QUESTION 1 (31 marks)
TechFusion Ltd. is an innovative technology company specialising in the development of sophisticated software solutions. TechFusion Ltd. has a financial year-end of 31 December.
During the 2023 financial year, the company undertook a series of transactions involving the following:
1. Issuing Class A and Class B Shares:
TechFusion Ltd. issued 1 000 Class A shares at R100 per share and 2 000 10% Class B shares at R200 per share. The Class B shares are non-cumulative with no voting rights. All amounts were received in cash by year-end.
The company declared and paid dividends on both Class A and Class B shares. A dividend of R3 per Class A share was declared.
3. Company Tax and Normal Tax:
TechFusion Ltd. made a taxable profit of R300 000 and must still pay company tax (at a rate of 27%) on the profit made.
TechFusion Ltd. issued R100 000 worth of 5% debentures on 1 January 2023. Interest on the debentures are payable on 31 December each year.
Prepare the necessary general journal entries to record transactions 1 – 4 in the accounting records of TechFusion Ltd. for the financial year ended 31 December 2023. Dates and narrations are not required. Be sure to clearly label each entry with the appropriate transaction number.(20 marks)
Analyse the debentures issued by TechFusion Ltd. in terms of their characteristics and financial implications. Explain the purpose and features of these debentures.(3 marks)
Analyse the dividend declaration made by TechFusion Ltd. for its Class A shares. Explain the significance of the dividend amount declared and its impact on shareholders.(2 marks)
Describe the characteristics of Class B shares issued by TechFusion Ltd., including any specific rights or restrictions associated with these shares.(4 marks)
Discuss the concept of equity in relation to a company’s financial position and explain its importance in determining the owner’s claim on the business.(2 marks)
QUESTION 2 (50 marks)
DEF Ltd. is a manufacturing company that produces custom-made furniture. The company’s year-end is 31 December.
You are presented with an extract of the final trial balance of DEF Ltd. for the financial year ended 31 December 2022:
|Land – Cost||2 000 000|
|Machinery – Cost||1||4 000 000|
|Machinery – Accumulated Depreciation||(1 000 000)|
|Vehicles – Cost||2||2 000 000|
|Vehicles – Accumulated Depreciation||(360 000)|
|Equipment – Cost||3||1 000 000|
|Equipment – Accumulated Depreciation||(160 000)|
The following information still needs to be recorded for the current financial year ending 31 December 2023:
The existing machinery is depreciated using the straight-line depreciation method over a period of 8 years, with no residual value.
On 1 February 2023, the company purchased a new laser cutting machine for R2 500 000. In addition, installation costs of R50 000 were incurred. The manager in charge of overseeing the installation of the machine received a monthly salary of R40 000. The machine was ready for use on 1 March 2023. The useful life of the laser cutting machine is 5 years, with no residual value, and the straight-line depreciation method will be applied. This machine has a shorter life span than the rest of the machinery of the business.
On 1 August 2023, the company imported a new CNC machine from Germany for
€200,000, FOB shipping point. The exchange rate on that day was R16: €1. The shipment arrived at Cape Town harbour on 1 September 2023. The exchange rate on that day was R17: €1. On 1 September 2023, the company incurred additional costs of R25 000 for customs duties and shipping. The company started using the machine on 1 September 2023. The CNC machine has a useful life of 8 years and no residual value. The straight-line depreciation method is applicable.
Existing vehicles are depreciated using the straight-line depreciation method over a period of 5 years, with a residual value of 10% on the total cost price.
On 1 May 2023, the company purchased and started using a new delivery truck for R400 000. The truck has a useful life of 5 years and a residual value of R40 000. The straight-line depreciation method is applicable.
Existing equipment is depreciated using the diminishing balance method at a rate of 20% per year, with a residual value of R100 000.
On 1 October 2023, the company purchased an improvement part on the existing equipment in the factory for R330 000, with a residual value of R30 000. The part was successfully installed and fully functional on the same day. The replacement part is depreciated using the diminishing balance method at a rate of 20% per year.
• Ignore VAT.
• The company has credit terms established with all of its suppliers and purchases all assets exclusively on credit.
Prepare the general ledger account for Machinery-Cost of DEF Ltd. for the financial year ended 31 December 2023. The account must be closed off.(8 marks)
Prepare the general ledger account for Machinery – Accumulated Depreciation of Machinery-Asset of DEF Ltd. for the financial year ended 31 December 2023. The account must be closed off.(14 marks)
Prepare all the general journal entries to account for all vehicle-related transactions of DEF Ltd. for the financial year ended 31 December 2023.(10 marks)
Prepare all the general journal entries to account for all equipment-related transactions of DEF Ltd. for the financial year ended 31 December 2023.(10 marks)
Prepare the reconciliation note for Property, Plant, and Equipment, focusing specifically on the Machinery category only as at 31 December 2023.(8 marks)
QUESTION 3 (19 marks)
BrightSun Electronics is a retail company specialising in the sale of electronic devices and accessories. They offer a wide range of products, including smartphones, laptops, and home entertainment systems. The company has a financial 31 December year- end.
You are provided with an extract from the pre-adjustment trial balance of BrightSun Electronics as at 31 December 2023:
|Trade Receivables||R593 000|
|Allowance for Doubtful Debts (01/01/2022)||R30 000|
The following transactions have not yet been processed in the company’s records:
1. Sale of goods or services on credit:
On 15 December 2023, BrightSun Electronics made credit sales to various customers for a total amount of R450 000 and cash sales of R50 000.
2. Cash collections from customers:
During December 2023, customers made cash payments amounting to R200 000 towards their outstanding balances.
3. Sales returns and allowances:
On 20 December 2023, a customer returned defective merchandise valued at R10 000. The company issued a credit note to the customer for the returned items. The customer’s original purchase was on credit and was not yet paid for.
4. Irrecoverable debt:
On 1 December 2023, it was confirmed that debtor Mr. Johnson, with an outstanding balance of R5 000, was declared insolvent and was only able to repay 20% of the total outstanding amount. The company received the 20% payment from Mr. Johnsons attorneys by the end of the year.
5. Bad debt recovery:
On 5 December 2023, Mr. Smith, who had a previously written-off balance of R12 500 (recognized as a bad debt), made full payment towards his outstanding balance, demonstrating his intention to settle the debt. In accordance with the company’s policy, debtors with previously written-off balances are reinstated when payments are received subsequently.
6. Bad debt write-off:
It was determined on 31 December 2023 that a specific customer’s outstanding balance of R30 000 was uncollectible. The company decided to write this amount off as a bad debt expense.
7. Allowance for doubtful debts:
Based on historical collection experience, BrightSun Electronics estimated that 4% of the outstanding trade receivables at 31 December 2023 would become uncollectible. The allowance for doubtful debts needs to be adjusted accordingly.
Prepare the Trade Receivables Account as it would appear in the General Ledger of BrightSun Electronics for the year ended 31 December 2023.
• Include the necessary adjustments which were not yet recorded.
• Include the necessary calculations.
• Close off the account appropriately.
• VAT and tax may be ignored for this question.
• Assume that there were no other transactions.
Prepare an extract of the Statement of Financial Position to present only the Current Assets for BrightSun Electronics for the financial year ended on 31 December 2023. Notes are not required. Totals and subtotals are required where applicable.(6 marks)
Answers to Above Questions on Financial Accounting
Answer 1: The necessary general journal entries to record transactions 1 – 4 in the accounting records of TechFusion Ltd. for the financial year ended 31 December 2023 are prepared as follows:
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