Exam FAC3701-2013-6-E-1.pdf - UNIS/A“ UNIVERSITY...

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Unformatted text preview: UNIVERSITEITSEKSAMENS UNIS/A“ UNIVERSITY EXAMINATIONS unwersrty ofsauth afrtcz FAC3701 MayiJune 2013 GENERAL FINANCIAL REPORTING Duratlon 2 Hours 100 Marks EXAMINERS FIRST MS RH HORN MS L LABUSCHAGNE MR Y MOHAMED MR J OBERHOLZER MR JC RIEKERT SECOND PROF S SWART EXTERNAL MRS S WALTERS Use of a non—programmable pocket calculator ls permlsslble Closed book examination This examinatlon question paper remains the property of the University of South Mum and may not be removed from the examination venue THIS PAPER CONSISTS OF NINE (9) PAGES. PLEASE NOTE: The paper consrsts of TWO (2) questions All questions must be answered All calculations must be shown Ensure that you are handed the correct exammataon answer book (blue for accounting) by the mvrgllator Each question attempted must commence on a new (separate) page PROPOSED TIME-TABLE: (Avord devratmg from this as far as possrble ) -m number minutes Conceptual Framework, Presentation of fmancral statements Accountmg pollcres, changes In accounting estimates and errors, Events after the reporting penod, Income taxes and Provrsmns, contm uent IlabIIl‘IleS and continent assets 2 Accounting poIICIes, changes In accounting estimates and - errors, Income taxes, Revenue, Provnsmns, contingent liabilities 5-“ and contm-ent assets and FaIr value measurement 50 TOTAL _— .p-oJM—L (DUI [TURN OVER] 2 FAC3701 05/06/201 3 QUESTION 1 (50 marks)(60 minutes) Eprint Limited manufactures and sells electronic books (digital books) and also operates a printing press for the printing of books and pamphlets for Its customers You have recently been appomted as the Manual accountant of Epnnt Limited after the immigration of the preVious finanCIal accountant to Australia You have been asked to update the accounting records With all the transactions not recorded to date and to finalise the draft annual fmancral statements of Eprint Limited for the year ended 31 March 2013 The annual finanCIaI statements of Epnnt Limited for the year ended 31 March 2013 Will be presented to the board of directors for authorisation for issue on 5 May 2013 The profit before tax according to the draft finanCIal statements of Eprint Limited for the Manual year ended 31 March 2013 amounted to R1 144 000 You are presented With the follownng information of Eprint Limited when finalismg the annual finanCIal statements for the year ended 31 March 2013 1 The followmg is an extract of the draft tax rate reconcniation prepared by the prewous finanCIal accountant, which you can assume to be correct R Tax at standard rate 320 320 Reconciling items. Penalty (refer 1 1) 2 240 Foreign income (refer 1 2) (9 600) Capital profit on sale of machine (refer 2) (7 021) Income tax expense 305 939 1 1 This penalty is due to the late submissmn of the second prowsmnal tax return for the finanCial year ended 31 March 2013 The first and second prowsmnal tax payments made by Epnnt Limited for the fmancral year ended 31 March 2013 amounted to R28 000 and R22 000 respectively 1 2 Foreign income received from Zimbabwe, is not taxable in the Republic of South Africa in terms of a double taxation agreement Eprint Limited paid foreign taxes of R24 000 on this income 2 The directors of the company deCIded to sell and replace their eXIsting printing machine, the Gobbler Machine, With the Eco Green Machine This new printing machine Will decrease the printing costs by 25% as it uses less ink and electricny and prints at mice the speed of the Gobbler Machine Details of the respective machines are as follows Gobbler Machine Eco Green Machine Cost price R420 000 R584 000 Date of purchase 1 January 2012 1 December 2012 Date of sale 1 January 2013 N/A Selling price R495 075 N/A Profit on sale R159 075 N/A DepreCIation for the year ended 31 March 2012 R21 000 N/A DepreCIation for the year ended 31 March 2013 R63 000 R29 200 Tax allowance (straight line)— not pro-rata 4 years 4 years [TURN OVER] 3 FAC3701 05/06/2013 QUESTION 1 (continued) 31 32 33 34 All the relevant transactions relating to the above pnntmg machines have already been recorded In the accounting records of Epnnt lelted for the year ended 31 March 2013 Durlng February 2012 the dlrectors ot Eprlnt lelted decrded to Implement a guarantee policy to repair all electronlc books With a manufactunng defect at no cost to the customer, Within 6 months from date of sale No costs In respect of thlS guarantee policy were Incurred during the fmancral year ended 31 March 2012 The followrng lournal entries relating to thlS provrsron were recorded by the prevrous accountant In the accountlng records of Eprlnt lelted, whlch you can assume to be correct Debit Credit R R 31 March 2012 Reparr costs (PlL) 36 000 PrOVISIon for manufacturing defects (SFP) 36 000 Provrsron raised for possrble repalr costs to be Incurred m terms of the guarantee policy m respect of electronrc books sold during the year ended 31 March 2012 31 March 2013 PrOVISIon for manufacturing defects (SFP) 29 500 Bank (SFP) 29 500 Reparr costs pard m respect of the guarantee polrcy for electronrc books sold during the year ended 31 March 2012 Prowsron for manufacturlng defects (SFP) 6 500 Reparr costs (PlL) 6 500 Reversal of unused provrsron ralsed for repair costs In respect of electronic books sold during the year ended 31 March 2012 Repair costs (Pl L) 43 500 Prowsmn for manufacturlng detects (SFP) 43 500 Prowsron ralseo‘ for possrble reparr costs to be Incurred rn terms of the guarantee polrcy In respect of electronrc books sold during the year ended 31 March 2013 The drrectors of Eprmt LImIted decrded to change the accounting policy In respect of the valuatlon of lnventory, as the new pollcy wrll ensure a more rellable value of inventory Inventorles were preVIously valued according to the welghted average method, but It should now be valued according to the flrst-In, first-out (FIFO) method The new method of Inventory valuation has already been correctly accounted for In the accounting records of Eprlnt lelted for the year ended 31 March 2013 [TURN OVER] 4 FAC3701 05/06/2013 QUESTION 1 (continued) The effect of the change in inventory valuation is as follows Diffe- Diffe- 2011 rence 2012 rence 2013 Inventory R R R R R FIFO 95 000 103 000 230 000 Weighted average (112 000) (145 000) (290 000) Decrease in profit (17 000) (25 000) (42 000) (18 000) (60 000) Tax effect 4 760 7 000 11 760 5 040 16 800 (12 240) (18 000) (30 240) (12 960) (43 200) The SA Revenue Sewice indicated that they Wlll not accept the new inventory valuation method for tax purposes and they Will not reopen the prewous years’ tax assessments 5 On 15 April 2013, on the return flight after attending a meeting in Cape Town, you inc1dentally overheard a conversation between the chief executive officer and the chief finanCIal officer of KidsBooks Limited, a Significant customer of Eprint Lirnited KidsBooks Limited was currently experiencmg serious financ1al and cashflow problems after their national warehouse was destroyed by a fire on 9 April 2013 This warehouse of KidsBooks Limited was not insured for fire caused by lightning There is uncertainty it KidsBooks Limited Will be able to settle their outstanding debt, due to Eprint Limited amounting to R130 130, on 31 March 2013 The SA Normal tax rate remained unchanged at 28% for the past 3 years All capital gains are taxable at 666% The company prowdes for deferred tax on all temporary differences usmg the statement of finanCIal posmon approach There are no other exempt or temporary differences except those mentioned In the question There is certainty beyond any reasonable doubt that there Will be suffiCIent taxable profit in the future against which any deductible temporary differences can be utilised The deferred tax liability balance on 31 March 2012, after taking into account the change in inventory valuation, amounted to R1 680 The retained earnings of Eprint Limited at 31 March 2011 amounted to R1 827 760 and the profit after tax for the year ended 31 March 2012 amounted to R650 000 Assume all amounts to be material REQUIRED 1 With reference to journal 3.1 in information (3) above, identify the relevant elements of finanCIal statements For each of these elements identified, also state the definition of the relevant elements identified Your answer must comply With the reqwrements of the Conceptual Framework for Financial Reporting 2010 (5V2) 2 Calculate the current tax due to the SA Revenue Servtce by Eprint Limited for the year ended 31 March 2013, taking into account all the above information (16) [TURN OVER] 5 FA03701 05/06/201 3 QUESTION 1 (continued) 3 Calculate the deferred tax balance in the statement of fmancral posmon of Eprint Limited for the year ended 31 March 2013, using the statement of financial position approach, according to the reqUIrements of IAS 12 —— Income taxes Indicate if the balance is a deferred tax asset or liability (41/2) Disclose the income tax expense note, excluding the tax rate reconciliation, to the annual tmancral statements of Eprint Limited for the year ended 31 March 2013, according to the reqwrements of IAS 12 — Income taxes No comparative figures are requrred All calculations are to be done to the nearest Rand (31/2) Disclose information (3) and (5) above in the notes to the annual finanCIaI statements of Eprint Limited for the year ended 31 March 2013, according to the reqwrements of only IAS 37-— PrOVISions, contingent liabilities and contingent assets and IAS 10 — Events after the reporting period No other notes are requrred No accounting policy notes are requrred (101/2) Prepare only the retained earnings section of the statement of changes in eqUity of Eprint Limited for the year ended 31 March 2013, taking into account the new inventory valuation method Your answer must comply With the reqwrements of International Finanoial Reporting Standards Comparative figures are reqUIred No notes are reqwred The statement of profit or loss and other comprehenswe income is not requrred (71/2) Disclose inventory in the statement of Manual posmon 0t Eprint Limited at 31 March 2013 Your answer must comply With the reqwrements of International FinanCIal Reporting Standards Comparative figures are reqUIred (21/2) [TURN oven] 6 FAC3701 05/06/2013 QUESTION 2 (50 marks)(60 minutes) THIS QUESTION CONSISTS OF 2 INDEPENDENT PARTS PART A (43 marks)(52 minutes) Carnastie Limited is a South African company which operates and owns the Carnastie golf resort as well as a golf eqUIpment manufacturing plant, speCIalizmg in the manufacturing of the Bling golf club brand The resort has an 18 hole championship golf course, Carnastie Links The profit before tax of Carnastie Limited In the draft finanCIal statements for the year ended 28 February 2013 amounted to R1 550 000, before taking into account any adjustments as a result of the additional information below The SA Normal tax rate IS 28% Deferred tax is provrded for on all temporary differences according to the statement of finanCIal posmon approach The company Will have suffICIent taxable profit in future against Wthh any unused tax losses can be utilized There are no other Items causmg temporary differences except those mentioned tn the question Assume all amounts are material Additional information 1 Only Carnastie golf club members can use the faCIIIties of the Carnastie Links golf course An annual membership fee payable on the 15‘ of March each year entitles members to use all the faculties at the golf course During the current finanCIal year the accountant, Mr Big Easy, requested you to aSSISt him With the accounting of the followmg revenue transactions of Carnastie Links golf course, which have not been included in the draft finanCIal statements for the year ended 28 February 2013 yet . For the current finanCIal year 34 membership application forms were received from prospective members but only 14 new members were accepted by the club At 1 March 2012 all the annual membership fees were fully paid up by the new and eXIsting members No outstanding membership fees were due from prior years - Annual membership fees for the 85 members in the prewous finanCIal year amounted to R5 700 per member All of these members also remained members for the current finanCIal year The annual membership fees annually increase With 10% o On 1 March 2012 Carnastie Links golf course instituted a membership loyalty programme Members pay H513 per game of golf, which is also regarded as the fair value thereof Members are rewarded With one free game of golf for every ten golf games played A total of 12 free golf games were rewarded during the 2013 finanCIal year in terms of the loyalty programme All free golf games rewarded in terms of the loyalty programme can only be redeemed during the 2014 finanCIal year A total of 1 330 golf games were actually played during the 2013 finanCIal year [TURN oven] 2 7 FAC3701 051061201 3 QUESTION 2 (continued) Carnastle LImIted manufactures and sells golf equipment under the Bllng brand to leading golf retailers and golf pro shops During the current financral year's audlt It was dlscovered that the Inexperlenced accounting clerk, Mr Goose, Incorrectly deblted four credit notes (detailed below) to the trade payables account The credit notes were correctly credited to the trade receivables account The adjustment to the cost of sales account In respect of these credlt notes was correctly recorded In the accounting records of Carnastle lelted Details of the four credit notes are as follows Date Credit note number Debtor Amount R 15 February 2012 1662 Duffer lelted 190 000 28 February 2012 1663 Sllce LImIted 260 000 15 March 2012 1664 Drive LImIted 48 500 10 April 2012 1665 Acker lerted 80 000 The tax effect of the above mlsallocatlons IS consrdered to be maternal and the SA Revenue Servrce Indicated that they wrll reopen the tax assessment for the pnor year No adjustments for the above Incorrect allocatlons have been recorded yet In the accounting records of Carnastre lelted 0n 1 March 2010 Carnastie lelted purchased a Dear John tractor at a cost of R2 500 000 for course mamtenance at the Carnastle Links golf course The Dear John tractor IS deprecrated on the reducrng balance method at 25% per annum However, after a reVIew of the draft financral statements for the year ended 28 February 2013 the directors decrded to change thus method to the straight-lune method The expected useful life at the date of purchase of the Dear John tractor was estimated as 5 years wrth a resrdual value of Rnrl The deprecratlon charge on the tractor for the current year, calculated according to the reducing balance method, has already been recorded In the accountrng records of Carnastle lelted The carryrng amount of the Dear John tractor on the respective dates was as follows R 28 February 2013 1 054 688 29 February 2012 1 406 250 28 February 2011 1 875 000 The tax allowance on tractors Is 5 years accordmg to the straight-line method On 30 January 2013 Carnastle LImIted sold adjustable drivers to a new customer. Caddyshack lelted, at a gross profit of 25% on cost price and received the full payment of R400 000 In cash Caddyshack LImIted IS currently In the process of opening Its golf “megaworld” shop In Gauteng Caddyshack lelted Immediately “took trtle and accepted billing" for the adjustable drivers sold, but requested to postpone delivery until 10 March 2013 due to their shop still being refurbished Carnastle erlted stored these adjustable drivers separately :n thear warehouse, ready for deltvery ThIS transaction has not been recorded yet In the accomtmg records of Carnastle erlted for the year ended 28 February 2013 [TURN OVER] 8 FA03701 05/06/2013 QUESTION 2 (continued) 5 On 12 February 2013 Green Peace instituted a claim of R3 500 000 against Carnastie Limited for enwronmental damage caused to a wetland adjacent to the Carnastie Links golf course According to Green Peace the damage was caused by fertilizer used by Carnastie Links on their greens, polluting the envrronmentally sensmve wetland At 28 February 2013 the legal adVIsor of Carnastie Limited was of the opinion that it IS not probable that Green Peace WIII be successful With their claim against Carnastie Limited 6 On 31 January 2013 Carnastie Limited instituted a claim of R340 000 against Fallaway Golf The claim relates to a patent infringement by Fallaway Golf for the Illegal copying of the 31mg brand’s technology The court case is scheduled for 31 March 2013 According to the legal adVIsor of Carnastie Limited there is sufflCIent ewdence against Fallaway Golf to prove that they infringed on the Bling brand’s patent and therefore it is probable but not Virtually certain that Carnastie Limited Will be successful With their claim REQUIRED: 1 The accountant of Carnastie Limited wants to recognise the “bill and hold sale” to Caddyshack Limited (additional information 4) as revenue for the current year, but is uncertain of the requirements for the recognition of a “bill and hold sale” as revenue State the reqwrements that must be met for the recognition of the “bill and hold sale” as revenue for the current year, according to the reqUIrements of the Appendix to IAS 18 — Revenue Calculations need not form part of your answer (4) 2 Prepare all the necessary Journal entries for additional information (1) to (6) above in the accounting records of Carnastie Limited for all the transactions that occurred during the current year ended 28 February 2013 Journal narrations are not reqwred No abbrewations for general ledger account names In your Journal must be used Indicate in your Journal if it is a statement of manual posmon (SFP) or statement of profit or loss and other comprehenswe income (PIL) general ledger account Ignore the implications of tax and VAT (17) 3 Calculate the deferred tax balance of Carnastie Limited for the year ended 28 February 2013 usmg the statement of financial positron approach, according to the reqwrements of IAS 12 w Income taxes Indicate if the balance IS a deferred tax asset or liability (5) 4 Disclose additional information (2), (3), (5) and (6) above in the notes to the annual finanCIal statements of Carnastie leited for the year ended 28 February 2013, according to the reqUIrements of only IAS 8 — Accounting p0liCies, changes In accounting estimates and errors and IAS 37 — Prowsmns, contingent liabilities and contingent assets Ignore the implications of VAT Comparative figures are reqwred No other notes are reqwred No accounting policy notes are reqwred (17) [TURN OVER] 9 FAC3701 05/06/2013 QUESTION 2 (continued) PART B (7 marks)(8 minutes) Glasgow letted acqutred a manufacturing plant at a cost of R1 500 000 on 1 March 2012 Glasgow lelted wants to measure the plant at far value, according to the requirements of IFRS 13 — Falr value measurement, for the tmancral year ended 28 February 2013 REQUIRED' 1 Define the term “fair value of an asset” according to IFRS 13 — Fair value measurement (21/2) 2 State the reasons why the transaction prlce and the fair value of an asset might dlffer on the Initial recognition of an asset according to the requurements of IFRS 13 — Fair value measurement (41/2) © UNISA 2013 ...
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