Reference no: EM132839487

HFAC130-1 Financial Accounting - Boston City Campus

QUESTION 1

Peter started his business as a Locksmith in Pietermaritzburg on 1 July 2019 and intends to expand his business to all major towns in KwaZulu-Natal in the next five years.

You have been provided with the following balances from the financial records of this business for the year-ended 30 June 2020:

Sales:                                                                                R 4 35 461

Bank balance:                                                                  R 2 76 320

Trade receivables:                                                            R 159 141

Assume the cash balance on 1 July 2019 was nil.

REQUIRED:

With reference to the scenario, identify and explain the assumption/accounting basis that should be used in preparing the financial statements of the business for the 30 June 2020 year-end.

Identify and explain the accounting basis used in recognising the transactions, that resulted in the total sales amount not being equal to the bank balance amount at 30 June 2020.

Peter informed his accountant that he approached the bank to apply for a loan to fund the establishment of a second shop and the bank is requesting a copy of his financial statements. Peter is requesting that the accountant inflates the sales figure to make the business looks more profitable and also to include on the financial statements that he deals only in silver and grey durable locks, which are highly preferred by his customers.

REQUIRED:

Briefly identify and explain, in accordance with the Conceptual Framework for Financial Reporting, which qualitative characteristics of financial information will be missing in the financial statements based on Peter's request to the accountant.

In addition to the qualitative characteristics identified in 1.2.1 above, identify and discuss four other qualities that should be present in the financial statements.

QUESTION 2

An asset is defined as:
• A present economic resource
• controlled by the business (entity)
• as a result of past events
• which gives the business (entity) a right
• that has the potential to produce economic benefits.
(Note: All the above conditions must be met in order to qualify as an asset.) A liability is defined as:
• A present obligation
• of the business
• to transfer economic resources
• as a result of a past event

New Vision is a company based in Cape Town with a 31 September 2020 financial year-end. The company organises events, such as musical concerts and conferences. Events usually take place in a conference hall owned by the company. The company's conference hall is scheduled to undergo maintenance from 1 October 2020 to 31 December 2020. Therefore, on 25 September 2020, New Vision applied at the municipality to lease one of its municipal halls for the three months that their own conference hall will undergo maintenance, commencing from 1 October 2020. An approval from the municipality was received on 30 September 2020. However, the agreement was signed on 1 October 2020, and the full three month rental was paid in advance, as required by the municipality. The directors of New Vision negotiated with the municipality to bring in their own chairs, as they did not like some of the chairs in the municipal hall. During the 2020 financial year, New Vision bought new chairs at a cost of R100 000 to be used at the municipal hall. These chairs will be transferred to their own conference hall once the maintenance work is completed.

REQUIRED:
Evaluate whether the cost associated with the purchase of the chairs would be recognised as an asset and prepare the journal entry as it should be prepared by New Vision.

Discuss whether the cost associated with the leasing of the municipal hall, would be recognised as a liability at 30 September 2020.

QUESTION 3

Marie is a retailer that buys and sells herbal products. The following information relates to the month ended 31 May 2019.

On 31 May 2019, 40 units were on hand.

REQUIRED:

Determine the cost of closing inventory by using the FIFO cost allocation method.

Prepare the cost of sales and inventory accounts in the general ledger for the month ended 31 May 2019 by using the FIFO cost allocation method, assuming the periodic recording system was used. Adjusting and closing entries should be included.

Using the information for the month ended 31 May 2019 given above, prepare a moving weighted average cost for the transactions.

Prepare the inventory account in the general ledger for the month ended 31 May 2019 by using the weighted average cost allocation method, assuming the perpetual recording system was used. Adjusting and closing entries should be included.

QUESTION 4

Comfort Zone is a business that sells imported furniture in and around Pretoria. Comfort Zone uses the perpetual method to record inventory and allocates costs to inventory using the weighted average method. Inventory is sold at a mark-up of 50% on cost price. The business's financial year end is 31 December 2019.

Additional information:
a.) Inventory consists of three different types of furniture namely Regular, Super and Delux.

b.) On 5 December 2019, Comfort Zone ordered 100 Regular furniture items from an overseas supplier. The agreed price was R8 000 per item before taking into account a trade discount of 10%. Comfort Zone paid a deposit of 40% when it placed the order and agreed to pay the balance outstanding once all the furniture is received. Due to an increase in demand, the supplier was only able to supply half of the order (FOB destination) and promised to send the remaining furniture as soon as possible. Comfort Zone received the first 50 Regular furniture items on the 28 of December 2019 and the rest of the order arrived on 16 January 2020. On 28 December 2019, Comfort Zone paid R5 000 import duties on the first consignment of the Regular furniture and R3 000 to a local transport company to collect the Regular furniture from the docks and deliver them to its premises.

c.) On 29 December 2019, Comfort Zone sold 7 Super furniture items to a customer on credit for R78 900 and on 30 December 2019 Comfort Zone sold 5 Regular furniture items for R55 200 cash, inclusive of a trade discount of 1% granted to the customer.

d.) On 31 December 2019, it was discovered that 3 of the Delux furniture items on hand have been damaged. The cost price per unit for the Delux furniture was R15 800. Management estimated that each damaged Delux furniture item can be sold for R14 000 if they spend R1 500 to repair each damaged item.

REQUIRED:

4.1) Explain the difference between a trade discount and settlement discount. (2 marks) 4.2) Calculate the mark-up percentage on selling price.

Prepare all journal entries that are necessary to record the transactions in additional information (b) and (c) above for the year ended 31 December 2019. Dates are required. Show all calculations.

Calculate the net realisable value of the damaged Delux furniture (d) and prepare the relevant journal entry that would be prepared by Comfort Zone.

Attachment:- Financial Accounting.rar