Week+6 - FINANCIAL ACCOUNTING(ACC1006S SUGGESTED SOLUTIONS...

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FINANCIAL ACCOUNTING (ACC1006S) SUGGESTED SOLUTIONS TUTORIALS HANDED IN ON 7 SEPTEMBER 2009 TUTORIAL 17 (solution): Theory B 004 1. Date Details Debit Credit 1 Jan 2005 DR Deposit/Prepayment (A) 280 000 CR Bank (A) 280 000 2. The deposit is a resource controlled by Gary. Gary controls this debt because the supplier has an obligation to provide Gary with the cash back or a reduction in the factory’s purchase price to the extent of the deposit paid (the rewards of ownership of the prepayment). He also has the risks of ownership because if the supplier goes insolvent, Gary will lose the deposit. The control over the debt was obtained through the past event of making the deposit payment. An inflow of economic resources into the business in the future is expected, because the amount still to be paid to the supplier will be reduced by the deposit paid or refund Gary the cash. On 1 January 2005 there is a prepayment asset which can be recognised because: Gary can reliably measure the cost of the debtor because he made the deposit payment (R280 000) – he has cheque/receipt as proof of payment and amount The future benefits, being the refund of the cash deposit or the reduction of the amount still owing on the machine, are probable - more likely than not, because Jason has a legal right and the supplier will protect his reputation by meeting orders that are placed by customers. On 1 January 2005, the asset definition and recognition criteria are met for a prepayment asset, and will be recorded as such in the books of Petersons Furniture 3. Date Details Debit Credit 1 Apr 2005 DR Property (A) 2 800 000 CR Loan (L) 2 520 000 CR Prepayment (A) 280 000 4. The financial worth of the business has not changed because, although we have increased one asset by R2 800 000, we have also increased a liability by R2 520 000 and decreased another asset by R280 000. There is no change in the net asset value of the business; therefore it has no effect on equity.
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