Questions
1. You are a consultant at Advanced (Pty) Ltd (Advanced). Advanced provides accounting and tax consulting services to various clients. Your client portfolio includes the following three allocated clients who have approached you regarding the recognition of assets and liabilities in terms of the revised Conceptual Framework for Financial Reporting 2018.
Client 1: Wizzkidz (Pty) Ltd
Wizzkidz (Pty) Ltd (Wizzkidz) is a developer and retailer of children’s technological learning and educational games. The entity has a 30 June year-end. The managing director at Wizzkidz recently travelled overseas where he came across a reading, spelling, and vocabulary game which would improve the reading and comprehension of children in grades 1 to 6. He was so excited about the idea and had the technical team develop the application called ‘Wizzkidz Comprehension’. Wizzkidz has registered a patent for this application, and they will be the only company locally with the right to develop and retail the ‘Wizzkidz Comprehension’ application. This patent will ensure that Wizzkidz is the only designer, developer, and retailer of this application.
It is estimated that 1,5 million Wizzkidz Comprehension applications will be purchased and downloaded on smartphones and devices across South Africa.
Easymove (Pty) Ltd
Easymove (Pty) Ltd (Easymove) is a packing and moving company with a December year-end. Easymove’s main business is assisting customers packing up their homes and offices and transporting all their goods to their new homes and offices. The entity now wants to expand their service offering by including long distance moves between all the major cities and towns around South Africa. To expand their offering Easymove invested in 2 trucks which were purchased and delivered to their premises in Cape Town during December 2022. At the 2022 year-end, the outstanding balance payable to the supplier amounting to R500 000 had not been settled. The R500 000 is due to be paid by 31 January 2023.
Accprac (Pty) Ltd Accprac (Pty) Ltd is an accounting practice that has invited you to be the guest presenter at their technical session update with their senior trainees and managers about the Conceptual Framework for Financial Reporting 2018. They have specifically requested that you address the enhancing qualitative characteristics of financial statements.
2. With reference to Client 1: Wizzkidz (Pty) Ltd, discuss, in terms of The Conceptual Framework for Financial Reporting 2018, whether the patent may be recognised as an asset in the financial statements of Wizzkidz (Pty) Ltd for the year ended 30 June 2023.
3. With reference to Client 2: Easymove (Pty) Ltd, discuss, in terms of The Conceptual Framework for Financial Reporting 2018, whether the outstanding balance of R500 000 may be recognised as a liability in the financial statements of Easymove (Pty) Ltd for the year ended 31 December 2022.
4. With reference to Client 3: Accprac (Pty) Ltd, list and provide a brief explanation of any two enhancing qualitative characteristics of financial statements in terms of the Conceptual Framework for Financial Reporting 2018.
5. Crispy (Pty) Ltd (Crispy) is a snack food-manufacturing company whose brands include a variety of chips. The company has a 30 June year-end.
Olympia Ltd is the parent entity of the Olympia group and manufactures sporting equipment. Mr. Able holds the following positions:
Olympia Ltd owns an 85% shareholding in the ordinary shares of Sprint Ltd, a company that manufactures sporting memorabilia. Olympia Ltd also has a 20% shareholding in Direct Ltd, a company that manufactures sporting watches. The 20% shareholding in Direct Ltd constitutes significant influence. The employees of Olympia Ltd are members of the Olympica Pension Fund, providing post-employment pension fund benefits to employees, and the Olympica Trade Union.
Drawings
The owner, Mr. Chippy, took chips from Crispy to give towards his daughter’s class party at school in celebration of her 8th birthday. The cost price of the chips amounted to R560, with a selling price of R820.
Machinery
Crispy purchased a new machine on the 1st of December 2022 with a cost price of R580 000. The residual value of the machine was estimated to amount to R10 000. The new machine was purchased to replace an older machine which was sold on the 30th of November 2022. The carrying value of the machine was R170 000 on the date of sale. The original cost of the machine sold was R300 000, with accumulated depreciation of R130 000. The older machine was sold for an amount of R110 000. All transactions were completed on a cash basis. Apart from the new machine purchased, all other machinery had a residual value of nil. Machinery is depreciated over a period of 5 years on a straight-line basis
Vehicles
The cost price of the vehicles given in the pre-adjustment trial balance consists of the following: Cost price Toyota Fortuner R 620 000 Volkswagen Polo R 260 000 During the current year, on 30 September 2022, the Toyota Fortuner was sold for R690 000. The Toyota Fortuner was originally bought on 1 July 2021 and had a residual value of R40 000. To replace the sold vehicle, Crispy purchased a Ford Ranger on 1 October 2022 for R550 000, with a residual value of R100 000. All transactions were completed on a cash basis. The Volkswagen Polo has an estimated residual value of R15 000. Vehicles are depreciated over a period of 5 years on a straight-line basis.
Trade debtors: Trade debtors include an outstanding balance from a chain retail store that purchases chips from Crispy. They are only able to repay Crispy R800 of the R1 500 balance outstanding. The balance outstanding should be written off as bad debt.
Loan from Caploan Bank
On 1 June 2023, Crispy received a loan from Caploan Bank for an amount of R80 000, which is repayable in 4 years. Interest is payable annually at a rate of 10% per annum. No transactions relating to the loan have been accounted for at year-end.
Income received in advance
Crispy received a payment of R125 000 from Zimba Chips, one of their top customers, on 22 June 2023. The delivery of the chips will take place on 7 July 2023. The transaction has not been accounted for at year-end.
Income tax expense
Income tax for the current year has been correctly calculated and amounted to R540 983. The balance was still outstanding at the financial year-end.
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