Why she cannot recognise the delivery vehicle

Assignment Help Financial Accounting

Reference no: EM132535429

ASSIGNMENT

Wilmah Designs Ltd ("Wilmah"), is an entity that design and manufactures custom made clothing for the South African market. The entity conducts its operations in Cape Town and has a financial year ending 30 June. Nikita Kulfi, an accountant at Wilmah, has learnt that you are studying Accounting 100 at the University of Johannesburg and requested that you assist her with the following matters:

MATTER 1

During the year, the entity entered into a new contract to produce nurses' uniforms for BetCare Hospitals for the next 5 years. To facilitate for the required increase in production, the entity acquired new sewing machines on 31 December 2019 from Dineo Ltd worth R1 500 000. These machines have an expected useful life of 10 years. Ms. Kulfi correctly recognised the transaction on the day of purchase. She presented the following to the Financial Manager at year-end:

Carrying amount balance as at 30 June 2020	R
New Machines	1 500 000
Old Machines	30 000 000
Total	31 500 000

The financial manager was not happy with the balances presented above, and made the following statement:
"Ms. Kulfi did not subsequently measure the new machines at year end."

REQUIRED:
Write an email to Ms. Kulfi explaining the statement made by the Financial Manager.

MATTER 2

During the year, the entity decided to buy a new delivery vehicle but due to cash flow constraints, the entity could not finance the acquisition and decided to approach a bank for a loan. TimeBank agreed to loan the entity R2 500 000 with the terms of the agreement stating that the acquired delivery vehicle will be used as collateral. TimeBank deposited the money in Wilmah's bank account on 1 May 2020.
At year-end, the negotiations for the acquisition of the delivery vehicle with the supplier were still ongoing. Ms. Kulfi believes that the delivery vehicle will be delivered and made available for use before the end of the next financial year. She made the following statement to the Financial Manager:
"I went to a workshop on the/a Financial Reporting Framework last month and they mentioned that an asset is a resource and that it is recognised in the financial statements when the value of the asset can be reliably measured. Since the delivery vehicle will be used in the future to obtain economic benefits and the supplier suggests a price of R2 500 000, the delivery vehicle will be recognised in the financial statements for the year ended 30 June 2020."

REQUIRED:
a) With reference to the Conceptual Framework 2010, explain to Ms. Kulfi why she cannot recognise the delivery vehicle as an asset for the year ended 30 June 2020.

Reference no: EM132535429

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