QUESTION $1-$ Going concern and factual insolvency $(30$ marks$)$

Lock$-$in $($Pty$)$ td is a company that manufactures burglar proofing, security doors and gates for

domestic use. The company operates on the South Coast of Walvis Bay, has been in existence for

$18$ years. Arno Swartz and Will Venter, who invested their savings and obtained a small loan from

the bank, formed the company. With the increase in the need for domestic security the company

experienced some growth, taking on more staff, purchasing machinery and expanding the

factory. There are five other shareholders with minor holdings, but Arno Swartz and Will Venter

have remained the majority shareholders. They are the only directors in the company. Both of

them work very hard in the business and most of their personal wealth is tied up in the company.

Your firm has been the auditor of the company since it incorporation. You have been assigned to

the $31$ August $2022$ financial year$-$end audit. Late in September, the company was ready for you

to commence the final audit and has provided you with the following abridged balance sheet as

at $31$ August $2022$:

Equity and non$-$current liabilities

N$

Share capital $100000$

Retained profits $128000$

Shareholders$$ funds $228000$

Non$-$current liabilities Note $12200000$

Deferred Tax $77000$

$2505000$

Non$-$current assets, current assets and liabilities

N$

Property, plant and equipment Note $21572000$

Investments Note $3250000$

Net current assets $683000$

Current assets $1620000$

Inventory $994000$

Accounts receivable $626000$

Current liabilities $937000$

Accounts payable $392000$

Bank overdraft $45000$

Current portion of non$-$current liability $500000$

$2505000$

Note $1$ Non$-$current liabilities are made up as follows:

N$

Shareholders$$ loans $-$ Arno Swartz $830000$

$-$ Will Venter $870000$

Industrial Bank of Namibia $500000$

$2200000$

The shareholders' loans have no set repayment dates, and interest is paid at $10\%$ per annum in

September each year. The loan from the industrial Bank of Namibia was raised in June $2019$ and

was for N$$1$ million, repayable in two instalments of N$$500000$ in June $2023$ and June $2026.$ The

loan is secured by a bond over the land and buildings, and interest of $12\%$ per annum is payable

on $30$ June each year. Arno Swartz is negotiating with the bank to extend the first repayment

deadline.

Note $2$ Property, plant and equipment is made up as follows:

N$

Vacant industrial site sub$-$lot $215$ Margate, at cost $170000$

Land and buildings $1052000$

Machinery: $($welders$,$ benders, etc$)350000$

$1572000$

$(1)$ The municipal valuation for $2022$ rates assessment purposes for sub$-$lot $215$ was

N$$200000.$

$(2)$ Land and buildings consist of a factory and a small adjoining brick administration building

situated on a site in the Margate industrial township. A recent valuation obtained from a

local industrial estate agent indicates that the land and buildings are fairly valued.

$(3)$ The company's machinery is shown at cost less accumulated depreciation and is in good

condition,

Note $3$ This represents a $20\%$ investment in a local company, Sunfun $($Pty$)$ Ltd$,$ which runs a

small entertainment park on the Margate beachfront. Although Sunfun $($Pty$)$ Ltd is financially

sound, its profitability over the years has not been up to expectations and as other beach

entertainment activities have opened up$,$ profitability is not expected to increase but to

remain constant

Whilst gaining an understanding of the business you also obtained the following information:

$1.$ After$-$tax profits $($losses$)$ for financial year$-$end: $2018$ N$$720000$

$2019$ N$$675000$

$2020$ N$$580000$

$2021$ N$$420000$

$2022($N$$372000)$

$2.$ In $2019,$ two of the large national security door suppliers had moved into the area and

had embarked on aggressive marketing campaigns, undercutting prices and attracting

skilled artisans away from the smaller companies with higher wage rates.

$3.$ Lock$-$in $($Pty$)$ Ltd is involved in a lawsuit $($with several other South Coast businesses$)$

against a building company, Beachomes $($Pty$)$ Ltd$,$ which has started the construction of a

large holiday home complex. Building had commenced on $240$ homes on stands that had

been sold to owners on sectional title. Lock$-$in $($Pty$)$ Ltd had won the tender to supply all

units with security doors and gates. Initially the contract had gone well, with the

developer paying promptly. However, by February $2022$ payments had dried up$,$ and in

May $2022$ the developers disappeared from the site, leaving a trail of incomplete homes

and extensive debt. As Lock$-$in $($Pty$)$ Ltd had concentrated much of their manufacturing

capacity on supplying the Beachomes $($Pty$)$ Ltd contract, it had no choice but to keep its

staff busy by continuing to manufacture the security doors and gates up until May $2022$

when the developers finally disappeared. At balance sheet date the accounts receivable

and the inventory figures included N$$372000$ owed by Beachomes $($Pty$)$ Ltd and N$$480$

$000$ of finished go