FAC2601/201/1/2012

Tutorial letter 201/1/2012 Financial accounting for companies (FAC2601)

FAC2601 Semester 1 Department Financial Accounting

Dear Student Enclosed please find information regarding the examination, group visits as well as the solution to assignment 03/2012.

Contact details of the module are as follows: Telephone number: 012 429 4238 E-mail: FAC2601@unisa.ac.za

Bar code

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Please use the following e-mail or SMS numbers for administrative related enquiries: Description of enquiry

Short SMS code

E-mail address

Applications and registrations 43578 Study-info@unisa.ac.za

Assignments 43584 Assign@unisa.ac.za

Exams 43584 Exams@unisa.ac.za

Study material 43579 despatch@unisa.ac.za

Student accounts 31954 finan@unisa.ac.za

myUnisa myLife

43582 MyUnisaHelp@unisa.ac.za MyLifeHelp@unisa.ac.za

Graduations gaudeamus@unisa.ac.za For further assistance you can contact the College Information Coordinator: Ms Portia Ngcobo Telephone number: 012 429-3925 E-mail: CEMSenquiries@unisa.ac.za With kind regards, LECTURERS: FINANCIAL ACCOUNTING FOR COMPANIES (FAC2601) ANNEXURE A: EXAMINATION ANNEXURE B: GROUP VISITS ANNEXURE C: SOLUTION TO ASSIGNMENT 03/1/2012 ANNEXURE D: LEASES FRAMEWORK AND EXAMPLES

FAC2601/201/1

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ANNEXURE A: EXAMINATION PLEASE NOTE: The syllabus for this module has changed for 2012 and you are going to be

examined on the new work. (i) We would like to draw your attention once more to tutorial letter 301 on examination

technique and we would like to stress a few items:

- Number all your answers clearly. - Answer each question on a new page. Please do not answer two questions on the

same page. - Keep to the time table. When the time for a question is over you must carry on with the

next question. You cannot afford to leave out a question. - Write neatly and structure your work so that it is easy to read. - It is important to answer what is asked from you so that you do not do unnecessary

work and thus waste valuable time. - Work though all your study material and do not just concentrate on old exam papers.

(ii) The examination consists of a two hour paper counting a total of 100 marks. The whole syllabus can be tested in this paper. Here are some tips to improve your future studies (these tips are based on what the students did wrong in previous exams). Remember this is not a summary of what to study, it is just guidelines for the examinations:

TAKE NOTE: Please take note of the changes to termininology that is used for the financial statements

1. Statement of profit or loss and other comprehensive income (Statement of comprehensive income (SoCI)):

- Know how to do calculations on finance cost and show CALCULATIONS clearly. - Remember to show/calculate other comprehensive income. - Note on profit before tax: Know how to disclose different disclosable items on this note

and show calculations in brackets.

2. Statement of financial position (SoFP):

- Show all calculations. This can be done in brackets next to the item or reference it back to your calculation on another page, but remember to reference your work.

- Study how the notes on financial statements are disclosed and show calculations separately on these notes if necessary. Notes are not just calculations, it is extra information for the users of the statements and is disclosable.

- Property, plant and equipment (PPE) is always one entry in the SoFP. The total you get in the note on PPE must be the same as the total in the SoFP. You get a principal mark for having the same amount. Remember to give the extra information regarding the description of the property just underneath the note on PPE.

3. Statement of changes in equity:

- Know how to calculate opening balances. You can only improve your knowledge on

this topic by exercising this type of questions under examination conditions. - Please note that dividends are normally declared at the end of the financial year after

all relevant transactions were accounted for. Read what the question asks you to do and always show all your calculations with specific reference to all the types of dividends (eg. ordinary dividends, cumulative preference dividends and preference dividends).

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4. Theory: Please study all relevant questions in assignment 3 and study guide, refer to text book as well where necessary.

5. Leases:

- Always show all calculations. - If a financial calculator was used, show all steps. (eg. identify amount used for present

value, interest, etc.). - If the formula was used, show all steps and workings.

FAC2601/201/1

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ANNEXURE B: GROUP VISITS - FIRST SEMESTER

Group visits will once again be conducted this year. The dates are as follows: PRETORIA Date: 13 April 2012 Venue: Exam Hall 1 Theo van Wijk Building Unisa Main Campus Time: 8:30 – 12:00 DURBAN Date: 13 April 2012 Venue: Durban Regional Office 230 Stanger Str Durban Time: 8:30 – 12:00 CAPE TOWN Date: 13 April 2012 Venue: Parow Regional Office 15 Jean Simonis Str Parow Time: 8:30 – 12:00 FLORIDA Date: 11 April 2012 Venue: Gencor Auditorium 3rd floor, B Block Florida Campus Time: 8:30 – 12:00

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ANNEXURE C: SOLUTION TO ASSIGNMENT 03/2012 SOLUTION 1 VULA LIMITED EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 2006

Notes RRevenue Cost of sales

12 000 000 (5 000 000)

Gross profit Other operating income Distribution cost Administrative expenses Other operating expenses (1 025 000 – 255 000) Finance cost [(1 800 000 x 15% x 6/12) + (1 600 000 x 15% x 6/12)] (Calculation 2)

7 000 000 245 000

(1 200 000) (3 000 000) (770 000)

(255 000)Profit before tax 1 Income tax expense

2 020 000 (585 800)

Profit for the year 1 434 200 VULA LIMITED NOTE FOR THE YEAR ENDED 28 FEBRUARY 2006 1. Profit before tax is disclosed after taking the following items into account,

amongst others: Income Profit on sale of non-current asset

R

10 000 Income from subsidiaries - Dividends - Interest

90 000 45 000

Income from other financial assets - Listed investments - Dividends - Unlisted investments – Dividends

40 000 60 000

Expenses Directors’ remuneration Executive directors

781 000

- Emoluments (766 000 + 5 200) - Less: Paid by subsidiary

771 200 (5 200)

Total paid by company 766 000 Non-executive directors - Emoluments (15 000 + 418 400) - Less: Paid by subsidiary

433 400 (418 400)

Total paid by company 15 000

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SOLUTION 1 (continued) Depreciation (36 000 + 525 000 + 66 500)

R 627 500

Auditors’ remuneration - Fees for audit - Expenses

75 000 15 000

Loss on sale of non-current asset 14 000 Calculations 1. Directors’ remuneration Executive Non-executive

Vula Ltd R

Bolo Ltd

R

Vula Ltd

R

Bolo Ltd

R A Salary Entertainment allowance Fees for attending meetings

7 000

200 000 12 000 3 200

B Salary Entertainment allowance Fees for attending meetings

300 000 24 000 4 000

C Salary Fees for attending meetings

180 000 4 000

D Fees for attending meetings

4 000

E Fees for attending meetings Salary

4 000

3 200 200 000

G Salary Fees for attending meetings

250 000 4 000

5 200

766 000 5 200 15 000 418 400

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SOLUTION 1 (continued) 2. Finance cost Long-term loan

Total payments payable (according to question (note 10)) 10 Less: Payments made up to 28/02/2006 2 Payments outstanding 8

R Outstanding loan as per list of balances 1 600 000 R1 600 000 = 8 payments One payment is thus R1 600 000 / 8 200 000 Loan at end of year 1 600 000 Plus: One payment made during the year 200 000 Loan at beginning of year 1 800 000 Outstanding amount 1/3/2005 – 31/8/2005 1 800 000 Outstanding amount 1/9/2005 – 28/2/2006 1 600 000 Finance charges is calculated at 15% on the above two amounts

3. Depreciation R 3.1 Buildings Cost price 1 800 000 Depreciation (2% x R1 800 000) 36 000

3.2 Plant and machinery Cost price 3 500 000 Depreciation (15% x R3 500 000) 525 000

3.3 Furniture and equipment Carrying amount 28/2/2006 (R700 000 – R101 500) 598 500 Carrying amount 28/2/2005 (R598 500 x 100/90) 665 000 Depreciation (10% x R665 000) 66 500

Or Cost price 1/9/2004 700 000 Less: Depreciation (1/9/2004 – 28/2/2005) (10% x 700 000 x 6/12) 35 000 Carrying amount 28/2/2005 665 000

FAC2601/201/1

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SOLUTION 1 (continued) MARKING PLAN Marks Statement of comprehensive income Revenue Cost of sales Other operating income Distribution cost Administrative expenses Other operating expenses Finance cost Income tax expense Note Profit on sale of non-current asset Income from subsidiary Income from other financial assets Executive directors’ remuneration Emoluments Paid by subsidiary Non-executive directors’ remuneration Emoluments Paid by subsidiary Depreciation Auditors’ remuneration Fees for audit Expenses Loss on sale of non-current asset

1 1 1 1 1 2 2 1 1 2 3

31/2 1

21/2 1 3 1 1 1

Total 30

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SOLUTION 2 LAST RESORT LIMITED EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 29 FEBRUARY 2008

Notes RRevenue (7 980 000 x 100 / 114) Cost of sales

7 000 000 (2 800 000)

Gross profit Other income (38 000 + 50 000 + 13 000) Administrative expenses Distribution cost Other operating expenses [370 000 – (15% x 120 000 x 6/12) – (15% x 90 000 x 6/12)] Finance cost (9 000 + 6 750)

4 200 000 101 000 2 170 000

(268 000) (354 250)

(15 750)

Profit before tax 1 Income tax expense

1 493 000 (421 950)

Profit for the period 1 071 050 LAST RESORT LIMITED NOTE FOR THE YEAR ENDED 29 FEBRUARY 2008 1. Profit before tax is disclosed after taking the following, amongst others, into account: Income Fair value adjustment [100 000 x 0,50(R3,00 – R2,50)] Profit on sale of non-current asset [85 000 – (80 000 – 8 000)]

R

50 000 13 000

Income from subsidiary - Dividends - Interest

12 000 6 000

Income from other financial assets - Listed investments - Dividends 20 000 Expenses Directors’ remuneration Executive directors 486 000 - Emoluments [240 000 + 200 000 + 12 000 + (2 x 5 000)] - Pension (managing director)

462 000 24 000

Non-executive directors 137 000 - Emoluments [120 000 + (1 x 5 000)] - Pension (chairman)

125 000 12 000

Auditors’ remuneration 48 000 - Fees for audit - Expenses

40 000 8 000

Depreciation (calculation 1) 59 000

FAC2601/201/1

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SOLUTION 2 (continued) Calculations: 1. Depreciation 1.1 Depreciation on equipment Carrying amount 28/2/2008 Cost price (48 000 x 100 / 40) or (48 000 x 5/2) Depreciation (20% x 120 000)

R

48 000 120 000

24 000 1.2 Depreciation on motor vehicles 1.2.1 Vehicle sold Carrying amount 28/2/2007 Depreciation 1/3/2007 – 31/8/2007 (20% x R80 000 x 6/12) Carrying amount 31/8/2007

80 000 8 000 72 000

1.2.2 Rest of vehicles Carrying amount 29/2/2008 (240 000 – 60 000 – 72 000) Carrying amount 1/3/2007 (100/80 x 108 000) Depreciation 1/3/2007 – 29/2/2008 (20% x 135 000)

108 000 135 000

27 000 1.3 Total depreciation (24 000 + 8 000 + 27 000) 59 000 MARKING PLAN Marks Statement of comprehensive income Revenue Cost of sales Other income Administrative expenses Distribution expenses Other operating expenses Finance cost Income tax expense Note Fair value adjustment Profit on sale on non-current asset Income from subsidiary Income from financial assets Directors’ remuneration Auditors’ remuneration Depreciation

2 1 3 1 1 2 2 1 1 1 2 1 3 1 3

Total 25

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SOLUTION 3 VISION LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 2006

Share capital

R

10% Cumulative preference

share capital R

12% Non-cumulative preference

share capitalR

Surplus on revaluation of assets

R

Reserve for increased replace-

ment cost of non-current

assets R

Retained earnings

R Total

R Balance 1 March 2005 1 500 000 300 000 550 000 500 000 250 000 350 000 3 450 000 Comprehensive Income for the year Dividends (calculation 1) Preference – cumulative Preference – non-cumulative Ordinary Capitalisation shares issued (1 200 000/6) x R1,25 Share issue expenses written off Transfer to reserve

250 000

1 000 000

90 000

800 000

(60 000) (66 000) (140 000)

(250 000) (25 000)

(90 000)

1 800 000

(60 000) (66 000) (140 000)

(25 000)-

Balance 28 February 2006 1 750 000 300 000 550 000 1 500 000 340 000 519 000 4 959 000

Calculation 1 Dividends

R 266 000

Cumulative preference (R300 000 x 10% x 2 years) Non-cumulative preference (R550 000 x 12%) Ordinary (1 400 000 x 10c)

60 00066 000

140 000 Note 1. Calculation of dividends in cents is done on the number of shares while the calculation

of dividends as a percentage (%) is done on rand (R) values. MARKING PLAN Marks Statement of changes in equity Share capital – ordinary shares 12% Non-cumulative preference share capital 10% Cumulative preference share capital Surplus on revaluation of assets Reserve for increased replacement cost of non-current assets Retained earnings

3½ ½ ½

1½ 1½ 12½

Total 20

FAC2601/201/1

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SOLUTION 4 TRIO LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2006

Ordinary share capital

R

Mark-to-market reserve

R

12% Cumula- tive pre-ference share capital

R

Surplus on Revalua-tion

of assets R

Reserve for replace-ment of assets

R

Retained earnings

R Total

R Balance 1 July 2005 432 000 - 150 000 - 20 000 80 000 682 000 Comprehensive income for the year Shares issued 1 January 2006 Shares issued 31 March 2006 Capitalisation shares issued Share issue expenses written off Transfer to replacement reserve Dividends declared* Preference shares Ordinary shares

56 000 60 000

5 000

51 000

50 000

70 000

200 000

(60 000)

(16 000) (70 000) (39 060) (90 000)

255 000 51 000 56 000

-

(16 000) -

(39 060) (90 000)

Balance 30 June 2006 548 000 5 000 201 000 50 000 90 000 4 940 898 940

*Dividends Preference

R 39 060

(12% x R150 000 x 2 years) (12% x R51 000 x 6 months)

36 0003 060

Ordinary (360 000 + 40 000 + 50 000) shares x 20c 90 000 Note 1. Calculation of dividends in cents is done on the number of shares while the calculation

of dividends as a percentage (%) is done on rand (R) values. MARKING PLAN Marks Statement of changes in equity Ordinary share capital 12% Cumulative preference share capital Surplus on revaluation of assets Reserve for replacement of assets Retained earnings

8 3 1 2

12 Total 26

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SOLUTION 5 5.1 TRIO LIMITED NOTES FOR THE YEAR ENDED 30 JUNE 2006 5. NON-CURRENT LIABILITIES

Long-term liability Secured 12% Long-term loan Less: Short-term portion transferred to current liabilities

R

80 000 (20 000)

60 000

The loan is secured by a first mortgage bond over fixed property. Interest is calculated at 12% per annum. The capital portion is repayable in five equal annual instalments from 30 April 2006.

5.2 TRIO LIMITED NOTES FOR THE YEAR ENDED 30 JUNE 2006 1. Property, plant and equipment

Land R

BuildingsR

MachineryR

Furniture and

equipment R

Total R

Carrying amount 1 July 2005 100 000 480 000 300 000 62 000 942 000 Cost Accumulated depreciation

100 000 -

500 000 (20 000)

400 000 (100 000)

90 000 (28 000)

1 090 000 (148 000)

Revaluation Disposal at carrying amount Additions at cost Depreciation

50 000 - - -

- - -

(10 000)

- - -

(75 000)

- (1 250) 15 000

(18 350)

50 000 (1 250) 15 000

(103 350)Carrying amount 30 June 2006 150 000 470 000 225 000 57 400 902 400 Valuation/Cost Accumulated depreciation

150 000 -

500 000 (30 000)

400 000 (175 000)

100 000 (42 600)

1 150 000 (247 600)

Land and buildings are situated on erf 3510, George and consist of an office block. It was revalued on 31 October 2005 by mr Black, a sworn appraiser, at replacement value of R150 000.

FAC2601/201/1

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SOLUTION 5 (continued) 5.3 TRIO LIMITED

EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2006

Notes RASSETS Non-current assets

962 400

Property, plant and equipment 1 Investment in subsidiary

902 400 60 000

Current assets

331 600

Inventory Trade and other receivables Other financial assets (100 000 + 15 000) Cash and cash equivalents

80 200 65 400 115 000 71 000

Total assets 1 294 000 Calculations:

1. Property, plant and equipment 1.1 Buildings Depreciation – current year (2% x R500 000)

R

10 000 1.2 Machinery

Carrying amount 30 June 2006 – given Carrying amount 30 June 2005 (R225 000 x 100/75) Cost 30 June 2004 (R300 000 x 100/75) Depreciation – current year (R300 000 x 25%) Depreciation – previous year (R400 000 x 25%)

225 000 300 000 400 000 75 000

100 000 1.3 Furniture and equipment

Cost 30 June 2006 – given Cost of addition 31 March 2006 Cost of disposal 31 March 2006

100 000 (15 000)

5 000 Cost 30 June 2005 90 000 Depreciation – current year New computer [(R15 000 – 3 000) x 20% x 3/12] Computer sold (R5 000 x 20% x 9/12) Remaining equipment (R85 000 x 20%)

600 750

17 000 Total 18 350

Accumulated depreciation on disposal (R3 000 + 750) 3 750

Carrying amount of disposal (R5 000 – 3 750) 1 250

Accumulated depreciation 30 June 2005 (R42 600 + 3 750 – 18 350) 28 000

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SOLUTION 5 (continued) MARKING PLAN Marks Statement of financial position Property, plant and equipment Investment in subsidiary Inventory Trade and other receivables Other financial assets Cash and cash equivalents Note on property, plant and equipment Land Buildings Machinery Furniture and equipment Details of property Note on long-term loan Gross amount Short-term portion Rate of interest Security Repayment conditions

1 1 ½ ½ 1 ½ 2 2 4 7 1 1 1 ½ ½ ½

Total 24

FAC2601/201/1

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SOLUTION 6 PURCO LIMITED EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2006 ASSETS Notes Non-current assets

R 6 143 600

Property, plant and equipment 1 Investment in subsidiary 2

5 793 600 350 000

Current assets 1 958 500 Inventories 3 Trade and other receivables Other current assets 4

950 000 748 500 260 000

Total assets 8 102 100 PURCO LIMITED NOTES FOR THE YEAR ENDED 30 JUNE 2006 1. Property, plant and equipment

Land R

Buildings R

Plant and machinery

R

Furniture and

equipment R

Total R

Carrying amount 1 July 2005 1 000 000 - 2 432 000 400 000 3 832 000 Cost Accumulated depreciation

1 000 000 -

- -

3 200 000 (768 000)

600 000 (200 000)

4 800 000 (968 000)

Revaluation Additions at cost (1 878 400 + 121 600) Disposals at carrying amount Depreciation capitalised Depreciation

500 000 - - - -

- 2 000 000

- -

(20 000)

- - -

(121 600) (364 800)

- 80 000

(52 500)

- (59 500)

500 000 2 080 000

(52 500) (121 600) (444 300)

Carrying amount 30 June 2006 1 500 000 1 980 000 1 945 600 368 000 5 793 600 Valuation/cost Accumulated depreciation

1 500 000 -

2 000 000 (20 000)

3 200 000 (1 254 400)

580 000 (212 000)

7 280 000 (1 486 400)

Land and buildings comprise of erf 323, Sunward Park, with factory buildings and an office block. The land was revalued during 2006 by mr Value, a sworn appraiser, at replacement value.

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SOLUTION 6 (continued) 2. Investment in subsidiary

R 350 000

Shares at cost Loan to subsidiary

200 000150 000

3. Inventories

Consist of: 950 000 Raw materials Work in progress Finished goods

300 000400 000250 000

4. Other current assets

Listed investments 260 000 20 000 Preference shares in Thakalaka Ltd at fair value (20 000 x R2,50) 70 000 Ordinary shares in Sugar Ltd at fair value (70 000 x R3)

50 000210 000

Calculations 1. Buildings 1.1 Additions

R

2 000 000Direct cost – given Depreciation capitalised

1 878 400121 600

1.2 Depreciation – current year (R2 000 000 x 2% x 6/12) 20 000 2. Plant and machinery 2.1 Cost – opening balance (R2 432 000 + 768 000) 3 200 000 2.2 Depreciation – current year (R2 432 000 x 20%) 486 400 2.3 Depreciation capitalised (R486 400 x 3/12) 121 600 2.4 Accumulated depreciation – closing balance (R768 000 + 121 600 + 364 800)

1 254 400

3. Furniture and equipment 3.1 Depreciation on machinery traded in – current year (R100 000 x 10% x 9/12) 7 500 3.2 Accumulated depreciation on machinery traded in (R40 000 + 7 500) 47 500 3.3 Carrying amount of machinery traded in (R100 000 – 47 500) 52 500

FAC2601/201/1

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SOLUTION 6 (continued) R

3.4 Depreciation of equipment on hand – current year [(R500 000 x 10%) + (80 000 x 10% x 3/12)]

52 000

3.5 Total depreciation – current year (R7 500 + 52 000) 59 500 3.6 Cost – closing balance (R600 000 – 100 000 + 80 000) 580 000 3.7 Accumulated depreciation – closing balance (R200 000 – 47 500 + 59 500) 212 000 MARKING PLAN Marks Statement of financial position Property, plant and equipment Investment in subsidiary Inventories Trade and other receivables Other current assets Notes Property, plant and equipment

Revaluation of land Additions to buildings Depreciation - buildings Plant and machinery at cost - opening balance Depreciation capitalised Depreciation - plant and machinery Accumulated depreciation plant and machinery - closing balance Additions to furniture and equipment Disposals of furniture and equipment Depreciation - furniture and equipment Furniture and equipment at cost - closing balance Accumulated depreciation furniture and equipment - closing balance Note on situation of land and buildings

Investment in subsidiary Shares Loan

Inventories Raw materials Work in progress Finished goods

Other current assets Listed Unlisted

1 1 1 1 1

1 2 1 1 2 2 1 1 2 2 1 1 1

1 1

1 2

Total 30

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SOLUTION 7 PURCO LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2006

Ordinary share capital

R

6% Cumulative preference

share capital R

8% Non-cumulative preference

share capital R

Surplus on revaluation

of non-current assets

R

Retained earnings

R Total

R Balance 1 July 2005 Ordinary share issued on 31 March 2006 Non-cumulative preference shares issued on 1 April 2006

2 000 000 1 000 000

500 000 -

1 200 000

-

800 000 3 300 000 1 000 000

1 200 000

Preliminary expenses written off Share issue expenses written off Capitalisation shares issued [(1 500 000/10) x R2] Comprehensive income for the year (1 000 000 - 444 300 - 161 150) Dividends declared: Cumulative preference shares (6% x 500 000 x 2 years) Non-cumulative preference shares (8% x 120 000 x 3/12) Ordinary shares (1 650 000 x 5c)

300 000

500 000

(30 000) (12 000) (300 000)

394 550

(60 000)

(24 000)

(82 500)

(30 000) (12 000)

-

894 550

(60 000)

(24 000)

(82 500) Balance 30 June 2006 3 300 000 500 000 1 200 000 500 000 254 050 5 754 000 MARKING PLAN Marks Statement of changes in equity Ordinary share capital 6% Cumulative preference share capital 8% Non-cumulative preference share capital Surplus on revaluation of non-current assets Retained earnings

5 3 2 1

15 Total 26

FAC2601/201/1

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SOLUTIONS 8-22 8. Elements of cost The cost of a PPE-item comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after

deducting trade discounts and rebates. (b) any costs directly attributable to bringing the asset to the location and condition necessary

for it to be capable of operating in the manner intended by management. (c) the initial estimate of the costs of dismantling and removing the item and restoring the site

on which it is located. This obligation can arise either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

9. Examples of costs that are not costs of a PPE-item are: (a) costs of opening a new facility; (b) costs of introducing a new product or service (including costs of advertising and

promotional activities); (c) costs of conducting business in a new location or with a new class of customer (including

costs of staff training); and (d) administration and other general overhead costs. 10. Derecognition The carrying amount of a PPE-item shall be derecognised: (a) on disposal; or (b) when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of a PPE-item shall be included in profit or loss when the item is derecognised. Gains shall not be classified as revenue from the sale of goods and services.

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SOLUTIONS 8-22 (continued) 11. (a) Change in accounting policy When an item of PPE is revalued for the first time it is considered to be a change in accounting policy. It is therefore treated as a normal revaluation. Only the effect of the change on the figures for the current year is shown, as replacement values applicable to previous years are not readily available. (b) Residual value Residual values of assets should be reviewed at least at each financial year-end. If necessary the residual values should be adjusted and the disclosure requirements with regard to a change in accounting estimate should be complied with. (c) Estimated useful life If necessary the amended remaining useful life should be used and the disclosure requirements with regard to a change in accounting estimate should be complied with. (d) Determination of replacement value Assets can be revalued according to the net replacement value or the gross replacement value. Gross replacement value is the replacement cost (market value) of a similar, new asset. Net replacement value is the equivalent fair market value of a similar asset of the same age and/or condition. 12. Change in fair value of a financial asset A gain or loss arising from a change in the fair value of a financial asset or financial liability that is not part of a hedging relationship shall be recognised as follows: (a) A gain or loss on a financial asset or financial liability classified as at fair value

through profit or loss shall be recognised in profit or loss. Profit or loss

Debit – Investment Profit Credit – Fair value adjustment

Debit – Fair value adjustment Loss Credit – Investment

FAC2601/201/1

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SOLUTIONS 8-22 (continued) (b) A gain or loss on a not-held-for-trading financial asset shall be recognised directly in

equity through the statement of changes in equity. Profit or loss

Debit – Investment Profit Credit – Mark-to-market reserve

Debit – Mark-to-market reserve Loss Credit – Investment 13. Revaluation of an asset – net replacement value basis

Carrying amount end of 20.1 Net replacement value

R 80 000

120 000Revaluation surplus 40 000

Journal

Dr R

Cr R

Accumulated depreciation Equipment at cost

20 000 100 000

Equipment at revaluation Revaluation surplus Revaluation of equipment on the net replacement value vasis

120 000 40 000

14. Net replacement value basis Step 1: The net replacement value of R90 000 is regarded as the cost to replace the asset

currently with a similar asset of the same age and condition. Step 2: Calculate the amount that must be transferred to the revaluation surplus (revalued

amount – carrying amount of asset on revaluation date).

Net replacement value Carrying amount

R 90 00060 000

Revaluation surplus 30 000

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SOLUTIONS 8-22 (continued) Step 3: Journalise the revaluation Journals

Dr R

Cr R

Asset at revaluation Asset at cost

90 000 100 000

Accumulated depreciation Revaluation surplus Revaluation of asset on net replacement value basis

40 000 30 000

Depreciation (90 000/6) Accumulated depreciation Depreciation for the year based on revalued amount

15 000

15 000

15. Revaluation date: 1 January 20.3 Net replacement value: R160 000 The asset is 1 year old at 1 January 20.3 (180 000/6 = 30 000; 30 000/30 000 = 1 year) or 1 January 20.2 – 1 January 20.3 = 1 year The revaluation surplus at this date is:

Cost Accumulated depreciation

R 180 000 (30 000)

Carrying amount at 1 January 20.3 Net replacement value 1 January 20.3

150 000 (160 000)

Revaluation surplus at 1 January 20.3 10 000 The accumulated depreciation and cost of the asset is written back and the asset is

shown at the revalued amount. Journals

Dr R

Cr R

Accumulated depreciation Asset at revaluation Asset at cost Revaluation surplus Revaluation of asset on the net replacement value basis

30 000 160 000

180 00010 000

Depreciation (160 000/5) Accumulated depreciation Depreciation for the year based on revalued amount

32 000

32 000

FAC2601/201/1

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SOLUTIONS 8-22 (continued) 16. Definition - Revenue Revenue is: the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity that results in increases in equity, excluding the contributions of equity participants.

17. Disclosure in respect of revenue The following should be disclosed in the financial statements: The accounting policies adopted for the recognition of revenue, including the methods

adopted to determine the stage of completion of transactions involving the rendering of services.

The amount of each significant category of revenue recognised during the period, including revenue arising from:

- the sale of goods; - the rendering of services; - interest; - royalties; - dividends. The amount of revenue arising from the exchange of goods or services included in each

significant category of revenue. In terms of the Fourth Schedule to the Companies Act, the following items should be disclosed separately: income from investments, distinguishing between listed and unlisted investments and

between interest, dividends and other specified income; the aggregate amount of income from subsidiaries, stating whether dividends, interest,

fees or other specified income; and the aggregate amount of turnover for the accounting period and the basis upon which

turnover has been determined. 18. Measurement - Revenue Revenue will be measured as follows: At fair value of the consideration received or receivable. At fair value which is the amount for which an asset could be exchanged or a liability

settled, between knowledgeable willing parties in arms length transaction.

26

SOLUTIONS 8-22 (continued) 19. Recognition - Revenue Revenue will be recognised when it is probable that future economic benefits will flow to the entity and it can be measured reliably. 20. Sale of goods (i) Bill and Hold sales: Revenue recognised when buyer takes title and it is probable

that delivery will be made. (ii) Goods shipped subject to conditions: (a) Installation and inspection: Revenue recognised when buyer accepts delivery

and installation and inspection process are complete or immediately upon delivery when installation process is simple.

(b) Consignment sales: Revenue recognised when goods are sold by the recipient to a third party.

(c) COD: Revenue recognised when delivery has been made and cash is received. (iii) Lay away sales: Revenue recognised when buyer makes final payment or

significant deposit is received. (iv) Order when payment is received in advance for goods not presently held in

inventory: Revenue recognised when goods are delivered to buyer. (v) Sale and repurchase agreements: The terms of agreement need to be analysed

to determine if the seller has transferred the risks and rewards of ownership. (vi) Sales to intermediate parties: Revenue recognised when risks and rewards of

ownership have passed to buyer. (vii) Subscriptions: Revenue recognised on a straight-line basis over the period of the

agreement. (viii) Instalment sales: Revenue attributable to sales price, exclusive of interest

recognised on date of sale. Interest element recognised on time proportion basis. (ix) Real estate sales: Revenue recognised when legal title passes to the buyer. 21. Rendering of services (i) Installation fees: Revenue recognised by reference to stage of completion unless

incidental; then recognised when goods are sold. (ii) Service fees included in price of product: Service fees is deferred and

recognised over the period during which the service is performed. (iii) Advertising commissions: Revenue recognised when advertisement appears

before public. Production commissions recognised by reference to the stage of completion of project.

(iv) Insurance agency commissions: Revenue recognised on the effective commencement or renewal dates of the related policies.

(v) Admission fees: Revenue recognised when the event takes place.

FAC2601/201/1

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SOLUTIONS 8-22 (continued) (vi) Tuition fees: Revenue recognised over the period of instruction. (vii) Initiation, entrance and membership fees: Revenue recognition depends on the

nature of the service provided, for example if the fee permits only membership or include other services as well.

(viii) Franchise fees: Revenue recognised on a basis that reflects the purpose for which the fees were charged.

(ix) Development of customised software: Revenue recognised by reference to stage of completion.

22. License fees and royalties: Revenue recognised in accordance with the substance of

the agreement, this may be on straight-line basis over the life of the agreement. MARKING PLAN Marks

8 9 10 11

12 13 14 15 16 17 18 19 20 21 22

Elements of cost Examples of cost not cost of PPE Derecognition (a) Change in accounting policy (b) Residual value (c) Estimated useful life (d) Determination of replacement value Change in fair value of a financial asset Revaluation of an asset Determination of replacement value Determination of replacement value Revenue – definition Revenue – disclosure Revenue –measurement Revenue – recognition Revenue recognition – sale of goods Revenue recognition – rendering of services Revenue recognition – other

6 6 4 2 2 2 4 8 10 10 12 3 4 2 2 12 10 2

Total 101

28

SOLUTION 23 SALSA LIMITED NOTES FOR THE YEAR ENDED 28 FEBRUARY 19.7 3. Profit before tax is stated after taking the following items into account: RIncome Income from: - Sale of motor vehicles 1 780 000 Other income: - Dividends received from an unlisted investment 13 500 Expenses Depreciation (11 200 + 15 000) Operating lease payments: Buildings (calculation 1) Loss on litigation settlement

26 200 42 000 85 000

4. Income tax expense R Current tax expense (calculation 3) 36 279 5. Commission prepayment R Commission prepaid in terms of an operating lease agreement (calculation 2) Less: Current portion to be expensed in statement of comprehensive income over next 12 months (R7 200 / 3)

5 600

(2 400) 3 200 6. Operating lease agreement The company entered into an operating lease agreement for the premises they are presently occupying. The lease agreement was entered into on 1 July 19.6 for a 3 year period. The payment terms are: Initial payment R9 000 initially 36 monthly instalments R5 000 per month

FAC2601/201/1

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SOLUTION 23 (continued) The future minimum lease payments are: Up to 1 year

R 60 000

1 to 5 yearsR

80 000

5 000 x 12 = 60 000 5 000 x 16 = 80 000

Calculations 1. Operating lease - building R Initial payment Instalments (5 000 x 36)

9 000 180 000

189 000 Equalisation of lease payments (189 000/36) 5 250 Lease payments for the year (5 250 x 8) 42 000 2. Commission prepayment R Commission paid Expensed through statement of comprehensive income (7 200 x 8/36)

7 200 (1 600)

Prepaid portion 5 600 3. Income tax expense R Current tax expense @ 29% (125 100 x 29%) 36 279 MARKING PLAN Marks Notes to financial statement Profit before tax note: - Income from sale of motorvehicle 1 - Other income 1 - Depreciation 1 - Operating lease payments 3½ - Loss on litigation settlement ½Income tax expenses 1½ Commission prepayment 3 Operating lease agreement 6½ Total 18

30

SOLUTION 24 a) The nominal rate is calculated on a financial calculator PV = 180 000 FV = 0 n = 6 (2 x 3) PMT = -43 500 Comp i = 11,77338% per half year = 23,54676% nominal interest rate per year b) Amortisation table

InstalmentR

InterestR

Capital R

BalanceR

Cash price Instalment 1 Instalment 2 Instalment 3 Instalment 4 Instalment 5 Instalment 6

-43 500 43 500 43 500 43 500 43 500 43 500

-21 192 18 566 15 630 12 349 8 681 4 582

- 22 308 24 934 27 870 31 151 34 819 38 918

180 000157 692 132 758 104 888 73 737 38 918

- 261 000 81 000 180 000 Nil

c) Journal entries Dr

R CrR

20.4 Jun 30

Property, plant and equipment Long-term liability – Finance lease

180 000

180 000 Finance charges

Long-term liability – Finance lease Bank

39 758 47 242

87 000 Depreciation

Accumulated depreciation 36 000

36 000 20.5

Jun 30 Finance charges Long-term liability – Finance lease Bank

27 979 59 021

87 000 Depreciation

Accumulated depreciation 36 000

36 000 20.6

Jun 30 Finance charges Long-term liability – Finance lease Bank

13 263 73 737

87 000 Depreciation

Accumulated depreciation 36 000

36 000 MARKING PLAN MarksFinance lease agreement Nominal interest rate per year 4Amortisation table 11Journal entries 20Total 35

FAC2601/201/1

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SOLUTION 25 LUXURY TRAVEL LIMITED NOTES FOR THE YEAR ENDED 31 DECEMBER 20.1 2. Profit before tax Profit before tax is stated after taking the following into account: R Depreciation [(1 600 000 + 16 000 - 200 000)/5] Interest paid on lease agreement (110 400 + 100 253)

283 200210 653

3. Property, plant and equipment R Leased assets: Limousines Additions (1 600 000 + 16 000) Depreciation

1 616 000 (283 200)

Carrying amount at 31 December 20.1 1 332 800 Cost price Accumulated depreciation

1 616 000 (283 200)

The limousines serve as security for a finance lease agreement. (Refer note 5) 4. Long-term borrowing RLong-term borrowing under finance lease agreement 744 940 Total borrowing (refer to amortisation table) Current portion payable within 12 months transferred to current liabilities (138 820 + 150 793)

1 034 553 (289 613)

The above liability is secured by a finance lease agreement over leased vehicles (refer note 4). The effective interest rate is 17,99% per annum. The loan is repayable in 8 equal bi-annual instalments of R228 050 payable in arrears, commencing on 30 June 20.1.

32

SOLUTION 25 (continued) Reconciliation between the total minimum lease payments at 31 December 20.1 and their present value: Up to 1

year R

1 - 5 years

R

Total

RAmount at statement of financial position dateFinance cost

456 100 (166 487)

912 200 (167 260)

1 368 300 (333 747)

Present value 289 613 744 940 1 034 553

228 050 x 2 = 456 100 89 230 + 77 257= 166 487 228 050 x 4= 912 200 64 251 + 50 123 + 34 777 + 18 109 = 167 260

MARKING PLAN Marks Notes to the financial statements Profit before tax notes 3 Property, plant and equipment 4 Long-term borrowing 9 Total 16

FAC2601/201/1

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SOLUTION 26 26.1 PMT = 30 000 n = 10 i = 10 FV = 0 PV = ? = R184 337 26.2 PMT = -40 000 n = 10 i = 10 PV = 0 FV = ? = R637 497 26.3 PV = 100 i = 5 ÷ 12 = 0,42 n = 12 PMT = 0 FV = ? = 105,16 - 100 = 5,16% 26.4 PV = -100 FV = 107 n = 2 PMT = 0 i = ? = 3,44 x 2 = 6,88% 26.5 PV = -1 000 FV = 3 000 n = 12 PMT = 0 i = ? = 9,59% 26.6 PV = 100 i = 18 ÷ 4 = 4,50 n = 4 PMT = 0 FV = ? = 119,25 - 100 = 19,25%

34

SOLUTION 26 (continued) 26.7 PV = -2 000 FV = 6 000 i = 18 ÷ 12 = 1,50 PMT = 0 n = ? = 73,79 months 26.8 PV = -3 000 FV = 9 435 n = 69/12 = 6,75 PMT = 0 i = ? = 18,5% 26.9 PV = 20 000 i = 18 ÷ 4 = 4,5 n = 5 x 4 = 20 PMT = 0 FV = ? = R48 234 26.10 PMT = 5 000 n = 5 i = 15 FV = 0 PV = ? = R16 761 26.11 PV = -2 500 i = 15 ÷ 12 = 1,25 FV = 2 500 x 2 = 5 000 PMT = 0 n = ? = 55,8 months 26.12 FV = 100 000 n = 10 i = 15 PV = 0 PMT = ? = R4 925,21

FAC2601/201/1

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SOLUTION 26 (continued) 26.13 Step 1 n = 3 i = 16 PV = 4 000 PMT = -1 000 FV = ? = R2 737,98 Step 2 n = 1 i = 16 PV = 2 737,98 PMT = 0 FV = ? = R3 176,06 MARKING PLAN Marks

26.1 Present value 3 26.2 Future value 3 26.3 Effective interest rate 3 26.4 Nominal interest rate 3 26.5 Interest rate 4 26.6 Effective interest rate 3 26.7 Time period 3 26.8 Interest rate 3 26.9 Future value 4 26.10 Present value 3 26.11 Time period 4 26.12 Payment 3 26.13 Future value 5

Total 44

36

SOLUTION 27 (a) FV = 0 n = 6 years i = 8% Pmt = 2 000 per year PV = ? = R9 245,76 Answer: C (b) n = 12 i = 1,5% (18%/12) PV = -100 PMT = 0 FV = ? = 119,56 ∴ = 119,56 – 100 = 19,56% Answer: B (c) n = 6,5 PV = -2 000 PMT = 0 FV = 4 178 = ? = 12% Answer: B (d) FV = -R40 000 PMT = 0 i = 4% (16%/4) n = 12 (3 x 4) PV = ? = R24 983,88 Answer: C (e) n = 3 i = 10% PV = 0 PMT = -1 000 FV = ? = R3 310 Answer: B

FAC2601/201/1

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SOLUTION 27 (continue) (f) Future value n = 18 i = 10% PV = 0 PMT = -1 200 FV = ? = R54 719, 01 Answer: B (g) n = 4 (1 X 4) i = 4% (16% ÷ 4) PV = -100 PMT = 0 FV = ? = 116,99 ∴ = 116,99 – 100 = 16,99% Answer: D MARKING PLAN Marks

27 (a) Present value 3 27 (b) Effective interest rate 4 27 (c) Interest rate 3 27 (d) Present value 4 27 (e) Future value 3 27 (f) Future value 3 27 (g) Effective interest rate 5

Total 25

38

ANNEXURE D: LEASES FRAMEWORK AND EXAMPLES

LEASES (Only Lessees)

Dear students,

It came under our attention that there is still allot confusion regarding leases. The main problems identified are the following:

1. The students can’t distinguish between the two different types of lease - Operating lease

And - Finance lease.

2. The students don’t know their theory and mix up the accounting treatment of the 2 types of leases.

We will try to make it easier with this illustration, but please also refer to your study guide and text book for further examples as this is a basic guideline to assist you.

LEASES

Finance lease Operating lease

Definition:

All substantial risks and rewards incidental to ownership of the asset are transferred to the lessee.

Definition:

All substantial risks and rewards incidental to ownership of the asset are remains with the lessor.

Accounting treatment:

- Recognise asset and lease liability at the lower of fair value of the asset or the present value of the minimum lease payments

Journal entry:

Dr Asset

Cr Lease liability

Accounting treatment:

- DO NOT recognise asset or liability

Journal entry:

NONE

FAC2601/201/1

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Accounting treatments continue...

- Depreciation must be provided for over the useful life of the asset or over the lease term if shorter than the useful life if the is uncertainty about whether ownership of the asset will be transferred at the end of the lease term

Journal entry: Dr Depreciation Cr Acc depreciation

- Monthly payment of lease instalment: Payments are apportioned between finance costs and capital. The split between capital and finance portion is calculated using a financial calculator and amortisation table (See study guide and text book for use of calculator).Finance cost are recognised as a expense in the Profit or loss statement and the Capital portion is a reduction of the liability

Journal entry:

Dr Lease liability Dr Finance costs Cr Bank

Accounting treatments continue...

- DO NOT recognises depreciation as there is no asset recognise in the accounting records of the lessee with an operating lease.

Journal entry: NONE

- Monthly payments of lease

installment: - Rent expense must be

recognized in the statement of profit or loss and other comprehensive income on a straight line basis over the lease term. Take note that the difference between the cash flows and the expense in the statement of profit or loss and other comprehensive income, results in an accrued or prepaid expense and must be disclosed in the statement of financial position. Journal entry:

Dr Lease expense (P/L) Dr/Cr Prepaid expenses (SFP)/

Accrued expense (SFP) Cr Bank

40

PLEASE TAKE NOTE: Use this as a guideline. Work through your study material and text book and add detail to this basic framework. Do the questions and refer to this basic framework.

Disclosure in financial statements of the lessee:

- Statement of financial position:

• Asset : Non-current assets

• Lease liability : Non-current liabilities

• Current portion of lease liability – Current liabilities

• Notes – Property plant and equipment , long term borrowings

Please refer to your study guide, tutorial letters and text book for detailed examples.

- Statement of profit or loss and other comprehensive income:

• Finance cost

• Notes

Disclosure in financial statements of the lessee:

- Statement of financial position:

• Current asset/liability: Accrued or prepaid expense (If applicable).

- Statement of profit or loss and other comprehensive income:

• Operating lease expense

• Notes to the financial statements

FAC2601/201/1

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EXAMPLE 1– Finance lease:

Apple Ltd entered into a lease agreement with Blackcherry Ltd on 1 January 20.0. The lease agreement is classified as a finance lease. The financial year end of Apple Ltd is 31 December.

The lease agreement has the following terms:

Term: 5 years

Instalments: R 25 000, payable annually in arrears on 31 December.

Interest rate: 12.0535% per annum

The contract determines that Apple Ltd has an option to obtain ownership of the asset at the end of the term at a nominal amount. It is, however, uncertain on initial recognition whether the option will be exercised. If Apple Ltd does not pay the instalments as agreed, Blackcherry Ltd can recover the asset. The asset has a cash selling price of R 105 000 at the commencement of the lease. At this date, the useful life is estimated at 5 years.

Required:

Account for the finance lease in the financial statements of Apple Ltd.

SOLUTION:

1. Die asset is classified as a finance lease. 2. Die asset must be recognised in the financial records of Apple Ltd as well as a finance lease

liability in the statement of financial position. 3. Depreciation must also by write down on the asset. 4. The monthly payment of the lease instalments is split between a capital and a finance cost

portion (Use a financial calculator for this). The finance costs are recognised as an expense in the statement of profit or loss and other comprehensive income and the capital position is accented for as a deduction of the lease liability. CALCULATIONS: Initial recognition on 1 January 20.0: Dr Cr Machine (SFP) 90 000 Finance lease liability (SFP) 90 000 The asset and the liability must on initial recognition be recorded at the fair value of the asset, or the present value of the minimum lease payments, if lower than the fair value. Calculation of the present value (PV): PMT = 25 000, n = 5, i = 12.0535%, FV = 0 PV = 90 000 (rounded) Fair value = R 105 000 The asset and liability must therefore be recognised initially at R 90 000.

42

Depreciation must be written of annually on the asset: The asset is recognised at R 90 000. The estimated useful life is 5 years. Therefore 90 000 / 5 = R 18 000 per year Dr

R Cr R

Depreciation (P of L) 18 000 Accumulated depreciation (SFP) 18 000 Accounting treatment once the first instalment is paid on 31 December 20.0: Dr

R Cr R

Finance lease liability (SFP) 14 152 Finance cost (P of L) 10 848 Bank (SFP) 25 000 The split between the capital and interest portion must be calculated by using a financial calculator and setting up an amortisation table. After calculating it should look like this. (Refer to the text book pg 280 for an illustration on the use of a calculator):

Year Installment Interest Capital Balance R R R R

R 90,0001 25000 R -10,848 R 14,152 R 75,8482 25000 R -9,142 R 15,858 R 59,9913 25000 R -7,231 R 17,769 R 42,2214 25000 R -5,089 R 19,911 R 22,3115 25000 R -2,689 R 22,311 R -0

Accounting treatment once the second instalment is paid on 31 December 20.1: Dr

R Cr R

Finance lease liability (SFP) 15 858 Finance costs (P of L) 9 142 Bank (SFP) 25 000

FAC2601/201/1

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DISCLOSURE: STATEMENT OF FINANCIAL POSITION AS ON 31 DECEMBER 20.0 ASSETS R Non-current assets Property plant and equipment (90 000 – 18 000) 72 000 Current assets EQUITY AND LIABILITIES EQUITY NON-CURRENT LIABILITY Finance lease liability ( 90 000 – 14 152 – 15 858) 59 990 CURRENT LIABILITY Current portion of finance lease liability ( Portion payable in the next 12 months)

15 858

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DESEMBER 20.0

R Sales xxxxxCost of sales (xxxxx)Gross profit xxxxx Expenses Other expenses xxxxxFinance cost 10 848 Notes to the financial statements:

2. Profit before tax Profit before tax is stated after taking into account the following items: R Depreciation 18 000

44

3. Property, plant and equipment

R Carrying amount beginning of the year -Cost - Accumulated depreciation - Movements: Additions 90 000 Depreciation 18 000 Carrying amount end of the year 72 000 Cost 90 000 Accumulated depreciation (18 000)

5. Long-term borrowing R Total liability under finance lease agreement 75 848 Current portion payable within 1 year (15 858) Long-term portion of finance lease liability 59 990

The above liability is secured by machinery under a finance lease agreement. The loan bears interest at a rate of 12.0535% per annum and is repayable in 5 equal instalments of R 25 000 commencing 31 December 20.0. The period of the lease is 5 years.

Reconciliation between the total of minimum lease payments at 31 December 20.0 and their present value:

Up to 1 year 1 to 5 years Total R R R Amount at statement of financial position date 25 000 75 000 100 000 Finance cost (9 142) (15 009) (24 151) Present value 15 858 59 990 75 848

FAC2601/201/1

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EXAMPLE 2 – Operating lease:

The following information is available in respect of a machine acquired by Apple Ltd from BlackCherry Ltd, in terms of an operating lease. The cash price of the machine is R 70 000. The lease term is from 1 January 20.6 to 31 December 20.8. The monthly lease payment is R 2500 for the first 24 months and thereafter R 250.

Required:

Account for the operating lease in the financial statements of Apple Ltd.

SOLUTION:

Refer to the framework for guidance.

The lease is classified as an operating lease.

1. The machine is NOT recognised as an asset in the records of Apple Ltd because it is an operating lease. Also, NO operating lease liability is recognised.

2. NO depreciation is written off on the asset as no asset was recognised. 3. ONLY the expense must be recognised in the statement of profit or loss and other

comprehensive income. Take note that the expense must be recognised on the straight-line basis. This means that if the instalments differ from year to year, it must be equalised. The difference between the cash flow and the expense in the statement of profit or loss and other comprehensive income will result in an accrued or prepaid expense that must be disclosed in the statement of financial position. Calculations:

Equalise lease instalments:

R Lease payments first 24 months (R2 500 x 24) = 60 000

Lease payments next 12 months (R250 x 12) = 3 000 6300063 000 / 36 = R 1750 per month

Annual prepayment 1 January 20.6 to 31 December 20.7:

For 12 months (R1 750 x 12) 21 000Actually paid (R2 500 x 12) 30 000Prepayment per annum 9 000

46

Shortfall 1 January 20.8 to 31 December 20.8:

For 12 months ( 1 750 x 12)

R 21 000

Actually paid (250 x 12) 3 000Shortfall 18 000

JOURNALS:

Year ended 31 December 20.6 Dr Cr R R Operating lease expense (P or L ) 21 000 Prepayment (SFP) 9 000 Bank (SFP) 30 000 Year ended 31 December 20.7 Operating lease expense (P or L ) 21 000 Prepayment (SFP) 9 000 Bank (SFP) 30 000 Year ended 31 December 20.8 Operating lease expense (P or L ) 21 000 Bank (SFP) 3 000 Prepayment (SFP) 18 000

DISCLOSURE:

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.6

R Sales xxxxxCost of sales (xxxxx)Gross profit xxxxx Expenses Other expenses ( Operating lease expense are included here) 21 000

FAC2601/201/1

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Notes to the financial statements:

Profit before tax

1. Profit before tax is disclosed after the following items are taken into account:

R Operating lease expense on machinery 21 000Paid for the year 30 000Prepayment (9 000)

2. Operating lease obligations

The total of the future minimum lease payments covers the following periods:

R Not later than 1 year ( 2500 x 12) 30 000Later than 1 year but not later than 5 years ( 250 x 12) 3 000Later than 5 years -

Note that the actual cash amounts paid and not the equalised amounts are used in note 2.

STATEMENT OF FINANCIAL POSITION AS ON 31 DECEMBER 20.6

R ASSETS Non-current assets Property, plant and equipment xxxxxx Current assets Prepaid expense 9 000

FAC2601_2012_TL_201_1_E.doc