Property, Plant and Equipment and Its Recognition in Financial Statements

QUESTION ONE [30]

You XYZ Ltd is a medium-sized manufacturing company that has been in operation for over 15 years. The company owns various types of property, plant, and equipment (PPE), including land, buildings, machinery, and vehicles. In the past financial year, XYZ Ltd expanded its operations by acquiring additional manufacturing equipment and disposing of older assets that were no longer efficient.

Recently, the company’s management has raised concerns regarding the accounting treatment of PPE in their financial statements. The finance director has asked the accounting department to ensure that all transactions related to PPE are correctly recorded in line with Generally Accepted Accounting Practice (GAAP). Additionally, the auditors have pointed out inconsistencies in how depreciation is applied to certain assets and have emphasised the need for better alignment with accounting standards.

The company also owns a commercial building that is rented out to third parties, and there is confusion regarding whether this asset should be accounted for as PPE or as an investment property.

REQUIRED		Sub- total	Total
a	Define property, plant, and equipment (PPE) according to accounting standards. (2)Explain the criteria for recognising an item as PPE in the financial statements. (3)       Y1: Critical thinking		›
b	Discuss the key considerations when recording the purchase of PPE. (3)   Explain how the disposal of PPE should be accounted for. (2)	5	5
Explain the purpose of depreciation in financial reporting. (2)Discuss the factors that must be considered when determining the useful life    5 and residual value of an asset. (3)
d	Describe how PPE should be presented in the annual financial statements, including the key disclosures required under GAAP. (4)	4	5
	Y1: Critical thinking
		1
e	Explain the key difference between investment property and PPE. (3)   Discuss why the commercial building rented out to third parties might be classified as an investment property rather than PPE. (2)	5	5
	Identify potential ethical issues related to the misclassification of PPE in financial statements. (3)Discuss why proper accounting treatment of PPE is crucial for decision- making by stakeholders. (2)		›
Total		30

QUESTION TWO                                                                                                         [15]

Wewrite is a small business that buys and sells stationery. The following transactions occurred in the month of March XY1, its first month of business:

1 Mar The owner contributed R200 000 cash to the business. 4 Mar Purchased stationery for R120 000 cash.

8 Mar Sold stationery on credit for a total price of R160 000. The total cost of this stationery was R65 000.

16 Mar Received payment from debtors for R90 000. 31 Mar Paid rent of R18 000 for the month of March.

REQUIRED	Sub- total	Total
2. Prepare the general ledger for Wewrite for March XY1. Balance the accounts.   14        15   Y1: Critical thinking   Your answer must comply with the requirements of International                                                                           1 Financial Reporting Standards. (IFRS)
Total	15

QUESTION THREE

For each of the following businesses, identify one product and one by-product:

1. Petroleum refinery.

• Wine-making business.

• Sugar refinery.

• Logging company.

[10]

REQUIRED	Sub- total	Total
3.1 Identify one product and one by-product.                                                                                               10                                                                                               10
Total	10

QUESTION FOUR:                                                                                                         [15]

The owner of a small retail shop, Artifacts, based in Aliwal, is completing an internal reconciliation between the relevant ledger accounts and the separate debtors and creditors ledgers before the year end of 30 April XY2. The following information has come to light:

1. On 15 March XY2, inventory costing R6 200 was purchased by Artifacts on credit. This was correctly recorded in the Purchases journal. This amount was settled by EFT on 15 April XY2 and the bookkeeper entered the amount in the Purchases column in the Cash Payments journal.
2. On 30 April XY2, the Trade receivables column in the Cash Receipts journal amounted to R8 200. Unfortunately, the bookkeeper posted all the totals to the incorrect sides of the respective ledger accounts.

• A credit customer, Azoo, owes R300 per the debtors ledger at 30 April XY2. In addition to being a customer, Azoo supplies cleaning materials to Artifacts on credit. As at 30 April XY2, Azoo had a debit balance of R2 400 in its account in the creditors ledger because of an overpayment. Artifacts agreed to transfer this balance to the Azoo account in the debtors ledger.
• During April XY2, Artifacts decided to write off an amount owing from a sale made to a credit customer in April XY1. The original sale was for goods which had cost Artifacts R230 including VAT at 15%. VAT applies to this transaction only.

You have also been provided with the following information:

Extract from the pre-adjustment trial balance of Artifacts for the year ended 30 April XY2

Trade receivables	64 400
Allowance for the expected loss	3 500
Trade payables	46 700

• Artifacts maintains an allowance for expected credit losses amounting to 5% of the balance on the Trade receivables account at the year end.
  • Artifacts uses a mark-up percentage on the cost price of goods of 50%.

• Artifacts uses the periodic inventory recording system.

REQUIRED	Sub- total	Total
Prepare any adjusting journal entries that would be required to 4.1     update the Trade receivables or Trade payables accounts in the general ledger of Artifacts for the year ended 30 April XY2. Dates                                                                                                 1s                                                                                                 11 and narrations are NOT required. You are NOT required to show the impact on the separate Debtors subsidiary and Creditors subsidiary ledgers. Y3: Problem solving                                                                 1
Calculate the closing balance that would appear in the Allowance 4.2     for expected credit losses ledger account for Artifacts as at 30 April XY2. IGNORE point 4 of the information above when answering                                                                                                 4                                                                                                 4 this question.
Total	15

QUESTION FIVE                                                                                                         [30]

GreenTech Solutions is a medium-sized South African company specializing in renewable energy technologies. The company has been successful in providing solar energy solutions to rural communities. However, it faces several challenges, including rapid technological advancements in the energy sector, increasing pressure to reduce its carbon footprint, and social demands for affordable energy access. The company is also considering how to align its operations with the United Nations Sustainable Development Goals (SDGs) while maintaining profitability.

The board of directors has asked you, as a sustainability consultant, to prepare a report addressing the following:

REQUIRED	total	Total
5.1       Explain the challenges and risks GreenTech Solutions faces in	9
relation to: o    Technological changes in the renewable energy		10
sector.
o    Environmental  pressures  to reduce  its carbon
footprint.
o    Social demands for affordable energy access (6
marks).
Discuss how these challenges could also present opportunities for
innovation. (3 marks).
Critical thinking	1
Analyse how GreenTech Solutions can make sustainable decisions that balance:Profits (financial sustainability).People (social sustainability).Planet (environmental sustainability). Provide specific examples for each aspect.	8	8
5.3        Identify three SDGs that are most relevant to GreenTech Solutions and explain how the company can work towards achieving them.	6	6
5.4         Discuss how sustainability reporting can enhance GreenTech Solutions’ accountability to its stakeholders. Include examples of key metrics the company could report on.	6	6
Total	30

Sample Accounting Answers: Property, Plant and Equipment

Property, Plant and Equipment and its Recognition

Property, plant and equipment is defined as tangible assets of a company that are used for the production and supply of goods and services and they are meant to be held for more than 1 year.
An asset is recognised as PPE if it is confirmed that the future economic benefits from it will flow to the entity and it is possible to measure its cost in a reliable way.

Consideration to Made When Recording a PPE Purchase

While making the recording of a PPE purchase, the initial cost should take into consideration the purchase price, import duties, and the cost that can be attributed directly to the purchase.
While doing the accounting for disposal of PPE, it is important to take out the cost of the asset and accumulated depreciation and any profit or loss should be recognised in the profit and loss statement.

Purpose of Depreciation

The purpose of depreciation is to reduce the value of an asset over its useful life, and make proper accounting for the expense to the periods. 

Disclaimer: This answer is a model for study and reference purposes only. Please do not submit it as your own work.

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