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Study Guide - TL 501 2021
Elementary Financial Accounting and Reporting (University of South Africa)
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FAC1602/501/3/2021
Tutorial Letter 501/3/2021
FAC1602
Elementary Financial Accounting and
Reporting
Semesters 1 & 2
Department of Financial Accounting
BARCODE
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FAC1602/501/3/2021
© 2021 University of South Africa
All rights reserved
Printed and published by the
University of South Africa
Muckleneuk, Pretoria
FAC1602/3/2021
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CONTENTS
Introduction and overview of the module ...........................................................
ii
LEARNING UNIT 1
Introduction to the preparation of financial statements ...........................
1
LEARNING UNIT 2
Financial statements of a sole proprietorship .........................................
24
LEARNING UNIT 3
Establishment and financial statements of a partnership .......................
46
LEARNING UNIT 4
Changes in the ownership structure of partnerships ..............................
69
LEARNING UNIT 5
Close corporations ...................................................................................
86
LEARNING UNIT 6
Statement of cash flows ..........................................................................
129
LEARNING UNIT 7
Branches ..................................................................................................
155
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Introduction and overview of the module
1.
Word of welcome
Dear Student
We are pleased to welcome you to this module and hope that you will find the content both
interesting and rewarding. We shall do our best to assist you to master this module and we
recommend that you start studying immediately after enrolment. Accounting is a subject that
requires continued exercise by working through many examples and you will be required to
work continually throughout the semester.
First-year accounting at UNISA consists of the following modules, namely FAC1502 and
FAC1601 or FAC1602. If you aim to become a chartered accountant (CA) or plan to include
second- and third-year Financial Accounting modules in your degree, the FAC1601 module is
compulsory. The same applies to other qualifications where second- and third-year Financial
Accounting is required. Completing FAC1502 and FAC1601 successfully, will allow you to
enrol for the second-year modules FAC2601 and FAC2602. If your focus is certain diplomas
and other Bachelor of Commerce degrees where you only need first-year Financial
Accounting, we recommend that you enrol for the FAC1602 module. However, ensure that
FAC2601 and FAC2602 are not included in your degree’s curriculum as only the FAC1601
allows access to further studies in Financial Accounting.
2.
Overview of FAC1602 and assumed knowledge from FAC1502
FAC1602 concerns itself with the issues of accounting reporting for different entities and builds
on the learning outcomes of FAC1502. You will remember that in FAC1502 the following topics
were covered:
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Basic principles of accounting
FAC1502
Including the nature of accounting, financial position and performance,
double entry and the accounting process
Collecting and processing accounting data
Including the processing of data and adjustments, closing-off
procedures and preparing financial statements
Accounting for current and non-current assets
Including cash and cash equivalents, trade and other receivables,
inventory, property, plant and equipment, and other non-current assets
Accounting for current and non-current liabilities
Accounting reporting
Including the financial statements of a sole proprietor, non-profit entities
and incomplete records
FAC1502 taught the basic bookkeeping functions and introduced you to the concepts,
principles and procedures of accounting. It is important to realise that FAC1502 forms the
foundation for all other financial accounting modules. The knowledge that you gained in
FAC1502 forms the building block of this module and cannot be repeated. If you need to
refresh your memory on these concepts, please refer to your FAC1502 guide and other
supplementary learning material for that module.
Although the aim is not to provide an exhaustive list of concepts dealt with in FAC1502, we
provide you with a summary of the most important ones to enable you to refer with ease:
•
•
Value-added tax (VAT) – section 5.10 in the FAC1502 guide and section 5.4 in the
textbook. Remember that the input and output VAT accounts are closed off to a VAT
control account which can be either a debtor (if VAT input is greater than VAT output for
the period) or a creditor (when VAT output is greater than VAT input for the period). In
this module, we refer to the VAT debtor account as VAT receivable and the VAT creditor
account as VAT payable.
The recording of depreciation – section 6.3 and section 11.5 – 7 in the FAC1502 guide
and section 11.7 in the textbook. Familiarise yourself with the reason for depreciation,
the journal entries to provide for depreciation and the different methods that can be used
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•
•
•
•
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to calculate depreciation. These methods are the diminishing-balance, the straight-line
and the production unit method. Remember that the useful life of an asset is an
estimation that must be reviewed annually, and the depreciable amount is reduced with
the residual value or scrapping value of the asset.
Credit losses and allowances for credit losses – section 9.5 in the FAC1502 guide and
section 9.4–9.6 in the textbook. Refresh your memory on the journal entries to write off
credit losses as well as to create, increase or reduce an allowance for credit losses. Also
refer to section 9.8 in the textbook where the VAT on credit losses is discussed and how
to journalise the VAT amount when credit losses are written off. Remember that when
credit losses previously written off are recovered, that a VAT output must again be
accounted for.
Settlement discount granted and allowance for settlement discount granted – section
5.9 and 9.2 – 9.3 in the FAC1502 guide and section 9.3 in the textbook. Remember that
settlement discount granted reduces sales in financial statements. Refresh your memory
on the VAT implications that arose with settlement discount granted and how to account
for VAT on settlement discounted granted in the journals of first entry.
Settlement discount received – section 5.9 in the FAC1502 guide and section13.6 in the
textbook. Remember that settlement discount received reduces purchases in financial
statements. The same VAT implications as for settlement discount granted are
applicable and you need to refresh your memory on the treatment of settlement discount
received in the journals of first entry.
Inventory systems – section 7.4 in the FAC1502 guide. Remember that an entity can
either use a perpetual (continuous) inventory system or a periodic inventory system.
When a perpetual inventory system is used, the cost of sales is determined for every
transaction and the inventory account reflects the purchases and sales of inventory
items. Under this inventory system, a purchase journal and purchase returns journal are
not used, and a physical inventory count will disclose shortages or surpluses in
inventory. When a periodic inventory system is used, purchases and purchases returns
journals are used. Accounts are closed off to a trading account. The trading account is
used to calculate cost of sales as no cost of sales account is kept and a physical
inventory count is essential to establish the closing inventory.
Inventory valuation – please familiarise yourself with the calculation of the cost of
inventory, which includes the cost of purchases, conversion costs and other cost. The
cost of purchases includes the purchase price, import duties, non-recoverable taxes,
transportation costs and handling costs. The cost of purchases must be reduced by
trade discounts, settlement discounts and rebates on purchases. Conversion costs
include, for example, direct labour cost, variable production overhead costs and fixed
overhead cost based on production at normal capacity. Other cost could include, for
example, designing and storage costs. Refresh your memory on the different inventory
valuation methods such as first-in-first-out (FIFO) and weighted average that were
covered in FAC1502. Remember that inventory is valued in the financial statements at
the lower of cost or net realisable value (NRV). The NRV is the selling price less the cost
to make the sale and these costs can include inventory completion costs, trade and
other discounts allowed, advertising cost, sales commission, packaging costs and
transport costs.
Assuming that your abovementioned knowledge is refreshed and sufficient, we can now
discuss the module objective and content of FAC1602 .
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3.
Module objective of FAC1602
The main objective of this module is to teach you certain aspects of financial accounting and
reporting so that you are able to do the following:
•
•
•
•
•
Discuss specified aspects of the Conceptual Framework for the preparation and
presentation of financial statements.
Understand and apply the concept of International Financial Reporting Standards (IFRS).
Prepare the financial statements for sole proprietors, partnerships and close corporations
according to certain of the requirements of International Accounting Standards 1 (IAS 1).
Apply the accounting procedures to record changes in the ownership structure of
partnerships on the admittance, retirement or death of partners.
Prepare statements of cash flows for sole proprietors, partnerships and close corporations
according to the requirements of International Accounting Standard 7 (IAS 7). In this
course only, the direct method is prescribed and dealt with.
The FAC1602 module content is illustrated in the following diagram:
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Learning Unit 1
FAC1602 + applied knowledge from FAC1502
Introduction to the preparation of financial statements
Learning Unit 2
Financial statements of a sole proprietorship
Learning Unit 3
Establishment and financial statements of a partnership
Learning Unit 4
Change in the ownership structure of partnerships
Learning Unit 5
Close corporations
Learning Unit 6
Statement of cash flows
Learning Unit 7
Branches
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4.
Using this Tutorial Letter (TL501), Tutorial Letter 101 (TL101) and the
prescribed textbook
This tutorial letter and the prescribed textbook, About Financial Accounting Volume 2, are the
primary sources of learning content for this module. The prescribed textbook contains a major
part of the learning content and must be used according to the directives given in this tutorial
letter. For example, the guide will indicate that certain sections in the prescribed textbook need
only be read, whereas other sections must be studied thoroughly. Such references usually
include action words. In this regard, the following action words should be interpreted as
follows:
ACTION
Read
WORD
Read to obtain broad and basic background knowledge of the subject
under discussion. You must read attentively so that theory/explanations
are clearly understood. You may be assessed on the theory by means
of short questions in activities and assignments.
Study
Learn with a view to gaining the highest level of understanding that is
necessary to solve problems in exercises, assignments and in the
examination. This level of knowledge will also be necessary for further
studies in financial accounting and/or your career. You will never be
required to give a definition of a concept or to discuss theory in the
examination. You will, however, be required to apply the theory in the
correct accounting format and to apply the correct steps/procedures.
For example, the layout and terminology to be used in the preparation
of financial statements are prescribed by the International Accounting
Standards. You may not use any other format.
Each learning unit starts with several learning outcomes, which will direct your learning. The
learning outcomes indicate what is expected of you to understand, know, calculate, disclose
and apply and will help you to structure your learning. In each learning unit, keywords or key
concepts are provided and should give you an indication of the issues that are being dealt
with in the learning content. Activities, examples and exercises will get you involved in the
content of the learning unit. These are designed to find out if you have the necessary assumed
knowledge, understand the work and can apply new knowledge gained. Activities can be in
the form of theory questions, multiple-choice questions, calculations, journal entries or true or
false questions, whereas examples and exercises are detailed questions dealing with the
learning content. Exercises are indicative of the types of questions that can be expected in
assignments and in the examinations. Activities, examples and exercises imply “doing”. They
help you to cover the content of the module systematically. For you to become an active
learner, you should first do the activity, example and exercise before referring to the feedback
and solutions.
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The following icons are used in this tutorial letter to refer to the above-mentioned concepts:
ICON
DESCRIPTION
Learning outcomes. This icon indicates which aspects
of the particular topic you must master and show that
you understand.
Key concepts. The learning content will address the
following issues.
Activity. This icon indicates activities that you must do
to develop a deeper understanding of the learning
material.
Self-assessment. This icon indicates that you will be
required to test your knowledge, understanding and
application of the material you have just studied.
Feedback. This icon indicates that you will receive
feedback on your answers to the activities.
Read. If you are required to read a certain section, you
should take note of the contents because that section
will contain useful background information or offer
another perspective of further examples.
Study. This icon indicates which aspects of the study
material you need to study and internalise.
Time-out. Well done – you have completed the learning
unit!
To indicate the length, scope and format of answers to questions, action verbs are deliberately
applied. An analysis of the action verbs in a question should enable you to:
•
•
plan the answer systematically
ensure that you comply with the lecturer’s/examiner’s requirements
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A clear understanding of the meaning of certain words is required. For the purpose of this
module, the following interpretations are given:
Adjust
WORD
INTERPRETATION
To adapt to new conditions/environment; to put in order; add,
change
Apply
Use in a practical manner; use as relevant or suitable
Calculate
Ascertain by mathematical procedure/exact reckoning
Clarify
Make clear the meaning of; explain the intention of; show by
reasoning/evidence
Compare
Examine to observe resemblances, relationships and differences
Complete
Finish/add what is required; show the necessary detail
Define
State precisely the meaning/scope/total character of; make clear
(especially the outline of); give a concise description of the
distinguishing features of
Describe
Give clearly the distinguishing details or essential characteristics of
Discuss
Examine by argument, debate, hold conversation about
Explain
Set out in detail (interpret); give the meaning of or account for
something; make something understandable
List
Record/itemise names or things belonging to a class
Mention/name/state
Specify by name; cite names, characteristics, items, elements of
facts
Prepare
Make ready/complete for a particular purpose; to put together using
parts; compose, construct. Compile or complete what is required on
the basis of prior knowledge
Reconcile
To make or become visible, noticeable; to exhibit or present; to
indicate
Record
Put in writing; set down for reference or retention
Show
To make compatible or consistent with each other
At the end of each learning unit, there is an elementary self-assessment questionnaire,
which you must complete to evaluate your knowledge of the learning content of each learning
unit and to monitor your progress. These questionnaires are presented in the form of questions
to which you must answer either “yes” or “no”. If you have answered “yes” to all the questions,
you may proceed to the next learning unit. If you have any “no” answers, you must study that
particular section of the work again. Since a clear understanding of certain aspects in a
learning unit may be essential for your further understanding of the course, you are advised
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not to go on to the next learning unit until you have resolved all your problems in the preceding
one.
Before you start studying, please read the discussion section in Tutorial Letter 101. Apart from
details on the prescribed textbook, this tutorial letter contains valuable guidelines on how to
go about studying this module, as well as suggested time specifications pertaining to each
learning unit to ensure that you cover the whole syllabus in time. It also provides you with the
contact and communication details of your lecturers for the FAC1602 module.
5.
Calculations and cash transactions
It is very important that you show all your calculations in your answers to exercises and
questions. In this tutorial letter and the prescribed textbook, short calculations are disclosed
in brackets after an entry in a journal, ledger account or financial statement. Note that these
calculations do not form part of the actual accounting disclosures. They are disclosed as such
for practical illustrative purposes only. Calculations that are more elaborate are referred to by
encircled symbols, for example “➀”. Sub-calculations are referred to by shaded encircled
symbols, for example “❶”. You may follow the same or a similar approach when preparing
your answers in assignments and examinations.
You should be aware that the books of first entry in respect of cash transactions are the cash
receipts journal and the cash payments journal as taught in FAC1502. However, to simplify
matters in this module, cash transactions, where required, are disclosed in the general journal.
6.
Feedback request
If there is anything discussed in the prescribed textbook or this tutorial letter which in your
opinion needs to be explained in more detail or in a different fashion, please notify us
accordingly by post or e-mail. The postal and e-mail addresses of this module are provided in
Tutorial Letter 101.
We trust that you will enjoy this module and wish you all the best!
Lecturers
FAC1602: Elementary Financial Accounting and Reporting
“It is difficult to say what is impossible,
for the dream of yesterday is the hope of today
and reality of tomorrow.”
Robert Goddard
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LEARNING UNIT
1
1
Introduction to the preparation of financial statements
Learning outcomes .................................................................................................................. 2
Key concepts............................................................................................................................ 3
1.1
Introduction ..................................................................................................................... 4
1.2
Conceptual framework for financial reporting ................................................................ 5
1.3
Applicable International Financial Reporting Standards .............................................. 10
1.4
Presentation of financial statements: IAS 1 ................................................................. 10
1.5
Financial instruments ................................................................................................... 14
1.6
Practical applications of IAS 1 and financial instruments ............................................ 17
1.7
Exercises and solutions................................................................................................ 17
Self-assessment .................................................................................................................... 22
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Learning outcomes
After studying this learning unit, you should be able to:
•
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explain the acronyms IFRS, IAS, APB, FRSC and SAICA, and know what they entail
describe what the concept "Conceptual Framework" entails
list the specific purposes of the Conceptual Framework regarding the preparation
and presentation of financial statements
explain the main objectives of financial statements per the Conceptual Framework
explain the underlying assumption when preparing financial statements per the
Conceptual Framework
discuss the qualitative characteristics of financial statements per the Conceptual
Framework
explain what the Conceptual Framework implies when it refers to the constraints in
preparing financial statements
discuss the elements of financial statements as explained in the Conceptual Framework
and indicate which elements pertain to the statement of financial position and which to
the statement of profit or loss and other comprehensive income
discuss the concepts of recognition and disclosure of the elements incorporated in
financial statements, as explained in the Conceptual Framework
explain what is meant by the measurement of the elements of financial statements by
referring to the measurement methods discussed in the Conceptual Framework
explain what type of business ownership must comply with IFRS
define each of the following terms per IAS 1:
− fair presentation
− going concern
− accrual basis of accounting
− materiality and aggregation
− offsetting
− frequency of reporting
− comparative information
− consistency of presentation
list the individual statements that, per IAS 1, together form the complete set of
financial statements of a reporting entity
explain what is meant by the identification of financial statements
explain what is meant by reporting period
explain which items comprise current assets and current liabilities per IAS 1
list the items that must be presented on the face of the Statement of Financial Position
and the Statement of Profit or Loss and Other Comprehensive Income respectively by
referring to IAS 1
list the items that can be presented on either the face of the Statement of Financial
Position and the Statement of Profit or Loss and Other Comprehensive Income or in the
notes to these statements for the particular reporting period per IAS 1
discuss the purpose of notes, by referring to IAS 1
discuss, according to IAS 1, the order in which items are disclosed as notes to financial
statements
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•
•
•
explain or define the following:
− a financial instrument
− a financial asset
− a financial liability
− fair value
− a contract
distinguish between financial instruments, financial assets and financial liabilities
recognise, measure and present certain financial assets and liabilities in the financial
statements
Key concepts
•
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•
Conceptual Framework
Underlying assumption
Qualitative characteristics
Components of financial statements
Elements of financial statements
Recognition
Measurement of elements
Capital
Capital maintenance
Reporting period
Financial instruments
Financial assets
Financial liabilities
Fair value
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1.1
Introduction
In FAC1502, we learnt that every business entity usually uses some accounting system to
collect financial data from a multitude of financial transactions. The entity then uses the data
and processed information about the entity’s financial performance and financial position to
present the information in a usable format (e.g. financial statements, budgets) that will assist
the users to make economically viable decisions. Remember that the accounting system
covered in FAC1502 forms the foundation for reporting the information to users. In the
introduction to this learning unit, we will briefly explain the regulatory framework applicable to
financial reporting in South Africa and give you an overview of why financial statements must
comply with certain requirements and who is responsible for issuing and overseeing
compliance with the regulatory framework.
To have financial information available that is meaningful and comparable across different
types of entities in countries around the world, the quest became to develop a set of
prescriptive standards that will provide guidance and prescribe certain principles that can be
used to prepare financial statements. Most countries established governing bodies with a
mandate to develop these standards. One of the many governing bodies mandated to embark
on this quest was the Accounting Practices Board (APB), which was established in South
Africa in 1973. The APB issued accounting standards which were collectively known as South
African Statements of Generally Accepted Accounting Practice or SA GAAP. All listed and
unlisted companies in South Africa were required to use SA GAAP as their reporting
framework when preparing financial statements.
In the 1990s, the APB decided to incorporate South Africa into the international accounting
standards arena and to harmonise SA GAAP with the standards issued by the International
Accounting Standards Board (IASB) and its predecessor. The predecessor of the IASB issued
International Accounting Standards (IASs) from 1973 until 2001, when the IASB was
established. These IASs are now designated as part of International Financial Reporting
Standards (IFRS), as these international standards are currently called. As from
January 2005, the Johannesburg Stock Exchange (JSE) requires all listed companies to
comply with IFRS. The Companies Act 71 of 2008 that came into effect in May 2011
established a body known as the Financial Reporting Standards Council (FRSC), which is
now the South African governmental accounting standard-setting body. The South African
Institute of Chartered Accountants (SAICA) serves as the technical advisor to the FRSC.
Because of the high regard of the usefulness of these standards to prepare financial
statements that are usable and comparable across countries, it became common practice to
also apply these statements, either in full or to a limited extent, when preparing the financial
statements of entities other than companies. IFRS deal with identification, recognition,
measurement, presentation and disclosure requirements in general-purpose financial
statements. These financial standards are directed at a wide range of users, such as
investors, shareholders, creditors, banks, the South Africa Revenue Service (SARS),
employees and other interest parties. There are currently two reporting frameworks available,
namely full IFRS or IFRS for SMEs.
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You can read more on the regulatory reporting framework and which companies
must comply with either full IFRS or IFRS for SMEs in section 1.3 in the
prescribed textbook.
FAC1502 introduced you to the Conceptual Framework, which is also the starting point of this
learning unit.
1.2
Conceptual framework for financial reporting
1.2.1 Introduction
The Conceptual Framework for Financial Reporting was issued by the International
Accounting Standards Board (IASB). This document contains a group of interrelated
objectives and theoretical principles that serve as a frame of reference for financial accounting
and, more specifically, financial reporting. As the content of the Conceptual Framework is
discussed in sufficient detail in the prescribed textbook of this module, it is unnecessary to
obtain a copy thereof.
Read paragraph 1.3.1 and 1.3.2 in the prescribed textbook. Take note of the
overview of the conceptual framework diagram which will help you to place the
content of the Conceptual Framework into perspective.
Activity 1.1
a)
Describe in your own words what you perceive a framework to be.
b)
Describe the purpose of the Conceptual Framework. Would you say that the
Conceptual Framework is similar to an IFRS?
Feedback 1.1
a)
A framework serves as a reference for an area of enquiry and often provides the
theoretical background to test practical problems. The financial accounting
framework is a set of theoretical concepts and principles, which forms the basis for
establishing and developing reporting practices.
b)
The purpose of the Conceptual Framework, inter alia, is to assist
• in the development of future standards
• in harmonising legislation and reducing the number of alternative accounting
treatments
• users in interpreting the information in financial statements when compiled
according to IFRS
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The Conceptual Framework is not an IFRS and does not override any particular
disclosure or measurement requirement in any IFRS. It is the foundation on which
principle-based IFRS is founded.
1.2.2 Objective of general-purpose financial reporting
The objective of general-purpose reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. These decisions involve buying,
selling or holding equity and debt instruments, and providing or settling loans and other forms
of credit. Potential and existing investors are interested in the returns they expect, while
creditors and other lenders are interested in principal repayments and interest payments they
expect.
Read paragraph 1.3.3 in the prescribed textbook.
Activity 1.2
Who do you think are the users of financial statements? Name a few.
Feedback 1.2
The primary users of financial statements are present and potential investors of the entity,
lenders, customers and creditors. Other users include the owners/shareholders of the entity,
trade unions (for collective bargaining), entity’s management, Government and its agencies,
such as the South African Revenue Service (SARS) and the public.
1.2.3 Qualitative characteristics of useful financial information
Study paragraph 1.3.4 in the prescribed textbook.
You must be able to explain in your own words what each qualitative characteristic entails.
Activity 1.3
a)
b)
Name the fundamental and enhancing qualitative characteristics of financial reporting
as stipulated in the Conceptual Framework.
Should one report all matters, irrespective of the cost of reporting?
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Feedback 1.3
a)
Fundamental qualitative
characteristics
Enhancing qualitative
characteristics
1. Relevance
2. Faithful representation
b)
1. Comparability
2. Verifiability
3. Timeliness
4. Understandabilit y
The cost of providing reporting information must be justified by the benefits derived from the
information.
1.2.4 Financial statements and reporting entity
The general purpose of financial statements is discussed in paragraph 1.3.5 in
the prescribed textbook. Study this section diligently.
1.2.5 Elements of financial statements
Study paragraph 1.3.6 in the prescribed textbook.
Elements that pertain to the statement of financial position are assets, liabilities and equity,
whilst elements that pertain to the statement of profit or loss and other comprehensive income
are income and expenses. You must learn the definitions of these elements by heart as you
will have to apply the definitions to establish whether a transaction results in the creation of
an asset, liability, equity, income or an expense.
The value of a reporting entity lies in the net assets (assets minus liabilities) under its control.
It is therefore important to realise that assets can be recognised in the statement of financial
position even though the entity may not be the legal owner thereof.
Activity 1.4
Define an asset, a liability and equity according to the Conceptual Framework.
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Feedback 1.4
An asset is:
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a present economic resource
controlled by a reporting entity
as a result of past events.
A liability is:
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a present obligation of a reporting entity
to transfer and economic resource
as a result of past events.
Equity is the residual interest in the assets of the entity after deducting all the liabilities.
Remember to also learn the definition of an income and expense as they are defined in
paragraph 1.2.6.3 in the prescribed textbook. Income encompasses revenue and gains, and
it is important to understand the difference between revenue and gains and give examples.
Revenue and gains are normally separately reported. Expenses, on the other hand, also
encompass losses, which are also normally separately reported.
1.2.6 Recognition of the elements of financial statements
Study paragraph 1.3.7 in the prescribed textbook.
Before an item can be disclosed in a financial statement, it must first be recognised. However,
all recognised items need not be disclosed. Take note of when an element of the financial
statements should be recognised and what the criteria for the recognition of each element are.
Activity 1.5
When will an asset, liability, income and expenses elements be recognised in the appropriate
financial statement?
Feedback 1.5
An asset or liability is recognised in the statement of financial position only if that asset or
liability, and of any resulting income, expenses or changes in equity, provide the users of the
financial statements with useful information. Useful information, in turn, must be relevant and
faithfully represented.
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1.2.7
Measurement of the elements of financial statements
“Measurement” means the process of determining the monetary value (amounts) at which the
elements of the financial statements are to be recognised and disclosed. Two bases of
measurement are listed in the Conceptual Framework, namely (1) historical costs and
(2) current value.
Study historical cost and current value carefully as these are the two bases you will encounter
the most in this module. Financial instruments, which you will encounter later in this learning
unit, are mainly measured at fair value whereas property, plant and equipment are often
measured at historical cost less accumulated depreciation and impairment, unless entities
choose to incorporate a revaluation model which will allow these assets to be revalued to more
recent values. Revaluations are covered in more detail in advanced accounting studies.
Both these measurement bases are explained in paragraph 1.3.8 in the
prescribed textbook. Make sure that you can describe each in your own words.
Activity 1.6
Name five measurement bases that are often encountered in a set of financial statements.
Feedback 1.6
Historical cost, realisable value, current cost, present value and fair value.
1.2.8
Presentation and disclosure
Presentation and disclosure requirements are discussed in paragraph 1.3.9 in
the prescribed textbook. Make sure that you gain a good grasp of each of these
requirements.
Activity 1.7
When is information effectively communicated in the financial statements?
Feedback 1.7
Information is effectively communicated in the financial statements when it …
•
•
•
focuses on presentation and disclosure objectives and principles
classifies information in a manner that groups similar items and separates dissimilar items
aggregates information in such a way that it is not obscured by unnecessary detail.
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1.2.9
Concepts of capital and capital maintenance
The selection of a measurement basis and the concepts of capital and capital maintenance
determine the model according to which financial statements are prepared. There are two
basic concepts of capital and capital maintenance, namely (1) the financial concept and (2)
the physical concept.
The financial concept of capital is synonymous with the net assets or equity of a business
entity. The physical concept pertains to the productive capacity of the entity, for example the
units of production per day.
Read paragraph 1.3.10 in the prescribed textbook.
1.3
Applicable International Financial Reporting Standards
IFRS must be applied when the financial statements of entities that are incorporated under
the Companies Act No 71 of 2008 (hereinafter referred to as the Companies Act) are prepared.
The fact that such compliance is not required by any other form of business ownership does
not mean that the requirements of these statements cannot be applied when the financial
statements of business entities other than companies are prepared. In the remainder of your
accounting studies, IFRS are taught and applied to all types of reporting entities.
The remainder of this learning unit deals with some important IFRS issued to assist us to
present financial statements in a useful and comparable way, namely IAS 1, IFRS 7 and 9
and IAS 32 and 39. In IAS 1, many of the concepts that you have encountered in the
Conceptual Framework are enforced, for example the purpose of general purpose financial
statements, the users thereof, the elements of financial statements and the underlying
principle of going concern. Although you will encounter financial instruments (IFRS 7 and 9
and IAS 32 and 39) in more advanced accounting studies, this learning unit introduces the
concept and the main definitions. The aim is to lay a foundation as all entities encounter
financial instruments in some form and must include them in their respective financial
statements. Ensure that your foundation on financial instruments, as presented in this learning
unit, is solid and that you know and understand the content as presented in the textbook and
this learning unit.
1.4
Presentation of financial statements: IAS 1
Read the overview of the presentation of financial statements (IAS 1) in
paragraph 1.4 in the prescribed textbook.
1.4.1
Introduction
The objective of IAS 1 is to prescribe the basis for the presentation of general-purpose
financial statements to ensure comparability with:
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•
•
an entity's financial statements of previous financial periods
the financial statements of other comparable entities.
Read paragraph 1.4.1 in the prescribed textbook to learn more about the
objective and purpose of IAS 1.
1.4.2 Definitions
Certain accounting terms are defined in IAS 1 and listed in paragraph 1.4.2 in the prescribed
textbook.
Study the definitions in paragraph 1.4.2 in the prescribed textbook.
Activity 1.8
Make a list of the new definitions that you will encounter in IAS 1. You don’t have to define
them for this activity.
Feedback 1.8
•
•
•
•
•
•
•
General-purpose financial statements
Impracticable
Material omissions
Notes
Owners
Profit or loss
Other and total comprehensive income
1.4.3
The purpose of financial statements
The main purpose of financial statements is to provide useful information to the users thereof.
To achieve this purpose, financial statements must provide information about each of the
elements listed in the Conceptual Framework in a specific format.
1.4.4
General features
You have already encountered some of the overall considerations when preparing financial
statements in the Conceptual Framework, such as going concern, materiality, comparability
and consistency. Make sure that you understand additional ones such as fair presentation,
accrual basis, offsetting and the frequency of reporting.
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Study paragraph 1.4.4 in the prescribed textbook.
1.4.5
Structure and content of financial statements
Structure and content have to do with the format in which financial statements must be
presented and with the items that must be disclosed. Structure and content are essential
aspects that pertain to the preparation of financial statements and you must study them
carefully.
Read paragraph 1.4.5.1 in the prescribed textbook.
1.4.5.1 Identification of financial statements
Each financial statement and its component(s) must be identified by giving it a name that
pertains to its particular function.
Study paragraph 1.4.5.2 in the prescribed textbook.
1.4.5.2 Statement of financial position
Remember that the purpose of a statement of financial position is to report on the financial
position of an entity. It consists of three elements, namely assets, liabilities and equity. In this
paragraph, the minimum line items that must be included in a statement of financial position
are listed. Study them by heart. The classification of assets into non-current and current
assets, and of liabilities into non-current and current liabilities, is highlighted. Make sure that
you know when assets or liabilities must be classified as “current”.
You will also learn which information must be presented:
•
•
on the face of a statement of financial position
either on the face or in the notes to the statement of financial position. Further subclassification of the main line items is normally presented in notes.
Study paragraph 1.4.5.3 in the prescribed textbook.
1.4.5.3 Statement of profit or loss and other comprehensive income
Study paragraph 1.4.5.4 in the prescribed textbook.
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A statement of profit or loss and other comprehensive income provide information about the
results of its operations. In simple terms, it shows whether the entity made a profit or loss on
its operating activities during a financial period.
In this section, the line items which must be presented on the face of the statement of profit
or loss and other comprehensive income, and which can be presented either on the face of
the statement of profit or loss and other comprehensive income or in the notes are presented.
Note that for the purpose of this module, expenses are disclosed in a statement of profit or
loss and other comprehensive income according to their function, and that IAS 1 requires
certain minimum disclosures when this method is applied.
1.4.5.4 Statement of changes in equity
A statement of changes in equity is a statement of changes in the capital structure of an entity
and shows the movement in equity (ownership) between two reporting periods. Information
can again be presented (disclosed) either on the face or in the notes to a statement of changes
in equity.
Study paragraph 1.4.5.5 in the prescribed textbook.
Note that the format of the statement of changes in equity depends on the type of business
ownership for which it is prepared. Also note that if this statement is prepared for a close
corporation, the name of the statement is shown as: "Statement of changes in net investment
of members". The learning unit on close corporations will discuss this statement in greater
detail.
1.4.5.5 Statement of cash flows
Although a statement of cash flows is a financial statement, we discuss it separately in a later
learning unit in this module.
Read paragraph 1.4.5.6 in the prescribed textbook.
1.4.5.6 Notes
•
•
Notes represent information about the basis of preparation and the accounting policies
that an entity subscribe to in the preparation of financial statements. Usually an affirmation
that the financial statements were prepared according to the requirements of IFRS is
given as well as a list and description of the significant accounting policies adapted in the
preparation of the financial statements.
Notes also disclose information prescribed by other IFRS that is not presented elsewhere
and is relevant to an understanding of the different IFRS.
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Read paragraph 1.4.5.7 in the prescribed textbook.
Please take note that a calculation, for example the calculation of depreciation, is NOT a note
to a financial statement and must not be indicated as such.
Activity 1.9
When are assets regarded as being current in nature and when are liabilities regarded as
being current in nature per IAS 1?
Feedback 1.9
An asset is classified as current when it satisfies any of the following criteria:
•
•
•
•
It is expected to be realised, or intended for sale or consumption, in the entity's normal
operating cycle.
It is held primarily for trade.
It is expected to be realised within 12 months after the statement of financial position date.
It is cash or a cash equivalent unless it is restricted from being exchanged or used to
settle a liability for at least 12 months after the statement of financial position date.
A liability is classified as current when it satisfies any of the following criteria:
•
•
•
It is expected to be settled in the entity's normal operating cycle.
It is held primarily for the purpose of being traded.
It is due to be settled within 12 months after the statement of financial position date.
1.5
Financial instruments
Read the overview of financial instruments in paragraph 1.5 in the prescribed
textbook.
Read paragraph 1.5.1 in the prescribed textbook to learn more about the reason
why financial instruments are dealt with and which standards were issued to
cover this important topic.
1.5.1
Definitions
Study paragraph 1.5.2 in prescribed textbook, where various definitions
applicable to financial instruments are discussed.
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Activity 1.10
Make a list of the definitions that you will encounter in dealing with financial instruments. You
don’t have to define them for purposes of this activity.
Feedback 1.10
•
•
•
•
•
Financial asset
Financial liability
Equity instrument
Fair value
Contract
1.5.2 Identification of financial assets and liabilities
Read paragraph 1.5.3 in the prescribed textbook, where the different financial
assets and liabilities that you will encounter in first-level accounting are
discussed.
Activity 1.11
Classify the following financial statement line items as financial assets, financial liabilities or
other (indicate if it is a non-current assets/liability or a current asset/liability):
•
•
•
•
•
•
•
•
•
•
•
Cash deposit with a bank or in a stokvel
Inventory
Trade receivable accounts
Trade payable accounts
Loans receivable
Bank overdraft
Property plant and equipment
Trademark, for example Apple or Dell
Prepaid rent
Income received in advance
VAT payable
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Feedback 1.11
Financial assets
Financial Liabilities
Other
• Cash deposit with a
bank
• Trade payable
accounts
•
Inventory – current asset
•
• Trade receivable
accounts
• Bank overdraft
Property plant and equipment –
non-current asset
•
Trademark, for example Apple
or Dell – non-current asset
•
Prepaid rent – current asset
•
Income received in advance –
current liability
• Loans receivable
•
1.5.3
VAT payable – current liability
Classification, recognition and measurement of financial assets and
financial liabilities
Read paragraph 1.5.4.1 to 1.5.4.4 in the prescribed textbook.
Financial assets are classified as:
• financial assets at fair value through profit or loss
• financial assets at amortised cost
• equity investments at fair value through other comprehensive income.
Financial assets that are not equity instruments are measured at initial recognition and
subsequently at either fair value or amortised costs, depending on the abovementioned
classification. You must be able to identify which financial assets are measured at amortised
cost and which at fair value. If the financial asset is an equity instrument and it is held for
trading, it must be measured at fair value through profit or loss.
Financial liabilities are classified as:
• financial liabilities at fair value through profit or loss (not in the syllabus for first-level
accounting)
• financial liabilities at amortised cost
You must be able to name financial liabilities that are measured at amortised cost.
Study the overview of financial instruments to determine when transactions
costs must form part of a financial asset /liability (capitalised) and when it must
be expensed.
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Activity 1.12
Work through example 1.1 in the prescribed textbook.
Before we get to more advanced examples and solutions, the practical application of IAS 1
and financial instruments must be studied.
1.6
An illustration of disclosure according to the requirements of
IAS 1 and IFRS 9
In paragraph 1.6 in the prescribed textbook, the theory discussed in this learning unit is applied
in the preparation and presentation of financial statements.
Study the example in paragraph 1.6 in the prescribed textbook.
Read paragraphs 1.7 and 1.8 in the prescribed textbook.
1.7
Exercises and solutions
EXERCISE 1.1 – Conceptual framework (adapted from Introduction to the understanding of
accounting question book)
Vusi Mailane was a famous sculptor who recently passed away. His daughter, Grace Modise,
bequeathed a sculpture of one of the founder members in distance education to Unisa. The
cost of creating the sculpture amounted to R25 000. A few weeks ago, while his estate was
being finalised, a similar sculpture from Mailane was sold for £80 000 (£ = British pound)
which, when converted to rand, amounted to R1 240 000 on 28 February 20.17, which is also
the date of the donation. The university approached your audit firm for advice on the treatment
of the sculpture in the financial statements at year end on 28 February 20.17.
REQUIRED
With reference to the Conceptual Framework only, discuss the treatment of the sculpture in
the financial statements of Unisa on 28 February 20.17. Explain which measurement base
would be appropriate to use to determine the value at which the sculpture can be recorded in
the financial statements of Unisa.
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SOLUTION 1.1
Recognition
of
the
element as an asset:
Present
economic
resource (a right that has
a potential to produce
economic benefits)
Controlled by the reporting
entity
As a result of a past event
Recognition criteria:
Faithful representation
Relevance
Conclusion
Measurement basis
The sculpture has a potential to produce an economic
resource in the form of cash when it is sold.
Unisa has the right to the economic resources from the
sculpture as the sculpture was donated to them.
The past event is the donation of the sculpture to Unisa
There is no measurement uncertainty as the asset can be
faithfully represented. The value of the sculpture can be
determined by looking at the value of similar sculptures that
the artist sold. It has a value of R1 240 000.
Only relevant information may be recognised. Relevance
may be affected by low probability of economic resources. It
is probable that the sculpture will retain its value and that it
may be sold, which would result in an inflow of economic
benefits (money) to the university.
The sculpture must be treated as an asset in the financial
statements of Unisa because it complies with the recognition
criteria as well as the definition of an asset.
The asset should be measured at its realisable value, which
is the cash or cash equivalents that could currently be
obtained by selling the sculpture in an orderly disposal.
Because Unisa did not pay for the sculpture, it cannot be
recorded at its historical cost of R25 000 and it should be
accounted for at R1 240 000.
EXERCISE 1.2 – Financial instruments
On 1 March 20.14 Louis CC purchased 100 ordinary shares of R100 each in Marble Ltd, a
company listed on the Johannesburg Securities Exchange (JSE). The purpose of this
investment was speculative in nature. The transaction costs amounted to R500. On
28 February 20.15, the end of the financial year of Louis CC, the shares were trading at R125
per share on the JSE.
REQUIRED
Record the above transactions in the general journal of Louis CC.
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SOLUTION 1.2
LOUIS CC
GENERAL JOURNAL
Debit
R
20.14
Mar 1
20.15
Feb 28
Investment: Shares in Marble Ltd (R100 x 100)
Investment expenses (transaction costs)
Bank
Initial recognition of investment at cost and recording of
investment expenses
10 000
500
Profit or loss account
Investment expenses
Closing-off of investment expenses
Investment: Shares in Marble Ltd (R25 x 100)
Fair-value adjustment: Listed share investment
Adjustment on subsequent measurement of investment
in the shares of Marble Ltd at the financial year end
Fair-value adjustment: Listed share investment
Profit or loss account
Closing off of fair-value adjustment of listed investment
500
Credit
R
10 500
500
2 500
2 500
2 500
2 500
EXERCISE 1.3 – IAS 1
N Naidoo purchased a diamond-cutting machine for her jewellery manufacturing business on
2 March 20.16. She incurred the following costs to get the machine installed and ready for
use:
- Cost of the machine R632 500
- Delivery cost R1 495
- Installation cost R4 370
- Training cost to operate the machine R920
During the year she also paid R2 750 for repairs to fix the machine. The repairs were not
subjected to VAT.
N Naidoo currently depreciates all manufacturing equipment at 30% according to the
diminishing-balance method. The residual value of the machine is R5 000 (VAT exclusive).
N Naidoo is a registered VAT vendor and VAT at 15% is included, except where stipulated to
the contrary.
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REQUIRED
Disclose the machine and related costs in the financial statements of N Naidoo at
31 December 20.16 to comply with the requirements of IAS 1. The accounting policy note is
not required.
SOLUTION 1.3
1.
2.
Calculation of the cost of the machine
Purchase price (R632 500 x 100/115)
Delivery cost (R1 495 x 100/115)
Installation cost (R4 370 x 100/115)
Training cost (R920 x 100/115)
R
550 000
1 300
3 800
800
Total cost of the machine
555 900
Calculation of depreciation
R(555 900 – 5 000) x 30% x 10/12
137 725
N NAIDOO
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20.16 (EXTRACT)
Other expenses
R
Depreciation – machinery
Repair costs
137 725
2 750
N NAIDOO
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.16 (EXTRACT)
ASSETS
Non-current assets
Property, plant and equipment R(555 900 – 137 725)
Note
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SOLUTION 1.3 (continued)
N NAIDOO
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 20.16 (EXTRACT)
Property, plant and equipment
Carrying amount – 1 January 20.16
Cost
Accumulated depreciation
Movement during the year
Additions
Disposals
Depreciation
Carrying amount – 31 December 20.16
Cost
Accumulated depreciation
Machinery
R
xxx
xx
(x)
555 900
(x)
(137 725)
xxx
xxx
(xx)
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
Explain the acronyms IFRS, IAS, APB, FRSC and SAICA.
Describe what the concept "Conceptual Framework" entails.
List the specific purposes of the Conceptual Framework regarding the
preparation and presentation of financial statements.
Explain the main objectives of financial statements per the Conceptual
Framework.
Explain the underlying assumption when preparing financial statements per
the Conceptual Framework.
Discuss the qualitative characteristics of financial statements per the
Conceptual Framework.
Explain what the Conceptual Framework implies when it refers to the
constraints in preparing financial statements.
Discuss the elements of financial statements as explained in the
Conceptual Framework and indicate which elements pertain to the
statement of financial position and which to the statement of profit or loss
and other comprehensive income.
Discuss the concepts of recognition and disclosure of the elements
incorporated in financial statements, as explained in the Conceptual
Framework.
Explain what is meant by the measurement of the elements of financial
statements by referring to the measurement methods discussed in the
Conceptual Framework.
Explain what type of business ownership must comply with IFRS.
Define each of the following terms as per IAS 1:
− fair presentation
− going concern
− accrual basis of accounting
− materiality and aggregation
− offsetting
− frequency of reporting
− comparative information
− consistency of presentation.
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Yes
No
List the individual statements that, per IAS 1, together form the complete
set of financial statements of a reporting entity.
Explain what is meant by the identification of financial statements.
Explain what is meant by the reporting period.
Explain which items comprise current assets and current liabilities per
IAS 1.
List the items that must be presented on the face of the Statement of
Financial Position and the Statement of Profit or Loss and Other
Comprehensive Income respectively by referring to IAS 1.
List the items that can be presented on either the face of the Statement of
Financial Position and the Statement of Profit or Loss and Other
Comprehensive Income or in the notes to these statements for the
particular reporting period per IAS 1.
Discuss the purpose of notes, by referring to IAS 1.
Discuss, according to IAS 1, the order in which items are disclosed as notes
to financial statements.
Explain or define the following:
− a financial instrument
− a financial asset
− a financial liability
− fair value
−
a contract
Distinguish between financial instruments, financial assets and financial
liabilities.
Recognise, measure and present certain financial assets and liabilities in
the financial statements.
If you answered "yes" to all of the above assessment criteria, you can move on to
learning unit 2. If your answer was "no" to any of the above criteria, revise those
sections concerned before progressing to learning unit 2.
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LEARNING UNIT 2
2
Financial statements of a sole proprietorship
Learning outcomes ................................................................................................................ 25
Key concepts.......................................................................................................................... 25
2.1
Introduction ................................................................................................................... 26
2.2
Establishment of a sole proprietorship ......................................................................... 27
2.3
Statement of profit or loss and other comprehensive income ..................................... 27
2.4
Statement of changes in equity .................................................................................... 29
2.5
Statement of financial position and notes .................................................................... 29
2.6
Exercises and solutions................................................................................................ 31
Self-assessment .................................................................................................................... 45
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Learning outcomes
After studying this learning unit, you should be able to:
•
•
•
•
•
record adjustments in the financial statements of a sole proprietorship
prepare a statement of profit or loss and other comprehensive income of a sole
proprietorship
prepare a statement of changes in equity of a sole proprietorship
prepare a statement of financial position of a sole proprietorship
draft the notes to the financial statements of a sole proprietorship
Key concepts
•
•
•
•
•
•
Sole proprietor/sole trader
Investment in a sole proprietorship
Equity
Capital
Profit/loss for the period/year
Drawings
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2.1
Introduction
In the FAC1502 module, we dealt with the financial accounting cycle concerning input and
processing and introduced you to the preparation of financial statements of a sole
proprietorship.
In FAC1601, we deal specifically with the preparation of the output (financial statements) for
different entities, such as sole proprietorships (revision), partnerships, close corporations and
companies.
The accounting process that presents the output can be illustrated as follows:
Input
FAC1502
Transaction data is recorded on
Source documents which are used to prepare
Processing
FAC1502
Subsidiary journals which are posted to
General ledger which is used to
Prepare a pre-adjustment trial balance
Adjustments are done
Post-adjustment trial balance is prepared
Closing transfers are done
Output
FAC1601
Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity
Statement of cash flows (dealt with in learning unit 9)
Notes
When closing transfers are done as part of the accounting process, two accounts are created
in the general ledger, namely the trading account and the profit or loss account. Generally, the
gross profit of the entity is calculated in the trading account whilst the profit and loss account
present the income and expenditure of the entity. These two accounts pave the way to prepare
financial statements. Financial statements are prepared to provide information on the state of
financial affairs of the entity and to enable decision-making.
This learning unit is a revision of the preparation of the financial statements of a sole
proprietorship (also known as a sole trader). Sole proprietorship is the simplest form of
business ownership and is often managed by the owner. There is no legislation prescribing
how a sole proprietorship should be established. The accounting process and preparation of
financial statements have been dealt with extensively in FAC1502 and we therefore mainly
provide you with additional questions and suggested solutions to refresh your knowledge.
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Cash and/or any other type of asset, for example a motor vehicle, are required to start the
business entity. The equity simply consists of the capital invested in the business entity plus
the profit made (or less a loss suffered), and less any money and/or goods withdrawn by the
owner for personal use.
2.2
Establishment of a sole proprietorship
A sole proprietor usually contributes capital in the form of cash, and/or non-current assets in
the form of property, plant and equipment towards the starting of the business. The following
example illustrates the accounting entries that are made when a sole proprietorship is
established.
Activity 2.1
On 1 March 20.1, J Manjane invests R125 000 to start a taxi business. The name of the
business is JM Taxis. His investment consists of R3 000 cash, equipment valued at R8 000
and a motor vehicle valued at R114 000.
Prepare the general journal entry that will be made to record the relevant information of JM
Taxis on the date of the investment.
Feedback 2.1
JM TAXIS
GENERAL JOURNAL
Debit
R
20.1
Mar 1 Bank
Equipment
Motor vehicles
Capital
Credit
R
3 000
8 000
114 000
125 000
Deposit of cash in the bank account of the entity and
recording of other assets brought into the entity at
valuation
In the above activity, no other journals were requested. Normally the cash portion of the capital
is recorded in the cash receipts journal.
2.3
Statement of profit or loss and other comprehensive income
Once the sole proprietorship is established, the accounting cycle commences. At the end of
the accounting period, a trial balance is prepared. As explained in the introduction, in this
module you will be required to do some adjustments whilst preparing the financial statements
and accompanying notes. It is therefore in your own interest to study the layout of a statement
of profit or loss and other comprehensive income to be able to present the accounting
information in the required format as prescribed by IAS 1.
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Activity 2.2
Study the layout illustrated in paragraph 1.6 in Volume 2 of the prescribed
textbook.
A statement of profit or loss and other comprehensive income is the statement that indicates
the result of the operating performance of the entity for a specific period.
Recall that revenue (in the example revenue consists of net sales) is calculated as the balance
of the sales account in the general ledger minus settlement discount granted and less any
adjustments that may be applicable to sales which have not been considered yet. Assuming
that the sole proprietorship is also a registered VAT vendor, you must realise that VAT is
already excluded from applicable amounts such as sales and purchases. The reason is that
in the journals of first entry, VAT input and VAT output have been separately accounted for
and transferred to a VAT control account which is either a VAT receivable (debit control
account) or a payable (credit control account).
When the perpetual inventory system is used, cost of sales in the statement of profit or loss
and other comprehensive income is the balance of the cost of sales account in the general
ledger less settlement discount received plus an inventory deficit (if a deficit exists when the
physical inventory count shows less closing inventory than the inventory account at the end
of the accounting period). When the periodic inventory system is in use, the calculation of the
cost of sales is shown on the face of the statement of profit or loss and other comprehensive
income.
Interest paid is a separate line item and is referred to as finance costs. Interest income is
shown separately as part of other income and, for purposes of this module, it is never offset
against interest paid.
Activity 2.3
Based on your FAC1502 knowledge, prepare the layout of the gross profit section of the
statement of profit or loss and other comprehensive income of Bibi Traders for the year ended
28 February 20.17. Assume that a periodic inventory system is used.
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Feedback 2.3
BIBI TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.17
Notes
R
Revenue
xxx xxx
Cost of sales
(xx xxx)
Inventory – 1 March 20.16
xx xxx
Purchases (net purchases – after purchase returns and settlement
discount received)
xxx xxx
Carriage on purchases
xx xxx
xxx xxx
Inventory – 28 February 20.17
(xx xxx)
Gross profit
xxx xxx
2.4
Statement of changes in equity
You will remember that a statement of changes in equity is compiled to show the movement
in equity during the financial period. This implies that you commence with the balance of equity
at the beginning of the accounting period (normally a year) and you disclose the movements
that caused a difference in the opening and closing balance of equity. For a sole proprietorship
we also refer to equity as capital.
Activity 2.4
Based on your FAC1502 knowledge, prepare the layout of a statement of changes in equity
for a sole proprietorship, Wong Chu Traders. Assume a 30 June 20.17 year end.
Feedback 2.4
WONG CHU TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.17
Balance as at 1 July 20.16
Profit for the year
Additional capital contribution
Drawings
Balance as at 30 June 20.17
2.5
R
xxx
xx
xxx
(x)
x xxx
Statement of financial position and notes
The statement of financial position indicates the financial position of the owner of the sole
proprietorship at a specific date, which is normally year end. Notes are prepared to explain
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the accounting policies implemented when presenting the financial statements and how the
amounts in the financial statements were calculated. Examples of accounting policies are the
basis on which the statements are presented (e.g. historical cost) as well as the accounting
framework adapted in the preparation of the financial statements, the methods used to
calculate depreciation and value property, plant and equipment, the valuation methods
adopted to account for inventory, the valuation methods adopted to account for financial
assets/liabilities and many more. Notes must be presented systematically and crossreferenced to the line items in the statement of profit or loss and other comprehensive income,
the statement of financial position, statement of changes in equity and the statement of cash
flows. Similar as to what you encountered in FAC1502 as notes, we will again introduce you
to the most significant notes applicable to first-year accounting. The notes become more
complicated in later years and it will ensure a good foundation if you can present the notes
that we illustrate in the different learning units.
Activity 2.5
Study the example of a layout of the statement of financial position and the
applicable notes to the financial statements in paragraph 1.6 in Volume 2 of the
prescribed textbook.
In FAC1602 you will mostly be presented with a pre-adjustment trial balance prepared from
the general ledger of the entity. You will then have to do the adjustments and prepare the
required financial statements.
The questions and time for completion will not always allow you to do the adjustments in a
journal and to post it to a ledger. You will thus be required to do the adjustments while
preparing the financial statements; for that reason, you must know by heart the journal entries
that can be applicable to account for adjustments. This will enable you to know which account
is debited and which credited, to prepare the financial statements with the double-entry in
mind and without physically posting to a general journal and prepare a post-adjustment trial
balance. In paragraph 2.6 of this learning unit, we present you with revision exercises and
solutions where you will apply your knowledge of adjustments with and without the aid of a
general journal in preparing the financial statements of sole proprietors.
Always remember the accounting equation:
assets = equity + liabilities
The adjustments that were covered in FAC1502 and that you may encounter in FAC1602 are:
Adjustments:
•
Inventory on hand
•
Depreciation
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2.6
•
Expenses payable
•
Prepaid expenses
•
Income receivable
•
Income received in advance (prepaid income)
•
Credit losses
•
Allowance for credit losses
•
Allowance for settlement discount received
•
Allowance for settlement discount granted
Exercises and solutions
EXERCISE 2.1
The following information relates to Lebombo Distributors, which is a sole proprietorship of
L Lebombo:
Pre-adjustment trial balance of Lebombo Distributors as at 31 December 20.1
Debit
R
Capital (1 January 20.1) ................................................................
Land and buildings (at cost)............................................................
Vehicles (at cost).............................................................................
Equipment (at cost) .........................................................................
Accumulated depreciation: Vehicles (1 January 20.1) ..................
Accumulated depreciation: Equipment (1 January 20.1) ..............
Fixed deposit: NBC Bank Ltd (1 January 20.1) ..............................
Inventory: Merchandise...................................................................
Trade receivables control ...............................................................
Bank ................................................................................................
Petty cash........................................................................................
Cash float ........................................................................................
Trade payables control ...................................................................
VAT control .....................................................................................
Long-term borrowing: Bean Ltd ......................................................
Allowance for credit losses .............................................................
Sales ...............................................................................................
Cost of sales ...................................................................................
Sales returns ...................................................................................
Wages .............................................................................................
Salaries ...........................................................................................
Assessment rates ...........................................................................
Settlement discount granted ...........................................................
Licences ..........................................................................................
Vehicle expenses ............................................................................
Credit losses ...................................................................................
Packaging materials........................................................................
Credit
R
141 700
263 240
40 000
9 000
11 200
1 710
50 000
8 500
5 200
3 100
100
500
8 800
750
25 000
300
381 790
165 400
1 200
2 000
25 000
1 500
380
1 000
3 500
550
4 700
Continued on the next page
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Insurance.........................................................................................
Water and electricity .......................................................................
Telephone expenses.......................................................................
Advertising ......................................................................................
Rental income .................................................................................
Settlement discount received..........................................................
Interest on investment.....................................................................
Credit losses recovered ..................................................................
Debit
2 250
2 100
1 400
2 000
Credit
15 600
650
5 000
120
592 620
592 620
The following adjustments must still be accounted for:
1.
Packaging material on hand at 31 December 20.1 to the value of R980.
2.
The long-term borrowing was obtained on 1 October 20.1. According to the
agreement, interest is payable biannually at a rate of 18% per annum.
3.
Advertisements include an amount of R400 paid for January 20.2.
4.
Rental income includes an amount in respect of January 20.2. Rental income was
earned evenly throughout the year.
5.
Interest on the fixed deposit has not yet been received for the last two months of the
financial year. Interest is calculated at a rate of 12% per annum.
6.
Insurance includes an amount of R750 paid for the period 1 November 20.1 to
31 October 20.2.
7.
The telephone account of R165 for December 20.1 has not yet been paid.
8.
Equipment of R2 000 (cost price) was purchased on 1 July 20.1.
9.
Depreciation must be provided as follows:
• Vehicles: 20% per annum on the diminishing-balance method
• Equipment: 10% per annum on the diminishing-balance method
10.
The account of Loose-Ends Ltd, a debtor who owes the entity R200, must be written
off as irrecoverable.
11.
It was determined that on 31 December 20.1 the allowance for credit losses should
amount to R250.
12.
Lebombo Distributors uses a perpetual inventory system.
REQUIRED
a)
Prepare the journal entries to record the adjustments above.
b)
Prepare the closing journal entries. Post these journal entries to the trading and
the profit or loss accounts on 31 December 20.1.
c)
Prepare the statement of profit or loss and other comprehensive income of
Lebombo Distributors for the year ended 31 December 20 1.
d)
Prepare the statement of changes in equity of Lebombo Distributors for the year
ended 31 December 20.1.
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e)
Prepare the statement of financial position of Lebombo Distributors as at
31 December 20.1.
f)
Prepare the following notes to the financial statements of Lebombo Distributors
for the year ended 31 December 20.1:
• Accounting policy for the basis of presentation, property, plant and
equipment and financial assets
• Property, plant and equipment
• Financial assets
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS) appropriate to the business of the sole trader.
SOLUTION 2.1
a)
LEBOMBO DISTRIBUTORS
GENERAL JOURNAL – 31 DECEMBER 20.1
Inventory: Packaging material
20.1
Packaging material
Dec 31
Packaging material on hand at 31 December 20.1
Interest on loan (R25 000 x 18% x 3/12)
Accrued expenses
Interest on loan still payable
Prepaid expenses
Advertisements
Advertisements paid in advance
Rental income (R15 600 x 1/13)
Income received in advance
Rent received in advance
Accrued income
Interest on investment (R50 000 x 12% x 2/12)
Interest on investment not yet received
Prepaid expenses
Insurance (R750 x 10/12)
Insurance prepaid
Telephone expenses
Accrued expenses
Telephone account for December brought into account
Depreciation
Accumulated depreciation on vehicles
Accumulated depreciation on equipment
Depreciation provided at 20% per annum on the diminishing
balance of vehicles and at 10% per annum on the diminishing
balance of equipment.
Credit losses
Loose-ends/Trade receivables control
Account written off as irrecoverable
Allowance for credit losses
Credit losses
Adjustment of allowance for credit losses
Debit
Credit
R
R
980
980
1 125
1 125
400
400
1 200
1 200
1 000
1 000
625
625
165
165
6 389
5 760
629
200
200
50
50
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SOLUTION 2.1 (continued)
Calculation
Depreciation
The accumulated depreciation is on the equipment owned by the entity at the beginning of the
financial year. Two calculations are therefore needed:
1.1
Equipment purchased in previous years
[(R9 000 – R2 000) – R1 710] x 10%
= R529
1.2
Equipment purchased in the current year
R2 000 x 10% x 6/12
= R100
Total depreciation for equipment:
(R529 + R100) = R629
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SOLUTION 2.1 (continued)
b) LEBOMBO DISTRIBUTORS
GENERAL JOURNAL (Closing journal entries)
20.1
Dec 31
Sales
Settlement discount granted
Closing off and transfer of settlement discount granted to
sales
Sales
Sales return
Closing off and transfer of sales returns to sales
Sales R(381 790 – 380 – 1 200)
Trading account
Closing off and transfer of sales to trading account
Settlement discount received
Cost of sales
Closing off and transfer of settlement discount to cost of
sales
Trading account
Cost of sales R(165 400 – 650)
Closing off and transfer of cost of sales account to trading
account
Trading account
Profit or loss
Transfer of gross profit
Rental income R(15 600 – 1 200)
Interest on investment R(5 000 + 1 000)
Credit losses recovered
Profit or loss
Closing off of above accounts against profit or loss
Profit or loss
Wages
Salaries
Assessment rates
Licences
Vehicle expenses
Credit losses R(550 + 200 – 50)
Packaging material R(4 700 – 980)
Insurance R(2 250 – 625)
Water and electricity
Telephone expenses R(1 400 + 165)
Advertising R(2 000 – 400)
Interest on loan
Depreciation
Closing off of above accounts against profit or loss account
Profit or loss R(215 460 + 20 520 – 51 824)
Capital
Transfer of profit to capital account
Debit
Credit
R
R
380
380
1 200
1 200
380 210
380 210
650
650
164 750
164 750
215 460
215 460
14 400
6 000
120
20 520
51 824
2 000
25 000
1 500
1 000
3 500
700
3 720
1 625
2 100
1 565
1 600
1 125
6 389
184 156
184 156
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SOLUTION 2.1 (continued)
Dr
20.1
Dec 31
Trading account
Cost of sales
Profit or loss account
(Gross profit)
R
20.1
164 750 Dec 31
215 460
Sales
380 210
Dr
20.1
Dec 31
Profit or loss account
Wages
Salaries
Assessment rates
Licences
Vehicle expenses
Credit losses
Packaging material
Insurance
Water and electricity
Telephone expenses
Advertising
Interest on loan
Depreciation
Capital (Total
comprehensive income
for the year)
Cr
R
380 210
380 210
Cr
R
20.1
2 000 Dec 31 Trading account
25 000
(Gross profit)
1 500
Rental income
1 000
Interest on investment
3 500
Credit losses recovered
700
3 720
1 625
2 100
1 565
1 600
1 125
6 389
184 156
R
215 460
235 980
235 980
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14 400
6 000
120
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SOLUTION 2.1 (continued)
c)
LEBOMBO DISTRIBUTORS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.1
R
Revenue
380 210
Cost of sales
(164 750)
Gross profit
Other income
Rental income
Credit losses recovered
Interest income
Distribution, administrative and other expenses
Wages
Salaries
Assessment rates
Licences
Vehicle expenses
Credit losses
Packaging material
Insurance
Water and electricity
Telephone expenses
Advertising
Depreciation
Finance costs
Interest on long-term loan
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
215 460
20 520
14 400
120
6 000
235 980
(50 699)
2 000
25 000
1 500
1 000
3 500
700
3 720
1 625
2 100
1 565
1 600
6 389
(1 125)
1 125
184 156
–
184 156
d) LEBOMBO DISTRIBUTORS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.1
Balance at 1 January 20.1
Total comprehensive income for the year
Balance at 31 December 20.1
Capital
R
141 700
184 156
325 856
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SOLUTION 2.1 (continued)
e)
LEBOMBO DISTRIBUTORS
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.1
ASSETS
Notes
Non-current assets
Property, plant and equipment
2.1, 3
Fixed deposit: NBC Bank
2.2, 4
Current assets
Inventories
Trade and other receivables R(5 200 – 200 – 250 + 1 000)
Prepayments R(625 + 400)
Cash and cash equivalents R(3 100 + 500 + 100)
4
Total assets
R
342 941
292 941
50 000
19 955
9 480
5 750
1 025
3 700
362 896
EQUITY AND LIABILITIES
Equity
Capital
Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables R (8 800 + 750 + 1 125 + 165)
Income received in advance
Total equity and liabilities
325 856
325 856
37 040
25 000
25 000
12 040
10 840
1 200
362 896
f)
LEBOMBO DISTRIBUTORS
NOTES TO THE FINANCIAL
31 DECEMBER 20.1
STATEMENTS
FOR
THE
YEAR
ENDED
Accounting policy
1.
Basis of presentation
The annual financial statements have been prepared in accordance with International
Financial Reporting Standards appropriate to the business of the entity. The annual
financial statements have been prepared on the historical-cost basis, modified for the fair
valuation of certain financial instruments, and incorporate the principle accounting policies
set out below. The statements are presented in South African rand.
2.
Summary of the significant accounting policies
2.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings. Vehicles and equipment are subsequently measured at
cost less accumulated depreciation. Depreciation on equipment and vehicles is written off
at a rate deemed to be sufficient to reduce the carrying amount of the assets over their
estimated useful life. The depreciation rates are as follows:
Vehicles:
20% per annum using the diminishing-balance method
Equipment:
10% per annum using the diminishing-balance method
2.2 Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument.
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SOLUTION 2.1 (continued)
Financial instruments are initially measured at the transaction price, which is fair value plus
transaction costs, except for “Financial assets at fair value through profit or loss”, which is
measured at fair value, transaction costs excluded. The entity’s classification depends on
the purpose for which the entity acquired the financial instruments. Financial instruments
are subsequently measured at fair value unless it is measured at amortised cost as
required by IFRS.
Financial instruments that are subsequently measured at amortised cost are done so using
the effective interest rate method.
3.
Property, plant and equipment
Carrying amount – 1 Jan 20.1
Cost
Accumulated depreciation
Additions
Depreciation for the year
Carrying amount – 31 Dec 20.1
Cost
Accumulated depreciation
4.
Land and
buildings
R
263 240
263 240
–
–
–
263 240
263 240
–
Vehicles
R
28 800
40 000
(11 200)
–
(5 760)
23 040
40 000
(16 960)
Equipment
R
5 290
7 000
(1 710)
2 000
(629)
6 661
9 000
(2 339)
Total
R
297 330
310 240
(12 910)
2 000
(6 389)
292 941
292 240
(19 299)
Financial assets
Non-current financial assets
Fixed deposit at amortised cost: NBC Bank Ltd at 12% p.a.
Current financial assets
Trade and other receivables
Trade receivables control R(5 200 – 200)
Allowance for credit losses
Cash and cash equivalents
Bank
Petty cash
Cash float
R
50 000
50 000
8 450
4 750
5 000
(250)
3 700
3 100
100
500
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EXERCISE 2.2
At 31 March 20.15, Cartoon Traders had the following general ledger balances before any
adjustments were made:
CARTOON TRADERS
BALANCES AS AT 31 MARCH 20.15
Rental income ................................................................................................
Stationery .......................................................................................................
Capital ............................................................................................................
Drawings ........................................................................................................
Accumulated depreciation: Equipment ..........................................................
Commission income .......................................................................................
Credit losses...................................................................................................
Property (at cost)............................................................................................
Equipment (at cost)………………………………………………………………
Bank (favourable) ..........................................................................................
Trade receivables control...............................................................................
Interest on mortgage ......................................................................................
Municipal taxes ..............................................................................................
Insurance........................................................................................................
Mortgage ........................................................ …………………………………
Water and electricity…………... .....................................................................
R
64 000
3 350
149 000
6 084
15 000
2 700
1 600
350 000
34 000
24 208
26 100
23 870
4 333
2 405
248 000
2 750
The following adjustments must still be accounted for:
1.
Cartoon Traders has five tenants, each paying different rental amounts. At the end of
March 20.15, one of the tenants owed two months’ rent to the entity. The monthly rental
payable by the tenant is R1 750.
2.
Stationery on hand at 31 March 20.15 amounted to R1 550.
3.
Commission income of R750 was earned for April and May 20.15.
4.
Mr D Poor disappeared, and the management decided to write off his debt amounting
to R2 650 as irrecoverable.
5.
Provision should still be made for depreciation on equipment at 10% per annum on the
diminishing-balance method.
6.
The water and electricity account for March 20.15, amounting to R310, has not yet been
paid.
7.
The insurance premium for April 20.15 was paid in advance. The premiums are paid in
equal monthly amounts.
8.
Interest on mortgage is calculated at a rate of 10,5% per annum. The interest for
March 20.15 is still to be accounted for.
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EXAMPLE 2.2 (continued)
REQUIRED
a)
Calculate the total comprehensive income or loss of Cartoon Traders for the year
ended 31 March 20.15.
b)
Prepare the statement of financial position of Cartoon Traders as at 31 March 20.15.
All calculations must be shown.
Your answer must comply with the requirements of the International Financial Reporting
Standards (IFRS) appropriate to the business of the entity.
SOLUTION 2.2
a)
Calculation of total comprehensive income or loss:
R
Rental income R(64 000 + 3 500)
Commission income R(2 700 – 750)
67 500
1 950
69 450
(43 603)
Less: Expenses
Interest on mortgage (R248 000 x 10.5%)
Water and electricity R(2 750 + 310)
Municipal taxes
Insurance R(2 405 – (2 405/13))
Stationery R(3 350 – 1 550)
Credit losses R(1 600 + 2 650)
Depreciation R(34 000 – 15 000) x 10%
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
26 040
3 060
4 333
2 220
1 800
4 250
1 900
25 847
–
25 847
b) CARTOON TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20.15
R
ASSETS
Non-current assets
Property, plant and equipment R(350 000 + 34 000 – 15 000 – 1 900)
Current assets
Inventories
Trade and other receivables R(26 100 – 2 650 + 3 500 + 185)
Cash and cash equivalent
TOTAL ASSETS
367 100
367 100
52 893
1 550
27 135
24 208
419 993
Continued on the next page
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SOLUTION 2.2 (continued)
EQUITY AND LIABILITIES
Equity
Capital R(149 000 – 6 084 + 25 847)
168 763
168 763
Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables R(750 + 310 + 26 040 – 23 870)
251 230
248 000
248 000
3 230
3 230
Total equity and liabilities
419 993
EXERCISE 2.3
BOJANE TRADERS
PRE-ADJUSTMENT TRIAL BALANCE AT 30 JUNE 20.15
Debit
R
Capital ................................................................................................
Drawings ............................................................................................
Trade receivables control ..................................................................
Vehicles (at cost)................................................................................
Accumulated depreciation: Vehicles..................................................
Inventory: Trading (1 July 20.14) .......................................................
Bank ...................................................................................................
Mortgage ............................................................................................
Loan from Africa Bank .......................................................................
Sales ..................................................................................................
Carriage on purchases.......................................................................
Import duty on purchases ..................................................................
Insurance on purchases ....................................................................
Commission income...........................................................................
Depreciation .......................................................................................
Insurance............................................................................................
Packaging materials...........................................................................
Purchases ..........................................................................................
Purchases returns ..............................................................................
Rental income ....................................................................................
Sales returns ......................................................................................
Settlement discount granted ..............................................................
Settlement discount received.............................................................
Telephone expenses..........................................................................
Carriage on sales ...............................................................................
Repairs……………… .. ………………………………………………….
Fuel……………… .………………………………………………………
Wages ................................................................................................
Water and electricity ..........................................................................
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Credit
R
202 000
27 000
18 560
202 100
19 100
28 300
56 520
105 000
15 000
272 195
750
782
329
18 000
19 100
8 575
4 600
190 800
245
6 500
1 860
465
225
2 420
1 250
2 160
3 479
64 115
5 100
638 265
638 265
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EXERCISE 2.3 (continued)
The following information must still be taken into account for the year ended
30 June 20.15:
1.
On 1 July 20.15, trading inventory had a balance of R22 750.
2.
Rental income for the year should have been R6 000.
3.
Packaging material on hand at 30 June 20.15 amounted to R1 200.
4.
Commission income of R3 600 is still outstanding.
5.
An account in respect of water and electricity amounting to R500 must still be paid.
6.
The mortgage was obtained from XYZ Bank during the previous financial year and bears
interest at a rate of 11,5% per annum. Interest for the current year must still be provided
for.
7.
The loan from Africa Bank is unsecured and bears interest at 19,5% per annum. Interest
for the current year must still be provided for.
8.
A debtor who owes the business R4 640 was declared insolvent and his account must be
written off as irrecoverable.
9.
The insurance amount includes the premiums for the months of July and August 20.15.
REQUIRED
a)
Prepare the statement of profit or loss and other comprehensive income of Bojane
Traders for the year ended 30 June 20.15.
b)
Prepare the statement of changes in equity of Bojane Traders for the year ended
30 June 20.15.
Please note:
Your answers must comply with the requirements of the International Financial Reporting
Standards (IFRS) appropriate to the business of the entity. All calculations must be shown.
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SOLUTION 2.3
a)
BOJANE TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 JUNE 20.15
R
Revenue R(272 195 – 1 860 – 465)
Cost of sales
Inventory - 1 July 20.14
Purchases R(190 800 – 245 – 225)
Carriage on purchases
Import duty on purchases
Insurance on purchases
Distribution, administration and other expenses
Repairs
Insurance R(8 575 – (8 575/14 x 2))
Wages
Water and electricity R(5 100 + 500)
Petrol
Packing materials R(4 600 – 1 200)
Depreciation
Telephone expenses
Carriage on sales
Credit losses
269 870
(197 741)
28 300
190 330
750
782
329
220 491
(22 750)
72 129
27 600
6 000
21 600
99 729
(113 514)
2 160
7 350
64 115
5 600
3 479
3 400
19 100
2 420
1 250
4 640
Finance costs
Interest on mortgage (R105 000 x 11,5%)
Interest on short-term loan (R15 000 x 19,5%)
Loss for the year
Other comprehensive income for the year
Total comprehensive loss for the year
(15 000)
12 075
2 925
(28 785)
–
(28 785)
Less: Inventory - 30 June 20.15
Gross profit
Other income
Rental income R(6 500 – 500)
Commission income R(18 000 + 3 600)
b) BOJANE TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.15
Capital
R
Balance as at 1 July 20.14
Comprehensive loss for the year
Less: Drawings
Balance as at 30 June 20.15
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202 000
(28 785)
(27 000)
146 215
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Record applicable adjustments in the financial statements of a sole
proprietorship.
Prepare a statement of profit or loss and other comprehensive income for
a sole proprietorship.
Prepare a statement of changes in equity for a sole proprietorship.
Prepare a statement of financial position for a sole proprietorship.
Prepare the required notes to the financial statements of a sole
proprietorship.
If you answered "yes" to all of the above assessment criteria, you can move on to
learning unit 3. If your answer was "no" to any of the above criteria, revise those
sections concerned before progressing to learning unit 3.
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LEARNING UNIT
3
3
Establishment and financial statements of a partnership
Learning outcomes ................................................................................................................ 47
Key concepts.......................................................................................................................... 47
3.1
Introduction ................................................................................................................... 48
3.2
Reasons for the formation of partnerships................................................................... 48
3.3
The legal position of a partner...................................................................................... 49
3.4
Establishment of a partnership..................................................................................... 49
3.5
The partnership agreement .......................................................................................... 49
3.6
Dissolution of a partnership .......................................................................................... 50
3.7
Accounting procedures and specialised accounts ....................................................... 50
3.8
Financial statements of a partnership .......................................................................... 53
3.9
Exercises and solutions................................................................................................ 54
Self-assessment .................................................................................................................... 68
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Learning outcomes
Learning outcomes
After studying this learning unit, you should be able to:
•
•
•
•
•
•
•
define a partnership
explain the reasons why a partnership is formed
discuss the contents of a partnership agreement
explain the ways in which a partnership can be established
explain the factors which can lead to the dissolution of a partnership
record the transactions of a partnership in the accounting records
prepare the financial statements of a partnership in accordance with the requirements of
IFRS, appropriate to the business of the partnership
Key concepts
•
•
•
•
•
•
•
•
•
Partnership
Partners
Partnership agreement
Profit-sharing ratio
Dissolution
Legal approach
Entity approach
Equity
Appropriation account
•
Financial statement
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3.1
Introduction
Because a sole trader has only one owner and usually limited capital resources, two or more
entrepreneurs often opt to form a business entity that can accommodate more than one
owner. If their requirement is to establish an entity without the judicial complications
associated with a company or close corporation, the formation of a partnership is an
appropriate choice of business ownership.
Read the overview of this learning unit in the prescribed textbook and read
paragraph 2.1 in the prescribed textbook.
Pay special attention to the definition of a partnership and the difference between a business
entity with and without legal status.
Activity 3.1
State whether the following statements are true or false:
a)
b)
c)
A partnership is a legal entity.
The assets and liabilities of a partnership belong to the owners.
A partnership agreement must be in writing.
Feedback 3.1
a)
b)
c)
3.2
False.
A partnership has no legal status. Only the owners have legal status.
True.
False.
An oral agreement is also binding.
Reasons for the formation of partnerships
There are many reasons why entrepreneurs enter into a partnership agreement. One of the
reasons is to have access to more capital and expertise.
Read paragraph 2.2 in the prescribed textbook.
Activity 3.2
Name four reasons for the formation of a partnership.
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Feedback 3.2
•
•
•
•
Increased access to capital
Eliminating competition
Uniting capital and expertise
Retaining skills and expertise
3.3
The legal position of a partner
Read paragraph 2.3 in the prescribed textbook.
3.4
Establishment of a partnership
Read paragraph 2.4 in the prescribed textbook. Note how a partnership can be
established by action or agreement.
3.5
The partnership agreement
Read paragraph 2.5 in the prescribed textbook. Can you name some essential
matters of a partnership agreement?
Activity 3.3
a)
It is advisable that a partnership agreement must be verbal.
True or False?
b)
What is the common law principle concerning the ownership and management of a
partnership?
c)
What is the common law principle if the partnership agreement does not stipulate a
profit-sharing ratio?
Feedback 3.3
a)
False. A written agreement is advisable.
b)
Partners share ownership in the same ratio as their profit-sharing ratio and have equal
rights in the management of the entity.
c)
Partners will share the profits/losses in the same ration as their capital contribution ratio
to the partnership.
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3.6
Dissolution of a partnership
Unlike a company or close corporation, a partnership has a limited life span.
Read paragraph 2.6 in the prescribed textbook.
Can you name all the factors that lead to the ending of a partnership?
3.7
Accounting procedures and specialised accounts
Just like a sole proprietorship, a partnership is a separate accounting entity (without legal
status). It also keeps record of its accounting transactions in journals, subsidiary journals and
ledgers and must prepare financial statements as an output. Refer to the accounting process
in learning unit 2.
Study paragraph 2.7 in the prescribed textbook. Pay attention to the use of
capital, current, drawings, loan and appropriation accounts in partnerships.
Two approaches can be followed in preparing the accounts of a partnership, namely the legal
and the entity approach. Make sure that you understand the difference between the two
approaches. For the sake of simplicity, we follow a legal approach in this module.
The recording of equity of a partnership is through the use of capital, current and drawings
accounts. The sole proprietorship uses capital and drawings accounts.
Activity 3.4
a)
What approach is followed when the partners and partnership are two different
accounting entities?
b)
How would interest paid on a capital investment be treated when an entity approach is
followed and how is it treated when the legal approach is followed in the accounting
records of the partnership?
c)
In which account is the initial investment of a partner in a partnership captured? How
can a partner increase this account?
d)
When is it compulsory to use a drawings account for each partner? And if the drawings
account is not compulsory, which other account can be used to record, for example,
cash drawings of partners?
e)
When is a loan account used in the accounting records of a partnership? How is the
interest payable or receivable treated in the statement of profit or loss and other
comprehensive income of the partnership?
f)
What is the purpose of an appropriation account?
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Feedback 3.4
a)
The entity approach is used.
b)
According to the entity approach, capital is regarded as finance from a separate entity –
the partner and the related interest on capital is treated as finance costs.
According to the legal approach, capital is not regarded as finance from a separate entity
(the partner) and interest on capital is an appropriation/distribution of profit to the partner
and not a finance cost.
c)
The initial investment in a partnership is captured in a capital account. The capital
account can only increase with an additional investment into the partnership.
d)
It is only compulsory when the partnership agreement states the use of drawings
accounts. The current account can be used.
e)
When a partner, in his/her personal capacity, grants a repayable loan to or receives a
repayable loan from the partnership. The interest paid is treated as finance cost whereas
the interest received is treated as other income in the statement of profit or loss and
other comprehensive income.
f)
The appropriation account is a final account used to appropriate the profit/loss of the
partnership to its partners according to the profit-sharing ratio.
Activity 3.5
Monte and Carlos are partners in Montecarlo Traders. The profit of the partnership for the year
28 February 20.7 amounted to R960 000 before taking the following provisions of the
partnership agreement into account:
1. Partners are entitled to 15% interest on the opening balances of their capital accounts.
2. The partners share equally in a profit/loss.
3. Monte receives a salary of R7 000 per month.
The opening balances of the capital accounts amounted to R350 000 for Monte and R450 000
for Carlos.
REQUIRED
Prepare the appropriation account in the general ledger of Montecarlo Traders on
28 February 20.7.
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Feedback 3.5
MONTECARLO TRADERS
GENERAL LEDGER
Dr
Appropriation account
20.7
Feb 28
Interest on capital (15% x
R350 000) + (15% x R450 000)
Salary: Monte (12 x R7 000)
Current account: Monte 50% x
R(960 000-120 000-84 000)
Current account: Carlos 50% x
R(960 000-120 000-84 000)
R
120 000
20.7
Feb 28
Profit or loss account
Cr
R
960 000
84 000
378 000
378 000
960 000
960 000
You can apply the following steps when recording the sharing of profits or losses:
•
•
•
•
Allocate the interest on the partners’ capital and current accounts with credit balances.
The interest payable will reduce the profit available for distribution but is not disclosed in
the statement of profit or loss and other comprehensive income, because it forms part of
the partnership agreement and does not influence the external parties of the entity.
Calculate the interest on drawings (if applicable) and the interest on current accounts with
debit balances. The interest receivable will increase the profit available for distribution
amongst the partners but is not disclosed in the statement of profit or loss and other
comprehensive income.
Allocate salaries, commissions and bonuses for services rendered by the partners. These
expenses will reduce the profit available for distribution but is not disclosed in the
statement of profit or loss and other comprehensive income.
Divide the remaining profit/loss according to the agreed profit-sharing ratio.
Activity 3.6
Work through example 2.1 in the prescribed textbook. Pay particular attention to the calculation
of the ratio in which profits/losses are shared in the example.
Activity 3.7
DJ Black and CJ Coffee are partners in Black Coffee Music who contributed R180 000 and
R270 000 respectively. The total profit for the year amounted to R225 000.
REQUIRED
Calculate the profit distribution for the following three scenarios:
a)
DJ Black and CJ Coffee share profits in their capital contribution ratio.
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b)
DJ Black and CJ Coffee share profits equally.
c)
DJ Black and CJ Coffee share profits in the ratio of 2:1.
Feedback 3.7
a)
The capital contribution ratio is calculated as follows:
Capital contribution R180 000 : R270 000. Find the greatest common denominator.
90 000 can be divided into both and equals 2:3.
DJ Black’s profit = 2/5 x R225 000 = R90 000
CJ Coffee’s profit = 3/5 x R225 000 = R135 000
b)
Each partner receives and equal share which is 50:50 or 1:1, which is also equal to
½:½
DJ Black’s profit = 1/2 x R225 000 = R112 500
CJ Coffee’s profit = 1/2 x R225 000 = R112 500
c)
DJ Black receives R2 for every R1 that CJ Coffee receives and is stated as 2:1 or 2/3 : 1/3
DJ Black’s profit = 2/3 x R225 000 = R150 000
CJ Coffee’s profit = 1/3 x R225 000 = R75 000
3.8
Financial statements of a partnership
By now you are familiar with the different financial statements that can be prepared as well as
their accompanying notes. The cash flow statement of a partnership is dealt with in learning
unit 9.
Read paragraph 2.8 in the prescribed textbook.
Activity 3.8
Work through example 2.2, 2.3 and 2.4 of the prescribed textbook, which illustrates the
different financial statements that can be prepared for a partnership. Pay specific attention to
the statement of changes in equity which is a summary of the appropriation account. Example
2.2 illustrates the financial statements when a profit is made while example 2.3 illustrates the
financial statements when a loss is incurred. Example 2.4 is a comprehensive example.
Read paragraph 2.9 in the prescribed textbook.
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3.9
Exercises and solutions
EXERCISE 3.1
The undermentioned information was taken from the accounting records of Bluered Traders,
a partnership with B Blue and R Red as partners, on 30 September 20.15, the financial year
end of the partnership.
BLUERED TRADERS
BALANCES AS AT 30 SEPTEMBER 20.15
Capital: B Blue ................................................................................................
Capital: R Red .................................................................................................
Current account: B Blue (1 October 20.14) (Cr) ..............................................
Current account: R Red (1 October 20.14) (Cr) ..............................................
Drawings: B Blue..............................................................................................
Drawings: R Red ..............................................................................................
Mortgage ..........................................................................................................
Trade payables control ....................................................................................
Bank overdraft ..................................................................................................
Land and buildings at cost ...............................................................................
Equipment at cost ............................................................................................
Accumulated depreciation: Equipment (1 October 20.14) ..............................
Motor vehicles at cost ......................................................................................
Accumulated depreciation: Motor vehicles (1 October 20.14) ........................
Office furniture at cost ......................................................................................
Accumulated depreciation: Office furniture (1 October 20.14) ........................
Inventory (30 September 20.15) ......................................................................
Trade receivables control ................................................................................
Allowance for credit losses (1 October 20.14) ................................................
Petty cash.........................................................................................................
Sales ................................................................................................................
Cost of sales ....................................................................................................
Advertising costs ..............................................................................................
Salaries and wages..........................................................................................
Administrative expenses ..................................................................................
Insurance expenses .........................................................................................
Carriage on sales .............................................................................................
Interest on mortgage ........................................................................................
R
20 000
5 000
1 060
2 800
9 000
3 000
10 000
24 150
6 160
19 500
19 840
5 000
900
500
350
50
21 069
16 020
600
32
340 628
306 000
4 409
12 189
2 622
364
203
450
Additional information:
1. Terms of the partnership agreement
1.1
1.2
1.3
The partners share profits and losses in the ratio of their fixed capital contribution.
Interest at 5% per annum is to be allowed on the opening balances of the partners’
capital and current accounts.
Interest is to be charged at 5% per annum on the average monthly amount outstanding
on the partners’ drawings accounts.
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EXERCISE 3.1 (continued)
1.4
R Red is entitled to a salary of R1 000 per annum plus a management commission of
10% of the comprehensive income for the financial year after his salary and the
adjustments for the interest on the capital, current and drawing account have been
considered.
2. Year-end adjustments
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
An outstanding debt of R20 is irrecoverable and must be written off.
The allowance for credit losses must be adjusted to R800.
Depreciation is to be provided as follows:
Equipment: 15% per annum according to the diminishing-balance method
A new machine was purchased on 1 April 20.15 for R1 560.
Motor vehicles: 20% per annum according to the straight-line method.
Office furniture: 10% per annum according to the diminishing-balance method.
Interest on the mortgage up to 30 September 20.15 amounts to R600.
R4 000 of the loan is repayable during the 20.16 financial year. The loan is secured by
a mortgage over land and buildings. The loan was granted by Corner Bank on
1 October 20.14. The terms of the loan provide for interest on the loan to be charged at
a rate of 6% per annum.
Salaries to employees of R69 have not been paid or taken into account.
The following expenses have been prepaid:
Insurance, R62
Advertising, R948
Interest correctly calculated on the partners’ average monthly drawings accounts
amounted to R320 for B Blue and R80 for R Red.
In terms of the partnership agreement, the following must still be provided for:
- Interest on the partners’ capital and current account
- R Red’s salary and management commission
REQUIRED
Prepare the following in respect of Bluered Traders to comply with the requirements of IFRS
appropriate to the business of the partnership. Show all calculations but ignore comparatives:
a)
Statement of profit or loss and other comprehensive income for the year
ended 30 September 20.15.
b)
Statement of changes in equity for the year ended 30 September 20.15.
c)
Statement of financial position as at 30 September 20.15.
d)
Notes for the year ended 30 September 20.15.
e)
Prepare the current accounts of the partners, properly balanced, in the general ledger of
Bluered Traders for the year ended 30 September 20.15. Show the correct contra ledger
accounts.
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SOLUTION 3.1
a)
BLUERED TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 SEPTEMBER 20.15
Note
2.5
Revenue
Cost of sales
Gross profit
Distribution, administrative and other expenses
Salaries and wages R(12 189 + 69)
Advertising costs R(4 409 – 948)
Delivery expenses
Administrative expenses
Insurance expenses R(364 – 62)
Credit losses ➀
Depreciation ➁
Finance costs
Interest on mortgage ➂
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
b)
BLUERED TRADERS
STATEMENT OF CHANGES
30 SEPTEMBER 20.15
IN
Balances at 1 October 20.14
Total comprehensive income
for the year
Salaries to partners
Interest on capital ➃
Interest on current accounts ➄
Interest on drawings
Commission to partners ➅
Drawings
Partners’ share of total comprehensive income ➆
B Blue
R
20 000
Balances at 30 September 20.15 20 000
2.1
EQUITY
Capital
R Red
R
5 000
FOR
THE
Current
accounts
B Blue
R Red
R
R
1 060
2 800
YEAR
Total
equity
R
–
R
28 860
12 643
(1 000)
(1 250)
(193)
400
(1 060)
12 643
(9 000)
7 632
1 908
(9 540)
425
4 078
–
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ENDED
Appropriation
1 000
250
140
(80)
1 060
(3 000)
1 000
53
(320)
5 000
R
340 628
(306 000)
34 628
(21 385)
12 258
3 461
203
2 622
302
220
2 319
(600)
600
12 643
–
12 643
(12 000)
29 503
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SOLUTION 3.1 (continued)
c)
BLUERED TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.15
Note
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables R(16 020 – 20 – 800)
Prepayments R(948 + 62) ➇
Cash and cash equivalents
2.1, 3
2.3
4
4
R
32 721
32 721
37 311
21 069
15 200
1 010
32
Total assets
70 032
EQUITY AND LIABILITIES
Total equity
Capital R(20 000 + 5000)
Current accounts R(425 + 4 078)
29 503
25 000
4 503
Total liabilities
40 529
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
Current portion of long-term borrowings
Bank overdraft
Total equity and liabilities
5
5
5
5
6 000
6 000
34 529
24 369
4 000
6 160
70 032
d) BLUERED TRADERS
NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.15
Accounting policy
1.
Basis of presentation
The annual financial statements have been prepared in accordance with International
Financial Reporting Standards appropriate to the business of the entity. The annual
financial statements have been prepared on the historical cost basis, modified for the
fair valuation of certain financial instruments and incorporate the principle accounting
policies set out below. The statements are presented in South African rand.
2.
Summary of significant accounting policies
The annual financial statements incorporate the following principal accounting policies,
which are consistent with those applied in previous years, except where otherwise stated.
2.1
Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings. Equipment, furniture and vehicles are subsequently
measured at cost less accumulated depreciation and accumulated impairment losses.
Depreciation on equipment, furniture and vehicles is written off at a rate deemed to be
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SOLUTION 3.1 (continued)
sufficient to reduce the carrying amount of the assets over their estimated useful life to
their estimated residual value. The depreciation rates are as follows:
Equipment: 15% per annum according to the diminishing-balance method
Motor vehicles: 20% per annum according to the straight-line method
Furniture: 10% per annum according to the diminishing-balance method
2.2
Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument. The entity
classification depends on the purpose for which the entity acquired the financial assets.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs, except for “Financial assets at fair value through profit or loss”,
which is measured at fair value, transaction costs excluded. Financial instruments are
subsequently measured at fair value, unless they are measured at amortised cost as
required by IFRS. Cash and cash equivalents consist of cash in bank and short-term
deposits. Financial instruments that are subsequently measured at amortised cost are
done so using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3
Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost
or net realisable value. Cost is calculated using the first-in-first-out method. Net
realisable value is the estimated selling price in the ordinary course of business less any
costs of completion and disposal.
2.4
Financial liabilities
Financial liabilities are recognised in the entity's statement of financial position when the
entity becomes a party to the contractual provisions of the instrument. The classification
depends on the purpose for which the financial liabilities were obtained.
2.5
Revenue
Revenue is measured at the fair value of the consideration received or receivable.
Revenue represents the transfer of promised goods to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those
goods. Revenue from the sale of inventory consists of the total net invoiced sales,
excluding value-added tax and settlement discount granted. Revenue is recognised
when performance obligations are satisfied.
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SOLUTION 3.1 (continued)
3.
Property, plant and equipment
Carrying amount at
1 October 20.14
Cost
Accumulated depreciation
Additions
Disposals*
Depreciation for the year
Carrying amount at
30 September 20.15
Cost
Accumulated depreciation
Land and
buildings
Equipment
Motor
Vehicles
Office
Furniture
Total
R
R
R
R
R
19 500
19 500
–
–
–
–
13 280
18 280
(5 000)
1 560
–
(2 109)
400
900
(500)
–
–
(180)
19 500
19 500
–
12 731
19 840
(7 109)
220
900
(680)
–
–
300
350
(50)
(30)
33 480
39 030
(5 550)
1 560
–
(2 319)
270
350
(80)
32 721
40 590
(7 869)
*Included for illustrative purposes. In cases where there are no disposals, this item is excluded from the note.
Disposals are disclosed at carrying amount.
The partnership has pledged land and buildings with a carrying amount of R19 500 as
security for the mortgage obtained from Corner Bank.
4.
Financial assets
20.15
R
Current financial assets
Trade and other receivables:
Trade receivables control R(16 020 – 20)
Allowance for credit losses
Cash and cash equivalents:
Petty cash
5.
15 200
16 000
(800)
32
32
Financial liabilities
Non-current financial liabilities at amortised cost
Long-term borrowings: Mortgage
The mortgage was acquired from Corner Bank on 1 October 20.14 at an
interest rate of 6% per annum. This loan is secured by a first mortgage
over land and buildings (refer to note 3).
Total loan
Current portion of loan
Current financial liabilities
Trade and other payables:
Trade payables control
Accrued expenses:
Salaries payable
Interest payable on mortgage
Current portion of long-term borrowings at amortised cost
Bank overdraft
20.15
R
6 000
6 000
10 000
(4 000)
34 529
24 369
24 150
69
150
4 000
6 160
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SOLUTION 3.1 (continued)
Calculations
➀ Credit losses:
Credit losses written off
Increase in allowance for credit losses
Credit losses
20
200
220
R
Allowance for credit losses (30 September 20.15)
Allowance for credit losses (1 October 20.14)
Increase in allowance for credit losses
➁ Depreciation:
800
(600)
200
R
On equipment
Old equipment R(19 840 – 1 560) = R18 280
R(18 280 – 5 000) x 15%
New equipment R(1 560 x 15% x 6/12 )
On office furniture: R(350 – 50) x 10%
On motor vehicles: R900 x 20%
1 992
117
30
180
2 319
➂ Interest payable on mortgage:
R(600 – 450)
150
➃ Interest on capital accounts:
R
1 000
250
1 250
➄ Interest on current accounts:
R
B Blue – R20 000 x 5%
R Red – R5 000 x 5%
B Blue – R1 060x 5%
R Red – R2 800 x 5%
➅ Management commission: R Red
Total comprehensive income for the year
Less: Salary to R Red
Interest on capital
Interest on current accounts
Add: Interest on drawings
Comprehensive income before commission
 R10 600 x 10% = R1 060
➆ Partners’ share of total comprehensive income
Total comprehensive income for the year
(before commission to R Red)
Commission to R Red
Comprehensive income available for distributions
53
140
193
R
12 643
(1 000)
(1 250)
(193)
400
10 600
R
10 600
(1 060)
9 540
B Blue: R9 540 x (R20 000/R25 000) = R7 632
R Red: R9 540 x (R 5 000/R25 000) = R1 908
➇ Prepayments:
R
Advertising costs
Insurance expenses
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SOLUTION 3.1 (continued)
e)
BLUERED TRADERS
GENERAL LEDGER
Dr
20.15
Sep 30
Current account: B Blue
R
Interest on drawings
Drawings (for the year)
Balance
c/d
320
9 000
425
20.14
Oct 1
20.15
Sept 30
Balance
Cr
b/d
Interest on capital
Interest on current account
Appropriation account
9 745
20.15
Oct 1
Dr
20.15
Sep 30
Balance
Interest on drawings
Drawings (for the year)
Balance
c/d
80
3 000
4 078
20.14
Oct 1
20.15
Sept 30
Balance
425
b/d
R
2 800
Cr
Salary to partner
Interest on capital
Interest on current account
Commission
Appropriation account
1 000
250
140
1 060
1 908
7 158
Balance
4 078
7 158
20.15
Oct 1
1 000
53
7 632
9 745
b/d
Current account: R Red
R
R
1 060
b/d
EXERCISE 3.2
The undermentioned information was taken from the accounting records of Toypork Traders,
a partnership with T Toy and P Porky as partners, on 28 February 20.15, the financial year
end of the partnership.
TOYPORK TRADERS
BALANCES AS AT 28 FEBRUARY 20.15
Sales .................................................................................................................
Settlement discount received............................................................................
Purchases returns .............................................................................................
Administrative expenses ...................................................................................
Sales returns .....................................................................................................
Purchases .........................................................................................................
Credit losses .....................................................................................................
Drawings: T Toy ................................................................................................
Drawings: P Porky ............................................................................................
Depreciation ......................................................................................................
Land and buildings ............................................................................................
Motor vehicles at cost .......................................................................................
Furniture and fittings at cost .............................................................................
Inventory (1 March 20.14).................................................................................
Trade receivables control .................................................................................
Allowance for settlement discount received .....................................................
Current account: T Toy (1 March 20.14) (Dr) ...................................................
Current account: P Porky (1 March 20.14) (Dr) ...............................................
Capital: T Toy (1 March 20.14) .........................................................................
R
97 600
1 450
850
33 750
860
44 000
2 440
3 880
1 800
3 940
20 000
36 000
12 000
21 530
23 520
400
500
600
40 000
Continued on the next page
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Capital: P Porky (1 March 20.14) .....................................................................
Bank overdraft ...................................................................................................
Accumulated depreciation: Furniture and fittings .............................................
Accumulated depreciation: Motor vehicles .......................................................
Allowance for settlement discount granted.......................................................
Allowance for credit losses ...............................................................................
Trade payables control .....................................................................................
R
20 000
4 922
5 298
14 800
500
2 300
17 500
Additional information:
1.
2.
3.
4.
5.
T Toy and P Porky share profits and losses in the ratio of 2:1 respectively.
On 28 February 20.15, salaries for services rendered according to the partnership
agreement were paid to the partners as follows: T Toy: R6 000 and P Porky R4 000.
Both these amounts were recorded as administrative expenses.
Interest on the partners’ capital accounts amounted to R2 140 for T Toy and R1 070
for P Porky.
Inventory on 28 February 20.15 amounted to R19 100.
Depreciation amounted to R940 on furniture and fittings and R3 000 on motor vehicles.
REQUIRED
Prepare the following in respect of Toypork Traders to comply with the requirements of IFRS
appropriate to the business of the partnership. Show all calculations but ignore comparatives:
a)
Statement of profit or loss and other comprehensive income for the year ended
28 February 20.15.
b)
Statement of changes in equity for the year ended 28 February 20.15.
c)
Statement of financial position as at 28 February 20.15.
d)
The note pertaining to property, plant and equipment for the year ended
28 February 20.15.
e)
Prepare the appropriation account of the partners, properly balanced, in the general
ledger of Toypork Traders for the year ended 28 February 20.15. Show the correct
contra ledger accounts.
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SOLUTION 3.2
a)
TOYPORK TRADERS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.15
Note
Inventory (28 February 20.15)
R
96 740
(44 130)
21 530
41 700
63 230
(19 100)
Gross profit
Distribution, administrative and other expenses
Administrative expenses R(33 750 – 10 000)
Credit losses
Depreciation
52 610
(30 130)
23 750
2 440
3 940
Revenue R(97 600 – 860)
Cost of sales
Inventory (1 March 20.14)
Purchases R(44 000 – 850 – 1 450)
2
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
b)
22 480
–
22 480
TOYPORK TRADERS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.15
Capital
T Toy
Balances at 1 March 20.14
Total comprehensive income for the year
Salaries to partners
Interest on capital
Drawings (3 880 + 6 000) (1 800 + 4 000)
Partners’ share of total comprehensive income ➀
Balances at 28 February 20.15
R
40 000
40 000
P
Porky
R
20 000
20 000
Current
accounts
P
T Toy
Porky
R
R
(500)
(600)
Appropriation
Total
Equity
R
–
22 480
(10 000)
(3 210)
R
58 900
22 480
6 000
2 140
(9 880)
4 000
1 070
(5 800)
6 180
3 090
(9 270)
3 940
1 760
–
(15 680)
65 700
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SOLUTION 3.2 (continued)
c)
TOYPORK TRADERS
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.15
Note
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables R(23 520 – 2 300 – 500)
3
R
47 902
47 902
39 820
19 100
20 720
Total assets
87 722
EQUITY AND LIABILITIES
Total equity
Capital R(40 000 + 20 000)
Current accounts R(3 940 + 1 760)
65 700
60 000
5 700
Total liabilities
22 022
Current liabilities
Trade payables R(17 500 – 400)
Bank overdraft
22 022
17 100
4 922
Total equity and liabilities
87 722
d)
TOYPORK TRADERS
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.15
3.
Property, plant and equipment
Carrying amount at 1 March 20.14
Cost
Accumulated depreciation ➁
Depreciation for the year
Carrying amount at 28 February 20.15
Cost
Accumulated depreciation
Land and
buildings
R
20 000
20 000
–
–
20 000
20 000
–
Furniture
and
fittings
Motor
vehicles
R
7 642
12 000
(4 358)
(940)
6 702
12 000
(5 298)
R
24 200
36 000
(11 800)
(3 000)
21 200
36 000
(14 800)
Calculations
➀ Partners’ share of total comprehensive income
Remaining total comprehensive income to be shared by partners:
R22 480 – R(10 000 + 3 210) = R9 270
T Toy: R9 270 x 2/3 = R6 180
P Porky: R9 270 x 1/3 = R3 090
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Total
R
51 842
68 000
(16 158)
(3 940)
47 902
68 000
( 20 098)
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SOLUTION 3.2 (continued)
➁ Accumulated depreciation at 1 March 20.14:
Furniture
and fittings
Accumulated depreciation at 28 February 20.15
Depreciation for the year
e)
R
5 298
(940)
4 358
Motor
vehicles
R
14 800
(3 000)
11 800
TOYPORK TRADERS
GENERAL LEDGER
Dr
20.15
Feb 28
Appropriation account
R
20.15
Interest on capital: T Toy
2 140 Feb 28 Profit or loss account
Interest on capital: P Porky
1 070
Salary: T Toy
6 000
Salary: P Porky
4 000
Current account: T Toy
6 180
Current account: P Porky
3 090
22 480
Cr
R
22 480
22 480
EXERCISE 3.3
Shoestring Corner Shop is a partnership with S Shoe and S String as partners. The information
below pertains to the business activities of the partnership for the year ended
28 February 20.15.
SHOESTRING CORNER SHOP
BALANCES AS AT 28 FEBRUARY 20.15
Land and buildings ............................................................................................
Motor vehicles at cost .......................................................................................
Trade receivables control .................................................................................
Inventory............................................................................................................
Bank (Dr) ...........................................................................................................
Accumulated depreciation: Motor vehicles (1 March 20.14) ............................
Allowance for credit losses (1 March 20.14) ....................................................
Capital: S Shoe (fixed) ......................................................................................
Capital: S String (fixed) .....................................................................................
Current account: S Shoe (Cr: 1 March 20.14) ..................................................
Current account: S String (Dr: 1 March 20.14) .................................................
Drawings: S Shoe .............................................................................................
Drawings: S String ............................................................................................
Administrative expenses ...................................................................................
Trading account (gross profit for the year) .......................................................
R
100 000
99 000
82 000
135 000
98 000
49 000
1 000
240 000
160 000
50 000
40 000
55 000
11 000
80 000
200 000
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EXERCISE 3.3 (continued)
Additional information:
1.
The partnership agreement stipulates the following:
• Interest is to be calculated at 7,5% per annum on the opening balances of the capital
accounts.
• Interest is to be calculated at 10% per annum on the opening balances of the current
accounts.
• S String is entitled to a monthly salary of R1 250.
• Profit/losses are to be shared equally.
2.
The following must still be accounted for:
• Depreciation on motor vehicles at 30% per annum, according to the diminishingbalance method
• Credit losses to the amount of R2 000.
• Interest on drawings for the current financial year amounted to R5 000 for S Shoe
and R1 000 for S String.
• An investigation indicated that credit losses could be as much as R4 000 during the
next financial period. The allowance for credit losses must be adjusted accordingly.
REQUIRED
Prepare the following in respect of Shoestring Corner Shop to comply with the requirements
of IFRS appropriate to the business of the partnership. Show all calculations but ignore
comparatives:
a)
Statement of profit or loss and other comprehensive income for the year
ended 28 February 20.15.
b)
Statement of changes in equity for the year ended 28 February 20.15.
SOLUTION 3.3
a)
SHOESTRING CORNER SHOP
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.15
Note
Gross profit
Administrative and other expenses
Administrative expenses
Credit losses ➀
Depreciation R(99 000 – 49 000) x 30%
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
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R
200 000
(100 000)
80 000
5 000
15 000
100 000
–
100 000
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SOLUTION 3.3 (continued)
b)
SHOESTRING CORNER SHOP
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.15
Balances at 1 March 20.14
Total comprehensive income
for the year
Salaries to partner ➁
Interest on capital ➂
Interest on current accounts ➃
Interest on drawings
Drawings
Partners’ share of total
comprehensive income ➄
Balances at
28 February 20.15
Capital
S Shoe S String
R
R
240 000
160 000
240 000
160 000
Current accounts
S Shoe
S String
R
R
50 000
(40 000)
18 000
5 000
(5 000)
(55 000)
15 000
12 000
(4 000)
(1 000)
(11 000)
30 000
30 000
43 000
1 000
Appropriation
R
–
Total
equity
R
410 000
100 000
(15 000)
(30 000)
(1 000)
6 000
100 000
(66 000)
(60 000)
–
444 000
Calculations
➀ Credit losses:
Credit losses written off
Increase in allowance for credit losses *
Credit losses
Allowance for credit losses (28 February 20.15)
Allowance for credit losses (1 March 20.14)
Increase in allowance for credit losses*
R
2 000
3 000
5 000
R
4 000
(1 000)
3 000
➁ Salary to partner: S String
R1 250 x 12 = R15 000
➂ Interest on capital:
S Shoe: R240 000 x 7,5% = R18 000
S String: R160 000 x 7,5% = R12 000
➃ Interest on current accounts:
S Shoe: R50 000 (Cr) x 10% = R5 000 (payable)
S String: R40 000 (Dr) x 10% = R4 000 (receivable)
➄ Partners’ share of total comprehensive income:
S Shoe: R60 000 x 50% = R30 000
S String: R60 000 x 50% = R30 000
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Define a partnership.
Explain the reasons why partnerships are formed.
Discuss the contents of a partnership agreement in general.
Explain the ways in which a partnership can be established.
Explain the factors which can result in the dissolution of a partnership.
Record the transactions of a partnership in its books.
Prepare the financial statements of a partnership to comply with the
requirements of the International Financial Reporting Standards (IFRS)
appropriate to the business of the partnership.
If you answered "yes" to all of the above assessment criteria, you can move on to
learning unit 4. If your answer was "no" to any of the above criteria, revise those
sections concerned before progressing to learning unit 4.
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LEARNING UNIT
4
4
Changes in the ownership structure of partnerships
Learning outcomes ................................................................................................................ 70
Key concepts.......................................................................................................................... 70
4.1
Introduction ................................................................................................................... 71
4.2
Valuation adjustments .................................................................................................. 71
4.3
Goodwill ........................................................................................................................ 72
4.4
The calculation of new profit-sharing ratios ................................................................. 72
4.5
Recording a change in ownership structure by way of a personal transaction ........... 74
4.6
Recording a change in ownership structure by way of a transaction with the
partnership .................................................................................................................... 74
4.7
Exercises and solutions................................................................................................ 75
Self-assessment .................................................................................................................... 85
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Learning outcomes
After studying this learning unit, you should be able to:
•
•
•
•
•
•
briefly describe what a change in the ownership structure of a partnership entails
mention events that cause a change in the ownership structure of a partnership
calculate the new profit-sharing ratio of a partnership
record a change in the ownership structure of a partnership by way of a personal
transaction
record a change in the ownership structure of a partnership by way of transaction with the
partnership as business entity by applying the accounting procedure which is based on
the legal perspective
prepare a statement of financial position for a new partnership at the date of its formation
according to the requirements of IFRS appropriate to the business of the partnership,
based on the legal perspective
Key concepts
•
•
•
•
•
•
•
•
•
Change in ownership structure
Dissolution
Valuation adjustment
Goodwill acquired
Revaluation surplus
Adjustment of profit-sharing ratio
Personal transaction
Transaction with a partnership as a business entity
Accounting procedure based on the legal perspective
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4.1
Introduction
After having studied learning unit 3, you should have a solid foundation about the accounting
procedures and the preparation of financial statements for a partnership. In this learning unit
we focus on the change in the ownership structure of partnerships that changes the
contractual relationship among partners. A change in the ownership structure of the
partnership occurs when a new partner is admitted to a partnership, when an existing partner
retires or dies or when the profit-sharing ratio of a partnership changes. In terms of the South
African common law, a partnership is not a separate legal entity; therefore, any change in the
ownership structure of the partnership terminates the existing partnership and creates a new
partnership.
Study paragraph 3.1 in the prescribed textbook. Please note that the goingconcern perspective falls outside the scope of this module.
Activity 4.1
a)
b)
Name the two accounting perspectives that can be adopted to record a change in the
ownership structure.
Explain in your own words what is meant by the legal perspective to account for a change
in the partnership structure.
Feedback 4.1
a)
b)
4.2
The legal and going-concern perspective.
The old and the new partnership are regarded as separate business entities and their
activities are separately recorded and reported.
Valuation adjustments
Study paragraph 3.2 in the prescribed textbook.
Note that the selling price of a partnership is determined by the fair value, and not the cost
price of the partnership. Recall that fair value is the amount for which an asset can be
exchanged, or a liability can be settled between knowledgeable, willing parties in an arm’s
length transaction. As is indicated in the prescribed textbook, the fair value of a partnership
refers to the fair value of the net assets (including goodwill) of the partnership. Net assets =
assets – liabilities.
Activity 4.2
Work through example 3.1 in the prescribed textbook.
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Remember that to revalue an asset or liability in lieu of a change in ownership structure, we
make use of a valuation account. The valuation account is closed off to the accounts of the
existing partners according to their existing profit-sharing ratio. Revaluations enable the value
of assets and liabilities to be adjusted to reflect their fair value instead of their cost or carrying
amounts.
In example 3.2 in the prescribed textbook, the revaluation is reversed in the new profit-sharing
ratio because the new partner paid a certain amount based on the fair value of the assets and
liabilities. So, any adjustment from fair value back to cost or carrying amount will reduce his
capital investment accordingly and similarly so for the remaining partners. However, the goingconcern perspective is excluded from this module and no further discussion is therefore
needed.
4.3
Goodwill
Study paragraph 3.3 in the prescribed textbook.
Activity 4.3
a)
b)
c)
Define goodwill in terms of IFRS 3.
Goodwill is classified as a non-current asset in the statement of financial position.
True or False?
After initial recognition of goodwill at cost, how is goodwill subsequently measured?
Feedback 4.3
a)
b)
c)
4.4
Goodwill is a future economic benefit arising from assets that are not capable of being
individually identified and separately recognised.
True. Goodwill is also an intangible asset compared to property, plant and equipment,
which are tangible assets.
Goodwill is subsequently measured at cost less impairment.
The calculation of new profit-sharing ratios
Study paragraph 3.4 in the prescribed textbook.
Make sure that you fully understand the various methods according to which the new profitsharing of the partners in a new partnership is calculated. Remember your school
mathematics when you work with fractions. Anything multiplied by 1 remains the same
(unchanged) and any numerator divided by the same denominator is equal to 1. You can only
work with fractions if they have the same denominator. Thus 2/3 – 1/4 must be converted to
have the same denominator and you do that by multiplying each ratio with a ratio equal to 1
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(to remain unchanged) that will enable them to have the same denominator. In this case the
same denominator will be 12 (3x4).
Thus, each ratio is multiplied with the ratio (1) that will make their denominator 12.
Thus [2/3 x 4/4]= 8/12 – [1/4 x 3/3 ] = 8/12 – 3/12 = 5/12.
•
Partners relinquish a share to a new partner according to their previous profit-sharing
ratio.
Activity 4.4
Work through example 3.3 in the prescribed textbook.
•
Partners equally relinquish a share to a new partner.
Activity 4.5
Work through example 3.4 in the prescribed textbook.
•
Partners relinquish a share according to a ratio other than equally or according to their
previous profit-sharing ratio to the new partner.
Activity 4.6
Work through example 3.5 in the prescribed textbook.
•
New profit-sharing ratio due to a retirement or death of an existing partner.
Activity 4.7
Work through example 3.6 in the prescribed textbook.
•
New profit-sharing ratio due to admission of a new partner and retirement of a partner.
Activity 4.8
Work through example 3.7 in the prescribed textbook.
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4.5
Recording a change in ownership structure by way of a
personal transaction
Study paragraph 3.5 in the prescribed textbook.
Make sure that you know what is meant by a personal transaction, and that no valuation
adjustments or goodwill acquired are recorded when a change in the ownership structure of
a partnership takes place by way of a personal transaction. Take note of the entries that are
recorded under these circumstances.
Activity 4.9
Work through examples 3.8 and 3.9 in the prescribed textbook.
4.6
Recording a change in ownership structure by way of a
transaction with the partnership
In paragraph 3.6 in the prescribed textbook, two accounting procedures according to which a
change in the ownership structure of a partnership can be accomplished, are discussed. The
different procedures are based on two distinct perspectives, namely the legal and the goingconcern perspective. The legal perspective is discussed in paragraph 3.6.1 in the prescribed
textbook and must be studied thoroughly. The going-concern perspective discussed in
paragraph 3.6.2, falls outside the scope of this module and can be ignored.
Study paragraph 3.6.1 in the prescribed textbook.
Remember the steps.
Accounting entries to be made in the books of the existing partnership:
•
•
•
Close off the books of the existing partnership. (This includes doing the necessary yearend adjustments, the closing off of nominal accounts and the closing off of drawings
accounts to current accounts, which was dealt with comprehensively in learning unit 3.)
All that remains will be accounts that must be disclosed in the statement of financial
position and, if required, a preliminary statement of financial position can be constructed.
In most questions, the closing adjustments have been dealt with and only entries affecting
the change in the degree of control will have to be made.
Close off the balances of current accounts of the existing partners to their respective
capital accounts.
If a revaluation surplus existed, it forms part of the equity of the partners and must be
allocated to the capital accounts of the existing partners in their existing profit-sharing
ratio.
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•
Record any valuation adjustments (refer to section 4.2) of existing assets and liabilities in
a valuation account.
Record goodwill initially acquired (refer to section 4.3). Remember the formula to calculate
if an incoming partner paid for goodwill that must be captured. Examples 3.10 and 3.11
will assist you in this regard.
Record the dissolution of the partnership. We make use of a transferral account to close
off the accounting records of the existing partnership and open the accounting records of
the new partnership.
•
•
Accounting entries to be made in the books of the new partnership:
•
•
Record the formation of the new partnership.
Adjust the capital account balances if required by the partners in the new partnership.
Examples 3.10 and 3.11 deal with these entries.
Activity 4.10
Work through examples 3.10 to 3.12 in the prescribed textbook. Make sure you understand
each step and remember how to calculate the new profit-sharing ratio.
Study paragraph 3.8 in the prescribed textbook. Remember that only the legal
perspective has been dealt with and needs to be studied.
4.7
Exercises and solutions
EXERCISE 4.1:
Recording valuation adjustments in the books of an existing
partnership
Work through the exercise, taking note of how valuation adjustments are recorded in the
books of an existing partnership in preparation of its change in ownership structure.
Stevie and Bob are in a partnership, Wonder Traders, and they share profits and losses in the
ratio of 3:2 respectively. They decided to admit Tina as a partner. From 1 March 20.15, the
profit-sharing ratio for Stevie, Bob and Tina will be 3:2:1 respectively. The following information
appeared in the accounting records of Wonder Traders, immediately prior to the recording of
any valuation adjustments:
WONDER TRADERS
BALANCES AS AT 28 FEBRUARY 20.15
R
Land and buildings ..............................................................................................
Trade receivables control....................................................................................
Inventory..............................................................................................................
Bank (Dr) .............................................................................................................
Capital: Stevie .....................................................................................................
Capital: Bob .........................................................................................................
Trade payables control .......................................................................................
30 000
26 000
44 000
20 000
60 000
40 000
20 000
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EXERCISE 4.1 (continued)
Additional information:
To prepare for the change in the ownership structure of Wonder Traders, the following
agreement was reached on 28 February 20.15:
1.
2.
3.
An allowance of R2 600 must be created for credit losses.
Inventory must be recorded at R50 000.
Land and buildings must be recorded at R50 000.
REQUIRED
Prepare the following accounts, properly balanced or closed off, in the general ledger of
Wonder Traders to record the valuation adjustments on 28 February 20.15:
•
•
•
•
•
•
Land and buildings
Inventory
Trade receivables control and allowance for credit losses
Valuation account
Capital: Stevie
Capital: Bob
SOLUTION 4.1
WONDER TRADERS
GENERAL LEDGER
Dr
20.15
Feb 28
Balance
Valuation account
R(50 000 – 30 000)
b/d
Land and buildings
R
30 000
20 000
Cr
50 000
Dr
20.15
Feb 28
Balance
Valuation account
R(50 000 – 44 000)
b/d
Inventory
R
44 000
6 000
Cr
50 000
Dr
20.15
Feb 28
Balance
Trade receivables control
R
b/d
26 000
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SOLUTION 4.1 (continued)
Dr
Dr
20.15
Feb 28
Allowance for credit losses
20.15
Feb 28 Valuation account
Allowance for credit
losses
Capital: Stevie (3/5)
Capital: Bob (2/5)
Dr
Dr
EXERCISE 4.2:
Valuation account
R
20.15
Feb 28
2 600
14 040
9 360
26 000
Capital: Stevie
20.15
Feb 28
Capital: Bob
20.15
Feb 28
Cr
R
2 600
Cr
R
20 000
6 000
Land and buildings
Inventory
26 000
Balance
Valuation account
Balance
Valuation account
b/d
Cr
R
60 000
14 040
74 040
b/d
Cr
R
40 000
9 360
49 360
Recording a change in the ownership structure of a partnership by
applying the accounting procedure which is based on the legal
perspective
Mahatma and Lerato were trading as The House Care Specialists and they shared
profits/losses equally. They decided to admit Enoch as a partner from 1 July 20.15 and to
trade as Home Care and Butler Services. Enoch had to deposit a capital sum of R6 500 into
the partnership’s bank account for a 1/3 share in the net assets (equity) of the new partnership.
The partners will share in the profits/losses equally and the capital accounts’ ratio of the
partners must be in the same ratio as their profit-sharing ratio. On 1 July 20.15, Enoch
deposited R6 500 into the bank account of the partnership and to ensure that the capital ratio
of the partnership is in the same ratio as his profit-sharing ratio, a cash repayment to Mahatma
and a cash contribution received from Lerato were recorded in their capital accounts.
On 30 June 20.15, the books of The House Care Specialists were closed off. At that date, the
following items appeared in the preliminary statement of financial position of the partnership
and the assets of The House Care Specialists were valued in preparation of the change in its
ownership structure:
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EXERCISE 4.2 (continued)
Items from the list of balances and valued amounts:
Item
Capital: Mahatma ............................................................................
Capital: Lerato .................................................................................
Current account: Mahatma (Dr) .......................................................
Current account: Lerato (Cr) ............................................................
Revaluation surplus .........................................................................
Land and buildings ..........................................................................
Goodwill ..........................................................................................
Inventory: Cleaning materials ..........................................................
Trade receivables control ................................................................
Bank (favourable) ............................................................................
Allowance for credit losses ..............................................................
Statement
of
financial
position
R
4 200
3 200
100
200
1 000
4 500
1 500
2 000
500
Valued
amounts
R
7 500
2 100
1 200
2 000
500
300
REQUIRED
a)
Prepare the journal entries on 30 June 20.15 in the general journal of The House Care
Specialists to prepare for the admission of Enoch as a partner and to record the
dissolution of the partnership. (Apply steps 2 to 6 of the accounting procedure based
on the legal perspective.)
b)
Prepare the journal entries on 1 July 20.15 in the general journal of Home Care and
Butler Services to record its formation and to give effect to the decisions which pertain
to the accounting policy and/or the partnership agreement. (Apply steps 7 to 9 of the
accounting procedure based on the legal perspective.)
c)
Prepare the statement of financial position of Home Care and Butler Services as at
1 July 20.15 according to the requirements of IFRS appropriate to the business of the
partnership. Notes and comparative figures are not required.
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SOLUTION 4.2
a)
THE HOUSE CARE SPECIALISTS
GENERAL JOURNAL
Debit
R
20.15
June 30
Capital: Mahatma
Current account: Lerato
Current account: Mahatma
Capital account: Lerato
Closing off the balances of the current accounts of Mahatma
and Lerato
Revaluation surplus
Capital: Mahatma (R1 000 x ½)
Capital: Lerato
Revaluation surplus apportioned to the capital accounts of
Mahatma and Lerato according to their profit-sharing ratio
Land and buildings R(7 500 – 4 500)
Inventory: Cleaning materials R(1 500 – 1 200)
Allowance for credit losses
Valuation account (balancing amount)
Recording the valuation adjustments
Valuation account
Capital: Mahatma (R2 400 x ½)
Capital: Lerato (R2 400 x ½)
Closing off the balance amount of the valuation account to the
capital accounts of Mahatma and Lerato according to their
profit-sharing ratio
Goodwill
Capital: Mahatma (R2 100 x ½)
Capital: Lerato (R2 100 x ½)
Recording goodwill in preparation for the admission of Enoch
Transferral account
Land and buildings
Goodwill
Inventory: Cleaning materials
Trade receivables control
Bank
Closing off the balances of the assets accounts to the
transferral account to record the dissolution of the partnership
Capital: Mahatma
Capital: Lerato
Allowance for credit losses
Transferral account
Closing off the balances of the equity and allowance accounts
to the transferral account to record the dissolution
Credit
R
100
200
100
200
1 000
500
500
3 000
300
300
2 400
2 400
1 200
1 200
2 100
1 050
1 050
13 300
7 500
2 100
1 200
2 000
500
6 850
6 150
300
13 300
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SOLUTION 4.2 (continued)
Calculation
Capital account balances of partners
Mahatma: R(4 200 – 100 + 500 + 1 200 + 1 050) = R6 850
Lerato:
R(3 200 + 200 + 500 + 1 200 + 1 050) = R6 150
b)
HOME CARE AND BUTLER SERVICES
GENERAL JOURNAL
Debit
R
20.15
July 1
Land and buildings R7 500 x (R6 850 ÷ R13 000)
Goodwill R2 100 x (R6 850 ÷ R13 000)
Inventory: Cleaning materials R1 200 x (R6 850 ÷ R13 000)
Trade receivables control R2 000 x (R6 850 ÷ R13 000)
Bank R500 x (R6 850 ÷ R13 000)
Allowance for credit losses R300 x (R6 850 ÷ R13 000)
Capital: Mahatma
Recording the capital contribution of Mahatma
Land and buildings R7 500 x (R6 150 ÷ R13 000)
Goodwill R2 100 x (R6 150 ÷ R13 000)
Inventory: Cleaning materials R1 200 x (R6 150 ÷ R13 000)
Trade receivables control R2 000 x (R6 150 ÷ R13 000)
Bank R500 x (R6 150 ÷ R13 000)
Allowance for credit losses R300 x (R6 150 ÷ R13 000)
Capital: Lerato
Recording the capital contribution of Lerato
Bank
Capital: Enoch
Recording the capital contribution of Enoch
Capital: Mahatma
Bank
Recording the cash repayment to Mahatma to bring the capital
account ratio in the same ratio as the profit-sharing ratio
Bank
Capital: Lerato
Recording the cash contribution of Lerato to bring the capital
account ratio in the same ratio as the profit-sharing ratio
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Credit
R
3 952
1 107
632
1 054
263
158
6 850
3 548
993
568
946
237
142
6 150
6 500
6 500
350
350
350
350
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SOLUTION 4.2 (continued)
Calculation
Adjustment of capital account balances of Mahatma and Lerato
Calculation of capital account balances according to profit-sharing ratio:
Capital: Mahatma
R19 500* x 1/3 = R6 500
Capital: Lerato
R19 500* x 1/3 = R6 500
Capital: Enoch
R19 500* x 1/3 = R6 500
* Total amount of capital in the new partnership
R(6 850 + 6 150 + 6 500) = R19 500
OR
Enoch’s capital contribution multiplied by the inverse of his share in the net assets of
the new partnership (R6 500 x 3) = R19 500
Difference between recorded and calculated capital account balances:
Calculated capital
Recorded capital
account balance
Difference
account balance
according to profitsharing ratio
R
R
R
Mahatma
6 850
6 500
350
6 150
6 500
(350)
Lerato
6 500
6 500
–
Enoch
The recorded capital account balance of Mahatma is greater than his calculated capital
account balance. Mahatma’s capital account balance must be reduced by R350. The
recorded capital account balance of Lerato is smaller than her calculated capital account
balance; therefore, Lerato must increase her capital contribution by R350.
c)
HOME CARE AND BUTLER SERVICES
STATEMENT OF FINANCIAL PROSITION AS AT 1 JULY 20.15
Note
ASSETS
Non-current assets
Property, plant and equipment R(3 952 + 3 548)
Goodwill R(1 107 + 993)
Current assets
Inventories R(632 + 568)
Trade receivables R(1 054 + 946 – 158 – 142 )
Cash and cash equivalents R(263 + 237 + 6 500 – 350 + 350)
R
9 600
7 500
2 100
9 900
1 200
1 700
7 000
Total assets
19 500
EQUITY AND LIABILITIES
Total equity
Capital R(6 850 + 6 150 + 6 500 – 350 + 350)
19 500
19 500
Total equity and liabilities
19 500
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EXERCISE 4.3:
Preparation of partner’s capital accounts and valuation account in
preparation of the change in the ownership structure of a
partnership
Work through the exercise, taking note of the following:
• When goodwill is created, it is not recorded in the valuation account.
• When the legal perspective is applied, the valuation and capital accounts are closed
off to the transferral account.
• The retired partner’s capital account is closed off to a loan account on the last date of the
existing partnership if the capital account was not settled by the partnership.
Kally, Rocky and Mike are in a partnership, trading as Fighting Fists, and share profits or losses
in the ratio of 2:2:1 respectively. Kally decided to retire from the partnership. His last day as a
partner in the partnership will be 31 May 20.15, which is also the financial year end of Fighting
Fists. The new partnership will pay out Kally’s capital in cash on 30 November 20.15. Rocky
and Mike decided to admit Gerrie as a partner as from 1 June 20.15. The new partnership will
trade as Fighting Fit. The profit-sharing ratio between Rocky, Mike and Gerrie will be 3:2:1
respectively. Gerrie will contribute R80 000 in cash for a 1/6 share in the equity (net assets) of
the new partnership.
The following information is taken from the accounting records of Fighting Fists at 31 May
20.15, immediately prior to the recording of valuation adjustments in preparation of the change
in the ownership structure of the partnership:
List of balances as at 31 May 20.15
R
Capital: Kally ............................................................................................................
Capital: Rocky ..........................................................................................................
Capital: Mike.............................................................................................................
Land and buildings ...................................................................................................
Inventory...................................................................................................................
Trade receivables control.........................................................................................
Trade payables control ............................................................................................
Bank (favourable) .....................................................................................................
56 000
74 000
38 000
80 000
48 000
36 000
14 000
18 000
Additional information:
1.
1.1
1.2
1.3
1.4
2.
To prepare for the change in the ownership structure of Fighting Fists, the following
agreement was reached on 31 May 20.15:
Goodwill must be recorded in the books.
An allowance for credit losses must be created at R3 600.
Inventories must be valued at R60 000.
Land and buildings must be valued at R140 000.
The change in the ownership structure of the partnership is viewed from a legal
perspective.
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REQUIRED
Prepare the valuation account and the capital accounts of Kally, Rocky and Mike (properly
closed off) in the general ledger of Fighting Fists at 31 May 20.15.
SOLUTION 4.3
FIGHTING FISTS
GENERAL LEDGER
Dr
20.15
May 31
Dr
20.15
May 31
Allowance for credit
Losses
Capital: Kally ➀
Capital: Rocky ➀
Capital: Mike ➀
Valuation account
R
20.15
May 31
3 600
27 360
27 360
13 680
72 000
Capital: Kally
R
20.15
182 144 May 31
Loan: Kally
Land and buildings
R(140 000 – 80 000)
Inventory
R(60 000 – 48 000)
Transferral account
Capital: Rocky
R
20.15
200 144 May 31
Balance b/d
Valuation account
Goodwill ➁
Balance b/d
Valuation account
Goodwill ➁
200 144
Dr
20.15
May 31
Dr
20.15
May 31
Transferral account
Transferral account
Capital: Mike
R
20.15
101 072 May 31
12 000
72 000
182 144
Dr
20.15
May 31
Cr
R
60 000
Cr
R
56 000
27 360
98 784
182 144
Cr
R
74 000
27 360
98 784
200 144
101 072
Cr
R
38 000
13 680
49 392
101 072
Loan: Kally
20.15
182 144 May 31
182 144
Cr
R
182 144
182 144
Balance b/d
Valuation account
Goodwill ➁
Capital: Kally
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SOLUTION 4.3 (continued)
Comment
The loan account of Kally was not required, and is shown for illustration purposes.
Calculations
➀
Apportionment of the balance of the valuation account to the capital account of
the partners of the existing partnership
Balance of valuation account to be apportioned: R(72 000 – 3 600) = R68 400
Kally: R68 400 x 2/5 = R27 360
Rocky: R68 400 x 2/5 = R27 360
Mike: R68 400 x 1/5 = R13 680
➁
Goodwill
Goodwill acquired = (Capital contribution of new partner multiplied by inverse of new
partner’s share in the equity [net assets] of new partnership) – Equity of new partnership
= (R80 000 x 6/1) – R(101 360* + 51 680* + 80 000)
= R(480 000 – 233 040)
= R246 960
* Balances of capital accounts
Rocky =
Opening balance + apportionment of profit of valuation account
=
R(74 000 + 27 360)
=
R101 360
Mike =
Opening balance + apportionment of profit of valuation account
=
R(38 000 + 13 680)
=
R51 680
Note that the capital account balance of Kally is excluded from the calculation of
goodwill, because Kally will not be a partner in the new partnership. A portion of the goodwill
is, however, credited in the capital account of Kally (as he is a partner of the existing
partnership Fighting Fists) and hence attributed to the creation of the goodwill.
Kally: R246 960 x 2/5 = R98 784
Rocky: R246 960 x 2/5 = R98 784
Mike: R246 960 x 1/5 = R49 392
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Briefly describe what a change in the ownership structure of a partnership
entails.
Mention events that cause a change in the ownership structure of a
partnership.
Calculate the new profit-sharing ratio of a partnership.
Record a change in the ownership structure of a partnership by way of
transaction with the partnership as a business entity by applying the
accounting procedure, which is based on the legal perspective.
If an accounting procedure is based on the legal perspective, prepare a
statement of financial position of a new partnership at the date of its
formation according to the requirements of IFRS appropriate to the
business of the partnership.
If you answered "yes" to all of the above assessment criteria, you can move on to
learning unit 5. If your answer was "no" to any of the above criteria, revise those
sections concerned before progressing to learning unit 5.
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LEARNING UNIT
6
5
Close corporations
Learning outcomes ................................................................................................................ 87
Key concepts.......................................................................................................................... 87
5.1
Introduction ................................................................................................................... 88
5.2
Attributes of a close corporation................................................................................... 88
5.3
Advantages of a close corporation ............................................................................... 89
5.4
Disadvantages of a close corporation .......................................................................... 89
5.5
Prescribed forms of a close corporation ...................................................................... 89
5.6
Name and registration number of a close corporation................................................. 89
5.7
Membership of a close corporation .............................................................................. 90
5.8
Internal relations ........................................................................................................... 90
5.9
External relations .......................................................................................................... 90
5.10 Joint liability of members and others for the debts of a close corporation .................. 90
5.11 The tax position of a close corporation and its members ............................................ 91
5.12 Accounting records and financial reporting .................................................................. 91
5.13 Deregistration ............................................................................................................... 94
5.14 Exercises and solutions................................................................................................ 95
Self-Assessment .................................................................................................................. 128
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Learning outcomes
After studying this learning unit, you should be able to:
•
•
briefly discuss the Close Corporations Act 69 of 1984 (Close Corporations Act) in
respect of matters concerning the attributes, registration, internal and external relations,
accounting records and annual financial statements, joint liability of members and others
for certain debts, the tax position of the close corporation and its members, and the
deregistration of a close corporation
prepare the financial statements (except for a statement of cash flows) of a close
corporation according to IFRS or IFRS for SMEs
Key concepts
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Close Corporations Act 69 of 1984
Juristic person
Unlimited existence
Limited liability
Member's contribution
Member's interest
Accounting officer
Financial statements
Profit distribution
Loan to members
Loan from members
Retained earnings
South African Revenue Service (SARS)
Profit before tax
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5.1
Introduction
Learning unit 4 concluded with the partnership as an entity form and you should now have a
clear understanding of the disadvantages of using this form of entity to conduct business.
Because of disadvantages such as dependent corporate status and restricted capital
resources, the close corporation as a form of business entity was introduced when the Close
Corporations Act 69 of 1984 was legislated. In terms of this Act, a business entity registered
as a close corporation is allowed to acquire independent corporate status and unlimited
existence (among other things).
When the Companies Act 71 of 2008 came into effect on 1 May 2011, it introduced certain
amendments that impacted on the existence of close corporations. These amendments
included, amongst other things, the discontinuation of the registration of new close
corporations. Existing close corporations will, however, continue to exist under the Close
Corporation Act, as amended, until such time that their members decide to convert to another
form of business entity or discontinue its operations. Conversion of a private company into a
close corporation is also prohibited from 1 May 2011.
Read the overview of close corporations and paragraph 5.1 in the prescribed
textbook.
5.2
Attributes of a close corporation
Read paragraph 5.2 in the prescribed textbook.
Activity 5.1
Summarise the main characteristics of a close corporation as an entity form.
Feedback 5.1
A close corporation is a legal entity, which implies that it is liable to pay for obligations and
acquire assets in its own name.
•
•
•
•
It was simple to register a close corporation before the changes in the Companies Act
were introduced. You can now obtain a close corporation by buying an existing CC,
which is less cumbersome than having to register a company.
A close corporation is taxed separately from its members (as the owners of a CC are
called).
A close corporation can have up to ten natural persons as members.
A close corporation can enter into contracts and can be sued as a legal personality in
its own right.
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•
•
•
•
•
5.3
A close corporation continues to exist under its registered name irrespective of a
change in its membership.
It provides its members with limited liability.
The financial statements of a close corporation are not subject to an annual audit
(under certain conditions – see paragraph 5.12.2).
A close corporation may give financial assistance to a person to acquire an interest in
the close corporation.
No transfer duties are payable on the transfer of an interest of a member.
Advantages of a close corporation
Many of the advantages of a close corporation are embedded in its characteristics as
summarised in feedback 6.1.
Read paragraph 5.3 in the prescribed textbook.
5.4
Disadvantages of a close corporation
The disadvantages of a close corporation are discussed in detail in the prescribed textbook.
Make sure that you can name a few.
Study paragraph 5.4 in the prescribed textbook.
5.5
Prescribed forms of a close corporation
Prior to the implementation of the Companies Act, a close corporation was formed when the
founder member(s) filed a founding statement (CK1) with the Registrar of Close Corporations.
The use of a CK1 has since been terminated and no new close corporations can be registered.
All changes to existing close corporations are now managed by the Companies Intellectual
Property Commission (CIPC). The Commissioner, appointed in terms of section 189 of the
Companies Act, is tasked with managing all the administrative matters previously handled by
the Registrar of Close Corporations.
Read paragraph 5.5 in the prescribed textbook.
5.6
Name and registration number of a close corporation
Read paragraph 5.6 in the prescribed textbook.
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5.7
Membership of a close corporation
The Close Corporations Act sets specific requirements in respect of the number of members
that a close corporation may have and the qualifications for membership. A close corporation
may have one or more members, but at no time may the number of members exceed ten.
With certain exceptions, only a natural person can become a member of a close corporation.
Read more about the legal requirements pertaining to membership in
paragraph 5.7 in the prescribed textbook.
Activity 5.2
Work through example 5.1 in the prescribed textbook. Note that in the case of a partnership,
capital is credited when a partner makes a contribution, but in the case of a close corporation,
a member’s contribution is credited.
5.8
Internal relations
The rules governing the internal relations of a close corporation pertain mainly to the fiduciary
relationship of members and their liability in the case of negligent conduct. Minimum legislative
requirements exist in respect of the managerial duties of members. The members may decide
to manage the close corporation within a more formal framework by means of a written
association agreement, which they may enter into at any time. Another important aspect is the
fact that a close corporation may grant loans and provide security to members and others only
when certain legislative requirements have been met.
Read paragraph 5.8 in the prescribed textbook.
5.9
External relations
Read paragraph 5.9 in the prescribed textbook.
The rules governing the external relations of a close corporation pertain mainly to the carrying
on of its business. Each member of a close corporation has an equal right to take part in the
business of the close corporation and is considered an agent of the close corporation in
dealings with non-members.
5.10 Joint liability of members and others for the debts of a close
corporation
The liability of a member for the obligations of the close corporation is limited to the extent of
the member’s contribution to the close corporation.
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Read paragraph 5.10 in the prescribed textbook.
5.11 The tax position of a close corporation and its members
Read paragraph 5.11 in the prescribed textbook.
Please note that we will not require you to calculate the provisional tax or the taxable income
for a financial year of a close corporation. You only must know how provisional tax payments
are recorded and how tax matters are disclosed in the financial statements of a close
corporation. These are illustrated in the detailed examples in this tutorial letter as well as in
the prescribed textbook. What you must know, is that if we provide you with the taxable income
and the tax rate, the current tax for the year is calculated as taxable income x tax rate.
Activity 5.3
a)
Name the debit and credit entries in the accounting records of a close corporation to
account for the payment of provisional tax.
b)
Name the debit and credit entries in the accounting records of a close corporation to
account for the current tax payable by the entity.
Feedback 5.3
a)
Debit SARS (income tax) and credit bank.
b)
Debit income tax expense and credit SARS (income tax).
Comment
Because the close corporation owes the South African Revenue Service (SARS) tax on
taxable profits, SARS is a creditor for the payment of current tax. Provisional tax is tax that is
paid twice a year on an estimation of what the tax liability for the year would be and therefore
reduces the creditor SARS. Also read about a voluntary third provisional tax payment that can
be made in paragraph 5.11. Once the actual tax payable is calculated at the end of the
financial period, the current tax expense is debited, and the creditor SARS credited. SARS
can have a debit or credit balance at this point and it is disclosed in the statement of financial
position of the close corporation under current assets/liabilities as either current tax receivable
(debit balance) or current tax payable (credit balance).
5.12 Accounting records and financial reporting
As you can predict by now, the keeping of accounting records and the financial reporting in
respect of close corporations are important.
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Read paragraph 5.12.1 and 5.12.2 in the prescribed textbook.
Note that the Close Corporations Act stipulated the reports that must be prepared for a close
corporation. Make sure that you can recall those or read paragraph 5.12.1.2 again.
You should recall that for a sole proprietorship and for partnerships a statement of changes in
equity was required. In the case of a close corporation, a statement disclosing the
contributions by members, the retained earnings (undrawn profits), revaluation surplus, loans
from members and loans to members (debit balance) is required. We refer to this statement
as a statement of changes in the net investment of members.
Pay specific attention to the section on the accounting officer, as many of you may in future
become the accounting officer of a close corporation.
Also note that the Companies Act Regulations applicable to close corporations state that IFRS
or IFRS for SMEs apply to every close corporation with a financial year end starting on or after
the effective date of the Act. Therefore, close corporations with a year end after 1 May 2011
(year end of 30 April 2012 and later) are required to prepare annual financial statements in
line with IFRS or IFRS for SMEs in accordance with their public interest score (PIS). The
calculation of the PIS, however, falls outside the scope of this learning unit. The information
is outlined in paragraph 5.12.2 in the prescribed textbook. Please take note of these important
changes. The table in section 5.12.2.6 should be a handy reference to establish which
reporting framework to apply and whether the financial statements of a close corporation must
be audited or not. In closing, note that for the purposes of this module, we assume close
corporations have a PIS of less than 100; however, the financial statements must be prepared
in accordance with IFRS owing to the fact that this is the reporting framework that is most
widely used.
Study paragraph 5.12.3 in the prescribed textbook, which deals with the
recording of a distribution of total comprehensive income as well as the
preparation of financial statements.
Make sure that you can account for a distribution of comprehensive income, which is either
paid to members or capitalised as a loan account.
Activity 5.4
S San and X Xai established a close corporation Khoi CC in 20.1, trading in gem stones mined
in the Karoo. The following balances were extracted from the financial records of Khoi CC on
1 July 20.16:
R
Members’ contributions
Retained earnings – 1 July 20.16
Revaluation surplus
Loan to S San
Loan from X Xai
Profit and loss account
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500 000
341 800
30 000
10 000
24 000
49 200
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Additional information:
1.
2.
3.
4.
5.
On 15 August 20.16, S San and X Xai each paid R50 000 of their personal funds into
the close corporation’s bank account to increase their contribution and to assist with the
cash flow position of the close corporation.
A cash distribution of profit of R10 000 to each member was agreed upon on
30 June 20.17. The distribution is payable to the members on 3 July 20.17.
Khoi CC borrowed an additional R4 000 from X Xai on 15 June 20.17, which was lent to
S San to pay towards funeral costs of a close relative.
The provision of current tax to the amount of R13 776 must still be considered.
Khoi CC repaid the first annual instalment of R6 000 of the loan from X Xai on
2 January 20.17. The loan to S San is repayable in full on 1 July 20.20.
REQUIRED
Prepare the statement of changes in net investment of members of Khoi CC for the year ended
30 June 20.17 according to the requirements of IFRS appropriate to the business of the close
corporation.
Feedback 5.4
KHOI CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 30 JUNE 20.17
Balances at
1 July 20.16
Additional
contributions
Total
comprehensive
income for the
year
Distribution to
members
Increase/Decrease
in loans
Balance at
30 June 20.17
Non-current
liability
Current liability
Members’
contributions
Revaluation
surplus
Retained
earnings
Loan
from a
member
R
R
R
R
500 000
30 000
341 800
24 000
Loan
Total net
to a
investment
member
R
(10 000)
100 000
600 000
R
885 800
100 000
30 000
35 424
35 424
(20 000)
(20 000)
357 224
(2 000)
(4 000)
(6 000)
22 000
(14 000)
995 224
16 000
6 000
R(50 000 + 50 000) = R100 000
R(49 200 – 13 776) = R35 424
R(10 000 + 10 000) = R 20 000
R(4 000 increase less 6 000 repayment) = R2 000 repayment
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Activity 5.5
First work through comprehensive example 5.3 in the prescribed textbook.
Then work through comprehensive example 5.2 in the prescribed textbook.
Take note of the following:
• A close corporation discloses its normal income tax expense in the statement of profit
or loss and other comprehensive income.
• The statement of changes in equity, which you studied in the section dealing with the
preparation of the financial statements of partnerships, is replaced by a similar
statement (namely the statement of changes in net investment of members). Take note
of how the format of the statement of changes in net investment of members differs
from the format of the statement of changes in equity. Note also how the profits of a
close corporation can be retained in a retained earnings account, and that in the
statement of changes in net investment no distinction is made between the members
as is done between the partners in the statement of changes in equity.
• Note how the total equity section of the statement of financial position of a close
corporation differs from that of a partnership. The reason for the above differences in
disclosure between a partnership and a close corporation is that a partnership is not a
legal entity whereas a close corporation is.
• Study the notes to the financial statements of a close corporation. Notes are a
component of financial statements and they form an important part of financial
reporting in the FAC1601 syllabus.
5.13 Deregistration
Read about the deregistration of a close corporation in paragraph 5.13 in the
prescribed textbook as well as the summary of the chapter in paragraph 5.14.
Work through the following exercises, taking special note of how to make year-end
adjustments and how to prepare the financial statements of a close corporation by applying
your knowledge of FAC1502, the Conceptual Framework, IAS 1, IFRS, the Close Corporations
Act, the Guide on Close Corporations and the Companies Act regulations concerning close
corporations.
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5.14 Exercises and solutions
EXERCISE 5.1
Mr L Left and Mr R Right are the only two members of Centre CC with an equal interest of
50% each. On 30 June 20.15, the end of the financial year, the bookkeeper presented the
following trial balance, together with additional information, to you as the accounting officer:
CENTRE CC
TRIAL BALANCE AS AT 30 JUNE 20.15
Debit
R
Member's contribution: Mr L Left
Member's contribution: Mr R Right
Loan to member: Mr L Left
Loan to member: Mr R Right (1 July 20.14)
Machinery at cost price
Accumulated depreciation: Machinery (1 July 20.14)
Mortgage (1 July 20.14)
Land and buildings
Improvements to buildings (31 January 20.15)
Trade receivables control
Telephone expenses
Stationery consumed
Petrol
Services rendered
Water and electricity
Salary: Mr L Left (paid)
Salary: Mr R Right (paid)
Remuneration: Accounting officer
Deposit: Petrol
Retained earnings (1 July 20.14)
Bank
SARS (income tax)
Credit
R
10 000
10 000
18 000
6 000
51 000
7 000
40 000
200 000
55 000
16 000
1 260
380
4 000
382 000
5 800
24 000
36 000
12 000
1 500
9 200
6 260
21 000
458 200
458 200
Additional information:
1.
Provision must still be made for depreciation on the machinery at 10% per
annum calculated according to the straight-line method. Machinery with a cost price of
R16 000 was purchased on 30 September 20.14 and recorded in the books.
2.
The members decided to capitalise the improvements to the buildings. Land
and buildings consist of Plot 166, Laudia, purchased on 1 August 20.13 for R200 000.
No depreciation is provided for on land and buildings.
3.
Interest on the mortgage (from T Bank) at 20% per annum must still be taken
into account. The interest is payable on 1 July 20.15. The loan was obtained on
1 July 20.14 and is secured by a first mortgage over land and buildings. The loan is
repayable on 1 July 20.22.
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4.
The following accounts were received and were payable at 30 June 20.15 but must still
be accounted for:
Telkom, for telephone expenses, R150
Pen & Pencil Stationery, for stationery, R120
5.
Mr D Down, a debtor of the close corporation, had a balance of R2 500 on his account
on 30 June 20.15. This amount must be written off as irrecoverable.
6.
The members decided that, as from 1 July 20.14, interest at a rate of 18% per annum
will be taken into account on their loan accounts. A new loan of R10 000 was granted to
Mr Left at 31 January 20.15. Interest on these loans is capitalised. Both loans are
unsecured and immediately callable.
7.
The current income tax for the year amounted to R83 044 and must still be recorded.
8.
The members decided to distribute equally between them R60 000 of the total
comprehensive income of the close corporation for the year ended 30 June 20.15. These
amounts will not be paid out in cash but will be left in the close corporation as loans to
the corporation. These loans are unsecured and an interest rate of 20% per annum is
applicable. It was further decided that 50% of these loans must be repaid on
31 March 20.16. The balances on these accounts are repayable on 31 December 20.22.
9.
The members' contributions were paid in full and no additional contributions were made
during the year.
REQUIRED
With regard to Centre CC:
a)
Prepare the statement of profit or loss and other comprehensive income for the year
ended 30 June 20.15.
b)
Prepare the statement of changes in net investment of members for the year ended
30 June 20.15.
c)
Prepare the statement of financial position as at 30 June 20.15.
d)
Prepare the notes for the year ended 30 June 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984 and
the requirements of IFRS. Comparative figures are not required.
NB: Show all calculations.
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FAC1602/501/3/2021
SOLUTION 5.1
a)
CENTRE CC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 30 JUNE 20.15
Notes
R
Revenue
2.3
382 000
Other income
3 270
4
3 270
Interest income
385 270
Administrative and other expenses
(90 910)
Depreciation
2.1, 3
4 700
Telephone expenses R(1 260 + 150)
1 410
Stationery consumed R(380 + 120)
500
Petrol
4 000
Salaries to members
8
60 000
Remuneration: Accounting officer
12 000
Credit losses
2 500
Water and electricity
5 800
Finance costs
(8 000)
5
8 000
Interest on mortgage
Profit before tax
286 360
Income tax expense
(83 044)
Profit for the year
203 316
Other comprehensive income for the year
–
Total comprehensive income for the year
203 316
Comment
Because there is no cost of sales, there can be no gross profit or any distribution
expenses. Remember that this is a service entity and not a retail entity.
b) CENTRE CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 30 JUNE 20.15
Members'
Loans
Retained
Loans to
contribufrom
Total
earnings
members
tions
members
R
R
R
R
R
Balances at 1 July 20.14
20 000
9 200
–
(14 000) 15 200
Total comprehensive income
for the year
203 316
203 316
Distribution to members
(60 000) 60 000
Loans to members
(13 270) (13 270)
Balances at 30 June 20.15
20 000 152 516 60 000 (27 270) 205 246
Non-current liability
Current liability
30 000
30 000
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SOLUTION 5.1 (continued)
c)
CENTRE CC
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.15
Note
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Trade receivables
Loans to members
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Total equity
Members' contributions
Retained earnings
Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade and other payables
Current portion of long-term borrowings
Current tax payable
Total equity and liabilities
2.1, 3
4
4, 6
4
R
294 300
294 300
48 530
13 500
27 270
7 760
342 830
5, 7
5
5, 7
172 516
20 000
152 516
170 314
70 000
70 000
100 314
8 270
30 000
62 044
342 830
d) CENTRE CC
NOTES FOR THE YEAR ENDED 30 JUNE 20.15
1.
Basis of presentation
The financial statements have been prepared in accordance with the requirements of the IFRS
appropriate to the business of the entity. The annual financial statements have been prepared
on the historical-cost basis, modified for the fair valuation of certain financial instruments, and
incorporate the principal accounting policies set out below.
2.
Summary of significant accounting policies
The financial statements incorporate the following significant accounting policies which are
consistent with those applied in previous years, except where otherwise stated.
2.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings. Machinery is subsequently measured at historical cost
less accumulated depreciation and accumulated impairment losses.
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FAC1602/501/3/2021
SOLUTION 5.1 (continued)
Depreciation on machinery is written off at a rate deemed to be sufficient to reduce the
carrying amount of the assets over their estimated useful life to their estimated residual
value. The depreciation rate is as follows:
• Machinery: 10% per annum according to the straight-line method
Depreciation is charged to profit or loss for the year. Gains or losses on disposal are
determined by comparing the proceeds with the carrying amount of the asset. The net
amount is included in profit or loss for the year.
2.2 Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs, except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. The entity classification
depends on the purpose for which the entity acquired the financial assets. Financial
instruments are subsequently measured at fair value, unless they are measured at
amortised cost as required by IFRS.
Financial instruments that are subsequently measured at amortised cost are done so
using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3 Revenue
Revenue is measured at the fair value of the consideration received or receivable.
Revenue represents the delivery of services to customers of an amount that reflects the
consideration to which the entity expects to be entitled in exchange for the services and
is recognised when performance obligations are satisfied.
3.
Property, plant and equipment
Carrying amount at 1 July 20.14
Cost
Accumulated depreciation
Additions
Depreciation for the year
Carrying amount at 30 June 20.15
Cost
Accumulated depreciation
Land and
buildings
R
200 000
200 000
–
55 000
–
255 000
255 000
–
Equipment
R
28 000
35 000
(7 000)
16 000
(4 700)
39 300
51 000
(11 700)
Total
R
228 000
235 000
(7 000)
71 000
(4 700)
294 300
306 000
(11 700)
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SOLUTION 5.1 (continued)
The land and buildings consist of offices on Plot 166, Laudia, and were purchased on
1 August 20.13. The CC has pledged land and buildings with a carrying amount of
R255 000 as security for the mortgage obtained from T Bank.
4.
Financial assets
Current financial assets
Trade and other receivables:
Trade receivables control
Loans to members
The loans are unsecured and carry interest at 18% per annum. The loans
are immediately callable.
Cash and cash equivalents:
Bank
Short-term deposit: Petrol
5.
13 500
27 270
7 760
6 260
1 500
Financial liabilities
Non-current financial liabilities at amortised cost
Long-term borrowings: Mortgage
The mortgage was acquired from T Bank on 1 July 20.14 at an interest
rate of 20% per annum. The loan is repayable on 1July 20.22. The loan
is secured by a first mortgage over land and buildings (refer to note 3).
Loans from members:
The loans from members are unsecured and carry interest at a rate of
20% per annum. Fifty percent of the loans are repayable on 31 March
20.16, and the remainder on 31 December 20.22.
Total loans from members
Current portion of loans from members
Current financial liabilities
Trade and other payables:
Accrued expenses:
Interest on long-term loan
Telephone expenses
Stationery
Current portion of loans from members at amortised cost
6.
20.15
R
48 530
20.15
R
70 000
40 000
30 000
60 000
(30 000)
38 270
–
8 270
8 000
150
120
30 000
Loans to members
Balance at 1 July 20.14
Advances during the year
Repayments during the year
Interest capitalised
Balance at 30 June 20.15
Mr L Left
Mr R Right
R
R
8 000
6 000
10 000
–
–
–
2 190
1 080
20 190
7 080
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Total
R
14 000
10 000
–
3 270
27 270
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FAC1602/501/3/2021
SOLUTION 5.1 (continued)
7.
Loans from members
Mr L Left
R
Balance at 1 July 20.14
Advances during the year
Repayments during the year
Balance at 30 June 20.15
Current portion
Non-current portion
8.
Mr R Right
R
30 000
–
30 000
(15 000)
15 000
Total
R
30 000
(15 000)
15 000
60 000
–
60 000
(30 000)
30 000
Mr L Left
Mr R Right
R
R
24 000
36 000
(2 190)
(1 080)
21 810
34 920
Total
R
60 000
(3 270)
56 730
–
30 000
Transactions with members
Salaries
Interest earned on loans to members
Calculations
Interest on loans
Loans to members
Interest on loans
Mortgage
Mr L Left
Balance (1 July 20.14)
Interest
(R40 000 x 20%)
(R 6 000 x 18%)
(R 8 000 x 18%)
(R10 000 x 5/12 x 18%)
Interest expense
Interest income
R
40 000
R
8 000
Mr R Right
R
6 000
8 000
1 080
1 440
750
8 000
2 190
1 080
R(2 190 + 1 080) = R3 270
Depreciation
Cost price
Depreciation
(R35 000 x 10%)
(R16 000 x 10% x 9/12)
Accumulated depreciation (1 July 20.14)
Carrying amount (30 June 20.15)
Old
Machinery
R
35 000
New
Machinery
R
16 000
(3 500)
(1 200)
(7 000)
24 500
14 800
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SOLUTION 5.1 (continued)
Trade and other receivables
R
Trade receivables control: 30 June 20.15
Credit losses written off
16 000
(2 500)
13 500
Trade and other payables
The amount on the statement of financial position was calculated as
follows:
Interest in arrears on long-term loan
Telephone expenses in arrears
Stationery in arrears
R
Current tax payable
Income tax expense for the year
Current tax paid during the year
Current tax payable
R
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8 000
150
120
8 270
83 044
(21 000)
62 044
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FAC1602/501/3/2021
EXERCISE 5.2
The bookkeeper presented you with the following information relating to Note Book CC for the
financial year ended 31 December 20.15:
NOTE BOOK CC
BALANCES AS AT 31 DECEMBER 20.15
Member’s contribution: N Note (60%)
Member’s contribution: B Book (40%)
Land and buildings at cost
Equipment at cost
Vehicles at cost
Accumulated depreciation on equipment (1 January 20.15)
Accumulated depreciation on vehicles (1 January 20.15)
Trade receivables control
Trade payables control
Bank (Dr)
Fixed deposit
Mortgage
Allowance for credit losses
Retained earnings (31 December 20.14)
SARS (income tax) (Dr)
Loan to N Note
Loan from B Book
Sales
Purchases
Inventory (1 January 20.15)
Salaries and wages
Water and electricity
Stationery consumed
Carriage on purchases
Telephone and fax expenses
Insurance expenses
Maintenance of vehicles
Credit losses
R
120 000
80 000
560 000
40 000
200 000
12 000
72 000
35 000
48 000
14 000
80 000
320 000
1 500
18 000
52 000
40 000
60 000
668 300
210 000
30 000
96 000
16 000
2 900
6 500
8 200
4 000
4 400
800
Additional information:
1.
2.
3.
4.
5.
The inventory on 31 December 20.15 amounted to R42 000.
An additional amount of R2 000 must be written off as irrecoverable. The allowance
for credit losses must be adjusted to R1 650.
The land and buildings consist of a shop and offices on Plot No 157, situated in
Mainland, and were purchased on 8 January 20.13 for R560 000. It is the policy of the
close corporation not to depreciate land and buildings.
Depreciation must be provided for as follows:
Vehicles: 20% per annum according to the diminishing-balance method
Equipment: 10% per annum according to the straight-line method.
On 31 December 20.15, a trade debtor who owes R1 600 will be entitled to a
10% discount if he settles his account before 15 January 20.16. The bookkeeper
recorded the sale transaction correctly but forgot to account for the allowance for
settlement discount granted.
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EXERCISE 5.2 (continued)
6.
7.
8.
9.
10.
11.
12.
Provision must still be made for interest on the fixed deposit at 14% per annum
receivable on 1 January of each year. The fixed deposit was made on 1 January 20.15
at Fair Bank for a period of three years.
During the financial year, an amount of R15 000 was paid to member N Note
as remuneration for specialised services rendered to the corporation. This amount was
included in salaries and wages.
Interest on the mortgage from CT Bank at 12% per annum must still be taken into
account. The interest is payable on 2 January 20.16. The loan was obtained on
2 January 20.13 and is secured by a mortgage over land and buildings. The loan is
repayable in total on 2 January 20.22.
The loan to member N Note was granted on 1 April 20.13. Interest is calculated at
12% per annum and is payable by the member in January 20.16. The loan is unsecured
and immediately callable.
On 1 July 20.15, an amount of R60 000 was borrowed from member B Book. The first
repayment of R20 000 will be made on 30 June 20.16 and the remainder on
30 June 20.19. Interest is calculated on 31 December at a rate of 10% per annum and
is paid in January of every year. The loan is unsecured.
Provision must be made for a distribution to the members of 80% of the total
comprehensive income for the financial year.
The current income tax for the financial year amounted to R79 515 and must still be
recorded.
REQUIRED
With regard to Note Book CC:
a)
Prepare the statement of profit or loss and other comprehensive income for the year
ended 31 December 20.15.
b)
Prepare the statement of changes in net investment of members for the year ended
31 December 20.15.
c)
Prepare the statement of financial position as at 31 December 20.15.
d)
Prepare the notes for the year ended 31 December 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984, as
well as the requirements of International Financial Reporting Standards (IFRS). Comparative
figures are not required.
NB: Show all calculations.
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FAC1602/501/3/2021
SOLUTION 5.2
a)
NOTE BOOK CC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.15
Notes
R
2.4
668 140
Revenue R(668 300 – 160➀)
Cost of sales
(204 500)
Inventory (1 January 20.15)
30 000
Purchases
210 000
Carriage on purchases
6 500
246 500
Inventory (31 December 20.15)
(42 000)
Gross profit
463 640
Other income
16 000
4
16 000
Interest income R(4 800 + 11 200) ➁
479 640
Distribution, administrative and other expenses
(164 050)
Salaries R(96 000 – 15 000)
81 000
Salaries to members
8
15 000
Water and electricity
16 000
2 950
Credit losses ➂
2.1, 3
29 600
Depreciation ➃
Stationery consumed
2 900
Telephone and fax expenses
8 200
Maintenance of vehicles
4 400
Insurance expenses
4 000
(41
400)
Finance costs ➄
Interest on mortgage
38 400
Interest on loan from members
8
3 000
Profit before tax
274 190
Income tax expense
(79 515)
Profit for the year
194 675
Other comprehensive income for the year
–
Total comprehensive income for the year
194 675
b)
NOTE BOOK CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 31 DECEMBER 20.15
Members'
Loans
Retained
Loans to
contrifrom
earnings
members
butions
members
R
R
R
R
Balances at 1 January 20.15
200 000
18 000
(40 000)
Total comprehensive income for the year
194 675
Distribution to members ➆
(155 740)
Loans from/to members
60 000
Balances at 31 December 20.15
200 000 56 935
60 000 (40 000)
Non-current liability
Current liability
Total
R
178 000
194 675
(155 740)
60 000
276 935
40 000
20 000
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SOLUTION 5.2 (continued)
c)
NOTE BOOK CC
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.15
Note
ASSETS
Non-current assets
Property, plant and equipment
2.1, 3
Fixed deposit
2.2, 4
Current assets
Inventories
2.3
4
Trade and other receivables ➈
Loans to members
4, 6
Cash and cash equivalents
4
Total assets
EQUITY AND LIABILITIES
Total equity
Members' contributions
Retained earnings
Total liabilities
Non-current liabilities
Long-term borrowings ➅
Current liabilities
Trade and other payables
Current portion of long-term borrowings
Distribution to members payable
Current tax payable ➇
NOTEBOOK CC
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.15
1.
Basis of presentation
766 400
686 400
80 000
143 190
42 000
47 190
40 000
14 000
909 590
5, 7
5
5, 7
5
Total equity and liabilities
d)
R
256 935
200 000
56 935
652 655
360 000
360 000
292 655
89 400
20 000
155 740
27 515
909 590
The financial statements have been prepared in accordance with the requirements of
the IFRS appropriate to the business of the entity. The financial statements have been
prepared on the historical-cost basis, modified for the fair valuation of certain financial
instruments, and incorporate the principal accounting policies set out below .
2.
Summary of significant accounting policies
The annual financial statements incorporate the following significant accounting policies,
which are consistent with those applied in previous years, except where otherwise
stated.
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FAC1602/501/3/2021
SOLUTION 5.2 (continued)
2.1
Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings. Equipment and vehicles are subsequently measured
at historical cost less accumulated depreciation and accumulated impairment losses.
Depreciation on equipment and vehicles is written off at a rate deemed to be sufficient
to reduce the carrying amount of the assets over their estimated useful life to their
estimated residual value. The depreciation rates are as follows:
• Equipment: 10% per annum according to the straight-line method
• Vehicles: 20% per annum according to the diminishing-balance method
Depreciation is charged to profit or loss for the year. Gains or losses on disposal are
determined by comparing the proceeds with the carrying amount of the asset. The net
amount is included in profit or loss for the year.
2.2
Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs, except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. The entity classification
depends on the purpose for which the entity acquired the financial assets. Financial
instruments are subsequently measured at fair value unless they are measured at
amortised cost as required by IFRS.
Financial instruments that are subsequently measured at amortised cost are done so
using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3
Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost
or net realisable value. Cost is calculated using the first-in-first-out method. Net
realisable value is the estimated selling price in the ordinary course of business less any
costs of completion and disposal.
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SOLUTION 5.2 (continued)
2.4
Revenue
Revenue is measured at the fair value of the consideration received or receivable.
Revenue represents the transfer of promised goods to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those
goods. Revenue from the sale of goods consists of the total net invoiced sales excluding
settlement discount granted. The entity is not registered as a VAT vendor. Revenue from
sales is recognised when performance obligations are satisfied.
3.
Property, plant and equipment
Carrying amount at 1 January 20.15
Cost
Accumulated depreciation
Depreciation for the year
Carrying amount at
31 December 20.15
Cost
Accumulated depreciation
Land and
buildings
R
560 000
560 000
–
–
560 000
560 000
–
Vehicles
Equipment
Total
R
128 000
200 000
(72 000)
(25 600)
R
28 000
40 000
(12 000)
(4 000)
R
716 000
800 000
(84 000)
(29 600)
102 400
200 000
(97 600)
24 000
40 000
(16 000)
686 400
800 000
(113 600)
The land and buildings consist of a shop and offices on Plot No 157, Mainland, and were
purchased on 8 January 20.13. The CC has pledged land and buildings with a carrying
amount of R560 000 as security for the mortgage from CT Bank.
4.
Financial assets
Non-current financial assets
Fixed deposit:
The fixed deposit was made on 1 January 20.15 for a period of three
years at Fair Bank at 14% interest per annum. The deposit is callable at
31 December 20.17.
Current financial assets
Trade and other receivables:
Trade receivables control ➈
Allowance for credit losses
Accrued income:
Interest on loan to members
Interest on fixed deposit
Loans to members:
The loans are unsecured and carry interest at 12% per annum. The
loans are immediately callable.
Cash and cash equivalents:
Bank
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20.15
R
80 000
80 000
101 190
47 190
32 840
(1 650)
4 800
11 200
40 000
14 000
14 000
lOMoARcPSD|9903431
FAC1602/501/3/2021
SOLUTION 5.2 (continue)
5.
Financial liabilities
Non-current financial liabilities at amortised cost
Long-term borrowings: Mortgage
The mortgage was acquired from CT Bank on 2 January 20.13 at an
interest rate of 12% per annum. This loan is secured by a first mortgage
over land and buildings (refer to note 3) and is repayable on
2·January 20.22.
Loans from members:
The loans are unsecured and carry interest at 10% per annum. R20 000
of the loans are repayable on 30 June 20.16 and the remainder on
30 June 20.19.
Total loans from members
Current portion of loans to members
Current financial liabilities
Trade and other payables:
Trade payables control
Accrued expenses:
Interest on mortgage
Interest on loans from members
Current portion of loans from members at amortised cost
Distribution to members payable
6.
40 000
60 000
(20 000)
265 140
89 400
48 000
38 400
3 000
20 000
155 740
Loans to members
Balance at 1 January 20.15
Advances during the year
Repayments during the year
Balance at 31 December 20.15
7.
20.15
R
360 000
320 000
N Note
R
40 000
–
–
40 000
B Book
R
–
–
–
–
Total
R
40 000
–
–
40 000
N Note
R
–
–
–
–
–
–
B Book
R
–
60 000
–
60 000
(20 000)
40 000
Total
R
–
60 000
–
60 000
(20 000)
40 000
Loans from members
Balance at 1 January 20.15
Advances during the year
Repayments during the year
Balance at 31 December 20.15
Current portion
Non-current portion
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SOLUTION 5.2 (continued)
8.
Transactions with members
Salaries
Interest incurred on loans from members
Interest earned on loans to members
N Note
B Book Total
R
R
R
15 000
–
15 000
–
3 000
3 000
(4 800)
–
(4 800)
10 200 3 000
13 200
Calculations
➀ Allowance for settlement discount granted
R1 600 x 10/100 = R160
➁ Interest income
Interest on loans to members
R40 000 x 12/100 = R4 800
Interest on fixed deposit
R80 000 x 14/100 = R11 200
➂ Credit losses
R
Original amount written off
Additional amount written off
Increase in allowance for credit losses *
* New allowance
Old allowance
Increase in allowance
➃ Depreciation
Vehicles
Equipment
Total
= R(200 000 – 72 000)
= R128 000 x 20/100
= R25 600
= R40 000 x 10/100
= R4 000
= R(25 600 + 4 000)
= R29 600
➄ Finance costs
Interest on mortgage
R320 000 x 12/100 = R38 400
Interest on loans from members
R60 000 x 10/100 x 6/12 = R3 000
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800
2 000
150
2 950
1 650
(1 500)
150
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FAC1602/501/3/2021
SOLUTION 5.2 (continued)
➅ Long-term borrowings
Mortgage
Loan from B Book
Portion to be repaid in 20.16 financial year
R
320 000
60 000
(20 000)
40 000
360 000
Current portion of loans from members
The current portion of loans from members represents that portion of the loan of R60 000
that will be repaid in the 20.16 financial year (refer to calculation).
➆ Distribution to members payable
R194 675 x 80/100 = R155 740
➇ Current tax payable
Income tax for the year
SARS (income tax)
Current tax payable
R
79 515
(52 000)
27 515
➈ Trade receivables
R(35 000 – 2 000 – 160) = R32 840
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EXERCISE 5.3
After the bookkeeper had recorded the transactions during the year, he handed you the
following trial balance and additional information with regard to Trade Acc CC:
TRADE ACC CC
TRIAL BALANCE AS AT 31 DECEMBER 20.15
Land and buildings at cost
Furniture and equipment at cost
Vehicles at cost
Accumulated depreciation: Furniture and equipment (1 January 20.15)
Accumulated depreciation: Vehicles (1 January 20.15)
Inventory (1 January 20.15)
Mortgage
Trade receivables control
Allowance for credit losses (1 January 20.15)
Bank
Trade payables control
SARS (income tax)
Sales
Purchases
Import duty on purchases
Railage on purchases
Repairs and maintenance
Assessment rates
Commission on sales
Delivery expenses
Salaries and wages
Stationery consumed
Credit losses
Loss on sale of equipment
Insurance expenses
Water and electricity
Dividends received
Settlement discount received
Investment
Loan from member: A Adam
Loan from member: C Charles
Interest expenses (in respect of loans)
Member's contribution: A Adam
Member's contribution: B Ben
Member's contribution: C Charles
Retained earnings (1 January 20.15)
Allowance for settlement discount granted (1 January 20.15)
Debit
R
95 000
33 000
21 000
6 700
8 400
54 600
50 000
20 500
955
24 000
37 100
6 900
319 950
224 700
1 550
2 500
1 315
1 710
1 500
650
36 615
520
460
220
475
2 100
450
1 000
10 000
10 000
8 000
9 660
548 975
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Credit
R
40 000
35 000
25 000
6 220
200
548 975
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FAC1602/501/3/2021
EXERCISE 5.3 (continued)
Additional information:
1.
The interest of the members in the CC is in the same ratio as their contributions.
2.
The land and buildings consist of a shop and offices on Plot No 32, situated in Clarence,
and were purchased on 15 March 20.14 for R95 000. It is the policy of the close
corporation not to depreciate land and buildings.
3.
The investment in Vicks Limited consists of 10 000 ordinary shares of R1 each and was
acquired in 20.14. On 31 December 20.14, the fair value of the investment was
determined at R10 000. On 31 December 20.15, the fair value was determined at
R11 000 and is still to be recorded.
4.
Included in salaries and wages is an amount of R10 000 which was paid to member
B Ben as remuneration for his special contribution to the management of the enterprise.
5.
Provision for depreciation of R1 650 on furniture and equipment and R2 100 on vehicles
must still be made. Depreciation is written off according to the straight-line method on
furniture and equipment and vehicles and no sales or purchases of furniture and
equipment or vehicles occurred in the year.
6.
The interest paid includes R2 160, which represents 12% interest paid to A Adam and
C Charles in respect of the loans they made to the close corporation. The loans are
unsecured and are repayable on 31 December 20.19.
7.
The mortgage was acquired on 2 January 20.15 from Bug Bank at 15% interest per
annum. Interest is payable on 31 December. The loan is secured by a first mortgage
over land and buildings and is repayable in five equal annual instalments as from
2 January 20.18.
8.
The allowance for credit losses must be adjusted to R1 025.
9.
On 31 December 20.15, the inventory on hand amounted to R58 300.
10.
The current income tax in respect of the financial year amounted to R11 166 and must
still be recorded.
11.
A distribution of income of R20 000 must be made to the members.
12.
The allowance for settlement discount granted on 1 January 20.15 must be written back
since the debtor did not settle his account on time. On 31 December 20.15, a trade
debtor who owes R1 500 is entitled to a 5% discount, provided he settles his account
before 10 January 20.16. The bookkeeper recorded the sales transaction correctly but
forgot to account for the allowance for settlement discount granted.
13.
Trade Acc CC was offered a discount of 6% on an amount of R 1 200 owing to a supplier,
provided the supplier is paid before 15 January 20.16. The close corporation intends
taking advantage of the discount offered.
14.
On 31 December 20.15 the land and buildings were revalued to R150 000 by Mr Sono,
an independent sworn appraiser. This information must still be recorded in the
accounting records of Trade Acc CC.
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EXERCISE 5.3 (continued)
REQUIRED
With regard to Trade Acc CC:
a)
Prepare the statement of profit or loss and other comprehensive income for the
year ended 31 December 20.15.
b)
Prepare the statement of changes in net investment of members for the year ended
31 December 20.15.
c)
Prepare the statement of financial position as at 31 December 20.15.
d)
Prepare the notes for the year ended 31 December 20.15.
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984,
as well as the requirements of IFRS. Comparative figures are not required.
NB: Show all calculations.
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FAC1602/501/3/2021
SOLUTION 5.3
a)
TRADE ACC CC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 20.15
Note
2.4
Revenue R(319 950 – 75 ➀ + 200)
Cost of sales
Inventory (1 January 20.15)
Purchases R(224 700 – 1 072 ➁)
Import duty
Railage on purchases
Inventory (31 December 20.15)
Gross profit
Other income
Dividend income: Listed share investment
Fair-value adjustment: Listed share investment
Distribution, administrative and other expenses
Repairs and maintenance
Assessment rates
Commission on sales
Delivery expenses
Salaries and wages R(36 615 – 10 000)
Salary to member
Stationery consumed
Credit losses ➂
Loss on sale of equipment
Insurance expenses
Water and electricity
Depreciation ➃
Finance costs
Interest on mortgage
Interest on loan from members
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income for the year
Revaluation surplus
7
2.1, 3
5
7
Total comprehensive income for the year
R
320 075
(223 978)
54 600
223 628
1 550
2 500
282 278
(58 300)
96 097
1 450
450
1 000
97 547
(49 385)
1 315
1 710
1 500
650
26 615
10 000
520
530
220
475
2 100
3 750
(9 660)
7 500
2 160
38 502
(11 166)
27 336
55 000
55 000
82 336
b) TRADE ACC CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 31 DECEMBER 20.15
Balances at 1 January 20.15
Profit for the year
Revaluation surplus
Distribution to members
Balances at 31 December 20.15
Members'
contributions
R
100 000
Retained
earnings
R
6 220
27 336
Revaluation
surplus
R
–
Loans
from
members
R
18 000
55 000
100 000
(20 000)
13 556
55 000
18 000
Total
R
124 220
27 336
55 000
(20 000)
186 556
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SOLUTION 5.3 (continued)
c)
TRADE ACC CC
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.15
Notes
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables ➄
Listed share investment
Cash and cash equivalents
Total assets
EQUITY AND LIABILITIES
Total equity
Members' contributions
Retained earnings
Revaluation surplus
Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade payables ➅
Distribution to members payable
Current tax payable ➆
Total equity and liabilities
2.1, 3
2.3
4
2.2, 4
4
5, 6
5
R
185 150
185 150
112 700
58 300
19 400
11 000
24 000
297 850
168 556
100 000
13 556
55 000
129 294
68 000
68 000
61 294
37 028
20 000
4 266
297 850
d) TRADE ACC CC
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.15
1.
Basis of presentation
The financial statements have been prepared in accordance with the requirements of the
IFRS appropriate to the business of the entity. The financial statements have been
prepared on the historical-cost basis, modified for the fair valuation of certain financial
instruments, and incorporate the principal accounting policies set out below.
2.
Summary of significant accounting policies
The financial statements incorporate the following significant accounting policies, which
are consistent with those applied in previous years, except where otherwise stated.
2.1 Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings, which is revalued at regular intervals by an independent
sworn appraiser. Vehicles and furniture and equipment are subsequently measured at
historical cost less accumulated depreciation and accumulated impairment losses.
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FAC1602/501/3/2021
SOLUTION 5.3 (continued)
Depreciation on vehicles and furniture and equipment is written off at a rate deemed to
be sufficient to reduce the carrying amount of the assets over their estimated useful life
to their estimated residual value. Depreciation is written off as follows:
• Vehicles: 10%* per annum according to the straight-line method
• Furniture and equipment: 5%** per annum according to the straight-line method
Depreciation is charged to profit or loss for the year. Gains or losses on disposal are
determined by comparing the process with the carrying amount of the asset. The net
amount is included in profit or loss for the year.
* R(2 100/21 000) x 100%
** R(1 650/33 000) x 100%
2.2 Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs, except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. The entity classification
depends on the purpose for which the entity acquired the financial assets. Financial
instruments are subsequently measured at fair value, unless they are measured at
amortised cost as required by IFRS.
Financial instruments that are subsequently measured at amortised cost are done so
using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3 Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost or
net realisable value. Cost is calculated using the first-in-first-out method. Net realisable
value is the estimated selling price in the ordinary course of business less any costs of
completion and disposal.
2.4 Revenue
Revenue is measured at the fair value of the consideration received or receivable.
Revenue represents the transfer of promised goods to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those
goods. Revenue from the sale of goods consists of the total net invoiced sales excluding
settlement discount granted. The entity is not registered as a VAT vendor. The revenue
from sales is recognised when the performance obligations are satisfied.
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SOLUTION 5.3 (continued)
3.
Property, plant and equipment
Land and
buildings
Carrying amount at 31 January 20.15
Cost
Accumulated depreciation
Revaluation surplus
Depreciation for the year
Carrying amount at 31 December 20.15
Cost/Valuation
Accumulated depreciation
R
95 000
95 000
–
55 000
–
150 000
150 000
–
Furniture
and equipment
R
26 300
33 000
(6 700)
(1 650)
24 650
33 000
(8 350)
Vehicles
R
12 600
21 000
(8 400)
(2 100)
10 500
21 000
(10 500)
Total
R
133 900
149 000
(15 100)
55 000
(3 750)
185 150
204 000
(18 850)
The land and buildings consist of a shop and offices on Plot No 32, Clarence, and were
purchased on 15 March 20.14. The CC has pledged land and buildings with a carrying
amount of R95 000 as security for the mortgage from Bug Bank. The land and buildings
were revalued by R55 000 on 31 December 20.15 by an independent sworn appraiser.
4.
Financial assets
Current financial assets
Trade and other receivables:
Trade receivables control R(20 500 – 75)
Allowance for credit losses
Listed investment:
Listed share investments held for trading at fair value through profit or
loss: 10 000 R1 ordinary shares in Vicks Limited
Cash and cash equivalents:
Bank
5.
20.15
R
54 400
19 400
20 425
(1 025)
11 000
24 000
24 000
Financial liabilities
Non-current financial liabilities at amortised cost
Long-term borrowings: Mortgage
The mortgage was acquired from Bug Bank on 2 January 20.15 at an
interest rate of 15% per annum. The loan is repayable in five equal
payments from 2 January 20.18. The loan is secured by a first mortgage
over land and buildings.
Loans from members:
The loans are unsecured and carry interest at 12% per annum. R20 000
of the loans are repayable on 31 December 20.19.
Current financial liabilities
Trade payables:
Trade payables control
Distribution to members payable
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20.15
R
68 000
50 000
18 000
57 028
37 028
37 028
20 000
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FAC1602/501/3/2021
SOLUTION 5.3 (continued)
6.
Loans from members
Balance at 1 January 20.15
Advances during the year
Repayments during the year
Balance at 31 December 20.15
A Adam
R
10 000
–
–
10 000
B Ben
R
–
–
–
–
C Charles
R
8 000
–
–
8 000
Total
R
18 000
–
–
18 000
The loans are unsecured and an interest rate of 12% per annum is applicable. The loans
are repayable on 31 December 20.19.
7.
Transactions with members
Interest on loans from members
Salaries
A Adam
R
1 200
–
1 200
B Ben
C Charles
R
R
–
960
10 000
–
10 000
960
Total
R
2 160
10 000
12 160
Calculations
➀
Allowance for settlement discount granted
R1 500 x 5/100 = R75
➁
Settlement discount received
Settlement discount received for the period
* Allowance for settlement discount received
R
1 000
72
1 072
Allowance for settlement discount received
R1 200 x 6/100 = R72
➂ Credit losses
R[460 + (1 025 – 955)]
= R(460 + 70)
= R530
➃
Depreciation
R(1 650 + 2100) = R3 750
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SOLUTION 5.3 (continued)
➄
Trade and other receivables
Trade receivables control
Allowance for settlement discount granted
Allowance for credit losses
➅
Trade and other payables
Trade payables control
Allowance for settlement discount received
➆
R
20 500
(75)
20 425
(1 025)
19 400
R
37 100
(72)
37 028
Current tax payable
Income tax for the year
Current tax paid during the year
Current tax payable
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R
11 166
(6 900)
4 266
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FAC1602/501/3/2021
EXERCISE 5.4
The bookkeeper has provided you with the following trial balance and additional information
with regard to Loga CC for the year ended 28 February 20.15:
LOGA CC
TRIAL BALANCE AS AT 28 FEBRUARY 20.15
Debit
Credit
R
Member's contribution: L Lock
Member's contribution: G Gate
Land and buildings at valuation
Vehicles at cost
Equipment at cost
Inventory
Trade receivables control
Trade payables control
Loan to G Gate
Investment (Fixed deposit at ABC bank)
Bank
Accumulated depreciation: Equipment (1 March 20.14)
Sales
Cost of sales
Retained earnings (1 March 20.14)
Revaluation surplus
Rental expenses
Advertising expense
Salaries and wages
Water and electricity
Telephone expenses
Income from investment
Credit losses
Administrative expenses
Remuneration: Accounting officer
SARS (income tax)
Interim profit distribution to members
Interest income
R
252 000
245 000
500 000
54 000
18 000
172 080
50 184
83 304
12 000
25 000
6 956
3 600
1 168 236
778 812
6 420
140 000
14 400
4 800
168 020
8 640
2 160
1 500
540
2 868
4 320
30 000
48 000
1 900 780
720
1 900 780
Additional information:
1.
A debtor cannot be traced and his debt of R184 must be written off as irrecoverable. At
year end, the members decided to create an allowance for credit losses of R1 000.
2.
The electricity account for February, R785, was received on 20 March 20.15.
3.
On 1 June 20.14, an insurance contract was entered into. The premium of R800,
payable annually on 1 June, is included in administrative expenses.
4.
The loan to G Gate was made on 1 March 20.14 at 12% interest per annum, payable
every six months. The loan is unsecured and immediately callable.
5.
Included in salaries and wages is an amount of R20 000, paid to L Lock as remuneration
for his special contribution to the management of the entity.
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6.
The investment at ABC Bank was made on 1 May 20.14 for 60 months at 12% interest
per annum, which is receivable every six months on 31 October and 30 April.
7.
The land and buildings were acquired on 31 March 20.13 for R300 000 and consist of
shops and offices situated at number 23 Rhavi Road, Dealsville. Additions to buildings
were completed at a cost of R60 000 on 31 July 20.14.
8.
On 28 February 20.14, the land and buildings were revalued for the first time to
R340 000. The land and buildings are not depreciated.
9.
Provision must still be made for the following:
• Depreciation on the vehicle and equipment at 20% per annum on the diminishing
balance. The vehicle was acquired on 1 September 20.14.
• Current income tax for the financial year amounted to R51 494.
• An additional distribution to members of R36 000. Members share profits equally.
REQUIRED
With regard to Loga CC:
a)
Prepare the statement of profit or loss and other comprehensive income for the year
ended 28 February 20.15.
b)
Prepare the statement of changes in net investment of members for the year ended
28 February 20.15.
c)
Prepare the statement of financial position as at 28 February 20.15.
d)
Prepare only the following notes for the year ended 28 February 20.15:
• accounting policy
• property, plant and equipment
• transactions with members
Your answer must comply with the provisions of the Close Corporations Act 69 of 1984, as
well as the requirements of IFRS. Comparative figures are not required.
NB: Show all calculations.
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SOLUTION 5.4
a)
LOGA CC
STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.15
Notes
R
Revenue
2.4
1 168 236
Cost of sales
(778 812)
Gross profit
389 424
Other income
3 940
3 940
Interest income R(1 440 + 2 500) ➀
393 364
Distribution, administrative and other expenses
(215 797)
Rental expenses
14 400
Advertising expense
4 800
Salaries and wages R(168 020 – 20 000)
148 020
Salary to member
4
20 000
9 425
Water and electricity ➁
Telephone expenses
2 160
1 724
Credit losses ➂
2 068
Administrative expenses ➃
600
Insurance expense ➄
Remuneration: Accounting officer
4 320
2.1, 3
8 280
Depreciation ➅
Profit before tax
177 567
Income tax expense
(51 494)
Profit for the year
126 073
Other comprehensive income for the year
100 000
Revaluation surplus
100 000
Total comprehensive income for the year
226 073
b) LOGA CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 28 FEBRUARY 20.15
Members'
Revaluacontri- Retained
tion
Loans to
butions earnings surplus members
R
R
R
R
Balances at 1 March 20.14
Total comprehensive income for the year
Profit for the year
Revaluation surplus
Loan to a member
Distribution to members
Balances at 28 February 20.15
497 000
6 420
126 073
126 073
40 000
100 000
–
100 000
(12 000)
497 000
(84 000)
48 493
140 000
(12 000)
Total
R
543 420
226 073
126 073
100 000
(12 000)
(84 000)
673 493
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SOLUTION 5.4 (continued)
c)
LOGA CC
STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 20.15
Notes
R
ASSETS
Non-current assets
585 120
Property, plant and equipment
2.1, 3
560 120
Fixed deposit
2.2
25 000
Current assets
241 956
Inventories
2.3
172 080
50 720
Trade and other receivables ➇
200
Prepayments ➈
Loan to a member
12 000
Cash and cash equivalents
6 956
Total assets
827 076
EQUITY AND LIABILITIES
Total equity
685 493
Members' contributions
497 000
Retained earnings
48 493
Revaluation surplus
140 000
Total liabilities
141 583
Current liabilities
141 583
Trade and other payables ⑩
84 089
36 000
Distribution to members payable ➆
Current tax payable ⑪
21 494
Total equity and liabilities
d)
LOGA CC
NOTES FOR THE YEAR ENDED 28 FEBRUARY 20.15
1.
Basis of presentation
827 076
The financial statements have been prepared in accordance with the requirements of
the IFRS appropriate to the business of the entity. The financial statements have been
prepared on the historical-cost basis, modified for the fair valuation of certain financial
instruments, and incorporate the principal accounting policies set out below.
2.
Summary of significant accounting policies
The financial statements incorporate the following significant accounting policies which
are consistent with those applied in previous years, except where otherwise stated.
2.1
Property, plant and equipment
Property, plant and equipment are initially recognised at cost price. No depreciation is
written off on land and buildings, which is revalued at regular intervals by an independent
appraiser. Equipment and vehicles are subsequently measured at historical cost less
accumulated depreciation and accumulated impairment losses.
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SOLUTION 5.4 (continued)
Depreciation on equipment and vehicles is written off at a rate deemed to be sufficient
to reduce the carrying amount of the assets over their estimated useful life to their
estimated residual value. The depreciation rates are as follows:
• Equipment: 20% per annum according to the diminishing-balance method
• Vehicles: 20% per annum according to the diminishing-balance method
.
Depreciation is charged to profit or loss for the year. Gains or losses on disposal are
determined by comparing the proceeds with the carrying amount of the asset. The net
amount is included in profit or loss for the year.
2.2
Financial instruments
Financial instruments are recognised in the entity’s statement of financial position when
the entity becomes a party to the contractual provisions of an instrument.
Financial instruments are initially measured at the transaction price, which is fair value
plus transaction costs, except for “Financial assets at fair value through profit or loss”
which is measured at fair value, transaction costs excluded. The entity classification
depends on the purpose for which the entity acquired the financial assets. Financial
instruments are subsequently measured at fair value, unless they are measured at
amortised cost as required by IFRS.
Financial instruments that are subsequently measured at amortised cost are done so
using the effective interest rate method.
Debt instruments that are classified as current assets or current liabilities are measured
at the undiscounted amount of the cash expected to be received or paid, unless the
arrangement effectively constitutes a financing transaction.
2.3
Inventories
Inventories are initially measured at cost and subsequently valued at the lower of cost
or net realisable value. Cost is calculated using the first-in-first-out method. Net
realisable value is the estimated selling price in the ordinary course of business less any
costs of completion and disposal.
2.4
Revenue
Revenue is measured at the fair value of the consideration received or receivable.
Revenue represents the transfer of promised goods to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those
goods. Revenue from the sale of goods consists of the total net invoiced sales excluding
value added tax and settlement discount granted. The revenue from sales is recognised
when the performance obligations are satisfied.
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SOLUTION 5.4 (continued)
3.
Property, plant and equipment
Land and
buildings
Carrying amount at 1 March 20.14
Cost/Valuation
Accumulated depreciation
Revaluation surplus for the year
Additions
Depreciation for the year
Carrying amount at 28 February 20.15
Cost
Accumulated depreciation
R
340 000
340 000
–
100 000
60 000
–
500 000
500 000
–
Furniture
and
equipment
R
14 400
18 000
(3 600)
–
–
(2 880)
11 520
18 000
(6 480)
Vehicles
R
–
–
–
–
54 000
(5 400)
48 600
54 000
(5 400)
Total
R
354 400
358 000
(3 600)
100 000
114 000
(8 280)
560 120
572 000
(11 880)
Land and buildings consist of shops and offices at 23 Rhavi Road, Dealsville. Land and
buildings are revalued annually by an independent sworn appraiser.
4.
Transactions with members
Salary
Interest on loan to member
L Lock
R
20 000
–
20 000
G Gate
R
–
(1 440)
(1 440)
Total
R
20 000
(1 440)
18 560
Calculations
➀
Interest on loan to member
R12 000 x 12% = R1 440
Interest on investment
R25 000 x 12% x 10/12 = R2 500
➁
Water and electricity
R(8 640 + 785) = R9 425
➂
Credit losses
Original amount written off
Further amount written off
Allowance for credit losses
➃
R
540
184
1 000
1 724
Administrative expenses
R(2 868 – 800) (R800 = insurance premium) = R2 068
➄
Insurance
The R800 was paid for a period of one year starting on 1 June 20.14. Only 9 months
of this period fall within the current financial year. Therefore, only R800 x 9/12 = R600
of the expense was incurred during the current financial year. The R200 that falls
outside this financial period must be shown in the statement of financial position as
a prepayment for the next financial period.
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SOLUTION 5.4 (continued)
➅
Depreciation
Equipment:
Equipment
Accumulated depreciation
Diminished balance (carrying amount)
R
18 000
(3 600)
14 400
R14 400 x 20% = R2 880
Vehicle:
R54 000 x 20% x 6/12 = R5 400
Total depreciation:
= R(2 880 + 5 400) = R8 280
➆
Distribution to members and distribution to members payable
Distribution to members R(48 000 + 36 000)
Interim distribution paid to members
Distribution to members payable
➇
Trade receivables
Trade receivables control R(50 184 – 184)
Allowance for credit losses
Accrued interest on loan to member R(1 440 – 720)
Accrued interest on investment R(2 500 – 1 500)
➈
R
84 000
(48 000)
36 000
R
50 000
(1 000)
49 000
720
1 000
50 720
Prepayments
Prepayments represent insurance prepaid (refer to insurance)
⑩
Trade payables
⑪
Current tax payable
Trade payables control
Accrued expenses (water and electricity)
Income tax for the year
SARS: Income tax paid during the year
Current tax payable
R
200
R
83 304
785
84 089
R
51 494
(30 000)
21 494
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Briefly discuss the Close Corporations Act in respect of matters concerning
the attributes, registration, internal and external relations, accounting
records and annual financial statement, joint liability of members and others
for certain debts of a close corporation, tax position of a close corporation
and its members, as well as the deregistration of a close corporation.
Prepare the financial statements (except for a statement of cash flows) of a
close corporation according to the provisions of the Close Corporations Act
and the requirements of IFRS and, where applicable, the guidelines as
presented in the Guide on Close Corporations and Companies Act No. 71
of 2008 Regulations (as issued by SAICA, December 2001).
If you answered "yes" to all of the above assessment criteria, you have completed
your studies on close corporations and can move on to learning unit 7. If you answered
"no" to any of the above criteria, you must revise those sections before progressing
to learning unit 7.
Food for thought:
Do you think that you would prefer to establish a partnership if you had the opportunity
or would you have preferred to establish a close corporation instead?
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LEARNING UNIT
9
6
Statement of cash flows
Learning outcomes .............................................................................................................. 130
Key concepts........................................................................................................................ 130
6.1
Introduction ................................................................................................................. 131
6.2
Main objective and advantages of a statement of cash flows ................................... 131
6.3
Format of a statement of cash flows .......................................................................... 132
6.4
Relationship between a statement of cash flows and other financial statements ..... 132
6.5
Identification of non-cash entries in financial statements prepared on the accrual
basis of accounting ..................................................................................................... 133
6.6
Preparation of a statement of cash flows from financial statements prepared on
the accrual basis of accounting .................................................................................. 133
6.7
Exercises and solutions.............................................................................................. 137
Self-assessment .................................................................................................................. 154
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Learning outcomes
After studying this learning unit, you should be able to:
•
•
discuss, in general terms, the purpose and importance of a statement of cash flows
explain the relationship between a statement of cash flows and the other financial
statements
•
prepare a statement of cash flows and the note in respect of non-cash transactions
pertaining to investing and financing activities of a sole proprietor, partnership,
close corporation and company according to the requirements of IAS 7 by utilising
information which is mainly obtained from the other financial statements and relevant
notes thereto
Key concepts
•
•
•
•
•
•
Cash and cash equivalents
Non-cash transactions
Operating activities
Direct and indirect methods
Investing activities
Financing activities
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6.1
Introduction
According to IAS 1, which was covered in learning unit 1, the objective of financial statements
is to provide information about the financial position, financial performance and cash flows of
an entity that is useful to a wide range of users in making economic decisions. The information
reported on in a statement of profit or loss and other comprehensive income, a statement of
financial position and a statement of changes in equity (in respect of a close corporation)
cannot meet all the informational needs of the users. More so in respect of the liquidity of a
business entity. A liquidity analysis of a business entity, inter alia, indicates how a business is
managing its cash flows. Such information is of great importance, since it shows, for example,
from which resources the transactions of a business entity are financed.
Making a profit is one side of the coin for a successful business, but cash management is
essential to be able to keep on trading. Cash flow and profit are not necessarily the same –
the crucial difference between the two concepts is timing. For example, when an entity sells
to a customer on credit, the sale is immediately accounted for in the statement of profit or loss
and other comprehensive income (referred to as the accrual accounting concept) and will
result in a profit if the sale was above the cost of the inventory. However, the entity does not
receive the cash immediately and a statement of cash flows will include this credit transaction
only when the actual cash is received. Furthermore, the sustainability of a business, for
example, will be questioned when its operating activities are predominantly financed with
external funds (such as long-term borrowings). The purpose of a statement of cash flows (as
prescribed by IAS 7) is to provide information on the cash position of the entity with regard to
the inflow and outflow of cash during the year.
You will encounter the statement of cash flows throughout your accounting studies. It is
therefore very important that your foundational knowledge of cash flows is good.
Read the overview of a statement of cash flows and paragraph 7.1 in the
prescribed textbook.
The paragraph illustrates how the financial performance of an illustrious American company
was misinterpreted with catastrophic results for the entity – all due to a lack of cash flow
information.
6.2
Main objective and advantages of a statement of cash flows
Read paragraph 7.2 in the prescribed textbook.
The statement of cash flows provides the users with the following valuable information:
•
•
•
The cash that was generated through operating activities
Cash used to acquire non-current assets and cash obtained from the disposal of noncurrent assets
The amount of money invested during the year or money received from the maturity of
investments previously made
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•
•
6.3
Any amounts borrowed and repaid during the financial year
The extent to which the entity used borrowed funds or obtained equity in the period under
review.
Format of a statement of cash flows
Study paragraph 7.3 in the prescribed textbook.
Please make sure that you can define cash, cash equivalents, cash flows and the three
sections of a statement of cash flows.
IAS 7 prescribes two methods for the preparation of a statement of cash flows, namely the
direct or the indirect method. Both are discussed in detail further on in this learning unit. Note
that the format presented in paragraph 7.3 is a comprehensive illustration of entries that can
be included in a statement of cash flows for different types of entities. Further references to
the format of a statement of cash flows pertain to this format.
The Cash flows from operating activities section can be disclosed according to either the
direct or the indirect method.
6.4
Relationship between a statement of cash flows and other
financial statements
Study paragraph 7.4 in the prescribed textbook.
Apart from a statement of cash flows, financial statements consist of:
•
•
•
•
Statement of profit or loss and other comprehensive income
Statement of financial position
Statement of changes in equity
Notes to the financial statements
The statement of cash flows is complementary to other statements and can be prepared from
information in the various statements and notes. Because statements of cash flows contain
only cash flow entries, it is very important to be able to distinguish between cash and noncash entries.
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6.5
Identification of non-cash entries in financial statements
prepared on the accrual basis of accounting
Study paragraph 7.5 in the prescribed textbook.
This paragraph must be read attentively. Attempt to complete the table provided on the
identification of non-cash transactions before you look at the solution. Carefully work through
the explanation and journal entries to understand why the mentioned entries are non-cash
entries.
Activity 6.1
Make a list of seven or eight non-cash transactions.
Feedback 6.1
•
•
•
•
•
•
•
•
•
6.6
Depreciation
Allowance for credit losses/increases or decreases in the allowance
Impairment losses or amortisation
Profit or loss on sale of assets
Losses with the writing off of inventory
Revaluation of assets and fair-value adjustments
Credit losses written off
Certain adjustments such as expenses in arears or income in arrears
Credit sales and credit purchases.
Preparation of a statement of cash flows from financial
statements prepared on the accrual basis of accounting
Study paragraph 7.6 in the prescribed textbook.
6.6.1 Cash flows from operating activities
The “cash flows from operating activities” section of a statement of cash flows can be reported
on according to either the direct or the indirect method. For the purposes of this module, you
must be able to apply only the direct method.
Study paragraph 7.6.1 in the prescribed textbook.
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Cash generated from or used in operations according to the direct method
Remember that outflows of cash are always indicated in brackets, whereas cash inflows are
indicated without brackets.
The calculation of cash receipts from customers and cash paid to suppliers and employees is
explained in detail in subparagraphs 7.6.1.1(a) and (b) in the prescribed textbook. Take note
that the financial period during which an accrued or prepaid amount was recorded, plays an
important role when the cash receipts and cash payments are calculated.
Activity 6.2
Work through examples 7.1 and 7.2 in the prescribed textbook, which illustrate the calculation
of cash receipts and cash paid to suppliers and employees, respectively.
The use of T-accounts to establish the cash paid or received is illustrated in example 7.3.
Activity 6.3
Work through example 7.3 in the prescribed textbook.
Comment
Cash flows can only be mastered by doing as many examples as you can and doing so on
your own before looking at the solution so that you can see where you made a mistake. The
use of T-accounts to calculate the cash amount pertaining to a specific account may also be
more “user-friendly” than using tables 7.1 and 7.2 in the prescribed textbook, and will be
particularly useful in the next section.
6.6.2 Cash flows from investing activities
IAS 7 requires an entity to disclose the classes of gross cash receipts and gross cash
payments made to acquire assets and/or investments. This is collectively referred to as the
investing activities of an entity.
The cash flows from investing activities are calculated by using information given in the
statement of financial position for the current and preceding financial years. If there is a
difference between the amounts of an entry from year to year, it is possible that a cash flow
took place. The difference must be analysed further to determine whether a cash flow occurred
or not. In this regard, the use of T-accounts is very helpful.
Make sure that you understand the effect of depreciation in the T-account when assets are
presented at carrying amount. Take note of the implications of a revaluation surplus in an
asset T-account and remember to consider those when you calculate the actual cash flow that
occurred in the T-account.
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Study paragraph 7.6.2 in the prescribed textbook.
Activity 6.4
Work through example 7.6 in the prescribed textbook.
6.6.3 Cash flows from financing activities
Cash flows from financing activities disclose future claims on cash and how activities and
investments were financed.
The cash flows from financing activities can be determined by comparing the statements of
financial position of the current year and of the preceding year and/or by using the information
given in the statement of the changes in equity (or the statement of changes in net investment
of members for CCs).
Study paragraph 7.6.3 in the prescribed textbook.
Activity 6.5
Work through example 7.7 in the prescribed textbook.
6.6.4
Cash and cash equivalents
Once the cash flows from the operating activities, investing activities and financing activities
sections have been prepared, the net cash increase/(decrease) in cash and cash equivalents
is calculated by adding/subtracting the net cash flows of the operating, investing and financing
activities sections. The cash and cash equivalents at the beginning of the financial period are
added to this net increase/(decrease). The answer of this calculation is equal to the cash and
cash equivalents at the end of the financial period. This amount must be equal to the cash
and cash equivalents as disclosed in the statement of financial position for that period (so you
know your statement of cash flows has balanced).
Study paragraph 7.6.4 in the prescribed textbook.
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Activity 6.6
Work through example 7.8 in the prescribed textbook.
6.6.5
Notes pertaining to a statement of cash flows
Study paragraph 7.6.5 in the prescribed textbook.
You need to be able to prepare only the note in respect of a non-cash transaction pertaining
to an investing or financing activity. Examples of such a note are supplied in example 7.9 and
7.10 in the prescribed textbook.
You are now ready to do the two comprehensive examples in the prescribed textbook.
Example 7.9 deals with the preparation of a statement of cash flows for a partnership prepared
according to the direct as well as the indirect method.
Activity 6.7
Work through comprehensive example 7.9 in the prescribed textbook.
Examples 7.10 and 7.11 deal with the preparation of a statement of cash flows for a close
corporation and company prepared according to the indirect method.
Activity 6.8
Work through comprehensive examples 7.10 and 7.11 in the prescribed textbook.
Study paragraph 7.7 in the prescribed textbook, which is a summary of the
chapter.
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6.7 Exercises and solutions
EXERCISE 6.1 – Preparation of a statement of cash flows in respect of a partnership
The following information pertains to the partnership Candyfloss:
CANDYFLOSS
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 28 FEBRUARY 20.17
R
Revenue
750 900
Cost of sales
(294 540)
Inventory (1 March 20.16)
150 600
Purchases
287 940
438 540
Inventory (28 February 20.17)
(144 000)
Gross profit
Other income
Profit on sale of non-current asset (Land and buildings)
Rental income
456 360
22 200
15 000
7 200
Distribution, administrative and other expenses
Administrative expenses (Salaries and wages included)
Depreciation
478 560
(106 800)
105 000
1 800
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
371 760
–
371 760
CANDYFLOSS
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 28 FEBRUARY 20.17
Capital
Balances at 1 March 20.16
Capital contributions
Total comprehensive income for
the year
Interest on capital
Interest on current accounts
Interest on drawings
Partners’ share of total
comprehensive income
Drawings
Balances at 28 Feb 20.17
C
Candy
R
290 700
39 300
330 000
Current accounts
F Floss
C Candy
R
290 700
39 300
R
75 600
R
(600)
19 800
7 560
(20 160)
19 800
(60)
(17 580)
181 200
(201 600)
62 400
181 200
(175 800)
6 960
330 000
F Floss
Appropriation
Total
equity
R
R
656 400
78 600
371 760
(39 600)
(7 500)
37 740
371 760
(362 400)
–
(377 400)
729 360
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EXERCISE 6.1 (continued)
CANDYFLOSS
EXTRACTED INFORMATION FROM THE STATEMENT OF FINANCIAL POSITION AS AT
28 FEBRUARY
20.17
20.16
R
R
Capital: C Candy
330 000
290 700
Capital: F Floss
330 000
290 700
Current account: C Candy
62 400 Cr
75 600 Cr
Current account: F Floss
6 960 Cr
600 Dr
Land and buildings at cost
360 000
540 000
Furniture and equipment at cost
19 200
18 000
Accumulated depreciation: Furniture and equipment
4 800
3 000
Inventory
144 000
150 600
Bank
100 860 Dr
15 000 Cr
Trade receivables control
219 900
111 000
Trade payables control
168 600
145 800
Accrued income (Rent receivable)
600
1 200
Accrued expenses (Salaries and wages)
1 800
600
Fixed deposit
60 000
–
Additional information:
1.
2.
3.
4.
5.
6.
7.
8.
All capital contributions were made in cash.
Inventory is disclosed at cost.
The drawings of the partners were made in cash.
No land and buildings were purchased during the year. Fifty percent of the selling price
of the land and buildings was received in cash, whereas the outstanding amount was
on credit.
No furniture or equipment was sold or scrapped during the year. All purchases were
paid for in cash.
All purchases of inventory were on credit. All of the other expenses, except the accrued
expenses, were paid in full.
There were only trade debtors at 28 February 20.16. The debtors at 28 February 20.17
pertain to trade debtors and the debtor in respect of the sale of land and buildings.
The fixed deposit was made on 28 February 20.17.
REQUIRED
Prepare the statement of cash flows of Candyfloss for the year ended 28 February 20.17 to
comply with the requirements of IFRS appropriate to the business of the partnership. The cash
generated from/(use in) operations must be disclosed according to the direct method.
Comparative figures are not required. Disclose only the note in respect of the non-cash
transaction pertaining to the investing activity.
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SOLUTION 6.1
CANDYFLOSS
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.17
Note
R
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Drawings R(201 600 + 175 800)
R
747 300
(368 940)
378 360
(377 400)
Net cash from operating activities
960
Cash flows from investing activities
Investments in property, plant and equipment to expand
operating capacity
Additions to furniture and equipment R(19 200 – 18 000)
Proceeds from the sale of land and buildings
Acquisition: Fixed deposit R(60 000 – 0)
(1 200)
(1 200)
97 500
(60 000)
1
Net cash from investing activities
36 300
Cash flows from financing activities
Proceeds from capital contribution R[(330 000 – 290 700) x 2]
78 600
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
78 600
115 860
(15 000)
100 860
CANDYFLOSS
NOTE FOR THE YEAR ENDED 28 FEBRUARY 20.17
1.
Non-cash transaction pertaining to the investing activity
Land and buildings with a cost price of R180 000 were sold for R195 000. An amount of
R97 500 is receivable in the next financial year.
Comment
Take note of how to calculate and disclose a non-cash transaction in respect of an investing
activity.
Calculations
① Cash receipts from customers
Items in statement of profit or loss and other
comprehensive income
Revenue
Rental income
R
750 900
7 200
20.16
+ Accrued
income –
income
received in
advance
R
+ 111 000
+ 1 200
20.17
- Accrued
income +
Income
received in
advance
R
- 122 400
- 600
Cash received
from
customers
during 20.17
R
= 739 500
= 7 800
747 300
Trade receivables (closing balance)
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SOLUTION 6.1 (continued)
A debtor included in the amount of R219 900 does not pertain to trade receivables, but to
a debtor who purchased land and buildings from the entity (refer to additional information
7). The closing balance of this debtor’s account must be excluded from the R219 900.
The closing balance is calculated as follows:
• The selling price of the sold land and buildings:
Carrying amount + Profit on sale
R(540 000 – 360 000) + R15 000
= R195 000
• According to additional information 4,50% of R195 000 is still outstanding at the end
of 20.17:
 R195 000 ÷ 2 = R97 500 = Closing balance
Therefore, R97 500 must be excluded from R219 900:
R(219 900 – 97 500) = R122 400 = Closing balance of trade receivables
② Cash paid to suppliers and employees
Items in statement of profit or loss and
other comprehensive income
Purchases
Administrative expenses
R
287 940
105 000
20.16
+ Accrued
expenses –
Prepayments
R
+ 145 800
+ 600
20.17
- Accrued
expenses +
Prepayments
R
- 168 600
- 1 800
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Cash to
suppliers and
employees
during 20.17
R
= 265 140
= 103 800
368 940
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FAC1602/501/3/2021
EXERCISE 6.2 – Preparation of a statement of cash flows in respect of a close
corporation
The following information pertains to Calabash CC:
CALABASH CC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 20.17
R
735 000
(423 750)
46 500
452 250
498 750
(75 000)
Revenue
Cost of sales
Inventory (1 January 20.17)
Purchases
Inventory (31 December 20.17)
Gross profit
Other income
Dividend income: Listed investment
Fair-value adjustment: Held for trading: Listed investment
311 250
42 000
19 500
22 500
353 250
(148 500)
28 500
36 000
30 000
54 000
(21 000)
21 000
Distribution, administrative and other expenses
Depreciation
Salaries to members
Administrative expenses
Wages
Finance costs
Interest on long-term loan
Profit before tax
Income tax expense
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
183 750
(54 000)
129 750
–
129 750
CALABASH CC
STATEMENT OF CHANGES IN NET INVESTMENT OF MEMBERS FOR THE YEAR
ENDED 31 DECEMBER 20.17
Balances at 1 January 20.17
Members’ contributions
Total comprehensive income for the year
Distribution to members
Balances at 31 December 20.17
Members’
contributions
R
532 500
30 000
Retained
earnings
R
12 000
562 500
129 750
(71 250)
70 500
Total
R
544 500
30 000
129 750
(71 250)
633 000
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EXERCISE 6.2 (continued)
CALABASH CC
STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
Note
ASSETS
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade receivables
Prepayments
Listed investment
Cash and cash equivalents
20.17
R
20.16
R
672 750
672 750
226 500
75 000
52 500
3 000
75 000
21 000
591 000
591 000
154 500
46 500
45 000
–
52 500
10 500
Total assets
EQUITY AND LIABILITIES
Total equity
Members' contributions
Retained earnings
Total liabilities
Non-current liabilities
Long-term borrowings
Current liabilities
Trade payables
Distribution to members payable
Current tax payable
899 250
745 500
633 000
562 500
70 500
266 250
150 000
150 000
116 250
46 500
56 250
13 500
544 500
532 500
12 000
201 000
105 000
105 000
96 000
57 000
22 500
16 500
Total equity and liabilities
899 250
745 500
1
CALABASH CC
ABSTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR
ENDED 31 DECEMBER 20.17
1.
Property, plant and equipment
Land and
buildings
Carrying amount at 1 January 20.17
Cost
Accumulated depreciation
Additions
Disposals
Depreciation for the year
Carrying amount at 31 December 20.17
Cost
Accumulated depreciation
R
390 000
390 000
–
–
–
–
390 000
390 000
–
Machinery
and
equipment
R
201 000
265 500
(64 500)
116 250
(6 000)
(28 500)
282 750
356 250
(73 500)
142
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Total
R
591 000
655 500
(64 500)
116 250
(6 000)
(28 500)
672 750
746 250
(73 500)
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FAC1602/501/3/2021
EXERCISE 6.2 (continued)
Additional information:
1.
2.
3.
4.
5.
6.
7.
8.
During the year, machinery with a cost price of R25 500 was sold for cash at its carrying
amount and replaced with new machinery. Depreciation to the amount of R19 500 was
recorded in respect of the sold machinery as from the date of purchase to the date of
sale.
An additional machine was purchased for R60 000 to expand the operating capacity of
the business.
Machinery was purchased for cash.
No equipment was purchased or sold during the financial year ended
31 December 20.17.
Listed investment pertains to shares purchased on 31 December 20.17 from Doc
Limited. The shares are held for trading. No shares from the listed investment were sold
during the current financial year.
All inventories are purchased and sold on credit.
Inventory is recorded at cost.
Trade and other payables include:
Trade payables control
Accrued wages
9.
10
11.
12.
20.17
R
37 500
9 000
20.16
R
49 500
7 500
The close corporation will be renting additional premises as from 1 January 20.18.
The trade receivables control pertains to the trade debtors to whom trading inventory
was sold on credit.
The prepayment was in respect of a rental expense which is included in administrative
expenses.
The long-term borrowings pertain to a long-term loan. The interest on the loan is not
capitalised.
REQUIRED
Prepare the statement of cash flows of Calabash CC for the year ended 31 December 20.17
to comply with the requirements of IFRS appropriate to the business of the close corporation.
The cash generated from/(used in) operations must be disclosed according to the direct
method. Comparative figures and notes are not required but all calculations must be shown.
143
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SOLUTION 6.2
CALABASH CC
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20.17
Note
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Dividends received
Interest paid
Income tax paid
Distributions to members paid
R
727 500
(585 750)
141 750
19 500
(21 000)
(57 000)
(37 500)
Net cash from operating activities
Cash flows from investing activities
Investments in property, plant and equipment to maintain
operating capacity
Replacement of machinery
Investment in property, plant and equipment to expand operating
capacity
Addition to machinery
Proceeds from sale of machinery
45 750
(56 250)
(56 250)
(60 000)
(60 000)
6 000
Net cash from investing activities
Cash flows from financing activities
Proceeds from members’ contributions
Proceeds from long-term borrowings ⑩
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
R
(110 250)
30 000
45 000
75 000
10 500
10 500
21 000
Comment
Take note of the following:
• How to disclose an investment in property, plant and equipment to maintain operating
capacity.
• How to calculate the cash receipts from the sale of machinery.
• The non-cash entry pertaining to the revaluation of the financial asset at fair value through
profit or loss: Held for trading: Listed investment. The fair-value adjustment of R22 500
R(75 000 – 52 500) pertains to a revaluation of the listed investment. The increase in the
statement of financial position is therefore a non-cash entry.
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FAC1602/501/3/2021
SOLUTION 6.2 (continued)
Calculations
① Cash receipts from customers
R
735 000
45 000
(52 500)
727 500
Revenue (Sales)
Add: Trade receivables control (opening balance)
Less: Trade receivables control (closing balance)
Cash receipts from customers
② Cash paid to suppliers and employees
Items
R
20.16
+ Accrued
expenses –
Prepayments
R
20.17
- Accrued
expenses +
Prepayments
R
Cash to
suppliers and
employees
during 20.17
R
+ 49 500
–
–
+ 7 500
- 37 500
–
+ 3 000
- 9 000
464 250
36 000
33 000
52 500
585 750
Statement of profit or loss and other
comprehensive income:
Purchases (for payments made to
trade payables control)
Salaries to members
Administrative expenses
Wages
452 250
36 000
30 000
54 000
③ Dividends received
No dividends are indicated as receivable at the beginning or end of the financial year
under review. It can therefore be concluded that the dividend income of R19 500 for the
year ended 31 December 20.17 was received in cash.
④ Interest paid
No accrued or prepaid amounts were indicated in respect of an interest expense. It can
therefore be concluded that the interest of R21 000 in the statement of profit or loss and
other comprehensive income for the year ended 31 December 20.17 was paid in cash.
⑤ Income tax paid
R
Income tax expense
Add: Current tax payable (opening balance)
Less: Current tax payable (closing balance)
Income tax paid
⑥ Distribution to members
Distribution to members
Add: Distribution to members payable (opening balance)
Less: Distribution to members payable (closing balance)
Distribution to members paid
54 000
16 500
(13 500)
57 000
R
71 250
22 500
(56 250)
37 500
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SOLUTION 6.2 (continued)
⑦ Replacement and addition to machinery
Step 1:
Determine the difference between the opening and closing balances of the
machinery and equipment at cost account:
The note in respect of property, plant and equipment shows that there were additions to
the amount of R116 250. In additional information 2, it was mentioned that machinery to
the amount of R60 000 was purchased to expand the operating capacity of the business.
It can therefore be concluded that machinery to the amount of R56 250 was purchased
to replace machinery sold.
Step 2: Determine whether the additions pertain to a cash flow:
Additional information 3 states that the purchases of machinery were paid for in cash.
⑧ Proceeds from the sale of machinery
Cost – Accumulated depreciation = Carrying amount
R(25 500 – 19 500) = R6 000
Additional information 1 states that machinery was sold for cash at its carrying
amount. The selling price of the machinery is therefore R6 000.
⑨ Proceeds from members’ contributions
Step 1:
Determine the difference between the opening and closing balances of the
members’ contributions account:
Members’ contributions (Statement of financial position as at 31 December 20.17)
Less: Members’ contributions (Statement of financial position as at
31 December 20.16)
Increase in members’ contributions*
R
562 500
(532 500)
30 000
* Also refer to the statement of changes in net investment of members for the year ended
31 December 20.17.
Step 2: Determine whether the increase pertains to a cash flow:
No further information was given in respect of members’ contributions. It can therefore be
concluded that the increase in the members’ contributions was a cash contribution.
⑩ Proceeds from long-term borrowing
Step 1:
Determine the difference between the opening and closing balances of the
long-term borrowing:
Long-term borrowings (Statement of financial position as at 31 December 20.17)
Less: Long-term borrowings (Statement of financial position as at
31 December 20.16)
Increase in long-term borrowings
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R
150 000
(105 000)
45 000
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FAC1602/501/3/2021
Step 2:
Determine whether the increase pertains to a cash flow:
Since there was an increase in the long-term borrowing and the interest charged on the
borrowing is not capitalised, the R45 000 must have been received in cash.
EXERCISE 6.3
Preparation of a statement of cash flows in respect of a sole
proprietorship
The following information was taken from the accounting records and financial statements of
Philander Outfitters, a sole proprietorship:
1.
Balances at 30 June
Land and buildings at cost ...............................
Equipment at cost ............................................
Accumulated depreciation: Equipment ............
Capital: Philander .............................................
Debtors control (trade debtors) ........................
Allowance for credit losses ..............................
Bank .................................................................
Inventory...........................................................
Long-term borrowing ........................................
Creditors control ...............................................
Water and electricity prepaid ...........................
Accrued interest expense ................................
Accrued insurance expense ............................
20.17
R
188 000
54 000
39 950
306 850
179 410
15 000
130 000 Dr
20 000
155 000
53 000
850
2 200
260
20.16
R
188 000
42 000
21 200
230 800
173 600
12 000
7 000 Cr
25 000
115 000
43 000
1 100
700
2.
Relevant information disclosed in the statement of profit or loss and other comprehensive
income for the year ended 30 June 20.17
R
Administrative expenses.............................................................................
20 000
Interest on long-term loan...........................................................................
16 000
Credit losses ...............................................................................................
4 500
Insurance expense .....................................................................................
12 280
Salaries and wages ....................................................................................
45 100
Sales ...........................................................................................................
425 500
Depreciation ................................................................................................
18 750
Water and electricity ...................................................................................
4 720
Purchases ...................................................................................................
155 000
3.
Additional information:
3.1 All sales of inventory were on credit.
3.2 All purchases of inventory were on credit and R153 000 was paid to the trade creditors
during the financial year.
3.3 Mr Philander withdrew R 68 100 in cash during the year.
3.4 A deposit of R4 000 was paid on new equipment purchased on credit on 2July 20.16. The
outstanding amount of the credit purchase of equipment is included in the creditors
control account.
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EXERCISE 6.3 (continued)
REQUIRED:
Prepare the statement of cash flows of Philander Outfitters for the year ended 30 June 20.17
to comply with the requirements of IFRS appropriate to the business of a sole proprietorship.
The cash generated from/(used in) operations must be disclosed according to the direct
method. Notes and comparative figures are not required but all calculations must be shown.
SOLUTION 6.3
PHILANDER OUTFITTERS
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 20.17
Note
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
Interest paid
Drawings
R
418 190
(234 590)
183 600
(14 500)
(68 100)
Net cash from operating activities
Cash flows from investing activities
Investments in property, plant and equipment to expend
operating capacity
Additions to equipment ④
101 000
(4 000)
(4 000)
Net cash used for investing activities
Cash flows from financing activities
Proceeds from long-term borrowings R(155 000 – 115 000)
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
R
(4 000)
40 000
40 000
137 000
(7 000)
130 000
Calculations
In this exercise the T-accounts of the relevant items are reconstructed to illustrate how to
determine the applicable cash amounts that affect the statement of cash flows. The aim is to
reconstruct the account when it was closed off to the statement of profit or loss and other
comprehensive income or to reconstruct a statement of financial position account from its
opening balance to its closing balance at year end. When a prepayment or accrued amount
in the statement of financial position affects an income or expense account, the relevant
expense account is used as a control account to calculate the actual cash payments/receipts
of the income or expense account.
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FAC1602/501/3/2021
SOLUTION 6.3 (continued)
① Cash receipts from customers
Dr
Balance – 20.17
Allowance for credit losses
R
Balance – 20.16
c/d
15 000 Credit loss (balancing figure)
15 000
Balance – 20.17
Dr
Allowance for credit loss
Trade rec control (balancing figure)
Cr
b/d
b/d
Credit losses
R
3 000 Statement of P/L (SoP/L)
1 500
R
12 000
3 000
15 000
15 000
Cr
R
4 500
4 500
4 500
The credit loss on the statement of profit or loss and other comprehensive income is disclosed
as R4 500. This amount comprises trade receivables written off during the year (which must
be calculated) and the increase in the allowance for credit losses R(15 000 – 12 000) =
R3 000. Thus the amount of trade receivables written off during the year is R(4 500 – 3 000)
= R1 500. By constructing the trade receivables control account, the amount received from
customers is calculated.
Dr
Balance – 20.16
SoP/L Sales
Balance – 20.17
Trade receivables control
R
b/d
173 600 Credit losses
425 500 Bank (balancing figure)
Balance – 20.17
599 100
b/d
c/d
179 410
② Cash paid to suppliers and employees
Dr
Bank (add info 3.2)
Balance – 20.17
c/d
Trade payables control
R
153 000 Balance – 20.16
53 000 Purchases SoP/L
Equipment (balancing figure)
b/d
206 000
Bank (balancing figure)
Balance – 20.17
c/d
Cr
R
43 000
155 000
8 000
206 000
Balance – 20.17
Dr
Cr
R
1 500
418 190
179 410
599 100
Insurance
R
12 020 Balance – 20.16
260 SoP/L
b/d
b/d
12 280
53 000
Cr
R
12 280
12 280
Balance – 20.17
b/d
260
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SOLUTION 6.3 (continued)
In this exercise an insurance accrual of R260 was outstanding at year end. This implies that
the insurance expense in the statement of profit or loss and other comprehensive income
included an amount that was not paid in cash. Thus to calculate the cash amount paid
R(12 280 – 260) = R12 020.
Dr
Balance – 2016
Bank (balancing figure)
b/d
Balance – 20.17
b/d
Water and electricity
R
1 100 SoP/L
4 470 Balance – 20.17
5 570
c/d
Cr
R
4 720
850
5 570
850
To calculate the cash amount of water and electricity paid, the prepayments (receivables) in
20.16 and 20.17 must be taken into account. The water and electricity expense in the SoP/L
must be increased with the amount prepaid in 20.17 and decreased with the amount prepaid
in 20.16 which is reversed in 20.17.
Administrative expenses of R20 000 and salaries and wages of R45 100 do not have any
accrued or prepaid amounts and the amount in the statement of profit or loss and other
comprehensive income will be the cash amounts paid.
Or
The payment of suppliers and employees can also be calculated as follows:
Items
R
20.16
+ Accrued
expenses –
Prepayments
R
20.17
- Accrued
expenses +
Prepayments
R
–
–
–
Cash to
suppliers and
employees
during 20.17
R
Statement of profit or loss and
other comprehensive income:
Payments made to trade
payables control – given
Administrative expenses
Insurance
Water and electricity
Salaries and wages
③
153 000
20 000
12 280
4 720
45 100
–
-1 100
–
153 000
20 000
12 020
4 470
45 100
234 590
- 260
+850
Interest paid
R
Interest expense
Add: interest payable (opening balance)
Less: interest payable (closing balance)
Interest paid
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16 000
700
(2 200)
14 500
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FAC1602/501/3/2021
SOLUTION 6.3 (continued)
Or
Dr
Bank (balancing figure)
Balance – 20.17
c/d
④ Equipment
Dr
Balance – 20.16
Creditors control ②
Bank (info 3.4)
b/d
Interest paid
R
14 500 Balance – 20.16
2 200 Interest SoP/L
16 700
b/d
700
16 000
16 700
Balance – 20.17
b/d
2 200
c/d
Cr
R
54 000
Equipment at cost
R
42 000 Balance – 2017
8 000
4 000
Cr
R
54 000
Balance – 20.17
EXERCISE 6.4
b/d
54 000
54 000
Preparation of the cash generated from operations section according
to the direct method of a close corporation’s statement of cash flows
Use example 7.10 in the prescribed textbook and compile the cash generated from
operations section according to the direct method.
SOLUTION 6.4
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash generated from operations
856 931
(604 624)
252 307
Although the remainder of the statement of cash flows was not required, it will be the same as
in the solution of example 7.10 (following the cash generated from operations section) and
you can follow the calculations in the prescribed textbook.
① Cash receipts from customers
Dr
Balance – 20.5
Allowance for settlement discount granted
R
c/d
170 Balance – 20.4
Settlement discount granted
Cr
R
b/d
–
170
170
170
Balance – 20.5
b/d
170
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SOLUTION 6.4 (continued)
Dr
Settlement discount granted
R
Allow for settlement disc granted
170 SoP/L (reduce revenue)
Cr
R
170
170
Dr
Credit loss (balancing figure)
Balance – 20.5
c/d
170
Allowance for credit losses
R
937 Balance – 20.4
1 563
2 500
Balance – 20.5
Dr
b/d
2 500
b/d
Credit losses
R
5 428 Allowance for credit loss
Credit loss in SoP/L
5 428
Trade receivable control
Trade receivables control
R
Balance – 20.4
b/d
20 457 Credit losses
Settlement disc granted (increase
170 Bank (balancing figure)
reduced revenue)
Balance – 20.5
Revenue SoP/L (net of disc
872 992
granted)
893 619
b/d
1 563
Cr
R
937
4 491
5 428
Dr
Balance – 20.5
Cr
R
2 500
c/d
Cr
R
5 428
856 931
31 260
893 619
31 260
② Cash paid to suppliers and employees
Dr
Allowance for settlement discount received
R
–
Balance – 20.4
b/d
Balance – 20.5
Settlement discount received
52
Balance 20.5
Dr
SoP/L (reduce purchases)
b/d
Cr
R
c/d
52
52
52
Settlement discount received
R
52 Allowance for
received
Cr
R
settlement
52
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SOLUTION 6.4 (continued)
Dr
Bank (balancing figure)
Balance – 20.5
c/d
Trade payables control
R
308 937 Balance – 20.4
b/d
31 188 SoP/L Purchases (net of settlement discount received)
Settlement discount received
340 125
Bank (balancing figure)
Balance – 20.5
c/d
Carriage on purchases
R
10 250 Balance – 20.4
938 SoP/L
b/d
b/d
11 188
Bank (balancing figure)
Balance – 20.5
c/d
Carriage on sale
R
11 250 Balance – 20.4
312 SoP/L
b/d
c/d
938
Cr
R
–
11 562
11 562
Balance – 20.5
Bank (balancing figure)
Balance – 20.5
Cr
R
–
11 188
b/d
11 562
Dr
31 188
11 188
Balance – 20.5
Dr
52
340 125
Balance – 20.5
Dr
Cr
R
40 650
299 423
b/d
312
Member’s salary
R
90 000 Balance – 20.4
15 000 SoP/L
105 000
b/d
–
105 000
105 000
Balance – 20.5
b/d
15 000
Cr
R
The remainder of the expenses in the statement of profit or loss and other comprehensive
income had no accrual or prepaid amounts outstanding at the beginning and/or end of the
year and can be accepted as cash payments.
Summary of cash paid to suppliers and employees
Cash paid towards:
Creditors
Carriage on purchases
Carriage on sale
Members’ salary
Salaries to employees
Stationery
Remuneration of accounting officer
Telephone expenses
Cash paid to suppliers and employees
R
308 937
10 250
11 250
90 000
150 000
4 937
17 500
11 750
604 624
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Briefly discuss the purpose and importance of a statement of cash
flows.
Briefly explain the relationship between a statement of cash flows and
the other financial statements that were prepared on the accrual basis
of accounting, and describe the impact of this relationship on the
preparation of a statement of cash flows.
Prepare a statement of cash flows and the notes in respect of non-cash
transactions pertaining to investing and financing activities according to
the requirements of IAS 7. Use information which is mainly obtained
from the other financial statements and any relevant notes thereto, for
each of the following business entities:
− Sole proprietor
− Partnership
− Close corporation
If you answered "yes" to all of the above assessment criteria, you have completed the
learning unit on cash flows and can move on to learning unit 7. If your answer was "no"
to any of the above criteria, revise those sections concerned before commencing with
the revision of the study material.
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LEARNING UNIT
7
Branches
Learning outcomes .............................................................................................................. 156
Key concepts........................................................................................................................ 156
7.1
Introduction ................................................................................................................. 157
7.2
Accounting for dependent branches .......................................................................... 157
7.3
Recording of transactions where inventory sent to the branch is invoiced at cost
price ............................................................................................................................ 157
7.4
Recording of transactions where inventory sent to the branch is invoiced at
selling price ................................................................................................................. 161
7.5
Exercises and solutions.............................................................................................. 166
Self-assessment .................................................................................................................. 176
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Learning outcomes
After studying this learning unit, you should be able to:
• explain the concept of branches
• briefly explain the differences between dependent and independent branches
• identify the information to be included in the reports submitted by a dependent branch to
the head office
• record the transactions between a head office and a dependent branch in the books of
the head office where inventory sent to the branch is invoiced at cost price
• record the transactions between a head office and a dependent branch in the books of
the head office where inventory sent to the branch is invoiced at selling price
• record the transactions of a dependent branch pertaining to the following where inventory
is invoiced at cost price or at selling price:
− Purchases of inventory by the branch
− Sales of inventory by the branch
− Inventory damaged or stolen at the branch
− Inventory sold by the branch at a discount
− Inter-branch inventory transactions
− Settlement discount granted to debtors of the branch
− Donations made by the branch
− Cash embezzled at the branch
− Inventory in transit between the branch and the head office
• identify and record a shortage or surplus in the inventory of a branch where inventory is
invoiced by the branch at selling price
Key concepts
•
•
•
•
•
•
•
•
•
Head office
Dependent branches
Branch inventory
Inventory to branch
Branch adjustments
Branch gross profit (or loss)
Branch profit (or loss)
Inventory transactions
Other branch transactions
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7.1
Introduction
A business entity can establish a branch (or branches) which is geographically separated from
but still form part of the main entity. One of the reasons why business entities establish
branches is to broaden their markets to increase their potential revenues in order to maximise
their profitability. Branches can be managed as dependent or independent units, each with its
own distinct accounting requirements. In this module, only dependent branches are
addressed.
Read the overview and paragraph 9.1 in the prescribed textbook.
7.2
Accounting for dependent branches
The head office of a dependent branch is responsible for supplying inventory to the branch
and for recording all of the accounting transactions of the branch in the accounting records of
the head office. The head office can invoice inventory to the branch at either cost or selling
price. Each method of invoicing requires a unique set of accounts and recording procedure.
Usually, the head office of a dependent branch is responsible for the payment of the major
expenses of the branch. The head office may also decide to provide the branch with petty
cash for the payment of minor expenses that are incurred by the branch. A branch may also
purchase inventory from other suppliers.
Since the activities of a dependent branch are recorded in the books of its head office, a
dependent branch is usually required to submit a report to the head office in respect of the
transactions that have occurred at the branch over a given financial period.
Read the overview and paragraph 9.2 in the prescribed textbook.
7.3
Recording of transactions where inventory sent to the branch
is invoiced at cost price
When this method of bookkeeping is followed, two accounts must be opened in the accounting
records of the head office:
(1)
a branch inventory account
(2)
an inventory to branch account
These accounts are specifically for the recording of transactions that pertain to the inventory
of the branch. The other business activities of a branch are recorded in other accounts in the
accounting records of the head office, for example a branch trade receivables control account,
a branch asset account or a branch expenses account.
Paragraph 9.3 in the prescribed textbook discusses the recording of transactions where
inventory is invoiced at cost price. Each example in this paragraph builds on the concepts
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explained in the previous example, so make sure that you follow and understand each new
entry in the examples in paragraph 9.3.
Read the overview and paragraph 9.3.1 in the prescribed textbook.
Activity 7.1
a)
In the accounting records of the head office, when inventory is invoiced to the branch
at cost price, the branch inventory account serves the same purpose as which other
account that you have already encountered and why?
b)
Explain what is meant with “the gross profit/loss of the branch”. A gross profit/loss
will be transferred to which account in the accounting records of the head office?
Feedback 7.1
a)
The branch inventory account serves the same purpose as the trading account. When
balanced at the end of the accounting period, the balance on the account represents
the gross profit/loss that the branch made.
b)
The gross profit/loss is the result of the difference between the price at which inventory
is received (from head office) and the price at which inventory is sold by the branch.
This profit/loss is transferred to the branch expense account.
Read paragraph 9.3.2 in the prescribed textbook.
Activity 7.2
Work through example 9.1 in the prescribed textbook, where inventory is sent to the branch
and the branch is allowed to purchase inventory from other suppliers as well.
Comment
Remember that we are dealing with a dependent branch and the accounting functions of the
branch are performed by the main entity (head office).
Journal entry to record the inventory sent to the branch at cost:
Dr Branch inventory
Cr Inventory to branch
Do you know the journal entry to account for purchases of inventory from other suppliers
(cash or credit)?
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Read paragraph 9.3.3 in the prescribed textbook.
Activity 7.3
Work through example 9.2 in the prescribed textbook, where inventory is returned to the head
office.
Journal entry to record the inventory returned to head office:
Dr Inventory to branch
Cr Branch inventory
Read paragraph 9.3.4 in the prescribed textbook.
Activity 7.4
Work through example 9.3 in the prescribed textbook, where inventory is sold by the branch.
Journal entry to record the cash/credit sale of inventory by the branch:
Dr Bank (cash sale) or Branch trade receivables control (sale on credit)
Cr Branch inventory
Read paragraph 9.3.5 in the prescribed textbook.
Activity 7.5
Work through example 9.4 in the prescribed textbook, where branch debtors settle their
accounts at a discount.
Journal entry to record the settlement of a branch debtor’s account at a discount:
Dr Settlement discount granted
Cr Branch trade receivables control
Comment
At the end of the accounting period, the settlement discount granted is closed off to the branch
inventory account (where the sale was recorded). This ensures the similar treatment of
discounts granted in the accounting records of an entity without a branch (settlement discount
granted reduces sales).
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Read paragraphs 9.3.6 and 9.3.7 in the prescribed textbook.
When inventory is sold by the branch at a marked-down price (below the normal selling price
of the branch), the entries remain the same as in paragraph 9.3.4 of the textbook (refer to
activity 7.4). Please make sure that you follow what will happen if the inventory is sold below
cost price.
Activity 7.6
Work through example 9.5 in the prescribed textbook, where cash is embezzled or stolen at
the branch.
Journal entry to record the embezzlement of cash at the branch from either a cash or
a credit sale:
Cash sale:
Dr Bank (with the actual money banked)
Dr Branch expenses (with the embezzled amount)
Cr Branch inventory account (with the cost of the inventory sold, which includes the money
banked and the embezzled cash)
Credit sale:
Dr Bank (with the actual amount banked)
Dr Branch expenses (with the embezzled amount)
Cr Branch trade receivables control (with the total amount that the debtor paid, which consists
of the banked amount and the embezzled cash).
Read paragraph 9.3.8 in the prescribed textbook.
Activity 7.7
Work through example 9.6 in the prescribed textbook where inter-branch inventory
transactions are recorded.
Journal entry to record the inter-branch inventory transactions:
Dr Branch inventory (of the branch that receives the inventory – the receiving branch)
Cr Branch inventory (of the branch that sells the inventory – the transferring branch)
Read paragraph 9.3.9 in the prescribed textbook.
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Activity 7.8
Work through example 9.7 in the prescribed textbook, where the branch incurs expenses that
are paid by head office and pays for minor expenses from its petty cash.
Journal entry to record the expenses paid for by head office and expenses paid for
from petty cash:
Paid by head office:
Dr Branch expenses
Cr Bank
Paid from petty cash:
Dr Branch expenses
Cr Petty cash
Read paragraphs 9.3.10 to 9.3.13 in the prescribed textbook.
Activity 7.9
Work through example 9.8 in the prescribed textbook where inventory in transit, inventory on
hand as well as the closing off of the accounts in the records of head office are illustrated.
Make sure that you understand how to account for inventory in transit from head office to the
branch and inventory in transit from the branch to head office, and also how to account for
inventory on hand. The branch inventory account (which is similar to the trading account and
contains the gross profit of the branch) is closed off to the branch expense account (which is
similar to a profit or loss account and contains the branch profit or loss for the period). The
branch expense account is closed off to the profit or loss account of the head office.
Activity 7.10
Work through example 9.9 in the prescribed textbook, which is a comprehensive example
illustrating inventory sent to the branch invoiced at cost price.
7.4
Recording of transactions where inventory sent to the branch
is invoiced at selling price
Paragraph 9.4 in the prescribed textbook discusses the recording of transactions where
inventory is invoiced at selling price. Each example in this paragraph builds on the concepts
explained in the previous example, so make sure that you follow and understand each new
entry in the examples in paragraph 9.4.
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When inventory is invoiced to the branch at selling price, the branch inventory account will
not reflect the gross profit of the branch (as is the case when the inventory is invoiced to
the branch at cost price). An additional account, namely a “branch adjustment account”, is
required to reflect the gross profit and to serve the function of a “trading account”. The branch
inventory account (at selling price) functions as an inventory control account.
The recording of all inventory transactions in the branch inventory account is done at selling
price. Each selling price is divided into two amounts, namely the cost price and the profit
mark-up of the inventory. These two amounts are disclosed separately in the branch inventory
account (at selling price) and must add up to the selling price. The reason for this separate
disclosure in the branch inventory account is that the entries pertaining to the cost price and
the entries pertaining to the profit mark-up have different contra accounts. For example, when
inventory that is sent to the branch is recorded (assume a cost of R100 and a mark-up of
R50), the branch inventory account is debited (separately) with the cost price (R100) and the
profit mark-up thereof (R50) against different contra accounts: the inventory to branch account
(R100) and the branch adjustment account (R50) respectively. The inventory to branch
account is credited with the cost price (R100) and the branch adjustment account is credited
with the profit mark-up (R50).
Study paragraph 9.4.1 in the prescribed textbook.
The calculation of the profit mark-up in branch inventory is discussed in paragraph 9.4.2 of
the prescribed textbook. Make sure that you can calculate the profit mark-up and the selling
price when given the cost price, and that you can calculate the profit mark-up and the cost
price when given the selling price.
Study paragraph 9.4.2 in the prescribed textbook.
Activity 7.11
D Pelser Ltd trades in watercoolers. Calculate the profit that D Pelser Ltd must add to send
two watercoolers with a total cost of R6 000 to its branch.
b)
D Pelser Ltd invoices inventory to its branch at cost plus 50%. Inventory with a cost
price of R50 000 will have a selling price of …
c)
Damaged inventory with a selling price of R12 000 was returned by the branch to
D Pelser Ltd. What is the cost of the inventory returned?
d)
D Pelser Ltd sells inventory to its customers at an additional 20% mark-up on the selling
price to its branch. How much will a customer pay for a watercooler with a cost of R2 500
bought from D Pelser Ltd?
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Feedback 7.11
a)
%
100
50
150
Cost assumed to be
Profit
Selling price
a)
R6 000 x 50/100 = R3 000
b)
R50 000 x 150/100 = R75 000
c)
R12 000 x 100/150 = R8 000
d)
R2 500 x 180/100 = R4 500
Cost assumed to be
Profit
Selling price to branch
Additional profit 20% x 150%
Selling price to customers
%
100
50
150
30
180
Study paragraph 9.4.3 in the prescribed textbook.
Activity 7.12
Work through example 9.10 in the prescribed textbook, which illustrates inventory sent to the
branch invoiced at selling price, and purchases by the branch.
Comment
Remember that we are dealing with a dependent branch and the accounting functions of the
branch are performed by the main entity (head office).
Journal entry to record the inventory sent to the branch at selling price:
Dr Branch inventory (with the cost)
Cr Inventory to branch (with the cost)
Dr Branch inventory (with the profit mark-up)
Cr Branch adjustment account (with the profit mark-up)
Do you know the journal entry when inventory is purchased from other suppliers and the
branch adds the profit mark-up before selling to customers?
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Study paragraph 9.4.4 in the prescribed textbook.
Activity 7.13
Work through example 9.11 in the prescribed textbook, where inventory is returned to the
head office.
Journal entry to record the inventory returned to head office:
Dr Inventory to branch (with the cost)
Cr Branch inventory (with the cost)
Dr Branch adjustment account (with the profit mark-up)
Cr Branch inventory (with the profit mark-up)
Study paragraph 9.4.5 in the prescribed textbook.
Activity 7.14
Work through example 9.12 in the prescribed textbook, where inventory is sold by the branch.
Journal entry to record the cash/credit sale of inventory by the branch:
Dr Bank (cash sale) at selling price or Branch trade receivables control (sale on credit) at
selling price
Cr Branch inventory (at selling price)
Study paragraph 9.4.6 in the prescribed textbook.
Journal entry to record the settlement of a branch debtor’s account at a discount:
Dr Settlement discount granted
Cr Branch trade receivables control
Comment
At the end of the accounting period, the settlement discount granted is closed off to the branch
adjustment account.
Study paragraph 9.4.7 in the prescribed textbook.
When inventory is sold by the branch at a marked-down price (below the normal selling price
of the branch), the entries remain the same as in paragraph 9.4.5 in the textbook (refer to
activity 7.14).
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Activity 7.15
Work through example 9.13 in the prescribed textbook, where inventory is sold at a markeddown price that is still above or equal to cost, and example 9.14, where inventory is sold
below cost.
Study paragraph 9.4.8 in the prescribed textbook.
Journal entry to record the embezzlement of cash at the branch from either a cash or
a credit sale:
Cash sale:
Dr Bank (with the actual money banked)
Dr Branch expenses (with the embezzled amount)
Cr Branch inventory account (with the price of the inventory sold, which includes the money
banked and the embezzled cash)
Credit sale:
Dr Bank (with the actual amount banked)
Dr Branch expenses (with the embezzled amount)
Cr Branch trade receivables control (with the total amount that the debtor paid, which consists
of the banked amount and the embezzled cash)
Study paragraph 9.4.9 in the prescribed textbook.
Activity 7.16
Work through example 9.15 in the prescribed textbook, where inter-branch inventory
transactions are recorded.
Journal entry to record the inter-branch inventory transactions:
Dr Branch inventory (receiving branch) with the cost of the transferring branch
Dr Branch inventory (receiving branch) with the mark-up
Cr Branch adjustment account (receiving branch) with the mark-up
Cr Branch inventory (transferring branch) with the cost to the receiving branch
Cr Branch inventory (transferring branch) with the mark-up
Dr Branch adjustment account (transferring branch) with the mark-up
Study paragraph 9.4.10 to 9.4.14 in the prescribed textbook.
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Activity 7.17
Work through example 9.16 in the prescribed textbook, which illustrates the closing inventory,
inventory in transit and inventory shortage.
Activity 7.18
Work through example 9.17 in the prescribed textbook, which is a comprehensive example
of inventory sent by head office to its branch, invoiced at selling price.
Read paragraph 9.5 in the prescribed textbook which summarises branch
transactions.
7.5
Exercises and solutions
EXERCISE 7.1 – Inventory is invoiced to the branch at cost price
The following information pertains to the head office and branch of Boom CC for the year
ended 31 December 20.15:
R
Inventory sent to branch
4 800
Inventory returned to head office by the branch
80
Sales by branch for the year: Cash
2 000
Credit
3 290
Cash received from branch debtors and paid into the head office bank account
2 890
Sundry expenses paid by head office
600
Additional information:
1.
2.
3.
4.
The branch began trading on 2 January 20.15 and inventory is invoiced to the branch at
cost price.
An amount of R50 must be written off as a credit loss.
Discount on selling prices for cash sales granted to customers amounted to R30.
Inventory at 31 December 20.15 amounted to R480.
REQUIRED
Prepare the following accounts properly balanced/closed off, in the general ledger of the head
office for the year ended 31 December 20.15:
a)
Branch inventory account
b)
Inventory to branch account
c)
Branch trade receivables control account
d)
Branch expenses account
e)
Bank account (partly)
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SOLUTION 7.1
BOOM CC (HEAD OFFICE)
GENERAL LEDGER
a)
Dr
Branch inventory (at cost price)
20.15
R
20.15
Dec 31 Inventory to branch
4 800 Dec 31 Inventory to branch
(Delivery at cost)
(Returns at cost)
Branch expenses
1 050
Bank (Cash sales)
(Branch gross profit for year*
Branch trade receivables
control (Credit sales)
Balance
c/d
(Closing inventory)
5 850
20.16
Jan 1 Balance
b/d
480
Cr
R
80
2 000
3 290
480
5 850
* Balancing figure
b)
Dr
Inventory to branch (at cost price)
20.15
R
20.15
Dec 31 Branch inventory
80 Dec 31 Branch inventory
(Returns at cost)
(Deliveries at cost)
Head office: Trading
account*
4 720
4 800
Cr
R
4 800
4 800
* Balancing figure
c)
Dr
20.15
Dec 31
20.16
Jan 1
d)
Branch inventory
(Credit sales)
Balance
Branch trade receivables control
R
20.15
3 290 Dec 31 Bank (Collections deposited by branch)
Branch expenses
(Credit losses)
Balance
3 290
b/d
Cr
R
2 890
50
c/d
350
3 290
350
Dr
Branch expenses
20.15
R
20.15
Dec 31 Bank (Sundry expenses)
600 Dec 31 Branch inventory
Branch trade receivables
(Branch gross profit for
control (Credit losses)
50
the year)
Head office: Profit or loss
400
(Branch profit for the year)*
1 050
Cr
R
1 050
1 050
* Balancing figure
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SOLUTION 7.1 (continued)
e)
Dr
20.15
Dec 31
Bank (extract)
R
Branch trade receivables
control
(Collections deposited by
branch)
Branch inventory
(Cash sales)
Cr
20.15
Dec 31 Branch expenses
2 890
R
600
2 000
Comments
• The cash discount on sales of R30 will not be recorded because the cash sales of
R2 000 already exclude this amount.
• Only cash transactions with the branch are shown in the bank account. In practice, the
bank account will contain the cash transactions of the branch as well as those of the
head office.
• In the above solution, we see that the branch inventory is brought down as a balance in
the branch inventory account at the end of the financial period. The balances of the
branch trade receivables control and the branch asset accounts are added to the head
office balances and disclosed as a total amount in the statement of financial position.
EXERCISE 7.2 – Inventory is invoiced to the branch at selling price.
The following information pertains to the head office and the branch of Pama CC for the year
ended 31 December 20.15:
R
Inventory sent to branch (selling price)
Cash sales (deposited in bank)
Returns to head office (selling price)
Sundry expenses paid by head office
18 750
17 918
186
4 760
Additional information:
1.
2.
3.
4.
5.
All purchases are made by head office and all goods required by the branch are supplied
by head office at selling price, which is cost price plus 50%.
A burglary took place during the year and R55 in cash (cash sales) and inventory to the
value of R36 (selling price) were stolen. No entries have been made in the records yet.
The net proceeds of the annual sales amounted to R360. Inventory was sold at selling
price less 10% and no entries were made in the records concerning this price reduction.
Inventory invoiced to the branch at R75 (included in the amount of R18 750 above) was
still in transit at 31 December 20.15 and was therefore not included in the branch’s
inventory at 31 December 20.15.
Inventory at selling price:
31 December 20.14
R1 500
31 December 20.15
R1 950
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EXERCISE 7.2 (continued)
REQUIRED
Prepare the following accounts, properly balanced/closed-off, in the general ledger of the head
office for the year ended 31 December 20.15:
a)
Branch inventory account
b)
Inventory to branch account
c)
Branch adjustment account
d)
Branch expenses account
SOLUTION 7.2
PAMA CC (HEAD OFFICE)
GENERAL LEDGER
a)
Dr
Branch inventory (at selling price)
20.15
R
20.15
Jan 1 Balance
b/d
1 500 Dec 31 Bank (Sales)
12 500
Inventory to branch
Inventory to branch
(Deliveries at cost)
(Returns at cost)
Branch adjustment
6 250
Branch adjustment
(Mark-up on deliveries)
(Mark-up on returns)
Branch adjustment
10
Branch expenses
(Inventory surplus)*
(Cash stolen)
Branch expenses
(Inventory stolen at cost)
Branch adjustment
(Mark-up on inventory
stolen)
Branch adjustment
(Discount on sales)
Balance
c/d
(Inventory in transit)
Balance
c/d
(Closing inventory)
20 260
20.16
Jan 1 Balance
b/d
75
(Inventory in transit)
Balance
b/d
1 950
(Opening inventory)
Cr
R
17 918
124
62
55
24
12
40
75
1 950
20 260
* Balancing figure
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SOLUTION 7.2 (continued)
b)
Dr
Inventory to branch (at cost price)
20.15
R
20.15
Dec 31 Branch inventory
124 Dec 31 Branch inventory
(Returns at cost)
(Deliveries at cost)
Head office: Trading
account*
12 376
12 500
Cr
R
12 500
12 500
* Balancing figure
c)
Dr
Branch adjustment (mark-up at 50% on cost)
20.15
R
20.15
Dec 31 Branch inventory
62 Jan 1 Balance
b/d
(Mark-up on returns)
(Mark-up on opening
Branch inventory
12
inventory)
(Mark-up on inventory
Branch inventory
(Mark-up on deliveries)
stolen)
Branch inventory
40
Branch inventory
(Discount on sales)
(Inventory surplus)
25
Balance ➇
c/d
(Mark-up on inventory in
transit)
Balance
c/d
(Mark-up on closing
650
inventory)
Branch expenses
5 971
(Branch gross profit for
the year)*
6 760
20.16
Jan 1 Balance
b/d
(Mark-up on inventory in
transit)
Balance
b/d
(Mark-up
on
opening
inventory)
Cr
R
500
6 250
10
6 760
25
650
* Balancing figure
d)
Dr
20.15
Dec 31 Bank (Sundry expenses)
Branch inventory
(Cash stolen)
Branch inventory
(Inventory stolen)
Head office: Profit or loss
(Branch profit for the
year)*
Branch expenses
R
20.15
4 760 Dec 31 Branch adjustment
55
(Branch gross profit for
the year)
24
Cr
R
5 971
1 132
5 971
* Balancing figure
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FAC1602/501/3/2021
SOLUTION 7.2 (continued)
Calculations
Cost of inventory sent to branch
%
100
50
150
Cost
Profit mark-up
Selling price
Inventory sent to branch at cost = R18 750 x 100/150 = R12 500
Profit mark-up on deliveries
R18 750 x 50/150 = R6 250
Cost of returns to head office
R186 x 100/150 = R124
Cost of inventory stolen
R36 x 100/150 = R24
Profit mark-up on inventory stolen
R36 x 50/150 = R12
Discount on sale
R360 = 90% of original selling price
Original selling price
= R360 ÷ 90%
= R400
.˙. Discount = R(400 – 360) = R40
or
Cost
Profit mark-up
Original selling price
Markdown (10% x 150)
Sold at
%
100
50
1 50
(15)
135
Original selling price
R360 x 150/135 = R400
Markdown on the original selling price
R(400 – 360) = R40
or
R400 x 15/150 = R40
Profit mark-up on opening inventory
R1 500 x 50/150 = R 500
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SOLUTION 7.2 (continued)
➇ Profit mark-up on closing inventory in transit
R75 x 50/150 = R25
Profit mark-up on closing inventory
R1 950 x 50/150 = R650
EXERCISE 7.3 – Inventory is invoiced to the branch at selling price
The following information pertains to the head office and branch of Sucro Confectionary CC
for the year ended 28 February 20.15:
R
Inventory to branch at selling price
64 500
Inventory returned to head office at selling price
1 800
Cash sales of branch embezzled by cashier
375
Administrative expenses of branch paid by head office
5 000
Discount granted to branch debtors for early settlement
150
Cash sales by branch (after deducting local purchases) – cost
41 500
price R500
Credit sales of branch
20 000
Rent expense of branch paid by head office
1 800
Inventory damaged – selling price
300
Credit losses of branch written off
50
Additional information:
1.
2.
3.
4.
5.
Inventory was supplied to the branch by head office at selling price, that is, cost plus
50%.
Inventory at selling price at:
28 February 20.14
R4 500
28 February 20.15
R4 800
It is estimated that theft of inventory amounting to R360 (selling price) occurred during
the year. This amount must be taken into account during inventory reconciliations.
During the year, the branch donated inventory (cost R60) towards a local charity fundraising campaign.
Inventory purchased locally was also sold at cost price plus 50%.
REQUIRED
Prepare the following accounts, properly balanced/closed-off, in the general ledger of the head
office for the year ended 28 February 20.15:
a)
Branch inventory account
b)
Branch adjustment account
c)
Branch expenses account
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FAC1602/501/3/2021
SOLUTION 7.3
SUCRO CONFECTIONERY CC (HEAD OFFICE)
GENERAL LEDGER
a)
Dr
Branch inventory (at selling price)
20.14
R
20.15
Mar 1 Balance
b/d
4 500 Feb 28 Inventory to branch
43 000
(Returns at cost)
Inventory to branch
(Deliveries at cost)
Branch adjustment
Branch adjustment
21 500
(Mark-up on returns)
(Mark-up on deliveries)
Branch expenses
Bank (Local purchases)
500
(Cash embezzled)
Branch adjustment
167
Bank (Cash sales)
(Mark-up on local
Branch trade receivables
purchases)
control (Credit sales)
Branch expenses
(Cost of inventory
damaged)
Branch adjustment
(Mark-up on inventory
damaged)
Branch expenses
(Cost of inventory
stolen)
Branch adjustment
(Mark-up on inventory
stolen)
Branch expenses
(Cost of inventory
donated)
Branch adjustment
(Mark-up on inventory
donated)
Branch adjustment
(Inventory shortage)*
Balance
c/d
(Closing inventory)
69 667
20.15
Mar 1 Balance
b/d
4 727
(Opening inventory)
Cr
R
1 200
600
375
42 000
20 000
200
100
240
120
60
20
25
4 727
69 667
* Balancing figure
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SOLUTION 7.3 (continued)
b)
c)
Dr
Branch adjustment (mark-up at 50% on cost)
20.15
R
20.14
Feb 28 Branch inventory
600 Mar 1 Balance ⑫
b/d
(Mark-up on returns)
(Mark-up on opening
Branch inventory
100
inventory)
(Mark-up on inventory
Branch inventory
damaged)
(Mark-up on deliveries)
Branch inventory
120
Branch inventory
(Mark-up on inventory
(Mark-up on local
stolen)
purchases)
Branch inventory ⑪
20
(Mark-up on inventory
donated)
Branch inventory
25
(Inventory shortage)
Balance ⑬
c/d
1 600
(Mark-up on closing
inventory)
Branch expenses
20 702
(Branch gross profit for
the year)*
23 167
20.15
Mar 1 Balance
b/d
(Mark-up on opening
inventory)
* Balancing figure
Dr
20.15
Feb 28 Branch inventory
(Cash embezzled)
Bank (Admin expenses)
Bank (Rent expenses)
Branch inventory
(Inventory damaged)
Branch debtors’ control
(Credit losses)
Branch inventory
(Inventory stolen)
Branch inventory
(Inventory donated)
Head office: Profit or loss
(Branch profit for the
year)*
Branch expenses
R
20.15
375 Feb 28 Branch adjustment
(Branch gross profit for
5 000
the year)
1 800
200
Cr
R
1 500
21 500
167
23 167
1 600
Cr
R
20 702
50
240
60
12 977
20 702
* Balancing figure
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SOLUTION 7.3 (continued)
Calculations
① Cost of inventory sent to branch
%
Cost
100
Profit mark-up
50
Selling price
150
Inventory sent to branch at cost = R64 500 x 100/150 = R43 000
② Profit mark-up on inventory sent to branch
R64 500 x 50/150 = R21 500
③ Profit mark-up on local purchases
R500 x 50/150 = R167
④ Cost of returns to head office
R1 800 x 100/150 = R1 200
⑤ Profit mark-up on returns to head office
R1 800 x 50/150 = R600
⑥ Bank (Cash sales)
Cash sales (after deduction of R500)
Cash used for local purchases
Total cash sales
R
41 500
500
42 000
⑦ Cost of inventory damaged
R300 x 100/150 = R200
⑧ Profit mark-up on inventory damaged
R300 x 50/150 = R100
⑨ Cost of inventory stolen
R360 x 100/150 = R240
⑩ Profit mark-up on inventory stolen
R360 x 50/150 = R120
⑪ Profit mark-up on inventory donated
R60 x 50/150 = R20
⑫ Profit mark-up on opening inventory
R4 500 x 50/150 = R1 500
⑬ Profit mark-up on closing inventory
R4 800 x 50/150 = R1 600
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Self-assessment
After having worked through this learning unit, are you able to do the following?
Yes
No
Briefly discuss the concept of branches.
Briefly explain the difference between dependent and independent
branches.
Briefly discuss the information to be included in the reports submitted by a
dependent branch to a head office.
Record the transactions between a head office and a dependent branch in
the books of the head office, where inventory sent to the branch is invoiced
at cost price.
Record the transactions between a head office and a dependent branch in
the books of the head office, where inventory sent to the branch is invoiced
at selling price.
Record the transactions of a dependent branch pertaining to the following,
where inventory is invoiced at cost price or at selling price:
−
Purchases of inventory by the branch
−
Sales of inventory by the branch
−
Inventory sold by the branch at a discount
−
Inventory damaged or stolen at the branch
−
Inter-branch inventory transactions
−
Settlement discount granted to debtors of the branch
−
Donations made by the branch
−
Cash embezzled at the branch
−
Inventory in transit from the branch to the head office and from the
head office to the branch
Identify and record a shortage or surplus in the inventory of a branch where
inventory is invoiced by the head office at selling price.
If you answered "yes" to all of the above assessment criteria, you have completed your
studies on branches and can now focus on revision of the study material for the exams.
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