END OF MODULE EXAMINATION: JUNE 2022

MODULE DESCRIPTION : GENERAL ACCOUNTING 3

MODULE CODE : RGV301/RG301/RG351
FACULTY : BUSINESS AND ECONOMIC SCIENCES
QUALIFICATION : B COM
EXAMINATION DATE : 06 JUNE 2022
SESSION STARTS AT : 09:00
DURATION (IN MINUTES) : 180

TOTAL MARKS : 100

PAGES : 6 (excluding cover page)
ADDENDA : WORKSHEET
EXAMINERS : 1. Ms S. Diedericks
2. Ms F. Oliveria
3. Mr P Brodrick

MODERATORS : 1. Prof. D. Forsyth

: 2. Mr. S. Rathnasamy (external)

INSTRUCTIONS
1. All questions must be answered.
2. Answers must be written in ink. Workings may be done in pencil.
3. Number your answers clearly.
4. Hand in all workings.
5. Permitted textbooks: SAICA Handbooks (IFRS Standards)

Candidates must use their initiative to deal with any perceived errors or ambiguities in the paper.
Any assumptions made by candidates should be clearly stated.

QUESTION MARKS MINUTES

1. 30 54
2. 35 63
3. 35 63
100 180

DO NOT TURN THE PAGE BEFORE TOLD TO DO SO

RGV301/RG301/RG351 June 2022 examination Page 1 of 6

QUESTION 1 (30 MARKS : 54 MINUTES)

GEMS Limited (GEMS) is a mining company based in South Africa with a 30 April year-end. You have
been asked to advise the company’s junior accounting team on a few accounting matters.

1. Mine rehabilitation

GEMS opened a new platinum mine on 1 May 2020. At this date, the mining land had been damaged due
to operational set-up. As part of the mine approval process, there is a legal requirement to rehabilitate the
disturbed land at the end of the mine’s economic life. At 1 May 2020, the expected useful life of the mine
was 12 years and the estimated future cash outflow relating to future rehabilitation of the mine land was
R9 500 000.

On 30 April 2021, there was no change in the estimated life of the mine, nor in the expected future cost of
rehabilitation of the mine land. During the current financial year, while the total useful life of the mine
remained at 12 years, the estimated future outflow for rehabilitation costs had decreased to R8 900 000
as a result of improved technology that has become available.

Mine assets are depreciated over their useful lives on a straight-line basis, to nil residual values.

An appropriate discount rate in respect of mine assets, and for the company as a whole, is 13% per annum.

2. Dispute with transport company

GEMS uses various companies to transport its ore to processing plants and customers. One company,
Loader Limited, has been unreliable with regard to the number of trucks provided and delivery times,
resulting in losses for GEMS during February and March 2022.

According to their agreement, penalties are payable in such instances and GEMS has demanded payment
of R255 000 as a result. However, Loader Limited is disputing these penalties, stating that they are not
valid because GEMS had been the cause of the issues by providing erroneous and conflicting information.

GEMS believed that it was entitled to these penalties and took legal advice on the matter during April 2022.
Legal counsel informed GEMS that it could institute legal action, suing Loader Limited to recover the
penalties of R255 000 plus legal costs.

Based on review of correspondence and agreements, legal counsel believes that a court would probably
find in favour of GEMS and would therefore be expected to award damages for the amounts claimed.

GEMS directors met on 29 April 2022, with the following outcome:

a) a decision that they would file a lawsuit against Loader Limited to recover the penalties according to
legal counsel recommendations, and
b) the need to appoint a new supplier, which would result in expected operating losses in the affected
department of approximately R90 000 per month for the next two months.

The lawsuit was duly filed on 6 May 2022. A ruling on the case has not yet been made, but legal counsel
has confirmed their view that a favourable outcome is more likely than not.

Legal costs for GEMS to 30 April 2022 were R10 000 and are expected to be R45 000 in total with the
court case proceedings.

The financial statements have not yet been authorised for issue.
RGV301/RG301/RG351 June 2022 examination Page 2 of 6

QUESTION 1 (continued):

REQUIRED:

a) Provide the journal entries to correctly account for the information in note 1 (mine rehabilitation), insofar
as the information permits, in the accounting records of GEMS Limited for the year ended
30 April 2021. (5)

Dates and narrations are not required.

b) Prepare the provision for rehabilitation note to the annual financial statements of GEMS Limited for the
year ended 30 April 2022.

Comparatives are required. (10½)

c) For this part only, assume that the rehabilitation of disturbed mine land was not a legal requirement,
and that GEMS Limited has not rehabilitated mine sites previously. Assume further that other mines
are conducting rehabilitation activities and pressure is mounting in the industry to do so. GEMS Limited
seeks to maintain its reputation but has not made any statement on its policy in this regard.

Briefly discuss how you would advise GEMS Limited in accounting for this matter. (4½)

d) Fully discuss the accounting implications for GEMS Limited regarding the dispute with the transport
company and related matters (refer to note 2), for the year ended 30 April 2022, in terms of International
Financial Reporting Standards. (10)

Ignore taxation.
Show all workings.
Round amounts to the nearest Rand.
RGV301/RG301/RG351 June 2022 examination Page 3 of 6

QUESTION 2 (35 MARKS : 63 MINUTES)

You are the financial manager of Cody (Pty) Limited (Cody), a South African company. The following is
an extract from the company’s draft trial balance for the year ended 31 December 2021:

Note DR/(CR)
R
Manufacturing plant, at carrying amount 1 ?
Financial assets 2 937 500
Contract liabilities 3 (1 207 500)
Deferred tax (31 Dec 2020) (83 700)
Retained earnings (31 Dec 2020) (982 500)
Preference dividends paid (non-cumulative, non-redeemable) 135 000
Revenue (6 337 500)
Other income 4 (1 542 000)
Cost of sales 4 500 000
Operating expenses 5 2 775 000

Additional information:

1. All manufacturing plant was acquired for R1 800 000 on 2 January 2017, when the useful life was
estimated at 10 years, with no residual value.

The plant was revalued on 1 January 2020 to its fair value of R910 000, using the net replacement
method. The estimated remaining useful life did not change.

On 31 December 2021 the plant’s recoverable amount was R500 000. This information has not yet
been accounted for in the accounting records of Cody.

SARS allows a 40%, 20%, 20%, 20% deduction for manufacturing plant from the date of acquisition.
The allowance is not pro-rated for part of a year.

2. Financial assets consist of a portfolio of equity investments, designated at fair value through profit or
loss. A fair value gain of R82 500 has not yet been accounted for. There was no other movement
during the year.

The cost of the financial assets was R787 500. The financial assets are capital assets for tax
purposes.

3. The accountant discovered that the amount accounted for as contract liabilities should have been
recognised as revenue in terms of IFRS 15 during the 2020 financial year end. SARS has agreed to
re-open the assessment of the previous year but will not levy the company with any penalties or
interest.

4. Other income includes:

- Dividends received (local) R225 000
- Interest received R147 000.

5. Operating expenses include:

- Ordinary dividends paid R192 000
- Research expenditure R144 000.

SARS allows the research expenditure as a deduction over 3 years, not pro-rated for part of a year.
There was no research expenditure in the last two years.
RGV301/RG301/RG351 June 2022 examination Page 4 of 6

QUESTION 2 (continued):

6. The normal tax rate is 28% (2020: 30%) and 80% (2020: 80%) of capital gains are included in taxable
income. Ignore dividends tax.

7. There are no temporary or permanent differences other than those that are apparent from the
information provided.

8. Cody had an assessed loss of R425 000 at 31 December 2020. At that date it was expected that there
would be future taxable profits to set off the assessed loss.

9. Assume all transactions have been correctly accounted for unless otherwise stated.

10. Cody (Pty) Limited prepares its financial statements in accordance with IFRS.

REQUIRED:

Show clear workings.

Round amounts to the nearest Rand.

a) Prepare the journal entries to record both current tax and deferred tax, in the accounting records of
Cody (Pty) Limited for the year ended 31 December 2021.
Clearly show your calculations for current and deferred tax. (20)

b) Prepare Cody (Pty) Limited’s statement of profit or loss and other comprehensive income for the year
ended 31 December 2021.
Comparatives and notes are not required. (6)

c) Prepare the retained earnings column of Cody (Pty) Limited’s statement of changes in equity for the
year ended 31 December 2021.
Comparatives are not required. (4)

d) Calculate the deferred tax balance at 31 December 2021, using the balance sheet method, and
indicate whether it is a deferred tax asset or liability. (5)
RGV301/RG301/RG351 June 2022 examination Page 5 of 6

QUESTION 3 (35 MARKS : 63 MINUTES)

You are the newly appointed group financial accountant for the Palkia group and are responsible for the
preparation of the group financial statements for the financial year ended 31 March 2022.

The accounting clerk provided the following trial balances as at 31 March 2022:

Palkia Limited Sylveon Limited

Debit/(Credit) Debit/(Credit)
Ordinary share capital (3 000 000) (1 100 000)
8% Preference shares - (1 000 000)
General reserve - 31 March 2022 (420 000) (280 000)
Revaluation reserve (315 000) (134 248)
Retained earnings – 31 March 2021 (2 680 000) (870 000)
Deferred tax (280 000) 70 000
Non-current borrowings (2 382 000) (1 500 000)
Current liabilities (1 706 000) (340 000)
Land – revalued carrying amount 2 100 000 815 000
Vehicles – cost 350 000 250 000
Vehicles - accumulated depreciation (190 000) (125 000)
Plant and machinery – cost 3 660 000 2 250 000
Plant and machinery – accumulated depreciation (835 000) (725 000)
Investment in Sylveon Limited – ordinary shares, at cost 1 020 000 -
Investment in Sylveon Limited – preference shares, at cost 400 000 -
Current assets 4 898 000 2 539 248
Other Investments - 418 000
Sales (3 650 000) (1 780 000)
Cost of sales 1 800 000 950 000
Operating expenses 750 000 460 000
Other income, including investment income (490 000) (130 000)
Taxation expense 440 000 135 000
Dividends paid – preference (31 March 2022) - 80 000
Dividends declared – ordinary (31 March 2022) 450 000 160 000
Transfer to general reserve 80 000 30 000
Gain on revaluation of land - (173 000)

Additional information:

1. Palkia Limited (Palkia) acquired 195 000 ordinary shares, representing 65% of the ordinary share
capital of Sylveon Limited (Sylveon), on 1 October 2019 for R1 020 000. On this date, Sylveon had an
accumulated deficit of R70 000, share capital of R1 100 000 and general reserves of R205 000. Both
companies have a 31 March year end.

All assets and liabilities of Sylveon were fairly valued on the date of acquisition with the exception of
land and machinery which were considered undervalued by R105 000 and R110 000 respectively. The
machinery, which was acquired on 31 March 2015, has a total useful life of ten years and a nil residual
value. Palkia agreed with these estimates.

2. Sylveon revalued its land for the first time in the 2022 financial year.

3. Sylveon sells inventory to Palkia. Sylveon achieves a gross margin of 25% on its sales to Palkia. During
the current year, Palkia purchased inventories from Sylveon for R560 000 (2021: R420 000).

Included in Palkia’s closing inventory was inventory purchased from Sylveon as follows:

Date R
31 March 2021 280 000
31 March 2022 360 000
RGV301/RG301/RG351 June 2022 examination Page 6 of 6

QUESTION 3 (continued)

4. On 1 October 2020, Palkia sold a vehicle to Sylveon at a profit of R28 800. Palkia had originally
acquired this vehicle on 1 October 2016 and had been depreciating it over its useful life of ten years,
to a nil residual value. The assessment of useful life and residual value remained unchanged since the
vehicle was acquired by Sylveon.

5. On 1 January 2021, Sylveon issued 100 000 8% R10 non-cumulative preference shares at their par
value. Palkia did not acquire any of the preference shares on the date of issue. The preference shares
are compulsory convertible into ordinary shares on 1 January 2026.

6. Sylveon rented office space from Palkia for four months during the 2022 financial year end, at a monthly
cost of R10 000.

7. An impairment test for goodwill in Sylveon was performed at the end of the 2022 financial year. The
goodwill is considered to have a recoverable amount of R97 720 at 31 March 2022. No impairment
was necessary in prior years.

8. Palkia’s group policy is to measure non-controlling interests at their share of the separately identifiable
assets of the subsidiary on acquisition date.

9. Palkia accounts for the investment in Sylveon at cost in its separate financial statements.

10. The normal tax rate has been 28% for the past few years, and 80% of capital gains are included in
taxable income. Ignore VAT.

11. The Palkia group presents taxation as a separate line item within other comprehensive income.

REQUIRED:

a) Prepare the consolidated statement of profit or loss and other comprehensive income for the Palkia
Limited group for the year ended 31 March 2022. (22)

b) Prepare the following columns of Palkia Limited’s consolidated statement of changes in equity for the
year ended 31 March 2022:
• Retained earnings
• Non-controlling interest. (13)

Comparatives are not required.

June 2022 examination - RGV301/RG301/RG351
NAME:

STUDENT NUMBER: _________________________