Tutorial Question:
Question 1: Sunny Side (19 marks;28,5 minutes)
You are the accountant of Sunnyside Car Wash, a car wash business that operates in
Bloemfontein. The business washes cars and also sells car cleaning materials to its
customers for cash only. The entity has a 31 December reporting date and adopted the full
implementation of International Financial Reporting Standards.
Tony Stark, the owner of the entity, sent you the following email on 13 February 2024
To: Accountant
From: Tony Stark
Subject: Depreciation of new car wash machine
Good day Accountant,
Thank you for the work you did in finalising the 2023 financial statements. I plan to
open another car wash branch in 2025. To do this, I will need to provide the bank
with the 2024 financial statements when I apply for a loan. I would really like the
profit to be as high as possible in the 2024 financial statements, in order to
negotiate the best possible loan terms.
I want to ask your advice about the following matter:
A friend of mine, Dr. Strange, approached me to buy a new car wash machine
from him. This machine will cost R500 000 and will be able to wash cars in half
the time that the current machine does.
I am considering buying the machine to help increase my 2024 profits. Dr.
Strange's selling point was that the machine can wash 100 000 cars over the
machine's total lifetime. I will start using the machine on 1 March 2024. Using the
new machine, I will be able to wash 1 000 cars per month. I need to decide on the
best way to depreciate this machine. I am thinking of using the straight-line
method to depreciate the machine over a total useful life of 15 years.
We previously discussed the new conceptual framework of IFRS. Do you think the
proposed depreciation method and useful life will result in a faithful representation
of the economic event?
QUESTION 1 REQUIRED: Marks
Discuss, in accordance with the Conceptual Framework for Financial
Reporting (2018), whether the depreciation method and useful life for the car
wash machine that is proposed by Mr. Stark would meet the criteria of
neutrality related to a faithful representation of the economic event, in the
19
financial statements of Sunnyside Car Wash, for the year ended 31 December
2024. Support your answer with the necessary depreciation calculations.
• Do not discuss the definitions of an asset or expense as part of your
answer.
Communication skills – logical argument 1
TOTAL MARKS 16
QUESTION 2 (16 marks; 24 minutes)
Weekend Chill Beverages Ltd (‘WCB’) is a Johannesburg Security Exchange (‘JSE’) listed
company that manufactures and distributes various alcoholic beverages. WCB’s current
year ends on 30 September 20.22. Its products are retailed through various stores, bars
and taverns across South Africa.
On 1 June 20.22, in an attempt to increase sales of WCB products, WCB entered into an
agreement with one of their clients, Ignite Ltd (‘Ignite’), to supply and install four,
WCBbranded display refrigerators at Ignite’s tavern in Bloemfontein. Past experience
indicates a positive correlation between branded refrigerators and sales of relevant
products. WCB is confident that the sales of its products will be positively affected by this
agreement. Each refrigerator has a value of R22 000.
The agreement stipulates the following:
• Ignite has unlimited use of the four refrigerators but may only stock it with WCB
products.
• Ignite may not sell the refrigerators. Should the tavern be sold, liquidated, or
declared insolvent, the refrigerators must be returned to WCB.
WCB is responsible for the maintenance and repair of damages to the refrigerators that
were not caused by negligent behaviour on Ignite’s (or any employee of Ignite) part.
Ignore all taxes.
QUESTION 2 REQUIRED: Marks
Write a memo to Mr Saturday Night, the accountant of WCB, in which you
discuss, with reference only to the Conceptual Framework for Financial
Reporting, if the costs of the four WCB-branded display refrigerators
13
should be recognised as assets in the records of WCB for the year ended
30 September 20.22. You are not required to discuss any measurement
base, if applicable, or any presentation and disclosure requirements
Communication skills – layout and structure. 3
TOTAL MARKS 16
QUESTION 3 (25 marks; 38 minutes)
Sefako Deliveries Ltd (‘Sefako’) rents out motorbikes and vehicles. The company is a
registered Value Added Tax (VAT) vendor with a 30 June year-end. VAT is charged at a
rate of 15%. The following balances appeared in the asset register on 1 July 20.21:
Motorbikes Vehicles
Cost (excluding VAT) R600 000 R850 000
Accumulated depreciation R300 000 R283 333
Residual value R20 000
1. Sefako purchased new motorbikes MV201 for R300 000 (including VAT) cash and
incurred delivery costs of R2 000 (excluding VAT). Sefako paid an additional R3 500
(excluding VAT) to have the motorbikes branded with the company logo before they
were used. The motorbikes were delivered and available for use on 1 January 20.22;
however, Sefako only brought them to use on 3 February 20.22 after they were
branded.
2. A motorbike MV1614 was involved in an accident on 31 March 20.22; this motorbike
was initially purchased at the cost of R104 348 (excluding VAT), and the accumulated
depreciation on 1 July 20.21 was R53 000. Proceeds of R12 000 (excluding VAT) were
received from selling the motorbike as scrap metal.
3. No purchases or disposals occurred in respect of the vehicles. The remaining useful
life and residual value remained unchanged for vehicles.
4. Depreciation policy:
Motorbikes are depreciated on the diminishing balance method at 20% per
annum.
Vehicles are depreciated on the straight-line method over a useful life of
5 years.
QUESTION 1: REQUIRED Marks
a) Prepare journal entries to record all the transactions in the records of
Sefako for the year ended 30 June 20.22. 17
Show all your calculations.
b) Prepare the note on Property, Plant and Equipment in the accounting
records of Sefako for the year ended 30 June 20.22. You only need to 7
prepare the column for motorbikes.
Layout and presentation 1
TOTAL MARKS 25
Answers are to comply with International Financial Reporting Standards (IFRS’s).
Assume that all current IFRS’s have always been in existence. All amounts must be
rounded of to the nearest Rand. Clearly show all calculations.
Source: Semester test 2 2023
Question 4
Zandile & Friends Pty (Ltd) “Z&F” is a leading company in the beauty and skincare
industry; the company operates in Johannesburg, Durban and some parts of the Eastern
Cape. Zandile is the Managing Director and just learned that you are a second-year
student and have recently studied PPE. She has transactions that she is unsure how they
should be treated and accounted for.
On the 01 of January 20.24, she bought the machine TRX-5000, which is used to process
skin care products; this was this machine was bought for about R1 000 000. She had to
pay a lawyer who assisted with the drafting of the contract, which was necessary for her to
be able to buy the machine; the lawyer invoiced her an amount of R20,000 for the
professional services provided.
She paid the local delivery man an amount of R15 000 for the delivery of the machine from
the supplier’s warehouse to Z&F’s warehouse. Given the nature of the skin care product
Z&F had to obtain a certificate from the Department of Health which permits Z&F to
operate this machine; they had to pay an amount of R40 000 then, she also installed a
filter on the machine(filter was necessary for the machine to work), which cost her about
R700 000, the filter has a useful life of 3 years.
To ensure that the machine does not split chemicals, an additional amount of R250 000
was spent on building a foundation for the machine; according to Zandile, they normally
replace similar foundations after 10 years. Z&F had to hire a specialist to install the filter
and the machine; they paid R20 000.
The machine was tested if it can produce the skin care products, and Z &F spent about
R500 000, of which R200 000 related to the inventory; they had not sold any of the
samples as yet as they had to pass the quality inspection, which was formalities to ensure
that good quality chemicals were utilised in the production of skincare.
The marketing team has already started promoting the new skin care that will be produced
by the machine, and so far, they have spent about R500 000 on marketing and
promotions. On the 30 June 20.24 Zandile was happy with how the machine was
operating. She does not know how to account for this, and the auditor will be starting their
audit so she needs help accounting for these transactions.
Additional Information
Z&F has a year-end of 31 December
All Assets are depreciated on a straight-line basis
The machine has a residual value of R150 000
Filter has a residual value of R50 000
All other items of PPE have a negligible residual value.
The machine has a useful life of 10 years
QUESTION 1: REQUIRED Marks
a) Discuss with reference to recognition criteria how Z&F should recognise
the Machine
b) Prepare Journal entries referencing IAS 16 Property, Plant and
Equipment, accounting for all the transactions related to the Machine
TRX-5000 in Z&F financial statements for the year ended 31 December
20.24. Include the initial measurement and subsequent measurement.
TOTAL MARKS
You have to comply with the IFRS Accounting Standards. Assume that all current
IFRSs have always been in existence. Clearly show all calculations and work to the
nearest Rand. Assume all items and amounts to be material unless the contrary is
evident from the information given