Question 1

1.1 Classification of Accounts

Complete the table by allocating each account to its appropriate element and
identifying the financial statement in which it appears:

No. Account Element Component of

Financial Statement
1.1.1 Equipment Non-current asset (Property, SOFP
Plant & Equipment)
1.1.2 Electricity Expense (Operating expense) SOCI
1.1.3 Services Revenue (Operating income) SOCI
rendered
1.1.4 Investment in Non-current asset (Investment) SOFP
shares
1.1.5 Dividends Income (Other income) SOCI
received
1.1.6 Trade Current asset SOFP
receivable
1.1.7 Long term Non-current liability SOFP
borrowings
1.1.8 Interest on Expense (Finance cost) SOCI
borrowings
1.1.9 Drawings Distribution/reduction in owner’s SOCE
equity
1.1.10 Capital Owner’s equity SOCE

Note: Although elements like “Capital” also appear as a balance in the statement of
financial position, many curricula require that movements in owner’s equity (including
capital and drawings) be presented in the Statement of Changes in Equity (SOCE).
[You can remove this note if needs be]

1.2 Definition and Recognition Criteria of a Liability

A liability is defined as a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow of economic benefits.

The three criteria for recognizing a liability in the financial statements are:

1. Present Obligation: There must be a current responsibility arising from past

transactions or events.
2. Probable Outflow: It is likely that settlement of the obligation will result in an
outflow of resources (e.g., cash or other assets).
3. Reliable Measurement: The amount of the obligation can be measured
reliably.
1.3 The Going Concern Assumption

This assumption is commonly known as the going concern assumption. Its

significance lies in the belief that an entity will continue its operations into the
foreseeable future. This assumption allows for:

 The deferral of recognition of certain expenses to future periods.

 Assets to be valued based on their continuing use rather than their liquidation
value.
 Liabilities to be recorded on the basis that they will be settled in the normal
course of business rather than at forced-sale prices.

1.4 Fundamental and Enhancing Qualitative Characteristics

The two fundamental qualitative characteristics identified in the conceptual

framework are:

 Relevance: Financial information is considered relevant if it can influence the

economic decisions of users.
 Faithful Representation: Information must be complete, neutral, and free
from error to faithfully represent what it purports to depict.

Enhancing the fundamental characteristics are additional qualities, including:

 Comparability: Enables users to identify and understand similarities and

differences among items.
 Verifiability: Ensures that independent observers can reach consensus that a
representation is a faithful depiction.
 (Other enhancing qualities include timeliness and understandability, but two—
comparability and verifiability—are sufficient for this answer.) [You can
remove this bullet if you need to]
Question 2

2.1: Calculation of Capital on 1 March 2019

Using the balances given as of 28 February 2019:

 Assets:
o Equipment: R73,000
o Inventory (spare parts): R58,000
o Bank: R97,500
o Total Assets: 73,000 + 58,000 + 97,500 = R228,500
 Liabilities:
o Trade payables: R22,000
o Long-term borrowings: R50,000
o Total Liabilities: 22,000 + 50,000 = R72,000

Using the basic accounting equation:

Capital = Total Assets – Total Liabilities

Capital = 228,500 – 72,000 = R156,500

2.2: Recording Transactions in a Table

For the year ended 28 February 2020, record each transaction in a table showing the
effect on the following columns:

 Assets:
o Non-current (e.g. Equipment)
o Current (e.g. Bank, Inventory, Receivables)
 Equity:
o Capital (Owner’s Investment)
o Income + Expenses (Results of Operating Activities)
 Liabilities:
o Non-current (e.g. Long-term borrowings)
o Current (e.g. Trade payables)

Opening Balances on 01/03/2019:

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 R73,000 R58,000 R156,500 R0 R50,000 R22,000
(Inventory) +
R97,500 (Bank) =
R155,500
Transaction 1:

Equipment contribution by Ringo

 Increase Equipment by R39,000 (non-current)

 Increase Capital by R39,000

Non-current Current Capital Income + Non-current Current

Assets Assets Expenses Liabilities Liabilities
01/03/2019 +R39,000 - +R39,00 - - -
0

After Trans 1:

 Non-current Assets: 73,000 + 39,000 = R112,000

 Capital: 156,500 + 39,000 = R195,500

Transaction 2:

Services rendered of R638,000 (R368,000 cash; R270,000 on credit)

 Increase Bank (cash) by R368,000

 Increase Receivables by R270,000 (both Current Assets)
 Increase Income (revenue) by R638,000

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - +R368,000(Bank); - +R638,000 - -
+R270,000(Receivables)

After Trans 2:

 Current Assets become: Bank = 97,500 + 368,000 = R465,500; Receivables =

R270,000; Inventory remains R58,000
Total Current Assets = 465,500 + 270,000 + 58,000 = R793,500
 Income: R0 + 638,000 = R638,000

Transaction 3:

Purchase of spare parts for R310,000 (70% on credit, 30% cash)

 Increase Inventory by R310,000

 Decrease Bank by 30% of R310,000 = R93,000
 Increase Current Liabilities (Trade payables) by 70% of R310,000 = R217,000

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - -R93,000(Bank); - - - +R217,000
+R310,000(Inventory)
After Trans 3:

 Inventory becomes: 58,000 + 310,000 = R368,000

 Bank becomes: 465,500 – 93,000 = R372,500
 Receivables remain: R270,000
Total Current Assets = 372,500 + 270,000 + 368,000 = R1,010,500
 Current Liabilities: 22,000 + 217,000 = R239,000

Transaction 4:

Closing inventory adjustment at 28 Feb 2020 (physical count R75,000)

 Inventory must be adjusted from R368,000 down to R75,000

 Decrease Inventory by R293,000
 Record an expense (decrease in Income) by R293,000

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - -R293,000(Inventory) - -R293,000 - -

After Trans 4:

 Inventory becomes: R368,000 – 293,000 = R75,000

 Total Current Assets = Bank (372,500) + Receivables (270,000) + Inventory
(75,000) = R717,500
 Income becomes: 638,000 – 293,000 = R345,000

Transaction 5:

Payment of wages R144,000

 Decrease Bank by R144,000

 Record wage expense (decrease in Income) by R144,000

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - -R144,000(Bank) - -R144,000 - -

After Trans 5:

 Bank becomes: 372,500 – 144,000 = R228,500

 Current Assets = 228,500 (Bank) + 270,000 (Receivables) + 75,000
(Inventory) = R573,500
 Income becomes: 345,000 – 144,000 = R201,000

Transaction 6:

Payment of trade payables R210,000

  Decrease Bank by R210,000
 Decrease Current Liabilities (Trade payables) by R210,000

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - -R210,000(Bank) - - - -R210,000

After Trans 6:

 Bank becomes: 228,500 – 210,000 = R18,500

 Current Liabilities become: 239,000 – 210,000 = R29,000
 Current Assets now = 18,500 (Bank) + 270,000 + 75,000 = R363,500

Transaction 7:

Interest paid on long-term borrowings (9% on R50,000 = R4,500)

 Decrease Bank by R4,500

 Record interest expense (decrease in Income) by R4,500

Non- Current Assets Capital Income + Non- Current

current Expenses current Liabilities
Assets Liabilities
01/03/2019 - -R4,500(Inventory) - -R4,500 - -

After Trans 7:

 Bank becomes: 18,500 – 4,500 = R14,000

 Final Current Assets = 14,000 (Bank) + 270,000 (Receivables) + 75,000
(Inventory) = R359,000
 Income becomes: 201,000 – 4,500 = R196,500

Final Cumulative Balances:

 Non-current Assets (Equipment): R112,000

 Current Assets: R359,000
 Total Assets: R112,000 + R359,000 = R471,000
 Equity:
o Capital: R195,500
o Income (Net Profit): R196,500
o Total Equity: R195,500 + R196,500 = R392,000
 Liabilities:
o Non-current: R50,000
o Current: R29,000
o Total Liabilities: R50,000 + R29,000 = R79,000

Check: Total Assets (R471,000) = Total Equity (R392,000) + Total Liabilities

(R79,000)
Summary Table

Below is a summary table that captures the running balances:

Date/ Non- Current Assets Capital Income Non- Current

Transaction current + current Liabiliti
Assets Expense Liabiliti es
(Equipme s es
nt)
01/03/2019 R73,000 R58,000(Inventory) R156,50 R0 R50,000 R22,000
; R97,500(Bank) 0
Trans 1 +R39,000 – +R39,00 – – –
0
After Trans 1 R112,000 R155,500 R195,50 R0 R50,000 R22,000
0
Trans 2 – +R368,000 (Bank); – +R638,0 – –
+R270,000(Receiv 00
able)
After Trans 2 R112,000 R793,500 R195,50 R638,000 R50,000 R22,000
0
Trans 3 – +R310,000(Invento – – – +R217,0
ry) 00
–R93,000 (Bank)
After Trans 3 R112,000 R1,010,500 R195,50 R638,000 R50,000 R239,000
0
Trans 4 – –R293,000 – – – –
(Inventory) R293,000
After Trans 4 R112,000 R717,500 R195,50 R345,000 R50,000 R239,000
0
Trans 5 – –R144,000(Bank) – – – –
R144,000
After Trans 5 R112,000 R573,500 R195,50 R201,000 R50,000 R239,000
0
Trans 6 – –R210,000 (Bank) – – – –
R210,000
After Trans 6 R112,000 R363,500 R195,50 R201,000 R50,000 R29,000
0
Trans 7 – –R4,500 (Bank) – –R4,500 – –
After Trans 7 R112,000 R359,000 R195,50 R196,500 R50,000 R29,000
0

This table shows the step-by-step recording of the transactions and confirms that the
final accounting equation balances:

Total Assets (R471,000 = R112,000 + R359,000) = Total Liabilities (R79,000 =

R50,000+R29,000) + Total Equity (R392,000 = R196,500+R195,500)
Question 3

3.1 Statement of Profit or Loss and Other Comprehensive Income

Keep Fit Services

Statement of Profit or Loss and Other Comprehensive Income For the year
ended 31 December 2019

Description Amount (R)

Revenue
Service fees 42,280
Total Revenue 42,280
Operating Expenses
Consumable Material Expense (858,800 – 70,000) 788,800
Depreciation Expense – Equipment 35,000
Depreciation Expense – Vehicles 15,000
Repairs and Maintenance (reclassifying repairs cost) 10,000
Rent Expense (net of January 2020 prepayment of R20,000) 350,000
Salaries and Wages 3,400
Telephone Expense (R25,500 + accrued R1,200) 26,700
Electricity and Water 130,000
Interest Expense (5% on adjusted borrowing) 336
Bad Debt Adjustment (net of write–off and allowance reversal) (121,560)
Total Operating Expenses 1,237,676
Operating Loss (1,195,396)
Other Income
Rent Income 128,000
Net Loss before Tax (1,067,396)
Other Comprehensive Income 0
Total Comprehensive Loss (1,067,396)

Detailed Workings

1. Consumable Material Expense:

o Recorded balance: R858,800
o Physical stocktake (closing inventory): R70,000
 o Expense recognized = R858,800 – R70,000 = R788,800
2. Depreciation Expenses:
o Equipment: Calculated at 10% reducing balance (based on provided
figures) = R35,000
o Vehicles: Straight-line over 4 years with an estimated residual value,
resulting in R15,000
3. Repairs and Maintenance:
o A cost of R10,000, which was reclassified from an erroneous charge to
the asset account, is recorded as an expense.
4. Rent Expense Adjustment:
o The trial balance shows a rent expense of R370,000; however,
R20,000 relates to January 2020 and is deferred.
o Adjusted Rent Expense = R370,000 – R20,000 = R350,000
5. Telephone Expense:
o Base expense per trial balance: R25,500
o An accrual for an invoice of R1,200 (not yet paid) is added:
Total = R25,500 + R1,200 = R26,700
6. Electricity and Water Expense:
o As per the trial balance: R130,000
7. Interest Expense:
o After repaying R20,000 on long-term borrowings, the remaining

o Calculated Interest Expense ≈ R336 (Note: The long‐term borrowing

balance is used to compute interest at 5% per annum.

balance after a R20,000 repayment is R6,720; 5% of 6,720 ≈ R336.)

8. Bad Debt Adjustment:
o A debtor of R2,600 is written off.
o The allowance for credit losses is adjusted to 3% of outstanding
debtors.
o A reversal of bad debt expense: –R124,160
o Net effect (after reversing an excessive previous bad debt expense)
results in a reduction of expense by R121,560
9. Net Loss Calculation:
o Operating Loss = Revenue – Total Operating Expenses
o = R42,280 – R1,237,676 = (R1,195,396)
o Adding Other Income (Rent Income: R128,000) gives:
o Net Loss before Tax = (R1,195,396) + R128,000 = (R1,067,396)
10. Other Comprehensive Income:
o No items identified; hence, OCI = 0

3.2 Workings for Selected Items in the Statement of Financial Position

3.2.1 Trade and Other Receivables

 Trial Balance: Trade receivables = R130,600

 Adjustment – Write–off: R2,600 written off, so receivables reduce to:
130,600 – 2,600 = R128,000
 Required Allowance: Should be 3% of remaining receivables = 3% of
128,000 = R3,840
 Net Trade Receivables: = R128,000 – R3,840 = R124,160
3.2.2 Inventory – Consumable Material

 Trial Balance: Consumable material recorded = R858,800

 Adjustment – Physical Stocktake: Closing inventory on hand = R70,000
 Amount Consumed (Expense): R858,800 – R70,000 = R788,800
 Carried in the Statement of Financial Position: Closing stock (inventory)
is shown at R70,000

3.2.3 Trade and Other Payables

 Trial Balance: Trade payables = R3,000

 Adjustment – Accrued Telephone Expense: Telephone expense accrual
= R1,200 (telephone invoice received but not yet paid)
 Adjusted Payables: R3,000 + R1,200 = R4,200