Financial Accounting IFRS Problem Set

Are you grappling with a complex Financial Accounting IFRS Problem Set? This comprehensive guide breaks down the Tjomma-ma-Lomma Traders case study, providing a detailed analysis of all transactions and adjustments for a sole trader business adhering to International Financial Reporting Standards (IFRS). We'll walk through the trial balance, additional information, and specific requirements to help you master similar accounting challenges. This breakdown is designed to simplify the learning process for students tackling financial accounting exams or assignments.

Unpacking the Tjomma-ma-Lomma Traders IFRS Problem Set

This problem set revolves around Tjomma-ma-Lomma, a sole trader business owned by Joah Venter, specializing in balance bikes. The business operates with a 28 February year-end and utilizes the periodic inventory system. Understanding the initial trial balance is crucial before diving into the adjustments.

Initial Trial Balance Overview (28 February 2026)

The pre-adjustment trial balance provides a snapshot of the business's financial position before year-end adjustments. Key accounts include:

• Capital: R500 000 (Note 5)
• Vehicles: R1 250 000 (Debit), with Accumulated Depreciation of R462 500 (Credit) (Note 3)
• Computer Equipment: R42 500 (Debit) (Notes 2, 3)
• Investment: NWP Bank: R100 000 (Debit) (Note 4)
• Debtors Control: R31 250 (Debit) (Notes 6, 8)
• Allowance for Credit Losses: R2 000 (Credit) (Notes 6, 10)
• Creditors Control: R24 000 (Credit)
• Bank: R112 500 (Debit)
• Sales: Debit R?, Credit R? (Needs calculation)
• Purchases: R325 000 (Debit)
• Freight on Purchases: R8 750 (Debit)
• Stationery: R3 750 (Debit) (Note 14b)
• Sales Returns: R6 800 (Debit) (Note 8)
• Purchase Returns: R4 963 (Credit)
• Rent Expense: R39 000 (Debit) (Note 9)
• Salaries and Wages: R513 000 (Debit) (Note 11)

Detailed Adjustments for February 2026 Year-End

Several additional pieces of information require journal entries to ensure the financial statements accurately reflect the business's performance and position. All amounts should be rounded to the nearest Rand.

1. Trading Inventory (01 March 2025): The opening inventory was R62 500. This is important for calculating the cost of sales under the periodic inventory system.
2. Computer Equipment Purchase: Purchased on 30 September 2025 for R42 500. This affects depreciation calculations.
3. Depreciation Calculation:

• Vehicles: Tjomma-ma-Lomma has one vehicle. Depreciation is calculated at 5 years on the diminishing balance method. Carrying amount = Cost - Accumulated Depreciation (R1 250 000 - R462 500 = R787 500). Annual depreciation = R787 500 * (1/5) = R157 500.
• Computer Equipment: Depreciated at 25% per annum on the straight-line method. Since it was purchased on 30 September 2025, depreciation for 5 months (Oct 2025 - Feb 2026) is required. (R42 500 * 25%) * (5/12) = R4 427.

4. Investment Interest (NWP Bank): The R100 000 investment bears 8% interest per annum. Made on 30 January 2025, with interest capitalized. Interest for the year (1 March 2025 - 28 February 2026) needs to be calculated. R100 000 * 8% = R8 000. This amount should be added to the investment and recognized as interest income.
5. Additional Capital Contribution: Joah paid R50 000 into the business bank account. This increases both Bank and Capital.
6. Credit Losses (Mr. Bullock): Mr. Bullock's debt of R3 750 had 5% paid, meaning R3 750 * 5% = R188 was recovered. The remaining R3 562 (R3 750 - R188) must be written off as irrecoverable against the allowance for credit losses.
7. Drawings (Trading Inventory): Joah took a bike (cost R1 750) for his son. This is treated as drawings and reduces trading inventory.
8. Sales Returns (Factory Fault): A debtor returned a bike with a selling price of R2 150 due to a factory fault. This reduces sales and debtors.
9. Rent Expense: Rent is R3 000 per month. The showroom was occupied from 01 March 2025 to 28 February 2026 (12 months). Total rent for the year should be R3 000 * 12 = R36 000. The trial balance shows R39 000, indicating R3 000 was prepaid (R39 000 - R36 000 = R3 000).
10. Allowance for Credit Losses Adjustment: The allowance must be adjusted to 12% of outstanding debtors. After Mr. Bullock's write-off and the sales return, recalculate debtors control and then 12% of that balance. The allowance was R2 000. The adjustment will be the difference between the new required allowance and the existing balance.
11. Accrued Salaries: The financial manager's salary of R11 250 for February 2026 is still unpaid. This is an accrued expense.
12. Mortgage Bond: A R220 000 mortgage bond was obtained on 01 December 2025, bearing 6% interest per annum. The first of 11 equal installments was due on 28 February 2026, but no interest or payment was recorded. Interest for 3 months (Dec 2025 - Feb 2026) is R220 000 * 6% * (3/12) = R3 300. The first installment payment also needs to be accounted for, which includes a portion of principal and interest.
13. New Business Property: Joah bought additional property for R220 000 on 28 February 2026, paid via EFT. The policy is not to depreciate land and buildings. This increases Property, Plant and Equipment and decreases Bank.
14. Year-End Inventory (28 February 2026):

• Trading inventory: R140 000
• Stationery on hand: R1 750. The initial stationery expense was R3 750, so R3 750 - R1 750 = R2 000 was consumed.

15. Gross Profit Markup: Tjomma-ma-Lomma uses a 60% markup on cost to determine sales price. This is vital for calculating Cost of Sales.

Calculating Gross Profit: A Step-by-Step Guide

To calculate Gross Profit, you need Sales Revenue and Cost of Sales.

• Sales Revenue: Start with the trial balance Sales (unknown), subtract Sales Returns (R6 800), and consider any unrecorded sales. The markup on cost is 60%, so Selling Price = Cost * 1.6.
• Cost of Sales: Under the periodic inventory system: Opening Inventory + Purchases + Freight on Purchases - Purchase Returns - Closing Inventory - Drawings of Trading Inventory

• Opening Inventory: R62 500 (Note 1)
• Purchases: R325 000
• Freight on Purchases: R8 750
• Purchase Returns: R4 963
• Closing Inventory: R140 000 (Note 14)
• Drawings of Trading Inventory: R1 750 (Note 7)

Using these figures, the Cost of Sales can be calculated. Once Cost of Sales is known, the Sales figure can be derived using the 60% markup on cost (Sales = Cost of Sales * 1.60). Then, Gross Profit = Sales - Cost of Sales.

Advanced Accounting Scenarios: Tjomma-ma-Lomma in 2027

Part B of the problem set introduces transactions occurring in the subsequent financial year, starting 01 March 2026 and ending 28 February 2027. These focus on asset disposal and acquisition.

Vehicle Disposal and Acquisition Analysis

Joah Venter decided to sell the existing vehicle and purchase a new delivery truck to facilitate business growth and make their own deliveries. This involves several critical accounting steps:

• Sale of Old Vehicle: On 30 April 2026, the old vehicle was sold for R850 000 cash. To record this, you first need to calculate the accumulated depreciation for the two months (March and April 2026) of the current financial year. Depreciation for 2 months = R157 500 * (2/12) = R26 250. The total accumulated depreciation would be R462 500 (from trial balance) + R26 250 = R488 750. The carrying amount at the date of sale would be R1 250 000 - R488 750 = R761 250. The profit on sale is R850 000 - R761 250 = R88 750.
• Purchase of New Delivery Truck: On the same date (30 April 2026), a new delivery truck was bought for R2 500 000. A 40% deposit was paid, and a financing loan covered the remaining 60%. Deposit = R2 500 000 * 40% = R1 000 000. Loan amount = R2 500 000 * 60% = R1 500 000.

These transactions require entries in the General Ledger for Vehicles, Accumulated Depreciation - Vehicles, and an Asset Disposal Account/Asset Realisation Account. The asset disposal account is used to consolidate all related entries for the sale, determining any profit or loss on disposal.

Frequently Asked Questions about IFRS Problem Sets

What is the diminishing balance method for depreciation?

The diminishing balance method, also known as the reducing balance method, calculates depreciation as a fixed percentage of the asset's carrying amount (cost less accumulated depreciation) each year. This results in higher depreciation charges in the early years of an asset's life and lower charges in later years. For vehicles, Tjomma-ma-Lomma uses a 5-year life, implying a 20% rate (1/5) on the diminishing balance.

How are credit losses handled under IFRS?

Under IFRS, credit losses (also known as bad debts) are recognized when there is objective evidence that an entity will not be able to collect all amounts due. Businesses often maintain an "Allowance for Credit Losses" (or "Allowance for Doubtful Accounts") to estimate and provide for these potential losses. When a specific debt becomes irrecoverable, it is written off against this allowance. The allowance itself is periodically adjusted based on a percentage of outstanding debtors, reflecting the expected future credit losses.

What is the periodic inventory system?

The periodic inventory system updates inventory records and calculates the cost of goods sold only at the end of an accounting period. During the period, purchases are debited to a Purchases account. At year-end, a physical count determines the closing inventory, and a series of adjusting entries are made to remove opening inventory, close the Purchases account, and record the cost of goods sold. This contrasts with the perpetual inventory system, which continuously updates inventory records with each purchase and sale.