ACCOUNTING PAPER 1
GRADE 12
NATIONAL SENIOR CERTIFICATE EXAMINATIONS
 MAY/JUNE 2021

INSTRUCTIONS AND INFORMATION

1. Read the following instructions carefully and follow them precisely.
2. Answer ALL questions.
3. A special ANSWER BOOK is provided in which to answer ALL questions.
4. Show ALL workings to earn part-marks.
5. You may use a non-programmable calculator.
6. You may use a dark pencil or blue/black ink to answer questions.
7. Where applicable, show ALL calculations to ONE decimal point.
8. If you choose to do so, you may use the Financial Indicator Formula Sheet attached at the end of this question paper. The use of this formula sheet is NOT compulsory.
9. Write neatly and legibly.
10. Use the information in the table below as a guide when answering the question paper. Try NOT to deviate from it.

QUESTION 1: TRANSACTION ANALYSIS AND AUDIT REPORT

(20 marks; 15 minutes)
1.1 Choose the correct word from those given in brackets. Write only the word next to the question numbers (1.1.1 to 1.1.3) in the ANSWER BOOK.

1.1.1 The concept of (limited/unlimited) liability ensures that shareholders are not responsible for the debts of the business in the event of bankruptcy. (1)
1.1.2 When preparing financial statements, creditors will be reflected as trade and other (receivables/payables/equity). (1)
1.1.3 The separate disclosing of significant items, such as interest expenses, is an application of the (prudence/materiality) GAAP principle. (1)

1.2 ROCK-STONE LTD
REQUIRED:
Analyse the transactions below according to the headings on the table provided in the ANSWER BOOK.

• Indicate account debited and account credited in the General Ledger and the effect on the accounting equation. Indicate an increase as +, a decrease as – and no effect as 0. Refer to the example provided.
• Assume a favourable bank balance at all times.

Example: Bought stationery on credit, R3 200.

TRANSACTIONS:
1.2.1 Electronic funds transfers (EFT) totalling R136 000 were made to shareholders, being the amount owing to them at the end of the previous financial year.
1.2.2 The company received R450 000 for the issue of new shares.
1.2.3 The income tax assessment for the year was received. The income tax amount, R338 200, exceeded the provisional tax payments made. (9)

1.3 Independent audit report:
You are provided with an extract of the audit report for Rock-Stone Ltd for the financial year ended 28 February 2021.
REQUIRED:
1.3.1 Identify the type of audit report that the company received. Give a reason for your answer. (2)
1.3.2 Explain why the auditor referred to:

• Pages 8 to 23 (2)
• International Financial Reporting Standards and the Companies Act of South Africa (2)

1.3.3 Name any TWO items of audit evidence that the auditors may have used. (2)

INFORMATION:
Extract of the audit report:

QUESTION 2: STATEMENT OF COMPREHENSIVE INCOME AND RETAINED INCOME NOTE
(50 marks; 40 minutes)

PEYPER LIMITED
You are provided with information for the financial year ended 28 February 2021.

REQUIRED:
2.1 Refer to Additional Information B(f).
Calculate the value of the closing stock on 28 February 2021 using the weighted-average method. (5)
2.2 Complete the Statement of Comprehensive Income (Income Statement) for the year ended 28 February 2021.
Some of the pre-adjustment figures have been entered for you. (37)
2.3 Prepare the Retained Income Note on 28 February 2021. (8)

INFORMATION:

1. Extract from the Pre-adjustment Trial Balance on:
   

   Balance Sheet accounts section	28 Feb. 2021 R	29 Feb. 2020 R
   Ordinary share capital	13 650 000	14 650 000
   Retained income	?	2 978 000
   Loan: Wonder Bank	1 439 600	2 150 000
   Vehicles	?	1 546 000
   Equipment	?	722 000
   Accumulated depreciation on vehicles	?	858 000
   Accumulated depreciation on equipment	?	269 500
   Trading stock	2 000 000
   Debtors' control	382 000
   Provision for bad debts	?	9 800
   SARS (Income tax)	520 000
   Nominal accounts section
   Sales	?
   Cost of sales	?
   Directors' fees	4 836 000
   Audit fees	497 200
   Advertising	342 400
   Sundry expenses	88 000
   Trading stock deficit	?
   Bad debts recovered	5 800
   Rent income	208 250
   Interest income (on fixed deposit)	?
   Salaries and wages	6 425 000
   Depreciation (on vehicle sold)	41 250
   Packing material	45 800
   Profit on sale of vehicle	?
   Bad debts	28 800
   Ordinary share dividends	672 000

2. Additional information:
   1. The mark-up achieved is 160% on cost. The correct gross profit is R14 881 600.
   2. Packing materials used during the financial year was R39 700.
   3. Received and recorded R9 750 from the insolvent estate of a debtor which paid out 65 cents in the rand. The remaining amount must be written off.
   4. Adjust the provision for bad debts to R9 350.
   5. One of the employees was on sick leave and was omitted from the Salaries Journal for February 2021. Her salary details are as follows:
      

      GROSS SALARY	DEDUCTIONS	NET SALARY	EMPLOYERS' CONTRIBUTION
      ?	30% of gross salary	R23 800	R4 500*

      
      *Employers' contributions are debited to the Salaries and Wages Account.
   6. Stock valuation:
      The business sells sunglasses. The accountant has incorrectly calculated the closing stock amount which is reflected on the Trial Balance. The weighted-average method should have been used. This must be corrected.
      The following details are applicable:
      • Stock of sunglasses:
        

        DATE	UNITS	TOTAL VALUE
        1 March 2020	4 000	R2 433 000
        28 February 2021	2 400	?

      • Purchases of sunglasses during the financial year:
        

        DATE	UNITS	COST PRICE PER UNIT R	TOTAL PURCHASES R
        31 May 2020	4 200	650	2 730 000
        15 October 2020	4 800	790	3 792 000
        11 February 2021	2 500	820	2 050 000
        TOTAL	11 500		8 572 000

   7. The premises have been rented for the past five years. The rent for March 2021 has been received and recorded. Due to the lockdown, the rent was decreased by 25% per month for only three months from April to June 2020.
   8. Loan: Wonder Bank
      • Fixed monthly repayments of R59 200 have been made and recorded for the financial year ended 28 February 2021.
      • The loan statement reflected a balance of R1 652 000.
      • Provide for interest on loan capitalised.
   9. An old delivery vehicle was sold for R88 400 cash on 31 December 2020. This has been correctly recorded.
      Details of the delivery vehicle sold:
      

      Cost price	R198 000
      Accumulated depreciation on date of sale	R115 500

      Provide for depreciation as follows:
      • On vehicles at 25% p.a. on cost
      • On equipment: R90 500
   10. The correct net profit after tax after all adjustments is R1 342 080. The income tax rate is 28% of the net profit before tax. Interest income is the balancing figure.
   11. Shares and final dividends:
       NOTE: The relevant entries have been made.
       • 250 000 shares were repurchased at R4,25 per share on 30 November 2020.
       • On 28 February 2021, the ordinary share capital comprised 3 412 500 shares.
       • A final dividend of 36 cents per share was declared on 28 February 2021. All shareholders on the register at the financial year-end qualify for final dividends.

QUESTION 3: FINANCIAL INDICATORS AND CASH FLOW STATEMENT
(35 marks; 30 minutes)

The information relates to Digital Giants Ltd. The financial year ends on 31 March.

REQUIRED:

3.1 Calculate the following financial indicators for the financial year ended 31 March 2021:
3.1.1 Debt-equity ratio (3)
3.1.2 Net asset value per share (3)
3.1.3 Dividend pay-out rate (4)
3.1.4 Return on average shareholders' equity (ROSHE) (4)

3.2 Complete the table in the ANSWER BOOK for the following items for the 2021 Cash Flow Statement. Indicate in EACH case whether it is an inflow or an outflow of cash.
3.2.1 Change in receivables (3)
3.2.2 Change in payables (3)
3.3 Calculate the following figures for the 2021 Cash Flow Statement:
3.3.1 Taxation paid (4)
3.3.2 Dividends paid (4)
3.3.3 Proceeds from sale of fixed assets (5)
3.3.4 Funds used for the repurchase of shares (2)

INFORMATION:

1. Extract from the Statement of Comprehensive Income for the year ended 31 March 2021:
   

   Depreciation:	R 785 000
   On vehicles	475 000
   On equipment	310 000
   Net profit before tax	3 955 000
   Income tax	1 085 000
   Net profit after tax	2 870 000

2. Extract from the Statement of Financial Position:
   

   	31 March 2021 R	31 March 2020 R
   Fixed assets at carrying value	8 865 000	8 878 000
   Inventories	585 700	391 200
   Debtors' control	418 000	390 000
   Creditors' control	520 000	359 200
   Income received in advance	16 000	0
   SARS: Income tax	354 000 (Cr)	124 000 (Dr)
   Ordinary shareholders' equity	10 387 600	6 910 000
   Ordinary share capital	7 280 000	5 950 000
   Retained income	3 107 600	960 000
   Mortgage loan	2 450 000	2 800 000
   Shareholders for dividends	262 400	210 000

3. Shares:
   • 700 000 shares were in issue on 31 March 2020.
   • 120 000 new shares were issued at R12,60 per share on 1 April 2020.
   • 20 000 shares were repurchased on 31 March 2021 for 50% more than the average issue price of R9,10 per share. These shares qualified for final dividends.
4. Dividends paid/declared were as follows for the financial year:
   

   	DATE	DIVIDEND PER SHARE	AMOUNT
   Interim	15 August 2020	45 cents	R?
   Final	31 March 2021	32 cents	R262 400

5. Fixed assets:
   
   • Extensions to the buildings were completed at a cost of R1 360 000 during the financial year.
   • Equipment was sold at carrying value during the financial year.
   • No other fixed assets were purchased or sold.
6. Extract: Financial indicators:
   

   	31 March 2021	31 March 2020
   Debt-equity ratio	?	0,4 : 1
   Earnings per share (EPS)	350 cents	314 cents
   Current ratio	2,7 : 1	1,8 : 1

QUESTION 4: INTERPRETATION OF FINANCIAL STATEMENTS AND CORPORATE GOVERNANCE
(45 marks; 35 minutes)

4.1 Choose a description from COLUMN B that matches the type of director in COLUMN A. Write only the letter (A–C) next to the question numbers (4.1.1 to 4.1.3) in the ANSWER BOOK, e.g. 4.1.4 D.

(3 x 1)
(3)
4.2 LIBRA LIMITED
The business trades in computer hardware and software from international companies. The information relates to the past two financial years, ended 30 April.
Anton Buys is the CEO and there are five other directors in the company.
REQUIRED:
4.2.1 Refer to Information A.
The current ratio and acid-test ratio show that the company's liquidity position has deteriorated over the past two financial years.
Identify TWO other liquidity indicators which also show that the company is likely to have serious liquidity concerns in future. Explain ONE point in EACH case (with figures). (4)
4.2.2 Refer to Information A and B.
The company increased the loan to finance the purchase of additional property in a new suburb. They hoped that this would improve the demand for their products.

• Comment on how the increase in the loan affected the risk and gearing in 2021. Quote TWO financial indicators. State ONE point in EACH case (with figures). (6)
• Explain whether the decision to purchase additional property had the desired effect on demand for this product (with figures). (3)

4.2.3 Explain why the public was not interested in buying the new shares issued at R6,00 per share. Quote THREE financial indicators (excluding indicators stated in QUESTION 4.2.2). State ONE point in EACH case (with figures). (9)
4.2.4 Refer to Information A and D.
At the AGM, many shareholders complained that the Remunerations Committee had been negligent in their duties and that Anton Buys did not deserve the fees that he was paid as CEO. State TWO different points to justify their opinion. Quote figures or financial indicators. (4)
4.2.5 Refer to Information A, B and C.

• Explain why the other directors were unhappy with the price paid for the shares repurchased from Anton Buys. State TWO points. Quote financial indicators or figures to support EACH point. (4)
• Give a calculation to show whether the repurchase of these shares affected Anton Buys' status as majority shareholder, or not. (3)

4.2.6 Refer to Information E.

• Explain what is meant by good corporate governance and explain why it is important to the shareholders. (3)
• Explain a possible reason why Anton Buys says he will vote against the proposal by Excellence Ltd. (2)
• The other directors feel that Anton Buys is abusing his position as CEO and majority shareholder.
  - Explain why you agree with them. (2)
  - Give the directors advice on how they should handle this. (2)

INFORMATION:

1. Financial indicators on 30 April:
   

   	2021	2020
   Mark-up % achieved	60%	75%
   % operating expenses on sales	44,1%	32%
   Solvency ratio	1,8 : 1	2,1 : 1
   Debt-equity ratio	0,7 : 1	0,2 : 1
   Current ratio	0,6 : 1	1,1 : 1
   Acid-test ratio	0,3 : 1	0,8 : 1
   Stockholding period	78 days	43 days
   Average debtors' collection period	58,9 days	32,6 days
   Average creditors' payment period	75,6 days	63,6 days
   Earnings per share	54 cents	102 cents
   Dividends per share	25 cents	90 cents
   Net asset value per share	732 cents	711 cents
   Return on average shareholders' equity	4,9%	5,3%
   Return on average capital employed	6,4%	9,1%

2. Additional information:
   

   	2021	2020
   Sales	R8 976 000	R11 550 000
   Market price of shares on stock exchange	580 cents	610 cents
   Interest rate on loans	12%	12%
   Interest rate on fixed deposit	8%	8%

3. Share capital and shareholding of Anton Buys:
   

   	2021	2020
   Number of authorised shares	5 000 000 shares
   Number of shares in issue	2 450 000	2 400 000
   Number of shares owned by shareholder, Anton Buys	1 240 000	1 270 000

   
   
   
   • On 30 April 2020, the company had 2 400 000 shares in issue.
   • At the directors' meeting on 1 May 2020, it was decided to repurchase 30 000 shares from the CEO, Anton Buys, at R12,00 per share. None of the other five directors supported this decision.
   • A further 80 000 shares were issued on 30 June 2020. The listed issue price of the purchase was originally R6,00 per share. Due to a poor response from the public at this price, the directors agreed to sell these shares at R4,80 per share.
4. Directors' fees:
   

   	2021	2020
   Director's fees paid to CEO	R2 900 000	R2 000 000
   Total fees paid to 5 other directors	R3 000 000	R3 000 000

   .
5. Proposal to purchase the unissued shares:
   • Excellence Limited is a respected company with a reputation for good corporate governance. They have made an offer to purchase the remaining 2 550 000 shares in this company at a price which is considerably more than the current market value.
   • Anton Buys says that he will vote against this proposal. The other directors feel strongly that this offer is very generous. They are in favour of accepting the offer.