Exam FAC3701-2013-10-E-1.pdf

Exam FAC3701-2013-10-E-1.pdf - UNISA“ UNIVERSITY...

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Unformatted text preview: UNIVERSITEITSEKSAMENS UNISA“ UNIVERSITY EXAMINATIONS unwrsrty of south afnca FAC3701 October/November 2013 GENERAL FINANCIAL REPORTING Duration 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 Is permussrble Closed book examination This examination question paper remains the property of the Unwersrty of South Africa and may not be removed from the examination venue THIS PAPER CONSISTS OF EIGHT (8) PAGES. PLEASE NOTE: 1 The paper consrsts of TWO (2) questions 2 All questlons must be answered 3 All calculatrons must be shown 4 Ensure that you are handed the correct examination answer book (blue for accounting) by the Invrgllator 5 Each question attempted, must commence on a new(separate) page PROPOSED TIME- TABLE: (avord devratlng from thIS as far as possrble ) Question number _ Conceptual Framework, Accounting polrcnes, changes In Tlrne minutes [TURN OVER] accounting estimates and errors, Income taxes, Revenue, Provrsrons, contingent Ilabllltres and contingent assets and Farr value measurement Accounting polrcres, changes In accounting estimates and errors, Events after the reporting period, Income taxes, Revenue and Provrsrons, contingent Ilabllltles and contingent assets TOTAL -_ —. v- --_v cehfl F- .«77 _ e v. 7v .« .mr _ war... ..._..._. .- ——_,.~. w-.._.v fl “.— w fireif". ......._.._..._ my" u——_———m—m—mmm 2 FA03701 10/1 1 2013 QUESTION 1 (55 marks)(66 minutes) Lawners Limited is a manufacturer and retailer of garden tools and lawnmowers, With retail outlets across the country The newly appomted finanCIal accountant has prepared draft finanCIal statements of Lawners Limited for the year ended 30 June 2013 You are reqwred to finalise these annual ftnancral statements according to the reqwrements of lnternational FinanCIal Reporting Standards You are presented With the followmg information 1 The profit before tax according to the draft finanCIal statements of Lawners Limited for the year ended 30 June 2013 amounted to R1 150 000 The profit before tax includes the followmg items Income R Profit on sale of spray painting equipment 324 000 Expenses DepreCiation — administration budding (refer 4) 75 000 DepreCiation — manufacturing budding (refer 4) 100 000 DepreCIation — manufacturing eqUIpment (refer 4) 301 760 (including spray painting equment sold) The issued share capital of Lawners Limited con5ists of 500 000 ordinary shares of R2 each On 25 June 2013 the directors declared a dividend of 10 cents per share for the year ended 30 June 2013 The diVidends as well as the diVidend tax were paid on 10 July 2013 The drvrdend transaction has not been recorded yet in the draft finanCIal statements of Lawners Limited for the year ended 30 June 2013 In order to increase the sales of its petrol Chainsaws, Lawners Limited deCIded on 1 July 2010 to award 250 loyalty award credits to its customers for every petrol chainsaw purchased The accounting policy of Lawners Limited states that revenue attributable to the loyalty award credits should be allocated based on the fair value of the loyalty award credits Loyalty award credits can be redeemed once an indiwdual customer has accumulated 2 000 loyalty award credits The loyalty award credits have no expiry date During the current year’s audit it was discovered that revenue relating to these petrol Chainsaws was incorrectly recorded in the accounting records of Lawners Limited for the current as well as the prior years Revenue from these Chainsaws was incorrectly recorded by also including the revenue attributable to the loyalty award credits immediately on delivery of the goods sold Details of the total revenue recorded in the accounting records of Lawners Limited relating to the petrol Chainsaws for the respective fmancral years are as follows 201 3 2012 2011 R Ft R Revenue attributable to petrol Chainsaws sold 625 000 450 000 300 000 Revenue attributable to loyalty award credits (Fair value) 115 400 81 000 54 000 Total revenue recorded in accounting records 740 400 531 000 354 000 Since the introduction of the customer loyalty programme, none of the loyalty award credits have been redeemed to date due to the fact that mdrvrdual customers did not acqmre the requued amount of loyalty award credits for redemption All petrol Chainsaws are sold at a gross profit percentage of 25% on cost The cost of sales relating to the petrol Chainsaws has correctly been recorded in the accounting records of Lawners Limited No adjustment has been made in the accounting records of Lawners Limited for the current and prior years, relating to the incorrect recording of the loyalty award credits, Since its introduction ,3 [TURN oven] 3 FAC3701 10/11 2013 QUESTION 1 (continued) 4 The followrng schedule relating to the assets of Lawners LImIted Is provrded to you Administration Manufacturing Manufacturing budding budding equment (Including spray painting equrpment) 30 June 2012 R R R Carrying amount 1 200 000 2 100 000 1 868 800 Tax base N/A 2 000 000 1 200 000 On 1 September 2012 the directors of Lawners lelted decrded to sell all the spray painting equipment and to rather lease advanced spray painting equrpment requrred In the production process On 30 September 2012 the directors of Lawners lelted sold the spray pamtlng equrpment for R780 000 The spray painting equrpment was originally purchased on 1 July 2010 for R750 000 The carrylng amount and tax base of the spray palntlng equrpment on 30 June 2012 amounted to R480 000 and R450 000 respectively The deprecratlon and tax allowance for the current year relating to all spray paintlng equrpment sold during the year amounted to R24 000 and R150 000 respectively No other manufacturmg equrpment was purchased or sold during the year After the draft frnancral statements for the year ended 30 June 2013 have been prepared, the directors of Lawners Limited re-estlmated the remalmng useful life of manufacturing equrpment (excluding the spray painting equrpment) and determined that their remalnlng useful lrfe, estimated from 1 July 2012, rs actually only 2 years The straight line method wrll In future be applied on manufacturing equrpment Instead of the reducrng balance method at 20% per annum No adjustment has been made for thrs change In deprecratlon method In the draft frnancral statements of Lawners Limited for the year ended 30 June 2013 The tax allowances for the year ended 30 June 2013 on the manufacturing burldlng and manufacturing equrpment (Including spray palntlng equrpment sold) amounted to R125 000 and R800 000 respectively The SA Revenue Sen/Ice do not allow any tax allowance on the admlnrstratlon burldmg 5 Lazee Limited, a regular customer of Lawners Limited, operates a number of holiday resorts across the country Lazee lelted purchases all rts garden tools and lawnmowers from Lawners lelted On 15 Aprll 2013 a lawnmower tractor’s brakes failed and lnrured two holidaymakers, whrlst playing golf at one of Lazee lelted’s holiday resorts On 21 Apnl 2013 Lazee lelted rnstrtutecl a claim of R850 000 against Lawners Limited for defective lawnmower tractors sold to Lazee LImIted At year end on 30 June 2013 the legal advrsors of Lawners LImIted are of the opinion that It IS probable that Lawners lerted Will not be found liable for the claim, due to msuffrcrent maintenance of their lawnmower tractors by Lazee Limited The two Injured holidaymakers were journallsts at a national newspaper Subsequent to the abovementloned Incrdent, a headllne news report titled “Lawnmower tractor Injures holidaymakers" was published In thls newspaper Thls headllne report adversely describes the quality of the lawnmower products manufactured and sold by Lawners lelted On 31 May 2013, Lawners erlted Instituted a legal claim of R250 000 agalnst thlS newspaper as a result of the negative publrcrty recelved by Lawners lelted On 30 June 2013, the legal advrsors of Lawners Limited are of the opinion that It Is probable, but not vrrtually certaln, that Lawners erlted wrll be successful wrth thelr claim [TURN OVER] ‘ 4 FACSTO1 10/1 1 2013 QUESTION 1 (contlnued) The SA Normal tax rate remalned unchanged at 28% for the past few years The dIVIdend tax rate Is 15% All capItal gaIns are taxable at 66 6% The company provrdes deterred tax on all temporary dlfferences usrng the statement of fInancral posmon approach There are no other exempt or temporary dIfferences except those mentIoned In the questIon There Is certaInty beyond any reasonable doubt that the company wrll have sufflcrent taxable profIt In the future agarnst thch any deducthle temporary dIfferences can be utIIIsed Lawners LImIted has carrIed forward an assessed loss of R95 000 from the prevrous year Assume all amounts to be material REQUIRED: 1 Prepare the necessary journal entry for Information (2) above to record the transactlon In the accountIng records of Lawners LImIted for the year ended 30 June 2013 Your answer must comply wrth the requrrements of Internatlonal FInanCIal Reportrng Standards Do not use abbreVIatIons for general ledger account names ll‘l your journals Journal narratrons are not requrred (4) DIscuss, WIth reasons, If the dIvrdends declared to the shareholders In InformatIon (2) above should be treated as a IIabIIIty In the statement of fmancral posrtron of Lawners LImIted at 30 June 2013, accordan to the reqUIrements of the Conceptual Framework (5) Prepare the necessary correctlng journal entry for Informatlon (3) above to record the transactions In the accounting records of Lawners LImIted for the year ended 30 June 2013 Clearly IndIcate In your answer If It Is a statement of finanCIal posmon (SFP) or a statement of profrt or loss and other comprehensrve Income (P/L) general ledger account Your answer must comply WIth the requrrements of Internatlonal FInancral Reporting Standards Do not use abbrevratlons for general ledger account names In your Journals Journal narratrons are not reqmred Ignore the Implicatlons of tax and VAT (31/2) Calculate the correct profit before tax In the statement of profit or loss and other comprehensrve Income of Lawners LImIted for the year ended 30 June 2013, takIng Into account all the above mentioned Information Your answer must comply wrth the reqUIrements of InternatIonal FInancral Reportlng Standards (31/2) Calculate the current tax expense of Lawners LImIted for the year ended 30 June 2013, accordIng to the requrrements of IAS 12 - Income taxes Use the profit before tax In the statement of profit or loss and other comprehenSIve Income as calculated In (4) above as your startrng p0Int All calculatlons are to be done to the nearest Hand (10) [TURN oven] 5 FACS701 10/11 2013 QUESTION 1 (continued) 6 Calculate the deferred tax balance In the statement of frnancral posrtlon of Lawners lelted for the year ended 30 June 2013, using the statement of finanCIal positron approach, according to the requlrements of IAS 12 - Income taxes lndlcate If your answer Is a deferred tax asset or deferred tax liability All calculations are to be done to the nearest Hand (7) 7 Disclose informatlon (3), (4) and (5) above In the notes to the annual frnancral statements of Lawners Limited for the year ended 30 June 2013 according to the requrrements of only lAS 8 — Accounting pOIICleS, changes In accountlng estlmates and errors and lAS 37 — Provrslons, contingent liabilities and contingent assets No accounting pollcy notes are requrred (16) 8 Currently Lawners errted values their bwldrngs at historical cost but IS consrdenng valurng their burldrngs at fair value In future Please name the three most WIder used valuation technrques that can be used to determine the fair value of the bUIIdIngs accordlng to IFRS 13 — Farr value measurement (3) 9 According to IFFlS 13 — Farr value measurement, the faIr value measurement of the bUIldIngs should take Into account a market partlcrpants ability to generate economic benefits by usrng the asset ll'l rts highest and best use or by selling It to another market partrcnpant that would use the asset In Its hrghest and best use Please advrse the frnancral accountant whrch three factors should be consrdered 1n determrntng the highest and best use of the burldlngs according to lFRS 13 — Farr value measurement (3) [TURN OVER] 5 FAC370‘I 10/11 2013 QUESTION 2 (45 marks)(54 minutes) Boxter Limited is a company which manufactures and retails luxury sports cars and vehicle tracking systems Boxter Limited also acts as the sole distributor of ZY gearboxes in South Africa The profit before tax in the draft finanCIal statements of Boxter Limited for the year ended 28 February 2013 amounted to R2 360 000, before taking into account any adjustments which may be necessary as a result of the additional information below On 25 April 2013 the board of directors rewewed the fmancral statements and authorised them for issue The finanCIal statements were approved at the annual general meeting held on 8 May 2013 The SA Normal tax rate is 28% 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 the company Will have sufficient taxable profit in the future against which any deductible temporary differences can be utilised Assume all amounts are maternal Additional Information 1 After a revuew of the draft finanCIaI statements of Boxter Limited, the finanCIal director of Boxter Limited decrded to change the current inventory valuation method from the last-in, first-out method to the first-in, first-out method in order to ensure that more appropriate estimates of the value of inventory is ascertained This change in accounting policy has already been recorded in the accounting records of Boxter Limited for the year ended 28 February 2013 A summary of the effect on the cost of sales as a result of the change in inventory valuation is as follows Cost of sales according to the last-in, first-out method- 2013 201 2 R R Cost of sales 829 500 780 000 Opening inventory 335 000 Purchases 960 500 800 000 1 135 000 355 000 1 315 500 486 000 Closmg inventory Cost of sales according to the first-in, first-out method. 2013 2012 R R Cost of sales 787 500 750 000 Opening inventory 460 000 Purchases 960 500 800 000 1 260 000 510 000 1 470 500 683 000 The SA Revenue SerVIce indicated that they Will not re-open the prewous year’s tax assessments and that they Will not accept the current inventory valuation method for tax purposes Closmg inventory [TURN oven] 7 FAC3701 10/11 2013 QUESTION 2 (continued) 2 The following transactions have not been recorded yet In the accounting records of Boxter Limited for the year ended 28 February 2013 21 Boxter Limited Is entitled to a commission of 20% on all their sales of ZY gearboxes, excluding bad debts During the year ended 28 February 2013, Boxter LImIted sold 2 155 ZY gearboxes to third parties for R1 385 each At 28 February 2013 an amount of R17 500 was still outstanding from third partIes In respect of ZY gearboxes sold, which is highly unlikely to be recovered as It has been outstanding for more than 6 months CommIssIon Is annually payable In cash, one month after year end 22 On 1 February 2013 Boxter Limited sold a Layman sportscar, With a sales value of R750 000, for cash to a customer These cars are sold at cost plus 25% The sales price includes a 2-year maintenance plan, which is valued at R45 000 on date of sale 3 Boxter Limited sells their vehicle tracking systems With a two year mechanical warranty Boxter Limited makes a prOVI5ion In Its annual finanCIal statements for these future warranty costs to repair defective vehicle tracking systems returned by customers The prOVISIon for warranty costs IS not deductible for tax purposes, but the actual warranty costs paid are deductible Based on past experience It is estimated that 12% of the vehicle tracking systems sold are returned With defects that has to be repaired The balance of the prOVISlon for warranty costs In the draft finanCIal statements of Boxter Limited on 29 February 2012 and 28 February 2013 amounted to R212 000 and R307 000 respectIvely Actual warranty costs paid during the current year amounted to R100 911 (2012 R30 300) and was debited against the prowsron for warranty costs The balance of the prowsmn for warranty costs on 28 February 2011 amounted to Rnil During February 2013 Boxter LImIted relocated Its manufacturing plant In Port Elizabeth to Cape Town This relocation WI” result In an annual saVIng of manufacturing costs of at least R500 000 In the future The current lease agreement of the manufacturing plant In Port Elizabeth stipulates that early termination of the agreement would result In a penalty of 50% of the remaining lease payments due, payable In cash Within three months after termination of the agreement The current lease agreement of the manufacturing plant In Port Elizabeth terminates on 31 August 2013 The lease payments of R30 000 per month for the year ended 28 February 2013 have been paid to date On 31 March 2013, after successfully relocating the manufacturing plant to Cape Town, the eastern Side of the manufacturing plant was destroyed In a fire, caused by the defectlve Installation of electrical Wiring during the relocation Damage to the plant was estimated at R500 997 of which R10 997 related to damaged Inventory manufactured during March 2013 The company’s Insurance policy does not cover this contingency and the claim was repudiated by the Insurance company A contract was concluded With VolksWerkers Limited to repair the eastern Side of the manufacturing plant In Cape Town at a cost of R500 000 REQUIRED: 1 Prepare all the necessary Journal entries for additional information (2) above in the accounting records of Boxter lelted only for the year ended 28 February 2013 Your answer must comply With the reqUIrements of International FinanCIal Reporting Standards Journal narrations are not reqUIred No abbreVIatIons for general ledger account names in your Journal must be used lndicate In your Journal If It Is a statement of finanCIaI posmon (SFP) or statement of profit or loss and other comprehensive Income (P/L} general ledger account ignore the Implications of tax and VAT e (101/2) [TURN OVER}: 8 FA03701 10/11 2013 QUESTION 2 (continued) 2 Calculate the deferred tax balance In the statement of fmancral posrtlon of Boxter lelted for the year ended 28 February 2013 usrng the statement of financial posrtlon approach, accordrng to the requrrements ot lAS 12 — Income taxes Indicate It the balance IS a deferred tax asset or liability (6) 3 Drsclose addltlonal rntormatlon (1), (3) and (4) above In the notes to the annual fmancral statements of Boxter Limited for the year ended 28 February 2013. according to the requwements of only ms 8 - Accounting polucres, changes In accounting estimates and errors, IAS 10 — Events after the reporting period and IAS 37 - PrOVISIons, contingent llabrlltles and contingent assets Ignore the Impllcatrons of VAT Comparative figures are requured No other notes are reqwred No accounting pollcy notes are requ1red (281/2) © UNISA 2013 ...
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