Question 1 RD incorporated (RD) is a diversified company that operates throughout South Africa in various sectors. The have recently expanded into the logistic sector and are looking to streamline their operations with the introduction of a more efficient logistics process and customer service. During the current financial year, two events occurred that require specific attention in light of the newly expanded division of RD. As the newly appointed senior accountant at RD, you were tasked by the Financial Manager to address the events and determine their appropriate accounting implications.

Event 1:

On 1 July 2013, a conveyor belt machine was purchased for R2 000 000. The machine requires special belts to operate efficiently and these belts cost R150 000. A requirement by the machines manufacturers is that the new belts need to be purchased every year. During the current financial year, which ends 31 December 2014, a new set of belts were acquired on account. The FM was unsure of how to treat the expenditure of the belts in relation to the Conveyor belt machine as he is aware that certain expenditures can be capitalised to the value of an asset.

Event 2:

The RD provides its logistical service to clients on a contract basis. In an effort to gain access to the logistic market, RD offered tailor made contracts to customers with a degree of negotiation between the parties. One contract arose during the current year which had a recognition issue that the FM did not know how to deal with: Value of the contract in total is 55 000 and is for an 18 month period The way the service is rendered makes difficult to determine when the funds will be received as conditions need to be met before the customers will pay their contracted service fees, i.e. a stage of completion assessment needs to be done before the customers pay their accounts. For this specific account, the stage of completion assessment done noted that 45% of the service had been rendered.

You are required to:

1. Event 1: Discuss, using full definition and recognition criteria, how the conveyor belt expenditure must be recognised for the year ended 31 December 2014. (13)

2. Event 2: Using the recognition criteria, determine the amount that can be recognised in the financial statements of RD for the year ended 31 December 2014.