COMPANIES

Definition

A company is a legal entity which is incorporated in terms of the Companies Act (71

of 2008), (which is also known as “the Act”.it is an entity which exists

individualistically of its own, the shareholders. The company as an entity is not

physically observable, but the community is alert of the existence of the company.

The company partakes in legal intercourse by means of governing bodies.

Learners are required to read download the following slides as the will

be helpful in doing the tasks given to them. These slide will help learners

enhance the knowledge that the already have on this topic

These are the links :

for the introduction on companies click on this link below

 http://www.slideshare.net/Guguprincess/companies-introduction

 If you want notes on the capitalization of companies click on the link below;

 http://www.slideshare.net/Guguprincess/companies-14897818 And

 if you want need notes on the capitalization of companies and other basic concepts

click the link

below

http://www.slideshare.net/Guguprincess/presentation-2gpmvubu

 and if you need slides on financial statements you can just view or download the file

below

https://sites.google.com/site/myloveforacccounting/slideshare

https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxteWxvdmVmb3JhY2Njb3VudGluZ3xneDo3MTU3ZjZhOGNjZjExZDA1

Self assessment

COMPANIES ACCOUNTING EQUATION

Required:

Read the case-study then answer the question

Learners must always answer in point form.

Open ended questions do not have one correct answer.

QUESTION 1

30 marks 30 minutes CASE STUDY – COMPANIES BLUE LABEL DIRECTORS GUILTY OF DODGY SALES

THABISO MOCHIKO

Daily News, Monday 14 April 2008

Three directors of listed firm, Blue Label Telecoms, were yesterday found guilty by

the JSE of trading shares without permission. Selwyn Diamond was fined R100 000

while Sean Kaplan and Graeme Prosser were “privately censured.”

Prosser bought shares last November while Diamond and his spouse, and Kaplan‟s

wife sold millions of rands worth of stock in February. The dealings occurred in an

open period but prior clearance from Blue Label‟s designated director was not

obtained, and the trades were not announced on the JSE‟s Stock Exchange News

Service (Sens) within 48 hours.

Prosser, Diamond and Kaplan work for a Blue Label subsidiary, the Prepaid

Company.

Diamond was fined R100 000 with R60 000 suspended for a year. If he breaches

listing requirements again, he will have to pay the suspended fine and face further

action, the JSE said. Diamond and Kaplan were found guilty of not telling their wives

that the directors needed to be informed about trades.

The JSE said it viewed any breach of listings requirements in a very serious light and

had informed Diamond of its “disappointment” at his conduct.

Prosser paid R2 million for 227 000 shares on November 14 at R8.81 each. The

shares closed at R7 yesterday, so he has lost R410 000 on his investment.

While Blue Label said the directors‟ conduct had caused it “damage and

embarrjassment”, their actions did not justify their dismissal or termination of their

directorships.

“It is unfortunate that these share dealings have attracted so much adverse

publicity,” said Blue Label‟s joint chief executives, Mark and Brett Levy. “We are

confident that lessons have been learnt.” To prevent a recurrence, all the company's

directors will attend a JSE workshop on the listing requirements this week.

Questions

1.1What is the role of directors in a company? Discuss at least 2. (4)

1.2 Explain the 2 different prices that are quoted for the shares, i.e. R8.81 and R7. Why is there a difference? (4)

1.3 Why do they say that Prosser has lost R410 000 on his investment? Explain fully. (4)

1.4 What did the 3 directors do that involved them being charged? Why is this wrong? (4)

1.5 What is the role of the JSE in the country? Discuss at least 2 roles using the above article as a guide. (4)

1.6 Why do you think the directors did not lose their directorships? (4)

1.7 The chief executives expressed their unhappiness concerning the adverse publicity. Do you agree with them and should incidents like this not be published? (6)

QUESTION 2

(8 MARKS)

LEARNERS ARE REQUIRED TO:

1. Choose a GAAP principle from COLUMN B to match the description in COLUMN A. Write only the letter (A–D) next to the question number (3.1.1–3.1.4) in the ANSWER BOOK.

Column A Column B

3.1.1 In preparing financial statements,

assets are recorded at the amount that

was originally paid for them

3.1.2 Expenses and income must be

recorded in the appropriate financial

period.

3.1.3 In preparing the financial

statements the accountant will assume

that the business will continue for the

foreseeable future.

3.1.4 Any amount which is significant to

the decisions made by the reader of the

financial statements should be disclosed

separately in the financial statements.

A Matching concept

B Materiality concept

C Historical cost concept

D Going concern concept

(8 MARKS )

2. Complete the statements (4.1.1–4.1.4) by choosing a word from the options below. Write only the option next to the question number (4.1.1–4.1.4) in the ANSWER BOOK.

shareholder; director; internal auditor; independent auditor

1. A person who expresses an opinion on the financial statements of a

company is a/an ...

2. A person who is appointed by shareholders to manage and make

decisions in running a company is a/an ...

3. A person who is a part owner of a company is a/an ...

4. A person employed by a company to check the reliability of the

accounting systems daily is a/an ... (8)

(10 MARKS)2. Choose the answer from the following .(multiply choice question)

Write only the letter (A–D) next to the question number (3.1–3.8) in the ANSWER BOOK

1. The purposes of the Companies Act (71 of 2008) are to:

A.   promote compliance with the Bill of Rights as provided for in the

Constitution, in the

application of company law;

B.   promote innovation and investment in the South African markets;

C.    include provisions dealing with matters the Act does not address, or

alter alterable

provisions;

D.   share proportionally in a dividend distribution by the company (2)

3.2 A MOI inter alia deals with:

A. The issuing of debentures

B. Taxation

C. Shareholders’ meetings

D. The nature of the company and its name (2)

3.3 Which one of these statements is for the non-profit companies

A. a company that is incorporated for public benefit, or whose object is related

to cultural or social activities or communal or group interests

B. falls within the meaning of a state-owned enterprise in terms of the Public

Finance Management Act

C. is owned by a municipality

D. No limitation is placed on the number of shareholders (2)

3.4 Which one of these companies are Profit companies?

A. A private company:=

B. A personal liability company

C. A state-owned company

D. non-profit company (2)

3.5 When did the new Companies Act together with the Regulations of 2011 come

into effect?

A. 14 December 2007

B. 1 May 2011

C. 8 April 2009

D. 15 May 2011 (2)

3.6 How are the directors elected?

A. if he is not a shareholder

B. if the person is ineligible or disqualified

C. The MOI must provide for at least 50% of the directors to be appointed by the

shareholders.

D. If it he has shares in the business (2)

3.7 What are dividends?

A. They are payments made by a corporation to its shareholder members.

B. It is money earned by the auditors

C. Repayment of the balance on the account of the preference shares

D. Settlement of secured payables (usually loans) from the proceeds of the

encumbered (3)

3.8 What does the term accrual basis of accounting mean?

A. Limited application and mainly plays a role in the decision regarding which

information should be disclosed

B. The effect of transactions and events are recognised in the period in which it

occurs, even if the resulting cash inflow and cash outflow occurs in a different

period

C. It relates to income and expenses from normal operating activities,

D. Limited application and mainly plays a role in the decision regarding

information should be disclosed in a note in respect of the expenses

aggregated and presented per function

(3)

E.

GROUP ASSIGNMENT

Learners are required to work in groups of 4-6 in order to complete this assignment.

The assignment must be attempted so that you will be able to answer questions based on this assignment. You have two week to prepare the solution during which time you may consult your teachers or peers for assistance with areas of this assignment that you may struggle with.

This assignment was carefully selected to assist you in learning key concepts necessary in accounting. It will count toward the calculation of your mark.

The assignment is due on the 24th of April 2014

Good luck!

QUESTION 1.1

COMPANY REPORTING 65 marks 30 minutes

1.1 INCOME STATEMENT

You are provided with information relating to Samora Sports Limited. The company sells sports equipment and repairs equipment for their customers.

REQUIRED

Prepare the Income Statement for the year ended 30 June 2008 after taking all the adjustments and additional information into account.[50]

INFORMATION

1. Figures extracted from the Pre-Adjustment Trial Balance on 30 June 2008:

Ordinary share capital (R5 par value)Fixed depositTrading stockDebtors controlEquipment (for office and shop)Accumulated depreciation on office and shop equipmentMortgage loan from CredbankSalesDebtors allowancesCost of salesService fee income (in respect of repair services)Rent incomeInterest incomeSalaries and wagesEmployers' contributions to Pension Fund and UIFAudit feesDirectors fees

R 1 200 000160 000215 00039 090224 000130 000

281 2001 703 20017 000?297 140105 00011 200234 750

53 200

30 000230 000

Consumable storesBank chargesSundry expenses

51 1005 240?

2.Adjustments and additional information:

The auditors have identified the following errors or omissions:

3.4 The auditors are owed a further R28 000 after completing the audit.

3.5 Bank charges of R310 reflected on the June 2008 bank statement have not yet been

entered in the books.

3.6 A credit note issued to a debtor, A Mona, dated 28 June 2008 was not recorded in the

books.

The credit note was for:

Goods returned by A Mona, R 6 200 (the cost was R4 800)

Price reduction on unsatisfactory repair of a tennis racket, R540

2.4 The stock count on 30 June 2008 revealed the following on hand:

Trading stock, R202 000

Consumable stores, R900

3.7 An employee was left out of the Salaries Journal for June 2008. The details fromhis

pay-slip were:

Gross salary R6 000

PAYE deduction (18%) (1 080)

Pension deduction (7,5%) (450)

UIF (60)

Net salary R4 410

The business contributions were:

Pension Fund: 10,5% of gross salary

UIF: Rand-for-rand basis

2.6 The tenant paid the July and August rent in June 2008. The rent was increased by R700

per month on 1 January 2008.

2.7 Provide for depreciation on office and shop equipment at 10% p.a. on the diminishing-

balance method. Note that new shop equipment costing R30 000 was purchased half-way

through the financial year (this was properly recorded).

2.8 Interest on the loan was capitalised. The loan statement from

Credbank on 30 June 2008 reflects the following:

CREDBANK

Loan statement on 30 June 2008

Balance on 1 July 2007 R332 800

Interest charged ?

Monthly payments to Credbank in

terms of the loan

agreement (12 months x R4 300)

R 51 600

Balance on 30 June 2008 R326 000

The interest expense for the year has not yet been entered in the books.

2.9 Use the following percentages to calculate the missing figures:

Mark-up % achieved: 60% on cost

Operating profit on sales: 20%

Income tax rate: 30% of net profit

QUESTION 1.2

1.2 CORPORATE GOVERNANCE AND AUDITING

The following audit report was issued by the auditors of Samora Sports Ltd:

Audit opinion – To the shareholders:

In our opinion, the financial statements fairly present, in all material respects, the financial

position of the company and the group at 30 June 2008 and the results of their operations

and cash flows for the year ended, in accordance with International Financial Reporting

Standards, and in the manner required by the Companies Act in South Africa.

I.M. Wright & Associates

Chartered Accountants (SA)

Registered Accountants and Auditors

Pretoria 10 August 2008

1.2.1 Why does the Companies Act make it a requirement for public companies to be

audited? (2)

1.2.2 Although this audit opinion is addressed to the shareholders, other interested persons

will also want to read it.

Name ONE other person who would be interested in this audit opinion, and give a reason for

his/her interest in the opinion. (3)

1.2.3 At the AGM, one of the shareholders says that he is not happy with the words

'Fairly present' in the audit report. He wants the auditors to say that the financial statements

are 'correct in all respects'.

What explanation should be given to this shareholder? State ONE point. (3)

1.2.4 The directors are not happy with the high audit fees reflected in the Income Statement.

Explain why improvement in internal control will have a positive effect on the external

auditors' fees. State ONR point. (3)

1.2.5 SAICA is one of the main professional bodies governing accountants in this country.

Explain TWO of the main roles performed by SAICA. (4) Total Marks [65]

QUESTION 2 (33 MARKS)

The reporting period of AB (Pty) Ltd, a successful company, ends on 31 December 20.7. AB

(Pty) Ltd and all its suppliers are registered as vendors in accordance with the VAT Act. VAT

is charged at a rate of 14%.

The following information is extracted from the financial records of AB (Pty) Ltd for the

reporting period ended 31 December 20.7:

1 Income

R

Sale of inventories 33 250 000

Rent income – letting of buildings (investment property) 532 000

Interest on fixed deposit 63 000

Profit on sale of machinery 132 000

Recoupment from insurer for inventories destroyed 855 000

Recoupment from insurer for machinery destroyed 735 300

2 Cost of sales

R

Cost of normal sales and smaller inventory shortages 13 250 000

3 Distribution costs, administrative expenses and other expenses

The company presents expenses in the statement of income with reference to the function

that the expense relates to. In this regard, the following three functions are distinguished:

Distribution costs, administrative expenses and other expenses. The company’s accounting

system summarised the balances of the respective expense accounts as follows:

R

Distribution costs

Administrative expenses 14 353 000

Other expenses

The balances of the respective expense accounts of AB (Pty) Ltd was as follows on

31 December 20.7:

R

Employee benefits expense 3 750 000

Depreciation on machinery 1 250 000

Impairment on machinery 400 000

Maintenance of machinery 665 000

Insurance expense 850 000

Auditors’ remuneration – remuneration for audit 765 000

Directors’ remuneration

- Non-executive directors – attendance of meetings 400 000

- Executive directors – attendance of meetings 300 000

- Executive directors – basic remuneration 2 400 000

- Executive directors – bonuses 1 200 000

Telephone- and network costs 750 000

R

Office supplies expense 560 000

Doubtful debts 61 000

Water and electricity 552 000

Other expenses 450 000

14 353 000

4 Interest expense

Interest expense constitutes the following:

R

Interest expense on bank overdraft 68 000

Interest expense on mortgage bond 482 000

550 000

5 The following adjustments still have to be accounted for:

5.1 Office supplies on hand on 31 December 20.7 to the amount of R45 000 still have to

be recognised.

5.2 The allowance for doubtful debts still has to be increased with R17 000.

5.3 A write-down of R90 000 in respect of certain inventory items, of which the cost price

exceeds the net realisable value thereof, still has to be recognised.

5.4 On 1 November 20.7 a fire destroyed certain inventory- and machinery items:

5.4.1 After consultation, the insurer determined the cost of the inventories destroyed

at R800 000. On 19 December 20.7 a cheque to the amount of R855 000

(including VAT) was received from the insurer. AB (Pty) Ltd’s accountant debited

the bank account with R855 000 and credited an account named “Recoupment

from insurer for inventories destroyed” with R855 000. The necessary

adjustment still has to be recognised and the cost of the inventories destroyed

still has to be recognised as an expense.

5.4.2 The carrying amount of the machinery-item that was destroyed in the fire, was

as follows on 1 November 20.7:

R

Machinery – cost price 1 320 000

Machinery – accumulated depreciation (517 000)

803 000

On 19 December 20.7 a cheque to the amount of R735 300 (including VAT) was

received from the insurer. AB (Pty) Ltd’s accountant debited the bank account

with R735 300 and credited an account named “Recoupment from insurer for

machinery destroyed” with R735 300. The necessary adjustment still has to be

recognised and the machinery that was destroyed in the fire still has to be

derecognised.

6 The income tax expense for 20.7 was reliably calculated as R1 236 000 and still has to

be recognised.

Required:

a) After accounting for the adjustments as provided, present the resulting balances in the

statement of income of AB (Pty) Ltd for the reporting period ended 31 December 20.7.

(15)

Note: No journal entries are required.

Show all calculations clearly.

b) Disclose ONLY the following notes to the statement of income of AB (Pty) Ltd for the

reporting period ended 31 December 20.7:

i) The note to Revenue. (1)

ii) The note to Cost of sales. (3)

iii) The note to Profit before tax. (14)