SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE

FINANCIAL ACCOUNTING 2A (ACCT211 P1W1)

MAIN ASSIGNMENT: 11 JUNE 2021

INTERNAL EXAMINERS: INTERNAL MODERATOR:

Mrs A Algu CA (SA); Mr Z Buthelezi CA (SA) Mr S Rathnasamy (CA) (SA)
ACCESS: 24 hours from 4pm on 11 June 2021 to 4pm on 12 June 2021
DURATION: 3 HOURS (including 30 minutes reading time)
TOTAL PAGES: 7 (including this page and the required) TOTAL: 100 MARKS

INSTRUCTIONS TO CANDIDATES: (Must be read before attempting the assignment)

1. You have 3 hours to read and write the assignment and an ADDITIONAL 30
MINUTES thereafter to scan and upload your attempt. NO EXCUSES / EMAIL
SUBMISSIONS will be accepted thereafter. If you do not upload your attempt
timeously, you will be awarded a mark of ZERO and no further correspondence will
be entered into.

2. Your attention is drawn to the necessity to provide suitable substantiating reasons

and/ or workings supporting your answers. Where workings are presented separately
from your answer, these must be clearly referenced thereto.

3. Your student number should be clearly written on the top of every page of your
submission. You are also required to state the total number of pages submitted on the
first/ cover page of your submission document.

4. Scanned answers need to be legible (i.e. we need to be able to read them). Please
check that all your pages are scanned and that your PDF is legible before uploading.
Only handwritten answers will be accepted.

5. The use of a non-programmable calculator is permitted.

6. All parts of the assignment must be answered.

Allocated marks and the suggested time is as follows:
Question 1 Marks Minutes Question 2 Marks Minutes Question 3 Marks Minutes

Part a (i) 6 9 Part a 21.5 32 Part a 12 18

Part a (ii) 6 9 Part b 18.5 28 Part b (i) 6.5 10
Part b (i) 13 20 Part b (ii) 8.5 12
Part a (ii) 8 12
Total 33 50 40 60 27 40

Page 1 of 7
QUESTION 1 (33 marks: 50 minutes)
Starship Limited (‘Starship’) is a diversified company within the food industry in South Africa.
The current financial year ends on 31 December 2020. You are a trainee accountant in the
finance division of Starship on the Training Outside Public Practice (TOPP) program.

Delivery Robot
 In January 2018, the company began a research and development programme to
develop robots that deliver groceries to users who purchase them via a mobile app.
 The initial research into the technical feasibility of the product and its potential market
cost R1 600 000 during January 2018.
 Development work on the robot began on 1 March 2018 and cost Starship a total of
R34 000 000 to 31 December 2020. Development costs were incurred evenly over the
period.
 All criteria for capitalisation of development costs incurred were met during 2018.
 However throughout 2019, continuous cash flow problems resulted in Starship being
unsure of their ability to continue the development of the prototype robots.
 During January 2020, Starship obtained a loan from Enterprise Bank as a response to
the cash flow problems experienced during 2019, resulting in all the necessary
capitalisation criteria being met from January 2020 to December 2020.

Lucky brand name

 On 1 February 2019, the company purchased a brand name called “Lucky”. The brand
was reflected in the draft statement of financial position on 31 December 2020 at its
carrying amount of R 3 000 000.
 Starship supplies canned tuna fish to supermarkets throughout South Africa under the
brand name “Lucky” canned tuna.
 The brand name has been classified as having an indefinite useful life.
 During October 2020, Netflix released a documentary called “Seaspiracy” which
exposed the fact that 46% of plastic in the ocean arose from discarded fishing nets
and blamed the commercial fishing industry for marine plastic pollution and being a
contributor to climate change.
 Consumers started protesting on social media vowing to block the supply chain of
canned fish to supermarket stores throughout South Africa. Soon thereafter in
November 2020, the demand for “Lucky” canned tuna dropped drastically.

Lucky brand name information continues on next page

Page 2 of 7
Lucky brand name continued
 The financial manager stated that it is not necessary to calculate the recoverable
amount of the Lucky brand at 31 December 2020 since a detailed calculation was
performed on 31 December 2019 on which date there was an immaterial difference
between the recoverable amount and carrying amount.

QUESTION 1 (33 marks – 50 minutes)

REQUIRED:
Show and reference ALL workings. Round off to the nearest rand.
Marks

(a) Briefly discuss the recognition and measurement of the costs relating to the
research and development programme of the delivery robots in the financial
statements of Starship in terms of IAS 38 Intangible assets.
Your discussion should consider:
(i) Recognition: the accounting treatment of research versus
6
development costs of the robot in each of the years ended
31 December 2018, 2019 and 2020. You are not required to discuss
the definition of an intangible asset.

(ii) Measurement: initial measurement, amortization and impairment of

the development costs of the robot in each of the years ended 6
31 December 2018, 2019 and 2020 (providing amounts where
possible). You are not required to discuss the method of
amortization or residual value issues.
(b) Draft an email to the financial manager to discuss the following matters relating
to the “Lucky” brand name for the years ended 31 December 2019 and 2020 in
terms of IAS 38 Intangible assets:
(i) Recognition of the ‘Lucky” brand name on its acquisition date on
13
1 February 2019.
(ii) Measurement: amortization and impairment of the
8
‘Lucky’ brand name.
- You are not required to discuss the method of amortization or
residual value.
- Your discussion must indicate whether you agree or disagree with
the statement made by the financial manager.
Total 33

Page 3 of 7
QUESTION 2 (40 marks: 60 minutes)

Grace Limited (‘Grace’) is a company that assembles and rents out window cleaning
machinery used for both household and industrial purposes. The current financial year ends
on 30 June 2020. Grace began operations on 1 July 2017 and uses one major item of plant
to assemble its products.

Plant
 The company purchased the plant on 1 July 2017 at a cost of R3 600 000. Plant is
measured using the cost model and is depreciated on the straight-line basis over its
estimated useful life of ten years, with no residual value. The tax authority grants an
allowance of 20% per annum, not apportioned for the year.

 The financial accountant prepared the following draft schedule relating to the plant’s
deferred taxation at 30 June 2019, before the plant was impaired:

Plant Carrying Tax Temporary Deferred

amount Base difference Tax @28%
R R R R

01/07/2017 Cost 3 600 000 3 600 000 0 0

Depreciation/ (360 000) (720 000) (360 000) (100 800)

Tax allowance

30/06/2018 Balance 3 240 000 2 880 000 (360 000) (100 800)

Depreciation/ (360 000) (720 000) (360 000) (100 800)

Tax allowance

30/06/2019 Balance 2 880 000 2 160 000 (720 000) (201 600)

 At 30 June 2019, there were indications that plant was impaired. An impairment test was
performed and the recoverable amount was estimated at R2 400 000. The remaining
useful life was estimated to be five years with no residual value. The impairment was
recorded correctly in the accounting records at 30 June 2019.

 The plant was sold on 31 October 2019 for R2 000 000. New plant was purchased on
1 November 2019 and there were no temporary differences arising from the new plant.

Page 4 of 7
Current taxation
The financial accountant prepared the following schedule relating to current taxation:
Year ended Year ended Year ended

30 June 2020 30 June 2019 30 June 2018

R R R

Amount of assessed income tax on Not yet 648 400 528 800
taxable profit received

Balance on current tax payable ? ? 20 400

account

Amount provided for current ? ? 540 400

income tax

1st and 2nd provisional payments 584 000 568 000 520 000

 The company paid the balance owing on assessment in December 2018 (for the year
ended 30 June 2018) and in December 2019 (for the year ended 30 June 2019).

 The corporate income tax rate for all years is 28%.

Additional information
 Prepaid expenses at 30 June 2020 amounted to R720 000. There was no prepaid
expenses at 30 June 2019. Prepaid expenses are deductible for tax purposes when paid.

 Income received in advance at 30 June 2020 amounted to R80 000. There was no income
received in advance at 30 June 2019. Income received in advance is taxed when received.

 The profit before taxation of the company has been correctly calculated at R2 080 000 for
the year ended 30 June 2019 and at R2 800 000 for the year ended 30 June 2020. Assume
that all accounting entries relating to the plant, the expenses paid and the income received
have been correctly included in the calculation i.e. no further adjustments to profit before
tax are required.

Page 5 of 7
 Additional information continued on next page

Additional information continued

 The profit before tax for both years also includes dividend income received of R160 000
for the 2019 financial year and R120 000 for the 2020 financial year.

 There are no other differences between accounting profit and taxable profit other than
those evident from the information provided. There are no components of other
comprehensive income.

QUESTION 2 (40 marks – 60 minutes)

REQUIRED:

Show and reference ALL workings. Round off to the nearest rand.
Marks

(a) Prepare the entries in journal form to account for current taxation payable, 21.5
as it would appear in the General Journal of Grace Limited for years ended
30 June 2019 and 30 June 2020.

You are not required to provide deferred tax journal entries.

(b) Prepare the income taxation expense note of Grace Limited for the year 18.5
ended 30 June 2020 in accordance with International Financial Reporting
Standards.
A tax rate reconciliation and comparative figures are required.

Page 6 of 7
QUESTION 3: (27 marks, 40 minutes)
IGNORE ALL FORMS OF TAXATION
Obah Limited (Obah) offers private taxi services throughout the Eastern Cape of South Africa.
The financial year end for Obah is 31 December. During the current year ended
31 December 2020, it expanded its operations to carry out delivery services.
The Eastern Cape currently has a shortage of vehicles to deliver the Covid-19 vaccines to the
various district municipalities. Obah was consequently awarded a tender by the Eastern Cape
provincial government to deliver the Covid-19 vaccines to rural areas of the province.
Obah entered into a contract (as the lessee) with Bolt Limited to lease twenty motorcycles to
fulfil the contract.
The following information relates to the lease contract for twenty motorcycles:
Commencement date 1 January 2020
Duration of lease 5 years
Payment terms R200 000 annually in arrears
Option to purchase the twenty motorcycles R30 000
at the end of the lease at the amount
specified
Implicit interest rate 12% per annum

Obah intends to take up the option for purchase at the end of the lease period.
The estimated useful life of the twenty vehicles is 8 years, with an estimated residual value of
R1 000 each. The policy of Obah is to depreciate all vehicles on the straight-line basis.
The present value factor of R1 in five years, discounted at 12% is 0.5674.
The present value factor of an annuity due of five arrear annual payments of R1 at 12% per
annum is 3.604776.

QUESTION 3: (27 marks; 40 minutes)

REQUIRED:
Show and reference ALL workings. Round off your final answer to the nearest rand.
Marks

(a) Prepare ALL the entries in journal form to account for the lease in the general
12.0
journal of Obah Limited for the year ended 31 December 2020.

(b) i. Prepare the relevant extracts of the Statement of Financial Position of

Obah Limited as at 31 December 2020 to disclose the vehicle lease
6.5
entered into with Bolt Limited.
ii. Prepare the leases note of Obah Limited as at 31 December 2020 to
disclose the vehicle lease entered into with Bolt Limited. 8.5

Accounting policy notes are not required. Comparatives are not required.

Total 27.0

Page 7 of 7