QUESTION 1 (16 marks)
One of your friends, Bob, is the owner of a tuck shop called Bob’s Breads and the entity has a 31 December year-end.
Bob requires your assistance with the accounting element liabilities, as set out in the Conceptual Framework, and therefore he sent you the following queries:
|Query 1||Do I have a liability if I have taken delivery of inventory today, 1 November2022, but I am only legally required to pay the R1 000 for the inventory in 30 days’ time?|
|Query 2||Do I have a liability if I have taken delivery of inventory of R2 000 on 1 December 2022, paid cash for the inventory on delivery, and am legally required to send a thank you email to my supplier within 30 days of receivingthis inventory?|
|Query 3||Do I have a liability if I have taken delivery of inventory of R3 000 on 1 December 2022, and am legally required to only pay the R3 000 in 5 years’time?|
|Query 4||Do I have a liability today, if I have contracted and committed to taking deliveryof inventory in two months’ time, and am legally required to pay R2 500, 60 days after it has been delivered?|
|Query 5||Do I have a liability if I verbally informed my employees, that I will pay them an extra R10 000 (a bonus) in 30 days’ time for work they have completed? Even though despite making this announcement I have not signed a contract to make this bonus payment. I am also not legally required to pay the bonus but on the other hand, my employees will most likely resign if I do not keepmy word and pay them the bonus.|
With reference to the definition of the liability element, as set out by the Conceptual Framework, for each of Queries 1 to 5 above, discuss the following:
- Confirm whether Bob has a liability, Yes or No.
- Apply the information in the query to the definition of the liability element, in order to explain/motivate why you conclude that Bob has/does not have a liability
QUESTION 2 (27 marks)
You are the owner of Rent a Room Pty (Ltd) (from here on referred to as “RR”). RR owns various properties and has a 31 December year-end. RR makes use of the accrual accounting method when compiling financial statements.
The following transactions relating to the 2022 financial year have not been accounted for yet:
|Transaction 1||On 31 December 2022, RR’s total telephone expense for the year amounted to R22 000. This was excluding the Telkom bill for December 2022. On 15 January 2023, Telkom sent you the telephone bill for December 2022, which amounted to R7 500. You have not recorded this in your books, nor have you paid the bill, as you are disputing the amount payable. By the end of January 2023, Telkom did not issue any credit notes despite your disputes, it is also considered unlikely that they will
issue a credit note in the future.
|Transaction 2||Penny Peterson, a tenant of RR, fell behind on her rental of R5 000 per month. She however made a payment of R50 000 on 15 December 2022. At the time of making the payment, she owed RR the rent for November and December 2022. You contacted her to enquire about the amount paid and she informed you that she received a big bonus at work and wanted to settle her outstanding rent and that the balance of the amount paid is toward her future, i.e. 2023, monthly rental. You were happy and kept the
money. You still need to account for the R50 000 in your books.
|Transaction 3||Your buildings have prepaid electricity meters installed. You do not have time to load electricity to the meters every other day, you, therefore, buy prepaid electricity units in bulk from Eskom. On 1 December 2022, you bought 17 800 units of electricity @ R2.50 per unit. On 31 December you
had 9 750 units left.
- Explain the term “accrual concept” in your own (2 marks)
- Make use of the table provided to:
- Classify each adjustment to the applicable element on the balance (Asset/Liability)
- Briefly describe each type of
|Adjustments||Applicable element||Description of the adjustment|
|Income received in advance|
- Prepare the general journal entries to account for transactions 1 – 3 of Rent a Room Pty (Ltd) for the financial year ended 31 December 2022. Dates and narrations are not
- Transaction 1 (2 marks)
- Transaction 2 (7 marks)
- Transaction 3 (8 marks)
Use the following table as a guide to give your answer:
|Transaction||Description (Element)||Debit (Rand)||Credit (Rand)|
|Trade Receivables (Asset)||50|
*Example: Bobby still owed business X, R 50 for products purchased. Bobby settled his debt by making a cash payment at the end of the following month.
QUESTION 3 (23 marks)
Tubby is a retailer that buys and sells handmade robotic toys. He buys a basic prototype and then programs it to do all sorts of unique tricks. The following information was provided that relates to the month ended January 2022:
• At the December 2021 month-end run Tubby had 200 robotic toy units left with a total value of R24 000.
• On the 5th of January 2022 Tubby purchased 90 robotic toy units which cost him R128 per unit.
• On the 10th of January 2022 Tubby realised that some of the robotic toy units from his previous purchase (on 5 January 2022) were broken. He was not happy with this at all and arranged to have 9 broken units returned to the supplier on that very same day and requested a refund.
• Closer to the January 2022 month end he realised that there will be a shortage of robotic toys and had an additional order of 40 robotic toy units delivered on the 19th of January 2022. This order cost him R4 400 for the stock plus an additional transport cost of R320 to have the robotic toys delivered on that same day.
• Tubby sells his robotic toys online. Customers can buy robotic toys up until the 25th of each month. He does not take sales or orders after this date as he has to put time aside to complete his month-end close procedures.
• On the 31st of January 2022 he counted 49 robotic toys on hand. There were no damaged or stolen toys noted during the count.
• The net realisable value of the 49 robotic toys amounted to R6 370.
Determine the cost of closing inventory, assuming that the business uses the weighted average cost allocation method and the periodic recording system.
Determine the cost of closing inventory, assuming that the business uses the FIFO cost allocation method and the periodic recording system.
Technology is constantly changing, and Tubby is unsure about the inventory recording system and subsequent inventory measurement bases which would best suit the robotic toys. To assist Tubby, explain the difference between each of the following terms:
Perpetual system vs Periodic system.
First-in-first-out (FIFO) vs weighted average cost allocation method.
Advise Tubby on which inventory recording system and measurement bases he should use, and why. Provide a reason to support your suggestions.
QUESTION 4 (12 marks)
Peppy Traders (Pty) Ltd is a company located in Johannesburg, that imports clothing from China. The company has a 31 December financial year-end.
You have been provided with the following information regarding the company’s inventory for 31 December 2022:
• The physical inventory count on 31 December 2022 indicated closing inventory with a cost of R55 000.
• Included in the closing inventory were damaged items with a cost price of R5 000. The damaged inventory could be sold for R5 100 if R450 was spent on repairs. Peppy Traders (Pty) Ltd received the invoice, from Bob the builder Ltd, prior to year-end for the repairs of R450.
• Peppy Traders (Pty) Ltd also sent inventory with a selling price of R4 800 to a client in Cape Town. The terms of the contract indicate FOB destination. The inventory left Johannesburg on the 31st of December 2022 and arrived in Cape Town on the 2nd of January 2023. This inventory is not included in the R55 000 closing balance.
• Peppy Traders (Pty) Ltd uses the perpetual system for recording inventory.
• Peppy Traders (Pty) Ltd uses a constant mark-up of 50% on cost.
• Peppy Traders (Pty) Ltd uses the cost model for the measurement of equipment.
With reference to the information given, calculate the cost of Peppy Traders (Pty) Ltd’s closing inventory at 31 December 2022. (5 marks)
Prepare the general journal entries to account for all the transactions relating to Peppy Traders (Pty) Ltd’s inventory for the 31 December 2022 financial year-end. Journal dates and narrations are not required. (5 marks)
Prepare an extract of the statement of financial position of Peppy Traders (Pty) Ltd as at 31 December 2022 to display the final balance of inventory. (2 marks)
Answers on Above Questions on Financial Accounting
Answer 1: In response to query 1, Bob has a liability even though the delivery of inventory is taken today, and payment is legally liable to be paid after a month. This is mainly because ….
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