COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF COMMERCIAL ACCOUNTING

Subject: Financial Accounting 2

Subject Code: FAC22B2
Test: Test 2

Test date: 04 October 2024

Marks: 50 Marks
Duration: 1 hour and 30 minutes
Pages 6 (Six) pages (including cover sheet)
No of questions 3 (three)

Examiner: L Kosene, L Mbhalati and M Tshiololi

Internal moderator: S Adam

Information to students:

1. You are allowed to use a calculator.

2. An answer sheet/book will be supplied to you, in which you must write your answers. If you need
another book/sheet, please ask the invigilator for another.
3. By writing this test and affixing your name and student number to the answer sheet/book, you confirm
that you are conversant with the test regulations of the University.
4. Use only a blue or a black pen to answer your questions. Answers given in pencil will not be marked.
5. Make sure your handwriting is neat and easy to read. Set out your answer in a clear, logical manner.
6. Use the same numbers for your answers as those used for the questions in the test/examination
paper.
7. Cross-out any empty space on your answer sheet before handing your answer book to the invigilator.
8. Hand your answer book to the invigilator at the end of the test/examination.

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Question 1 (10 marks:18 minutes)

Play-Time (Pty) Ltd (hereafter “Play-Time”) is a company that manufactures baby toys. The
company is not a VAT vendor and has a 30 June reporting date.
The following information about a Delivery vehicle was provided to you on 30 June 2024:

Acquisition date 30 June 2022

Carrying amount as at 30 June 2024 R130 000
Cost R600 000
Accumulated depreciation (R428 000)
Accumulated impairment loss (R42 000)
Total expected kilometers to be travelled 400 000 kms
Residual value R65 000
Depreciation method Units of production

Additional information:

1. At the end of the 2024 financial year, a new delivery vehicle was introduced to the market
and this model performed better than the older version (which is the current vehicle the
company has). This was deemed as an impairment indicator and the recoverable amount
was R130 000.
2. At the end of the 2024 financial year, the delivery vehicle had 80 000 kms remaining. In
the 2025 financial year, the delivery vehicle travelled for 70 000 kms.
3. At the end of the 2025 financial year, it was discovered that the new delivery vehicle
introduced to the market had major manufacturing faults and thus, impacted its
performance. This new delivery vehicle had to be removed from the market.
4. The recoverable amount of the delivery vehicle as at 30 June 2025 is R114 000.

Required:

1. Calculate the depreciation expense on the delivery vehicle for the year ended 30 June
2025. (3)

2. Calculate the carrying amount of the delivery vehicle as at 30 June 2025. (1)

3. Briefly discuss if Play-Time will recognise an impairment loss or impairment loss reversal
at the end of the 2025 financial year end. (1.5)

4. Based on your answer above in required 3, Calculate the impairment loss / reversal, if
any for the year ended 30 June 2025.
(1.5)

5. Prepare an extract of the statement of comprehensive income of Play-Time (Pty) Ltd for
the year ended 30 June 2025 to reflect the above transactions. (3)

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Notes to consider for the above questions:
• Show all calculations clearly.
• Round all amounts to the nearest rand where applicable
• Comparatives are not required.

[PLEASE TURN TO THE NEXT PAGE]

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Question 2 (20 marks: 36 minutes)

Basel Ltd (hereafter “Basel”) is a retail company, based in Johannesburg. The company has
recently expanded into online shopping and the directors decided to build a new warehouse to
ensure efficiency. The company has a 31 December reporting date.
The details of the project are as follows:

15% p.a Loan from BAC Bank taken out for the project from R1 800 000
1 February 2022
Commencement of construction 1 March 2022
The principal amount and the interest on the loan are repayable on
31 December 2024
Project completion date 31 August 2023
Construction expenditure R1 000 000 (2022)
R800 000 (2023)

In terms of the company's policy, the construction period for the warehouse is considered to be a
substantial period.
Required:

1. Define the term borrowing costs as per IAS 23 Borrowing costs. (1.5)

2. Indicate whether the warehouse is a qualifying asset by applying the definition as per
IAS 23 Borrowing costs. (2)

3. Calculate the interest incurred on the loan for the year ended 31 December 2022 and
31 December 2023. (2.5)

4. Calculate the interest to be capitalised to the warehouse for the year ended
31 December 2022 and 31 December 2023.
(2)

5. Prepare all the relevant journal entries relating to recognition and capitalisation of
interest in the financial records of Basel for the year ended 31 December 2022. (4)

6. Calculate the total cost of the warehouse as at 31 December 2023. (4)

7. Disclose the Finance cost note in the financial statements of Basel for the year ended 31
December 2023. (4)
Notes to consider for the above questions:
• Show all calculations clearly.
• Round all amounts to the nearest rand where applicable
• Comparatives are not required.
• Journal narrations are not required.
[PLEASE TURN TO THE NEXT PAGE]
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Question 3: (20 Marks: 36 minutes)

Bell Computers Limited (hereafter “Bell Computers”) is a company that manufactures high-
performance laptops. At the end of December 2023, the company was in the process of finalising
their financial statements. The company and all their suppliers are not VAT Vendors.

The following matters require consideration in response to the raising of provisions per IAS 37:

Matter 1: Laptops Warranty

The laptops manufactured by Bell Computers are sold with a warranty whereby the manufacturer
is obliged to repair or replace the laptops that fall within the warranty period. Based on the
company’s past experience and future expectations, it is estimated that 80% of the laptops sold
will have no defects, 15% will have minor defects and 5% will have major defects. If minor defects
were detected in all products sold, repair costs of R1 000 000 (2022: R1 500 000) would be
incurred. If major defects were detected in all products sold, then repair costs of R3 000 000
(2022: R2 000 000) would be incurred. No entries have been made for this as the accountant is
unsure of how to calculate the appropriate provisions in accordance with IAS 37: Provisions,
Contingent Liabilities and Contingent Assets.

Matter 2: Lawsuit

On 17 September 2022, the company was informed of the incidents that occurred where two
people died, possibly as a result of injuries they sustained after the batteries from their laptops
overheated and caused an explosion. These laptops were both purchased from Bell Computers
during the month of June 2022 . Legal proceedings have been instituted against Bell Computers
seeking damages, but the company disputes liability.

On 31 December 2022, the lawyers of Bell Computers advised that it is probable that the entity
would be found liable, but they could not give an estimate of the amount that the company would
be liable for.

On 30 November 2023, the company’s lawyers advised that owing to developments in the case
it is probable that Bell Computers will be found liable for an amount of R1 000 000 for each person
who died. The case will only be heard during June 2024.

Required:

1. Which of the following options would be recognised for matter 2: lawsuit in the financial
statements of Bell Computer Limited for the year ended 31 December 2022, in terms of
IAS 37? (1)
A. Pure Liability
B. Provision
C. Contingent Liability
D. Contingent Asset

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 2. Indicate the appropriate method that will be used to measure the best estimate of the
obligations with regard to the laptops warranty and lawsuit (2)
A. Laptop Warranty: ????
B. Lawsuit: ????

3. Discuss how the lawsuit should accounted for in the financial statements of Bell Computer
Limited for the year ended 31 December 2023. Where necessary, your answer should
include the definition and recognition criteria as stated in IAS 37. (6)

4. Prepare all the relevant journal entries that Bell Computer Limited would process in its
financial statements for the year ended 31 December 2023 relating to the lawsuit. (2)

5. Calculate the amount of the provision that was recognised for the laptop warranty for the
financial year ended 31 December 2022 (3)

6. Calculate the amount of provision for the laptop warranty for the financial year ended
31 December 2023. (3)

7. Provide the necessary journal entry to recognise the provision of the laptop warranty for
the year ended 31 December 2023. (3)

Note for all journal entry questions (4, 5 and 7):

• You are required to include transaction date where applicable.
• You are required to include account classifications.
• Show all your workings
• Journal narrations are not required.

[THE END]

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 SOLUTION

Question 1 (10 marks)

1. Calculate the depreciation expense on the delivery vehicle for the year ended 30 June
2025. (3)

Step 1: New cost = Recoverable amount = R130 000

Step 2: New depreciable amount (NDA) = New cost – Residual value
= R130 000^ – R65 000^ = R65 000
Step 3: Remaining useful life (RUL) = 80 000 kms

Step 4: Depreciation expense = NDA * (Actual kms travelled during the year / RUL)
= R65 000^P * (70 000^ / 80 000^)
= R56 875 ^P

1. Calculate the carrying amount of the delivery vehicle as at 30 June 2025. (1)

Carrying amount (30 June 2025) = Recoverable amount (Step 1) – Depreciation expense
(Step 2)
= R130 000^P – R56 875 ^P
= R73 125
Or
= R600 000 – (R428 000 + R56 875) ^ – R42 000^
= R73 125

2. Briefly discuss if Play-Time will recognise an impairment loss or impairment loss

reversal at the end of the 2025 financial year end. (1.5)

• At the end of the 2024 financial year end, there was an external indicator present that
was caused by the introduction of the new delivery vehicle in the market.
• In the subsequent year (2025 financial year), there is an indication that the
previously recognised impairment no longer exists as the circumstances that
originally caused this impairment has now reversed. ^
➢ Due to the major manufacturing faults in the delivery vehicle, the vehicle had
to be removed from the market. ^
Conclusion: Therefore, the entity should recognise an impairment loss reversal at the
2025 financial year end. ^

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 3. Based on your answer above in required 3, Calculate the impairment loss or
impairment loss reversal for the year ended 30 June 2025. (1.5)

Calculations of Impairment loss reversal:

Step 1: Actual Carrying Amount (ACA) = R73 125

Step 2: Recoverable amount (RA) as at 30 June 2025 = R114 000

Step 3: RA (R114 000) > ACA (R73 125), there is an impairment loss reversal (limited to
the previously recognised impairment loss, R42 000) ^

Step 4: Impairment loss reversal = RA – ACA

= R114 000 ^– R73 125 ^P
= R40 875 (limited to, R42 000)

4. Present the extract to the statement of comprehensive income of Play-Time (Pty) Ltd
for the year ended 30 June 2025. (3)

Marks
Play-Time (Pty) Ltd 0.5
Extract of the statement of comprehensive income for the year ended 30 June 2025
^
2025
Other income ^ 0.5
Impairment loss reversal ^ 40 875 ^P 1 Commented [TM1]: Let's remember that this is a
principle mark based on what the students discussed
and calculated in 2 and 3.
Other expenses
Depreciation expense ^ 56 875 ^P 1 If a student say they will recognise impairment loss in
required 2 or calculated impairment loss in required 3.
The student should be allocated the marks if they
present the answer as an expense

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Question 2 (20 marks)
1. Define the term borrowing costs as per IAS 23 Borrowing costs. (1.5)

Interest^ and other costs^ that an entity incurs in connection with the borrowing of
funds^
2. Indicate whether the warehouse is a qualifying asset by applying the definition as per IAS
23 Borrowing costs. (2)

Yes^, the warehouse is a qualifying asset; it will take a substantial period of time^
(18 month^) to get ready for its intended use or sale ^.

3. Calculate the interest incurred for the year ended 31 December 2022 and 31 December
2023. (2.5)

2022:

R1 800 000^ * 15%^ * 11/12^= R247 500

2023

(R1 800 000^*15%)^* 12/12= R270 000

4. Calculate the interest to be capitalised for the year ended 31 December 2022 and
31 December 2023. (2)

Interest to be capitalized:

2022
(R1 800 000*15%)^ *10/12^= R225 000 OR R247 500^P * 10/1^ = R225
000

2023

(R1 800 000*15%)^ * 8/12^=R180 000 OR R270 000^P * 8/12^ = R180

000

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 5. Prepare the journal entries to record the interest in the financial records of Basel for the
year ended 31 December 2022. (4)

Date Description Debit Credit

Finance costs (P/L: E) ^ R247 500 ^P
31
December Loan Payable (SFP: L)^ R 247 500 1.5
2022 Interest incurred on the loan
expensed

Date Description Debit Credit

Warehouse (SFP: A)^ R225 000 ^P
31
December Finance costs (P/L: E) ^ R 225 000 1.5
2022 Interest capitalised to the qualifying
asset (Warehouse)

Dates^ and narrations^ Commented [TM2]: Journal narrations are not required
(as stated in the question).

We discussed with lethabo yesterday to allocate the 1

6. Calculate the total cost of the warehouse as at 31 December 2023. (4) mark to journal dates (^ for each journal date)

Construction costs ( R1 000 000^+ R800 000^) R1 800 000

Interest capitalized 2022 R225 000P
2023 R180 000P
Total R2 205 000P


7. Disclose the Finance cost note in the statement of comprehensive income and statement of
financial position of Basel for the year ended 31 December 2023. (4)

Basel Ltd
Statement of comprehensive income for the year ended 31 December 2023 ^
Finance costs R Commented [TM3]: Majority of students are not writing
this heading of the note.
Finance cost incurred 270 000P
Less borrowing costs capitalised (180 000)P We have also discussed to break the 1 mark allocated to
90 000^P the heading and allocate the ^ on each of the line items
on the note.

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Question 3: 20 Marks

1. Which of the following options represent the item that would be recognised with
regard to the lawsuit in the financial statements of Bell Computer Limited for the
year ended 31 December 2022, in terms of IAS 37. (1)
A. Pure Liability
B. Provision
C. Contingent Liability 
D. Contingent Asset

2. Which method would be appropriate to measure the best estimate of the amount of
to be recognised for the laptops warranty and Lawsuit for the financial year ended
31 December 2023. (2)

C. Laptop Warranty: Expected Value Method 

D. Lawsuit: Most Likely Outcome Method

3. Discuss how the lawsuit should be dealt with in the financial statements of Bell
Computer Limited for the year ended 31 December 2023, in terms of IAS 37. (6)
(6.5 marks available)

Definition per IAS 37 and recognition Application

criteria
There is a present obligation^ Bell Computers Limited is facing a lawsuit after two people
died from the injuries sustained when their laptops
purchased from Bell Computers Limited exploded. ^

There is a legal proceeding instituted against the

company and thus, this represents a legal obligation. ^

arising from a past event^ The past or obligating event is the death of two people as
a result of injuries sustained when the batteries on the
laptops purchased from Bell Computers Limited
exploded. ^
The settlement of which is expected to If Bell Computers Limited loses the case/ is found guilty,
result in an outflow of economic economic resources in a form of cash will be transferred
benefits/resources. ^ out of the company^.

It is probable that outflow of resources Bell Computers Limited lawyers have communicated that
^will be required to settle the obligation it is probable that the company will be found guilty^

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A reliable estimate ^can be made of the The outflow of economic benefits can be reliably
amount of the obligation. measured at R1 000 000 for each death (R2 000 000 in
total) ^.
Therefore, this is a liability^ as the definition and recognition criteria are met. However, it is not a
‘pure’ liability because there is uncertainty in predicting the timing^. Therefore, this liability is
recognised as a PROVISION^. Commented [TM4]: Updated

4. Prepare all the relevant journal entries that Bell Computer Limited would process in
its financial statements for the year ended 31 December 2022 relating to the lawsuit.
(2)
Date Account Debit Credit
30 Nov 2023^ Lawsuit claim (P/L:E) ^ R 2000 000^
Provision for lawsuit (SFP:L) ^ R2 000 000

5. Calculate the amount of provision that was recognised for the laptop warranty for
the financial year ended 31 December 2022. (3)
(4 marks available)

Outcome 2021 Workings Amount

Minor defects R1 500 000^ x 15%^ R225 000^p
Major defects R2 000 000^ x 5%^ R100 000^p
No defects R0 x 80% R0^
Total amount recognised in 2021 R325 000^p

6. Calculate the amount of provision for the laptop warranty for the financial year
ended 31 December 2023. (3)
(4 marks available)

Outcome Workings Amount

Minor defects R1 000 000^ x 15%^ R150 000^p
Major defects R3 000 000^ x 5%^ R150 000^p
No defects R0 x 80% R0^
Total amount to be recognised R300 000^p

7. Prepare all the relevant journal entries to recognise the laptops warranty in the
financial statements of Bell Computers Limited for the year ended 31 December
2023 (3)
(3.5 marks available)

Total amount recognised in 2022 R325 000^p

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 Total amount to be recognised in 2023 R300 000^p
Movement in laptop warranty provision (R25 000) ^p

Date Details Debit Credit

31-Dec^ Laptop Warranty Provision (SFP:L) ^ R25 000^p
Laptop warranty Reversal (P/L: I) ^ R25 000

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