QUESTION 1 (10 marks) (30 minutes)

The following questions are discussion type questions. The marks per questions are indicated in brackets at the end of each question. Please provide answers in full sentences.

a. Fashion Retailers is an unlisted company and is primarily involved in the clothing retail industry. Fashion Retailers intends to expand its operations and issues listed bonds on the Board Exchange of South Africa (BESA).

Required:
Which reporting framework is Fashion Retailers required to use? Motivate your answer. (2)

b. The Conceptual Framework for Financial Reporting of 2018, provide clarity on the new definitions of assets and liabilities as presented in the elements of financial statements. The previous definition for assets of 2010 is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Required:
Please provide the new definition of an asset as defined in the Conceptual Framework for Financial Reporting of 2018 and describe in short what is meant with control? (2)

c. The IAS 2 standard describe inventories as assets that are held for sale in the ordinary course of business, used in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Required:
If a motor vehicle dealer uses one of the motor vehicles for his own personal use for travelling to and from work, please discuss if one could classify the motor vehicle as an asset or as inventory? (2)

d. Capital Brokers Ltd underwrites an issue of 75 000 ordinary shares at R4,50 each in DebtCor Ltd. The underwriting commission is 9%.

Required:
If the public takes up 45 000 shares, please calculate the commission payable to the underwriters and motivate your answer? (2)

ASSESSMENT 03 (First semester) (continued)

QUESTION 1 (continued)

e. Rock Ltd issued 180 000 7% cumulative preference shares at R5 each, on the 1 January 2022. During the 2022 financial year, Rock Ltd did not have sufficient funds to pay for the cumulative preference shares dividends. During the following year, 2023, Rock Ltd decided to declare dividends, as they have sufficient accumulated funds to pay the dividends. Rock Ltd has a 31 December financial year end.

Required:
How much will be accounted for as dividends declared in the 2023 statement of changes in equity? Motivate your answer. (2)

QUESTION 2 (35 marks) (105 minutes)

The following balances were extracted from the accounting records of Impala Ltd for the financial year ended 28 February 2022:

Additional information:

1. Impala Ltd maintained a 35% gross profit percentage throughout the year.

2. A cash sales transaction that took place on 28 February 2022, with a total consideration of R575 000 (including VAT of 15%), was not yet recorded.

3. Included in other operating expenses is an amount of R12 000 (before the election of the recognition exemption, was applied) in respect of lease payments for a photocopying machine from Orange Ltd. The contract is a lease in terms of IFRS 16 and Impala Ltd elected to apply the recognition exemption that deals with low value assets to this lease agreement (IFRS 16.5). The following information is applicable to the lease contract:

• The lease term is 3 years.

• The lease was entered into on 1 January 2022.

• The lease payments are R6 000 per month for the first 6 months and then R8 000 per month for the following 6 months. The lease instalments for the last two years are R5 500 per month.

• At the commencement of the lease Impala Ltd had the option to extend the lease for a year at R3 000 per month and it was reasonably certain that Impala Ltd would exercise this option to extend the lease.

• 10% of every lease payment goes towards covering the maintenance costs incurred and this will be paid by Orange Ltd. Orange Ltd accounts for lease and non-lease components separately (IFRS 16.12).

4. Other operating income consists of:

Proceeds on sale of motor vehicle …………………………………………………….
Dividends received from the following companies:
– Fila Ltd ……………………………………………………………………………………….
– Zarra Ltd …………………………………………………………………………………….

R
240 000

60 000
50 000

5. The issued ordinary share capital of Zarra Ltd is R250 000 (shares issued at R2 each). Impala Ltd purchased 60 000 shares in Zarra Ltd at a cost of R3 each. The market value of the shares on 28 February 2022 was R5,50 per share. These shares have been obtained for speculative purposes.

Impala Ltd owns 250 000 of the 3 400 000 issued shares in Fila Ltd purchased for R2 000 000. The shares of Fila Ltd are traded on the JSE and the market value per share was R9 each on 28 February 2021. The market value on 28 February 2022 was R11,50 per share. These shares were classified as “financial assets at fair value through other comprehensive income”.

6. Property, plant and equipment are depreciated at the following rates and methods:

Motor vehicles – 25% per annum using the straight-line method Equipment – 20% per annum using the reducing balance method Buildings – the straight-line method over its expected useful life of 20 years
7. The following information regarding motor vehicles and equipment follows below:

• One of the motor vehicles, obtained on 1 March 2020 at a cost of R340 000 and no residual value, was sold for R240 000 on 1 November 2021. A replacement vehicle at cost of R350 000 was obtained on 1 December 2021 and is included in the balances as at 28 February 2022.

• All the equipment was purchased on 1 March 2020 and no sales or purchases of equipment occurred since then.

8. Land and buildings consisted of the following on 28 February 2022:
• Land and buildings are measured at fair value less depreciation on buildings and impairment charged subsequent to the date of the revaluation. Depreciation is calculated on a straight-line basis over the useful life of the assets.

• Following initial recognition at cost, land and buildings are carried at a revalued amount, which is the fair value at the date of the revaluation less any subsequent accumulated depreciation on buildings and subsequent accumulated impairment losses. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Any revaluation surplus is credited to the revaluation surplus via other comprehensive income. Upon derecognition the revaluation surplus will be transferred to retained earnings.

• Impala Ltd chooses to adopt the fair value model for all its investment property. Gains and losses from changes in the fair value of the investment property are recognised in the profit or loss section of the statement of profit or loss and other comprehensive income, in the period in which they arise.

• Land with a building thereon, purchased on 1 March 2020 for R1 800 000 and R3 500 000 respectively. The land was revalued at R2 000 000 on 1 March 2021 by R Roos, an independent sworn appraiser. The land and building are situated on stand 45, Graskop, Ekurhuleni and is owner occupied. Impala Ltd uses the revaluation model to revalue these assets for subsequent measurement, as the assets can be measured reliably.

• Land with a building thereon, purchased on 1 September 2021 for R1 500 000 and R2 800 000 respectively. The land was revaluated to its fair value of R1 800 000 on 28 February 2022 by R Roos, an independent sworn appraiser. The land and building are situated on stand 129, Graskop, Ekurhuleni and is rented out to Mcgabbe Attorneys Incorporated, since it was acquired. The rental income for the financial year end, 28 February 2022 of R550 000, was not yet recorded in the accounting records of Impala Ltd.

9. The long-term loan was incurred on 1 March 2021 with the capital portion repayable in six annual instalments. The first instalment was paid on 1 January 2022. Interest which is calculated at 12% per annum is payable at the end of each financial year.

Required:

The following balances, amongst others, were extracted from the accounting records of Tugela Ltd at 30 June 2022:

Additional information:

1. The authorised share capital of the company is as follows:

10 500 000 Ordinary shares
2 000 000 10% Redeemable preference shares
4 500 000 6% Cumulative preference shares
7 500 000 8% Non-cumulative preference shares
2. The issued share capital of the company is as follows: 9 000 000 Ordinary shares
1 500 000 6% Cumulative preference shares issued on 1 July 2017
900 000 8% Non-cumulative preference shares issued on 1 April 2022

3. The following transactions have not yet been recorded:

Land was revalued on 30 June 2022 at net replacement value for R5 000 000 by Mr Cele, a sworn appraiser.

Depreciation on property, plant and equipment must still be provided for, as well as any other transactions regarding property, plant and equipment that may have taken place during the current financial year.

1 500 000 Ordinary shares were issued on 31 March 2022, amounting to R4 500 000.

No dividends were declared or paid by the company during the current or previous financial year.

4. Tax for the current year after considering all adjustments provided in the additional information of (3), (5) and (6) amounts to R844 500.

5. The following information regarding the long-term loan is available:

The long-term loan from Axis Bank originated on 1 July 2019 and is repayable in ten equal annual instalments with the first repayment commencing on 2 January 2021. Interest, calculated at 15% per annum is payable bi-annually on 31 December and 30 June each year. However, for the current financial year both bi-annual interest payments are outstanding and need to be provided for.

6. The following information regarding property, plant and equipment is available:

All the machinery was purchased on 1 July 2020. The company provides for depreciation on machinery at 20% per annum on the straight-line method. The residual value of the machinery at the end of its useful life is R360 000. During the current financial year all the machinery was withdrawn from the production process for a period of 3 months and used in the construction of the buildings. No sales or purchases of machinery took place during the current financial year. The following direct cost relating to the buildings was debited to buildings:

Labour R4 070 400
Material R7 200 000

Land and buildings, consisting of factory buildings and offices in Woodford Park, stand 49, is owner occupied. The building was completed on 1 April 2022 and is depreciated over its estimated useful life of 20 years.

On 1 April 2022 furniture and equipment with a cost price of R960 000 was acquired, but is yet to be recorded in the accounting records of Tugela Ltd. The residual value of the machinery at the end of its useful life is zero. Furniture and equipment are depreciated at 10% per annum on the reducing balance method.

7. Financial Lease: The lease was not yet accounted for in the accounting records of Tugela Ltd

On 1 June 2021 Tugela Ltd entered into a lease agreement for the lease of a network server from Sonic Computers Ltd. Sonic Computers Ltd made the network server available for use by Tugela Ltd on 1 July 2021. The terms of the financial lease agreement are as follows:

Annual installments in arrears R95 250
Guaranteed residual value R55 000
Unguaranteed residual value R15 000
Lease term 5 years
Fair value of the underlying asset R362 000
Tugela Ltd’s incremental borrowing rate 15% (implicit interest rate) Useful life of the network server 7 years

The underlying terms and conditions of the lease agreement determines that ownership of the network server will not transfer to Tugela Ltd at the end of the lease term. Tugela Ltd paid a non-refundable deposit of R25 000 on 1 December 2021 to secure the lease.

REQUIRED:

Get answers on financial accounting questions above

Answer 1: 

An analysis of the given situation in the kids that fashion retailers is an unlisted company and is trying to list bonds on the board exchange of South Africa (BESA). The reporting Framework that person retailers are required to use is South African statements of Generally Accepted Accounting practice (SA GAAP). This is mainly because companies in South Africa are required to follow either IFRS or SA GAAP, and in the case of Fashion Retailer, the company is seeking to expand in South Africa. Hence, the most appropriate reporting framework would be South African GAAP, as the information related to the company is likely to be useful to the stakeholders within South Africa.