PROGRAMME:

BACHELOR OF COMMERCE IN ACCOUNTING

MODULE:

FINANCIAL ACCOUNTING $3$

QUESTION ONE

This question comprises two independent parts.

PART A

GoMart Ltd $($GoMart$)$ is a diversified utility, manufacturing and supermarket retailer company

based in Cape Town. You are furnished with the following information in respect of GoMart

Ltd$\text{'}$s annual financial statements for the year ended $31$ December $20\mathrm{.}8$:

GoMart's supermarket division, Save Supermarkets, has opened the country's largest

superstore in Durban and has arranged for GoBag Ltd $($GoBag$)$ to supply their plastic bag

requirements for the superstore with effect from $1$ January $2019.$

The agreement is for a four$-$year period and the terms are as follows:

GoBag Ltd will set up a new bag$-$making machine in a warehouse located close to

and dedicated to the Durban Superstore of GoMart. The bag$-$making machine will be

owned and operated by GoBag. The contract stipulated the type and quality of bags

to be supplied by GoBag to GoMart.

GoBag Ltd has the right to use the machine for other bag orders but that is

considered unlikely as it is designed and set up to produce bags that are unique to

the Save Supermarkets superstore.

Save Supermarkets will purchase a minimum of $1$ million bags per month. It is

expected that normal demand will be in the region of $1\mathrm{.}5$ million bags per month with

the maximum output capacity of the bag$-$making machine being $1,6$ million bags per

month.

In terms of the contract, GoBag operates and maintains the bag$-$making machine and

makes the ultimate decision in terms of its operation, use, maintenance and possible

modification for a change in use.