QUESTION 1

Cakes and Cashews produce and sell a variety of cakes and snacks. They also offer cake decorating classes to aspiring bakers. The firm’s PRE-ADJUSTED trial balance as of 31 December 2021 is presented below.

Assume all the appropriate reversal entries relating to the prior year were processed correctly on 1 January 2021.

On 30 June 2021, a cheque for R50 000 was issued to repay part of the 12% bank loan. Interest on the loan is payable half-yearly in arrears on 1 July and 1 January. The bookkeeper correctly recorded the payments made on 1 January 2021 and 30 June 2021 but has however not yet accrued for the interest on the loan that will be paid on 1 January 2022.

The bookkeeper has also not recorded (or adjusted for) the following items relating to the financial year ended 31 December 2021:
1. The fixed deposit investment was made on 1 April 2021 and correctly recorded. It earns interest at 10% per annum. The interest on the fixed deposit has not yet been received for the last two months of the financial year.
2. The advertising expenses (see the pre-adjustment trial balance) includes an amount of R500 paid for advertising to be done in January 2022.
3. According to the non-current assets register, there is only one delivery vehicle that is depreciated at 20% per annum using the straight-line method of depreciation. The vehicle was purchased on the 1st January 2019 has a residual value of R16 000. The bookkeeper has not yet provided for this year’s depreciation.
4. The account of Pretty Little Cakes, a debtor owing the entity R2 000, was declared insolvent and must be written off as irrecoverable.
5. A telephone bill of R1 500 relating to the month of December 2021 was received on 5 January 2022 and no entries had been made for it.
6. The fees income of R190 000 includes an amount of R5 000 (received in December 2021), which relates to cake decorating classes to be provided in January 2022.
7. The physical count conducted on 31 December 2021 revealed that inventory on hand had a cost of R125 000 and a net realizable value (NRV) of R100 000.
The company makes use of a Trading Account in General Ledger in order to calculate the gross profit.

REQUIRED:

1.1 Prepare the following accounts in the General Ledger of Cakes and Cashews for the year ended 31 December 2021. Show all your workings. 1.1.1 Trading Account
1.1.2 Profit and Loss Account
1.2 Prepare the Statement of Financial Position for Cakes and Cashews as of 31 December 2021.

QUESTION 2

Got That Yummy Ltd is a fast-food restaurant franchise that has been operating successfully in South Africa for the past 10 years. They sell a number of items from their menus such as burgers, pizzas, and sandwiches for both sit-down customers and takeaway deliveries.

One of Got That Yummy Ltd’s pizza items, the “Topping Me Up’’ pizza, has become internationally popular after a celebrity who ate the pizza tweeted about it on Twitter. The tweet subsequently boosted the company’s sales and profits and continues to do so. Only Got That Yummy Ltd has the secret recipe for this pizza. As a result, the owner of Got That Yummy Ltd is of the opinion that an amount of R1.5 million for goodwill relating to the “Topping Me Up’’pizza should be recognized as an asset in the annual financial statements of the company for the year ended 31 December 2021

REQUIRED:

Discuss whether or not the owner of Got That Yummy Ltd can recognize the R1.5 million as an asset (goodwill) in the annual financial statements. Your answer should include full definitions and recognition criteria as outlined by IFRS in the conceptual framework.

QUESTION 3

Alex is operating a business that buys and sells sunglasses. The following information relates to the month ended 31 January 2022:

Alex uses the first-in-first-out (FIFO) cost allocation method and aperiodic method to record his inventory. On 31 January 2022, in order to calculate the cost of sales for the period, a stock count was performed and it indicated that there were 98 sunglasses on hand.
REQUIRED:
3.1) Prepare ALL the general journal entries required to account for the sunglass transactions for the month of January 2022 in Alex’s accounting records, including the general journal entries are required to calculate the cost of sales for the period. Include dates and accounts, but narrations can be ignored.
3.2) Until now, Alex has sourced all his sunglasses locally from nearby his business. From the next period, however, Alex will be importing trendy sunglasses from Italy. This will result in him incurring import duties and transport costs in order to bring the stock to his business’s location. Advise Alex on what to do regarding these costs relating to the purchase of stock i.e. how would he account for it in the books of his periodic recording system.

QUESTION 4

PART A

Consider the following situations:

Situation 1

Holiday Out is a company operating in the travel and tours industry. Due to the Covid pandemic placing many restrictions on travel, Holiday Out suffered immense losses during the current year ended 31 March 2021. They decided to discontinue their operations with effect from 1 May 2021, however, Holiday Out’s financial statements for the year ended 31 March 2021 were prepared using the same basis as last year when they were a profitable company.

Situation 2

The financial results of Fresh Farmers fluctuate erratically from year to year. The directors of Fresh Farmers, therefore, decided to create certain provisions in years of higher profits and adjust those provisions in the years of lesser profits to present profits at a consistent level from year to year.

PART B

Consider the following general concepts relating to financial information:

(a) Use of the same cost formula for stock valuation which was used in the previous period.

(b) Users of the financial statements need the most up-to-date information as soon as possible after the financial year-end so that the information is current and relevant for the economic decisions made by the users.

(c) Information that assists in estimating net future cash flows and when in the future the cash flows are likely to be produced. It can influence the decisions made by users.

(d) The cost of small calculators may be charged to expenses instead of capitalized.

REQUIRED:

4.1) Identify and explain the accounting concepts/principles relevant to each of the above two situations mentioned in PART A.
State whether you agree with how the financial statements are presented in each of the two situations mentioned in PART A and if not, suggest what adjustment should be made to the financial statements.
4.3) Identify what qualitative characteristic/accounting concept is being referred to in each of the letters (a) to (d) in PART B.