FAC2601 MAY/JUNE EXAM 2025

QUESTION 1 (10 Marks) (20 minutes) Answer the following multiple-choice questions. Indicate your choice by selecting only ONE option from the four options given for each question answered. 1. The following list of balances appears, amongst others, in the accounting records of Shimmo Ltd on 31 December 2024: R Ordinary share capital (shares issued at R0,50 each) 5 000 000 Proceeds of 1 500 000 ordinary shares issued on 31 October The following decision that must still be recorded was ratified by the directors on 31 December 2024: Capitalisation shares must be issued to the ordinary shareholders that are registered in the share register on 31 December 2024, in the ratio of one ordinary share for every five ordinary shares held at R0,65 per share. Which one of the following options represents the Rand-value of the shares that must be capitalised? 1. R796 250 2. R. R845 000 4. R7 475 000 (2) 2. Both the managing director and the chief executive officer of Bossa Ltd have the benefit of the use of company cars, which may also be used for private purposes. The total benefit for each director, for the use of the cars, is estimated at R400 000 per year, of which 30% is for private use and 70% for business purposes. The total amount that should be disclosed in remuneration, as other benefits, should be: 1. R120 000 2. R400 000 3. R240 000 4. R560 000 (2) 3. The normal production capacity of an entity is 350 000 units per annum. The raw material cost is R220 per unit, and direct labour is R250 per unit. Variable production overheads are R60 per unit and fixed production overheads incurred amounts to R5 250 000. The closing balance of finished goods is 9 500 units (assume there is no opening balance). Which amount is the correct cost of sales figure if the actual production was 280 000 units for the year? 1. R. R. R. R (2) 7 FAC2601 MAY/JUNE 2025 QUESTION 1 (continued) 4. USW Ltd, a manufacturing entity, manufactures specialized, robust cellphone cases for resale. The manufacturing cost per ton is R900. Finished products are sold for R935 per ton. Sales expenses amount to R45 per ton, delivery costs amount to R35 per ton, and other directly associated costs to inventory to make a sale are R25 per ton. Closing inventories on hand at 31 December 2024 amount to 3,500 tons. The amount that must be used to write down inventories to its net realisable value is: 1. R0 2. R35 000 3. R157 500 4. R245 000 (2) 5. Preference shares, which retain the right to a dividend from year to year, irrespective of whether a dividend was declared or not during the year, are known as: 1. Ordinary preference shares; 2. Participating preference shares; 3. Non-cumulative preference shares; 4. Cumulative preference shares. (2) 8 FAC2601 MAY/JUNE 2025 QUESTION 2 (55 marks) (110 minutes) The following information was taken from the financial records of DDP Ltd, who manufacturer unique off-road caravans for the year ended 31 December 2024: R Land at valuation (note 1) ........................................................................................... Office buildings at cost (31/12/2023 (note 1 and 2) .................................................... Motor vehicles at carrying amount (31/12/2023) (note 2 and 3) .................................. Machinery at cost (31/12/2023) (note 1, 2 and 3) ...................................................... Furniture and fittings at carrying amount (note 2 and 3) ............................................. Accumulated depreciation: - Motor vehicles (31/12/2023) ................................................................................... - Machinery (31/12/2023) .......................................................................................... Investments at cost (note 5) ........................................................................................ Loan (note 6) ............................................................................................................... Inventories (note 4) ..................................................................................................... Trade and other receivables ....................................................................................... Bank overdraft ............................................................................................................. Trade and other payables ........................................................................................... Additional information: The following information in respect of transactions that occurred during the financial year was given: 1. Land and buildings are owner-occupied and consist of erf 14, Sunnyside, with an office building thereon. The land was acquired on 1 March 2023 for R1 425 000. The office buildings were erected during the current financial year and have no residual value. Total costs incurred on the building were as follows: - Material ....................................................................................................... - Professional fees ......................................................................................... - Labour cost .................................................................................................. R1 950 000 R525 000 R1 125 000 The company withdrew the machinery, listed in the balances above, from production for a period of 7 months during the year. It was used in the process of erecting the office building. This machinery was acquired on 1 July 2022 and had no residual value. The building was completed on 31 October 2024 and was available for use, as intended by management, on the same date. The land was revalued for the first time on 1 January 2024 at net replacement value by Mrs. Msiza, an independent sworn appraiser. 2. Other transactions in respect of non-current assets that took place during the current year: - On 30 June 2024, one of the vehicles was involved in an accident and as a result, it was written off to zero. This vehicle was purchased on 1 July 2021 and had a cost price of R225 000. An amount of R187 500 was paid by the insurance company on 25 August 2024 as a reimbursement. On 1 October 2024, a new vehicle costing R337 500 was purchased, to replace the vehicle that was written off. - The company bought an additional machine for business on 1 July 2024 at a cost of R562 500. The machine has an estimated residual value of R37 500 at the end of its useful life. The machine was ready and available for use, as intended by management, on the purchase date. This machine requires a major inspection every two years, estimated to cost R50 000 per inspection. No inspection was done on acquisition, but the separate component was identified. This machine was not used in the construction of the new office building. 9 FAC2601 MAY/JUNE 2025 QUESTION 2 (continued) All the machinery produce 100 000 units over its useful life, with the number of units per year, being estimated at: 40 000 (year 1), 30 000 (year 2), 20 000 (year 3), 10 000 (year 4). - All furniture and fittings were purchased on 1 January 2023. No furniture and equipment were purchased during the current financial year. 3. Non-current assets are depreciated as follows: - Buildings: 2% per annum on the straight-line method. - Motor vehicles: On the straight-line method over the asset’s useful life of 5 years. - Machinery is depreciated in accordance with the units of production method. - Furniture and fittings: 20% per annum on the reducing balance method. 4. Inventories consist of the following at cost price: - Raw materials ............................................................................................... - Work in progress ........................................................................................... - Finished goods .............................................................................................. R565 000 R750 000 R187 500 The net realisable value of the inventories was reviewed by the directors at year end, and they arrived at the estimates below: Inventory type : Net realisable value: - Raw material : 10% above cost - Work in progress : 8% below cost - Finished goods : 5% above cost 5. Investments consist of the following: - 20 000 Ordinary shares in MMA Ltd purchased for R80 000. These shares were classified as a financial asset through profit or loss, purchased for speculation purposes. The issued share capital of MMA Ltd consists of 200 000 ordinary shares. These shares were trading on the JSE at R4,50 each on 31 December 2024. - 10 000 Preference shares in UFC Ltd purchased for R50 000. The issued preference share capital of UFC Ltd consists of 40 000 shares. These shares were trading on the JSE at R6,00 each on 31 December 2024. These shares are classified as a financial asset at fair value through other comprehensive income. - On 1 April 2024, a property was acquired at a cost of R700 000 to serve as an investment property in the future. This property is located at stand 22 in Mamelodi, and on 1 July 2024, construction of an office block commenced on the property. On 1 December 2024 a tenant for the office block was secured, and a capital expenditure of R25 000 was incurred to secure this tenant. At the end of the financial year, construction costs incurred, amounts to R2 500 000. The fair value of the land and buildings at the end of the current financial year, as valued by Mr. Nkosi a sworn appraiser, is R3 500 000. The accountant was not sure as how to record this in the financial records, so it has not yet been included in the investment amount. The company applies the fair value model for investment property. 10 FAC2601 MAY/JUNE 2025 QUESTION 2 (continued) 6. The loan was granted to Nkosi Ltd on 30 June 2024. Interest is calculated on the loan at 12% per annum. The loan is secured by a first mortgage bond over the company’s fixed property. The capital portion of the loan is repayable on 31 December 2027. Interest is paid annually on 31 December each year. 7. The company applies the revaluation model for non-depreciable assets, the cost model for remaining property plant and equipment. 8. On 1 July 2024, DDP Ltd signed a long-term agreement with Camp Ltd to supply them with the kitchen unit for these unique caravans on a daily basis, for a period of five years. To ensure that Camp Ltd fulfils its obligations in terms of the agreement, the management of both companies agreed that Camp Ltd constructs a manufacturing plant on its own premises. The plant will also then be used by DDP Ltd to manufacture and assemble the caravans. The close proximity of the plant will ensure that these kitchen units can be supplied as and when needed by DDP Ltd. The following information is relevant to the long-term agreement:  To ensure the continuous availability of the kitchen units, the agreement stipulates that DDP Ltd has to pay an annual fixed charge of R600 000 (at the end of each financial year) to Camp Ltd;  A deposit of R50 000 was paid on 1 June 2024, to secure the lease;  DDP Ltd incurred legal fees of R30 000 relating to this lease contract and was partially reimbursed by Camp Ltd, who paid over R10 000 on 1 July 2024;  Since these products are unique, the plant has no other purpose and will be demolished at the end of the agreement at the expense of Camp Ltd;  The incremental borrowing rate of DDP Ltd is 12% per annum. The arrangement conveys the right to DDP Ltd to control the use of the plant and the plant will be depreciated over its useful live. 11 FAC2601 MAY/JUNE 2025 REQUIRED: Marks For DDP Ltd as at 31 December 2024, you are required to: (a) Prepare the “Asset” section of the Statement of Financial Position; (b) Property, Plant and Equipment note; (c) Investment Property note; (d) Draft Prepare the necessary journal entries in the accounting records of DDP Ltd to account for the lease (assuming the agreement meets the requirements to be recognised as a lease in terms of IFRS16, for the financial year-end 31 December 2024.Ignore closing entries. Please note: Comparative figures are NOT required. The accounting policy note is NOT required. All amounts exclude VAT (where appropriate), except where otherwise noted. Ignore the total column in the Property, Plant and Equipment note. Show all calculations, no marks for amounts without calculations. Your answers must comply with the requirements of International Financial Reporting Standards (IFRS). 4 ½ 33 3 14 ½ [55] 12 FAC2601 MAY/JUNE 2025 QUESTION 3 (15 marks) (30 minutes) Mr Sharp has recently been appointed as the new financial manager of Wizard Ltd. Even though he held a financial position long ago, he has been working in the entertainment industry for the past 5 years. His knowledge of financial accounting is thus somewhat outdated, and he approached you for advice on the correct accounting treatment for the products and services offered by Wizard Ltd. The company's year-end is 31 December 2024. Technology support services Wizard Ltd provides online technology support services to customers remotely via the internet. Wizard Ltd will scan a customer’s personal computer for viruses and optimise their computer’s performance for a fixed fee of R500. When a customer calls to obtain the support services the following process is followed: - Wizard Ltd describes to the customer the services it can provide and the price for those services. All telephonic conversations with customers are recorded. - When the customer agrees to the terms stated by the Wizard Ltd representative, a payment is made over the telephone via the customer’s credit card. - After a successful payment has been made by the customer, Wizard Ltd gives the customer an access code for Wizrd Ltd’s website in order to obtain and use the scan services. Software licenses and software customisation Wizard Ltd licenses accounting software to its customers. In addition, Wizard Ltd also provides a service to significantly customise the accounting software to the customer’s business environment and information technology platform. The license, including the customisation of the software, is sold to customers at R20 000. Laptops Wizard Ltd also sells laptops to the public via its website. Wizard Ltd only sells the Delux and Pro model laptops. The Delux and Pro are sold for R10 000 and R15 000 respectively. Once the customer has paid for the laptop on Wizard Ltd’s online shop using his/her credit card, the laptop is dispatched to the customer. Wizard Ltd uses a third-party carrier to deliver the laptops to its customers. Wizard Ltd’s delivery terms on its website stipulate that legal title of the product passes to the customer when the laptop is handed over to the carrier. 13 FAC2601 MAY/JUNE 2025 REQUIRED: Marks Provide a response to Mr Sharp on the following: (a) If the technology support services provided by Wizard Ltd is a contract with a customer. (b) If the software licenses and software customisation are separate performance obligations in a single contract. (c) When should revenue from the laptops sold through the online shop be recognised by Wizard Ltd. Please note: Your answers must comply with the requirements of International Financial Reporting Standards (IFRS).