TOPIC: FRAMEWORK

TUTORIAL PACK - WEEK 1

Question Required for Due Date
submission
Question 1 Yes 28 March 2023 @ 09:00
Question 2 Yes 28 March 2023 @ 09:00
Question 3 Yes 28 March 2023 @ 09:00
Question 4 Yes 28 March 2023 @ 09:00
Question 5 Yes 28 March 2023 @ 09:00
Question 1 (12 marks: 18 minutes)

Toys Galore purchases a warehouse for R3 500 000. On 1 August 2010, the sale contract is
signed by Toys Galore which states that the transfer of ownership will occur on
1 October 2010. On 30 November 2010, Toys Galore pays the seller of the warehouse
R3 500 000.

Required

1. Indicate the date on which Toys Galore should recognise the warehouse as an asset in
the books of the business. (1 mark)

2. Using definitions and recognition criteria as outlined in the conceptual framework,

discuss why the warehouse will be recorded as an asset on this date (as answered in 1
above). (10 marks)

3. By using the format A = E + L, show how the financial position of the business will be
affected when the warehouse is recorded by Toys Galore as an asset. Indicate clearly
whether the element has increased or decreased and provide the relevant amount and
accounts that would be affected. (1 mark)

Question 2 (8 marks: 12 minutes)

On 1 March 2010, Bargain Buys ordered a vehicle from Porters Ltd. Bargain Buys paid R70
000 to Porters Ltd for the vehicle on 1 April 2010. The vehicle was delivered on 1 May 2010.
The vehicle will be used to deliver products to Bargain Buys’ clients.

Part A (7 marks)

You are required to:

a) Indicate the date on which Bargain Buys should recognise the vehicle as an asset.
b) Discuss why the vehicle is recorded as an asset. Your answer should refer to the asset
definition and recognition criteria as detailed in the conceptual framework.

Part B
Briefly explain the underlying assumption of “going concern” (1 mark)
Question 3 (11 marks: 17 minutes)

Part A (7 marks)
Joe Sephume, the owner of a small business, Joe’s Car Shop, that sells and repairs cars,
has recently received a copy of the financial statements for the current year. Joe is confused
about some of the items in the financial statements and has asked you to answer a few
questions that he has. You have agreed to do this.

Joe’s questions are as follows:

What does the term ‘‘asset’’ mean? My knowledge and skill are assets to my business, but I
do not see these in the financial statements. Can you explain this omission to me?
Why is the ‘‘bank’’ balance on the statement of financial position different from the profit
amount in the statement of comprehensive income?

YOU ARE REQUIRED TO:

Answer each of Joe’s questions, using full explanations of any terms and concepts outlined
in the Conceptual Framework.

Part B (4 marks)

YOU ARE REQUIRED TO:

Indicate whether the following assets of a retailing business are non-current or current
assets
• Delivery van
• Cash at bank
• Inventory
• Shop fittings
• Trade receivables
• Cash registers
• Cash in the cash registers
• Insurance paid in advance

Question 4 (7 marks: 11 minutes)

You are working in the advisory division of WSU Incorporated, a medium-sized firm of
Chartered Accountants. You have been assigned to a number of clients that require your
assistance. The queries are unrelated.

Query 1 (3 marks)

A previous client, Nobalindi called to thank you for your very professional service. She
mentioned that she had received a copy of her business’ financial statements and they showed
a strong profit of just above R3 million. The large profit was driven by credit sales totalling R4.5
million to her only client Mvezo Spar. Mvezo Spar had not settled the amount owing at year
end.

She concluded by saying “Thanks to you now I will use this profit to buy the new MBW 750i
that I have been admiring for so long, cash.”
Please respond to her statement by clearly indicating whether you agree with the statement
above.

Query 2 (4 marks)

Mbuso’s business has traded in luxury watches for many years. He introduced a new brand
of luxury watches namely MSD™ in the previous financial period. These watches were new
to the market. In 2011 the cost per watch amounted to R350 and as the brand grew in
popularity the business would have to pay R720 to purchase the watches in 2012, which is
more than double the price they paid a year ago.

Mbuso has a number of watches still on hand that he purchased in 2011. In pursuit of fair
presentation on the financial statements, Mbuso believes he should present the watches
(inventory) at the end of the 2012 year end as R720 per watch, i.e. its fair value.

Do you agree with Mbuso’s statement? Support your response with reasons.

Question 5 (22 marks: 33 minutes)

1. Briefly explain the term “recording” (1 mark)

2. Briefly explain the term “investing decision”. Your answer needs to clearly explain all
relevant terms used. (2 marks)

3. Briefly explain the term “accumulated profit/retained earnings” (2 marks)

4. The business, Thompson Traders, borrows R20 000 from the bank

4.1. Show how the transaction above affects the financial position of the Thompson
Traders as represented by A = E + L. You need to clearly indicate whether the
element has increased or decreased and provide the relevant amount and account
that would be affected. (2 marks)

4.2. Clearly explain whether the transaction above has changed the wealth of the owner.
(2 marks)

5. Distributions to the owner are not shown on the statement of comprehensive income as,
although they represent an outflow of cash/assets, they are not a cost to the business.
Indicate whether the statement above is True/False (1 mark)

6. Thompson Traders purchased a vehicle costing R60 000 and paid in cash

6.1. Show how the transaction above affects the financial position of Thompson
Traders as represented by A = E + L. You need to clearly indicate whether the
element has increased or decreased and provide the relevant amount and account
that would be affected. (2 marks)

6.2. Clearly explain whether the transaction above has changed the wealth of the owner.
(2 marks)

7. Briefly explain the term “reporting” (1 mark)

8. Briefly explain the term “distribution decision”. You answer needs to clearly explain all
relevant terms used. (1 marks)

9. Briefly explain the term “entity concept” (1 mark)

10. The owner of Thompson Traders deposits R10 000 of her own money into the bank
account of the business

10.1. Show how the transaction above affects the financial position of Thompson
Traders as represented by A = E + L. You need to clearly indicate whether the
element has increased or decreased and provide the relevant amount and account
that would be affected. (3 marks)

10.2. Clearly explain whether the transaction above has changed the wealth of the
owner. (2 marks)