QUESTION 1 (24 marks)
Royal Confectionery Ltd. produces high-quality confectionery products. The company is a registered VAT vendor. The company’s current financial year ends on 31 December 2023.
Royal Confectionery Ltd. purchased a new piece of equipment, an industrial oven for R230 000 (including VAT) on 1 June 2022. The oven was ready for use on 1 July 2022. The estimated useful life of the oven was initially set as 7 years with a residual value of R18 000 (excluding VAT).
On 1 January 2023, after discussions with the Production Manager, the company decided to change the estimated useful life of the oven from 7 years to 5 years, starting from the date the oven was ready for use (1 July 2022). The residual value remained unchanged.
Additional Information:
• All assets are depreciated on the straight-line method.
• Assume a Value Added Tax (VAT) rate of 15%.
REQUIRED:
Calculate the depreciation expense of Royal Confectionery Ltd., for the oven, for the years ended 31 December 2022 and 31 December 2023 considering the change in the estimated useful life. Round all answers to the nearest Rand.(11 marks)
Prepare the general journal entries for the depreciation expense of Royal Confectionery Ltd. for the year ended 31 December 2023.(3 marks)
Calculate the carrying amount of the oven of Royal Confectionery Ltd., as at 31 December 2023. Dates are required. Narrations are not required. Round all answers to the nearest Rand.(4 marks)
Prepare the disclosure note to the financial statements of Royal Confectionery Ltd. for the year ended 31 December 2023 relating to the change in estimate.(6 marks)
QUESTION 2 (45 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:
| Account | Note | Debit/ (Credit)
(R) |
| Land – Cost | 2 000 000 | |
| Factory Building – Cost | 1 | 5 000 000 |
| Factory Building – Accumulated Depreciation | (500 000) | |
| Machinery – Cost | 2 | 4 000 000 |
| Machinery – Accumulated Depreciation | (1 000 000) | |
| Vehicles – Cost | 3 | 2 000 000 |
| Vehicles – Accumulated Depreciation | (360 000) | |
| Equipment – Cost | 4 | 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:
Notes:
1. Factory Building
The factory building was purchased for R5 000 000 in 2020. The company has chosen to depreciate its factory buildings using the straight-line depreciation method over a period of 25 years, with no residual value. No changes were made to the factory building since it was initially purchased.
2. Machinery
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.
3. Vehicles
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.
4. Equipment
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.
Additional information:
• Ignore VAT.
• The company has credit terms established with all of its suppliers and purchases all assets exclusively on credit.
REQUIRED:
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. (11 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. (6 marks)
QUESTION 3 (15 marks)
GreenVille Landscaping specialises in providing landscaping design and maintenance services. The company’s financial year-end is 31 December, and it is not VAT registered.
GreenVille Landscaping decided to upgrade and replace some of its equipment during the 2023 financial year. The following transactions took place:
Vehicle A (Truck):
This truck was purchased on 1 January 2019 for R300 000 with an estimated useful life of 6 years. On 1 April 2023, the truck was replaced with a new truck that cost R400 000. The old truck was sold for R120 000 cash. The new truck has an estimated useful life of 5 years.
Equipment B (Lawnmower):
A new lawnmower was purchased on 1 January 2023 for R150 000. The lawnmower has an estimated useful life of 4 years. The lawnmower was used from 1 January 2023. The company also incurred additional costs as follows:
| Transportation and delivery costs | R5 000 | paid cash |
| Training of employees on the new lawnmower | R3 500 | paid cash |
| Installation and setup costs | R1 500 | paid cash |
On 31 December 2023, the owner noticed that the services for this lawnmower have changed dramatically. They estimated that the lawnmower has a value in use of R85 000 and a net selling price of R70 000 as at 31 December 2023.
All assets are depreciated on the straight-line method with nil residual values. Ignore VAT and tax.
REQUIRED:
Prepare the Statement of Profit or Loss of GreenVille Landscaping for the financial year ended 31 December 2023.
Instructions:
• Start with a Gross Profit of R500 000.
• Include all necessary headings and sub-headings in your statement.
• Provide all workings and reference appropriately.
• Assume that there were no other transactions for the year.
• Round all answers to the nearest Rand.
Answers to Above Questions on Financial Accounting
Answer 1: The calculations of the depreciation expense of Royal Confectionery Ltd., for the oven, for the years ended 31 December 2022 and 31 December 2023 considering the change in the estimated useful life:
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