ACCOUNTING 3AB

CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accounting
CAMPUSES APK and SWC
MODULE NAME Accounting 3AB
MODULE CODE ADIA001, S3PACQ1, ACC3AB0, REK3AB0, REK3A01
SEMESTER First Semester
ASSESSMENT OPPORTUNITY, Continuous Evaluation Assessment
MONTH AND YEAR May 2020

ASSESSMENT DATE 18 May 2020

ASSESSORS Mr. G Barnes
Mrs. B Madikizela
Mrs. Z Patel
Ms T.P. Shavhani
MODERATOR Mr. M van Wyk
DURATION 24 Hours TOTAL MARKS 100
NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 11

INSTRUCTIONS____________________________________________________________________
 This is an open-book assignment/assessment and consists of 4 questions and a total of 10 pages.
 Read the questions carefully and answer only what is required.
 Your answer needs to be completed on the ANSWER SHEET provided to you
 The ANSWER SHEET FORMAT should be FOLLOWED at all times. DO NOT CHANGE THIS
FORMAT AND LAYOUT UNDER ANY CIRCUMSTANCES!!!!!!!!
 Your answer should be typed out on the answer sheet with the following guidelines:
o Font type – Arial
o Font size – 11
o No pictures, symbols, shapes, screenshots, charts or smart art is to be inserted unless
otherwise indicated
o ALL sections on the ANSWER SHEET should be TYPED OUT.
o DO NOT use a tick mark (✔) as a bullet point when answering the required
o The word limit should be seen as a guideline and SHOULD NOT be exceeded as you will be
penalised. It should also not be seen as a benchmark but rather as a maximum number of
words allowed.
 Ensure that you submit your assessment timeously on 19 May 2020 at or before 9am
 Ensure that you submit on BOTH links, Assessment submission link AND Turnitin using your
student number as the file name
_________________________________________________________________________________
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-2-
QUESTION 1 (30 MARKS)

You are employed as a junior accountant (J Accountant) at a medium sized consulting firm: Ingwe Inc.
During the week, you receive the following email directly from the financial director at a manufacturing
client,Awesome Eggs (Pty) Ltd:

Subject: New packaging machine

Hi J Accountant,

We are in the process of acquiring a new packaging machine for our Bloemfontein operation
at the beginning of our next financial year (1 July 2020). We haven’t yet decided if we’re going
to lease the machine or buy it outright. If we lease it for three years, we will pay 3 annual
instalments of R688 362 in arrears at an interest rate of 6%. If we simply buy the machine
outright, this will cost us R1 840 000 (Including Vat) and we expect the useful life of the asset
to be 5 years. In the past we have always bought our machines outright, but given the tough
economic times, I’m wondering if this is still the right approach. What are your thoughts on
the matter?

Further, I believe there is a new IFRS accounting standard out for leases? A colleague of
mine explained that, should we decide to lease the asset above, we can simply expense the
lease payments over the lease term on the straight line method? Is this correct and if not,
how should I account for the transaction?

Looking forward to your response,

Regards
FD Awesome Eggs

REQUIRED:

Draft an email response to the FD of Awesome eggs in which you address ALL of the following:

a) Motivate a recommendation to either lease or buy the packaging machine. (10)

Please note: - Your typed solution SHOULD NOT exceed 500 words. Refer to the instructions
regarding word limits
- You DO NOT have to use the 5 step theory approach

b) Respond to the client’s query regarding the accounting treatment should they decide to lease the
machine. (5)
Please note: Your response should address initial recognition and subsequent measurement,
Your typed solution SHOULD NOT exceed 200 words. Refer to the instructions
regarding word limits and you DO NOT have to use the 5 step theory approach

c) Prepare the journals relating to the lease (including deferred tax) for the period ended 30 June 2021,
assuming the client decides to lease the packaging machine. Assume that VAT input can be claimed
at inception of the lease. Remember to use the template on the answer sheet provided. (15)
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-3–
QUESTION 2 (25 MARKS)

In 2009, Pontauk Energy (‘Pontauk’) was appointed by the City of Johannesburg (CoJ) to develop and
operate a plant that will convert its landfill gas to electricity. Pontauk will transfer the plant to the
municipality after twenty years, which is the anticipated lifespan of the plant. Pontauk was tasked to
finance the investment costs as a means of avoiding the burden on the municipal budget. Pontauk has
a 31 March year end.

The plant is an electric power generation facility with a capacity of 18.6 megawatts. The cost of
developing the plant is R250 000 000 (including gas extraction and electricity generation). There are
two phases to the construction of the plant: 1) the construction phase of wells and piping system and 2)
the construction phase of generating plant. On 14 September 2018 Pontauk obtained a foreign loan
from UniCredit Group, a bank in Milan, Italy. The loan of €4 635 000 was to cover the first phase of
construction and was received on 1 October 2018 in Pontauk’s bank account. The capital is repayable
on 30 September 2023, while interest rate on the loan is payable in arrears at 10% per annum. The
interest rate on surplus funds is 6%.

The first phase of construction commenced in January 2020 and by this date various activities, such as
environmental impact assessment, approval of waste licenses and procurement of generators,
connections and switch gear had begun since 1 October 2019. The estimated duration of phase 1 would
be twenty-four months from January 2020. Payments related to construction would be as follows:
 R40 000 000 on 01 October 2019
 R30 000 000 on 01 April 2020
 R10 400 000 on 01 February 2021

The applicable exchange rates are as follows:

1EURO = R
31 Mar 2018 14.608
14 Sep 2018 17.375
30 Sep 2018 16.466
01 Oct 2018 16.430
31 Mar 2019 16.264
30 Sep 2019 16.545
01 Oct 2019 16.792
31 Mar 2020 19.603
01 Apr 2020 19.818

Additional information
1. The average exchange rate to translate the finance charges must be the average rate for 31
March 2018 to 31 March 2019 and 31 March 2019 to 31 March 2020 respectively.
2. The functional currency of Pontauk Energy is South African Rand.
3. Ignore any tax implications.
4. Round off the exchange rate to two decimal points.
5. Round off amounts to the nearest rand.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-4–
QUESTION 2 (CONTINUED) (25 MARKS)

REQUIRED:

a) Disclose Long-term borrowings and interest expense as it would appear in the notes (excluding
accounting policy notes) to the financial statements of Pontauk Energy for the reporting period ended
31 March 2020. (15)
Please note: - Remember to use the template provided in the answer sheet and
- Your solution SHOULD NOT exceed the 2 pages that have been provided.
- Marks will be awarded as follows:
• Calculation of the amounts for the applicable elements (10 Marks)
• Presentation and description of the applicable elements (5 Marks)

b) On 23 March 2020, President Cyril Ramaphosa announced that South Africa will enter a nationwide
lockdown for 21 days from midnight on Thursday, 26 March. The lockdown will then end on 16 April.
(https://mybroadband.co.za/news/government/344121-21-day-nationwide-lockdown-for-south-africa.html)

This announcement followed the declaration on 30 January 2020 by the World Health Organization
(WHO) that the outbreak was a Public Health Emergency of International Concern.

Discuss, using the 5 step approach to answering theory questions and with reference to IAS
23: Borrowing Costs, whether management should consider the impact of events related to COVID-
19 on the annual financial statements. Your discussion must focus only on suspension of the
capitalization of borrowing costs during the nationwide lockdown period. (10)

Please note: Your typed solution SHOULD NOT exceed 500 words including the headings of the
5 step theory approach. Refer to the instructions regarding word limits
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-5-
QUESTION 3 (35 MARKS)

EcoAir is an airline company that was incorporated and registered in South Africa in 2012. The company
has a reporting period ended 31 March 2020. The airline had initially begun with a few local flights but
was soon a popular choice of travel. This enabled them to expand their operations to the international
arena and have since become a popular choice of airline travel to some of the major countries around
the world.

EcoAir offers the following services for travelers:

1. A flight ticket can be purchased through the EcoAir website or app.

This allows a traveler to compare the prices of flights for the particular travel dates. Flights can either
be booked as a one-way travel ticket meaning that the travel will only be from the place of departure
to the place of arrival or a return trip meaning that a flight is booked on the date of departure and
another flight is booked from the destination back to South Africa.

Travelers have a choice of booking a flexible ticket or a set, non-refundable ticket. The flexible ticket
gives the passenger the choice to fly on particular flights on a range of days but the set, non-
refundable ticket only allows the passenger to travel on a set day at a scheduled time. Flexible
tickets, in general, are slightly more expensive than the set, non-refundable tickets.

The flight ticket only allows the booked passenger access to the flight, subject to obtaining a
boarding pass within 24-hours of the flight. The boarding pass is printed either at the check-in
counters on the day of travel or can be obtained via the online check-in function that the passenger
would have access to 24-hours prior to the scheduled flight.

Passengers are allowed one carry-on luggage weighing up to a maximum of 7kg’s with the flight
ticket purchased. Should a passenger wish to travel with additional luggage, a luggage voucher can
be purchased from the website/app as well.

2. A luggage voucher
EcoAir offers passengers on all local flights only a choice to purchase a separate luggage voucher
should the passenger wish to check-in any luggage. This luggage voucher allows the passenger to
carry a further 2kg’s as carry-on luggage and an additional 25kg’s luggage that would be checked
in.

The luggage voucher further notes that all luggage that should be checked-in can either be done at
the check-in counters on the day of travel or should a passenger have chosen to check-in their
luggage online then the luggage should be dropped off at the luggage/bag drop off counters on the
day of travel. The online check-in of luggage is not charged for additionally and therefore is included
as a service if you are possession of a luggage voucher.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-6-
QUESTION 3 (CONTINUED) (35 MARKS)

In order to ensure that there is control on the luggage that is allowed as carry-on luggage, the
luggage is weighed as passengers make their way through the safety and security check point
counters. Should the weight of the luggage exceed the 7kg’s allowed carry-on luggage with the flight
ticket and the passenger is not in possession of a luggage voucher, the passenger would be required
to purchase a voucher before being allowed through the security check points.

The above voucher is automatically granted to a passenger on an international flight once the
passenger purchases a flight ticket and cannot be redeemed in any form even if the passenger
chooses to travel lighter.

3. A meal voucher
As EcoAir tries to ensure flights are kept as affordable as possible, passengers on flights for a
duration of less than 4-hours are not automatically served a warm meal. Instead, passengers have
the option to purchase a meal voucher should they opt for the warm meal option. The meal voucher
entitles the passenger to be served a warm meal, a small snack and drinks during the course of the
flight.

Passengers on flights that are equal to and exceed the 4-hour duration would automatically qualify
for a meal voucher once they have purchased a flight ticket. These meal vouchers are not issued to
the passengers but are rather factored into the price of the ticket and cannot be redeemed in any
form.

Separate light snacks are sold on board all flights and these snacks can be purchased using cash
or credit cards during the flight.

EcoAir views all flights that have a duration of 4-hours or more as international flights and those
flights that are for a duration of less than 4-hours are deemed local flights.

4. Shuttle service transfers from the airport to hotel or home

Through surveys EcoAir has found that after a pleasant flight, passengers are sometimes stressed
on how they would get to their hotels as taxi fares from airports are generally more expensive.
Therefore, EcoAir began offering passengers aboard their flights an option of a shuttle service to
transfer them to their hotels or their homes (if they are returning to South Africa) so as to ensure a
pleasant and stress free flying experience.

This shuttle transfer service can only be booked on EcoAir’s website and has to be done prior to the
check-in procedure so as to ensure that EcoAir makes the necessary arrangement’s for the
passenger at the airport of arrival.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-7-
QUESTION 3 (CONTINUED) (35 MARKS)

As most airlines, EcoAir was significantly impacted with the global novel coronavirus pandemic, most
commonly known as Covid-19. EcoAir watched as many countries had closed international travel and
not long after local flights were also halted. As the uncertainty around flights and the national lockdown
being effective from 26 March 2020 in South Africa had caused much panic to passengers, EcoAir
decided to take some measures for all its international and local flights. All travel up until 22 March 2020
were completed according to the normal policies of EcoAir but the following was applicable from 23
March 2020 onwards.

Flexible tickets:
Passengers that were in possession of a flexible airline ticket for both international and local travel would
NOT be granted a refund on their tickets. Instead, they would be granted an extension of 9 months on
their ticket. Should the pandemic continue beyond the 9 months’ extension period, with travel bans still
in place, the airline would reconsider the extension period to a period of 12 months. Any luggage
vouchers, meal vouchers as well as shuttle vouchers would also be granted the extension with no
additional penalty on these.

Set, non-refundable tickets:

Under normal circumstances these tickets are non-refundable. However, as Covid-19 is unprecedented,
EcoAir’s management decided that in order to ensure they do not lose their passenger clientele by
passengers losing their flight tickets and money for a pandemic not within their control, they would make
an exception to these ticket holders. Therefore, set non-refundable ticket holders would be granted the
following options:

Option 1 Option 2
Change the nature of non-refundable ticket to a Take a refund of ticket subject to a 10%
flexible ticket and pay the difference in price penalty on tickets.
between the flexible ticket and the set non-
refundable ticket.

Any luggage vouchers, meal vouchers as well as Any luggage vouchers, meal vouchers as well
shuttle service vouchers would also be converted to as shuttle vouchers would also be refunded
a flexible voucher to be used on the date of flight as with a 10% penalty as well.
noted above. The will be no pricing difference for
these vouchers.

OR

As this was a unique decision and the company had no history in determining the options passengers
would take, management decided to allow passengers to make their choices via a survey choice form
emailed to each of the passengers. Should a choice not be made within the 1-week time-frame, the set
non-refundable tickets would be forfeited and the ticket would revert to its original form being non-
refundable. Passengers were contacted using various modes of communication (telephonic calls, sms’s,
advertisements, e-mails, social media platforms) so as to ensure that all passengers were aware of the
survey that began on 23 March 2020 and the deadline being 30 March 2020. As this process was
deemed an industry norm, a significant reversal of revenue in the future, arising from the transactions,
was not expected.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-8-
QUESTION 3 (CONTINUED) (35 MARKS)

The survey presented the following outcome for the set, non-refundable tickets

Percentage of passengers who chose

Option 1 Option 2 Or did not respond
75% 24% 1%

EcoAir noted the following expected revenue from the sale of both local and international flight tickets
with travel dates between 23 March 2020 to 31 March 2020:

Date 23/03 24/03 25/03 26/03 27/03 28/03 29/03 30/03 31/03
Type of ticket
purchased: All balances recorded below are denoted in R’ 000 and exclude VAT
Flexible 492 576 560 651 823 985 656 450 532
Set non- 386 435 411 572 728 854 539 392 405
refundable
Luggage 50 64 61 73 82 99 76 59 67
voucher
Meal Voucher 32 45 45 58 73 81 72 44 51
Shuttle Service 172 298 385 496 699 874 595 254 311
Total per dates 1 132 1 418 1 462 1 850 2 405 2 893 1 938 1 199 1 366

As the pandemic has caused havoc globally in all sectors, EcoAir approached your firm to assist with
some of the following issues relating to IFRS 15, Revenue from contracts with customers. You have
been appointed as the accounting assistant to the technical financial manager, Mrs. W. Loprince. As
she had been swamped with queries over the recent weeks regarding technical issues, she has asked
you to handle some of the issues relating to EcoAir. These issues are noted under the required section
below.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

-9-
QUESTION 3 (CONTINUED) (35 MARKS)

REQUIRED

a) In an email to you, Mrs. W. Loprince confirmed that your firm would be doing a presentation to
EcoAir. She asked if you could please prepare the draft slides for this presentation that relate to
the number of performance obligations that exist for both local and international travel for EcoAir
based on the sale of tickets and services rendered assuming you have already established that a
contract exists between the passengers and EcoAir. The slides should be explained using
speaker notes. She has attached the slides on the answer sheet which means that you would
only need to populate it and complete the speaker notes underneath the slides.

The only other comment that she has made is that the team that would be presented to, do consist
of accountants and therefore you can keep the slides as simple as possible with elaborations
made in the speaker notes. (15)

Please note: - You DO NOT have to do any voice recordings but instead populate slides and type
out your explanations substantiating the information on the slides and conclusions
reached under the speaker notes section in the answer sheet.
- Your typed solution SHOULD NOT exceed 900 words including both the slides
and speaker notes. Remember the word count is a guideline, but should you have
reached your conclusion using fewer words, then you do not have to use 900words.
However, the word count should not be exceeded AND
- Your solution SHOULD ALSO NOT exceed the 3 pages provided in the template.
Refer to the instructions regarding word limits

b) Respond via email to the following Whatsapp message sent to you from Mrs. W. Loprince.

“Hi there. Hope you are well.  As you know Covid 19 has caused an upstir and sent every
business in a frenzy. As such we are swamped with queries and I am battling to keep up with
all the work. I haven’t slept nicely in days and with the national lockdown being announced I am
yet to go buy a few essentials I will require during the lockdown and to stock up on some
groceries as I also do not want to be traveling unnecessarily. Needless to say, I am stressed
beyond words.

I therefore need your assistance please and since you are familiar with the EcoAIr case, can
you kindly assist me by determining how much revenue should be recognised from set, non-
refundable tickets for the month of March 2020 only for the options that were exercised by
passengers. Please will you calculate this figure based on the principles covered in IFRS 15.
Please provide brief reasons for your calculations

Please respond to this text with an email to my personal email ([email protected]) account
so that I can review the calculation from my laptop later on this evening. One more thing, please
DO NOT exceed 650 words including the calculations as I really want to keep it as simple
and easy for them to understand. Thank you so much for all your assistance dear, I am very
much appreciative. DO NOT USE the 5 step theory approach please. W. Loprince”
(12)
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

- 10 -
QUESTION 3 (CONTINUED) (35 MARKS)

REQUIRED CONTINUED

c) From the information given and with reference to Step 5: Recognise revenue when/as a
performance obligation is satisfied, only, discuss when revenue should be recognised for the
flexible tickets AND the change of the tickets from set, non-refundable to flexible tickets? (8)

Please note: - Your typed solution SHOULD NOT exceed 500 words. Refer to the instructions
regarding word limits.
- You DO NOT have to use the 5 step theory approach.
ACCOUNTING 3AB
CONTINUOUS EVALUATION ASSESSMENT - MAY 2020 QUESTION PAPER

- 11 -
QUESTION 4 (10 MARKS)

Following your B.Comm graduation at UJ in 2019, you are newly employed as a junior accountant at
Sidogi Holdings (Pty) Ltd (hereafter referred to as Sidogi), a company that manufactures and produces
kids toys and stationery. It also owns several buildings for rental purposes as well as for administrative
purposes. Since the announcement made by the World Health Organisation declaring the COVID-19
coronavirus outbreak to be a pandemic, the government took stringent steps to contain and/or delay the
spread of the virus, and the actions taken in response to the spread of COVID-19 have resulted in
significant disruption to its business operations.

Due to the above, Sidogi had to make certain difficult decisions in order to ensure that they abide by the
laws of the country. As such, some of the administrative buildings were left empty and all machinery
were switched off and many administrative staff were to work remotely from home. As such, while
working from home you received an e-mail relating to the implications of COVID-19 on IFRS. One of the
aspects you noted was that an entity would need to assess if COVID-19 would be an indicator of
impairment.

Based on the above information and your knowledge of IFRS standards, you begin to suspect that
certain non-financial assets in the administrative building as well as the manufacturing assets may be
impaired. You also note that certain financial assets, such as lease receivables may be impaired based
on the fact that some tenants that occupy the rental buildings may not be able to pay their rental. You
carefully research the matter and become convinced a large group of the assets your suspected may
meet the criteria for impairment in terms of IAS 36: Impairment of Assets.

In a weekly Zoom meeting with the financial manager, you raise the issue with the accounting team.
The Financial manager responds as follows:

“Thanks for that J Accountant, but I think you should stick to processing electricity invoices and
leave the real accounting to me ok? Do you have any idea how bad what you are proposing
would look on our financials not to mention our bonuses? No thanks, we also have contracts in
place for the tenants and that is good enough for me. Moving on…”

REQUIRED:

a) Discuss the ethical implications of the financial manager’s response to the issue of impairment that
you raised during the meeting and how you would approach the issue moving forward. (10)
Please note: - Your typed solution SHOULD NOT exceed 500 words
- You DO NOT have to use the 5 step theory approach