SAIPA PROFESSIONAL EVALUATION SECTION A MULTIPLE CHOICE QUESTIONS FINANCIAL ACCOUNTING QUESTION 1:

14 MARCH 2009

PETROS ENTERPRISES CC, an entity engaged in the wholesale and distribution of consumer products to various forms of outlets in the loweconomic segments, maintains its accounting records using the cash basis. All cash received during the financial period was recorded as sales. The records forwarded to the accounting officer include a schedule of debtors balances for the financial period that ended. The total of the debtors list at 28 February 2007 and 29 February 2008 amounted to R246 789 and R398 127 respectively. VAT is charged at a rate of 14%. Including the debtors balances in the sales figure for the financial period ended 29 February 2008 will: (a) increase the sales by R398 127 (b) increase the sales by R349 234 (c) increase the sales by R151 338 (d) increase the sales by R132 753 (e) increase the sales by R132 753 if all the debtors settled their accounts QUESTION 2: TIPOGRAPH CC, an entity engaged in the printing and design of marketing material, concluded a rental agreement for premises in an industrial area. The lease agreement stipulates an increment of 10% per annum over the 8year lease period. Rental payments are payable quarterly in advance. The last payment of R180 000 [excluding VAT] was made on 01 January 2008. The accounting officer states that the rental payments, including the increment should be spread equally over the lease period. The rental payments for the financial period ending 29 February 2008 amount to R540 000 and the amount to be written off in terms of the equalization process was calculated as R612 000. The entry recorded to draft the financial statements for 29 February 2008 will be: (a) rental prepaid of R60 000 (b) rental accrued of R72 000 (c) net rental accrued of R12 000 (d) rental prepaid of R60 000 and rental accrued of R72 000 (e) none of the above

QUESTION 3: During the financial period ended 29 February 2008 one of the major customers of MAGIC CARPET CC, an entity involved in the distribution and installation of imported Middle-Eastern carpets in residential and commercial properties, faced financial difficulties and was placed under administration. The customer had a balance of R458 765 and it was estimated that if the customer went into liquidation then the creditors would only receive 20c to R1. MAGIC CARPET CC is confident that, if the customer can bear up against its financial difficulties, the customer will be able to continue operating and meeting its financial obligations as normal. What should the accounting officer do when finalising the financial statements for the period ended 29 February 2008: (a) include the full amount in the accounts receivable figure (b) make a provision for doubtful debts of R367 012 (c) write off R367 012 as irrecoverable [bad debts] (d) cancel the full amount against the sales (e) none of the above QUESTION 4: The accounting officer stated that providing for deferred tax for close corporations and SMMEs is a waste of time as it only complicates the financial statements. Which of the following reasons provided by the accounting officer for not accounting for deferred tax is correct: (a) deferred tax only applies for companies, especially listed companies (b) financial statements are not prepared for tax purposes (c) there are no differences between the accounting and tax profits (d) deferred tax does not affect the cash flow statement (e) (d) and (e)

NB: Use the following information to answer QUESTIONS 5 - 8: The accountant classified an office building as investment property in the statement of financial position [balance sheet]. The accountant stated that this building was incorrectly classified as part of property, plant and equipment in previous financial statements. QUESTION 5: The re-classification of the office building should be treated as: (a) a change in the accounting policy of the entity (b) correction of a fundamental error (c) a change in estimate (d) correction due to misinterpretation of the Accounting Standards (e) re-classification of a balance sheet item

QUESTION 6: The office building can only be classified as an investment property under the following: (a) it is not used in the ordinary revenue generating activities (b) it is used for administrative purposes only (c) it is used by the entity to save rental expenses (d) it is acquired as a long-term investment (e) a major part of the building is used to generate rental income QUESTION 7: The entity incurred an amount of R143 576 to paint its building to reflect the new colour scheme of its business image. Which of the following statements by the accountant is correct? This expense should be: (a) capitalised and amortised over the remaining period of the lease agreement (b) capitalised as an intangible asset (c) written off as repairs and maintenance (d) classified as part of the rental expenses (e) request a refund from the lessor QUESTION 8: At the financial year-end 29 February 2008 the accounting officer discovered that the entity owed R81 400 to a maintenance company for the servicing and repair of its machinery, while the maintenance company was liable to pay the entity an amount of R27 000 for damages to the factory floors. The accounting officer stated that the above transactions should be included in the statement of financial position [balance sheet] as: (a) disclose the net amount as part of the accounts payable figure (b) disclose the amounts separately under debtors and creditors respectively (c) only in the amount due to the maintenance company (d) write off the claim from the maintenance company against the expense (e) defer recording the transactions until the matter is settled

TAXATION QUESTION 9: A couple was married out of community of property until the death of the wife in November 2005. They had both purchased the same amount of the same listed shares in January 2002 for R1m each (R2m in total). Upon the death of

the wife (November 2005) the shares had a market value of R1.8m respectively (R3.6m in total). The wife had bequeathed all of her shares to the husband. In September 2008, the husband sold all the shares for R6m. The base cost of the shares, for the purposes of determining the husbands capital gain is: (a) (b) (c) (d) (e) R1m R2m R2.8m R3.6m R4.0m

QUESTION 10: An employee is paid a cash salary of R10 000 per month plus a travel allowance of R5 000 per month. The employee is also a member of the employers pension fund in terms of which R1 000 per month is deducted from the employees salary. The net amount of remuneration to be taken into account for the purposes of determining the monthly employees tax to be deducted by the employer is: (a) R15 000 (b) R14 250 (c) R13 000 (d) R12 250 (e) R12 000 QUESTION 11: If a taxpayer previously acquired and held an asset as a capital investment and then subsequently (during the course of the current year of assessment) changes his/her intention and decides to deal with that asset as trading stock, then the normal tax implications of the change-of-intention are as follows : (a) Deemed disposal of the asset (for capital gains purposes) (b) Deemed opening stock (trading stock) deduction (c) Deemed trading stock recoupment under s22(8) of the Income Tax Act (d) (a) and (b) above (e) (a), (b) and (c) above

QUESTION 12: If a taxpayer donates an asset as a donatio mortis causa (i.e. donation in contemplation of death) and then does in fact die (i.e. so that the asset is indeed transferred to the donee) then the Donations Tax and Estate Duty implications for the (deceased) donor, in respect of the donated asset, are: (a) Exempt from Donations Tax and also excluded from the net value of the Estate (b) Subject to Donations Tax, but excluded from the net value of the estate (c) Exempt from donations tax but included in the net value of the estate (d) Subject to Donations Tax and also included in the net value of the estate (e) None of the above QUESTION 13: If a natural person taxpayer disposes of his/her primary residence and realises a capital gain of R2m (before deducting the so-called primary residence exclusion), the full primary residence exclusion can NOT be taken (i.e. must be apportioned) if: (a) The taxpayer was a 100%-owner of the property, but 20% (R400 000) of the capital gain is attributable to a portion of the land that exceeds 2ha (b) The taxpayer was a 100%-owner of the property, but 20% (R400 000) of the capital gain is attributable to a portion of the property that was used for trade purposes (c) The taxpayer was a 100%-owner of the property, but 20% (R400 000) of the capital gain is attributable to an ownership-period when the property was not the primary residence (d) The taxpayer was only an 80%-owner of the property, i.e. the full gain is R2.5m and the taxpayers 80% portion is R2m (e) All of the above QUESTION 14: If a taxpayer is dissatisfied with a tax assessment, then the correct sequence of appeals by the taxpayer in order to dispute the assessment, will be as follows (assuming that the taxpayer is unsuccessful at each stage and thus

forced to go to the next stage in the sequence in order to continue the dispute) : (a) Objection, Appeal to Tax Court, Appeal to High Court, Appeal to Appeals Board (b) Appeal to Appeals Board, Objection, Appeal to Tax Court, Appeal to High Court (c) Appeal to Tax Court, Objection, Appeal to Appeals Board, Appeal to High Court (d) Appeal to High Court, Appeal to Tax Court, Appeal to Appeals Board, Objection (e) Objection, Appeal to Appeals Board, Appeal to Tax Court, Appeal to High Court QUESTION 15: On 1 March 2007 a SA-resident father donates R100 000 cash to a family trust that has two vested-interest beneficiaries, namely his two children aged respectively fourteen years (60% vested interest) and nineteen years (40% vested interest) both of whom are SA-resident. By 29 February 2008 the trust has earned interest of R12 000 on the R100 000 deposit. The interest amount to be included in the gross income of the FATHER is: (a) R Nil (b) R4 000 (c) R5 000 (d) R6 000 (e) R10 000 QUESTION 16: If an employee receives a travel allowance in respect of his/her own car and is also given the free use of an employer-owned (company) car, the employee will be taxed on: (a) The travel allowance plus 4% (per month) of the value of the company car (b) The travel allowance plus 2,5% (per month) of the value of the company car (c) The travel allowance only (d) 4% (per month) of the value of the company car (and not on the travel allowance)

(e) 2,5% (per month) of the value of the company car (and not on the travel allowance)

CORPORATE LAW QUESTION 17: Consider the following statements: (1) A Professional Accountant (SA) may perform the duties of Accounting Officer to a Non-profit Organisation (NPO) registered with the Director of Non-profit Organisations (2) The Annual Financial Statements of the NPO need not comply with Generally Accepted Accounting Standards (3) The Accounting Officer appointed to an NPO must review the Accounting Policies of the NPO for appropriateness of such policies (4) The Accounting Officer appointed to an NPO must check that presented Accounting Policies of the NPO that are presented are applied in the preparation of the Annual Financial Statements (5) It is not advisable to prepare a Letter of Engagement for NPOs Which of the following is true? (a) All the statements are correct (b) Statements 1, 3 and 4 are correct (c) Statements 1, 2 and 5 are correct (d) Only statements 2 and 5 are correct (e) None of the statements are correct QUESTION 18: Section 44 of the Close Corporations Act provides that the members of a CC may enter into a written Association Agreement in order to regulate the internal relations between themselves and/or the CC. Which items are to be provided for in such an Association Agreement? 1. The powers of members to represent the CC in carrying on its business 2. Dispute resolution between members with regard to matters concerning the business 3. Participation of the members, or some of them, in the carrying on of the business 4. Procedures to be followed in the event of members wanting to dispose of their members interest 5. Procedures to be followed in circumstances where a member becomes permanently incapable of performing his/her part in the carrying on of the business (a) Items 2 and 3 only (b) Items 1, 2 and 3 (c) Items 1, 2, 3 and 5

(d) All of the above (e) None of the above

QUESTION 19: The following are possible contraventions of the Close Corporations Act, that the Accounting Officer must include in his/her report to the CC: 1. 2. 3. 4. 5. The Annual Financial Statements have not been prepared within 9 months of the financial year end Members contributions were not paid or delivered within 90 days of incorporation The Accounting Officers Report has not been prepared within 3 months after the completion of the Annual Financial Statements The liabilities of the close corporation exceeds its assets fairly valued Persons who are disqualified from membership have been included in the management of the CC (a) Items 1, 2 and 4 (b) Items 2, 3 and 5 (c) Item 2 only (d) Item 4 only (e) Item 1 and 5 QUESTION 20: When reviewing the payments journal of Bhola Enterprises CC the accountant discovered that fixed monthly payments were made to its members. During discussion the members confirmed that the monthly payments were regarded as salaries but treated as drawings from the business. The accountant was concerned about the tax implications for the business entity and its members, and recommended that: (a) the members make provisional tax payments in respect of the withdrawals (b) the entity deduct PAYE on the monthly withdrawals (c) the entity pay the taxes on behalf of the members when completing its business tax return (d) the amounts should be treated as withdrawals in respect of their share of the profits of the business entity and so result in no tax effect (e) the withdrawals should be treated as loans which bear no tax

QUESTION 21: You have accepted the appointment as Accounting Officer to Make em Clever Primary School in terms of section 43(2) of the South African Schools

Act, Act 84 of 1996. Which of the following items does not form part of your duty to report: (a) Payments were made to employees of the State, re-imbursing such employees for expenses incurred by them (b) Payments were made to employees of the State for additional services rendered by them (c) The school budget was not tabled or approved (d) Significant deviations from the approved budget was recorded (e) The schools Annual Financial Statements conform to Generally Accepted Accounting Practice

QUESTION 22: Mark Shuttle renders an exclusive designer service to Worthmark Ltd through Space Designs CC, of which Mark Shuttle is the only member and employee. Worthmark Ltd pays Space Designs CC on the 12th of every month, and for the year ended 29 February 2008 Space Designs CC received R275 000 from Worthmark Ltd. Space Designs CC had no other income. Worthmark Ltd is obliged to withhold PAYE from Space Designs CC at: (a) (b) (c) (d) (e) 0% because Space Designs CC is a taxpayer in its own right 14% because Space Designs CC is not a VAT vendor 25% because Mark Shuttle is not a standard employee, as defined by the Income Tax Act 29% because all close corporations pay per corporate Income Tax rates 34% because Space Designs CC is a personal service company

QUESTION 23: As Accounting Officer to a close corporation, you have a duty to report to the Registrar of Close Corporations if: (1) (2) (3) (4) (5) (6) Changes to the Founding Statement of the CC had not been registered The Balance Sheet reflects that the CC has no cash or cash equivalents The Annual Financial Statements incorrectly indicate that the assets of the CC exceeds its liabilities The Annual Financial Statements indicate that the liabilities of the CC exceeds its assets, fairly valued The CC has made an accumulated loss for 5 years in a row The CC is not likely to resume business operations in the foreseeable future Which of the following is true: (a) All the statements are correct (b) Only statements 2 and 5 are correct

(c) Only statements 3 and 4 are correct (d) Statements 1, 3, 4 and 6 are correct (e) None of the statements is correct

QUESTION 24: PBOs or Public Benefit Organisations are registered as such by the South African Revenue Service, in terms of the Income Tax Act. Consider the following statements: (1) Every Non-profit Organisation is automatically a PBO, as defined in the Income Tax Act (2) PBOs are exempt from paying Income Tax, Skills Development Levies, Donations Tax, Estate Duty and Capital Gains Tax (3) PBOs have limited allowable trading activities (4) The Commissioner of Revenue Services may not withdraw a PBO status once granted by SARS (5) Public schools established in terms of the South African Schools Act do not qualify for PBO status (6) A voluntary association of persons which is governed by a constitution, e.g. a religious organisation, sports club or drama society, may apply for PBO-status (7) Only 50 percent of the PBOs activities need be for the benefit of persons in South Africa (a) All the statements are correct (b) Statements 2, 3, 4 and 6 are correct (c) Statements 2, 3, 5 and 6 are correct (d) Only statement 6 is correct (e) None of the statements are correct QUESTION 25: The Close Corporations Act and Companies Act provide for the lodgement of an annual return. Such annual returns: (a) (b) (c) (d) (e) attract a fee from CIPRO based on the declared turnover must only be lodged by Auditors or Accounting Officers can be lodged within 6 months after the entitys anniversary date without attracting penalties are not the responsibility of the directors of the company or members of the close corporation all of the above are true

AUDITING QUESTION 26: The liquidity of business entities is significantly affected by the level and value of the inventory included in the current assets section of the statement of financial position [balance sheet]. Many accounting officers are therefore concerned about the value of inventory given by the members/management of close corporations and will often perform the following audit to verify the accuracy of the inventory value at the balance sheet date: (a) check that the gross profit margin is consistent with previous years (b) accept the valuation of inventory provided by management (c) perform a physical inventory count (d) check the accuracy of the valuation of the inventory on hand (e) (c) and (d) QUESTION 27: When finalising the financial statement it is important to ensure that proper cut-off procedures were implemented. The purpose of this audit procedure is: (a) to ensure that the accrual concept is adhered to when drafting financial statements (b) to ensure the accuracy of the financial statements (c) to ensure that all transactions are recorded for the financial period ended (d) to ensure the accuracy of the bank reconciliation (e) to ensure that the profit meets the expectations of management QUESTION 28: In order to eliminate the risk of inventory losses the business entity implemented a system of internal control in its warehouse. Management was informed that the system was hi-tech and was guaranteed that the system would eliminate inventory losses. However, after the system was implemented for eight months, management discovered that inventory with a value of R150 000 was stolen from the warehouse. The reason for the inventory loss can be attributed to: (a) the inherent weaknesses of the system implemented (b) staff not being properly trained to use the system (c) staff collusion to hide the inventory losses (d) all of the above [(a) to (c)] (e) none of the above QUESTION 29: The current economic climate resulted in many business entities, especially small enterprises, defaulting in payments or being liquidated. The accounting officer informed his staff that it is important to check the value of the debtors

included in the financial statements. The recoverability of the debtors can be established at the end of the financial period by using the following audit techniques: (a) calling the debtors to enquire about their financial status and stability (b) checking the payments received from debtors after the balance sheet date (c) requesting the financial statements from debtors (d) conducting a debtors verification (e) (b) and (d) QUESTION 30: The risk of fraud is prevalent in all types of business entities. The members and management of close corporations are of the opinion that fraud should be detected by: (a) the accounting officer when drafting and finalising the financial statements (b) implementing proper systems of internal control (c) management controlling all the cash of the business (d) employing religious people (e) giving staff rewards for whistle blowing QUESTION 31: The financial statements of many close corporations include loans to/from members. Banks and long-term creditors often view this as a risk to the business entity and therefore expect the accounting officer to perform audits to verify the loans to members. The purpose of performing audit procedures to verify the loan accounts of the members is: (a) to assess the entitys (b) ability to meet its obligations to creditors (c) to verify the members interest in the business (d) to provide assurance to creditors that members also bear the risks of the entity (e) to ensure the accuracy and reliability of the values of the loans to/from members (f) to protect the members against each other

MANAGEMENT ACCOUNTING QUESTION 32: JOSTIN CC manufactures an industrial cleansing fluid using the standard costing system. The data for the production of the cleansing fluid for June included the following:

Direct materials used 21 600 kg of material VXC Cost of direct material VXC used R128 304 Direct materials price variance [material VXC] R1 296 (F) Direct materials usage variance [material VXC] R2 880 (U) 4 800 units of the cleansing fluid were manufactured during June What is the standard direct materials cost of the cleansing fluid? (a) 4,4 kg of material VXC at R5,88 per kg (b) 4,6 kg of material VXC at R5,88 per kg (c) 4,6 kg of material VXC at R6,00 per kg (d) 4,4 kg of material VXC at R6,00 per kg (e) None of the above NB: Use the following information to answer QUESTIONS 33 - 35: The following information was extracted from the monthly budgeted production records of SPORTS CC, an entity engaged in the manufacture of standardised rugby and cricket tops and shirts: Selling price per unit R275,00 Variable material cost per unit R82,50 Variable labour costs R37,20 Variable production overheads R27,90 Variable selling costs per unit R3,60 Fixed production costs R2 467 400 Fixed administrative costs R487 200 Fixed selling & distribution costs R176 500 Production capacity 300 000 units QUESTION 33: The break-even point in units for the month if the members expect a target profit of R480 000 per month is: (a) (b) (c) (d) (e) 29 169 units 28 345 units 25 921 units 24 577 units 25 000 units

QUESTION 34: The break-even point in units for the month if the members expect a target profit of R40.00 per unit is: (a) (b) (c) (d) (e) 180 562 units 118 769 units 37 364 units 24 577 units 80 000 units

QUESTION 35: For the month of September 2008 the entity produced 325 500 units. The variable costs incurred were the same as the budgeted amounts. The fixed production costs amounted to R2 750 000 and the fixed administrative costs amounted to R500 000. The fixed overheads for the month were: (a) (b) (c) (d) (e) under-absorbed by an amount of R282 600 over-absorbed by an amount of R72 871 under-absorbed by an amount of R72 871 over-absorbed by an amount of R282 600 there was no over- or under-absorbed amount

QUESTION 36: Management of TRUNCH CC is in the process of finalising their decision to invest in a new machine. Management uses the payback period as a basis of making investment decisions with a minimum payback period of 3 years. The following information was presented to management: Cost of the machinery Useful life Cash inflows Year 1 Year 2 Year 3 Years 4 5 R780 000 R1 200 000 R1 400 000 R1 500 000 R2 400 000 6 years Cash outflows R690 000 R920 000 R900 000 R870 000

The payment period for this investment is: (a) (b) (c) (d) (e) 3,5 years 5 years 4 years more than 5 years None of the above

QUESTION 37: Relevant costing is an important concept that is used for decision-making. The relevant costs from a management accounting perspective are defined as: (a) all the costs relating to the particular options being compared (b) only the variable costs relating to the options being compared (c) only the costs which are common to the options being compared (d) excluding all sunk costs relating to the options being compared (e) only the cost which management considered to be important

PRACTICE MANAGEMENT QUESTION 38: The manager of Malcolm & Associates [Professional Accountants (SA)] completed discussions with a new client to act as Accounting Officer for the first time for the year ended 29 February 2008. The manager was requested to complete an engagement letter with the client. The purpose of the engagement letter is to: (a) include the client on the database of the firm (b) confirm the appointment of the firm as Accounting Officer for the client (c) outline the scope of work that the firm is required to render (d) serve a written confirmation allowing the firm to gain access to the clients information from the bank and SARS (e) both (b) and (c) QUESTION 39: The Accounting Officers report is an essential and important component of a set of financial statements of a close corporation. The purpose of the report is to: (a) free the accounting officer from all liabilities when the entity is sued by creditors (b) indicate that the accounting officer has approved the financial statements (c) report on the fair presentation of the financial statements (d) indicate that the accounting officer complied with the auditing standards (e) maintain its registration with SAIPA QUESTION 40: When taking on a client from another accounting officer it is essential that the newly appointed accounting officer does the following: (a) collect all the working papers and records from the previous accounting officer (b) check the accuracy and reliability of the last set of financial statements (c) enquire from the previous accounting officer if there are any reasons why the client should not be accepted (d) commence with the accounting work in order to secure the clients work (d) (b) and (c)

QUESTION 41: Smidt Accounting Services renders bookkeeping and tax services to SMEs in the northern suburbs of the Western Cape. The following is a summary of the salaries paid for June 2008 categorised into salary ranges per employee. Learner allowance is R3 000 per learner. Employees Under R5 000 (including 4 learners) Between R5 000 and R12 478 Over R12 478 8 4 3 Gross R32 000 R39 800 R46 000 Net R28 840 R26 530 R30 240

In terms of the Unemployment Insurance Fund [UIF] regulations 1% of the salaries is payable to SARS. The amount that should be paid to SARS amounted to: (a) R922,34 (b) R1 042,34 (c) R1 944,68 (d) R2 184,68 (e) none of the above QUESTION 42: A Management Letter is best described as: (a) A letter from management to staff pertaining to the entitys performance (b) A letter from management to the independent auditors pertaining to the entitys performance (c) A letter to management from the directors/members regarding their performance (d) A letter from the shareholders to the directors regarding their performance (e) None of the above QUESTION 43: On 1 February 2008, Manto Lekota entered a 3-year learnership agreement with Manuel Ramos & Ass Professional Accountants (SA) for the Professional Accountant: Public Practice learnership which is registered at SAQA (South African Qualifications Authority). Which of the following statements is correct? (1) The learnership agreement need not be registered with FASSET (2) Manuel Ramos & Ass must deduct UIF contributions from Manto Lekota (3) Manto Lekota must maintain a Portfolio of Evidence including the updating of the SAIPA log book (4) Manuel Ramos & Ass need not pay a skills development levy on Manto Lekotas remuneration

(5)

Manuel Ramos & Ass is not entitled to a tax rebate for the financial year ended 29 February 2008. (a) All the statements are correct (b) Statements 3 and 4 are correct (c) Statements 2, 3 and 4 are correct (d) Only statement 4 is correct (e) None of the statements is correct

QUESTION 44: Tsabalala Pisang Trading CC asked you to resign as their Accounting Officer and subsequently appointed B Hogan & Co (Professional Accountants (SA)) as their new Accounting Officer. You may: (a) (b) (c) (d) (e) Ignore B Hogan & Cos letter of professional courtesy Refuse to resign as Tsabalala Pisang has not paid your fees Shred your working paper file of Tsabalala Pisang Refuse to hand over any of Tsabalala Pisangs books and vouchers Not do any of the above

QUESTION 45: In order to remain a Member in Good Standing of the South African Institute of Professional Accountants, you (a) (b) (c) (d) (e) Must pay your annual membership subscription, which amount shall be determined by the SAIPA Board Must ensure that you have logged or recorded your Continuous Professional Education hours Need not learn anything anymore, as this exam is done Need not pay your Professional Indemnity Insurance, as you are a new member Have to do (a) and (b) above

CASE STUDIES: QUESTION 1: [35] PART A On 01 June 2007 ZUMBALU CC, a company engaged in road works, entered into a lease agreement with a financial institution, Capital Bank, which included the following: (a) Machinery which cost R1 429 000 [including VAT @ 14%] will be purchased by the lessor, Capital Bank; (b) Six instalments of R380 000 [including VAT] will be payable annually in arrears on 31 May; (c) The effective interest rate is 15,238% per annum; (d) After expiry of the six years, the lessee will purchase the machinery at a nominal amount. The fair market value of the machinery on 31 May 2013 is estimated at R220 000 [excluding VAT]; (e) Zumbalu CC is responsible for all ownership costs; and (f) The lessee has the right to cancel the contract if the outstanding capital balance as determined by the lessor is paid. The following amortisation schedule was prepared by Capital Bank and forms part of the lease agreement concluded on 01 June 2007:

Date 01 June 2007 31 May 2008 31 May 2009 31 May 2010 31 May 2011 31 May 2012 31 May 2013

Instalment Interest Capital 380000 380000 380000 380000 380000 380000 217751 193028 164537 131704 93869 50268 162249 186972 215463 248296 286131 329889

Capital balance 1429000 1266751 1079779 864315 616020 329889 0

Additional information: On conclusion of the agreement the directors of Zumbalu CC had already decided to purchase the machinery on expiry of the lease agreement and approved it in a board resolution. No residual value is placed on the machinery. The machinery has an estimated useful life of eight years. It was ready for use and was taken into use on 01 June 2007 by Zumbalu CC. The lease instalment of the current year was charged to a Lease instalment account. This amount was accidentally deducted in the determination of the Profit before finance costs of 28 February 2008.

The accounting office stated that this lease agreement should be classified and recognised in the financial statements as a finance lease agreement. REQUIRED: (a) Assume that the lease agreement was classified as a finance lease by Zumbalu CC. Record all the transactions relating to the lease agreement [excluding deferred tax] to recognise the agreement as a finance lease in the general journal of Zumbalu CC for the financial period ended 28 February 2008. (9 marks) (b) Disclose only the following notes to the financial statements of Zumbalu CC for the financial period ended 29 February 2008 in compliance with the Accounting Standards: (i) Accounting policy note relating to the machinery; (ii) Long-term liability. NB: No comparative figures are required. (9 marks) PART B The following statement of financial performance [income statement] was drafted from the accounting records of THOBIN CC, an entity engaged in the retailing of clothing products, for the financial period ended 29 February 2008: Revenue Less: Cost of sales Opening inventory Purchases Closing inventory Gross profit Other Income Gross income Expenses Accounting fees Bank charges Consumable stores Depreciation Electricity and water Fines Insurance Leasing charges Members' salaries Rent paid 995487 497863 6540 498523 505063 7200 497624 245 497869 386139 3500 2756 1892 89450 21759 900 13458 28540 125000 26400

Salaries and wages Stationery Telephone and faxes Profit before taxation Taxation expenses Profit after taxation

68210 854 3420 111730 24857 86873

Additional information: 1. No capital expenditure was incurred for the financial period ended 29 February 2008. 2. The total VAT payments as per the VAT 201 forms for the year ended 29 February 2008 amounted to R49 175,68. REQUIRED:
(a)

Prepare a VAT reconciliation schedule that should be included in the file for the financial period ended 29 February 2008. (12 marks) Advise the client what should be done, if anything, in respect of the difference, if any, that was noted in the VAT reconciliation (5 marks)

(b)

QUESTION 2: [22] PART A: Mr Latte Tyoode is a SA-resident individual who owns a manufacturing business in his own name. His annual turnover exceeds R20m, and his capital gains for the 2008 tax year exceed the annual exclusion amount, before taking into account the transactions described below. As regards the year of assessment ended 29 February 2008, Mr Tyoode decided to elect whatever roll-over provisions are available in the Income Tax Act in order to defer as far as possible the normal tax liabilities arising from the disposal of Machine #1. Machine #1 (also a manufacturing machine) was originally acquired for R1m on 1 January 2007 and put into operation immediately. Machine #1 was sold for R1,2m (excluding VAT) in December 2007. The proceeds from the sale of Machine #1 were used as follows: R700 000 to acquire Machine #2 (a second-hand manufacturing machine) on 1 January 2008 which was put into use immediately.

The balance of R500 000 was used towards the Machine #3 acquisition which was acquired on 1 February 2008 at a cost of R800 000 (excluding VAT). On 1 April 2008 he put the new manufacturing machine (Machine #3) into use.

Machine #3 could not be put into use immediately in February 2008 because a supporting platform had to be purpose-built for Machine #3. The platform was eventually completed during March 2008 at a total cost of R100 000. REQUIRED: Calculate, with clear and detailed workings and reasons, the impact of all of the above on Mr Latte Tyoodes taxable income for his year of assessment ended 28 February 2009 (11 marks)

PART B: You are a consulting accountant and one of your clients (Knock-Hear (Pty) Ltd) has requested your advice on certain VAT-related enquiries. (KnockHears full-time accountant resigned a while ago and they have not yet been able to replace him so they are a little uncertain about the VAT implications of a few transactions.) Knock-Hears main business is trading in cellular telephone components. The company has requested your advice in respect of the following two (2) matters in respect of the companys financial year ended 30 September 2008 : Directors car A car used by a Knock-Hear director was sold to that director during the year. The car was originally acquired by the company for R364 800 (R320 000 plus VAT of R44 800) on 1 January 2007, and used by the director immediately from that date. On 1 July 2008, the car had a market value of R285 000 (R250 000 plus VAT of R35 000), and a depreciated accounting book value of R182 400. The car was sold to the director for R207 936 on that date. For the 10-month period from 1 October 2007 to 31 July 2008, the company had recorded to following journal entry in respect of the directors private use of the car : Employee Benefits [R364 800 x 0,3% x 14/114] 134,40 Output VAT liability 134,40 (This entry was repeated every month for the 10-month period.) Upon the sale of the car to the director on 1 August 2008, the following entry was made:

Loan due from Director Output VAT liability Motor vehicles Purchase of office block

207 936,00 25 536,00 182 400,00

On 1 March 2008, Knock-Hear acquired (for R8,5m) a building as a rentproducing investment. The building was originally used (by the seller) 75% for commercial rental purposes and 25% for residential rent. Upon acquisition, Knock-Hear immediately started using 80% of the building to earn commercial rental (i.e. 20% for residential rental). However, the acquisition was fully zerorated, so the purchase price of R8,5m paid by Knock-Hear contained no VAT. REQUIRED: Comment on whether any adjustments are required to the VAT treatment of any of the above-mentioned transactions. Journal entries are not specifically required, but may be used as part of your answer. Clear and detailed workings and reasons must be provided. (11 marks)

QUESTION 3: [18] PART A The accounting officer of MTHABA CC, an entity involved in importing domestic and industrial goods, discovered that the value of inventory has increased significantly but that the creditors reduced by more than 35% for the financial period ended 29 February 2008. The accounting officer was concerned that the creditors might be understated and therefore requested the audit staff to perform audit work on the creditors balances at the reporting period date. REQUIRED: (a) List the audit procedures that that you would follow to ensure that all creditors have been accounted for at 29 February 2008. (10 marks) (b) Discuss the purpose of performing creditors reconciliations as part of the audit procedures conducted when drafting the financial statements. (2 marks) PART B Management discovered that fraud was committed in the debtors department using the following methods: credit notes were issued for cash received debtors accounts were written-off to cover-up for the cash received

Management requested the accounting officer to design a system that will minimise the risk of fraud being committed in the debtors department through the methods mentioned above. REQUIRED: List the internal control procedures that should be recommended to address the risks discovered by management. (6 marks)

QUESTION 4: [15] You have been requested by the management of KHULA CC, an entity engaged in the construction industry, to advise them on which type of plant and equipment they should purchase based on the best return and contribution to the growth of the business. The following information was presented to you by management: Plant DCE Cost of plant and equipment Useful life Net cash flow per year: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 8 Disposal value: Year 8 R1,75 million 8 years R160 000 R450 000 R560 000 R730 000 R750 000 R720 000 R280 000 Plant 345 R1 million 5 years R130 000 R380 000 R510 000 R580 000 R600 000

R90 000

The entity depreciates is plant and equipment on a straight-line basis over its estimated useful life to a nil residual value. SARS allows a wear and tear allowance in respect of the plant and equipment at a rate of 25% per annum on cost. The tax rate is estimated to remain at 30%. Management considers a fair return to be 20%. REQUIRED: Advise management which machinery should be purchased using the net present value. ` (15 marks)