordinary
shares to Excel on conversion date (20 000 ordinary shares).
In light of the above, the principal amount contains an equity instrument.

53
 FAC1601/QUESTION BANK

Dividends
It has to be determined if SW has a contractual obligation to make dividend payments to
assess if the dividend component of this agreement is equity or a financial liability.
Since this preference share agreement contains a compulsory conversion feature, all
accumulated (unpaid) dividends will roll up until conversion date and will have to be paid on
31 December 20.15 when the preference shares are converted.
Therefore based on the substance of this transaction, SW has a contractual obligation to
declare and pay all preference dividends on or before 31 December 20.15.
In light of the above, the preference dividends contain a financial liability.

Conclusion
The preference shares are classified as a compound financial instrument as it contains both
an equity and a liability component (IAS 32.28).
This would lead to a “split accounting” treatment whereby at issue date the net present value of
the amount payable to Excel will be classified as a liability and the balance of the proceeds
received on issue date will be classified as equity (IAS 32.AG37).

Excel’s financial statements (holder)

The investment in the preference shares will be classified as a financial asset in the records
of Excel as it is a contractual right to receive cash or another financial asset.

COMMENT

If the convertible preference shares are not compulsory convertible but convertible
at the option of the holder at any time up to maturity, the preference shares will
still be classified as a compound financial instrument for the following reasons:
• SW has a contractual obligation to declare and pay all accumulated preference
dividends when Excel exercises its option to convert to ordinary shares
(financial liability component).
• If Excel does not exercise its option to convert to ordinary shares, SW will have
to redeem the preference shares on 31 December 20.15 (financial liability
component).
• Excel has a call option (the right to exchange the preference shares for fixed
number of ordinary shares) at any time before maturity date (equity
component).

54
 FAC2601/QUESTION BANK

QUESTIONS 8.2

Maraisane Limited commenced the retail business on 1 January 20.15. Maraisane Limited’s
Statement of Financial Position disclosed an investment account of R310 000 on 31 December
20.15, comprising of the following:

1.Modise Limited
R40 000
20 000 Ordinary shares in Modise Limited were purchased for speculative purpose. The total
issued share capital of Modise Limited consists of 200 000 ordinary shares. The shares are
traded on the JSE Ltd and the market value on 31 December 20.15 was R3.50 per share.

2.Booi Limited
R100 000
25 000 Ordinary shares in Booi Limited were acquired at cost. The total issued ordinary
share capital of Booi Limited was 100 000 shares. The investment is designated as a
financial asset at fair value through other comprehensive income. The shares were traded on
the JSE at R6.00 per share on 31 December 20.15.

3.Boikie Limited
R80 000
A loan was issued to Boikie Limited on 1 January 20.15. The conditions of the agreement are
as follows:
 Loan is payable in half-yearly instalment of R15 261 in arrears on 30 June and
31 December each year until 31 December 20.17.
 Interest rate is 4.0% per annum.

Additional information

No adjustments for the increase in value of investments have yet been made in the accounting
records for the current financial year.

REQUIRED

1. Prepare the asset section of the Statement of Financial Position of Maraisane Limited as at
31 December 20.15 in accordance with the requirements of International Financial
Reporting Standards.
2. Disclose the following notes to the financial statements of Maraisane Limited for the year
ended 31 December 20.15 in accordance with the requirements of International Financial
Reporting Standards:
 Financial assets
 Profit before tax

55
 FAC1601/QUESTION BANK

SOLUTION 8.2

QUESTION BANK – FINANCIAL INSTRUMENTS SOLUTIONS

MARAISANE LIMITED
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.15
R
ASSETS
Non-current assets
Financial assets 1 178 614

Current assets
Short-term portion of financial assets 116 612

Notes for the year ended 31 December 20.15

1. Financial assets
Non-current assets
R
Listed
- Financial assets at fair value through other comprehensive income 150 000
25 000 ordinary shares in Booi Limited (25 000 x 6)
Unlisted
- Financial assets measured at amortised cost 28 784
Loan to Boikie Limited 55 396
Short-term portion of loan to Boikie (26 612)
Loan is payable in half-yearly instalments of R15 261 on 31 June and
31 Dec at an interest of 8% per annum.
178 784
Current assets
R
Listed
- Financial assets at fair value through profit or loss 70 000
20 000 ordinary shares in Modise Limited (20 000 x 3.50)
Unlisted
- Financial assets measured at amortised cost – loan to Boikie 26 612
116 612

56
 FAC2601/QUESTION BANK

2. Profit before tax

Profit before tax includes the following:
R
Income
- Fair value adjustment on financial assets at fair value through profit or 30 000
loss [20 000 x (3.50 – 2.00)]
- Finance income 5 918
Other comprehensive income
- Fair value adjustment on financial assets at fair value through other 50 000
comprehensive income: Mar-to-market reserve [25 000 x (6-2)]

Workings

Date Instalment Capital Interest Balance

R R R R
80,000
30 Jun 2015 15 261 12 061 3 200 67 939
31 Dec 2015 15 261 12 543 2 718 55 396
30 Jun 2016 15 261 13 045 2 216 42 351
31 Dec 2016 15 261 13 567 1 694 28 784
30 Jun 2017 15 261 14 110 1 151 14 674
31 Dec 2017 15 261 14 674 587 0

57
 FAC1601/QUESTION BANK

LU 9: REVENUE FROM CONTRACTS WITH CUSTOMERS – IFRS 15:

QUESTION 9.1 – Modification resulting in a cumulative catch-up adjustment to revenue

A construction company enters into a contract to construct a commercial building for a customer on
customer-owned land for a promised consideration of R1 million and a bonus of R200 000 if the
building is completed within 24 months. The entity accounts for the promised bundle of goods and
services as a single performance obligation satisfied over time because the customer controls the
building during construction. At the inception of the contract, the entity expects the following:

R
Transaction price 1 000 000
Expected costs 700 000
Expected profit (30%) 300 000

At contract inception, the entity excludes the R200 000 bonus from the transaction price because it
cannot conclude that it is highly probable that a significant reversal in the amount of cumulative
revenue recognised will not occur. Completion of the building is highly susceptible to factors
outside the entity’s influence, including weather and regulatory approvals. In addition, the entity
has limited experience with similar types of contracts.

The entity determines that the input measure, based on costs incurred, provides an appropriate
measure of progress towards complete satisfaction of the performance obligation. By the end of
the first year, the entity has satisfied 60% of its performance obligation based on costs incurred to
date (R420 000) relative to total expected costs (R700 000). The entity reassesses the variable
consideration and concludes that the amount is still constrained in accordance with paragraphs
56 to 58 of IFRS 15. Consequently, the cumulative revenue and costs recognised for the first year
are as follows:

R
Revenue (420 000/700 000 X 1 000 000) 600 000
Costs 420 000
Gross profit 180 000

In the first quarter of the second year, the parties to the contract agree to modify the contract by
changing the floor plan of the building. As a result, the fixed consideration and expected costs
increase by R150 000 and R120 000, respectively. Total potential consideration after the
modification is R1 350 000 (R1 150 000 fixed consideration + R200 000 completion bonus). In
addition, the allowable time for achieving the R200 000 bonus is extended by 6 months to 30
months from the original contract inception date. At the date of the modification, based on its
experience and the remaining work to be performed – which is primarily inside the building and not
subject to weather conditions – the entity concludes that it is highly probable that including the
bonus in the transaction price will not result in a significant reversal in the amount of cumulative
revenue recognised. Therefore, it includes the R200 000 in the transaction price. In assessing the
contract modification, the entity evaluates and concludes that the remaining goods and services to
be provided using the modified contract are not distinct from the goods and services transferred on
or before the date of contract modification; that is, the contract remains a single performance
obligation.
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Consequently, the entity accounts for the contract modification as if it were part of the original
contract. The entity updates its measure of progress and estimates that it has satisfied 51,2% of its
performance obligation (R420 000 actual costs incurred ÷ R820 000 total expected costs). The
entity recognises additional revenue of R91 200 ((51,2% complete × R1 350 000 modified
transaction price) – R600 000 revenue recognised to date) at the date of the modification as a
cumulative catch-up adjustment.

QUESTION 9.2 – DETERMINING WHETHER GOODS OR SERVICES ARE DISTINCT

HiLo Ltd, a software developer, enters into a contract with Flow Ltd to transfer a software licence,
perform an installation service and provide unspecified software updates and technical (online and
telephonic) support for a two-year period. HiLo Ltd sells the licence, installation service and
technical support separately. The installation service includes changing the web screen for each
type of user (for example, marketing, inventory management, and information technology). The
installation service is routinely performed by other entities and it does not significantly modify the
software. The software remains functional without the updates and the technical support.

HiLo Ltd assesses the goods and services promised to Flow Ltd to determine which goods and
services are distinct (refer to par .27). HiLo Ltd observes that the software is delivered before the
other goods and services and remains functional without the updates and the technical support.
Thus, HiLo Ltd concludes that Flow Ltd can benefit from each of the goods and services either on
their own or together with the other goods and services that are readily available (refer par .27(a)).

HiLo Ltd also considers the factors in paragraph 29 of IFRS 15 and determines that the promise to
transfer each good and service to Flow Ltd is separately identifiable from each of the other
promises (refer par .27(b)). In particular, HiLo Ltd observes that the installation service does not
significantly modify or customise the software itself and, as such, the software and the installation
service are separate outputs promised by HiLo Ltd instead of inputs used to produce a combined
output.

Based on the above assessment, HiLo Ltd identifies four performance obligations in the contract
for the following goods or services:

a. the software licence;

b. an installation service;
c. software updates; and
d. technical support.

QUESTION 9.3 – GOODS AND SERVICES ARE NOT DISTINCT

A contractor enters into a contract to build a hospital for a customer. The entity is responsible for
the overall management of the project and identifies various goods and services to be provided,
including engineering, site clearance, foundation, procurement, construction of the structure, piping
and wiring, installation of equipment, and finishing.

The promised goods and services are capable of being distinct, as the customer can benefit from
the goods and services either on their own or together with other readily available resources. This
is evidenced by the fact that the entity, or competitors of the entity, regularly sells many of these
goods and services separately to other customers. In addition, the customer could generate
economic benefit from the individual goods and services by using, consuming, selling or holding

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those goods or services.

However, the goods and services are not distinct within the context of the contract, as the entity’s
promise to transfer individual goods and services in the contract is not separately identifiable from
other promises in the contract. This is evidenced by the fact that the entity provides a significant
service of integrating the goods and services (the inputs) into the hospital (the combined output) for
which the customer has contracted.
In this case the goods and services are not distinct. The entity accounts for all of the goods and
services in the contract as a single performance obligation.

QUESTION 9.4 – SIGNIFICANT FINANCING COMPONENT AND RIGHT OF RETURN

XYZ Ltd sells a trailer to a customer for R121 000 that is payable 24 months after delivery. The
customer obtains control of the product at contract inception. The contract permits the customer to
return the trailer within 90 days. The trailer is new and XYZ Ltd has no relevant historical evidence
of product returns or other available market evidence.

The cash selling price of the trailer is R100 000, which represents the amount that the customer
would pay upon delivery for the same product sold under otherwise identical terms and conditions
as at contract inception. XYZ Ltd’s cost of the trailer is R80 000.

SOLUTION 9.4

XYZ Ltd does not recognise revenue when control of the product transfers to the customer. This is
because the existence of the right of return and the lack of relevant historical evidence mean that
the entity cannot conclude that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. Consequently, revenue is recognised only after 90
days when the right of return lapses.

The contract includes a significant financing component. This is evident from the difference
between the amount of promised consideration of R121 000 and the cash selling price of R100 000
at the date at which the goods are transferred to the customer. The contract includes an implicit
interest rate of 10% (the interest rate that discounts the promised consideration of R121 000 to the
cash selling price of R100 000 over 24 months). XYZ Ltd evaluates the rate and concludes that it is
commensurate with the rate that would be reflected in a separate financing transaction between
the entity and its customer at contract inception.

The following journal entries illustrate how XYZ Ltd accounts for this contract:
Dr Cr
R R
Asset for right to recover trailer to be returned1 80 000
Inventory 80 000
Recognise asset for right to recover the trailer to be returned when the
trailer is transferred.

Receivable 100 000

Revenue 100 000
Recognise revenue for the transfer of the trailer when the right of return
lapses as the product is not returned.

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 FAC2601/QUESTION BANK

Cost of sales 80 000

Asset for right to recover trailer to be returned 80 000
Recognise cost of sales for the transfer of the trailer when the right of return
lapses as the product is not returned.

1
Note that this example does not consider the expected costs to recover the trailer.

QUESTION 9.5 – VOLUME DISCOUNT INCENTIVE

LOL Ltd enters into a contract with CHAT Ltd on 1 January 20.14 to sell cellular phone devices for
R100 per device. If CHAT Ltd purchases more than 1 000 cellular phone devices in a calendar
year, the contract specifies that the price per device be reduced retrospectively to R90 per device.
Consequently, the consideration in the contract is variable.

For the first quarter ended 31 March 20.14, LOL Ltd sells 75 cellular phone devices to CHAT Ltd.
LOL Ltd estimates that CHAT Ltd’s purchases will not exceed the 1 000-unit threshold required for
the volume discount in the calendar year. LOL Ltd considers the requirements on constraining
estimates of variable consideration. LOL Ltd determines that it has significant experience with this
product and with the purchasing pattern of CHAT Ltd. Thus, LOL Ltd concludes that it is highly
probable that a significant reversal in the cumulative amount of revenue recognised (R100 per
device) will not occur when the uncertainty is resolved (namely, when the total amount of
purchases is known). Consequently, LOL Ltd recognises revenue of R7 500 (75 devices x R100
per device) for the quarter ended 31 March 20.14.

In May 20.14, CHAT Ltd acquires another company and in the second quarter ended
30 June 20.14, LOL Ltd sells an additional 500 units of cellular phone devices to CHAT Ltd. In the
light of the new fact, LOL Ltd estimates that CHAT Ltd’s purchases will exceed the 1 000-unit
threshold for the calendar year and therefore it will be required to reduce the price per device to
R90 retrospectively. Consequently, LOL Ltd recognises revenue of R44 250 for the quarter ended
30 June 20.14. That amount is calculated based on R45 000 for the sale of 500 devices (500
devices x R90 per device) less the change in transaction price of R750 (75 devices x R10 price
reduction) for the reduction of revenue relating to devices sold for the quarter ended
31 March 20.14.

QUESTION 9.6 – ALLOCATING A DISCOUNT AND VARIABLE CONSIDERATION

An entity regularly sells products A, B and C individually, thereby establishing the following stand-
alone selling prices:
Stand-alone
Product selling
price
R
Product A 40
Product B 55
Product C 45
140

In addition, the entity regularly sells products B and C together for R60.

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Case A – Allocating a discount to one or more performance obligations

The entity enters into a contract with a customer to sell products A, B and C in exchange for R100.
The entity will satisfy the performance obligations for each of the products at different points in
time. The contract includes a discount of R40 on the overall transaction, which would be allocated
proportionately to all three performance obligations when allocating the transaction price, using the
relative stand-alone selling price method. However, because the entity regularly sells products B
and C together for R60 and product A for R40, it has evidence that the entire discount should be
allocated to the promises to transfer products B and C.

If the entity transfers control of products B and C at the same point in time, then the entity could, as
a practical matter, account for the transfer of those products as a single performance obligation.
The entity could, in other words, allocate R60 of the transaction price to the single performance
obligation and recognise revenue of R60 when products B and C simultaneously transfer to the
customer.

If the contract requires the entity to transfer control of products B and C at different points in time,
then the allocated amount of R60 is individually allocated to the promises to transfer product B
(stand-alone selling price of R55) and product C (stand-alone selling price of R45) as follows:

Allocated
Product transaction
price
R
Product B 33 1
Product C 27 2
Total 60

1
R55 / R100 (total stand-alone selling price) x R60
2
R45 / R100 (total stand-alone selling price) x R60

Case B – Residual approach is appropriate

The entity enters into a contract with a customer to sell products A, B and C as described in case
A. The contract also includes a promise to transfer product D. Total consideration in the contract is
R130. The stand-alone selling price for product D is highly variable because the entity sells product
D to different customers at a broad range of amounts (R15–R45). Consequently, the entity decides
to estimate the stand-alone selling price of product D using the residual approach.

Before estimating the stand-alone selling price of product D using the residual approach, the entity
determines whether any discount should be allocated to the other performance obligations in the
contract.

As in case A, because the entity regularly sells products B and C together for R60 and product A
for R40, it has observable evidence that R100 should be allocated to those three products and a
R40 discount should be allocated to the promises to transfer products B and C. Using the residual
approach, the entity estimates the stand-alone selling price of product D to be R30 as follows:

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 FAC2601/QUESTION BANK

Stand-alone
Product selling
price
R
Product A (the stand-alone selling price is directly observable) 40
Products B & C (the stand-alone selling price is directly observable with a discount) 60
Product D (the stand-alone selling price is estimated using the residual approach) 30
130

The entity observes that the resulting R30 allocated to product D is within the range of its
observable selling prices (R15 – R45). Therefore, the resulting allocation is consistent with the
allocation objective.

Case C – Residual approach is inappropriate

The same facts as in case B apply to case C, except for the transaction price, which is R105
instead of R130. Consequently, the application of the residual approach would result in a stand-
alone selling price of R5 for product D (R105 transaction price less R100 allocated to products A, B
and C). The entity concludes that R5 would not faithfully depict the amount of consideration to
which the entity expects to be entitled in exchange for satisfying its performance obligation to
transfer product D, because R5 does not approximate the stand-alone selling price of product D,
which ranges from R15 to R45. Consequently, the entity reviews its observable data, including
sales and margin reports, to estimate the stand-alone selling price of product D using another
suitable method. The entity allocates the transaction price of R105 to products A, B, C and D using
the relative stand-alone selling prices of those products.

QUESTION 9.7 – MEASURING PROGRESS WHEN MAKING GOODS OR SERVICES

AVAILABLE

Italiano Ltd, an owner and manager of health clubs, enters into a contract with a customer for one
year of access to any of its health clubs. The customer has unlimited use of the health clubs and
promises to pay R100 per month. Italiano Ltd determines that its promise to the customer is to
provide a service of making the health clubs available for the customer's use as and when the
customer wishes. This is because the extent to which the customer uses the health clubs does not
affect the number of the remaining goods and services to which the customer is entitled. The entity
concludes that the customer simultaneously receives and consumes the benefits of its
performance in making the health clubs available. Consequently, the entity’s performance
obligation is satisfied over time in terms of paragraph 35(a).

Italiano Ltd also determines that the customer benefits from the entity’s service of making the
health clubs available evenly throughout the year (that is, the customer benefits from the health
clubs being available, regardless of whether the customer uses them or not). Consequently, the
entity concludes that the best measure of progress towards complete satisfaction of the
performance obligation over time is a time-based measure and it recognises revenue on a straight-
line basis throughout the year at R100 per month.

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