SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE

MAIN EXAMINATION: 29 OCTOBER 2018

FINANCIAL ACCOUNTING 2B (ACCT212 P1 W1)

INTERNAL EXAMINERS:
Mrs Aathi Algu CA (SA), Mrs Vanessa Gregory CA (SA) and Ms Kerry-Lee Gurr CA (SA)

INTERNAL MODERATOR:
Mrs Shazia Essa (CA) SA

TOTAL: 100 MARKS DURATION: 3 HOURS (including 30 minutes reading time)

INSTRUCTIONS TO CANDIDATES:

1. This paper comprises 2 questions on 6 numbered pages (including this cover page).
2. Answer all questions. 1 answer booklet is provided.
3. Complete all required details on the front of each answer book accurately. In particular,
record the total number of books sent in (for all questions) on the cover of each answer
book in the space provided.
4. Use both sides of the page when answering.
5. All answers must be written in blue / black ink. Answers written in pencil will not be
marked.
6. The use of non-programmable, silent calculators is permitted.
7. Please show all of your workings clearly and label them as workings.
8. No abbreviations are to be used. Abbreviations will not be marked.
9. A recommended time allocation has been provided for each question. Manage your time
effectively.
10. Please note that this question paper does not contain the ‘required’ section. You have
30 minutes to familiarize yourself with the information contained in this question paper and
thereafter you will be provided with a separate sheet with the ‘required’ section. You may
only start writing after you have received the ‘required’ section.
11. No cellphones and smart watches are permitted.
12. Where workings are presented separately from your answer, these must be clearly
referenced thereto.
Question 1 33 Marks 49.5 Minutes
Question 2 34 Marks 51 Minutes
Question 3 33 Marks 49.5 Minutes
Total 100 Marks 150 minutes
 FINANCIAL ACCOUNTING 2B (ACCT212P1W1)
MAIN EXAMINATION 29 OCTOBER 2018

Question 1: (33 marks; 49.5 minutes)

Ignore VAT
On 1 July 2017, Healer Limited (‘Healer’) purchased 60% of the ordinary shares of
Sickie Limited (‘Sickie’).

The following are the trial balances of Healer and Sickie as at 30 June 2018.

Trial balance as at 30 June 2018

Healer Sickie
Limited Limited
R’000 R’000
Dr / (Cr) Dr / (Cr)
Land – Cost (purchased on January 2012) - 110 000
Buildings – Cost - 90 000
Buildings - Accumulated depreciation - (20 000)
Furniture – Cost 6 000 2 000
Furniture - Accumulated depreciation (1 800) (600)
Investment in Sickie Limited 200 000 -
Loan to Sickie Limited 10 000 -
Inventories 54 000 -
Trade and other receivables 30 000 3 600
Bank 20 300 48 000
Share capital (200 000) (100 000)
Retained earnings – 1 July 2017 (56 000) (101 500)
Loan from Healer Limited - (10 000)
Trade and other payables (31 060) (8 375)
Shareholders for dividends (19 000) (5 000)
Sales (210 000) -
Cost of sales 130 000 -
Rent income - (34 000)
Interest on loan to Sickie Limited (500) -
Dividend income (3 000) -
Property expenses - 12 000
Selling and administration expenses 25 000 -
Rent expense (paid to Sickie Limited) 15 000 -
Depreciation on furniture 600 200
Depreciation on buildings - 5 500
Audit fees 400 100
Interest on loan from Healer Limited - 500
Income tax expense 11 060 2 575
Dividends declared 19 000 5 000

On acquisition of Sickie Limited, all assets and liabilities were considered to be fairly valued
with the exception of land which had a fair value of R250 million. The non-controlling interest
was initially measured at their proportionate share of the net identifiable assets.

On 28 June 2018, Sickie Limited declared a dividend of R5 million, payable on 6 July 2018.

Please turn over for Question 2

Page 2 of 6
 FINANCIAL ACCOUNTING 2B (ACCT212P1W1)
MAIN EXAMINATION 29 OCTOBER 2018

Question 2: (34 marks; 51 minutes)

Clinic (Proprietary) Limited (‘Clinic’) is a medical supplies distributor that has a 31 December
year-end.

The following information relating to Clinic became known during the preparation of its annual
financial statements for the year ended 31 December 2018:

1) Foreign Currency Loan

In order to grow their footprint within South Africa, Clinic obtained a foreign currency loan of
$200 000 on 1 January 2016 from a venture capitalist (a person who provides capital to start-
up ventures or supports small companies that wish to expand but do not have access to
finance). The venture capitalist agreed that interest would be compounded annually at
10% per annum and that the capital and accumulated interest would all be repaid on
1 January 2018.

The accountant is busy preparing the financial statements for the year ended
31 December 2018 and has discovered that the bookkeeper in charge of processing bank,
loan payable and interest has processed interest and exchange rate differences relating to the
foreign currency loan incorrectly. The error is considered material. The following information
has been presented by the accountant:

Exchange rates
Date Spot rate Average rate
1 January 2016 $ 15.64 : R1
1 January 2016 - 31 December 2016 $ 14.71 : R1
1 January 2017 $ 13.73 : R1
1 January 2017 - 31 December 2017 $ 13.32 : R1
1 January 2018 $ 12.33 : R1

Working paper from the bookkeeper to show how the loan was accounted for:
Date Workings Amount (R) Journal entry
Dr Bank
1 January 2016 $200 000 x 15.64 3 128 000 Cr Loan payable
Dr Interest Expense
31 December 2016 R3 128 000 x 10% 312 800 Cr Loan payable
3 440 800
Dr Interest Expense
31 December 2017 R3 440 800 x 10% 344 080 Cr Loan payable
Loan closing balance 3 784 880

1 January 2018 3 784 880 Dr Loan

(Repayment of Loan) $242 000 x 12.33 2 983 860 Cr Bank
R3 784 880 - R2 983 860 801 020 Cr Profit on Loan (Income)
Question 2 continued overleaf

Page 3 of 6
 FINANCIAL ACCOUNTING 2B (ACCT212P1W1)
MAIN EXAMINATION 29 OCTOBER 2018

Question 2 continued

Tax information relating to the foreign currency loan

The same incorrect information relating to the foreign currency loan was submitted to the
South African Revenue Services (SARS) when submitting the tax return for the 2016 and 2017
tax years. During the 2018 year, SARS has allowed the tax assessments to be reopened for
both the 2016 and 2017 years for the error to be rectified.

The accounting and tax treatment of interest and exchange rate differences on foreign
currency loans is the same (i.e. there are no permanent or temporary differences).

The tax rate has remained unchanged at 30% since January 2015.

2) Preference Share Issue by Clinic

On 1 January 2018, Clinic issued 500 000 redeemable preference shares at R6 each. The
shares have a coupon interest rate of 10% and are compulsorily redeemable at R6.40 on
31 December 2021. Share issue costs of R35 000 were incurred on the issue of the preference
shares. An effective interest rate of 11.7817% is applicable to the preference shares.

Please turn over for Question 3

Page 4 of 6
 FINANCIAL ACCOUNTING 2B (ACCT212P1W1)
MAIN EXAMINATION 29 OCTOBER 2018

Question 3: (33 marks; 49.5 minutes)

Winterfell Limited (‘Winterfell’) is one of the world’s most advanced and efficient producers of
high-quality steel. Steel is a widely used metal with demand driven by use in the transportation,
packaging and construction industries. You are a first year accounting trainee employed in the
“training outside public practice” (TOPP) program of the financial reporting division at
Winterfell.

As a part of your TOPP trainee duties, your senior accountant, Mr. Jon Snow, has referred the
following two matters to you during the course of the current financial year ending
31 December 2017:

Waste Spillage

Winterfell conducts some mining activities in the Westeros region. During December 2017,
Westeros experienced a severe cold front and snow storm.

One of Winterfell’s tankers transporting toxic waste from the manufacturing plant overturned
due to the slippery roads caused by the snow fall. Waste material was spilt into a community
farm. The waste entered a river on the farm which is the only water supply to a nearby village.
The river also feeds into the irrigation system of the farm. Winterfell’s tanker that overturned
also destroyed a storage structure on the farm. There was a public outcry from the villagers,
the farmer and the environmentalists over the damage caused to the farm and the river by
Winterfell’s tanker spillage.

Jon Snow, the senior accountant, does not believe that Winterfell has to make any
adjustments to the 2017 annual financial statements of Winterfell with regard to the waste
spillage. When discussing the matter with you, Jon Snow explained that “It was no fault of the
driver of the tanker. The accident was a result of a freak snow storm that has never occurred
before, therefore I believe Winterfell has no obligation to compensate the farmer or the
villagers nearby.”

Due to the negative publicity however, the directors of Winterfell made an announcement in
the local newspaper on 30 December 2017 that the company would rehabilitate the farm and
the river and compensate the farmer and villagers by 15 February 2018. A detailed
investigation and cost assessment would only be conducted during early February 2018 to
determine the extent of the damage. The directors of Winterfell were unable to reliably
estimate the cost of rehabilitation and compensation at 31 December 2018, as this was the
first time that an incident of this nature has occurred. The financial statements will be
authorised for issue and published on 31 January 2018.

Question 3 continued overleaf

Page 5 of 6
 FINANCIAL ACCOUNTING 2B (ACCT212P1W1)
MAIN EXAMINATION 29 OCTOBER 2018

Question 3 continued

Furnace plant

Winterfell purchased a furnace plant for R5 500 000 on 1 January 2014. The furnace plant
has a useful life of 5 years and a nil residual value. Winterfell uses the cost model to measure
the furnace plant which is used in the manufacturing process to extract metal from the raw
ore.

Legislation requires all companies operating furnace plants of this nature to dismantle and
dispose of the furnace plant at end of the asset’s useful life. Engineers estimated the future
cost of such decommissioning to be R1 500 000 on initial recognition. There was no indication
of impairment at any stage during the asset’s useful life.

On 1 January 2017, the engineers employed at Winterfell conducted research and based on
estimations received from experts involved in dismantling of such plants, the expected future
cost of decommissioning the furnace plant was estimated to be R2 500 000.

Winterfell uses the re-allocation method to record changes in accounting estimates.

An appropriate pre-tax discount rate is considered to be 10% per annum.

Year 10% discount

factor
0 1
1 0.909091
2 0.826446
3 0.751315
4 0.683013
5 0.620921

END

Page 6 of 6