QUESTION 11.
13 (B)
(20 marks: 24 minutes)
Dube Dangerous Chemicals Ltd has a December year-end.
Extracts from the post-adjustment trial balance for the year ended 31 December 2007 is as
follows:
Plant and equipment – Cost 200 000
Plant and equipment – Accumulated depreciation (100 000)
Vehicles – Cost 150 000
Vehicles – Accumulated depreciation (131 250)
Office equipment – Cost 20 000
Office equipment – Accumulated depreciation (13 333)
A decision was made to sell plant and equipment with a total cost of R50 000 and accumulated
depreciation of R18 750 on 30 September 2007. The plant and equipment were withdrawn from
service, but have not yet been sold. Current depreciation has not been accounted for.
Office equipment to the value of R50 000 was purchased on 30 June 2007.
Vehicles are depreciated over 5 years on the straight-line method, plant and machinery over 8 years
on the straight-line method and office equipment 30% on the diminishing balance method.
Prepare the non-current asset notes in the annual financial statements of the company for the
year ended 31 December 2007
QUESTION 11.15 (B) (29 marks: 35 minutes)
Alexander Engineering is a small factory that manufactures machinery. Alexander Engineering is
registered for value added tax and the VAT rate is 15%.
During the financial year ended 31 October 2008, the following transactions took place with regards
to the factory’s property, plant and equipment:
[Link] depreciation methods and the opening balances at 1 November 2007 for the property, plant
and equipment accounts were as follows:
[Link] 31 May 2008, a spark set off a fire in the factory. Luckily there was only superficial damage to
the factory buildings and other assets. The machinery of the company was however damaged
beyond repair. A cheque for R456 000 was received on 30 June from the insurance company in
settlement of the claim.
[Link] D was purchased for R287 500 (including VAT) on 1 July. This machine was paid in cash
and will be depreciated over 8 years on the straight-line basis.
[Link] they manufactured a piece of machinery (Machine E) they required for their business.
The following expenses were incurred and where applicable paid for in cash:
Cost of spare parts (VAT Inclusive) 172 500
Internal labour on the project (Already included in salaries and wages) 30 000
Payment to construction company for alterations to the building to accommodate new machine
(VAT exclusive) 50 000
New air conditioning system for new machine (VAT Inclusive) 17 250
Cost of testing the new machine (VAT Exclusive) 25 000
Architect’s fees (Non-VAT vendor) 5 000
The machine was brought into use on 30 September 2008. It has an expected useful life of five years
and a residual value of R15 000. It will be depreciated using the straight- line basis.
Required
a) Record the transactions pertaining to the property, plant and equipment for the financial
year ended 31 October 2008 in the general journal of the company. Narrations are not
required (23 marks)
b) A machine was built for a client at a cost of R250 000 and was on hand at the end of the
year. The bookkeeper is unsure if it should be classified as inventory or property, plant and
equipment in the financial statements. Discuss each of these types of asset briefly and why
the machine would or would not qualify in that category. (6 marks)
QUESTION 11.19 (A) (13 marks: 18 minutes)
Hlonipha uLifeboy Ltd (Lifeboy) is a company that manufactures helicopters from its premises in Port
Elizabeth (PE). The company has a 30 November year-end.
On 1 July 2012, Lifeboy entered into an agreement with Chopper Plc, a company based in London,
for the purchase of a machine that it intended to use in the production process.
The terms of the agreement were as follows:
[Link] machine would be delivered on 30 October 2012 to the PE Harbour and the purchase price of
R15 000 000 will be payable on delivery.
[Link] payment will attract a penalty of 10% of the purchase price of the machine.
[Link] machine will be shipped, FOB shipping point, from London on 15 October 2012.
Lifeboy was concerned about the heavy storms that have been affecting the Indian and Atlantic
Oceans and that the machine might be lost at sea. Lifeboy decided to take out insurance with You
Will Need US Insurers to guard against this risk. The premium charged for the service by the insurers
amounted to R400 000 and is payable on 30 October 2012.
The machine was loaded onto a ship in London on 15 October 2012 and arrived in PE on 30 October
2012. Lifeboy paid the amount owing to the supplier as required by the agreement. The machine
was transported on the same day to Lifeboy’s factory by HDT Couriers at a cost of R10 000. The
machine has a useful life of 20 years and a residual value of R500 000.
The machine is specialised in nature and had to be installed by experts. The experts started working
on the machine on 31 October 2012.
The experts took 30 days to complete the installation after which the machine was ready for use.
The experts were paid R500 000 for the installation.
Lifeboy only started using the machine on 1 January 2013 as their employees had to attend a
training course on how to use the machine.
[Link] date on which Lifeboy should start depreciating the asset. (1 mark)
[Link] the date on which the risk and rewards of ownership transfer to Lifeboy. (1 mark)
[Link] the cost at which the asset will be recorded in the accounting records of Lifeboy for the
year ended 30 November 2012. Give a brief explanation for the inclusion of each amount in the cost
of the asset. (9 marks)
[Link] would your answer for number (2) have differed if Lifeboy did not pay the supplier on the
date of delivery? (2 marks)