SECTION A

QUESTION 1 (11 marks; 20 minutes)

HK Traders is a business that manufactures cooling systems. The current financial year end is 28 February 2019.

The following issues need to be considered:

1. HK Traders entered into a contract with Jumbo Ltd on 01 November 2018 to lease equipment for a period of 5 years. The cash price is R3 000 000. Ownership of the equipment remains with Jumbo Ltd. The bookkeeper is of the opinion that the equipment should not be classified as an asset.

2. The accounts receivable balance on 28 February 2019 amounted to R97 500. Included in this balance is an amount of R5 250 owed by Regent Traders, which was declared bankrupt on 27 February 2019.

3. HK Traders has spare warehouse capacity and on 01 December 2018 entered into a one year contract to lease part of the warehouse to Larry Botha. The contract stipulates rent of R5 000 per month, payable monthly in advance on the last of each month (eg. Januarys rental will be paid on 31 December). All rentals were received timeously and all rental received recorded in Rent Income Account.

You are required to:

Discuss the impact of each issue on the financial statements of HK Traders for the year ended 28 February 2019.

Start your answer by referring to the relevant definition of the elements and then state the issue and discuss.