TUTORIAL

QUESTION

CHAPTER 13 – CHAPTER 15
TUTORIAL QUESTION 1 (40 MARKS)
AS Entity, as well as all of AS Entity’s suppliers, are registered VAT vendors.
AS Entity uses the perpetual inventory system. AS Entity’s current reporting date is 31 December 20.7
and the financial statements for 20.7 will probably be approved by the owner for distribution on 28
February 20.8.
The following transactions have reference and include VAT at 14%, where applicable:
1 On 30 November 20.7, the carrying amount of one of AS Entity’s property, plant and equipment
items, namely Truck A, comprised the following:
• Cost price R750 000
• Accumulated depreciation R600 000
On 1 December 20.7, AS Entity’s truck A was traded in on a new vehicle, truck C, with an invoice
price of R889 200. A trade-in value of R228 000 was placed on truck A. On 1 December 20.7, truck
C was delivered to the premises of AS Entity and on this date, the amount owed was paid to the
trader.
2 On 6 December 20.7, trade inventories were sold on credit to Receivable DN and delivered on the
same day. The invoice reflects the amount as R442 446 and is payable on or before 5 January
20.8. The gross profit percentage on sales in respect of this transaction is 40%.
3 On 26 November 20.7, AS Entity ordered trade inventories from Payable GH. On 7 December
20.7, the trade inventories were loaded onto the transport contractor’s truck at the premises of
Payable GH. In accordance with the purchase contract, right of ownership transfers to the
purchaser as soon as the trade inventories are loaded onto the truck at Payable GH. On
8 December 20.7, the transport contractor delivered the trade inventories to AS Entity’s premises.
AS Entity is responsible for the transport costs and on 8 December 20.7, AS Entity paid the invoice
of the transport contractor, to the amount of R35 200.
On 8 December 20.7, the invoice from Payable GH, to the amount of R305 300, was received
together with the trade inventories. The invoice indicates that a settlement discount of 4% would
be granted if the invoice is paid on or before 14 December 20.7. In this instance, as in the past,
AS Entity utilised the settlement discount.
(Note: Provide only die journal entry(s) for the initial recognition of the transaction.)
4 On 10 December 20.7, office supplies together with an invoice to the amount of R16 200 which is
payable on or before 8 January 20.8, were delivered to the premises of AS Entity by Payable KS.
These items were ordered by AS Entity on 5 December 20.7.
(Note: Provide only die journal entry(s) for the initial recognition of the transaction.)
5 On 12 December 20.7, AS Entity returned some of the office supplies which were received from
Payable KS on 10 December 20.7, to the supplier. In this regard AS Entity received a credit note,
dated 19 December 20.7, from Payable KS to the amount of R3 300.
6 The VAT due for November 20.7, was paid to SARS on 24 December 20.7 by means of an
electronic fund transfer. On 30 November 20.7, the balances on the VAT accounts were as follows
in the accounting records of AS Entity:
• VAT output account R171 296
• VAT input account R116 796
7 On 30 December 20.7, the following payroll for December 20.7 has already been correctly
accounted for in the accounting records of AS Entity.
R
Employee benefits expense 326 730
PAYE – transfer control (72 720)
Medical aid – transfer control (32 500)
Pension fund – transfer control (49 010)
Salaries control 172 500

On 30 December 20.7, the net salaries, as reflected on the December 20.7 payroll, was transferred
to AS Entity’s separate salaries bank account by means of an electronic fund transfer.
8 On 31 December 20.7, trade inventories with a cost price of R27 500 was taken by the owner for
personal use.
9 On 3 January 20.8, the bank statement for December 20.7 was received from the bank. The
following items that appear on the bank statement on 31 December 20.7, have reference:
• Bank charges to the amount of R7 220; and
• Interest on the overdraft bank balance to the amount of R8 550.

Required:
Recognise the abovementioned transactions and events in the accounting records (general journal) of
AS Entity for the reporting period ended 31 December 20.7. (40)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations for the
financial statements between brackets: P/L, SCE, SFP.
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Dates must be indicated correctly.
Calculations must be shown clearly as part of the relevant journal entry and must, where applicable, be
calculated to the nearest Rand.
TUTORIAL QUESTION 2 (15 MARKS)
AS Entity’s current reporting period ends on 31 December 20.7.
On 31 December 20.7, the detail of AS Entity’s plant, machinery and equipment is as follows:
Dr Cr

Plant at cost 4 500 000

Accumulated depreciation – plant 1 395 000

Machinery at cost 2 250 000

Accumulated depreciation – machinery 810 000

Computer equipment at cost 2 400 000

Accumulated depreciation – computer equipment 960 000

Depreciation on plant, machinery and equipment for 20.7 1 201 800

The following additional information is available:

1 Depreciation on plant, machinery and equipment has already been recognised for 20.7. The
depreciation expense however still has to be adjusted with an amount in respect of computer
equipment.
The residual values for each of the assets is still estimated at R nil.
2 Plant
The estimated useful life of the plant is 6 000 000 production units.
3 Machinery
3.1 The estimated useful life of machinery is 10 years and the depreciation rate is 22% per year
on the carrying amount at the beginning of the year.
3.2 Included in the machinery balances on 31 December 20.7 is the following amounts in
respect of machines P and Q:
Machine P Machine Q

Cost price 500 000 600 000

Accumulated depreciation – 31/12/20.7 (110 000) (284 700)

 390 000 315 300

3.3 Machine P produces toxic waste during the production process. Due to complaints lodged
with the local authority in this regard, the owner decided to withdraw the machine from usage
on 31 December 20.7. The derecognition of Machine P still has to be recognised.
3.4 It was determined during December 20.7 that the recoverable amount of Machine Q is only
R175 000. The impairment still has to be recognised on 31 December 20.7.
4 Computer equipment
The computer equipment was purchased on 2 January 20.6 and at that stage, the useful life was
estimated at 5 years. Depreciation for 20.6 and 20.7 was calculated on the straight-line method at
R480 000 per year. The owner decided to reduce, as from the beginning of the current financial
year, the useful life of computer equipment with one year to three years. The necessary adjustment
in respect of depreciation still has to be recognised.
Required:
a) Disclose an appropriate note regarding the accounting policy in respect of plant, machinery and
equipment. (10)
b) After accounting for the additional information, present the applicable items in the statement of
profit or loss of AS Entity for the reporting period ended 31 December 20.7. (5)
TUTORIAL QUESTION 3 (20 MARKS)
AS Entity, as well as all the parties with whom AS Entity conducts business, are registered VAT vendors.
AS Entity uses the perpetual inventory system.
The following balances, amongst others, related to AS Entity’s reporting period ended 31 December 20.7:
Additional Dr Cr
information
VAT input 101 460
VAT output 152 190
Trade inventories 1 1 450 200
Trade and other payables 2 889 500
Cost of sales 4 850 600
Loss – plant destroyed in a fire 1 350 000
Loss – trade inventories destroyed in a fire 650 000
Loss with write down of inventories to NRV 87 500

Derecognition of plant sold – carrying amount 600 000

Depreciation on plant and equipment for 20.7 1 400 000

Insurance compensation in respect of the plant 1 200 000

Insurance compensation in respect of trade inventories 605 000
Proceeds on sale of plant item 700 000
Doubtful debts recovered – gross amount 3 16 530
Water and electricity 2 467 500
Bad/Doubtful debts 3 202 500

Additional information
1 On 23 December 20.7 trade inventories with a cost price of R30 000 were donated to a local
organisation. This event still has to be recognised.
2 The water- and electricity account for December 20.7 to the amount of R44 745 was received on
4 January 20.8 and still has to be recognised.
3 Receivable AD’s account has already been written off during the reporting period ended
31 December 20.6. On 28 December 20.7, a final liquidation dividend to the amount of R16 530
was received from the liquidator of AD Entity’s estate.
Required:
After accounting for the abovementioned information, appropriately present the balances in the financial
statements of AS Entity for the reporting period ended 31 December 20.7. (20)
Note:
Notes to the financial statements are not required.
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or directly underneath
the wording of the relevant line item.
Where applicable, round off amounts to the nearest Rand.
TUTORIAL QUESTION 4 (10 MARKS)
AM Entity and all its suppliers are registered VAT vendors. Where applicable, VAT is charged at 14%.
AM Entity sells furniture at a mark-up percentage of 25% gross profit on cost price. AM Entity is insured
for potential inventory losses due to fire for an amount of R216 600 (including VAT).
On 20 July 20.7 a fire broke out in the store room of AM Entity which destroyed almost all of AM Entity’s
trade inventories, except for trade inventories with a cost price of R90 000 that the entity was able to
salvage. This salvaged trade inventory items are still in a very good condition and will be sold at the
normal selling price.
AM Entity uses the periodic inventory system and therefore does not know what the value of trade
inventories on hand was on 20 July 20.7. The last inventory count was performed at the reporting date
on 30 June 20.7 and the inventory records reflected trade inventories on hand at a cost price of R351 000
on that date.
The total value of supplier’s invoices for trade inventories purchased since the reporting date until the
date of the fire, amounted to R59 280. The total value of sales invoices made out to customers since the
reporting date until the date of the fire amounted to R159 600.

Required:
Calculate the value of the insurance compensation that will probably be paid by the insurance company
in respect of the trade inventories destroyed in the fire. (10)
TUTORIAL QUESTION 5 (15 MARKS)
The owner of EB Entity has asked for your assistance. She suspects that the new store manager who
was appointed on 1 July 20.7, has stolen trade inventories from the store room of EB Entity during the
last 6 months of the year.
The entity uses the periodic inventory system and has maintained a constant gross profit percentage on
all its inventory sales throughout the year.
The following extracts from EB Entity’s general ledger for the year ended 31 December 20.7 are provided
to you:
R
Trade inventories on hand
1 January 20.7 200 000
30 June 20.7 240 000
31 December 20.7 30 000

Purchases
1 January 20.7 – 30 June 20.7 480 000
1 July 20.7 – 31 December 20.7 350 000

Freight on purchases
1 January 20.7 – 30 June 20.7 50 000
1 July 20.7 – 31 December 20.7 40 000

Sales
1 January 20.7 – 30 June 20.7 612 500
1 July 20.7 – 31 December 20.7 625 000

Required:
Calculate whether any trade inventories have been stolen from EB Entity’s store room during the last 6
month (1 July 20.7 – 31 December 20.7) of the year and calculate the value of trade inventories stolen
(if applicable).
TUTORIAL QUESTION 6 (150 MARKS)
AC Entity, as well as all of AC Entity’s suppliers, are registered VAT vendors.
AC Entity uses the perpetual inventory system.
AC Entity’s current reporting date is 31 December 20.7 and the financial statements for 20.7 will probably
be approved by the owner for distribution on 28 February 20.8.
On 31 December 20.7 the following balances, amongst others, appeared in AC Entity’s records:
Dr Cr
R R
Sales 9 625 500
Insurance compensation – inventories 328 320
Cost of sales 3 850 200
Employee benefits 2 256 400
Office supplies 477 400
Rent expense 704 000
Water and electricity 594 660
Maintenance – delivery vehicles 98 640
Doubtful debts 275 500
Bank charges 67 576
Interest expense –bank overdraft 85 190
Depreciation – equipment 197 000
Office supplies on hand (31 Des 20.6) 34 600
Rent deposit 62 500
Trade inventories 841 700
Trade receivables 2 103 870
Allowance for doubtful debts 106 590
Deposit with order 172 140
VAT input 84 770
Equipment 2 090 000
Accumulated depreciation – equipment (31 Des 20.7) 937 000
Delivery vehicles 879 600
Accumulated depreciation – delivery vehicles (31 Des 20.6) 167 400
Payables 908 365
VAT output 112 990
Bank 862 520
SARS – PAYE 436 720

Additional information
The following transactions and events have reference and, where applicable, include VAT at 14% and,
where indicated, still have to be recognised in the accounting records of AC Entity for the reporting period
ended 31 December 20.7:
1 AC Entity’s trade inventories are insured for R461 700 (including VAT). During the early hours of 1
November 20.7, the greater part of AC Entity’s trade inventories were destroyed in a fire. The
inventory system indicates that on 31 October 20.7, trade inventories with a cost of R354 500 were
on hand. A portion of these trade inventories, with a cost of R34 500, was undamaged.
On 2 December 20.7, the insurer paid an amount of R328 320 to AC Entity in respect of the fire.
This amount has already been recognised by debiting “Bank” with R328 320 and crediting
“Insurance compensation – inventories” with R328 320. The trade inventories destroyed in the fire
still have to be appropriately derecognised.
2 According to the inventory system, certain inventory items’ cost is more than the estimated net
realisable value thereof on 31 December 20.7. In this regard, a write-down of R32 500 still has to
be recognised.
3 The statement for December 20.7 that was received from Payable K on 7 January 20.8, reflects a
credit note on 31 December 20.7 for R19 836. The credit note relates to trade inventories that were
purchased from Payable K, but returned by AC Entity on 21 December 20.7 since the trade
inventories were not of the quality as agreed between the parties. The return of the trade
inventories still has to be recognised.
4 On 31 December 20.7, trade inventories were sold on credit to Receivable D and delivered on the
same day. The invoice price is R102 600 and the credit term is 30 days. With reference to this
transaction, the gross profit percentage on cost is 66.667%. This transaction still has to be
recognised.
5 On 12 December 20.7, AC Entity ordered trade inventories from Payable L. As agreed AC Entity
paid a deposit of 50% of the invoice price (R172 140) on this date to Payable L. The deposit has
already been recognised by debiting “Deposit with order” with R172 140 and crediting “Bank” with
the same amount. On 31 December 20.7, Payable L delivered the trade inventories to AC Entity’s
premises. The invoice price is R344 280 and the credit term is 30 days. This transaction still has
to be recognised.
6 The owner decided to pay a bonus to the manager in respect of 20.7. On 31 December 20.7 an
amount of R75 000 was transferred to the manager’s bank account. The payment has already
been appropriately recognised in AC Entity’s records. The amount deposited into the manager’s
bank account represents the bonus, which has already reduced with 25% in respect of PAYE. The
relevant PAYE still has to be appropriately recognised.
7 Office supplies on hand on 31 December 20.7 to the amount of R41 000 still has to be recognised.
8 Due to an oversight, the lease instalment for December 20.7 to the amount of R72 960 was paid
only on 7 January 20.8. The remaining lease term is 12 months.
9 The water and electricity account for December 20.7 to the amount of R50 445 was received
electronically from Payable Jozi on 8 January 20.8 and is payable on 26 January 20.8.
10 After numerous fruitless attempts over several months, AC Entity decided to write-off Receivable
J’s debt, to the amount of R36 480, as irrecoverable. The write-off was approved by the owner on
31 December 20.7 and still has to be recognised.
11 The allowance for doubtful debts must be increased to R125 400.
12 The bank statement for December 20.7 was received from the bank on 4 January 20.8. The
following items that appear on the bank statement on 31 December 20.7, but not in AC Entity’s
records, have reference:
• Bank charges to the amount of R8 607; and
• Interest on bank overdraft to the amount of R9 125.
13 AC Entity’s non-current assets comprise only equipment and delivery vehicles.
14 No equipment was sold during 20.7. On 30 June 20.7, an equipment item was purchased at an
invoice price of R273 600. This transaction has already been appropriately recognised.
15 The asset register of AC Entity contained the following detail in respect of delivery vehicles on 31
December 20.6:
Vehicle Date purchased Cost price Accumulated Total Residual
and ready for use depreciation on useful life value
31 December 20.6 (excl VAT)
R R R
V1 2 Jan 20.5 360 000 108 000 6 years 36 000
V2 2 Jan 20.6 396 000 59 400 6 years 39 600
V3 2 Jan 20.7 420 000 0 6 years 42 000
1 176 000 167 400

15.1 The depreciation expense in respect of delivery vehicles is calculated in accordance with the
straight line method. The depreciation expense for 20.7 still has to be recognised.
15.2 During the fire on 1 November 20.7 (as mentioned in additional information 1), delivery
vehicle V2 was damaged beyond repair. In conclusion of the claim, the insurer paid an
amount of R296 400 directly into AC Entity’s bank account on 12 December 20.7. The
amount received was recognised by debiting “Bank” with R296 400 and crediting “Delivery
vehicles” (the cost price account) with the same amount. Vehicle V2 still has to be
appropriately derecognised.
15.3 On 22 November 20.7, vehicle V3 was damaged in an accident. On 1 December 20.7 the
insurer provided authorisation that Supplier P can repair the vehicle at R65 550 (including
VAT). It was furthermore agreed that, on the day on which the vehicle is satisfactorily
repaired, the insurer will pay an amount of R52 440 directly to Supplier P, whilst AC Entity
will pay an amount of R13 110 to Supplier P.
On 22 December 20.7 the vehicle was satisfactorily repaired and the payments, as agreed,
were made. The only entry recognised in respect of this incident, was to debit “Payable P”
with R13 110 and credit “Bank” with R13 110. Further entries still have to be appropriately
recognised.
Required:
a) Recognise the transactions and events resulting from the additional information in the records
(general journal) of AC Entity for the reporting period ended 31 December 20.7. (80)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Where applicable, VAT is charged at 14%.
Dates must be indicated correctly.
Calculations must be shown clearly directly under the relevant journal entry.
Where applicable, round off amounts to the nearest Rand.
b) Appropriately present the balances of the abovementioned general ledger accounts in one of the
following financial statements:
i) Statement of profit or loss of AC Entity for the reporting period ended 31 December 20.7; or
(22)
ii) Statement of financial position of AC Entity for the reporting period ended 31 December 20.7.
(35)
Note:
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or directly
underneath the wording of the relevant line item.
Where applicable, round off amounts to the nearest Rand.
c) Disclose ONLY the following note to the financial statements of AC Entity for the reporting period
ended 31 December 20.7:
i) Property, plant and equipment. (10)
ii) Cost of sales. (3)
Note: Accounting policy notes are not required.
TUTORIAL QUESTION 7 (12 MARKS)
The current reporting period of AC Ltd, a successful company, ends on 31 December 20.7. It is expected
that the directors of the company will approve the 20.7 financial statements for distribution, on 31 March
20.8.
The following journal entries, amongst others, appear in the company’s records:
J4562
20.7 Dr Cr
31 Dec Ordinary dividend – distribution 24 000 000
Shareholders for dividends 24 000 000

J1008
20.8 Dr Cr
15 April Shareholders for dividends 24 000 000
Bank 24 000 000

Required:
a) Provide a journal narration for journal J4562. (2)
b) By referring to the abovementioned journals, explain the practical implications of the accrual
principle. (2)
c) With reference to the definition of a liability, indicate why the item “Shareholders for dividends”
satisfies this definition. (6)
d) Motivate in one sentence why the item “Ordinary dividend – distribution” is not an
expense. (2)
TUTORIAL QUESTION 8 (30 MARKS)
The financial year of AB (Pty) Ltd, a successful private company, ends on 31 December 20.7. The
following balances appeared in the financial records of the company as at 31 December 20.7:
Notes Dr Cr

Sales 40 750 000

Cost of sales 1 16 250 000

Profit on sale of equipment 75 000

Rent income 2 1 200 000

Distribution costs 3 4 750 000

Administration expenses 3 9 950 000

Other expenses 350 000

Interest expense – bank overdraft 95 000

Interest expense – bank loan 225 000

Auditors’ remuneration 4 800 000

Directors’ remuneration 5 1 200 000

Ordinary share capital – 1 000 000 shares 7 4 000 000

Retained earnings (31 Dec 20.6) 32 000 000

SARS – income tax (provisional payments for 20.7) 6 1 950 000

Dividend distribution – 31 March 20.7 8 2 500 000

Additional information
1 Cost of sales was appropriately debited with R243 000 in respect of certain inventory items whose
cost was written down to the net realisable value thereof.
2 The rent income is in respect of a portion of AB (Pty) Ltd’s building that is rented out to a third party.
3 Depreciation was correctly calculated and was recognised at the following amounts for 20.7:
• Depreciation on buildings R400 000
 • Depreciation on equipment R1 200 000
These amounts were included in the line items “Distribution costs” and “Administrative expenses”
reflected above.
4 Auditors’ remuneration comprises the following:
• Costs in respect of the interim audit for 20.7 R680 000
• Costs in respect of tax advisory services R120 000
5 Director’s remuneration comprises the following:
• Remuneration to non-executive directors for the attendance of directors’ meetings to the
amount of R200 000; and
• Salaries to executive directors to the amount of R1 000 000.
6 The income tax expense for 20.7 of R2 050 000 still has to be recognised.
7 The authorised share capital of AB (Pty) Ltd consists of 2 000 000 ordinary shares. No additional
shares were issued during the current financial year.
8 AB (Pty) Ltd does not pay interim dividends. On 31 March 20.7, a dividend of R2,50 per share was
declared in respect of the 20.6 financial year. This dividend was paid to the shareholders on 30
April 20.7.
Required:
a) Recognise the income tax expense for 20.7 in the financial records (general journal) of AB (Pty)
Ltd for the reporting ended 31 December 20.7. (3)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
b) Present the appropriate amounts in the statement of profit or loss of AB (Pty) Ltd for the reporting
period ended 31 December 20.7. (10)
c) Disclose the note “Profit before tax” to the statement of profit or loss of AB (Pty) Ltd for the reporting
period ended 31 December 20.7. (7)
d) Present the appropriate amounts in the statement of changes in equity of AB (Pty) Ltd for the
reporting period ended 31 December 20.7. (4)
Note: The presentation of the dividend per share is not required.
e) Present the following in the statement of financial position of AB (Pty) Ltd for the reporting period
ended 31 December 20.7:
• Equity; and (2)
• Amount payable to SARS in respect of income tax. (2)
f) Provide the appropriate disclosure to the equity section in the statement of financial position of AB
(Pty) Ltd for the reporting period ended 31 December 20.7 (2)
TUTORIAL QUESTION 9 (25 MARKS)
AC (Pty) Ltd successfully conducts business in the retail industry.
The information below relates to the reporting period ended 31 December 20.7:
20.7

Authorised share capital

3 000 000 ordinary shares

1 000 000 6% preference shares

Issued share capital

2 050 000 ordinary shares 8 500 000

1 000 000 6% preference shares 2 000 000

Retained earnings – beginning of the year 5 750 000

Profit for the year (before taxation) 1 950 000

Provisional tax paid – 30 June 20.7 (250 000)

Provisional tax paid – 31 December 20.7 (245 000)

Ordinary dividend distribution

(Final distribution in respect of 20.6: 22 cents per share – declared on

31 March 20.7) (275 000)

Ordinary dividend distribution

(Interim distribution in respect of 20.7: 14 cents per share – declared on 30 November

20.7)
(287 000)

Additional information
1 The financial statements for the reporting period ended 31 December 20.7 will probably be
approved for distribution on 28 February 20.8.
2 The income tax expense for the reporting period ended 31 December 20.7, was reliably calculated
as R525 000. On 5 February 20.8 the financial director authorised the recognition of the income
tax expense in respect of 20.7.
3 On 31 March 20.7, AC (Pty) Ltd invited the existing ordinary shareholders to buy a further 4
ordinary shares in AC (Pty) Ltd at R7.50 per share for every 5 ordinary shares held in AC (Pty)
Limited. The applications closed on 30 April 20.7. Two ordinary shareholders that jointly owned
250 000 ordinary shares on 31 December 20.7, decided not to buy additional shares in AC (Pty)
Ltd. The shares which were applied for, were allotted on 31 May 20.7. No other shares were issued
during the current reporting period.
4 On 31 December 20.7 the directors declared a preference dividend in respect of 20.7. The declared
dividend still has to be recognised. The dividend will be paid on 15 January 20.8.
Required:
a) Recognise the following outstanding transactions/events in the financial records (general journal)
of AC (Pty) Ltd for the reporting period ended 31 December 20.7:
i) The income tax expense for 20.7. (3)
ii) The preference dividend declared on 31 December 20.7. (3)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
b) Indicate with reasons why the item that you credited in journal (a)(ii) above, meets the definition of
a liability. (6)
c) Calculate the issued ordinary share capital (in Rands) of AC (Pty) Ltd as at 1 January
20.7. (3)
d) Present the resulting balances in the statement of changes in equity of AC (Pty) Ltd for the
reporting period ended 31 December 20.7. (7)
Note: The presentation of the dividend per share is not required.
e) Calculate the earnings per share of AC (Pty) Ltd for the reporting period ended 31 December 20.7.
(Show calculations). (3)
TUTORIAL QUESTION 10 (18 MARKS)
This question comprises two independant parts, namely PART A and PART B.

PART A (12 MARKS)

The following information relates to AA (Pty) Ltd, a successful company, whose current reporting period
ends on 31 December 20.7.
Dr Cr
R R
Profit before tax for the year ended 31 December 20.7 19 675 750

Income tax expense for 20.7 6 490 750

Provisional tax payments during 20.7 5 855 000

Retained earnings – 1 January 20.7 12 075 000

Ordinary share capital – 500 000 issued shares 41 000 000

Dividend distribution (declared on 31 March 20.7) – final dividend in respect

of 20.6 2 000 000

Dividend distribution (declared on 30 December 20.7) – interim dividend in

respect of 20.7 3 000 000

SARS – Income tax payable 6 490 750

Additional information
1 On 30 September 20.7, 300 000 ordinary shares were allotted to current shareholders at R120 per
share.
2 On 31 December 20.7, the unissued ordinary share capital of the company amounted to 500 000
ordinary shares.

Required:
a) Calculate and present the earnings per share in the appropriate financial statement of AA (Pty) Ltd
for the reporting period ended 31 December 20.7. (6)
b) Calculate and present the dividend per share in the appropriate financial statement of AA (Pty) Ltd
for the reporting period ended 31 December 20.7. (3)
c) Present the income tax payable to SARS in the statement of financial position of AA (Pty) Ltd for
the reporting period ended 31 December 20.7. (3)
Note: Show all calculations clearly.

PART B (6 MARKS)
A few months ago, you were appointed as the accountant of AB Ltd, a successful company, whose
current reporting period ends on 31 December 20.7.
On 1 October 20.7, GR & Partners commenced with the audit of AB Ltd’s financial records for the
reporting period ended 31 December 20.7.
Prior to the commencement of the audit, GR & Partners provided AB Ltd with a comprehensive summary
of their budgeted account for the completion of the audit of the records and financial statements for the
reporting period ended 31 December 20.7. The total budgeted account amounted to R1 050 000.
The audit will be completed on 31 March 20.8. On 31 December 20.7, GR & Partners delivered an
account to the amount of R450 000 for audit work performed to date of the account. The account was
appropriately recognised in the records of AB Ltd.
You presented the concept financial statements of AB Ltd for the reporting period ended 31 December
20.7 to the financial director for his comments. The financial director’s comment in respect of the audit
expense and liability was as follows:
In accordance with the prudence principle, the full audit expense and the accompanying loan of R1 050
000 should indeed be included in the statements!

Required:
With reference to the definition of a liability, explain why the audit expense and the accompanying liability
should be recognised at only R450 000 on 31 December 20.7. (6)
Note: Ignore VAT.
TUTORIAL QUESTION 11 (63 MARKS)
The current reporting period of AC Ltd, a successful company, ends on 31 December 20.7. AC Ltd, as
well as all of AC Ltd’s suppliers are registered VAT vendors.
It is expected that the directors of the company will approve the 20.7 financial statements for distribution,
on 31 March 20.8.
The following information is an extract from the pre-adjustment trial balance of AC Ltd, as at 31 December
20.7:
Additional Dr Cr
informatio R R
n
Sales 28 177 500
Trade inventories (31 Dec 20.6) 1 3 150 000
Purchases 1 10 847 500
Freight (in) 1 612 500
Insurance compensation – inventories destroyed in a fire 1 974 700

Rent income 120 000

Distribution costs
Administrative expenses 2 8 209 000
Other expenses

Share issue costs 8 900 000

Ordinary dividend distribution – final dividend
(declared on 30 April 20.7 in respect of 20.6) 1 500 000

Computer equipment:
- Cost price 5 17 050 000
- Accumulated depreciation (31 Dec 20.7) 5 7 870 000

Trade receivables 2 045 500

Allowance for doubtful debts 3 100 730
Term deposit 6 400 000
VAT input 231 167
Provisional tax payments in 20.7 7 2 050 375

Retained earnings (1 Jan 20.7) 24 800 000

Ordinary share capital – 7 400 000 shares 8 27 000 000

Mortgage bond 9 10 319 726

Trade payables 1 324 500
 VAT output 342 138

Additional information:
1 Trade inventories
1.1 AC Ltd uses the periodic inventory system.
1.2 On 2 November 20.7, certain inventory items with a cost of R950 000 were destroyed in a
fire. In this regard, the insurer deposited R974 700 (including VAT) directly into AC Ltd’s
bank account on 22 December 20.7. AC Ltd recognised this receipt by debiting “Bank” with
R974 700 and crediting “Insurance compensation – inventories destroyed in a fire” with the
same amount. The trade inventory items that were destroyed in the fire still have to be
derecognised.
1.3 The trade inventories on hand on 31 December 20.7 were physically counted. The cost of
these inventory items were calculated in accordance with the FIFO method.
The calculation that was completed on 27 January 20.8, indicates that the cost of the trade
inventories on hand on 31 December 20.7, amounts to R3 339 000. These trade inventories
on hand on 31 December 20.7 still have to be recognised in the accounting records.
1.4 The cost of certain inventory items that are included in the trade inventories in 1.3 above,
exceeds the net realisable value thereof with R320 000. This write-down still has to be
recognised.
2 Distribution costs, administrative expenses and other expenses
The company presents expenses in the statement of profit or loss with reference to the function
that the expense relates to. In this regard, the following three functions are distinguished:
Distribution costs, administrative expenses and other expenses. The company’s accounting
system summarised the balances of the respective expense accounts as follows:
R
Distribution costs
Administrative expenses 8 209 000
Other expenses

3 The allowance for doubtful debts still has to be increased with R22 000.
4 On 15 November 20.7 the auditors commenced with the audit for the year ended 31 December
20.7. On 12 January 20.8, an invoice was received from the auditors for R513 000 for audit work
performed during 15 November 20.7 to 31 December 20.7. This transaction still has to be
recognised. On 31 January 20.8 the outstanding amount was paid to the auditors.
5 Property, plant and equipment
 5.1 AC Ltd’s tangible non-current assets comprise property, computer equipment and other
equipment items. In this set of facts, only computer equipment is dealt with.
5.2 In accordance with the stipulations of a purchase contract, a new computer equipment item,
namely NEW, was received and put into service on 1 December 20.7. The invoice that was
received from Payable K together with the item NEW, contains the following information,
amongst others:
R
Invoice price of item NEW 1 368 000
Less: Trade-in value placed on computer equipment item OLD 205 200
Amount payable on 31 January 20.8 1 162 800

5.3 Item NEW and the accompanying obligation still have to be recognised and item OLD still
has to be derecognised.
5.4 The asset register reflects the following amounts in respect of item OLD:
R
Cost price 3 300 000
Accumulated depreciation on 1 December 20.7 3 080 000

5.5 The depreciation expense on computer equipment is calculated in accordance with the
straight line method over an estimated useful life of 5 years. Estimated residual values are
not accounted for. The depreciation expense on computer equipment for 20.7 has already
been calculated and recognised at R3 355 000. No depreciation expense has been
calculated and recognised in respect of item NEW. No other computer equipment items were
purchased or sold during the current reporting period.
6 The investment in the term deposit of R400 000 was made on 1 July 20.7. The interest rate is 6%
per year, calculated on the simple basis. (The interest therefore accrues evenly over the term of
the deposit.) The deposit term is 1 year and the deposit together with the accrued interest are
repayable on 30 June 20.8. An appropriate amount in respect of interest income still has to be
recognised on 31 December 20.7.
7 The income tax expense for 20.7 was reliably calculated as R2 324 375 and still has to be
recognised.
8 Share capital
8.1 The authorised share capital of AC Ltd comprises 15 000 000 ordinary shares.
8.2 On 1 August 20.7, AC Ltd issued and allotted 2 400 000 ordinary shares at R5.00 per share.
The share issue has already been correctly recognised.
8.3 The share issue costs amounted to R1 026 000 (including VAT). The share issue costs
incurred and paid have already been appropriately recognised.
9 Mortgage bond
 9.1 The mortgage bond was incurred on 1 January 20.0 at the following stipulations, amongst
others:
• The interest rate is 12% per year, annually compounded. (The interest is therefore added
to the primary debt at the end of each year);
• The loan is repayable in 20 instalments of R1 606 545 at the end of each year; and
• Erf 1234 Rosebank, with improvements on it, is pledged as security for the loan.
9.2 The appropriate portion of the repayment schedule in respect of the mortgage bond is as
follows.
Instalment
Date Total Capital Interest at 12% Amortised cost
per year
01/01/20.7 Balance 10 648 456
31/12/20.7 Instalment 7 1 606 545 328 730 1 277 815 10 319 726
31/12/20.8 Instalment 8 1 606 545 368 178 1 238 367 9 951 548

10 On 31 December 20.7 the directors declared an interim dividend of 25 cents per share in respect
of 20.7. The dividend will be paid on 15 April 20.8. The declaration of the dividend still has to be
recognised.

Required:
a) After accounting for the additional information:
i) Present the appropriate balances in the statement of profit or loss of AC Ltd for the reporting
period ended 31 December 20.7. (22)
ii) Present the appropriate balances in the statement of changes in equity of AC Ltd for the
reporting period ended 31 December 20.7. (8)
iii) Present the appropriate balances in the statement of financial position of AC Ltd as at
31 December 20.7. (24)
Note:
Journal entries and general ledger accounts are not required.
When accounting for the additional information, some cases have VAT implications.
Where applicable, VAT is charged at 14%.
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or directly
underneath the wording of the relevant line item.
Where applicable, round off amounts to the nearest Rand.
b) Disclose ONLY the following notes to the financial statements of AC Ltd on 31 December 20.7:
i) The accounting policy note in respect of inventories; and (2)
ii) The computer equipment column of the note to property, plant and equipment. (7)
TUTORIAL QUESTION 12 (50 MARKS)
AW (Pty) Ltd conducts business in the construction industry by delivering pre-mixed concrete to
contractors.
On 31 December 20.6, AW (Pty) Ltd owned six delivery vehicles which are used to deliver pre-mixed
concrete.
The six delivery vehicles’ detail was as follows on 31 December 20.6:
Cost price R9 750 000

Accumulated depreciation R4 875 000

Useful life 6 years

The following transactions / events took place during 20.7:
1 On 2 January 20.7 a bank loan was obtained and the loan amount of R1 600 000 was received on
this date. The loan is repayable in five equal annual instalments on 31 December each year and
the interest rate is 14% per year. Inventories are pledged as security for the loan. The loan was
obtained to supplement AW (Pty) Ltd’s working capital.

The repayment schedule applicable to the bank loan is as follows:

Instalment

Date Total Capital Interest at 14% Outstanding

per year capital amount

02/01/20.7 1 600 000

31/12/20.7 Instalment 1 466 054 242 054 224 000 1 357 946

31/12/20.8 Instalment 2 466 054 275 942 190 112 1 082 004

31/12/20.9 Instalment 3 466 054 314 573 151 481 767 431

31/12/20.10 Instalment 4 466 054 358 614 107 440 408 817

31/12/20.11 Instalment 5 466 054 408 817 57 234 0

2 330 270 1 600 000 730 270

2 On 2 January 20.7, AW (Pty) Ltd acquired a new delivery vehicle by means of a lease agreement.
The lease agreement meets all the requirements of a finance lease. (The substance of the event
is that AW (Pty) Ltd obtained control over the delivery vehicle through a long term loan).

The written lease agreement contains inter alia the following stipulations:
 • The lease term is 6 years and the date of inception of the lease is 2 January 20.7 (which
also represents the date on which AW (Pty) Ltd put the asset into service).
• The lease instalments are 6 annual instalments of R419 564 each, payable in arrears on
31 December. Ownership of the delivery vehicle is transferred to AW (Pty) Ltd after the
payment of the last instalment.
• The interest rate implicit to the agreement is 12% per year.
• The fair value of the delivery vehicle is R1 725 000 which is equal to the present value of the
lease instalments.
The expected useful life of the delivery vehicle is 6 years. The repayment schedule applicable to
the finance lease loan is as follows:
Instalment

Date Total Capital Interest at 12% Outstanding

per year capital amount

02/01/20.7 1 725 000

31/12/20.7 Instalment 1 419 564 212 564 207 000 1 512 436

31/12/20.8 Instalment 2 419 564 238 072 181 492 1 274 364

31/12/20.9 Instalment 3 419 564 266 640 152 924 1 007 724

31/12/20.10 Instalment 4 419 564 298 637 120 927 709 087

31/12/20.11 Instalment 5 419 564 334 474 85 090 374 613

31/12/20.12 Instalment 6 419 564 374 613 44 954 0

2 517 384 1 725 000 792 384

Depreciation on delivery vehicles are written off on the straight-line method over the useful life
thereof to an estimated residual value of nil. Depreciation for 20.7 still has to be recognised. No
other delivery vehicles were purchased or sold during the year.

Required:
a) Recognise the transactions in respect of the bank loan, the finance lease loan and the depreciation
in the financial records (general journal) of AW (Pty) Ltd for the reporting period ended 31
December 20.7. (14)
Note:
 Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
b) Present and disclose the resulting balances in the financial statements of AW (Pty) Ltd for the
reporting period ended 31 December 20.7. (36)
Note:
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or directly
underneath the wording of the relevant line item.
Note: Ignore VAT.
TUTORIAL QUESTION 13 (90 MARKS)
On 31 December 20.6 the following balances, amongst others, appeared in the general ledger of AT (Pty)
Ltd:
Manufacturing plant Dr Cr

Cost price 3 000 000

Accumulated depreciation 1 800 000

At the end of February 20.7, AT (Pty) Ltd decided to build an additional plant.
On 4 March 20.7, an agreement was signed to obtain a specific loan to finance the construction of the
additional plant. On 11 March 20.7, a contract was signed with KK Construction to build the additional
plant for R3 400 000. Construction commenced on 1 April 20.7.
The primary debt of the loan is R3 400 000 and was received in two equal amounts on 1 April 20.7 and
30 September 20.7. The interest rate is 12% per year and the finance costs are payable in arrears on 31
December 20.7 and 30 June 20.8. The loan is repayable on 30 June 20.8 and the entity’s inventories are
pledged as security for the loan.
The borrowed funds that are not immediately utilised for the construction of the new plant, is temporarily
invested.
Payments by AT (Pty) Ltd to KK Construction for construction work performed, will relate to the extent of
the completion of the plant. The plant was completed on 30 June 20.8 and was put into service on the
same date. Depreciation must be written off from this day at 20% per year on cost. Depreciation on the
existing plant is also written off at 20% per year on cost.
Finance costs on loans and investment income on the temporary investment of specific borrowed funds
are as follows:
20.7 Specific borrowed funds Dr Cr

01/04 – 31/12 Finance costs – specific loan 204 000

01/04 – 31/12 Interest income – temporary investment 73 500

20.8

01/01 – 30/06 Finance costs – specific loan 204 000

01/01 – 30/06 Interest income – temporary investment 16 500

Bank overdraft
 20.7 Finance costs 210 000

20.8 Finance costs 185 000

Detail of payments to KK Construction for construction work is as follows:

20.7 R

30 April Bank 850 000

31 July Bank 900 000

31 Dec Bank 750 000

2 500 000

20.8

28 Feb Bank 500 000

30 Jun Bank 400 000

900 000

Required:
a) Recognise the transactions in respect of the plant, the specific loan, the finance costs, the
capitalisation of the relevant finance costs and the depreciation in the financial records (general
journal) of AT (Pty) Ltd for the reporting periods ended 31 December 20.7 and 31 December 20.8.
(42)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
b) Present and disclose the resulting balances in the financial statements of AT (Pty) Ltd for the
reporting periods ended 31 December 20.7 and 31 December 20.8. (37)
Note:
Accounting policy notes are not required.
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or directly
underneath the wording of the relevant line item.
c) By referring to the definition and recognition criteria of an asset, explain why plant under
construction can be recognised as an asset. (11)
Note: Ignore VAT.
TUTORIAL QUESTION 14 (25 MARKS)
On 2 January 20.7, AC (Pty) Ltd acquired a new truck in accordance with a finance lease agreement.
The finance lease agreement contained inter alia the following stipulations:
• The lease term is 5 years and the date of inception of the lease is 2 January 20.7. This date also
represents the date on which AC (Pty) Ltd put the truck into service.
• The lease instalments are 5 annual instalments of R166 446 each, payable in arrears on
31 December.
• The interest rate implicit to the agreement is 12% per year and the interest period is one year.
• The fair value of the delivery vehicle is R600 000 which is equal to the present value of the lease
instalments.
The expected useful life of the truck is 5 years. AC (Pty) Ltd depreciates similar assets over the estimated
useful life of the assets by using the straight line method.
The following portion of the repayment schedule is available in respect of the finance lease loan:

Instalment

Date Total Capital Interest @ 12% Capital amount

per year outstanding

02/01/20.7 600 000

31/12/20.7 Instalment 1 166 446 94 446 72 000 505 554

31/12/20.8 Instalment 2 166 446 105 780 60 666 399 774

31/12/20.9 Instalment 3 166 446 118 473 47 973 281 301

31/12/20.10 Instalment 4 166 446 132 690 33 756 148 611

Required:
a) Recognise the transactions in respect of the finance lease loan, the finance costs and the
depreciation in the financial records (general journal) of AC (Pty) Ltd for the reporting period
ended 31 December 20.7. (8)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Where applicable, round off amounts to the nearest Rand.
b) Present the resulting balances in the financial statements of AC (Pty) Ltd for the reporting period
ended 31 December 20.8. (5)
c) Explain the nature of the principle “Substance over form” by referring to the acquisition of an
asset in accordance with a finance lease agreement. (3)
d) Disclose applicable detail of the finance lease loan in a note to the financial statements of AC
(Pty) Ltd for the reporting period ended 31 December 20.8. (6)
e) Disclose the accounting policy note in respect of the finance lease in the financial statements of
AC (Pty) Ltd for the reporting period ended 31 December 20.8. (3)
Note: Ignore VAT.
TUTORIAL QUESTION 15 (28 MARKS)
AQ (Pty) Ltd, a very successful company, as well as all of AQ (Pty) Ltd’s suppliers, are registered as VAT
vendors in accordance with the VAT Act.
The current reporting date of AQ (Pty) Ltd is 31 December 20.7. On this date, the following balances,
amongst others, appeared in the company’s accounting records:
Additional Dr Cr
information
R R

Mortgage bond 1 6 674 642

Land at cost price 1 1 750 000

Buildings at cost price 1 8 700 000

Accumulated depreciation – buildings 3 045 000

Plant items at cost price 2 5 400 000

Accumulated depreciation – plant items 3 178 000

Accumulated impairment – plant items 450 000

Plant under construction 2 2 100 000

Finance lease loan 2.1 1 506 794

Interest expense on mortgage bond for 20.7 692 200

Depreciation on buildings for 20.7 435 000

Depreciation on plant items for 20.7 (12.5% on cost price) 790 500

Impairment on plant items for 20.7 450 000

Insurance claim proceeds 2.2 750 000

Proceeds from sale of plant item 2.3 262 500

Additional information
1 The land (erf 1711, Wynberg) and buildings were purchased on 2 January 20.1. A bond is
registered over the property and serves as security for the mortgage bond.
2 During the current financial year, the following changes occurred in respect of plant items:
2.1 Plant item acquired in accordance with a finance lease
On 2 January 20.7, a plant item was acquired in accordance with a finance lease agreement. This
item was put into service on the same day. All transactions and events resulting from the
acquisition of the plant item in accordance with the finance lease agreement have already been
correctly accounted for in the accounting records of AQ (Pty) Ltd. No other plant items were
purchased during 20.7.
The fair value of the plant item is R1 800 000 (excluding VAT), which is equal to the present value
of the lease instalments.
The following portion of the repayment schedule in respect of the finance lease loan is available:
Instalment

Date Total Capital Interest at 10% Capital amount

per year outstanding

02/01/20.7 Loan 1 800 000

31/12/20.7 Instalment 1 473 206 293 206 180 000 1 506 794

31/12/20.8 Instalment 2 473 206 322 527 150 679 1 184 267

2.2 Plant item withdrawn

On 1 January 20.7, a plant item was destroyed in a fire. The cost price of the plant item was
R1 200 000 and the accumulated depreciation of the item amounted to R500 000 on the day of
the fire. In this regard, a recoupment of R855 000 was received from the insurer and was correctly
recognised in the accounting records of AQ (Pty) Ltd. This plant item still has to be derecognised.
2.3 Plant item disposed
On 31 December 20.7, a plant item was sold for R262 500 cash. The cost price of the plant item
was R900 000 and the accumulated depreciation of the item amounted to R787 500 on the day of
the sale. The proceeds from the sale of the plant item have already been recognised in the
accounting records of AQ (Pty) Ltd. This plant item still has to be derecognised.
2.4 Plant item under construction completed
On 1 March 20.6, construction of a plant item commenced. The construction of the plant item was
financed by means of a specific loan, which was incurred on 1 March 20.6 and redeemed on 31
December 20.7. Over the duration of the project, the unutilised portion of the borrowed funds was
temporarily invested. The plant item was completed on 31 December 20.7 and was put into service
on 1 January 20.8. All transactions and events arising from the specific loan, temporary investment,
the plant item under construction as well as the capitalisation of the finance costs, have already
been correctly recognised in the accounting records of AQ (Pty) Ltd. Construction costs and net
finance costs were capitalised as follows against the plant item under construction:
 R

1 March 20.6 to 31 December 20.6

Construction expenses 820 000

Net capitalised finance costs 123 500

943 500

1 January 20.7 to 31 December 20.7

Construction expenses 976 000

Net capitalised finance costs 180 500

1 156 500

2 100 000

The net capitalised finance costs of R180 500 in respect of the period 1 January 20.7 to
31 December 20.7 comprises interest expense on the specific loan to the amount of R315 240 and
interest income on the temporary investment to the amount of R134 740.
Required:
a) With reference to the information provided in this question, disclose the following notes to the
statement of profit or loss of AQ (Pty) Ltd for the reporting period ended 31 December 20.7:
i) Finance costs (5)
ii) Profit before tax

(6)
b) With reference to the information provided in this question, disclose the following note to the
statement of financial position of AQ (Pty) Ltd for the reporting period ended 31 December 20.7:
i) Property, plant and equipment (17)
Note: The total column of the note is not required.
Note:
Where applicable, round off amounts to the nearest Rand.
Show all calculations clearly.
TUTORIAL QUESTION 16 (40 MARKS)
The current reporting period of BB (Pty) Ltd, a company that does earth moving in the construction
industry, ends on 31 December 20.10.
On 31 December 20.9, the following balances, amongst others, appeared in the accounting records of
the company in respect of equipment:

Dr Cr

R R

Equipment at cost price 18 540 000

Accumulated depreciation – equipment 8 497 500

Finance lease liability – truck B 217 806

Additional information
1 Equipment comprises bull dozers, front end loaders and trucks. All the equipment, except for trucks
B and F referred to below, were purchased by using own funds.
2 The estimated useful life of the equipment items is 6 years. The annual depreciation expense is
calculated by applying the straight line method. Depreciation on equipment still has to be
recognised for the reporting period ended 31 December 20.10.
3 Truck B
3.1 On 2 January 20.5, truck B was acquired at R996 000 (excluding VAT) in accordance with
a finance lease agreement and was put into service on the same day.
3.2 The following table represents a portion of the repayment schedule in respect of the finance
lease loan for truck B:

Instalment

Date Total Capital Interest at 12% Capital amount

per year outstanding

01/01/20.10 Balance 217 806

30/06/20.10 Instalment 11 118 800 105 732 13 068 112 074

31/12/20.10 Instalment 12 118 800 112 074 6 726 0

 3.3 Subsequent to negotiations with the lessor, BB (Pty) Ltd obtained permission to sell truck B
on 30 June 20.10.
The lessor prescribed the following conditions:
• Instalment 11 has to be paid on 30 June 20.10;
• The remaining outstanding capital amount also has to be paid on 30 June 20.10;
and
• A cancellation fee of R3 990 (including VAT) has to be paid on 30 June 20.10.
All the outstanding transactions in respect of paragraphs 3.2 and 3.3 above still have to
be recognised.
3.4 On 1 July 20.10, truck B was sold for cash to the amount of R140 220 (including VAT).
This transaction still has to be recognised.
4 Truck F
4.1 On 1 July 20.10, truck F was acquired in accordance with a finance lease agreement and
was put into service on the same day.
4.2 The following table represents a portion of the repayment schedule in respect of the finance
lease loan for truck F.

Instalment

Date Total Capital Interest at 10% Capital amount

per year outstanding

01/07/20.10 Balance 1 824 000

31/12/20.10 Instalment 1 205 793 114 593 91 200 1 709 407

30/06/20.11 Instalment 2 205 793 120 323 85 470 1 589 084

31/12/20.11 Instalment 3 205 793 126 339 79 454 1 462 745

All the transactions in respect of this finance lease agreement still have to be recognised.
5 No other equipment was purchased or sold during the reporting period ended 31 December 20.10.
6 VAT must not be taken into account except for the two cases where it was explicitly indicated that
the relevant amount includes VAT. The current VAT rate is 14%.

Required:
a) Recognise the outstanding transactions, resulting from the abovementioned information, in the
financial records (general journal) of BB (Pty) Ltd for the reporting period ended
31 December 20.10. (24)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Where applicable, round off amounts to the nearest Rand
b) Present the finance lease loan in the statement of financial position of BB (Pty) Ltd as at
31 December 20.10. (4)
Note:
Amounts must be presented next to the correct line item and under the correct heading.
c) Disclose the detail of equipment in a note to the statement of financial position of BB (Pty) Ltd as
at 31 December 20.10. (10)
Note: In the note, you only have to deal with the column for “Equipment”.
d) Explain the concept financing outside the statement of financial position. (2)
TUTORIAL QUESTION 7 (27 MARKS)
AD (Pty) Ltd produces various products by using multipurpose plant units. Due to the demand for the
company’s products, it was decided to build an additional plant.
On 8 May 20.7, an agreement was signed to obtain a specific loan to finance the construction of the
additional plant. On 11 May 20.7, a contract was signed with CK Construction to build the additional plant.
Payments by AD (Pty) Ltd to CK Construction for construction work performed, will relate to the extent of
the completion of the plant. Construction commenced on 1 July 20.7.
The primary debt of the loan is R4 400 000 and was transferred in two equal amounts on 1 July 20.7 and
31 December 20.7, into a special cheque account, mentioned below, by means of electronic fund
transfers.
The interest rate implicit to the loan is 12% per year and the finance costs are payable in arrears on 31
December 20.7, 30 June 20.8 and 30 September 20.8.
The capital amount of the loan is repayable on 30 September 20.8. AD (Pty) Ltd’s other plant units are
pledged as security for this loan.
AD (Pty) Ltd agreed with its bank that a special cheque account will be opened and used for all the
receipts and payments that relate to the project (construction of the additional plant). A few characteristics
of the special cheque account are as follows:
• All deposits into and payments out of the special cheque account will occur by means of electronic
fund transfers;
• Bank charges will not be charged on this special cheque account;
• No overdraft facility is available on this special cheque account and consequently this account
cannot go into overdraft;
• Interest on the favourable balance of the special cheque account is calculated daily and is added
to the favourable balance of this account on a monthly basis. Due to the specific nature of the
special cheque account, the interest rate is equal to the money market rate of AD (Pty) Ltd’s bank.
• The special cheque account will be closed on 30 September 20.8 and any balance on this account
will be transferred to AD (Pty) Ltd’s normal cheque account held with the bank.
The current reporting period of AD (Pty) Ltd ends on 31 December 20.7. The special cheque account
was opened with the bank as well as in the general ledger of AD (Pty) Ltd. The only entries in respect of
the project that were accounted for by AD (Pty) Ltd for the reporting period ended 31 December 20.7,
were the recognition of the loan amount, which was received in two instalments.
The following information was obtained from the bank statements in respect of the special cheque
account for the period 1 July 20.7 to 31 December 20.7:

Date Detail R
20.7 Receipts
1 Jul Loan amount received 2 200 000
1 Jul to 31 Dec Interest earned on the unutilised funds 52 250
31 Dec Loan amount received 2 200 000
 4 452 250
20.7 Payments
1 Jul to 31 Dec CK Construction 1 800 000
31 Dec Interest paid on loan 132 000
1 932 000

Required:
a) Recognise the transactions in respect of the plant, the interest expense, the interest income and
the capitalisation of net finance costs in the financial records (general journal) of AD (Pty) Ltd for
the reporting period ended 31 December 20.7. (12)
Note:
Appropriately indicate next to each account in the journal one of the following abbreviations
between brackets: P/L, SCE, SFP.
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
b) By referring to the definition and recognition criteria of an asset, explain why plant under
construction can be recognised as an asset. (10)
c) Calculate the carrying amount of the completed plant on 31 December 20.8 if the following is
accepted: (5)
i) The plant was completed and ready for use on 30 September 20.8.
ii) For the period 1 January 20.8 to 30 September 20.8:
• The payments to CK Construction amounted to R2 151 375; and
• The net capitalised borrowing costs amounted to R368 875.
iii) Depreciation on plant units is written off at 12.5% per year on cost.
Note:
Ignore VAT.
Show all calculations clearly.