IFRS Graded Questions complete.pdf

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IFRS

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Accountants

Graded

Questions

Reference

Page

Number

to

Gripping

Contents

IFRS

Volume-1

Parti

IFRS: The pillars

Financial

reporting

framework

The

framework

Presentation

of

financial statements

1

1

_Ch

1

2

3

Ch

1

3

11

Ch 1

Part 2

IFRS: Recognition,

measurement

and disclosure

of

income and expenses

Revenue

Accounting for

taxation

Taxation

and

deferred

taxation

Accounting policies, changes

in accounting estimates and

errors

Earnings

per

share

Statement

of comprehensive income disclosure

Ch

15

25

4

41

Ch

2

5

53

Ch 3

6

7

77

Ch

18

91'

Ch 23

General

8

109

9

IFRS: Recognition,

measurement

and disclosure of

assets

Property, plant and

equipment

and Impairment

of

assets

Intangible

assets

investment

properties

Inventories

Statement

of financial position

disclosure:

Assets

Part

3

Ch

5, 6 and 10

121

10

147

Ch7

11

157

Ch8

12

Ch 4

165

13

General

175

14

IFRS: Recognition,

measurement and

disclosure

of

equity and liabilities

Share

capital

Financial instruments

Provisions

and

contingencies

Events

after

the reporting period

Leases

Statement of financial position

disclosure:

Equity and

liabilities

Part 4

183

Ch

22

15

Ch 21

195

16

Ch

17

205

17

Ch

17

215

18

221

Ch 13

and

14

19

20

General

233

IFRS: Other recognition,

measurement and

disclosure

issues

Non-current

assets

held

for sale

and Discontinued

operations

Statement

of

cash

flows

Borrowing costs

Foreign

currency

transactions and

forward

exchange

contracts

Employee benefits

Financial

statement

disclosure

Part 5

21

Ch

9

239

Ch

24

253

22

Ch

11

269

23

Ch

19

and

20

Ch 16

General

279

24

289

25

299

26

[Part

l]

Chapter 1

Financial reporting framework

Question

Keyissues

l.i The IASB Fairpresentation 1.2

Question

1.1

I

The International Accounting StandardsBoard(IASB),basedinLondon,began operations in 2001.

Required:

a) DescribetheobjectivesoftheIASB. b) Discussthecomposition of the IASB.

c) Explain the due process forthedevelopment of International FinancialReporting

Standards.

Question

1.2

"Financial statements should fairlypresentthe financial position, financial performance and

cashflows ofanentity. Theapplication ofIFRSs,with additional disclosurewhennecessary, ispresumedtoresult,in financialstatementsthatachieveafairpresentation."

(IASB (2007)IAS 1,Presentation

_of

FinancialStatements)

Required:

"Discuss theissuesrelating to fair presentation andcompliance with International Financial

ReportingStandards. Your answer should addressthe following:

•

therequirementsfor fairpresentationtobeachieved;

•

inappropriate accountingtreatments;

•

wheremanagementbelievesthatdeparture fromarequirement inastatementis

[Part

l|

Chapter

2

The

framework

5

Question

Keyissues

2.1

Qualitative

characteristic

-

reliability Fair presentation

Qualitative

characteristics

-

measurement Usersoffinancialstatements

Elementsofthefinancialstatements

Income received in advance

‘Self-insurance’, anassetorexpense?

Deciding whetherornottorecognizeabrandname

Treatmentofanemployee incentivepayment.

Dividends: timing andrecognition

Determiningifarivermeetsthe requirements ofoneof the elements of financial

statementsand therespective recognitioncriteria Accounting for purchasedgoods

Recognition andmeasurementofthecostsincurred in planting and maintaining

atreeplantation

Recognitionandmeasurementof the issue andredemptionof preferenceshares together with correcting journal entries

Treatment ofassetrevaluation

Advertisingexpenditure 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 I

i

Question

2.1

One of themost important characteristics that a set of financial statements should have is ‘reliability’.

Required:

Explain, in terms of the Framework, how to ensure that a set of financial statements is reliable.

Question2.2

“Fair presentation requires the faithful representation of the effects of transactions, other

events and conditions inaccordance with thedefinitionsand recognition criteria for assets,

liabilities,income and expensessetoutinthe Framework.”

(IAS1,paragraph13)

Required:

Discuss the implications of the above quote inthe context of the relationship betweenthe

Framework and IFRS(InternationalFinancial ReportingStandards).

Question

2.3

!

“Measurementisthe processof determiningthemonetaryamounts at whichthe elements of

the financial statements are tobe recognized andcarried in theBalance Sheet andIncome Statement.This involvestheselection of the particular basis of measurement...”

(TheFramework, Para 99)

Required:

Discuss how effective different measurement models are in achieving the qualitative characteristics of financialstatements.

Question

2.4

_.

“The framework is concerned with general purpose financial statements. Such financial statementsarepreparedandpresentedatleast annually andare directedtoward thecommon

informationneedsofa widerange of users”.

(FrameworkforthePreparation andPresentationof FinancialStatements,Para6).

Required:

a) Tolist the users of financial statements identifiedby The AccountingFramework and

briefly discusstheirneeds for information.

b) To briefly discuss the relationship between the information needs of investors and of otherusers.

Question

2.5

A company issued 100 000 ordinary shares(withapar value ofCl)atanissue price ofC1.20

eachduringthe year. The following is thejournalentrypassed by theaccountant:

Dr Cr Bank Share capital Share premium 120 000 100000 20 000 Required:

Statewhat element the credit entriesrepresents. Discuss,by way ofaprocess ofelimination, the reason for your answer. A discussion of the relevant definitions provided in The

Framework is required.

Question

2.6

Hazyview Mall Ltd isashoppingcentersituated inUmzinto,Kwa-Zulu Natal.Thecompany

isin the process of preparingthefinancialstatementsfortheyearended31December20X3. Whilst preparing the annualrentalreconciliation the accountant found that the bookkeeper hadrecognised all rentals receivedas income,includinganamountof C65000,received in December20X3,fromalong-standingtenantinrespectofhis January 20X4 rental.

Required:

Explain, withreference to therelevant definitions and recognition criteria provided in the Framework,whetheror notthetreatmentoftherental received for January20X4 as ‘income’ inthefinancialstatementsofHazyviewMall Ltdfor the yearended 31December 20X3is correct. Where considered appropriate, the correct alternative treatment and correcting

journalentryshould beprovided.

Question

2.7

Innerstrength Limitedisoneofyouraudit clients. Duringtheauditof Innerstrengthyoucame across thefollowing journalentry:

Dr Cr

480 000

Insuranceexpense

Insuranceloss liability 480 000

Onrequesting theaccountanttoprovidesupportinginvoices fromthe insurance company, the

accountant explained that the director is of the belief that insurance is the biggest conin society these days. Over the years that he haspaidinsurance, his insurance claims have

equatedtoroughly 20% of hispremiums. As a result, Innerstrengthdecided toself-insure

fromthe beginning ofthe year:Innerstrength intendstobearallpossible futurelossesthrough its own reserves. Instead of paying aninsurance company C40 000 per month, the above

Required:

Discusstheacceptability ofthe above journalentryintermsofTheFramework.

Question

2.8

{ Inanefforttoincrease laggingsales,BGD Limiteddecidedtosell under a newbrandname.

ThecompanyspentCl500 000onpurchasinganewbrandname. Saleshave almost doubled and accordingtothe directors this is ascribed solelytothenewbrandname. Accordingly,the

Cl500 000hasbeencapitalisedas anasset.

Required:

Discuss thetreatmentoftheCl500 000withreferencetoTheFramework.

Question

2.9

An international sportsandleisure clubhasrecently enteredtheSouth Africanmarket. The

club pays large incentives to sales representatives to sign up customers on a two-year contract. The memberthen has topaythe club amonthlyfee forthe2-year period.

Thecompany believesthatit shouldcapitalisethe incentivespaidand amortise themovera 10-yearperiod. This amortisationis basedon theirexperience inEurope wherecustomers whojoinonthetwo-year contractgenerally remainloyalmembers of the club afterthe first contracthasexpired. Theexpectationthatmembers generallyrenewtheircontractafterthe

expiry ofthefirstcontractisbasedonresearchperformedoverthelast 5 years. Required:

Discussthetreatmentoftheincentivepaymentwith referencetoTheFramework.

Question

2.10

IndependentLimiteddeclaredafinaldividendofCO.15perordinary share on 13 April20X4

inrespectof the financialyearended31March20X4. Theaccountant,MrPoll,hasrecorded the dividendas anexpense on the incomestatementforthe yearended31March 20X4 and a

liability onthebalance sheetat31 March 20X4.

Thefinancialstatementshavenotyetbeen finalised.

Required:

Analysethetreatmentof thedividend declaration.

Youranswershould

_refer

tothe relevant

_definitions

providedin TheFramework. You should

state whether or not the accounting treatment is acceptable, providing an alternative treatmentwhereappropriate. Adiscussion

_of

the recognitioncriteria isnotrequired.

wmm

;

...

•

—

....

,,

...

,

_,

,

I

GrippingIFRS:GradedQuestions The

framework

I

1

Question

2.11

I

_{McDonald’s Farm needs toraise aloan from the bank tobuy a new irrigation plant. The}

balancesheet, however,shows large liabilities andtoofewassetsaccordingtothefarmer. He tells youthat the biggestassetthat the farmownsdoesnot appearinthebalancesheet

-

the river thatrunsright through thecentreofthefarm.

Required:

Discuss how the river should be treated in the financial statements with reference to the Framework.

Question

2.12

Minutemin, a client of yours, sells photocopiers andprovides photocopying services. The

manufacturer suppliesinventorytoMinuteminonthe followingtermsand conditions:

Minutemin pays the manufactureradeposit of C3 000 per photocopierupondelivery. Themachineshaveatotalcostof C30 000.

The photocopiers are displayed on Minutemin’s premises and used as demonstration models until sold.

Whenanitem is sold, thebalance of thepurchase price, which is determined when the

deposit is paid,ispaidtothe manufacturer.

Minutemin paysforthe insuranceof the items whileon itspremises.

If the items arenotsoldafter3 months,they canbereturned tothemanufacturer. This

situation hasnevertaken placeas thecompany keeps onlyone month’s inventoryonhand

atany onetime.

Required:

Discuss how the inventory ofphotocopiers at the year end should be accounted for in the financialstatementsofMinutemin,ifatall.

Question

2.13

Lumber Jacks Limited is a company with a primary interest in the forestry industry. The companypurchases large tracts of land and plants scoresoftreeson these lands. When the trees reach a certain age, they are either sold to a major paper milling company or to manufacturers of cheapfurniture.The company employs the bestlumberjacks inthebusiness and alsoboasts the best pine wood in thecountry.The founder andmanaging director Jim

Duggan, attributes theexcellent qualityof the woodto their sophisticated plantingprocess and regular maintenance and weed control.

You have been approached by the company to help resolve certain accounting issues pertainingtotheyearended31December20X2:

•

Lumber JacksLimitedboughtafarmintheMpumalangaarea that issuitableforgrowing

pinetrees. Theypaid Cl million forthefarmandimmediatelystartedtodeveloptheland andplantyoungpinetrees. This involved theconstructionof roadstothe various planting

areas,dividingthefarm intosections, andcreatingfire andwind breaks. Holeswerealso dug into which young trees were planted and fertilised. This was done at a cost of

C100 000 per hectare.

•

Once the trees wereplantedthey hadtobe wateredandthe weeds hadtobe controlled. The trees alsohadtobe prunedto ensure that theygrew straight and tall. This wasan

ongoing operationwithcostscontinuallybeing incurred.

•

After aperiod of approximately 10 years the trees will be ready for harvest and are

expectedtoyieldareturninexcessof 20% perannum on thecostsincurredtoestablish them.

•

Duringthefinancial year ended31December20X2,LumberJacksLimiteddeveloped10

hectares at a total cost of Cl million and also spent C300 000 on watering and maintaining thetrees.

•

Theaccountantreflectedthecostof Cl.3millionas anexpense intheincomestatement. The financial director, however feels that there are enough reasons to justify the

capitalisation oftheC1.3millionas anassetinthebalance sheet of Lumber Jacks Limited

at31December20X2 Required:

Discuss the appropriate recognition of the costs incurred in planting and maintaining the

plantation in the financial statements of Lumber Jacks Limited as at 31December 20X2. Specific reference should be madetoThe Framework.

Question

2.14

You are the newly appointed auditor of KeeptryingLtd,charged with theresponsibility of

ensuringthat the equity and liabilities section of the balance sheet is fairly reflected. The following extract from the draft balance sheet and additional information relevant to the currentfinancialyearended 31 December 20X4 has been giventoyou:

BALANCE SHEET AS AT 31DECEMBER 20X4

(EXTRACTS)

20X4 20X3

C

c

Issued sharecapital

Ordinarysharecapital: Cl shares

Preferencesharecapital:10%cumulative, redeemable Cl shares

100 000 100 000 300000 300000

Additional information:

100 000 ordinaryshares of Cl eachwereissuedon1January 20X1.

300 000 redeemable preferenceshares,eachwithacouponrateof 10% andapar value of

Cl were issued on 1 January 20X3. These shares are compulsorily redeemable on

31December20X5 at a premium of CO.10 per share. The effective interest rate is 12.937%.

I*

•

Journal entries processedtodate inrespectofthepreference sharesare asfollows:

Dr Cr

1January 20X3 Bank

Preferenceshares

Issueofpreferenceshares

300000

300 000

31 December20X3

Preference dividend Bank

Paymentofpreferencedividend

30 000

30 000

31 December 20X4

Preferencedividend Bank

Paymentofpreferencedividend

30000

30 000

•

Allamountsareconsideredtobematerial. Required:

Provide the following definitions(per the Framework): i) Liability

ii)Equity

iii)Expense

a)

Discuss the recognition of the following transactions:

b)

i) Theissueofthe preference sharesintermsoftheliability andequitydefinitions.

ii) The redemption of the preference shares (that is, the payment of C330 000 on

31 December20X5)intermsoftheexpense definition.

Calculatethebalance at which thepreferencesharesshould be measured in the balance sheet ofKeeptrying Ltdasat31December20X4.

Providethecorrecting journal entries where considered appropriate.

c)

d)

Ignore taxation.

Question

2.15

Thinkican Ltd is acompany that has always measuredits plant at cost less accumulated

depreciationandimpairmentlosses. Thedirectorsnowwishtomeasurethe plantatfair value less subsequent accumulated depreciation and impairment losses. Revaluing plant to fair

value will result inasubstantial increase initscarrying amount. Although the accountant

knows that theincreasein value isdebited toplant, he isoftheopinionthat theincrease in

Required:

Discusswhether theaccountant’s proposedtreatmentiscorrect. Youranswershould be based

ontherelevantdefinitionsprovidedin the Framework.

Question

2.16

Quick

Fix Ltd is amanufacturing company engaged in the production of adhesives. The company hasnotperformed welloverthepastthree financial years.

So as to improve on the poor past profits, the Board approved a C2000 000 advertising

promotionduring the year ended 31December 20X8inorder togenerateincreased sales in

thefuture. The advertisingpromotiontookplace(and waspaidfor)duringDecember 20X8.

The accountant insists on recognising the C2 000 000 payment as an asset at

31 December20X8. His reasoning is that future sales will increase as the number of customersgrowduetotheadvertisingcampaign.

Required:

Discuss whetheryouagreewiththeaccountant,makingreferencetothe Framework. Suggest

GrippingIFRS:Graded_Questions Presentationof financial statements

f

[Part

l[

Chapter

3

Presentation

of

financial

statements

Question

Keyissues

Components of financialstatementsandtheobjective ofa statementof comprehensive income

Profit andloss,othercomprehensiveincome and totalcomprehensive income Discussion of consistency

Itemsrequiringseparatedisclosure Classification ofassetsandliabilities 3.1

3.2 3.3 3.4 3.5

3.6 Refinancingofalong-term loan

Basicstatementofchanges in equity andsharecapitalnotes Basicstatementofcomprehensiveincome andnotes Adjustingentries,basicstatementof comprehensive income

Basicstatementofcomprehensiveincomeandstatementofchangesin equity Statement ofcomprehensiveincome,statementofchangesinequity, accounting

policies,items requiringseparatedisclosure

Discussiononstatementofcomprehensiveincomepresentationandpreparation ofastatementof comprehensiveincome,statementofchangesinequity,and notestothe financialstatements

Statement ofcomprehensiveincome,notesanddisclosure of borrowings 3.7 3.8 3.9 3.10 3.11 3.12 3.13

Question

3.1

IAS 1,Presentation of financialstatements, sets outthe requirements for acomplete setof financialstatements.

Required:

a) List thecomponentsofacompletesetoffinancialstatements.

b) Discussthe reasonsfor the introduction ofastatementofcomprehensive income.

Question

3.2

IAS 1, Presentation of financial statements issued in 2007, requires a statement of comprehensive incometobe presentedaspartofacompletesetoffinancialstatements.

Required:

Define and explain the difference between the terms profit andloss, other comprehensive income and total comprehensive income.

Question

3.3

Oneof thegeneral features when preparinga set of financial statements is ‘consistency of presentation’.

Required:

a) Explainwhat ‘consistency of presentation’meansin relationtothepresentation of financial

statements.

b) Explain why itisimportant foranentitytoretainthepresentationandclassification of items inthefinancialstatementsfromoneperiodtothenext.

c) Detailthecircumstancesunder whichachange in the presentation of financialstatements maybemade.

'

Question

3.4

Full Stop Limited has a factory in asmall Free State town. The wallof aslimes damata

neighbouring mine broke inMay 20X8, flooding the whole town,including the company’s

factoty. The factory wassubmerged intwometresof mud slime that damagedall theplant and machinery. Thecostof cleaning the factoryandreplacing the plant and machinery amountedto C7500 000. Thefinancialdirectorisunsure howthisshouldbe accountedforanddisclosed in the company’s financialstatements.

Required:

Discuss the recognition and disclosure of the loss incurred by the company in terms of InternationalFinancial ReportingStandards.

!

Question

3.5

"Each entity shall present current and non-current assets, and current and non-current

liabilities, as separateclassificationsonthefaceofits statement of financialpositionexcept

where a presentation based on liquidity provides information that is reliable and more

relevant."

(IAS1,paragraph60)

Required:

List the criteriaapplied by IAS 1 in classifyingassetsascurrentornon-current.

a)

b) Listthecriteria applied by IAS1inclassifying liabilitiesascurrentornon-current. Discuss what ismeantby theoperating cycle ofabusiness.

c)

State theclassification of inventories that arenot expected toberealised withintwelve

monthsofthefinancialreportingdate.

d)

State the classification of accounts payable that are not expected to be settled within

twelvemonthsoffinancialreportingdate. e)

f) Discuss your answersto(d)and(e) above fromtheperspective of theusersoffinancial

statements.

Question

3.6

Kyoto Limited received a loan of C500 000 from the bank on 1 January 20X4, which is

repayable on 30 December 20X8. On 30 June 20X8 the directors passed a resolutionto

negotiate an agreement with the bank to renew the loan for another three years. On

20August20X8,an agreement wassigned withthebanktorenewtheloanforafurther three yearsfrom30December 20X8. The directors approvedthefinancialstatements fortheyear

ended 30June20X8on 15 September 20X8. Thedirectorsdistinguishbetweencurrent and non-currentliabilities in the company’s financialstatements.

Required:

Discuss how theloanshouldbedisclosedinthe financialstatementsofKyotoLimitedfor the yearended30June 20X8 in accordance with IAS1,Presentation of FinancialStatements.

Question

3.7

GarminLimited has the followingcapitalstructure at1January20X1:

Authorised share capital Ordinary shares(Cleach)

12% Preferenceshares(Cl each) 10%Preferenceshares(Cleach)

C

300000 100000

100 000

500000

Issued share capital Ordinaryshares

12%Preferenceshares

Sharepremium (arisingonordinaryshares)

120000 100 000 50 000

270000

•

The preference sharesarenon-redeemable.

•

Duringthe year ended 31December 20X1 thefollowing tookplace:

•

Anew shareissue of 80 000ordinary shares atCl.20each,of whichtheManaging

Directorpurchased 1 500 shares.

•

Anewshareissue of50 000 10%preferencesharesatC1.50each

•

Share issue expenses of C5 000 incurred were set off against the share premium

account

•

Thereare nocomponentsofothercomprehensiveincome S

Required:

Disclose the above information in the statement of changesinequity and the notes to the financialstatementsfortheyear ended31December20X1intermsofInternational Financial

Reporting Standards.

Question

3.8

The following is the trial balance of Eskimo Limitedat31December 20X8: ESKIMOLIMITED

TRIAL BALANCE AT 31DECEMBER 20X8 Retained earnings

-

1/1/20X8

Non-current liabilities: LoanfromABBank Non-distributablereserves

-

1/1/20X8 Sharecapital Sales Interest income Rent income Cost of sales

Interestonbank overdraft Other expenses

Administrationexpenses

Distribution expenses Investments

Tradeaccountsreceivable Bank

Currenttaxpayable Inventories

Tradeaccountspayable

Land

Equipment -cost

Equipment - accumulated depreciation Taxation (145000) (25 000) (20000) (240000) (580000) (12 500) (23000) 300 000 9500 250 000 25000 25000 50 000 250 000 (8 000) (12 800) 120000 (225 000) 200 000 100000 (40000) 1 800 Additionalinformation:

•

Dividends of C15 000 weredeclaredon31 December 20X8. These hadnotbeenpaidas

at31December 20X8.

•

Sharecapital constitutes 120 000 issued ordinary shares with apar value of C2 each.

20000 shareswereissuedatparonthe firstdayoftheyear.

•

Accumulateddepreciationonequipmentat31December20X7wasC25000. There have beenneitherpurchasesnorsales of equipment duringthe year.

•

Thereare nocomponentsof other comprehensiveincome

Required:

a) Draft the statementofcomprehensiveincomeandstatementofchangesin equity for the

financialyear-ended31 December20X8andstatementoffinancialpositionatthat datein accordance withInternationalFinancial Reporting Standards. Only the followingnotes arerequired:

» Analysts of expenses by function

GrippingIFRS:Graded_Questions Presentationoffinancialstatements

b) Showhowyour answer would changeassumingthatthedividendshadbeen proposedbut hadnotyetbeenformally declared by3 1December 20X8.

Question

3.9

The following is the trial balance of Travel Bug Limited for the year ended

31 December 20X3:

TRAVEL BUG LIMITED

TRIAL BALANCEAT 31DECEMBER20X3

Debit Credit 480000 50000 170 000 Sales Rent income Dividendincome Cost ofsales Depreciation Interest income Interest expense Otherexpenses Tax expense

Dividends declared: 30 June20X3

Retained earnings: 1 January 20X3

Property,plantandequipment

Rent incomereceived inadvance: 1 January20X3 Telephoneexpensepayable:1January20X3

Accountspayable

Current taxliability

Accountsreceivable LoanfromSouthBank

Share capital Sharepremium Bank 105 000 80 000 240 000 22 000 100 000 136 590 50000 63000 556000 5 000 3000 180 000 136 590 1 528 000 150 000 200000 20000 120 000 _i. 1697000 1697000 ; Additionalinformation:

Rentincomereceived inadvanceat31December20X3 is C6 000.

Telephone expense prepaidat 31 December 20X3 is C4 000. Telephoneexpenses are

includedin'otherexpenses’.

Dividends ofC30000 weredeclaredon31December 20X3. These havenot yet been

paid.

Depreciationisdistributedasfollows:

-

60% onfactorymachinery; usedtomake inventory

-

all of whichhas beensold.

-

30% on companycars (usedby salesrepresentatives)

-

10%onofficecomputers(used foradministrativepurposes).

Other expensesareallocatedtotheentity'scorefunctionsasfollows:

-

Operations:50%

-

Distribution:30% - Administration: 20%

I

/ « i

•

Thereare nocomponentsof othercomprehensive income Required:

Process alladjustingjournal entriesrequired to finalise the financial statements for the

yearended 31 December 20X3.

Closing

_transfer

entriesarenotrequired.

Ignore

_deferred

tax.

a)

Prepare the statement ofcomprehensive income for the year ended 31 December 20X3 using the function method, (showing the breakdown of the costs on the face of the statement of comprehensive income), and in accordance with International Financial

Reporting Standards.

b)

Nonotesarerequired.

No comparativesarerequired.

Ignore

deferred

tax.

Question

3.10

The followingis the trial balance of ABC Limitedat28February 20X9,before taking the additionalinformation intoaccount:

ABCLIMITED

TRIAL BALANCE AT28FEBRUARY 20X9

(100 250) (52750) (2 500) (36 500) (300 000) (200 000) (100 000) 142 500 9500 250 000 100000 10000 25 000 3000 (118 000) 129000 (64000) 1000 (2000) 150 000 40000 30000 80 000 6000 Retainedearnings

-

1/3/20X8

Non-currentliabilities:Loan from S Windle Loan Sharks Non-distributablereserves

-

1/3/20X8 Sharecapital Sales Royaltyincome Dividendincome Cost ofsales Interestexpense

Salariesandwages Depreciation

Rates

Electricity andwater

Bank

Currenttaxpayable

Inventories

Accountspayable

Electricity prepaid - 1/3/20X8 Wagespayable

-

1/3/20X8 Accounts receivable

Equipment (Carryingamount)

Vehicles (Carryingamount)

Land and buildings Taxation

Additionalinformation:

•

Wages of C500 have been paid towards thenextyear’s wages.

•

Electricity of C2000is still payableat28/2/20X9.

•

Salaries and wages are split between administration, distribution and operations on a

30:20:30basis.

•

Rates must be split between administration,distribution and operations on the basis of

floorareaused: theadministrationdepartmentuses25% of the floorarea,the distribution

department15%and the operationsdepartmentsthebalance.

•

Electricity andwatermaybesplit between the operations and administration suchthatthe operations departmentsareallocated three timesasmuchasis allocatedtoadministration.

•

Depreciation is madeupofdepreciationonoffice equipment(30%) andvehicles(70%).

Operations and administration use office equipment equally. Depreciation on vehicles constitutes 20% depreciation ondirectors’ company vehicles, (considered tobe another

expense)and 80%deliveryvans.

•

A transfer of C50 000must still be made from retained earnings to non-distributable

reserves.

•

Thereare nocomponentsofothercomprehensive income Required:

a) Prepare the statement ofcomprehensive income andthe statement of changes in equity for the year ended 28 February 20X9 and thestatementof financialpositionat that datein accordancewith LAS 1. Only the followingnotesarerequired:

•

Analysis of expenses by function

Ignore comparatives

b) Assuming that you are given the following additional information,redraft the financial statementswherenecessary:

The loanagreementwith SWindleLoan Sharksincludes aclause wherebyABCLimited undertakestomaintain itscurrentratioat1.8:1orhigher. Ifthecurrentratio drops below

I

I

_Question

_3.11

I

1

Durham Limited isasmall companylistedonKarachi Stock Exchange. The trial balanceof thecompanyat28February20X6is shown below:

DURHAMLIMITED

TRIALBALANCE AT 28 FEBRUARY 20X6

Debit Credit 5 000 000

440000

1250000 Ordinarysharecapital

Nondistributablereserve

Retainedearnings Dividends

Landand buildings Equipment

Accumulated depreciation - equipment Longtermborrowings

Accountsreceivable Inventory Bank Accountspayable Sales Cost of sales Distribution expenses Administration expenses Other expenses Financecosts 100000 8140000 500 000 200 000 1 100000 262 000 258 000 131 000 141 000 10 500 000 7 500 000 520 000 480 000 600 000 140000 18 631 000 18 631 000

Thefollowinginformationisrelevant:

•

Theauthorised sharecapital comprises10000 000 ordinarysharesofCleach. 1 000 000 shareswereissuedatparon30 November 20X5.

•

The land andbuildingsareusedforthesupply ofgoods and for administration purposes. The landandbuildingswererevaluedon28February20X6toafair value of C8140 000. Thisrepresentedanincrease of C240 000overthepreviousvaluation.

•

Flooding during the heavy summer rains have damaged the equipment. Management

considered it necessary to estimate the recoverable amount of the equipment at

28February 20X6. The fair valueless costs to sellare estimatedat C250 000 and the value inuseis estimatedatC270000. Thishasnotbeentaken intoaccountin preparing

theabove trial balance. Theamountisconsideredtobematerial.

•

Allproperty,plantandequipment isdepreciatedusingthe straight line method.

•

Inventorywithacostof C62 000wasestimatedtohave anetrealisablevalueof C50000

at year end. Thishas notbeentaken into account inpreparingthe above trial balance. Theamountisconsideredtobematerial.

•

Distribution costs include depreciation on buildings of Cl12500, depreciation on

:

Administration costs include depreciation on buildings of C85000, _depreciation

equipment of C40 000andsalaries of office staff of €342000.

on

Othercostsinclude thefee forthe audit of C20 000 and audit expenses of C3 000.

Dividends of C100 000 were declared on 18March 20X5 inrespect of theyear ended 28February 20X5. Dividends of C150 000weredeclaredon 15March 20X6 inrespect ofthe yearended28February20X6.

The standard rate of income tax is 29%.

differences.

There are no permanent or temporary

Required:

a) Prepare the statement of comprehensive income of Durham Limited for the year ended

28 February 20X6 in conformity with International Financial Reporting Standards.

b) Prepare the statement of changes in equity of Durham Limited for the year ended 28 February 20X6 in conformity with InternationalFinancialReporting Standards.

c) Insofarasinformation isavailable,prepare therelevantnotes tothefinancialstatements

forthe year ended28February20X6inconformitywith International Financial Reporting Standards.

The statement

_of

compliancenote andaccountingpolicies

_for

the basis

_of

preparation,

property,plant and equipment andinventory arerequired.

Thenotesrelatingtoshare capital andproperty,plantandequipmentarenotrequired.

Question

3.12

The managing director of Sky Limited presented you with the following draft results of operations inrespectof the financial year ended 30 September20X9:

SKYLIMITED

DRAFT RESULTS OF OPERATIONS

C 000's 6700 2150 Gross profit Otherincome Other expenses General expenses Depreciation Auditorsfees Technicalfees

Profit before taxation Incometaxexpense

Profit aftertaxation

Dividendsonordinarysharespaid 2February20X9 Transfertonon-distributablereserve

Retained earnings fortheyear

Retained earningsat30 September 20X8

Retainedearnings perstatementoffinancialposition

(5 408) 4 500 620 88 200 3442 (741) 2701 (240) (900) 1561 10 110 11671

I

The following informationis relevant:

Thefollowing itemsareincluded in general

expenses:-•

An amount of C350 000 paid to the auditors in respect of consulting fees on the installation ofacomputerised accountingsystem.

•

An amountof Cl 800 000 relatingtoinventory written off when the company's

new-managing directorwasappointed.

•

A loss of C300 000 sustainedinrespectof flood damage of themachinerybecause the company wasunderinsured. The insuranceproceedstotalled C900 000.

Other income includes C900 000, a surplus on the revaluation of land. The balance

representsC800000 inrespectofdividends received from listed companies, C260 000 in

respect of dividends received from a subsidiary company and C190 000 in respect of

interest from thesubsidiarycompany.

The companytax rateis 50%.

Technical feesexpensecomprises of C120 000paidtoSoftwareConsultantsInc. and the

technical manager's salary of C80 000.

Thenewmanagingdirector,wishingtomakeagood impression andtomaximise the eamings per share of thecompany hasmadethefollowingproposals:

•

Theamountpaidtothe auditors,the inventory write-offandthe loss from flood damage

(includedin ‘general expenses’above)shouldnotappear in the determination of theprofit

beforetaxation butshouldappearasaspecialdeduction before dividends paid.

•

The surplus on the revaluation of land (included in ‘other income’ above) should be incorporatedinthedetermination ofprofitbefore taxation.

Required:

a) Commentontheproposals ofthemanaging director.

b) In so far as the information allows, prepare the statement of comprehensive income, statement of changes in equity and relevant notes of Sky Limited for the year ended 30September20X9,in compliance withInternationalFinancialReporting Standards. All

amountsaretoberegardedasmaterial.

c) State what other information you would require in order to present the statement of comprehensive income in compliance with IAS 1

.

Question

3.13

I

Mustard Seed Limited isasmall company listedonKSE. The trialbalanceofthecompanyat

28 February 20X5 is shown below:

V

MUSTARD SEED LIMITED

TRIAL BALANCEAT 28FEBRUARY 20X5

Debit Credit 8422 500 140 200 62 800 67 000 Sale ofgoods Rendering of services Dividends received

Profitonsale of fixtures, fittings andequipment

Cost of goodssold

Distributioncosts Administrationcosts Other expenses Share capital Retainedearnings Dividends Paid

Fixtures,fittingsandequipment Investments Accountsreceivable Inventory Bank Borrowings Accountspayable 6 053 500 505 300 436 000 48000 2 000 000 112 000 80 000 I200 000 750000 302 300 250 100 1395 200 100 000 115900 11020 400 11020 400

The following informationis relevant:

Distributioncostsincludedepreciation of showroomfurnitureand fittingsofC82 000 and salaries of sales personnel of C320 000.

Administrationcostsincludedepreciation of office equipment of C68 000 and salariesof

officepersonnel of C312 000.

Othercostsincludethefee fortheaudit ofC25 000andauditexpensesof C4000.

Theshare capital comprises 1 000 000 shares of C2 each. Aninterimdividend of eight centsper share wasdeclaredon15 September 20X4. A final dividend of two cents per

sharewasdeclaredon15March 20X5. Thefinancialstatementswereauthorisedforissue on20March20X5.

Inventory withacostof C75 000wasestimatedtohave anetrealisable value of C52 000 at year end. This hasnot been takeninto accountinpreparing the above trial balance. Theamountisconsideredtobe material.

Borrowingscomprisethe balance of C100000on aloanraisedonI June20X2and is due be settledon30 May 20X5. Interestonthe loan is chargedat 12%perannum,payable

annuallyinarrears. Theinterestfor thecurrentyear hasnotbeenpaid. The existing loan facility gives the entity the discretion to refinance the loan until 30 May 20X6. The refinancingagreementwasconcludedon25February20X5.

1

_•

Thereare nocomponentsofothercomprehensiveincome.

•

The standardrateofincometaxis30%. There are no permanent ortemporarydifferences

otherthan thoseapparentfiomthe information given. Required:

Prepare the statement ofcomprehensive income ofMustard Seed Limited for the year ended 28February 20X5 in conformitywithInternational Financial ReportingStandards.

a)

Prepare the relevant notes to the statement

_of

comprehensive income and statement

_of

changes inequityforthe yearended28February20X5 in conformity withInternational

FinancialReporting Standards.

b)

Describe, giving reasons, how you would disclose the borrowings in the financial statements at28February20X5.

c)

FB.COM/GCAOFFICIAL

jPart

2|

Chapter

4

Revenue

Key

issues

Question

Short

questions

relating

torevenue

recognition

Discounts,

rebates and

extended

credit

Recognition

of sales:

journals

Rendering

of

services: discussion and journals

Sale of

goods,

rendering of

services,

interest income:

discussion

and

revenue

note

disclosure

4.1

4.2

4.3

4.4

4.5

Consignment sales:

discussion

Estate

agents

commission:

discussion

Rendering of

services:

discussion

and

journals

4.6

4.7

4.8

Sale of

goods

on

installment

Sales of goods and

services

on

installment

installment,

dividend

income,

interest income:

discussion,

4.9

4.10

Sale of

goods

on

journals

and

disclosure

Prepaid vouchers:

discussion

Installment

sales:

discussion, lay-away

sales

4.11

4.12

4.13

WarramysalL,

sales subject

to

conditions,

option

to

return

Sale of goods with

service

plan

Sale of call cards and

airtime:

discussion

and

journals

Loyalty

programs

Sales

revenue: recognition

discussion

4.14

4.15

4.16

4.17

4.18

4.19

The following

situations

a)

A company

declared

its

final

dividend

on ordinary

shares on 31

IJecember

,

meeting.

These

final

dividends

will

be

paid

with

in45

days

to

shareholders

fie#

31

December.

The

year-end

is

31

December.

edrw

on

b)

Value

added

tax

received

on

sales

made.

c)

Trade discounts

allowed

on

goods

sold

d)

Cash

discounts

allowed

on

goods sold

for

cash

e)

Settlement discounts

allowed

on

early

settlement

0

Goods sold

on an

instalment sale basis.

g) Goods sold by

a

company in

Ireland

to a customer

in

New

York. The

_{customer in}

_Ney,

York

paid

the full

amount

for the

goods

before the

year-end,

yet

the

goods

_were

only

delivered

to

him after

year-end.

h)

Goods

sold

toacustomeron a

lay-by (lay

away)

basis.

i)

Goods sold

on

a

bill-and-hold

basis.

j)

A

customer

ordered

15 000

cartons

of widgets

on

31 January. The

customer

paid for

the

widgets on

31

January. Manufacturing of the widgets began

on

19

February'

and the

goods

were

completed

and ready for delivery

on

22

February

but were

delivered

on

3

March.

k)

Goods sold

on

credit

on

3 1

May

to

Mr X who

went

insolvent

on

30

June.

The

year-end is

31

December.

Required:

Consider the situations above

and

briefly

discuss,

with

reference

to

International

Fininoi

Reporting

Standards,

how the

revenue

should

be

recognised,

if

at

all.

Question

4.2

Gizmo Limited

manufactures

and sells

vehicle engines used

to

modify racing

cars

company

policy

to grant

a

5%

early settlement

discount

if

the

account

is

settled

w‘

days

and

a

10%

discount

if

the transaction is

paid

for

in

cash

on

transaction

date.

following

transactions

occurred

during the

period:

•

2

January

20X7;

_Mr

_{Schumi purchased}

_a

_{turbo engine}

_at

_a

_list

_price

_of

C200 000*

paid

in

_{cash on transaction date.}

•

each

•

1April 20X7:MsHaki. who has been buyingenginesfromGizmo for the last 10years boughtanengineatalistpriceof C400 000on60dayterms. Thesearenot_consideredto beextendedcreditterms. Ms Hakipaidon31May 20X7.

•

1 May20X7: Mr.Rory purchased 10 enginesat alistpriceof C100 000each(on60-day terms). Mr.Rory willbe selling themtoa _{foreign racing club. Inorder} to foster good

business relations going

forward.

Gizmo Limitedgavehimarebateof 10%tohelp offset

his selling expenses. Mr. Rory paidon30 June 20X7.

•

1 June 20X7: Mr.Bumpurchased 10 enginesat alist priceofC100000each(on60-day terms),less a 10%rebate. The sale agreement makesit clear that 10% rebateisagainst thesellingprice. Mr.Bumpaidon31 July20X7.

•

1 July 20X7: Mr. Mechanic purchased3enginestobepaid forover aperiod oftwoyears.

The payment plan is two instalments of C250 000 each,payable in arrears, calculated usinganinterestrateof7.32125%. The cash price ofthe threeengines is C450 000.

The 5% settlement discount isnotavailableto customers who manage topay within 30 days

iftheinitialsalesagreementinvolvedeither the60-daytermsortheextended creditterms.

Required

Providethejournal entry/entries requiredtorecord each of theabovemenlioned transactions for the periodended31 August20X7.

Question

43

StoresLimited, a retailer,entered intothe followingtwotransactionson10January20X7.

Transactionnumber 1: StoresLimitedsoldgoodstoacustomeronthe followingterms:

•

Quoted

sellingpriceofC160000.

•

Payment is duein 5 monthstime.

•

Customers who

purchase

thegoods upfrontforcash,will pay only 144535.

•

Delivery hasbeenmadeand thegoodscostC85000.

•

Paymentwas

received

from thedebtoron10 June20X7.

Transactionnumber 2: Stores

Limited

sold goodstoacustomeronthe followingterms:

•

Quoted

selling

price

of C150 000 was

received

on 10 January 20X7 with a 9-month

warranty.

.

This is(he _{first lime} Stores

Limited

has

entered

intosucha

transaction

with a warranty.

andthey

therefore

havenopast

experience

to

assess

theprobability

of

return.

into their current bank account which earns

•

Stores

Limited

has

deposited

this money

•

Thewarrantyexpiredwithoutreturnof thegoodson 10 October 20X7. Required:

Prepare the journal entries to record the two transactions in its generaljournal for the year

ended 31 December 20X7.

Question

4.4

Ralph Construction buildsroads throughout thecountry. Ralph Constructionhas

previously

maintained and serviced all of its own earth-moving equipment through its ‘Service and

MaintenanceDivision’. This divisionhas since beensoldandinitsplace,Ralph

Construction

has contracted with Mark’s Maintenance Men Limited, (a company specialising in

maintenanceof large machinery)tomaintain all earth-movingequipment for three years.

•

The contracted price for this 3-year period of maintenance is C225 000, payable

immediately.

•

Budgetedcostsofprovidingthis servicehave beendrawn up by theaccountantof Mark’s Maintenance Men Ltd basedon10 yearsofprevious experience:

•

Year 20X3

•

Year 20X4

•

Year 20X5 C30000 C45 000 C75000 Required:

a) Discuss how the income for this servicecontract should berecognised and measured in thefinancial records of Mark’sMaintenanceMenLtd.

The

_{effects of}

financing are

considered

tobe immaterialin this transactionand should

therefore

be

ignored

(i.e. discountingandinterestneednotbediscussed).

b) Show thejournal entries relatingtothis transaction inthe accounting records of Mark’s

Maintenance Men Ltd for each of the

affected

years.

Question

4.5

TheRedhill Estate, an active Grape farm, isowned and run by Burnt

Limited.

Duringthe

current financial year Burnt Limited

completed

the

construction

of a unique “out of town

clusterdevelopment. Inaddition,Burnt

Limited

ownsandoperates ashopontheestate.

Clusters

Thedevelopment

comprises

200 cluster homes of varying

shapes

and sizes.

•

150 of

these clusters were sold to buyers during the year,

for

a

total of

C28 500 000

(inclusive

of VAT

at 14%).

Transfer

of these units

had

been

registered in

the

names

of

the buyers by

the

end of the financial

year.

registeredinthe names_{of the buyers. Deposits totalling C250000(excludingVAT)}

had been received to date in respect of the 25 clusters. _{These deposits were banked on}

1February 20X4,andearn

interest

at a rate of 12% per annum. 50%_{of the interest on}

depositsaccruesto_{Burnt Limited, and the other 50%tothebuyer.}

Shop

BurntLimitedownsandoperatesashoponRedhillEstate. The shop hasdaily grape-tasting,

sells produce fromtheestateandcurios from the

•

The feesreceived for thegrape-tastingamountedtoC148200(inclusiveofVAT).

•

The produce sold from the estate amounted to C2 500 000 (excluding VAT). The

shopkeeper doesnot eam a salary,but instead,earnscommission of 10% of the selling

price of the producesold.

•

The curios are carried on a consignment basis. During the year, the cost of curios

deliveredtothe storeonconsignmentamountedtoC50000. After the stockcount,itwas

established that curios costingCl 500were stolenduringthe year. Thecuriosonhandat the end of the year amounted to CIO 000 at cost. Curios sold to customers totalled

C85500(inclusiveofVAT).

Required:

a) Discuss the measurement and recognitioncriteria of IAS 18 ‘Revenue’, specifically in

relation to the transactions entered into by Burnt Limited during the year ended

31 March 20X4. Your answer must refer to all the revenue transactions, including the

sale

of

theclusters and alltheactivities of the shop.

b) Prepare the revenuenoteinthe financialstatementsofBurnt Limited,for the yearended

31

March

20X4,as

required

by

International

Financial Reporting Standards.

Question

4.6

Mitch Ltd is a manufacturing concern and

Gareth

Ltda

retailer.

Mitch Ltd sells goods to

Gareth

Ltdonaconsignment

basis.

Thetermsoftheconsignment sales include

.

Mitch Ltd

dictates the

retail price

atwhich

Gareth

Ltd

sells

theinventory;and

•

Gareth Ltd pays Mitch

Ltd the consignment

sales price

only once the goods have been

sold

tothe

public.

During

20X3,

Mitch Ltd

had

sold goods

to the value

of C500

000to

Gareth

Ltd

of

which,

goods

to the value of

C200

000

had

not yet been sold by

Gareth

Ltd by

year-end.

The

accountantof

Mitch Ltd stated

that sinceno

goods

have ever

beenreturned

by

Gareth

Ltd,he

intends

recognising

the

total

consignment

sales

duringthe

year of

C500(XX

.

Required:

Question

4.7

Fortmann Ltd isanestateagency. Thenewaccountantisunsurehowtorecordthe

_following.

•

Oneof theestateagents,Mrs Michelle,securedanoffertopurchaseapropertyon

_behalf

ofaseller. MrCaveman, on28 December20X3.

!

•

The purchaser, Mr.Anderson,hasofferedtopay C200 000 for theproperty.

•

If the seller, Mr Caveman, accepts the offer, the seller will have to pay the

Fortmann

estate agency C14 000 in estate agent’s commission, of which C8 000 will be paid to

Mrs Michelle.

•

The seller accepted the offer on 29 December, but the purchaser has three monthsto retracthisoffer(called a_{‘cooling off period’).}

Required:

Discuss therecognition oftherevenuefromthe commission onthe sale of thepropertyin the

financial statements of

_Fortmann

_{Estate Agency for the financial} year-ended

31December20X3.

Question

4.8

Jillianne Ltdis acompany that cleans and repairs_{upholstery for the hotel industry. During}

December

20X4, it signed a contract _{for the re-upholstery of all the furniture in a} fifteen-storey

beachfront

hotel. The contract stipulated the price to be C30 000. Jillianne Ltd estimated,based onmany previous re-upholsterycontracts with this hotel,that the totalcost

tocompletetheprojectwould be C18 000.

At31 December 20X4,Jillianne Ltd had completed the re-upholstery of the furnitureonthe

hotel's first 3 floors(at acostofC6000). These 3 floorsare thegeneralpublicareasof the

hotel including the lobby, lounges, library and diningrooms and thus includemost of the

hotel’s furniture. Sincethese areasareopentothegeneral public,the furnitureon thesefloors is alsothehotel’smostdamaged furniture.

Required:

a) Discuss how the contract income

should

be

recognised

in Jillianne Ltds

financial

for the year

ended

31

December

20X4. Your

discussion should include

the statements

relevant

recognition

criteria

from IAS

18,Revenue.

b) Showtherelated

journal

entries for the year

ended

3 1

December 20X4.

Question

4.9

Caravan

Limited

enteredintoasale of tencaravansto

Outdoors

Limited,a

retailer

located

in

Gauteng,ataselling

price

of

C50

000 per caravan.

The normal cash

selling

price

per

caravan

is C58 500

(based _{on cost}

_{price plus}

_{a 30%}

_{mark-up) but}

_a

_trade

_discount

_{of C8 500 per}

caravanwasgiven

_{since Outdoors Limited}

_isa

_regular

_customer

_and

_generally

buys in

bulk.

Revenue

The saleagreement

involves

_instalments

_{(based on}

_interest

_{of 15%}

•

1 March 20X5

-

C100

000(received_{on 1March 20X5)}

•

28 February

20X6

_-

C200 000

•

28February 20X7-

C299

000

Caravan

Limited usesaperpetual

inventory

system.

Required:

a)

Discuss how the

revenue

from this sale

agreement

should

be

recognised

and measured

in

the

financial

statements

of

Caravan

Limited.

Calculations

should be provided wherever

possible.

Definitions

arenot

required.

Prepare

all

related

journal

entries

in the

general

journal of

Caravan

Limited

for

the year

ended

31

December 20X5 and 31 December 20X6.

Ignoretax.

Question

4.10

DS Motors

is

a

company

that retails

a

high

end

sports car

called

the

BZ3.

As

all the

customers

of DS

Motors

are

usually

very wealthy

people,

most

sales

are

made for cash.

The managing

director

of DS

Motors has

embarked

on a

campaign

to

entice

customers to

purchase

the

car

by

paying in instalments

(i.e.

instead

of

cash) as

he believes that this

will

result in

a greater

profit

for DS Motors.

The

details

of the

campaign

are

as

follows:

•

Customers pay three

equal instalments

annually in arrears of Cl 000 000.

of

year

2 and C200 000

at

the end

of year

3.

Ten

customers

purchased

the

BZ3

on

1 of

January

20X6

under

the

usually

retails

for

C2 152 817

(i.e.

a

cash

price).

DS Motors

normally

provides

services

ataprice

of

cost

plus

20%.

A fair

market

interest

rate

is

considered

to

be 10%.

perannum)_as

_follows:

campaign.

Each

BZ3

new

Required

:

Question

4.11

Roger Ltd is acompany that sells and

repairs

factory machinery. The

following

is

the

_draft

incomestatementforthe year ended 31

December 20X3:

ROGER

LTD

DRAFT STATEMENT OF

COMPREHENSIVE

INCOME

FOR THE

YEAR

ENDED

31

DECEMBER

20X3

_

20X3

_20X2

C

_c

120

000

80

000 70 000 (50 000) (60 000)

IOOOOO

80

₀₀₀

80

₀₀₀

(60000)

_C50_000)_

150

000

(10000)

Sales Services Other income

Cost

of sales

Operating

costs

Profit

before

financecharges

Finance charges

Profit beforetax

Taxation

Profit for the

period

Other comprehensive

income

Total

comprehensive

income

160 000 (10000)

150000

(40000)

140000

(40

_{QQQ)_}

100 000

110 000 110000

100000

The above statement

of comprehensive

income has been drafted

_before

taking

the

following

transactions

/

information

intoaccount:

•

On

5 October

20X3, a

frequent

customer

ordered

a new machine.

The

sale

agreement,

which

was

signed

onthesameday, included the

following

terms:

•

Cash

price

(before

trade

discount):C240000

•

Trade

discount offered: C40

000

•

The agreed price would be paid in 3

annualarrear

instalments

as

follows:

•

C20 000

on

30

November 20X4,

•

C20 000

on

30

November

20X5 and

•

C240 000

on

30

November

20X6

•

The customer

indicated

_{that the machine should be delivered}

_{as soon as}

possible.

Roger Ltd ordered the machine

from

a

foreign

supplier

on 6

October

20X3.

The

machine

arrived

-

and was

available

for

delivery

- on

1

November

20X3.

Due

to

inefficiencies

within Roger Lid’s

ordering

system,

the machine

was

only

delivered

to

the

customer’5

premises

on

30

November

20X3.

The

customer

duly

signed the delivery

note

on

this

Revenue

•

Thecosts

_incurred

_byRogerLtd

inac¬_{quiringthe machineare}

analysed asfollows:

Cost

incurred _currencyIvocal

in:

Total

cost(paidto_{the supplieron15}

_December

_20X3)

Costofpurchase_{convertedintotherelevantlocal}

currency

Cost of _{shipment from the foreign supplier}

to _{Roger Ltd’s} premises 180 000 20X3 20X3 150 000 20000

Cost of shipment and

insurance

from _{the premises of Roger}

Ltdtothelocalcustomer 20X3 10 000

•

The

effective

interestrateis12.937%.

•

The tax expense has not yet been adjusted for the abovementioned transaction. The

corporate normal income tax rate is 30% (20X2: 30%). The income from the above

transaction is taxable whenrecognisedasearnedinthe accountingrecords andtherelated costsare

deductible

when recognisedasincurred in the accounting records.

•

Thereareno componentsof othercomprehensiveincome.

•

Other relevant information: 20X3 20X2

C

c

80 000 70 000

•

Other incomeincludes the following:

Dividend income Profitonsale of land

•

Finance charges includesthe following:

Finance charges earned

Finance

charges incurred

60000 20 000 60 000 10000 (10000) (10000) 100 000 (110000) 90 000 (100 000)

Required:

Refer

to

the relevant

recognition

criteriaand

principles provided

inIAS18.

possible, provide

the

journal

entries

that

would

be

required

in 20X3

and

20X4.

from the

abovementioned

b)

Where

•>

“

sis

31

December 20X3.

Comparatives

are

not

required.

Accounting

policies

are

not

required.

Question

4.12

large

Required:

a) Discuss how the revenue from the sale of prepaid vouchers should be

assuming that there is no expiry date.

:

rccoeniSed

1

b) Briefly discuss how the revenue from the sale of the prepaid

vouchers

_should

u

recognised assuming that the vouchershave anexpiry date.

Question4.13

PartA

Battleship GallacticaLimited sold goodsunder aninstalmentsalescontract.The

_instalit*-

fl

wereCl000 per month for fivemonths with interestcharged at 12%per

_annum.

_The

_buy1*

₄

tookpossession of the goodsonthe date ofpurchase.

Required:

Discuss how the revenue from this sale transaction should be recognised inthe

_financial

i

statementsofBattleship GallacticaLimited.

Nocalculationsarenecessary. PartB

Battleship GallacticaLimited sold goods onalay away basis.The _{instalments were Cl000}

_\

per month for five months. The buyer is only entitledtolake possessionof thegoods

_once

₁

thefinalinstalmenthasbeen paid.

,'S

Required: »

Discusshow therevenue this saletransaction shouldberecognised in the _{financial statements}

i

of

Battleship Gallactica

Limited.

Nocalculationsare necessary.

Question

4.14

Sporty

Limited

is a gym which

opened approximately

eleven months ago. The gymsells

j

contractstoitscustomerswhich includes thefollowingterms:

3

•

The usermustpayanupfrontpayment of C3 420 (including VAT

of

14%);

•

The

purchaser

has

unlimited

accesstothe gym for thecontract

period of three years.

The gym’s

directors

are

trying

tomake a

decision

on

how

the revenue

should

be

recognised

over

the three year

period.

According to

the research in the gym

industry

the

services

provided

tothe

clients

is

concentrated

mainly in the first

year,

as

after this time the majonty

of the

clients

contracts

become

dormant (

i.e. the

users do not

access the

gym more

than6

times

ayear).

visits

They have gone further in their analysis

and have come up

with

an

analysis of the

gym

per

client. These

statistics

have been

analysed by

experts

who have

agreed

that

the)

tc

They

have

found

that

the visits

to

the gym

for

the average user are

as accui

Revenue

Required:

Discuss how the_{directors shouldrecognise r} account the _{information above. Calculate the} each year inaccordancewithLAS 18.

Question4.15

Dumble Door is the _{financial manager}of achain of general-purposeretailstores.Warthogs Limited. He has approached you with _{specific revenue recognition concerns. He is aware}

that in terms of IAS 18,_{revenue should only be recognised when certaincriteriahave been}

Ofconcerntohimis _{whether the significant risksand rewards ofownership wouldhave}

passedto the buyer inthe followingcircumstances,andtherefore whether Warthogs Limited shouldrecogniserevenue considering whetherthe other recognition criteria havebeenmet as

well.

a) WarthogsLimited sells broomsticks atamark up of 25% for C750. Thesebroomsticks carry a 12 month warranty in terms of whichdefective broomsticks will be repaired or

replaced for free. Dumble informsyou thatpast experience indicates that 2out of every

100 broomsticks sold needs to be repaired at an average repair cost of C10Q per

broomstick sold.

b) Warthogs Limited sells a highly specialised MSR air-conditioning system to other

manufacturing shops in their surroundinggeographical region. Sale agreementsentered

into stipulate that Warthogs Limited isrequiredtoinstall theair conditioning unit at the

buyer’s

premises,

as they employ the only MSR technician in the region. 40% of the

sales

price

relatestothe installation of theunit.

c) Warthogs Limited soldamotorisedlawnmower oncredit to aDubai garden-landscaping

business

(based in the same region as Warthogs Limited) which anticipated being

awarded

a contract to maintain the gardens of the vice president’s private aeroplane

hanger. The sales agreemententeredintostipulates that thelawnmowermay berelumed

if the purchaser

isnot

awarded

the

gardening

contract.

d)

In

addition

to sellinga wide range of goods, Warthogs Limited

publishes

and distributes

local

area

newspapers

to

shops within

a 20km radius. Unsold newspapers at theend of a

particular

month

are

returned

to Warthogs

Limited for refund

or a

credit.

Dumble has

informed

you

that

the demand

for

newspapers

is fairly

unpredictable.

fromthe sale of thecontract,_{taking into}

amount_{of revenue that should be recognised} revenue

met

Required:

Discuss

when

il will

be

appropriate

for

Warthogs to

recognise

revenue

in

each

of

the

above

circumstances:

Question

4.16

Jabulani

Motors

Ltd is

.

-

d«

seMing

used

and new cars

“St

_"

pt

The

arnount

charged

for

each

service

within

a

5

year

/

90

000kilometre

period

is

normally C880. Services

are

!tgUutmetthÿtcleU'.o

tat

ZLiMotoTwealise

profit

percentage

of