QUESTION 1 (44 marks)

Wonderful Walls (Pty) Ltd (‘Wonderful Walls’) is a premier décor company in South Africa, specialising in delivering top-quality wallpapers and wall murals. The company is a registered VAT vendor. The company’s current financial year ends on 31 December 2024.

Asset Register

Events that took place during the year that must still be accounted for:

During the current financial year, heavy rain waters flooded the production facility building. On 1 July 2024, the following damages were reported:

1. Roof Damage and Insurance Claim: A significant portion of the production facility’s roof, amounting to 20% of the total factory building, was destroyed. The total book value of the production facility building was R11 000 000 on 1 July 2024. Due to Wonderful Walls being under-insured, the insurance company agreed to cover only 80% of the damages incurred to this portion of the building’s book value. The insurance payment was received on 1 July 2024.

To repair the production facility building, the following costs were incurred and paid in cash on 31 August 2024:
Raw materials R977 500 (VAT inclusive)
Overtime to permanent employees to
help with repairs. R195 500 (VAT exclusive)
Architect and engineering sign-off fees R172 500 (VAT inclusive)

All the repairs were finalised by 31 August 2024.

2. The digital design station equipment was damaged and a salvage value of R18 000 (no VAT) was paid by a scrapyard on 20 July 2024. The scrapyard is not a registered VAT vendor.

The digital design stations were replaced at a cost of R287 500 (including VAT). The purchase was done on credit on 31 August 2024.

3. The high-resolution printer (equipment) was completely destroyed and the company decided not to replace it.

Additional information:
• Assume a Value Added Tax (VAT) rate of 15%.
• Round off to the nearest Rand.
• The depreciation rates and methods of the repaired assets are as follows:

REQUIRED:

Prepare the general journal entries for all the transactions that occurred during the 2024 financial year in the records of Wonderful Walls (Pty) Ltd.
This includes:
• Recording the flood damages and their financial impacts.
• Accounting for the costs and recovery associated with repairs and replacements.
• Depreciation calculations on all assets.

Instructions:
• Journal dates and narrations are not required.
• Show all calculations and reference accordingly.
• Organise the journal entries following the order of the asset register categories. For example, start with entries related to “Land: Industrial park plot”, followed by “Buildings: Production facility”, etc. Example:
Journal 1: Land Industrial park plot Journal 2: Buildings Production facility Journal 3: Equipment Digital design stations (44 marks)

QUESTION 2 (19 marks)

Sunrise Electronics Ltd. specialises in manufacturing advanced electronic components. The company is VAT-registered. The company has a 30 June financial year-end.

On 1 January 2023, Sunrise Electronics Ltd. invested in state-of-the-art machinery for R460 000 (including VAT). The machinery was operational (ready to be used) by 1 February 2023. The machinery’s estimated useful life was initially determined to be 8 years with a residual value of R40 000 (excluding VAT).

However, on 1 July 2023, after a thorough analysis with the Engineering Department, the company revised the machinery’s estimated useful life from 8 years to 6 years, effective from the date it was put into operation (1 February 2023). The residual value remained the same.

Additional Information:
• Depreciation is computed using the straight-line method.
• Assume a Value Added Tax (VAT) rate of 15%.

REQUIRED:

Prepare all the general journal entries to account for the change in estimate for Sunrise Electronics Ltd. for the years ended 30 June 2023 and 30 June 2024. Journal dates are required. Narrations are not required. (13 marks)

Prepare the disclosure note related to the change in estimate for the financial statements of Sunrise Electronics Ltd. for the year ended 30 June 2024. (6 marks)

QUESTION 3 (21 marks)

You are the newly appointed financial analyst at Durban Electronics, a company specialising in the retail of various electronic goods. The company’s current financial year ends on 31 December 2024. You are required to perform a detailed examination of the trade payables account as part of the year-end procedures. You’ve encountered several transactions and occurrences that have affected the trade payables account during the year.

The following information was made available from the company records and financial statements:
• The subsidiary ledger account of AdvancedElectronix (AE) has a balance of R255 000 on 31 December 2024.
• The creditor’s statement of account, received from AdvancedElectronix (AE), shows a balance of R264 500 outstanding on 31 December 2024.

Upon detailed investigation of the 2024 financial records, you noted the following:
1. An invoice (INV001) of R10 000 for inventory received from AdvancedElectronix (AE) was recorded twice in the subsidiary ledger account due to an administrative error.
2. Inventory worth R5 000 was returned to AdvancedElectonix, but the credit note (CN002) has not been accounted for yet.
3. AdvancedElectronix (AE) awarded Durban Electronics a R3 000 discount for early payment received in November 2024. The discounts were earned but were not recorded in the accounting system.
4. Goods received directly into the warehouse (R12 000) from AdvancedElectronix (AE) on 24 December 2023 were not recorded as the related purchase invoice (INV003) was only received in the next accounting period, on 8 January 2025.
5. A payment of R4 000 (EFT004) made to AdvancedElectronix (AE) is not yet reflected on their creditor’s statement. Durban Electronics made the payment at year end and did not update the subsidiary ledger account of AdvancedElectronix (AE) yet.
6. Durban Electronics identified an overstatement of R1 000 in its accounts payable due to a transposition error. Invoice (INV005) received from AdvancedElectronix

(AE) that should have been recorded as R2 345 was mistakenly entered as R3 245.
7. The company acquired goods valued at R50,000 from AdvancedElectronix (AE). However, the associated transport costs of R7,000 were not recorded in the subsidiary ledger for AE but were instead found in Durban Electronics’ suspense account. These costs represent the transport and handling charges for the imported goods from AE and are due for payment to AE along with the cost of goods. Proper allocation to the AE subsidiary ledger is required to reflect the full transaction accurately.
8. An amount of R2 500 was incorrectly credited to AdvancedElectronix (AE) subsidiary ledger account due to an erroneous entry.
9. The company discovered unrecorded interest of R1 000 on overdue INV000 which was payable to AdvancedElectronix (AE) in October 2023.
10. A purchase from AdvancedElectronix (INV006) valued at R15,000 was mistakenly charged as an expense, impacting the profit and loss account instead of being correctly recorded as inventory in the subsidiary ledger. This entry was incorrectly accounted for as a debit to an expense account and a credit to AdvancedElectronix, instead of the correct entry, a debit to inventory and a credit to AdvancedElectronix. The subsidiary ledger for AdvancedElectronix should be updated to reflect the purchase as part of the inventory, not as an expense.

REQUIRED:

Prepare the trade payables reconciliation for Durban Electronics’ AdvancesElectronix (AE) trade payable as at 31 December 2024 to identify the discrepancies between the subsidiary ledger and the creditor’s statement of account. (15 marks)

Describe the impact of incorrect treatment of trade payables, such as overstatements or understatements, on the financial statements of Durban Electronics. (2 marks)

Explain how the adjustments for early payment discounts, returned goods, and unrecorded interest affect the Trade Payables account and the overall financial position of Durban Electronics. (2 marks)

Discuss the importance of timely and accurate recording of transactions related to trade payables in compliance with IFRS, using examples from the scenario of Durban Electronics and AdvancedElectronix (AE). (2 marks)

QUESTION 4 (16 marks)

EcoThrive Apparel, a company at the forefront of sustainable fashion, faced several intricate transactions during the financial year ended 30 June 2024.

Below is an extract from the pre-adjustment trial balance as at 30 June 2024:

The following still needs to be recorded:
1. Credit Sales: On 28 June 2024, EcoThrive Apparel made credit sales totaling R500 000. These sales were not included in the trade receivables closing balance.
2. Cash Collections: During June 2024, EcoThrive Apparel collected R250 000 from customers against their outstanding balances.
3. Goods Return: On 15 June 2024, a customer returned goods worth R20 000, citing quality issues. The return was not recorded and the customer’s account was not credited.
4. Irrecoverable Debt: Debtor Ms. Aniston, who owed R8 000, declared bankruptcy, and the company expects to recover only 40% of the outstanding amount from her estate.
5. Reinstating a Debtor: On 10 June 2024, Mr. Bing, whose debt was previously written off as bad, paid his outstanding balance of R15,000 in full. While the payment received has been recorded in the bank account, the accounting entry to reinstate Mr. Bing as a debtor in the books was not made. It is necessary to make the appropriate entries to reflect the reinstatement of the debt and to ensure the financial records accurately represent the recovery of the previously written-off amount.
6. Write-off: On 30 June 2024, it was determined that receivables from various customers totaling R25 000 would likely be uncollectible and should be written off.
7. Allowance for Doubtful Debts: EcoThrive Apparel estimated that 5% of the remaining trade receivables would likely be uncollectible at year-end.

REQUIRED:

Prepare the trade receivables account as it would appear in the general ledger of EcoThrive Apparel for the year ending 30 June 2024. Include all necessary adjustments and calculations and close off the account. (10 marks)

Explain the significance of maintaining an accurate Allowance for Doubtful Debts account in the context of EcoThrive Apparel. What impact does this have on the financial statementsfor the year ending 30 June 2024. (2 marks)

Discuss the implications of not recording the goods returned on 15 June 2024 for EcoThrive Apparel. Explain how this affects the trade receivables balance and the overall financial reporting for the year ending 30 June 2024. (2 marks)

Evaluate the effect of credit sales made on 28 June 2024, which were not included in the trade receivables closing balance. Explain how this omission impacts EcoThrive Apparel’s working capital management and financial position at year-end.(2 marks)

Answers to Above Questions on Financial Accounting

Answer 1: The general journal entries for all the transactions that occurred during the 2024 financial year in the records of Wonderful Walls (Pty) Ltd are indicated below:

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