SECTION B

QUESTION 1 (44 MARKS; 79 MINUTES)

Sports4U is an entity that sells sports equipment and also rents out additional space in the factory to a soccer club. The owner Mac, has supplied you with the information below and asked you to make the necessary adjustments and to prepare financial statements for his business in respect of the financial year ended 31 December 2021.

LIST OF PRE-ADJUSTMENT BALANCES OF SPORTS4U

ON 31 DECEMBER 2021:

	Rand
Bank balance	?
Supplies	8 450
Equipment	80 000
Land and buildings	600 000
Long term loan	65 000
Capital	500 000
Drawings	10 500
Inventory	235 000
Accounts receivable	96 320
Accounts payable	87 000
Sales	945 000
Rent Income	24 000
Cost of Sales	459 250
Salaries expense	83 700
Advertising expense	18 450
Rates expense	39 190
Telephone expense	12 400
Interest expense	2 925

Additional information:

1. During the year Mac took inventory home for his children to play with, amounting to R1 200. This transaction has not yet been recorded in the records of the business.

2. On 31 December 2021, unused supplies were physically counted and amounted to R2 200.

3. Mac paid his personal house cleaner R9 500 with a business cheque and the bookkeeper debited salaries expense and credited bank.

4. The rental agreement stipulates that an annual rental equal to 8% of the annual soccer club revenue should be paid to Sports4U. The soccer club agreed to pay monthly instalments of R2 000 on the first day of each month and then to settle the difference at the end of each year. All rent has been paid each month and credited to the rent income account. The soccer club

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earned R350 000 in revenue for the 2021 financial year, but has not made any further payments to Sports4U.

5. Sports4U entered into an additional advertising agreement with AdMark Limited on 30 November 2021 to promote the business for a twelve month period starting 01 December 2021 and ending on 30 November 2022. The total amount for the campaign will be R36 000 spread evenly over the year of the agreement and the advertising fee will be paid monthly in advance. The payment on 30 November and 31 December has been made and debited to advertising expense.

6. Sports4U took out a loan on 01 May 2021 and interest on the loan is charged at a rate of 9% per annum. The loan agreement also calls for six monthly interest payments at the end of each half year. A six-monthly payment was made and recorded on 31 October 2021.

7. On 1 October 2021 Mac invested R50 000 of his own money into a short-term investment account in the name of Sports4U with Capitek Bank and this transaction has not yet been recorded in the books of the business. Interest is received half yearly in arrears on 01 April and 01 October at 10% per annum.

You are required to:

a) Process the adjusting entries in the general journal. (15 marks)

b) Prepare the Statement of Profit or Loss, Statement of Changes in Equity and Statement of Financial Position of Sports4U for the period ended 31 December 2021. (28 marks)