ANNEXURE F: FORMATIVE ASSESSMENT 1 QUESTION 1 (15 marks) Tale Limited is a manufacturing company with a 31 December financial year-end. The company owns various machines that are used in its manufacturing process. The following is an extract from its fixed asset register: Accumulated Carrying Asset Purchase date depreciation amount Cost 31 December 31 December Machine A Machine B 01/07/2019 30/04/2021 R1 250 000 R995 000 2021 (R625 000) (R116 083) 2021 R625 000 R878 917 Machine A When the machine was bought, it had a production capacity of 350 000 units. The production manager noted that the machine's production capacity reduced to 280 000 units over time and requested that the machine be assessed and serviced. The machine was checked and serviced during June 2021, and the cost incurred amounted to R150 000. After the service, the machine's production capacity increased to 305 000 units. Tale Limited did not initially account for the major service as a separate component of the machine. Machine B After the machine was in use for a month, the production manager noted that if a slight modification was made to the machine, it could increase its production capacity by 15%. The directors approved the modification, and it was affected on 1 June 2021 at the cost of R105 000. The modification increased the machine's production capacity by 15%. Machinery is depreciated at 20% per year on a straight-line basis. The above- mentioned costs relating to Machine A and B have not been accounted for in the fixed asset register provided, as the accountant is not sure how to account for these costs. 60 ANNEXURE F: FORMATIVE ASSESSMENT 1 HFAC232-1-Jan-Jun2022-FA1-CP-V2-16112021 REQUIRED: Advise the accountant on how the expenditure incurred in respect of Machine A and Machine B should be recognised in the financial statements of Tale Limited for the financial year ended 31 December 2021 to comply with the requirements of IAS 16. No calculations are required. Competency Framework Reference: (15 marks) QUESTION 2 (27 marks) Millennium Limited is in the process of expanding and require capital for the expansion planned. The board therefore approved the issue of preference shares. Preference shares On 1 July 2020, the company issued 1 000 000 redeemable preference shares of R15,00 each. These shares pay dividends that are not within the discretion of Millennium Limited, at a market-related rate of 12% per annum. As per the terms and conditions, 50% of the shares will be redeemed at par value for cash on 31 December 2021. The remainder will be redeemed on 31 December 2023. Debentures By 31 December 2021, the expansion project had been completed. Millennium Limited had some of the capital left, which was raised through the issue of preference shares. The directors therefore decided to invest these surplus funds in debentures. The terms of the debentures purchased on 1 January 2022 were as follow: 5000 debentures with a face value of R500 each. The debentures are redeemable in 2 years' time. An annual rate of 9% is applicable, and interest is payable annually on 31 Decem- ber. The purchase price of the debentures amounts to their present value. Assume an effective interest rate of 9.66%. Millennium Limited's business model is to hold the debentures to collect contractual cash flows and that the cash flows are solely payments of principal and interest on the principal amount. 62 ANNEXURE F: FORMATIVE ASSESSMENT 1 HFAC232-1-Jan-Jun 2022-FA1-CP-V2-16112021 REQUIRED: 2.1) Discuss the correct classification and presentation of the preference shares in the financial statements of Millenium Limited for the financial year ended 31 December 2020 in accordance with IAS 32. (13 marks) 2.2) Prepare the journal entries to record the acquisition of the debentures in the records of Millenium Limited for the financial year ended 31 December 2022. Round all answers to the nearest Rand. Include statement references ("journal narrations"). (14 marks) ANNEXURE F: FORMATIVE ASSESSMENT 1 QUESTION 3 (16 marks) Feathers Limited is a distributor of down jackets to various clothing outlets. Feathers Limited has the policy to refund purchases within 30 days from the date of sale, and their refund policy is generally known. Feathers Limited uses past sales and refund history to account for the refund provision, and the 31 December 2020 financial statements showed a provision for refunds amounting to R23 500. During the 2021 financial year, refunds to the value of R35 600 were paid out for down jackets returned by customers. R15 900 of these returns related to sales for the financial year ended 31 December 2020. The Financial Manager estimated that of the down jacket sales for the financial year ended 31 December 2021, R25 400 would most probably be refunded in the first 30 days of the next financial year. The manufacturer from which Feathers Limited sources the down jackets prides themselves on the quality of their product. They, therefore, provide a guarantee to Feathers Limited to take back and refund any jacket that is returned with a manufacturing defect. On 31 December 2021, it is estimated that 10% of the probable returns will be returned due to manufacturing defects and will therefore be refunded to Feathers Limited by the manufacturer. According to the Financial Manager, this estimate is probable but not virtually certain. In November 2021, the local animal shelter instituted a claim against Feathers Limited for animal cruelty. Due to their down jackets being manufactured using duck feathers, the animal shelter claims that the ducks are being harmed in the manufacturing process. Feathers Limited's legal advisor believes that it is probable that the claim will not succeed, seeing as Feathers Limited is not the manufacturer of the down jackets. The claim is for R200 000. 64 ANNEXURE F: FORMATIVE ASSESSMENT 1 HFAC232-1-Jan-Jun2022-FA1-CP-V2-16112021 REQUIRED: Disclose the above information in the notes to the financial statements of Feathers Limited for the financial year ended 31 December 2021, according to the requirements of IAS 37 - Provisions, contingent liabilities, and contingent assets. You can assume that all amounts mentioned are material. No accounting policy notes, or comparative figures are required. (16 marks) ANNEXURE F: FORMATIVE ASSESSMENT 1 QUESTION 4 (27 marks) Foodz Limited is a manufacturing company with a 31 March financial year-end. The company bought a new manufacturing machine on 1 April 2021 for R2 850 000, payable on 31 March 2022. The cost price was paid in cash on 31 March 2022. The machine was delivered to Foodz Limited on 1 May 2021, and they paid R120 000 to DLH Carries for the delivery of the machine in cash on delivery. The machine was installed in Foodz Limited's factory at R55 000 was ready for use on 31 May 2021. The installation costs were paid on 31 May 2021. The machine's useful life was estimated at five years and the residual value at R210 000. Foodz Limited makes use of the diminishing balance method to account for depreciation. Assume a market-related interest rate of 14% per annum and standard credit terms of 60 days. REQUIRED: 4.1) For the 31 March 2022 financial year, determine the following values applicable to the machine bought by Foodz Limited: The cost price (5 marks) The depreciable amount (3 marks) The carrying amount at the end of the financial year (5 marks) All amounts must be clearly indicated to receive all marks. If amounts are not clearly indicated, all marks will not be allocated. 4.2) Prepare all the journal entries required in the records of Foodz Limited for the financial year ending 31 March 2022 to account for the machine. Journal dates are required. Include statement references ("journal narrations"). (14 marks) Round all answers to the nearest Rand. 66 HFAC232-1-Jan-Jun 2022-FA1-CP-V2-16112021 ANNEXURE F: FORMATIVE ASSESSMENT 1 Competency Framework Reference: B1 B1.1 b) REPORTING FUNDAMENTALS Fundamental reporting concepts Identify users' needs and develop a reporting approach by selecting suitable reporting and regulatory framework(s) which satisfies most users' needs in general purpose reporting by: (i) Applying the fundamental theories related to reporting, (ii) Applying the objective, usefulness and limitations of the available reporting frameworks, (iii) Applying the objective, nature and characteristics of regulatory frameworks and requirements Apply the qualitative characteristics and principles of useful information 67 ANNEXURE F: FORMATIVE ASSESSMENT 1 HFAC232-1-Jan-Jun 2022-FA1-CP-V2-16112021 QUESTION 5 (15 marks) Electrical Limited sells various appliances and the company has a 31 December financial year-end. All minor appliances are sold with a six-month warranty, while major appliances are sold with a one-year warranty. The company's financial statements showed a warranty provision balance of R225 500 for the financial year ended 31 December 2020. During the 2021 financial year, Electrical Limited spent R345 600 on repairs done to goods under warranty. R222 200 of the amount related to items sold during the 2020 financial year. Electrical Limited calculates their warranty provision as a percentage of the sales price and an expectation of the item being brought in for repairs, based on past experience of repairs. For the 2021 financial year, the company sold minor appliances of R2 505 000 and major appliances of R4 785 000. For minor appliances, 5% of the sales price is provided for as repair costs, and the probability for minor appliances to be brought in for repairs while under warranty is 65%. For major appliances, 10% of the sales price is provided for as repair costs, and the probability for major appliances to be brought in for repairs while under warranty is 38%. REQUIRED: Prepare the journal entries to account for the above information relating to the provision for refunds in the records of Electrical Limited for the financial year ended 31 December 2021. Show all calculations. Include statement references ("journal narrations"). Round all answers to the nearest Rand. 68 ANNEXURE F: FORMATIVE ASSESSMENT 1 Competency Framework Reference: B1 REPORTING FUNDAMENTALS B1.1 Fundamental reporting concepts (15 marks) HFAC232-1-Jan-Jun2022-FA1-CP-V2-16112021