Financial Accounting III
Exam 2021
Question 1 (47 marks; 70,5 minutes)
IGNORE VAT
You are an assistant manager at KN Inc (a small audit firm) and are allocated to the audit of Funky
ending 31 December 2021.
You obtained the following information
Client: Funky Stuff Group Prepared by: Audit trainee
Year-end: 31 December 2021
Working paper 1: Obtain background knowledge of the client
The Funky Stuff Group is a group of South African companies that manufacture and sell sports
training equipment, clothes, and shoes. Other entities in the group include Arona (Pty) Ltd
Funky Stuff (Pty) Ltd (FS), the parent company,
manufactures and sells training equipment. Arona manufactures and sells sport shoes while
Trunks manufactures and sells swimming gear. The individual entities and the Group prepare
and present financial statements in accordance with International Financial Reporting
Standards (IFRS).
The financial year-end for the group is 31 December 2021.
FS obtained an 80% controlling interest in Arona on 1 January 2014 for R800 000. At this date,
the Share Capital of Arona consisted of 100 000 issued shares. The shares were issued at R2
per share and no further changes in share capital has taken place since the acquisition date.
The retained earnings of Arona amounted to R300 000 on 1 January 2014.
working paper 3.
Page 2 of 14
, Financial Accounting III
Exam 2021
Working paper 2: Incomplete disclosure in FS (Pty) Ltd (the company, not the group)
FS owns the following property, plant and equipment for manufacturing of training equipment:
Carrying amount as at Carrying Amount as at 1 July
31 December 2020 2021
Manufacturing R1 200 000 R1 125 000
equipment
Asset acquired on 1 January Remaining useful life 7,5 years
2019 for an original cost price of
R1.5 million.
SARS allows a 20% p.a.
allowance on Manufacturing
equipment, not apportioned for
time.
Due to Covid-19 lockdown restrictions and working from home, the demand for home-based
fitness training equipment for domestic consumers increased. FS identified the need to acquire
an additional manufacturing machine to meet the growing demand from customers. In order to
obtain funds, FS entered into a sale-and-leaseback transaction for its existing Manufacturing
equipment with SLL Cash Advances. The details of the transaction are as follows:
Date of sale and inception of leaseback 1 July 2021
Sales price (based on fair market price on R1 400 000
1 July 2021)
Lease term 5 years
Lease instalments R25 000 payable monthly in arrears
Ownership FS has the option to own the asset at the end
of the lease term for an amount of R50 000.
This amount would be substantially below
market value at that date and hence it is
reasonably certain that FS will exercise the
option.
Remaining useful life of the manufacturing 7,5 years with zero residual value
machine on 1 July 2021
Interest rate implicit in the lease 10.25%
Page 3 of 14
Exam 2021
Question 1 (47 marks; 70,5 minutes)
IGNORE VAT
You are an assistant manager at KN Inc (a small audit firm) and are allocated to the audit of Funky
ending 31 December 2021.
You obtained the following information
Client: Funky Stuff Group Prepared by: Audit trainee
Year-end: 31 December 2021
Working paper 1: Obtain background knowledge of the client
The Funky Stuff Group is a group of South African companies that manufacture and sell sports
training equipment, clothes, and shoes. Other entities in the group include Arona (Pty) Ltd
Funky Stuff (Pty) Ltd (FS), the parent company,
manufactures and sells training equipment. Arona manufactures and sells sport shoes while
Trunks manufactures and sells swimming gear. The individual entities and the Group prepare
and present financial statements in accordance with International Financial Reporting
Standards (IFRS).
The financial year-end for the group is 31 December 2021.
FS obtained an 80% controlling interest in Arona on 1 January 2014 for R800 000. At this date,
the Share Capital of Arona consisted of 100 000 issued shares. The shares were issued at R2
per share and no further changes in share capital has taken place since the acquisition date.
The retained earnings of Arona amounted to R300 000 on 1 January 2014.
working paper 3.
Page 2 of 14
, Financial Accounting III
Exam 2021
Working paper 2: Incomplete disclosure in FS (Pty) Ltd (the company, not the group)
FS owns the following property, plant and equipment for manufacturing of training equipment:
Carrying amount as at Carrying Amount as at 1 July
31 December 2020 2021
Manufacturing R1 200 000 R1 125 000
equipment
Asset acquired on 1 January Remaining useful life 7,5 years
2019 for an original cost price of
R1.5 million.
SARS allows a 20% p.a.
allowance on Manufacturing
equipment, not apportioned for
time.
Due to Covid-19 lockdown restrictions and working from home, the demand for home-based
fitness training equipment for domestic consumers increased. FS identified the need to acquire
an additional manufacturing machine to meet the growing demand from customers. In order to
obtain funds, FS entered into a sale-and-leaseback transaction for its existing Manufacturing
equipment with SLL Cash Advances. The details of the transaction are as follows:
Date of sale and inception of leaseback 1 July 2021
Sales price (based on fair market price on R1 400 000
1 July 2021)
Lease term 5 years
Lease instalments R25 000 payable monthly in arrears
Ownership FS has the option to own the asset at the end
of the lease term for an amount of R50 000.
This amount would be substantially below
market value at that date and hence it is
reasonably certain that FS will exercise the
option.
Remaining useful life of the manufacturing 7,5 years with zero residual value
machine on 1 July 2021
Interest rate implicit in the lease 10.25%
Page 3 of 14
