UNIVERSITY EXAMINATIONS
May/June 2022
FAC3703
SPECIFIC FINANCIAL REPORTING
100 marks
3 hours
60 minutes for uploading
THIS PAPER CONSISTS OF
TEN (10) PAGES.
INSTRUCTIONS:
Please remember to complete the Honesty Declaration.
Follow these steps to submit your take-home answer file.
1. Access myUnisa at https://my.unisa.ac.za/portal and login using your student number
and myUnisa password.
2. Click on the “myAdmin” tab in the top navigation.
3. In the “Assessments” submenu, click on the “Assessment Info” tool in the drop-down
list.
• Locate the section for UNISA summative assessments at the bottom of the list.
• Find the corresponding portfolio number for your module.
• Click on the Submit link in the Action column and follow the steps described below.
Load the answer file from your PC to myUnisa:
• Click on the Browse button next to File Name.
• In the Choose File dialog box, select the file you want to upload, and then click OK.
• Select the correct file format from the File Format drop-down list. Only PDF
formatted files are allowed to be uploaded.
• Click on the Continue button. If you do not click Continue, no submission action will
take place.
Additional student instructions.
1. Students must upload their answer scripts in a single PDF file (answer scripts must not
be password protected or uploaded as “read only” files)
2. Incorrect file format and uncollated answer scripts will not be considered.
3. NO emailed scripts will be accepted.
4. Students are advised to preview submissions (answer scripts) to ensure legibility and
that the correct answer script file has been uploaded.
5. Incorrect answer scripts and/or submissions made on unofficial examinations platforms
(including the invigilator cell phone application) will not be marked and no opportunity will
be granted for resubmission.
6. Mark awarded for incomplete submission will be the student’s final mark. No opportunity
for resubmission will be granted.
7. Mark awarded for illegible scanned submission will be the student’s final mark. No
opportunity for resubmission will be granted.
8. Submissions will only be accepted from registered student accounts.
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FAC3703
May – June 2022 Examination
9. Students who have not utilised invigilation or proctoring tools will be subjected
to disciplinary processes (only include if applicable).
10. Students suspected of dishonest conduct during the examinations will be subjected to
disciplinary processes. UNISA has a zero tolerance for plagiarism and/or any other forms
of academic dishonesty.
11. Students are provided one hour to submit their answer scripts after the official
examination time. Submissions made after the official examination time will be rejected
by the examination regulations and will not be marked.
12. Students experiencing network or load shedding challenges are advised to apply
together with supporting evidence for an Aegrotat within 3 days of the examination
session.
13. Students experiencing technical challenges, contact the SCSC 080 000 1870 or email
casenquiries@unisa.ac.za or alternatively email your module lecturer. ONLY
communication from your myLIfe account will be considered.
PLEASE NOTE:
1.
The paper consists of TWO (2) questions.
2.
All questions must be answered.
3.
All calculations must be shown.
4.
Each question attempted, must commence on a new page.
5.
PROPOSED TIME-TABLE: (Avoid deviating from this as far as possible.)
Question
number
1
2
Subject
Leases and Employee
benefits
Financial Instruments,
Borrowing cost and Related
Parties
TOTAL
2
Marks
Time
(minutes)
45
80
55
100
100
180
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FAC3703
May – June 2022 Examination
INSTRUCTIONS ON THE DAY OF THE ASSESSMENT
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Ensure you are connected to the internet in order to log into the Invigilator App and
scan this QR code.
If you encounter difficulty in scanning the QR code, you can alternatively enter the
Exam Access Code below the QR code to start the invigilation.
Unless otherwise specified by your institution, note that you can only scan this QR
code once. If your assessment has multiple online sections, tests or attempts, you
should NOT finish the invigilation until your entire assessment has been completed.
Only scan the QR code when the assessment formally commences.
The QR code is only scannable for a limited time and it should therefore be
scanned as soon as possible to start the invigilation.
Once the QR code is scanned, ensure your media volume Is turned up and place your
smartphone next to you. The Invigilator App will notify you with a notification beep when
you are required to action a request, which you should then perform.
We recommend that you keep your smartphone on charge for the duration of the
assessment.
If you only have one device you may access your assessment in the application by
pressing the ‘Access Exam’ button in the top right corner of your app.
Keep the Invigilator App open on your cell phone for the full duration of the
assessment. You are not allowed to minimise or leave the app.
Ensure you are connected to the internet in order to commence the invigilation as well
as at the end of the assessment. No internet connection is required during the
assessment.
You have to adhere to the assessment time limit communicated to you by your
institution as the time displayed in the Invigilator App could differ from the time
allocated to complete your assessment.
You can click the "Finish Assessment" button in the app if you finish your assessment
early .
If you are performing a written or Scan-and-Upload assessment:
The Invigilator App may request you to take a picture of every page of your answer
sheet at the end of the assessment. Unless otherwise specified by your institution,
this does NOT replace the normal upload of your script to your institutions
online portal.
After completing invigilation and following all app instructions, you must upload your
Invigilation App data. If however there is a delay in the upload of the app data at the
end of the assessment, you should prioritise the upload of your script to your university
portal and you can temporarily minimise the app to do so. Uploading of app data is not
time sensitive and you can come back and do it after you have successfully uploaded
your script to the exam portal.
Should you encounter any technical difficulty, please WhatsApp The Invigilator
Helpdesk on 073 505 8273.
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FAC3703
May – June 2022 Examination
Question 1 (45 Marks) (80 Minutes)
Grumpy Limited, a VAT vendor, is listed on the JSE Limited and has a 31 March year-end.
Grumpy offers consulting services in various industries from financial services to software
development. Their offices are in Johannesburg and Cape Town.
1. Employee Benefits
The table below shows information obtained from the Human Resources department as at 31
March 2022, indicating the following:
Employee Group/Employee
Gross Salary Leave
closing Leave days taken:
for the year
balance:
1 April 2021 – 31
R
31 March 2021
March 2022
Professional staff
5 895 400
8
28
Semi – Professional Staff
2 345 200
3
27
Administration & Support staff
704 000
2
32
Mallory Foxx
450 750
0
5
All employees who work for Grumpy Limited have been employed since incorporation of the
company in 2007, except for Mallory Foxx, who was only employed from 1 January 2022.
There are 260 working days per year. All employees employed at Grumpy Limited are entitled
to two and a half days leave per month. The company applies the first-in-first-out method on
leave taken by employees, in that the leave carried over from the previous year is taken first.
Leave not taken during a financial year, limited to a maximum of seven days, can be carried
over to the following financial year. Any days exceeding the maximum days allowed to be
carried forward are forfeited. The leave days carried forward should be taken within the first
three months of the following financial year. If not taken, they will be paid out in cash to the
employees on 1 June of each year. No leave was paid out by Grumpy Limited during the
financial year ended 31 March 2022. The leave accrual balance as at 31 March 2021 was
R104 750.
Employees are entitled to a thirteenth cheque on 31 March of every financial year. This bonus
pay-out is made in proportion to the number of months employed in a specific financial year.
2. Lease from Doc Limited
On 1 January 2022, Grumpy Limited entered into a finance lease agreement with Doc Limited,
to lease a newly erected office building from Doc Limited for a period of fourteen years. The
office building was erected at a total cost of R6 560 000 and was available for use as intended
by the management of Doc Limited on 1 January 2022. On 1 January 2022, the market value
of the office building amounted to R6 560 000
In terms of the lease agreement, R140 000 was payable immediately by Grumpy Limited on
1 January 2022, and the outstanding balance is repayable in monthly instalments of R67 280
each, payable in advance.
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FAC3703
May – June 2022 Examination
On 1 January 2022, it was estimated that the useful life of the office building is sixteen years.
Legal title will not be transferred to Grumpy Limited at the end of the lease term. It was
estimated that Doc Limited would be able to sell this office building at the end of the lease
term for R626 445. Grumpy Limited and Doc Limited incurred legal costs in respect of this
lease agreement, amounting to R48 000 and R35 000 respectively. Grumpy Limited had
access to all the above information relating to Doc Limited.
Grumpy Limited’s incremental borrowing rate of interest is 10% per year. You can assume
that on 1 January 2022, the present value of the minimum lease payments was lower than the
fair value of the office building.
3. Lease to Smurvette Limited
On 1 April 2022 Grumpy Limited leased one of their newly acquired office buildings to
Smurvette Limited, for a period 5 years. The lease does not contain an option to extend the
lease term or the option to purchase the building, and as a result the building will return to
Grumpy Limited at the expiry of the lease.
The office building is not a specialised building, no major modifications are required for any
tenant to rent out the building.
In terms of the lease agreement, a market-related rent of R55 000 is payable monthly in
arrears. The escalation clause is as follows:
- An increase of 10% on 1 April 2023
- A further increase of 10% 1 April 2025
Grumpy Limited Ltd incurred R10 000 in legal fees to secure the lease agreement. The legal
fees are deductible for tax purposes.
The office building was acquired on 1 April 2022 for an amount R4 150 000 with a total useful
life of 20 years. It is the accounting policy of Grumpy Limited to account for investment property
in accordance with the cost model.
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FAC3703
May – June 2022 Examination
REQUIRED:
Marks
(a) Calculate the short-term employee benefits amount (employee costs) as
it would appear in the profit before tax note to the annual financial
statements of Grumpy Limited for the ended 31 March 2022.
(b)
(c)
Prepare the journal entries (cash transactions included) in the books of
Doc Limited for the year ended 31 March 2022, in accordance with
International Financial Reporting Standards (IFRS).
- Journal narrations are not required.
- Round all calculated amounts to the nearest R1 and percentages
to two decimal places.
- One journal entry can be prepared for cash received during the
year ended 31 March 2022.
- Do not prepare any journal entries for current tax and deferred tax.
- You must not prepare a journal for the payment of the net VAT to
SARS
Discuss, in detail how the lease with Smurvette Limited will be classified
and accounted for in the accounting records of Grumpy Limited for the
year ended 31 March 2023.
Your discussion must address the classification, recognition, and
measurement of the lease.
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16
15
NB: the measurement discussion must include calculations.
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Please note:
Your answers must comply with the requirements of International Financial
Reporting Standards (IFRS).
Comparative figures are not required.
Show all data input into your financial calculator, where applicable.
Ignore income tax and value-added tax (VAT).
Round all amounts off to the nearest rand.
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FAC3703
May – June 2022 Examination
Question 2 (55 Marks) (100 Minutes)
Smartphone (Pty) Ltd
Smartphone (Pty) Ltd (hereafter “SM”) is a company based in Johannesburg. SM
manufactures smartphone accessories like cases, chargers, etc. and SM has proved to be
one of the best companies in this industry. The company has a 31 March financial year-end.
Anthony Nzume is both the owner and the chief executive officer of SM.
SM has been currently renting the factory plant they use to manufacture the smartphone
accessories. During the financial year-ended 31 March 2021 there were discussions that the
company should build their own factory plant in response to the growing market share. It was
then decided during the final board meeting for the year ended 31 March 2021 that the
company would go ahead with the building of the factory plant, however, due to the funds
needed for this they would then have to borrow funds.
1. Factory plant construction
The plans to construct a factory plant were finalised in April 2021 and SM incurred the initial
expenses on 1 June 2021 for drawing up the plans for the construction of the factory plant
amounting to R275 000. The construction of the factory plant commenced on 1 July 2021 and
the total cost of the factory plant amounted to R10 500 000. The construction was done by
Construction Company Ltd and it took six months to complete the factory plant. The new
factory plant meets the definition of a qualifying asset in terms of IAS 23, Borrowing costs.
SM applied for an overdraft facility from Banker Bank on 15 May 2021 to finance the
construction of the factory plant. Victor Nzume, the brother of Anthony Nzume, is the financial
director of Banker Bank. The overdraft facility was approved on 30 May 2021 by Banker Bank
and advanced the amount as needed by SM to pay the construction costs of the factory plant
immediately. The construction costs were incurred and withdrawn from Banker Bank as
follows:
The construction costs were incurred and withdrawn from the overdraft facility as follows:
Date
From 1 July 2021 – 30 September 2021
From 1 October 2021 – 30 November 2021
1 December 2021 - 31 December 2021
Amount
R
6 000 000
3 000 000
1 225 000
10 225 000
Incurred how
Evenly incurred
Evenly incurred
Not evenly incurred
The overdraft from Banker Bank bears interest at a fixed rate of 13% per annum, starting on
30 June 2021. According to the loan agreement, interest accrued on the loan until 31
December 2021 will be settled in cash on 31 December 2021. The loan of R10 225 000 is
repayable in four annual instalments starting on 1 January 2022. The terms of the loan
agreement were at arm’s length.
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FAC3703
May – June 2022 Examination
The new factory plant was ready for use on 1 January 2022 and was brought into use on 1
February 2022. It is the policy of SM to depreciate its factory plant over its expected useful life
of 20 years. The new factory plant has a residual value of R750 000. The current tax is 28%
for the financial year and South African Revenue Services (SARS) allows a 5% per annum
non-apportioned for time, tax allowance (capital allowance) on the factory plant.
2. Investment in debentures
Phone (Pty) Ltd is a company that specializes in the manufacturing of screens for cell phones
and SM decided to invest in Phone (Pty) Ltd for strategic purposes. SM acquired a 65%
interest in investment of Phone (Pty) Ltd in the prior year and as a result SM has control over
Phone (Pty) Ltd as defined in IFRS 10, Consolidated Financial Statements. SM owns 300 000
ordinary shares of Phone (Pty) Ltd.
On 1 October 2021, SM acquired 30 000 debentures in Phone (Pty) Ltd at their fair value of
R18 per debenture. The face value of the debenture is R15. On 1 October 2021, SM paid
broker’s commission of R45 000. The coupon interest of 12% per annum will be received by
SM on 30 September each year. The debentures are redeemable on 30 September 2025 for
cash at face value. On 1 October 2021 the debentures are considered to be a good investment
that is not credit impaired.
At year-end, 31 March 2022, the credit risk has increased significantly with no objective
evidence of being credit impaired.
On 31 March 2022, the expected credit loss information for the investment in debentures was
as follows:
1 October 2021
8%
Probability of default occurring within the next 12
months
12%
Probability of default occurring until lifetime of the
investment
31 March 2022
9%
15%
The fair value of the debenture of Phone (Pty) Ltd amounted to R19,50 and R20,80 on 31
March 2022 30 September 2022 respectively.
On 15 March 2022, Phone (Pty) Ltd declared and paid a dividend of R2,50 per share to all
ordinary shareholders. SM acquired cell phone screens from Phone (Pty) Ltd at their marketrelated (arm’s length) price of R250 000 from Phone (Pty) Ltd. The cell phone screens were
paid for in cash.
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FAC3703
May – June 2022 Examination
3. Convertible debentures
SM would like to expand its operations and decided to issue convertible debentures to raise
funds for the expansion.
SM issued 2 200 convertible debentures on 1 April 2021. The debentures have a four-year
term and are issued at par value (equivalent to the fair value of the debentures) of R1 500 per
debenture. On 31 March 2025, each debenture is convertible into 180 ordinary shares, if not
converted the debentures will be redeemed at par on maturity date. The debentures are
convertible at the option of the holder. Coupon payments of 9% per annum will be made
annually on 31 March.
When the debentures were issued the prevailing market interest rate for similar debt
instruments without a conversion option was 11,5% per annum. Each convertible debenture
had a fair value of R1 540 on 31 March 2021 and R1 550 on 31 March 2021.
SM manages its liquidity risk by ensuring that the maturities of its assets and liabilities match
according to cash flow needs and that the company has adequate access to credit. Expected
cash flow requirements are monitored with rolling cash flow budgets.
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FAC3703
May – June 2022 Examination
REQUIRED:
Marks
(a) The accountant of Smartphone (Pty) Ltd included the full interest incurred
on the loan from Banker Bank in the profit before tax and as a result she
asked you to assist with the following:
- Discussion on whether the interest incurred on the overdraft
facility from Banker Bank should be included as interest expense
fully in the financial year ended 31 March 2022.
- IAS 23 Borrowing Costs should be followed in addressing this
question.
- Include calculations in your discussion.
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(b) Disclose point 1 and point 2 above in the following notes to the separate
annual financial statements of Smartphone (Pty) Ltd for the financial year
ended 31 March 2022:
(c)
Profit before tax
Related parties.
22
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Disclose point 3 above in the Accounting Policies and Categories of
Financial Liabilities note to the annual financial statements of
Smartphone (Pty) Ltd for the financial year ended 31 March 2023.
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55
Please note:
Your answers must comply with the requirements of International Financial
Reporting Standards (IFRS).
Comparative figures are not required.
Ignore income tax and value-added tax (VAT).
Round all amounts off to the nearest rand.
END OF EXAMINATION
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