Calculators: Yes

Requirements for this paper:

Answer scripts: X Multi-choice cards (A5):
Attendance slips (Fill-in paper): Multi-choice cards (A4):
Scrap paper: Graph paper:

Type of Assessment: Test 1 Qualification: BCOM

Module code: ACCC271 Duration: 101 minutes
Module description: Financial accounting Max: 45
Examiner(s): Miss L van Staden Date: 15/03/2021
Time: 09:00

INSTRUCTIONS TO STUDENTS:

1. You are reminded that answers may NOT be written in pencil or erasable pen.
2. The marks shown against the requirement(s) for each question should be taken as an
indication of the expected length and the required depth of the answer.
3. Answer the questions using:
 Appropriate arrangement and presentation;
 Clarity of explanation;
 Logical argument; and
 Clear and concise language.
Marks will be awarded for the above.
4. Non-programmable calculators are allowed.
5. All books must be handed in.
6. Clearly show all calculations.
7. Round off to the nearest rand (including price per unit), unless otherwise stipulated
in a question.
8. Assume that all amounts are material except where the contrary is stated.
9. All answers need to be handwritten. No typed answers will be marked.
10. Your answers must adhere to International Financial Reporting Standards (IFRS).

ACCC271 2021 Test 1 1/5

QUESTION 1 45 MARKS
Ignore tax
MPE Ltd (‘MPE’) manufactures medical grade personal protective equipment which includes
a mask called a N95 respirator. The company has seen a healthy increase in profits over the
past year, due to the outbreak of the Covid-19 virus. MPE is very well established and has
been in the protective equipment market for many years. The company has a financial year
of 31 January.
Due to all the health risks in the current world wide situation, MPE has invested significantly
in obtaining new methods to improve their equipment and ensure the safety of health
workers. The innovation and development manager came across a European company
which developed a state of the art material to increase the effectiveness of N95 respirators.
After inspecting their research and results and observing an effectiveness experiment, MPE
decided to buy this patent from the European company. The agreement stated that MPE will
pay an amount of R1 200 000 for the patent on the same day the agreement was signed,
which will be used in the production of N95 respirators for at least the next six years.
The patent was effectively used in the production of MPE’s N95 respirators as of
31 July 2020. Market research indicated that the patent will be profitable, since consumers
are more and more becoming aware of the consequences of not wearing a mask or wearing
a mask of poor quality. A cost and profitability projection, prepared by the financial
accountant, also indicated that the patent will be successful in securing a profit.
Respirator production
N95 Respirators, a specialised type of mask with higher filtration abilities, are one of the
more complicated types of protective equipment to manufacture. Respirators are made with
melt blown nonwoven fabric, which is produced by forcing out plastic (commonly
polypropylene) fibres (one micron in diameter) onto a conveyor. These layers bond as they
cool to form the cloth. This fabric is layered with a needled pre-filtration layer of nonwoven
fabric, which is usually hot calendared and thick enough to be moulded into the mask’s
shape. (Calendaring is a process by which fabric is run through hot, heavy rollers at the mill.
This flattens the fabric, seals the weave, and leaves one side of the fabric shiny while the
other is matte/dull in appearance. This process is done to make the fabric down proof,
increase wind resistance, and improve hand feel.) Protective layers of nonwoven fabric then
cover the mask’s inside and outside. Once masks are completed they are sterilised. Some
from each batch must then pass a series of tests, including flammability, breathing and
splash resistance, particle filtration efficiency, and bacteria filtration efficiency. (Credit:
https://www.thomasnet.com/articles/plant-facility-equipment/how-to-make-ppe/)
An extract of MPE’s trial balance for the year ended 31 January 2021 is provided below:
Note Dr Cr
s R R
Sales 1 17 460 000
Cost of sales 2 ?
Depreciation 3 250 000
Fixed manufacturing overheads 4 850 000
Variable manufacturing overheads 5 680 000
Salaries and wages 6 3 178 500
Training cost 7 10 000
Delivery cost 1 2 500
Purchases (raw material) 8 21 387 200
Raw material – Balance as at 1 Feb 2020 8 810 000
Work in progress – Balance as at 1 Feb 2020 9 0
Finished goods – Balance as at 1 Feb 2020 10 727 500
Consumables – Balance as at 31 Jan 2021 11 5 500
Finance cost 12 470 000
Interest earned 12 35 000
ACCC271 2021 Test 1 2/5
Note 1
The sales amount listed in the trial balance excludes a large sale that was made
in January 2021. Delivery of the goods took place on 20 January 2021 at a cost to MPE of
R2 500. A volume discount of 2% was offered to the customer as well as a settlement
discount of 5%, if paid before the end of February 2021. It is expected that the customer will
make use of this discount and MPE makes use of allowance for settlement discount
accounts, where applicable. The total invoice price before any discounts, amounted to
R650 000.

Note 2
MPE makes use of the periodic inventory system applying the weighted average cost to
account for manufactured inventory balances, as per IAS 2 Inventory. Cost of sales have not
been calculated yet. The company generally does not include any net realisable value write-
downs on the manufactured goods, in the cost of sales line item as most of these write-
downs are not considered a normal part of losses incurred. The statement of profit or loss is
prepared on the function method as per IAS 1 Presentation of Financial Statements and
there are no expenses that are classified as administrative expenses.

Note 3
This amount includes depreciation of R50 000 on manufacturing equipment. Manufacturing
equipment is depreciated on the unit of production method. The remainder of the
depreciation as per the trial balance, relates to admin buildings and vehicles.

Note 4
The total fixed manufacturing overhead cost incurred during the 2021 financial year
amounted to R850 000. This amount does not include depreciation or any salaries. MPE’s
normal production capacity for N95 respirators is 15 000 units. In the 2021 financial year
14 000 units were manufactured.

Note 5
The total variable overheads incurred during the 2021 financial year amounted to R680 000.
This amount does not include any depreciation, wages or consumables.

Note 6
Wage workers directly involved in the manufacturing process is paid R45 per hour. During
the 2021 financial year, 28 700 hours were worked by these labourers of which 200 hours in
total were considered idle time during which training took place. Salaries amounted to
R1 887 000 for the 2021 financial year of which only R260 000 relates to the factory
supervisor. The remainder of the salaries is for admin and management staff.

Note 7
The training cost relates to the training of workers to apply the knowledge from the
purchased patent.

Note 8
The total raw materials purchased during the year, amounted to R21 387 200 (excluding
information provided below). Each N95 respirator requires three raw material items for
production.

On 4 January 2021, 2 000 units of raw materials were delivered to MPE. These units were
imported from Japan at 4 000 Japanese yen, per unit and are not significantly different from
raw materials sourced elsewhere. The units were shipped free on board from Japan, and
ACCC271 2021 Test 1 3/5
were loaded onto the ship in Japan, on 15 December 2020. The ship arrived in the South
African harbour on 23 December 2020, and was cleared through customs and unloaded at
the harbour on 28 December 2020. On 2 January 2021 the items were loaded onto a cargo
truck on its way to MPE. Customs duty, that cannot be claimed back, amounted to R8 500.
The transport of the goods to MPE amounted to R5 300. This transaction has not yet been
recorded in the above trial balance.

The following exchange rates were applicable:

Japanese yen to RSA rand

15 December 2020 1Yen = R0.14
23 December 2020 1Yen = R0.17
28 December 2020 1Yen = R0.15
2 January 2021 1Yen = R0.16
4 January 2021 1Yen = R0.13

The opening balance of raw materials amounted to R450 per unit.

A stock count conducted on 31 January 2021, indicated that the number of raw material
units on hand at year end amounted to 4 200 units. These include the units on hand, that
were received from Japan.

Note 9
There was no work in progress at the beginning or end of the 2021 financial year.

Note 10
At the beginning of the 2021 financial year there were 1 500 finished respirators on hand
and according to a calculation, correctly made by the cost accountant, 9 000 units were sold
during the 2021 financial year.

Included in the closing finished goods inventory balance at the end of the year, are 1 100
units which will be sold for only R800 per unit, since the colour is not very popular with
customers. These units were produced in the 2021 financial year. This is considered to be a
once off event.

Note 11
Consumable items used in the manufacturing process, is accounted for on the first-in-first-
out method (FIFO). The more respirators manufactured, the more consumable items are
used. On 1 February 2020, the balance of consumables was R5 500 consisting of 55 units.
The purchase and usage of the items were as follows:

Purchases
18 March 2020 200 units R22 000
30 August 2020 180 units R20 700
2 September 2020 (10 units) R1 150 (These units were sent back due to defects)

Sent to production
31 March 2020 150 units
3 September 2020 200 units

On 5 September 2020, 15 of the units purchased on 30 August were damaged due to an

unexpected and unusual electrical fault. These 15 units were included in the units sent for
production on 3 September 2020. No additional units were sent to production to replace the
damaged consumables.

ACCC271 2021 Test 1 4/5

Note 12
MPE is in the process of constructing a building specifically for their manufacturing needs.
Construction of the building started on 30 November 2019 and was estimated to take eight
months to complete. The building is a qualifying asset as per IAS 23 Borrowing Cost and all
criteria for capitalisation were met on 30 November 2019. However due to the outbreak of
the virus, no construction could take place between 31 March 2020 to 30 June 2020. This is
considered a substantial period of time.

MPE incurred a loan of R2 600 000 for the construction of the building and received the
money on 30 November 2019, on which date a payment of R350 000 was immediately made
to the construction company. On 1 July 2020 another payment of R450 000 was made and
an amount of R270 000 was paid on 1 February 2021. The building was still under
construction as at 31 January 2021. The loan was specifically incurred to finance the
construction of this building at a rate of 13.5% per year. Interest is not compounded, but paid
monthly. No capital repayments have been made yet. The correct interest earned during the
qualifying period for the 2021 financial year, amounts to R24 000.

MPE also has other loans on which it pays interest.

MARKS
REQUIRED:
Subtotal Total

(a) Discuss in terms of the Conceptual Framework of 2018,

if the patent can be recognised as an asset in the
statement of financial position of MPE as at
9
31 January 2021.
1
Communication skills – Logical argument 10

(b) Prepare an extract from the statement of profit or loss

and other comprehensive income for the year ended
31 January 2021, based on all the information provided
and the policies of the company. Comparative figures are
not required. 24
Communication skills – Presentation and layout 1 25

(c) Assume that half of the raw materials purchased

(excluding those imported from Japan) were purchased
on 15 March 2020 for R10 642 404, and the other half on
30 August 2020 for R10 744 796, and that 21 000 units of
the raw material were sent into production on
31 March 2020 and another 21 000 units were sent to
production on 3 September 2020.
If the accounting policy for inventory was weighted
average cost and the inventory system was a perpetual
system, calculate the total cost of raw materials
transferred to work in progress in the 2021 financial year. 6
Explain why this amount is different to the relevant
amount calculated in part b. 4 10

TOTAL MARKS 45

TOTAL: 45
ACCC271 2021 Test 1 5/5