Afe3691 - financial accounting 1a - prepare the statement

Question

FINANCIAL ACCOUNTING

ASSIGNMENT 1

Question 1 OVERVIEW

Mr Fish and Mr Sole have been friends since they played rugby on the same team at university more than ten years ago. After completing their studies, Mr Fish moved to Gansbaai and Mr Sole to Arniston, where both began small fishing business. They both operated as sole proprietors, owing small fishing vessels and selling the daily catch to local restaurants, hotels and butcheries. Both business have been reasonably profitable, but sales have been confined to their local coastal towns.

Formation of partnership

Over a year ago they entered into discussions regarding the possibility of combining their operations and expanding their sales to customer in other coastal towns. They felt that by combining their business they would be able to share their resources, knowledge and skills. As the saying goes, no one of us is as smart as all of us'. In order to ensure that their operation ran as efficiently as possible, they invited Mr Lobster, a recently qualified chartered accountant, to join their business.

Mr Lobster advised that the best way to run their business would be as a partnership, rather than by means of a company or close corporation. They decided to call the partnership Catching Something Fishy (‘CSF').

Partnership agreement

a) On 1 January 2010 a partnership agreement was drawn and CSF commenced trading. The partnership agreement stated the following:
b) Each partner will contribute R100 000 in cash.
c) Mr Fish and Mr Sole will each contribute their fishing vessels, valued at R50 000 each, to the partnership.
d) The partnership will use fixed capital accounts (this means that capital accounts will not change after the initial capital is contributed).
e) Profits and Losses will be shared equally amongst the 3 partners.
f) Mr Fish and Mr Sole are each entitled to receive a monthly salary of R5 000, WHILE Mr Lobster will receive a salary of R6 000 PER MONTH.
g) Mr Fish will make a loan to the partnership of R200 000 ON 1 January 2010. The loan will attract interest at a rate of 10% per annum (year). Interested will be paid in arrears on 31 December each year.
h) Interest of 2% per annum will be charged on capital account balances.

Trial balance as at 31 December 2010

The following is the trial balance of CSF as at 31 December 2010. The trial balance include all accounts of the partnership but some numbers are yet to be calculated:

	Debit	Credit
Capital accounts:
Mr Fish		?
Mr Sole		?
Mr Lobster		?
Current Accounts:
Mr Fish		?
Mr Sole		?
Mr Lobster		?
Loan (at 10%) from Mr Fish		200 000
Office equipment - cost	25 000
Motor vehicle - cost	240 000
Fishing vessels - cost	100 000
Accumulated depreciation:
Office equipment		5 000
Motor Vehicles		40 000
Fishing vessels		20 000
Inventory	20 000
Trade receivables	150 000
Trade payables		20 000
Bank	130 000
Sales		720 000
Cost of sales	283 000
Depreciation	65 000
Salaries	?
Interest expense	?

Required

1) What are the advantages and disadvantage to Mr Fish, Mr Sole and Mr Lobster of forming a partnership rather than a close corporation or a company?

2) Calculate the interest expense to be recognised in the income statement for the year ended 31 December 2010.

3) Calculate the total profit appropriated to Mr Sole for the 2010 year. (HINT: In order to do this, prepare the appropriation of profit account.)

4) Calculate the current account balances that should be reflected in the trial balance and statement of financial position of CSF as at 31 December 2010.

5) Prepare the statement of profit or loss and other comprehensive income and statement of changes in equity of CSF for the year ended 31 December 2010.

6) What would the balances in the capital and current accounts be fixed capital accounts were not used?

Question 2

Mark and Tom are partners in a computer store trading as Blink Computers. They share profits and losses in the ratio 3:2

On 28 February 20.10 the statement of position indicated the following:

BLINK COMPUTERS STATEMENT OF FINANCIAL POSITION ON 28 FEBRUARY 20.10
ASSETS
Non - current assets
Property, plant and equipment (land and buildings)	1 000 000
Current Assets
Inventory	220 000
Cash and cash equivalent (land and buildings)	44 000
Total assets	1 264 000
EQUITY AND LIABILITIES
Equity
Capital: Mark	400 000
Capital: Tom	200 000
Current account : Mark	350 000
Current account : Tom	150 000
General reserve	100 000
Non - current liabilities
Interest - free long term loan	64 000
Total equity and liabilities	1 264 000

1. On 1 March 20.10 Travis obtained a one third (1/3) interest in the partnership by depositing R650 000 into the cheque account of the partnership.

2. The partners do not want to show the general reserve on the statement of financial position after the admission of Travis.

3. The partner agreement states the following:
a) Each partner is entitled to salary of R5 000 per month.
b) Partners are entitled to interest on capital of 10% of the opening balance of their capital accounts. Newly admitted partners earn 10% of their capital contribution apportioned for the number of months that they served as partners.

4. Sales for the year amounted to R3 000 000. All sales were made in cash.

5. Inventory purchases for the year amounted to R2 500 000. All purchases were made in cash.

6. Inventory on hand at 28 February 20. 11 amounted to R320 000.

7. Operating expenses of R160 000 was incurred and paid in cash during the year. Land and buildings are not depreciation.

8. Cash withdrawals by the partners during the year were as follows:

Mark                                            R65 000

Tom                                             R30 000

Travis                                           R75 000

Total                                          R170 000

Required:

1) Calculate the new profit share ratio after the admission of Travis o1 March 2010.
2) Provide the journal entries to record the admission of Travis on 1 March 20.10. Journal narrations are not required.
3) Prepare the statement of financial position of the partnership on 28 February 20.11 Comparative figures are not required.

Question 3

Fourie and Fouche are in partnership, which operates as a general dealer and their profit sharing ratio 3:2. The following statement of financial position appears in their books on 30 June 20.4:

	R
Capital	3 000
Fourie	18 000
Fouche	12 000
Assets	30 000
Land and building at cost	10 000
Furniture at carrying value	2 000
Goodwill	2 000
Inventory	1 400
Debtors (after allowance for credit losses of R 1000)	3 000
Bank	1 000
Liabilities (creditors)	2 000

It was agreed on 30 June 20.4 to admit Van Romburg as partner on the following conditions:

a) The goodwill that is currently shown in the partnership must be written off.

b) The allowance for credit losses must be increased to R 2000.

c) Land and building must be re-valued to the market value of R90 000.

d) Van Romburg will receive 1/5 of the future profits, which will be surrendered in equal parts by the current partners.

e) Van Romburg must bring in R120 000 in cash of which R26 750 is for capital and the rest for goodwill.

f) Goodwill must be shown in the books of the new partnership.

g) Fourie and Fouche have to pay in or withdraw cash so that their capital contribution are in comparison with Van Romburg in the ratio 5/10 and 2/10 respectively.

Required

1. Show the capital accounts of the partners to carry out the above mentioned.

2. Show what the realization account would look like in the ledger, should the partnership be liquidated prior to Van Romburg's joining.

Assume that the asset would realize as follows; Land and buildings, R90 000.
Other assets, R10 000.

Question 4

Diana and Nolothando have operated a clothing business called Fabulous Fashions for the past few years. The two became friends after meeting at a fashion design course in their first year of study. Shortly after qualifying in 2007, the two decided to combine their immense talent and flair for fashion and began producing their own designs through a partnership. The partnership began trading on 1 January 2008 and profits and losses were shared equally between the partners. The partners use fixed capital accounts.

Prior year statement of financial position

The following is the statement of financial position of Fabulous Fashion as at 31 December 2009.

Statement of financial position of Fabulous Fashion as at 31 December 2009
Non- current assets:	446 000
Property, plant and equipment - cost	743 000
Property, plant and equipment - accumulated - accumulated depreciation	(297 000)
Current Assets:	929 000
Inventory	543 000
Trade receivable	274 000
Bank	112 000
	1 375 000
Total Assets
Equity	1 084 500
Capital account : Diana	225 000
Capital account: Nolothando	225 000
Current account: Diana	356 000
Current account: Nolothando	278 500
Current liabilities	290 500
Trade payables	73 000
Short - term loan (10% per annum)	217 500
Total equity and liabilities	1 375 000

Admission of a new partner

In January 2017 Tharuna, Diana's neighbour, returned home after spending two years working for fashion house in Milan. Inspired to begin producing her own designs, she approached Diana and Nolothando and asked to join Fabulous Fashions. The Partners agreed and admitted Thaurana to the partnership on 1 January 2010, knowing that Thaurana would assist considerably in bringing their designs in line with overseas trends.

On 1 January 2010 the fair value of the assets and liabilities of Fabulous Fashions were as follows:

Goodwill	?
Property, plant and equipment	566 000
Trade receivable	244 000

a) Tharuna would be entitled to 20% of the profit and losses of the new partnership. Nolothando and Diana would each be entitled to 40% of the profits and losses.

b) Tharuna contributed R254 900 in cash, which included an amount of R20 000 relating to her share of goodwill in the partnership.

c) The new partnership would be called Fabulous International Fashions, and would continue to use the books of the previous partnership.

d) Capital account balances would attract interest at a rate of 5% per annum.

Dissolution of partnership

During the 2010 financial year, inspired by Tharuna's stories of working overseas, Nolothando and Diana began to feel that they too wanted to spend some time working in a foreign country.

Nolothando was offered a job designing women's clothes at DKNI and Diana was offered a position in Zurich to work as a designer for the national soccer team. It was decided that the partnership would dissolve, by way of a simple dissolution on 31 December 2010, and that Tharuna would continue to run the business as a sole proprietor.

The net profit earned by Fabulous International fashions for the year ended 31 December 2010, was R636 745. No drawings were made and no additional capital contributions were granted during the year.

Tharuna undertook to purchase the inventory and equipment from the partnership for an amount of R2, 6 Million on 31 December 2010. The debtors balance was recovered in full as it related to only one debtor who settled his account on 1 January 2011. The short-term loan needed to be repaid up on dissolution of the partnership and full trade payables balance was settled. Dissolution costs amounted to R15 000.

Current year statement of financial position

The following is an extra of the statement of financial position of fabulous fashions as at 31 December 2010.

Statement of financial position of Fabulous Fashions as at 31 December 2010 (extract)
Non - current assets:
Goodwill	?

Property, plant and equipment - cost	566 000
Property, plant and equipment - accumulated depreciation	(113 000)
	3 309 645
Current Assent:
Inventory	2 080 000
Trade receivables	460 000
Bank	769 645
Total assets	?
Equity	?
Current liabilities:	1 696 500
Trade payables	1 278 500
Short term loan (10% per annum)	418 000
Total liabilities

Required:

1) Calculate the goodwill to be recognised on 1 January 2010 when the new partnership, Fabulous International Fashions, is formed.
2) Discuss what goodwill is. Given an example of what Fabulous Fashions may have done that may have given rise to goodwill.
3) Prepare the journal entries required to record the admission of Tharuna to the partnership.
4) Prepare the equity section of the statement of financial position of Fabulous International Fashions at 31 December 2010, immediately prior to the dissolution.
5) Process the journal entries to account for the dissolution of Fabulous International Fashions.

ASSIGNMENT 2

Question 1

On 1 January 20x0, the company was incorporated with an authorised share capital of 150 000 ordinary shares and 50 000 preference shares (fixed annual dividend of 10c/share). The post - closing trial balance of Coral Limited as at December 20x2 after the provisional statement of profit or loss & other comprehensive income was drafted is shown.

Coral Limited

POST-CLOSING TRIAL BALANCE AS AT 31 DECEMBER 20x2

Details	Fol.	Debit		Credit
Ordinary share capital (100 000 shares @R1 each	B1			100 000	00
Ordinary share premium	B2			5 000	00
Retained earnings	B3			43 000	00
Preference share capital (40 000 preference shares @R1 Each	B4			40 000	00
Land and buildings	B5	100 000	00
Plant and Machinery	B6	60 000	00
Underwriting commission - Preference shares	B7	4 000	00
Share issue expenses - preference shares	B8	2 000	00
Bank	B9	22 000	00
		188 000	00	188 000	00

Additional information

The directors decided, with the necessary general meeting approval, to implement these decision on 1 January 20x3 in this order:

1) The authorised share capital must be converted to 150 000 ordinary shares @ no par value.

2) The preference shares are to be redeemed at a premium of 5c/share.

3) The redemption of the preference shares must be financed partly from the issue of 10 000 ordinary shares @R2/share and partly out of the current bank balance.

4) The ordinary share were offered to the public.
a. The issue was underwritten in full by Down -Under Ltd for an underwriting commission of 6%
b. The public subscribed for 8 000 shares.
c. All the shares were allotted on January 20x3.
d. Share issue expenses amounted to R500.

5) The directors wish to write of all commission and share issue expenses immediately after the redemption of the preference shares.

6) Subsequent to the above transactions, there must be a capitalisation issue of one ordinary share for every eight already held at the current market price of R2,00 per share.

You are required to:

1. Show the general journal entries for the decision on 01 January 20x3.

Question 2

Part 1

Define the following terms:

a) Retained earnings.
b) Redeemable cumulative preference shares.
c) Memorandum of Incorporation (MoI)
d) Limited liability.
e) Authorised share capital.

Part 2

Diraster Ltd (‘Diraster') is a hedge fund that is listed on the JSE Ltd with a 31 January year end. Diraster researches various investment options on behalf of clients and invests their money according to their preferences. Massief Diraster, the CEO and founder of Diraster, has never been very good at the administration and accounting side of the business and often loses documents. He has approached you for help, but ca only offer you certain information.

Trial balance extract at 31 January 2009

	Note	Debit	Credit
Long - term loan	4		4 500 000
Interest payable	4		350 625
Application and allotment	1		5 382 000
Shareholders for ordinary dividend	2		60 000
Shareholder for preference dividend	3		?
Stated capital (2 000 000 ordinary shares)	1		8 000 000
Preference share capital	3		?
Retained earnings - closing balance			25 988 000

Notes

1) 754 000 ordinary shares were issued on 28 February 2009. R120 000 was returned to application due to an oversubscription.

2) The underwriter was paid commission of 2%.

3) Diraster accounting policy with respect to share issue costs is to minimise distributable reserves.

4) Underwriting commission was not accrued in the previous final year.

5) The dividend payable from the previous financial year was settled on 3 February 2009.

6) Diraster declared and paid an ordinary interim dividend of 7 cents per share on 15 February 2009 and declared a final dividend of 5 cents per share on 30 January 2010.

7) The final dividend was paid on 3 February 2010.

8) Diraster had issued 30 000, R3, 6% cumulative preference shares on 1 February2007.

9) Preference shares have never been issued at a premium.

10) If declared, preference dividends are paid on 1 February.

11) The R60 000 ordinary dividend of the prior financial year was the first dividend ever to be declared by Diraster.

12) The long- term bears simple interest at 8, 5% on the outstanding balance.

13) Two capital repayments of R700 000 and R800 000 were made on 31 June 2009 and 31 December 2009 respectively.

14) Interest is payable annually on 28 February.

15) The net profit in the income statement is started at R7 654 000 for the year ended 31 January 2010.

16) This is before any of the above information has been taken into account.

Required

1) Calculate the price at which each ordinary share was issued in the current year.

2) Prepare all the journal entries that should be processed in the 2010 financial year that relate to the share issue.

3) Calculate the dividends paid to ordinary and preference shareholders during the year ended 31 January 2010. If in your opinion any of the dividend in the question should not be included in the calculation, briefly justify your reasoning.

4) Calculate the dividend amount that will be shown in Diraster statement of changes in equity for the year ended 31 January 2010. If in your opinion any of the dividends in the question should not be included in the calculation, briefly justify your reasoning.

5) Calculate the net profit of Diraster for the year ended 31 January 2010.

6) Prepare the equity and liabilities section of Diraster statement of financial position as at 31 January 2010.

7) Calculate the total asset value of Diraster as at 31 January 2010.

Question 3

PART 1

These balances and totals are from Mark and Brake Ltd who manufactures sport equipment:

Inventory: 1 March 20x7
Raw material	14 400
Work-in progress (WIP)	9 500
Finished goods	52 000
Delivery vehicle at cost	19 000
Plant and machinery at cost	120 000
Office furniture at cost	6 000
Bank	11 400
Accumulated depreciation on 1 March 20x7:
Delivery vehicles	3 800
Plant and Machinery	36 000
Office furniture	1 200
Water and electricity:
Factory	6 200
Office	320
Purchase of raw material	144 000
Customs duty on raw material	3 400
Freight in on raw material	7 200
Insurance paid :
Factory	2 520
Office	840
Insurance paid in advance 1 March 20x7
Factory	960
Office	260
Allowance for bad debts on 1 March 20x7	830
Account receivable	16 600
Factory wages	73 000
Indirect labour	9 600
Salaries:
Sale personnel	17 40
Office personnel	11 600
Factory overheads	4 560
Stationary	760
Sales	260 400

Additional information:

1. Inventory on hand 28 February 20x8:
- Raw material R13 400
- Work - in- progress R10 700
- Finished goods R60 000

2. Depreciation should be provided for on the reducing-balance method:
- Delivery vehicle 20% p.a.
- Plant and machinery 15%p.a.
- Office furniture 5%p.a

3. Insurance is payable one year in advance on 1 July.

4. Finished goods are transferred from the factory to the sales department at production cost plus 25%
You are required to:

Prepare a work - in - progress inventory account for the year ended 28 February 20x8. (10 marks)

PART 2

Mr Len Naidoo, the owner of Widget Distributors, has in the past imported widgets. However, from 1 January 20x8, he decided to manufacture the widgets himself.

Here is the abridged statement of financial position of Widget Distributors at 31 December 20x7:

Capital - Len Naidoo	2 000	Inventory (1 000 units)	800
Accounts payable	1 000	Accounts receivable	700
		Bank	1 500
	3 000		3 000

From a scrutiny of vouchers and other documents you find that these transaction have taken place during the year ended 31 December 20x8:
1. Cash transaction as per the cash book:

Receipts:

Capital introduced by Mr Naidoo                     R10 000

Accounts receivable                                    R6 000

Cash sales                                                 R2 000

Payments:

Accounts payable                                       R7 000

Drawings- Mr Naidoo                                   R2 500

Wages paid to manufacturing staff                R3 000

Rent for factory                                         R1 200

Hire of specialised machinery                        R1 300

2. Amount owing, totalling R3 500 were written off as bad debts.
3. 5 500 units were sold.
4. A royalty of 10 cents per completed unit manufactured during the year is payable in arears on 1 January of the following year.
5. In addition, the following balance at 31 December 20x8 were determined:
- Accounts payable - raw material R3 500
- Accounts receivable - trade debtors R1 200
- Inventory: Finished goods (4 500 units) R?
- Work - in - progress (2 000 units) R?
- Raw material R2 500

6. Inventory is valued at factory cost using the first - in first - out basis.

7. Work - in - progress at 31 December 20x8 was 75% complete in respect of raw material, and 45% complete in respect of direct labour and overheads.

You are required to:

1) Prepare the statement of the cost of goods manufactured for Widget distributors for the year ended 31 December 20x8.
2) Calculate the gross profit of Widget Distributors for the year ended 31 December 20x8.

Question 4

These balances were taken from the books of Amigo CC as at 30 June 20x2.

Members contribution:
Mpho (60%)	300 000
Jansen (40%)	200 000
Loan to members:
Mpho	100 000
Jansen	60 000
Long-term loan	200 000
Loan from member - Jansen	180 000
Property, plant and equipment	700 000
Net profit - 1 July 20x1	200 000
Gross sales	2 2000 000
Cost of sales	900 000
Operating expenses	106 000
Long term-investment	500 000
Inventories	500 000
Account receivable	400 000
Bank	164 000
Accounts payable	250 000

Additional information:

1) Mpho and Jansen, the only members, contributed R300 000 and R200 000 respectively during the year. Theses transaction must still be recorded.

2) Interest on the loans is to be accrued as:
a. To members 15% p.a
b. From members 10% p.a

3) Included in the operating expenses were the salaries of R20 000 and R30 000 paid to Mpho and Jansen respectively.

4) Property, plant and equipment were revalued at R300 000 above their carrying value.

5) Members decided to distribute 80% of the profit. Tax must be provided at 28%.

You are required to:

1) Prepare the statement of profit or loss & other comprehensive income for Amigo CC for the year ended 30 June 20x2.
2) Prepare the members net investment statement.