Question

PART II 14 marks

Telecon Ltd is a telecommunications company which operates in the wireless telecommunications sector and is present in both developed and developing economies over four continents. Telecon Ltd provides over 12 million local and international customers with mobile devices, voice, messaging and data services. Telecon Ltd is listed on the Johannesburg Stock Exchange and has a 31 August year end.

During the 2020 financial year Telecon Ltd entered into a contract with the South African National Defence Force (SANDF) to supply 5 000 smart phones for a total transaction price of R32 250 000. The agreement stipulated that this order would be fulfilled over three months due to a shortage of stock. The first 2 500 smart phones were delivered on 30 June 2020 and the next delivery is expected to take place on 1 September 2020. Payment will only be received after the contract has been completed.

The smart phone comes with a standard 30-day phone replacement guarantee that the phone will work as intended. Included in the contract with the SANDF is also a 24-month extended warranty provided by Telecon Ltd. The extended warranty covers all repairs, except screen repairs.

The smart phones are purchased by Telecon Ltd from the manufacturer for R4 100 per smart phone. The cost incurred by Telecon Ltd to provide the 24-month extended warranty amounts to R250 per smart phone.

Telecon Ltd regularly sells a smart phone and a 24-month extended warranty separately to customers for R6 000 and R450 respectively.

The contract stipulates that the SANDF will qualify for a volume discount of 5% on the total contract price.

Historic data indicates that 2% of all smart phones purchased will be replaced under the 30-day guarantee and 4% of smart phones will be repaired under the extended warranty. No returns were logged for the period ending 31 August 2020.

Question: Prepare the journal entries in the financial statements of Telecon Ltd to account for all the journal entries arising from the contract with the South African National Defence Force for the year ended 31 August 2020.

Answer 1

Journal Entries -

Smartphone Dr. 20,910,000

To Manufacturer 20,910,000   

(Being 5100 smartphones ordered from Manufacturer at 4100$ p.u. out of which 100 smartphones are purchased as per replacement history)

South African National Defence Force Dr. 16,125,000

To Smartphones 16,125,000

(Being 2500 smartphones sent to South African National Defence Force on 30th June @ 6,450 p.u. incl warranty)

Warranty and Replacement expenses 50,000

To Provision to Warranty and Replacement 50,000

(Being provision for warranty and replacement expenses made. Warranty = 250 * (5000*4%) = 50,000)

Entry for replacement has not been passed yet and the expense is still kept in inventory because of non-occurrence of event.