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Flattering Soaps Ltd is a soap manufacturing company based in Cape Town, South Africa. The company has a 30 June financial year end. The following

Flattering Soaps Ltd is a soap manufacturing company based in Cape Town, South Africa. The company has a 30 June financial year end.

The following revenue transactions have taken place during the financial year ended 30 June 2020:

Transaction 1: Sale to US company

On 1 January 2020, Flattering Soaps Ltd entered into a contract for the sale of 10 boxes of soap to a US based company. Due to the fact that Flattering Soaps Ltd anticipated that the Rand would deteriorate in the foreseeable future, the transaction was dominated in US dollars ($). The total selling price of the soaps sold amounted to $1 000 and the customer settled the amount on 10 February 2020. The soaps were shipped free on board on 31 January 2020

The following foreign exchange rates are applicable:

Spot rate

Date $1 = R

1 January 2020 .................................................................... ....................... 14,50

31 January 2020 .................................................................. ....................... 14,55

10 February 2020................................................................. ....................... 14,20

The cost to manufacture the soaps amounted to R9 500.

The above transaction has not been recorded yet in the accounting records of Flattering Soaps Ltd.

Transaction 2: Cash sales

Flattering Soaps Ltd mainly sells soaps for cash to customers. The total cash sales of soaps for the year ended 30 June 2020 amounted to R1 200 000. Control of the soaps is transferred to the customer as soon as the cash is received. Flattering Soaps Ltd’s policy is to allow customers to return the soaps, within 30 days from date of purchase, for a full refund if they are unsatisfied with the product. Flattering Soaps Ltd uses the expected value method and estimated, based on experience, that 10% of the soaps sold will be returned. The cost of the soaps sold amounted to R900 000.

The inexperienced financial clerk of Flattering Soaps Ltd only recorded the following journal entries to account for the above cash sales for the year:

Debit

R

Credit

R

Journal 1

1 200 000

1 200 000

Bank (SFP) Revenue (P/L)

Recognition of revenue on sale of soaps.

Journal 2

900 000

900 000

Cost of sales (P/L) Inventory (SFP)

Recognise cost of soaps sold

Assumptions:

  1. Assume all amounts are material.
  2. Ignore the implications of Value-Added Tax (VAT).

REQUIRED:

Marks

a) Prepare all the general journal entries (including cash transactions) in the accounting records of Flattering Soaps Ltd to correctly account for transaction (1), the sale to the US based company, for the financial year ended 30 June 2020.

13

b) Discuss, with reasons whether transaction (2), the cash sales transaction, was correctly recorded in the accounting records of Flattering Soaps Ltd for the financial year ended 30 June 2020.

10

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