COMPANIES

2. Definition
A company is a legal entity which is incorporated in terms of the Companies Act (71
of 2008), (which is also known as “the Act”.it is an entity which exists
individualistically of its own, the shareholders. The company as an entity is not
physically observable, but the community is alert of the existence of the company.
The company partakes in legal intercourse by means of governing bodies.
Learners are required to read download the following slides as the will
be helpful in doing the tasks given to them. These slide will help learners
enhance the knowledge that the already have on this topic
These are the links :
for the introduction on companies click on this link below
http://www.slideshare.net/Guguprincess/companies-introduction
If you want notes on the capitalization of companies click on the link below;
http://www.slideshare.net/Guguprincess/companies-14897818 And
if you want need notes on the capitalization of companies and other basic concepts
click the link
below
http://www.slideshare.net/Guguprincess/presentation-2gpmvubu
and if you need slides on financial statements you can just view or download the file
below
https://sites.google.com/site/myloveforacccounting/slideshare
https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpb
nxteWxvdmVmb3JhY2Njb3VudGluZ3xneDo3MTU3ZjZhOGNjZjExZDA1

3. Self assessment
COMPANIES ACCOUNTING EQUATION
Required:
 Read the case-study then answer the question
 Learners must always answer in point form.
 Open ended questions do not have one correct answer.

4. QUESTION 1
30 marks 30 minutes
CASE STUDY – COMPANIES
BLUE LABEL DIRECTORS GUILTY OF DODGY SALES
THABISO MOCHIKO
Daily News, Monday 14 April 2008
Three directors of listed firm, Blue Label Telecoms, were yesterday found guilty by
the JSE of trading shares without permission. Selwyn Diamond was fined R100 000
while Sean Kaplan and Graeme Prosser were “privately censured.”
Prosser bought shares last November while Diamond and his spouse, and Kaplan‟s
wife sold millions of rands worth of stock in February. The dealings occurred in an
open period but prior clearance from Blue Label‟s designated director was not
obtained, and the trades were not announced on the JSE‟s Stock Exchange News
Service (Sens) within 48 hours.
Prosser, Diamond and Kaplan work for a Blue Label subsidiary, the Prepaid
Company.
Diamond was fined R100 000 with R60 000 suspended for a year. If he breaches
listing requirements again, he will have to pay the suspended fine and face further
action, the JSE said. Diamond and Kaplan were found guilty of not telling their wives
that the directors needed to be informed about trades.
The JSE said it viewed any breach of listings requirements in a very serious light and
had informed Diamond of its “disappointment” at his conduct.
Prosser paid R2 million for 227 000 shares on November 14 at R8.81 each. The
shares closed at R7 yesterday, so he has lost R410 000 on his investment.
While Blue Label said the directors‟ conduct had caused it “damage and
embarrjassment”, their actions did not justify their dismissal or termination of their
directorships.

5. “It is unfortunate that these share dealings have attracted so much adverse
publicity,” said Blue Label‟s joint chief executives, Mark and Brett Levy. “We are
confident that lessons have been learnt.” To prevent a recurrence, all the company's
directors will attend a JSE workshop on the listing requirements this week.

6. Questions
1.1What is the role of directors in a company? Discuss at least 2. (4)
1.2 Explain the 2 different prices that are quoted for the shares, i.e. R8.81 and
R7. Why is there a difference? (4)
1.3 Why do they say that Prosser has lost R410 000 on his investment? Explain
fully. (4)
1.4 What did the 3 directors do that involved them being charged? Why is this
wrong? (4)
1.5 What is the role of the JSE in the country? Discuss at least 2 roles using
the above article as a guide. (4)
1.6 Why do you think the directors did not lose their directorships? (4)
1.7 The chief executives expressed their unhappiness concerning the adverse
publicity. Do you agree with them and should incidents like this not be
published? (6)

7. QUESTION 2
(8 MARKS)
LEARNERS ARE REQUIRED TO:
1. Choose a GAAP principle from COLUMN B to match the description in
COLUMN A. Write only the letter (A–D) next to the question number (3.1.1–
3.1.4) in the ANSWER BOOK.
Column A Column B
3.1.1 In preparing financial statements,
assets are recorded at the amount that
was originally paid for them
3.1.2 Expenses and income must be
recorded in the appropriate financial
period.
3.1.3 In preparing the financial
statements the accountant will assume
that the business will continue for the
foreseeable future.
3.1.4 Any amount which is significant to
the decisions made by the reader of the
financial statements should be disclosed
separately in the financial statements.
A Matching concept
B Materiality concept
C Historical cost concept
D Going concern concept

8. (8 MARKS )
2. Complete the statements (4.1.1–4.1.4) by choosing a word from the
options below. Write only the option next to the question number (4.1.1–
4.1.4) in the ANSWER BOOK.
shareholder;director;internalauditor; independentauditor
1. A person who expresses an opinion on the financial statements of a
company is a/an ...
2. A person who is appointed by shareholders to manage and make
decisions in running a company is a/an ...
3. A person who is a part owner of a company is a/an ...
4. A person employed by a company to check the reliability of the
accounting systems daily is a/an ... (8)

9. (10 MARKS)
2. Choose the answer from the following .(multiply choice question)
Write only the letter (A–D) next to the question number (3.1–3.8) in the
ANSWER BOOK
1. The purposes of the Companies Act (71 of 2008) are to:
A. promote compliance with the Bill of Rights as provided for in the
Constitution, in the
application of company law;
B. promote innovation and investment in the South African markets;
C. include provisions dealing with matters the Act does not address, or
alter alterable
provisions;
D. share proportionally in a dividend distribution by the company (2)
3.2 A MOI inter alia deals with:
A. The issuing of debentures
B. Taxation
C. Shareholders’ meetings
D. The nature of the company and its name (2)
3.3 Which one of these statements is for the non-profit companies
A. a company that is incorporated for public benefit, or whose object is related
to cultural or social activities or communal or group interests
B. falls within the meaning of a state-owned enterprise in terms of the Public
Finance Management Act
C. is owned by a municipality
D. No limitation is placed on the number of shareholders (2)

10. 3.4 Which one of these companies are Profit companies?
A. A private company:=
B. A personal liability company
C. A state-owned company
D. non-profit company (2)
3.5 When did the new Companies Act together with the Regulations of 2011 come
into effect?
A. 14 December 2007
B. 1 May 2011
C. 8 April 2009
D. 15 May 2011 (2)
3.6 How are the directors elected?
A. if he is not a shareholder
B. if the person is ineligible or disqualified
C. The MOI must provide for at least 50% of the directors to be appointed by the
shareholders.
D. If it he has shares in the business (2)
3.7 What are dividends?
A. They are payments made by a corporation to its shareholder members.
B. It is money earned by the auditors
C. Repayment of the balance on the account of the preference shares
D. Settlement of secured payables (usually loans) from the proceeds of the
encumbered (3)
3.8 What does the term accrual basis of accounting mean?
A. Limited application and mainly plays a role in the decision regarding which
information should be disclosed

11. B. The effect of transactions and events are recognised in the period in which it
occurs, even if the resulting cash inflow and cash outflow occurs in a different
period
C. It relates to income and expenses from normal operating activities,
D. Limited application and mainly plays a role in the decision regarding
information should be disclosed in a note in respect of the expenses
aggregated and presented per function
(3)

12. GROUP ASSIGNMENT
 Learners are required to work in groups of 4-6 in order
to complete this assignment.
 The assignment must be attempted so that you will be
able to answer questions based on this assignment.
You have two week to prepare the solution during
which time you may consult your teachers or peers
for assistance with areas of this assignment that you
may struggle with.
 This assignment was carefully selected to assist you
in learning key concepts necessary in accounting. It
will count toward the calculation of your mark.
 The assignment is due on the 24th of April 2014
Good luck!

13. QUESTION 1.1
COMPANY REPORTING 65 marks 30 minutes
1.1 INCOME STATEMENT
You are provided with information relating to Samora Sports Limited. The
company sells sports equipment and repairs equipment for their customers.
REQUIRED
Prepare the Income Statement for the year ended 30 June 2008 after taking all
the adjustments and additional information into account.[50]
INFORMATION
1. Figures extracted from the Pre-Adjustment Trial Balance on 30 June
2008:
Ordinary share capital (R5 par value)
Fixed deposit
Trading stock
Debtors control
Equipment (for office and shop)
Accumulated depreciation on office
and shop equipment
Mortgage loan from Credbank
Sales
Debtors allowances
Cost of sales
Service fee income (in respect of
repair services)
Rent income
Interest income
Salaries and wages
Employers' contributions to Pension
R 1 200 000
160 000
215 000
39 090
224 000
130 000
281 200
1 703 200
17 000
?
297 140
105 000
11 200
234 750
53 200

14. 2.Adjustments and additional information:
The auditors have identified the following errors or omissions:
3.4 The auditors are owed a further R28 000 after completing the audit.
3.5 Bank charges of R310 reflected on the June 2008 bank statement have not yet been
entered in the books.
3.6 A credit note issued to a debtor, A Mona, dated 28 June 2008 was not recorded in the
books.
The credit note was for:
 Goods returned by A Mona, R 6 200 (the cost was R4 800)
 Price reduction on unsatisfactory repair of a tennis racket, R540
2.4 The stock count on 30 June 2008 revealed the following on hand:
 Trading stock, R202 000
 Consumable stores, R900
3.7 An employee was left out of the Salaries Journal for June 2008. The details fromhis
pay-slip were:
Gross salary R6 000
PAYE deduction (18%) (1 080)
Pension deduction (7,5%) (450)
UIF (60)
Net salary R4 410
Fund and UIF
Audit fees
Directors fees
Consumable stores
Bank charges
Sundry expenses
30 000
230 000
51 100
5 240
?

15. The business contributions were:
 Pension Fund: 10,5% of gross salary
 UIF: Rand-for-rand basis
2.6 The tenant paid the July and August rent in June 2008. The rent was increased by R700
per month on 1 January 2008.
2.7 Provide for depreciation on office and shop equipment at 10% p.a. on the diminishing-
balance method. Note that new shop equipment costing R30 000 was purchased half-way
through the financial year (this was properly recorded).
2.8 Interest on the loan was capitalised. The loan statement from
Credbank on 30 June 2008 reflects the following:
CREDBANK
Loan statement on 30 June 2008
Balance on 1 July 2007 R332 800
Interest charged ?
Monthly payments to Credbank in
terms of the loan
agreement (12 months x R4 300)
R 51 600
Balance on 30 June 2008 R326 000
The interest expense for the year has not yet been entered in the books.
2.9 Use the following percentages to calculate the missing figures:
 Mark-up % achieved: 60% on cost
 Operating profit on sales: 20%
 Income tax rate: 30% of net profit

16. QUESTION 1.2
1.2 CORPORATE GOVERNANCE AND AUDITING
The following audit report was issued by the auditors of Samora Sports Ltd:
Audit opinion – To the shareholders:
In our opinion, the financial statements fairly present, in all material respects, the financial
position of the company and the group at 30 June 2008 and the results of their operations
and cash flows for the year ended, in accordance with International Financial Reporting
Standards, and in the manner required by the Companies Act in South Africa.
I.M. Wright & Associates
Chartered Accountants (SA)
Registered Accountants and Auditors
Pretoria 10 August 2008
1.2.1 Why does the Companies Act make it a requirement for public companies to be
audited? (2)
1.2.2 Although this audit opinion is addressed to the shareholders, other interested persons
will also want to read it.
Name ONE other person who would be interested in this audit opinion, and give a reason for
his/her interest in the opinion. (3)
1.2.3 At the AGM, one of the shareholders says that he is not happy with the words
'Fairly present' in the audit report. He wants the auditors to say that the financial statements
are 'correct in all respects'.
What explanation should be given to this shareholder? State ONE point. (3)
1.2.4 The directors are not happy with the high audit fees reflected in the Income Statement.
Explain why improvement in internal control will have a positive effect on the external
auditors' fees. State ONR point. (3)
1.2.5 SAICA is one of the main professional bodies governing accountants in this country.
Explain TWO of the main roles performed by SAICA. (4) Total Marks [65]

17. QUESTION 2 (33 MARKS)
The reporting period of AB (Pty) Ltd, a successful company, ends on 31 December 20.7. AB
(Pty) Ltd and all its suppliers are registered as vendors in accordance with the VAT Act. VAT
is charged at a rate of 14%.
The following information is extracted from the financial records of AB (Pty) Ltd for the
reporting period ended 31 December 20.7:
1 Income
R
Sale of inventories 33 250 000
Rent income – letting of buildings (investment property) 532 000
Interest on fixed deposit 63 000
Profit on sale of machinery 132 000
Recoupment from insurer for inventories destroyed 855 000
Recoupment from insurer for machinery destroyed 735 300
2 Cost of sales
R
Cost of normal sales and smaller inventory shortages 13 250 000
3 Distribution costs, administrative expenses and other expenses
The company presents expenses in the statement of income with reference to the function
that the expense relates to. In this regard, the following three functions are distinguished:
Distribution costs, administrative expenses and other expenses. The company’s accounting
system summarised the balances of the respective expense accounts as follows:
R
Distribution costs
Administrative expenses 14 353 000
Other expenses
The balances of the respective expense accounts of AB (Pty) Ltd was as follows on
31 December 20.7:
R

18. Employee benefits expense 3 750 000
Depreciation on machinery 1 250 000
Impairment on machinery 400 000
Maintenance of machinery 665 000
Insurance expense 850 000
Auditors’ remuneration – remuneration for audit 765 000
Directors’ remuneration
- Non-executive directors – attendance of meetings 400 000
- Executive directors – attendance of meetings 300 000
- Executive directors – basic remuneration 2 400 000
- Executive directors – bonuses 1 200 000
Telephone- and network costs 750 000
R
Office supplies expense 560 000
Doubtful debts 61 000
Water and electricity 552 000
Other expenses 450 000
14 353 000
4 Interest expense
Interest expense constitutes the following:
R
Interest expense on bank overdraft 68 000
Interest expense on mortgage bond 482 000
550 000
5 The following adjustments still have to be accounted for:
5.1 Office supplies on hand on 31 December 20.7 to the amount of R45 000 still have to
be recognised.
5.2 The allowance for doubtful debts still has to be increased with R17 000.
5.3 A write-down of R90 000 in respect of certain inventory items, of which the cost price
exceeds the net realisable value thereof, still has to be recognised.
5.4 On 1 November 20.7 a fire destroyed certain inventory- and machinery items:

19. 5.4.1 After consultation, the insurer determined the cost of the inventories destroyed
at R800 000. On 19 December 20.7 a cheque to the amount of R855 000
(including VAT) was received from the insurer. AB (Pty) Ltd’s accountant debited
the bank account with R855 000 and credited an account named “Recoupment
from insurer for inventories destroyed” with R855 000. The necessary
adjustment still has to be recognised and the cost of the inventories destroyed
still has to be recognised as an expense.
5.4.2 The carrying amount of the machinery-item that was destroyed in the fire, was
as follows on 1 November 20.7:
R
Machinery – cost price 1 320 000
Machinery – accumulated depreciation (517 000)
803 000
On 19 December 20.7 a cheque to the amount of R735 300 (including VAT) was
received from the insurer. AB (Pty) Ltd’s accountant debited the bank account
with R735 300 and credited an account named “Recoupment from insurer for
machinery destroyed” with R735 300. The necessary adjustment still has to be
recognised and the machinery that was destroyed in the fire still has to be
derecognised.
6 The income tax expense for 20.7 was reliably calculated as R1 236 000 and still has to
be recognised.
Required:
a) After accounting for the adjustments as provided, present the resulting balances in the
statement of income of AB (Pty) Ltd for the reporting period ended 31 December 20.7. (15)
Note: No journal entries are required.
Show all calculations clearly.
b) Disclose ONLY the following notes to the statement of income of AB (Pty) Ltd for the
reporting period ended 31 December 20.7:
i) The note to Revenue. (1)
ii) The note to Cost of sales. (3)
iii) The note to Profit before tax. (14)