FAC3704/103/3/2020
Tutorial letter 103/3/2020
Group Financial Reporting
FAC3704
Semesters 1 and 2
Department of Financial Accounting
IMPORTANT INFORMATION:
Please activate your myUnisa profile and myLife email address and ensure you have
regular access to the myUnisa module site FAC3704 as well as to your group site.
Note: This is an online module, and therefore your module is available on myUnisa. However,
in order to support you in your learning process, you will also receive some study material in
printed format.
BARCODE
Open Rubric
CONTENTS
1
INTRODUCTION ..................................................................................................................... 2
2
LECTURERS AND CONTACT DETAILS ............................................................................... 2
3
EXAM PREPARATION AND APPROACH ............................................................................. 4
4
INTEGRATED QUESTIONS AND SUGGESTED SOLUTIONS ............................................. 7
1 INTRODUCTION
Dear student
In this tutorial letter 103, please find integrated questions with the suggested solutions. It is in your own
interest to work through the suggested solution in conjunction with the question and your answer.
These questions will assist with your exam preparation and are of an exam standard.
You will notice in our suggested solutions, dealing with company financial statements, opposite certain
items calculations are shown in brackets. Such calculations are given for tuition purposes only and
consequently do not form part of the statutory disclosure requirements.
2 LECTURERS AND CONTACT DETAILS
You may contact your lecturers by post, e-mail, telephone or on myUnisa.
Lecturers
Office number
Mr J van Staden
Simon Radipere Building, 2-72
Ms B Qheya
Simon Radipere Building, 2-66
Mr A Steyn
Simon Radipere Building, 2-70
Personal appointments
Please make an appointment, in advance, with your lecturer should you wish to see them personally
with specific problem areas in your studies. Lecturers are available from 07:45 to 16:00 on weekdays.
Telephonic enquiries
You can contact your lecturers telephonically, by making use of the course contact number provided
below. An available lecturer will take your call and assist you as promptly as they can.
(012) 429 4250
2
FAC3704/103
E-mail
You can also communicate with the lecturers via e-mail. Please make use of the following e-mail
address which is specific to the FAC3704 module to ensure a prompt reply:
FAC3704@unisa.ac.za
It is essential that you include your name, student number and telephone number in all e-mails.
Due to the high volumes of e-mails received by lecturers from students it is not always possible to
reply to these e-mails immediately. Please be patient as your e-mails will be attended to as soon as
possible.
College Information Coordinators
Jabulani Chauke:
(012) 429 2982
Christine Tage:
(012) 429 2233
E-mail: CASenquiries@unisa.ac.za
College Information Hub
Tel no: (012) 429 4211
The Department of Financial Accounting is situated on the main campus on the second floor of the
Simon Radipere Building.
3
3 EXAM PREPARATION AND APPROACH
You will be examined on all examinable topics as indicated in the prescribed books and all tutorial
letters. It is not sufficient to only work through your assignments because all the principles are not
tested in there.
Please ensure that you have received the following study material:
1. Study guide
2. Tutorial letter 101/3/2020
3. Tutorial letter 102/3/2020
4. Tutorial letter 103/3/2020
The following study material will only be available online (after the due dates of the compulsory
assignments) under the additional resources tab:
5. Tutorial letter 201/1/2020 (semester 1) ; Tutorial letter 201/2/2020 (semester 2)
6. Tutorial letter 202/1/2020 (semester 1) ; Tutorial letter 202/2/2020 (semester 2)
CHOICE OF CORRECT PAPER: FAC3704
It is your responsibility to ensure that you receive the correct paper in the examination. If you are
handed the wrong paper, you must immediately request the invigilator to hand you the correct paper.
FORMAT OF THE EXAMINATION PAPER
The May/June 2020 (October/November 2020) examination paper will consist of 100 marks and the
duration will be 3 hours.
SUPPLEMENTARY EXAMINATIONS AND REMARKING OF SCRIPTS
Please take note of the following important information regarding supplementary examinations and
remarks:
-
To qualify for a supplementary examination opportunity, you must obtain a final mark of 40% 49% for modules offered by the School of Accounting Sciences (for example FAC3704).
-
The year mark, previously obtained will contribute to the final result of students writing
supplementary examinations. It will also contribute in the case of aegrotat (sick) examinations.
-
Supplementary examinations will be conducted in October/November 2020 (May/June 2021) for
students who fail the May/June 2020 (October/November 2020) examination paper and achieve a
final mark between 40% - 49% for FAC3704.
-
Only those students who obtain a final mark of 35% - 49% or 68% - 74% in a module may apply for
a remark of such examination answer book.
-
A student will not be entitled to a supplementary examination (if applicable) on the grounds of a
remark result.
For more information refer to the general rules for study and examinations in the myStudies@Unisa
publication.
4
FAC3704/103
REMARKING OF EXAM SCRIPTS
Students who apply for the remarking of their scripts should provisionally register for the module as if
they have failed. Registration can be cancelled if the remark is successful.
EXAM PREPARATION
Steps to follow when preparing for the exam:
-
First read through the theory at the start of each study unit in the study guide, and in your Group
Statements textbook making sure that you understand the principles involved. You must not read
the next sentence unless you understand what you have just read.
-
Work through the illustrative examples that demonstrate the application of the principles. It is
important to work through the examples in the study guide and in the Group Statements textbook.
Do not memorise the examples, try to understand why the specific calculations were done.
-
When working through the examples please be aware of the disclosure requirements in terms of
the International Financial Reporting Standards which are required by certain sections (i.e.
statement of cash flows, associates and joint arrangements). Make sure you understand why it has
been disclosed in that specific manner. Once you understand, memorise the disclosure
requirements by referring back to the accounting standard and your study guide.
-
Prepare a summary of all the principles relevant to each topic and the accounting treatment and
disclosure thereof.
-
The next step is to attempt the integrated questions in this tutorial letter. Answer the questions
without referring to the solution by following the steps prescribed in the next section - exam
technique. Once you have completed an answer you should compare your answer with the
suggested solution. If your answer differs from the suggested solution refer back to the study guide,
the Group Statements textbooks and the accounting standard. If you still don’t understand what has
been done in the suggested solution, contact one of your lecturers.
-
Remember if you don’t understand the principles involved there will be no advantage in working
through numerous questions. If you understand the principles, working through one or two
questions per scenario should be sufficient.
-
-
Please do not attempt new questions in the few hours before you write your exam. It will only
confuse and unsettle you if you come across something you cannot do. Remember you must be
both cognitively and psychologically prepared.
On the morning of your exam, refresh your memory by reading through the summaries you have
compiled and reciting the disclosure requirements. This will help you to relax as you will be familiar
with the information by then.
EXAM TECHNIQUE
If students apply the correct exam technique they will be able to complete the answer within the time
frame allowed and their answers will be structured as to obtain the marks in the shortest time possible.
How should you answer a question?
-
Read the REQUIRED section first. Ensure that you are clear of what is required from you. Please
note that marks will not be awarded if you do not complete what is required. For example: If you are
required to provide only the note to the statement of financial position, no marks will be
awarded for disclosing the statement of financial position and/or notes to the statement of profit or
loss and other comprehensive income (e.g. profit before tax and current tax notes).
-
It is also important that you read what is not required as it wastes time if you prepare unnecessary
workings and disclosure. TIME MANAGEMENT IS VERY IMPORTANT IN ANY PAPER.
-
Start off by writing the layout (wording) of the disclosure. The disclosure will then be a guide for
deciding what calculations to prepare.
5
-
After you have written down the layout (disclosure), start with the calculations. Once you have done
a calculation, immediately transfer the answer to your layout (disclosure). Don’t wait until all the
calculations have been done before transferring the answer. NO MARKS will be awarded if
calculations are not correctly transferred to the required section!
-
It is advisable to show shorter calculations on the face of the statement of profit or loss and other
comprehensive income, statement of financial position or notes (whichever is required) in brackets
next to the disclosure. This will save time and avoid duplication. Longer calculations which cannot
fit into the line next to the disclosure or the next line must be done on a separate page marked
“calculations”. The figures in the disclosure should then be cross referenced to the calculations. NO
MARKS will be awarded if calculations are not correctly transferred to the required section!
-
Never exceed the time allocated per question.
-
Attempt each question in the paper. Leaving out a question could be the reason you fail.
-
When answering an examination paper, it is normally advisable to answer the questions in the
order that they have been given. When an examination paper is prepared due care and
consideration is given in determining the sequence of the questions. A question on a topic that you
may consider to be easy may in fact be the more difficult question of the paper and answering it
first might cause you to spend too much time on it or upset you so much that it influences your
ability to answer the rest of the paper.
-
If in doubt, always go back to the basic principles, especially where two or more topics are
combined.
-
Show all calculations, even if it is as simple as adding two figures together. Marks cannot be
allocated if we cannot see how the amount has been made up.
-
Make sure that you transfer the calculated amounts correctly to the disclosure. If the REQUIRED
section stipulates for instance: prepare the statement of financial position, then marks will not be
awarded to calculations that have not been transferred to the layout (disclosure). If the REQUIRED
has asked for calculations then the calculations will be marked.
-
Students will only lose marks once for an error. When the figure as calculated by the student is
used (even though calculated incorrectly) in other calculations or disclosure, marks will be allocated
if the principle is applied correctly.
PERSEVERE
We would like to encourage you to tackle your studies with enthusiasm. Remember, success can only
be achieved by effort and perseverance.
Every year we find that many students do not turn up at the examination venue. You must never inflict
this disservice on yourself. Remember that if you write, you have a chance, if you don’t, you have no
chance at all.
All the best with your studies!
6
FAC3704/103
4
INTEGRATED QUESTIONS AND SUGGESTED SOLUTIONS
QUESTION
NUMBER
SUBJECT
MARKS
TIME
(Minutes)
1
Change in ownership and joint operation
50
90
2
Consolidation of a group of entities (subsidiary and
associate)
30
54
3
Consolidation of a group of entities (joint venture
and associate)
56
101
4
Complex group with intragroup transactions
58
104
5
Journal entries to account for a joint venture
27
49
6
Horizontal group with intragroup transactions
35
63
7
Vertical group with intragroup transactions
38
68
8
Subsidiary and joint arrangements (vertical group)
60
108
7
QUESTION 1 (50 marks)(90 minutes)
Panem Ltd is a company that produces combat equipment and invests in other similar entities in South
Africa. Everdeen Ltd manufactures bows and arrows. All the companies in the Panem Ltd Group have a
31 December year end.
The following are extracts of the trial balances of the entities in the Panem Ltd Group for the year ended
31 December 20.17:
Panem
Everdeen
Mellark
Ltd
Ltd
Ltd
R
R
R
Credits
Share capital:
– 1 000 000 ordinary shares
– 350 000 ordinary shares
– 80 000 8% cumulative preference shares
Share capital – 250 000 ordinary shares
Retained earnings – 1 January 20.17
Accumulated depreciation
Trade and other payables
Revenue
Other income
Debits
Property, plant and equipment at cost
Investments in equity instruments:
– Everdeen Ltd at cost: ordinary shares
– Everdeen Ltd at cost: cumulative preference shares
– Mellark Ltd at cost
Trade and other receivables
Cash and cash equivalents
Inventories
Ordinary dividends paid – 31 December 20.17
Preference dividends paid – 31 December 20.17
Cost of sales
Other expenses
Income tax expense
1 000 000
2 777 600
1 650 000
150 000
4 114 000
386 000
10 077 600
500 000
80 000
960 000
214 000
82 000
2 200 000
96 000
4 132 000
250 000
90 000
390 000
76 000
1 050 000
20 000
1 876 000
5 589 294
1 788 728
843 800
584 706
40 000
136 000
200 000
190 000
380 000
200 000
1 600 000
480 000
677 600
10 077 600
115 000
260 000
280 000
50 000
6 400
950 000
423 600
258 272
4 132 000
50 000
98 000
85 000
10 000
530 000
150 000
109 200
1 876 000
Additional information
1. On 1 January 20.14, Panem Ltd acquired control of Everdeen Ltd by acquiring 85% of the issued
ordinary shares in Everdeen Ltd for R710 000. The retained earnings of Everdeen Ltd amounted to
R300 000 on 1 January 20.14.
2. On 1 January 20.14, Panem Ltd also acquired 50% of the issued cumulative preference shares of
Everdeen Ltd for R40 000. No preference dividends were in arrears on 1 January 20.14 and all
preference dividends had been declared and paid until 31 December 20.17. On 1 January 20.14
the fair value of the identifiable assets and liabilities of Everdeen Ltd were considered to be equal to
the carrying amounts thereof.
8
FAC3704/103
QUESTION 1 (continued)
3.
Panem Ltd acquired a 40% interest in Mellark Ltd on 1 January 20.17. In terms of a contractual
agreement with other operators, Panem Ltd exercises joint control over the economic activities of
Mellark Ltd. The arrangement was classified as a joint venture as per IFRS 11, Joint Arrangements
and the consideration paid was equal to the fair value of the net assets of Mellark Ltd on the date of
acquisition. At acquisition date the fair value of the identifiable assets and liabilities of Mellark Ltd
were considered to be equal to the carrying amounts thereof.
4.
Since 20.16, Panem Ltd purchased inventory from Everdeen Ltd at a margin of 25% on the cost
price. During the current year Panem Ltd purchased inventories to the value of R750 000 from
Everdeen Ltd. On 31 December 20.17, 50% of the inventory on hand in the records of Panem Ltd
had been purchased from Everdeen Ltd (31 December 20.16: R110 000).
5.
On 1 March 20.17, Panem Ltd sold a vacant piece of land to Mellark Ltd for R600 000. The vacant
piece of land was originally acquired by Panem Ltd on 1 May 20.14 for R500 000.
6.
Panem Ltd is responsible for the day-to-day management of Mellark Ltd at an agreed management
fee of R28 000 per annum in accordance with the contractual arrangement. Management fees
paid to Panem Ltd are included in “other expenses” of Mellark Ltd and management fees received
are included in “other income” of Panem Ltd.
7.
On 1 May 20.17 Panem Ltd disposed of 52 500 of the ordinary shares held in Everdeen Ltd for an
amount of R255 000 (fair value) to non-controlling shareholders. The profit on the disposal of
shares is included in “other income” of Panem Ltd. Panem Ltd continued to control Everdeen Ltd.
8.
The disposal of the interest in the subsidiary, Everdeen Ltd, did not comply with the criteria of IFRS
5, Non-current Assets Held for Sale and Discontinued Operations until the date of disposal.
9.
The profit of Everdeen Ltd and Mellark Ltd was earned evenly during the current year.
10. The Panem Ltd Group measures its investments in equity instruments at cost, in accordance with
IAS 27, Separate Financial Statements.
11. The Panem Ltd Group uses the partial (proportionate) goodwill method to recognise goodwill.
Goodwill relating to the Everdeen Ltd investment was tested for impairment at 31 December 20.17
and it was determined that the fair value of the goodwill was R22 000 on 31 December 20.17.
Panem Ltd did not recognise any impairment on its investment in Everdeen Ltd in its separate
accounting records.
12. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof (effective capital
gains tax rate of 22,4%). You may assume that the tax rate has remained unchanged since
1 January 20.14.
13. Each share carries one vote and the issued share capital of all the entities in the group remained
unchanged since 1 January 20.14.
REQUIRED:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of the
Panem Ltd Group for the year ended 31 December 20.17.
(37)
(b) Prepare the consolidated statement of changes in equity for the Panem Ltd Group for the year
ended 31 December 20.17.
(13)
Please note: Total columns are not required in the consolidated statement of changes in equity.
Your answer must comply with the requirements of International Financial Reporting Standards (IFRS).
Comparative figures and notes to the consolidated financial statements are not required.
All amounts are to be calculated to the nearest R1.
9
QUESTION 1 (SUGGESTED SOLUTION)
PART A
PANEM LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDING 31 DECEMBER 20.17
R
Revenue (4 114 000 + 2 200 000 - 750 000)
Cost of sales (1 600 000 + 950 000 - 22 000 (110 000 x 25/125) - 750 000 + 38 000
38 000 (380 000 x 50% x 25/125))
Gross profit
Other income (386 000 + 96 000 - 4 000 (10 000 x 40% div JV) - 40 000 (C1) –
35 000 (50 000 x 70%div sub) - 3 200 (6 400 (80 000 x 8%) x 50% preference div) 129 706 (C3))
Share of profit of joint venture ((1 050 000 + 20 000 – 530 000 – 150 000 -109 200) x
40%)
Other expenses (480 000 + 423 600 + 8 000 (C5))
Profit before tax
Income tax expense (677 600 + 258 272 + 6 160 (22 000 x 28%) – 8 960 (C2) 10 640 (38 000 x 28%))
PROFIT FOR THE YEAR
Other comprehensive income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Total comprehensive income for the year attributable to:
Owners’ of the parent
Non-controlling interests (35 262(C5) + 123 338(C5) + 3 200(preference shares)
5 564 000
(1 816 000)
3 748 000
270 094
112 320
(911 600)
3 218 814
(922 432)
2 296 382
2 296 382
2 134 582
161 800
2 296 382
PART B
PANEM LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.17
Share
Retained
Change in
Noncapital
earnings
ownership
controlling
interests
R
R
R
R
4
256 6241
Balance at 1 January 20.17
1 000 000
3 325 136
Total comprehensive income:
-Profit for the year
2 134 582
161 8005
Disposal of interest (C4)
3 114
251 886
Ordinary dividends paid
(200 000)
(15 000)2
Preference dividends paid
(3 200)3
Balance at 31 December 20.17
1 120
1 000 000
5 259 718
3 114
652 110
000 (C5) + 96 624 (C5) + 40 000 (80 000 x 50%) (preference share capital) = 256 624
000 x 30% = 15 000
3 80 000 x 8% x 50% = 3 200
4 2 777 600 + 547 536 (C5) = 3 325 136
5 123 338 + 35 262 + 3 200 (preference dividends NCI) = 161 800
2 50
10
FAC3704/103
QUESTION 1 (SUGGESTED SOLUTION)(continued)
Calculations
C1 Unrealised profit on sale of land
Selling price
Carrying amount
Profit on sale of land
Eliminate only 40% interest
R
600 000
(500 000)
100 000
40 000
C2 Tax effect on unrealised profit on sale of land
Unrealised profit
Tax on unrealised profit (40 000 x 22,4% (28% x 80%))
R
40 000
8 960
C3 Profit on sale of shares – separate financial statements of Panem Ltd
Consideration received (given)
Carrying amount of shares sold
(710 000/297 500 shares (350 000 x 85%) = R2,39 x 52 500 shares sold (given)
Profit on sale of shares
R
255 000
(125 294)
129 706
C4 Change in ownership (equity)
Consideration received (given)
Equity of subsidiary transferred to NCI
(800 000 (C5) + 644 160 (C5) + 235 083 (C5)) x 15%
Goodwill transferred to NCI (no goodwill transferred to NCI as control retained and
partial goodwill method used)
Change in ownership
R
255 000
(251 886)
3 114
Comment:
When there is a change in % interest holding in a subsidiary and the parent entity
retained control of the subsidiary (i.e. parent has control of the subsidiary before
and after the change in interest), IFRS 3 requires the transaction to be
recognised as a transaction between owners (i.e. as an equity transaction).
The difference between the consideration received by Panem Ltd on the disposal of
the shares in Everdeen Ltd and the equity “lost/transferred” to the NCI will be
accounted for directly in equity in a reserve called change in ownership.
Any profit/loss recognised on the disposal of the shares in the parent’s separate
financial statements will be reversed on consolidation. In this question, Panem Ltd
recognised a profit on disposal of shares in Everdeen Ltd of R129 706 which must
be reversed on consolidation.
11
QUESTION 1 (SUGGESTED SOLUTION)(continued)
C5 Analysis of owners’ equity of Everdeen Ltd
100%
Total
R
At acquisition
Share capital
500 000
Retained Earnings
300 000
800 000
Equity presented by goodwill
30 000
Consideration and NCI
830 000
Since acquisition
Adjusted retained earnings
644 160
Retained earnings
(960 000 - 300 000)
660 000
Unrealised profit in opening
inventory (110 000 x 25/125)
(22 000)
Tax effect on unrealised profit
(22 000 x 28%)
6 160
1 474 160
Current year
Profit before change in interest
235 083
Profit for 4 months of the year
(657 7281 x 4/12)
219 243
Adjusted for:
15 840
Unrealised profit in opening
inventory – realised (110 000 x 25/125)
22 000
Tax effect on opening inventory
(22 000 x 28%)
(6 160)
1 709 243
Disposal of 52 500 ordinary
shares
Proceeds on disposal (given)
Transfer of equity to NCI
[(800 000 + 644 160 + 235 083) x
15%] or [(680 000 + 547 536 +
199 820) x 15/85]
Change in ownership equity reserve
Profit after change in interest
Net profit for 8 months of the year
(657 7281 x 8/12)
Adjusted for:
Unrealised profit in closing inventory
(190 000 x 25/125)
Tax effect on unrealised profit
(38 000 x 28%)
Dividends paid
15% - 30%
NCI
R
75 000
45 000
120 000
120 000
547 536
96 624
561 000
99 000
(18 700)
(3 300)
5 236
547 536
924
216 624
199 820
35 262
186 356
13 464
32 886
2 376
18 700
3 300
(5 236)
747 356
(924)
251 886
255 000
(251 886)
251 886
3 114
411 125
287 788
123 338
438 485
(27 360)
306 940
(19 152)
131 546
(8 208)
(38 000)
(26 600)
(11 400)
10 640
7 448
3 192
(50 000)
2 070 368
Goodwill at acquisition
Current year impairment of goodwill - SP/LOCI
Balance at end of year
12
Panem Ltd 85% - 70%
At
Since
R
R
425 000
255 000
680 000
30 000
710 000
(35 000)
1 000 144
(15 000)
612 110
30 000
(8 000)
22 000
200 000 (revenue) + 96 000 (other income) - 950 000 (cost of sales) - 423 600 (other expenses) 258 272 (income tax expense) - 6 400 (80 000 x 8%) (preference dividend) = 657 728.
12
FAC3704/103
C6 Analysis of owners’ equity of Everdeen Ltd – preference shares
100%
Panem Ltd 50%
Total
At
Since
R
R
R
At acquisition
Share capital
80 000
40 000
Current year
Profit attributable to preference
shareholders
Dividend paid
6 400
(6 400)
80 000
50%
NCI
R
40 000
3 200
(3 200)
0
3 200
(3 200)
40 000
C7 Investment in joint venture
Analysis of owners' equity of Mellark Ltd
At acquisition
Share capital
Retained earnings
Goodwill
Investment in Mellark Ltd
Current year
Profit for the year [1 050 000 + 20 000 –
530 000 – 150 000 -109 200]
Unrealised profit in sale of land
Dividend paid
100%
Total
R
250 000
90 000
340 000
340 000
280 800
(100 000)
(10 000)
510 800
At
R
100 000
36 000
136 000
136 000
Panem Ltd 40%
Since
R
320 000
CA
R
136 000
112 320
(4 000)
108 320
112 320
(40 000)
(4 000)
204 320
C8 Journal entries
J1
J2
J3
J4
Dr Share capital – ordinary shares
Dr Retained earnings
Dr Goodwill
Ct
Investment in Everdeen Ltd – ordinary shares
Cr
NCI (SFP)
Elimination of owner’s equity in Everdeen Ltd at acquisition date
Dr
R
500 000
300 000
30 000
Cr
R
710 000
120 000
Dr Share capital – preference shares
Cr
Investment in Everdeen Ltd – preference shares
Cr
NCI (SFP)
Elimination of owner’s equity in Everdeen Ltd at acquisition date
80 000
Dr Retained earnings ((960 000 – 300 000 – 22 000 + 6 160) x 15%)
Cr
NCI (SFP)
Recognition of NCI’s interest in since acquisition retained earnings
96 624
Dr Retained earnings – beginning of year
Dr Deferred tax (SFP) (22 000 x 28%)
Cr
Cost of sales (110 000 x 25/125)
Elimination of unrealised profit in opening inventories
15 840
6 160
40 000
40 000
96 624
22 000
13
QUESTION 1 (SUGGESTED SOLUTION)(continued)
J5
J6
J7
Dr Income tax expense
Cr
Deferred tax
Deferred tax implication on unrealised profit in opening inventories
Dr
NCI (SPL)
(657 7281 x 4/12 = 219 243 + 22 000 – 6 160 = 235 253 x 15%)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit for the first four months
Dr
NCI (SPL)
(657 7281 x 8/12 = 438 485 – 38 000 + 10 640 = 411 125 x 30%)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit for the second eight
months
Dr
R
6 160
Cr
R
6 160
35 262
35 262
123 338
123 338
12
200 000 (revenue) + 96 000 (other income) - 950 000 (cost of sales) - 423 600 (other expenses) 258 272 (income tax expense) - 6 400 (80 000 x 8%) (preference dividend) = 657 728.
J8
J9
Dr Revenue
Cr
Cost of sales
Elimination of realised intra-group sales during the current year
Dr Cost of sales (190 000 x 25/125)
Cr
Inventory
Elimination of unrealised profit in closing inventory
J10 Dr Deferred tax (38 000 x 28%)
Cr
Income tax expense
Tax implication of unrealised profit in closing inventory
J11 Dr Investment in Everdeen Ltd – ordinary shares
Dr Other income
Cr
Change in ownership equity reserve (255 000 – 251 886)
Cr
NCI (SFP)
Recording of change in control due to sale of 52 500 shares to NCI
J12 Dr Other income (50 000 x 70%)
Dr NCI (SFP) (50 000 x 30%)
Cr
Ordinary dividend paid
Elimination of ordinary dividends received from subsidiary
J13 Dr Other income (6 400 x 50%)
Dr NCI (SFP) (6 400 x 50%)
Cr
Preference dividend paid
Elimination of preference dividends received from subsidiary
14
Dr
R
750 000
Cr
R
750 000
38 000
38 000
10 640
10 640
125 294
129 706
3 114
251 886
35 000
15 000
50 000
3 200
3 200
6 400
FAC3704/103
QUESTION 1 (SUGGESTED SOLUTION)(continued)
J14 Dr Other expenses
Cr
Goodwill
Impairment of goodwill in current year
J15 Dr Other income (10 000 x 40%)
Cr
Investment in joint venture
Elimination of dividend received from joint venture
Dr
R
8 000
8 000
4 000
4 000
J16 Dr Other income (100 000 x 40%)
Cr
Investment in joint venture
Elimination of unrealised profit on sale of a vacant piece of land to the
joint venture
40 000
J17 Dr Deferred tax (40 000 x 80% x 28%)
Cr
Income tax expense
Tax implications of realisation of unrealised profit on sale of a vacant
piece of land to the joint venture
8 960
J18 Dr
Investment in joint venture
((1 050 000 + 20 000 – 530 000 – 150 000 -109 200) x 40%)
Cr
Share of profit in joint venture
Recording of the joint venture’s profit for the current year
Cr
R
40 000
8 960
112 320
112 320
15
QUESTION 2 (30 marks)(54 minutes)
Papyrus Ltd was incorporated in 19.06 and is one of the oldest book stores in Bloemfontein. On
1 January 20.15, Papyrus Ltd purchased 36 000 ordinary shares in Parchment Ltd, a company that
exclusively sells Afrikaans’ books. From this date, Papyrus Ltd exercised significant influence over the
financial and operating policy decisions of Parchment Ltd. The assets and liabilities of Parchment Ltd
were fairly valued on this date, with the exception of trade and other receivables that were overvalued
by R10 000.
Papyrus Ltd wished to further expand its business and on 1 December 20.16 acquired control of Paper
Ltd by acquiring 90% of the issued ordinary shares in Paper Ltd. The assets and liabilities were fairly
valued at this date.
The following balances were extracted from the trial balances of Parchment Ltd and Paper at various
dates:
Parchment Ltd
Paper Ltd
01/01/20.15 01/12/20.16
01/12/20.16
R
R
R
Share capital - 120 000 ordinary shares
Share capital - 100 000 ordinary shares
Retained earnings
Revaluation reserve
220 000
1 060 000
210 000
220 000
1 480 000
245 000
The following are the trial balances of the relevant entities as at 30 November 20.17:
Parchment
Papyrus Ltd
Ltd
R
R
Share capital - 500 000 ordinary shares
(500 000)
- 120 000 ordinary shares
(220 000)
- 100 000 ordinary shares
Retained earnings - 30 November 20.17
(3 560 000) (1 630 000)
Revaluation surplus
(350 000)
(290 000)
Mark-to-market reserve
(162 704)
Long term loans
(100 000)
Deferred tax asset / (liability)
14 670
(8 500)
Loan from Papyrus Ltd
(12 500)
Loans from other owners
Trade and other payables
(485 000)
(202 500)
Bank overdraft
(15 400)
Property, plant and equipment
2 567 000
1 660 900
Investment in Parchment Ltd at cost
430 330
Investment in Paper Ltd at cost
185 000
Loan to Parchment Ltd
12 500
Loan to Paper Ltd
45 000
Trade and other receivables
594 000
416 000
Inventory
467 000
402 000
Cash and cash equivalents
579 500
-
16
100 000
90 000
-
Paper Ltd
R
(100 000)
(104 000)
(45 000)
(55 000)
(154 000)
257 000
102 000
99 000
-
FAC3704/103
QUESTION 2 (continued)
Additional information
1.
All the entities have a 30 November year-end.
2.
On 28 February 20.17, Paper Ltd sold office equipment to Papyrus Ltd for an amount of R59 975.
Paper originally purchased this office equipment for R60 000 on 1 December 20.16. On
1 December 20.16, Paper Ltd estimated that the office equipment had a total useful life of six
years. The entity’s policy is to provide for depreciation over the expected useful life of the office
equipment using the straight-line method which is consistent with the allowance of the South
African Revenue Service.
3.
From 1 January 20.15, Parchment Ltd purchased inventory from Papyrus Ltd. Papyrus Ltd sold the
inventory at a profit margin of 25% on cost. Total sales amounted to R400 000 in the 20.16
financial year and R620 000 in the 20.17 financial year.
Inventory purchased from Papyrus Ltd that was still on hand at year-end was as follows:
30 November 20.16
30 November 20.17
-
R90 000
R130 000
4.
During the current year Papyrus Ltd sold inventory to the value of R100 000 to Paper Ltd at a profit
mark-up of 40% on the selling price. On 30 November 20.17, Papyrus Ltd had inventory on hand
amounting to R60 000 that was purchased from Paper Ltd.
5.
Parchment Ltd declared a dividend of R30 000 on 1 September 20.17. Paper Ltd did not declare a
dividend for the current financial year.
6.
Papyrus Ltd has the right to demand repayment of the loans to Parchment Ltd and Paper Ltd at
any time.
7.
The Papyrus Ltd Group accounts for investments in associates using the equity method in
accordance with IAS 28, Investments in Associates and Joint Ventures.
8.
The Papyrus Ltd Group elected to measure non-controlling interests in an acquiree at their
proportional share of the acquiree’s identifiable net assets.
9.
Assume the SA normal tax rate is 28% and that the capital gains tax is calculated at 80% thereof.
REQUIRED:
Prepare only the asset section of the consolidated statement of financial position of the Papyrus Ltd
Group as at 30 November 20.17.
(30)
Your answer must comply with the requirements of International Financial Reporting Standards (IFRS).
Comparative figures to the consolidated financial statements are not required.
All amounts are to be calculated to the nearest R1.
17
QUESTION 2 (SUGGESTED SOLUTION)
PAPYRUS LTD GROUP
EXTRACT OF THE CONSOLIDATED
30 NOVEMBER 20.17
STATEMENT
OF
FINANCIAL
ASSETS
Non-current assets
Property, plant and equipment
(2 567 000 + 257 000 - 2 475 (C1) + 323 (C1))
Goodwill (C2)
Investment in associate (C3)
Deferred tax asset (C5)
Total non-current assets
Current assets
Inventory (467 000 + 99 000 – 24 000 (60 000 x 40/100))
Trade and other receivables (594 000 + 102 000)
Cash and cash equivalents
Loan to Parchment Ltd
Total current assets
Total assets
POSITION
AS
2013
R
2 821 848
14 000
634 200
24 177
3 494 225
542 000
696 000
579 500
12 500
1 830 000
5 324 225
Comment:
Important exam technique
IAS 28 is very clear that ‘investment in associate’ must be disclosed separately from
any other investment. NO MARKS will be awarded in an exam if this is disclosed
under “investments in equity instruments”.
Calculations
C1 Unrealised profit on sale of equipment
Cost of equipment
Accumulated depreciation at 31 March 20.17
(3 months elapsed from 1 December 20.16 = 60 000/3 x 9/12)
Carrying amount at 31 March 20.17
Proceeds of sale of equipment
Unrealised profit on sale
Reversal of current year’s depreciation (2 475/69 x 9 months)
(6 x 12 = 72 months – 3 months = 69 months, remaining useful life)
18
AT
R
60 000
(2 500)
57 500
59 975
2 475
323
FAC3704/103
QUESTION 2 (SUGGESTED SOLUTION)(continued)
C2 Investment in subsidiary
Analysis of owners' equity of Paper Ltd
At acquisition
Share capital
Retained earnings
Goodwill
Consideration paid and NCI
Current year
Profit for the year (104 000 - 90 000)
Profit on the sale of machinery
(2 475(C1)x 72%)
Depreciation on machinery (323(C1) – 90)
100%
Total
R
100 000
90 000
190 000
14 000
204 000
Papyrus Ltd 90%
At
Since
R
R
90 000
81 000
171 000
14 000
185 000
10%
NCI
R
10 000
9 000
19 000
19 000
14 000
12 600
1 400
(1 782)
232
216 450
(1 604)
209
11 205
(178)
23
20 245
185 000
C3 Investment in associate
Analysis of owners' equity of Parchment Ltd
At acquisition
Share capital
Retained earnings
[1 060 000 - (10 000 x 72%)]
Revaluation surplus
Gain on bargain purchase
Investment in Parchment Ltd
Since acquisition
Retained earnings [(1 480 000 –
1 060 000 + (10 000 x 72%)) x 30%]
Revaluation surplus (245 000 - 210 000)
Current year
Profit for the year [1 630 000 – 1 480 000
+ 30 000 dividend]
Revaluation surplus (290 000 - 245 000)
Dividend paid
Unrealised profit in closing inventory
(130 000 x 25/125)
100%
Total
R
220 000
1 052 800
210 000
1 482 800
(14 510)
1 468 290
Papyrus Ltd
36 000/120 000 = 30%
At
Since
CA
R
R
R
66 000
315 840
63 000
444 840
(14 510)
430 330
427 200
35 000
1 930 490
128 160
10 500
138 660
180 000
45 000
(30 000)
(26 000)
2 099 490
14 510
430 330
444 840
430 330
128 160
10 500
583 500
54 000
13 500
(9 000)
54 000
13 500
(9 000)
(7 800)
189 360
(7 800)
634 200
19
QUESTION 2 (SUGGESTED SOLUTION)(continued)
Comment:
The direction of the intragroup transaction is downward (from the parent to the
associate).
Firstly it is important to note that in the analysis the carrying amount column of the
investment in associate is adjusted with the unrealised profit of R7 800. The
inventory of the associate is overstated with the unrealised profit included in closing
inventory but the only SFP-line item of the associate that can be adjusted is the
“investment in associate” line item. The journal entry to account for the unrealised
profit included in closing inventory will be as follows:
Dr
Cr
R
R
Revenue (130 000 x 30% x 125/125)
39 000
Cost of sales (130 000 x 30% x 100/125)
31 200
Investment in associate (130 000 x 30% x 25/125)
7 800
Secondly it is important to note that in the analysis the carrying amount column of
the investment in associate is not adjusted with the tax effect of the unrealised
profit. The journal entry will be as follows:
Dr
Cr
R
R
Deferred tax (SFP)(7 800 x28%)
2 184
Cost of sales (130 000 x 30% x 100/125)
2 184
Thirdly it is important to note that the “share in profit of associate” line item is not
adjusted with the unrealised profit of R7 800 included in the closing inventory
because the P/L line items that is adjusted is “revenue” and “cost of sales”.
C4 Investment in associate alternative calculation
36 000 / 120 000 = 30%
Cost price of investment in associate
Gain on bargain purchase
Recognition of equity since acquisition until beginning of current year
(128 160 + 10 500) (C4)
Recognition of share of profit and other comprehensive income
(54 000 + 13 500) (C4)
Reversal of intragroup dividend received
Reversal of current year unrealised profit in closing inventory
(130 000 x 25/125 x 30%)(C4)
R
430 330
14 510
138 660
67 500
(9 000)
(7 800)
634 200
C5 Deferred tax asset
Deferred tax liability at year-end (given)
Unrealised profit in closing inventory – Parchment Ltd
(130 000 x 25/125 x 30%) x 28%
Unrealised profit in equipment (2 475 (C1) x 28%)
Reversal of current year’s depreciation (323 (C1) x 28%)
Unrealised profit in closing inventory – Paper
[(60 000 x 40/100) x 28%]
20
R
14 670
2 184
693
(90)
6 720
24 177
FAC3704/103
C6 Journal entries
J1
J2
J3
J4
J5
J6
J7
J8
J9
Dr Share capital
Dr Retained earnings
Dr Goodwill
Ct
Investment in Paper Ltd
Cr
NCI (SFP)
Elimination of owner’s equity in Paper Ltd at acquisition date
Dr Loan from Papyrus Ltd
Cr
Loan to Paper Ltd
Elimination of intragroup loan to Paper Ltd
Dr Profit on sale of equipment
Cr
Property, plant and equipment
Elimination of profit on the sale of intra-group equipment during the
current year
Dr
R
100 000
90 000
14 000
185 000
19 000
45 000
45 000
2 475
2 475
Dr Deferred tax (2 475 x 28%)
Cr
Income tax expense
Elimination of tax on the profit on the sale of intra-group equipment during
the current year
693
Dr Accumulated depreciation
Cr
Depreciation
Elimination of excess depreciation of the intra-group equipment during
the current year
323
Dr Income tax expense (323 x 28%)
Cr
Deferred tax
Elimination of tax on the excess depreciation of the intra-group equipment
during the current year
Dr Revenue
Cr
Cost of sales
Elimination of realised intra-group sales during the current year
Dr Cost of sales (60 000 x 40/100)
Cr
Inventory
Elimination of unrealised profit in closing inventory
Dr Deferred tax (24 000 x 28%)
Cr
Income tax expense
Tax implication of unrealised profit in closing inventory
J10 Dr NCI (PL) ((104 000 – 90 000 – 1 782 + 232) x 10%)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
693
323
90
90
100 000
100 000
24 000
24 000
6 720
6 720
1 245
1 245
J11 Dr Investment in associate
Cr
Retained earnings
Recording of gain on bargain purchase against previous year’s profits
14 510
J12
128 160
Dr Investment in associate
Cr
Retained earnings
Recording of associates interest in since acquisition retained earnings
Cr
R
14 510
128 160
21
QUESTION 2 (SUGGESTED SOLUTION)(continued)
J13 Dr Investment in associate
Cr
Revaluation surplus
Recording of associates interest in since acquisition revaluation surplus
10 500
J14 Dr Investment in associate
Cr
Share of profit of associate
Recording of profit for the year in the associate
54 000
J15
Dr Investment in associate
Cr
Revaluation surplus
Recording of the revaluation surplus for the year in the associate
J16 Dr Revenue
Cr
Cost of sales
Cr
Investment in associate
Elimination of unrealised profit resulting due to sale of inventory to the
associate
10 500
54 000
13 500
13 500
39 000
31 200
7 800
J17 Dr Deferred tax (7 800 x 28%)
Cr
Income tax
Tax on the elimination of unrealised profit resulting due to sale of
inventory to the associate
2 184
J18 Dr Other income
Cr
Investment in associate
Elimination of dividend received from associate
9 000
22
2 184
9 000
FAC3704/103
QUESTION 3 (56 marks)(101 minutes)
You are assisting the chief financial officer of the Earth Ltd Group with the year end consolidation. The
following is an extract from the annual financial statements of Earth Ltd and its related group investment
companies for the year ended 31 December 20.17:
EXTRACT FROM THE STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
Earth
Water
Air
Fire
Ltd
Ltd
Ltd
Ltd
R
R
R
R
ASSETS
Non-current assets
Property, plant and equipment
4 500 000
2 000 000
400 000
350 000
Investment in equity instruments
935 000
128 000
Total non-current assets
5 435 000
2 128 000
400 000
350 000
Current assets
Cash and cash equivalents
550 000
150 000
66 200
10 500
Inventory
670 000
115 000
450 000
70 000
Trade and other receivables
700 000
255 280
50 000
60 000
Total current assets
1 920 000
520 280
566 200
140 500
Total assets
7 355 000
2 648 280
966 200
490 500
EQUITY
Share capital - 500 000 ordinary shares
- 150 000 ordinary shares
- 80 000 ordinary shares
- 50 000 ordinary shares
1 000 000
-
300 000
-
80 000
-
100 000
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 20.17
Earth
Water
Air
Fire
Ltd
Ltd
Ltd
Ltd
R
R
R
R
RETAINED EARNINGS
Balance at 1 January 20.17
3 500 000
446 000
120 000
150 000
Profit for the year
2 865 000
1 536 500
706 200
70 500
Dividends paid
(100 000)
(50 000)
(20 000) (10 000)
Balance as at 31 December 20.17
6 265 000
1 932 500
806 200
210 500
Additional information
1.
Water Ltd
On 1 January 20.17, Earth Ltd obtained control of Water Ltd, by acquiring 120 000 ordinary
shares in Water Ltd. The consideration paid consisted of a cash amount of R650 000 and a
vehicle transferred at a fair value (equal to the carrying amount) of R150 000. The market price of
Water Ltd’s shares on this date was R6,40 per share.
23
QUESTION 3 (continued)
The following is an extract from the trial balance of Water Ltd on 1 January 20.17:
Share capital
Retained earnings
Revaluation surplus
Dr/(Cr)
R
(300 000)
(446 000)
(120 280)
On the acquisition date the fair value of the identifiable assets and liabilities of Water Ltd were
equal to the carrying amounts thereof, except for a newly occupied manufacturing building which
was valued by R100 000 more than its carrying amount. The new manufacturing building was
ready for use on 1 January 20.17. The revaluation of the new building was not recorded in the
accounting records of Water Ltd.
Water Ltd acquired a 5% interest in Wind Ltd on 1 June 20.17 for an amount of R100 000. The
investment was fair valued to R128 000 at 31 December 20.17.
On 31 December 20.17, the directors of Earth Ltd assessed goodwill and determined that the
goodwill in Water Ltd was impaired by R18 000 in the current year. No impairment was
recognised on the investment in Water Ltd in the separate financial statements.
2.
Air Ltd
On 31 December 20.15, Earth Ltd acquired 40% of the ordinary share capital in Air Ltd and paid a
cash amount of R45 000 for the shares. At the date of acquisition the retained earnings of Air Ltd
amounted to R40 000. Since 31 December 20.15, Earth Ltd exercised significant influence over
the financial and operating policy decisions of Air Ltd.
On 1 January 20.16, Earth Ltd started selling inventory to Air Ltd at a profit mark-up of 25% on
the selling price. On 31 December 20.17, Air Ltd had inventory on hand that was purchased from
Earth Ltd amounting to R120 000 (20.16: R60 000).
3.
Fire Ltd
Earth Ltd acquired 15 000 of the ordinary shares in Fire Ltd on 1 January 20.17. A cash amount
of R90 000 was paid for these shares. Since this date, Earth Ltd exercised joint control over the
financial and operating policy decisions of Fire Ltd in terms of a contractual agreement. The
arrangement was classified as a joint venture in accordance with IFRS 11, Joint Arrangements.
No gain on bargain purchase arose at the acquisition of Fire Ltd.
On 1 September 20.17, Fire Ltd sold furniture with a carrying amount of R135 000 to Earth Ltd for
R180 000. The furniture is included in the statement of financial position of Earth Ltd on
31 December 20.17. On this date the remaining useful life of the furniture was two years. The
entity’s policy is to provide for depreciation over the expected useful life of the furniture, using the
straight-line method which is in line with the allowance received from the South African Revenue
Service.
4.
24
The fair value of the identifiable assets and liabilities of Air Ltd and Fire Ltd at the respective
acquisition dates were considered to be equal to the carrying amounts of these items.
FAC3704/103
QUESTION 3 (continued)
5.
General accounting information and policies
The Earth Ltd Group:
- measures their non-controlling interests at fair value.
- measures its investments in equity instruments at fair value through profit or loss.
- depreciate newly occupied manufacturing buildings at 5% per annum which is in line with the
allowance received from the South African Revenue Service.
- accounts for investments in associates and joint ventures in accordance with the equity
method.
Earth Ltd has no other investments in equity instruments, other than the investments detailed in
the given information.
The share capital of the companies remained unchanged since the acquisition dates of the
companies. Assume that each share carries one vote.
The SA normal tax rate remained unchanged at 28% since 31 December 20.15 and capital gains
tax is calculated at 80% thereof.
REQUIRED:
(a) Prepare the pro forma journal entries to account for the intragroup sale of furniture between Fire Ltd
and Earth Ltd for the year ending 31 December 20.17 (no journal narrations are required).
(8½)
(b) Prepare only the asset section of the consolidated statement of financial position of the Earth Ltd
Group as at 31 December 20.17 (assume that there is no deferred tax asset).
(23)
(c) Calculate the amount that will be disclosed as deferred tax in the consolidated statement of financial
position as at 31 December 20.17 of the Earth Ltd Group. Clearly indicate whether amounts used
are deferred tax assets or liabilities.
(7)
(d) Prepare the consolidated statement of changes in equity of the Earth Ltd Group for the
year ended 31 December 20.17. The total columns are not required in the consolidated statement
of changes in equity.
(17½)
Your answers must comply with the requirements of International Financial Reporting Standards
(IFRS).
Comparative figures and notes to the consolidated financial statements are not required.
All amounts are to be calculated to the nearest R1.
25
QUESTION 3 (SUGGESTED SOLUTION)
PART A
J1
J2
J3
J4
Dr
Share of profit of joint venture (P/L)
((180 000 -135 000) x 30%)
Cr
Property, plant and equipment (SFP)
Elimination of unrealised profit on sale of furniture
Dr
R
13 500
13 500
Dr Deferred tax (SFP) (13 500 x 28%)
Cr
Share of profit of joint venture (P/L)
Tax effect of eliminating unrealised profit on sale of furniture
3 780
Dr
2 250
Property, plant and equipment (depreciation) (SFP)
(13 500/2 x 4/12)
Cr
Share of profit of joint venture (P/L)
Depreciation adjustment
Dr Share of profit of joint venture (P/L) (2 250 x 28%)
Cr
Deferred tax (SFP)
Tax effect of depreciation adjustment
Cr
R
3 780
2 250
630
630
PART B
EARTH LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Non-current assets
Property, plant and equipment
(4 500 000 + 2 000 000 + 100 000 - 5 000 (100 000 x 5%) (depreciation) – 13 500(part a)
+ 2 250(part a))
Investment in equity instruments (Wind Ltd) (given)
Investment in associate - Air Ltd (C1)
Investment in joint venture - Fire Ltd (C2)
Goodwill (C6)
Total non-current assets
Current assets
Trade and other receivables (700 000 + 255 280)
Cash and cash equivalents (550 000 + 150 000)
Inventory (670 000 + 115 000)
Total current assets
Total assets
R
6 583 750
128 000
342 480
108 150
35 720
7 198 100
955 280
700 000
785 000
2 440 280
9 638 380
Comment:
Important exam technique
IAS 28 is very clear that ‘investment in associate’ and ‘investment in joint venture’
must be disclosed separately from any other investment. No marks will be awarded
in an exam if these are disclosed under 'investments in equity instruments'.
Associates and joint ventures are both accounted for using the equity method. You
should notice in the above consolidated statement of financial position that Air Ltd
and Fire Ltd are accounted for in exactly the same way.
26
FAC3704/103
QUESTION 3 (SUGGESTED SOLUTION)(continued)
Calculations
C1 Investment in associate
R
45 000
3 000
Cost price (given)
Gain on bargain purchase (48 000 ((80 000 + 40 000) x 40%) - 45 000)
Recognition of equity since acquisition until beginning of year
((120 000 - 40 000) x 40%)
Recognition of share of profit for the current year
(706 200 x 40%)
Reversal of intra-group dividends (20 000 x 40%)
Elimination of current year unrealised profit in closing inventory
((120 000 x 25/100) x 40%)
32 000
282 480
(8 000)
(12 000)
342 480
OR
Analysis of owners' equity of Air Ltd
At acquisition
Share capital
Retained earnings
Gain on bargain purchase
Investment in Air Ltd
Since acquisition
Retained earnings (120 000 – 40 000)
Gain on bargain purchase
Current year
Profit for the year
Dividend paid
Unrealised profit in closing inventory
(120 000 x 25/100)
100%
Total
R
80 000
40 000
120 000
(3 000)
117 000
At
R
32 000
16 000
48 000
(3 000)
45 000
Earth Ltd
40%
Since
R
CA
R
45 000
80 000
3 000
32 000
3 000
32 000
3 000
706 200
(20 000)
282 480
(8 000)
282 480
(8 000)
309 480
(12 000)
342 480
(30 000)
886 200
430 330
C2 Investment in joint venture
R
15 000/50 000 = 30%
Cost price (given)
Recognition of share of profit for the current year
(70 500 x 30%)
Reversal of intra-group dividends (10 000 x 30%)
90 000
21 150
(3 000)
108 150
OR
27
Analysis of owners' equity of Fire Ltd
100%
Total
R
100 000
150 000
250 000
15 000
235 000
At acquisition
Share capital
Retained earnings
Goodwill
Investment in Fire Ltd
Current year
Profit for the year
Dividend paid
Earth Ltd
30%
Since
R
At
R
30 000
45 000
75 000
15 000
90 000
70 500
(10 000)
886 200
CA
R
90 000
21 150
(3 000)
18 150
90 000
21 150
(3 000)
108 150
PART C
Dr/(Cr)
R
(28 000)
1 400
Opening balance deferred tax liability
Revaluation (100 000 x 28%) (part b) - liability
Depreciation ((100 000 x 5%) x 1 year x 28%) - asset
Closing inventory - associate
(120 000 x 25/100 x 40% = 12 000 x 28%) (part b) - asset
Unrealised profit - furniture - joint venture (part a) - asset
Unrealised profit - depreciation - furniture - joint venture (part a) - liability
Closing balance deferred tax liability
3 360
3 780
(630)
(20 090)
PART D
EARTH LTD GROUP
CONSOLIDATED STATEMENT
31 DECEMBER 20.17
OF
CHANGES
Share
capital
R
Balance as at 1 January 20.17
Acquisition of subsidiary
Total comprehensive income:
- Profit for the year
Dividends
Balance as at 31 December 20.17
1 50
28
000 x 20% = 10 000
1 000 000
1 000 000
IN
EQUITY
Retained
earnings
R
FOR
THE
YEAR
NCI
R
3 530 680 C3
-
192 000
4 317 130 C4
(100 000)
302 980 C5
(10 000)1
7 747 810
484 980
ENDED
FAC3704/103
QUESTION 3 (SUGGESTED SOLUTION)(continued)
C3 Opening retained earnings
Earth Ltd (given)
Air Ltd - associate - gain on bargain purchase (C1)
Air Ltd - associate - movement in retained earnings (C1)
Unrealised profit in opening inventory - Air Ltd (60 000 x 25% x 40%)
Tax on unrealised profit in opening inventory (6 000 x 28%)
C4 Profit for the year attributable to owners of the parent
Earth Ltd (given)
Water Ltd - subsidiary (given)
Elimination of intragroup dividends - Water Ltd (50 000 x 80%)
Elimination of intragroup dividends - Air Ltd (part b)
Elimination of intragroup dividends - Fire Ltd (part b)
Impairment of goodwill (given)
Additional depreciation due to revaluation of building at acquisition date
Tax on additional depreciation
Unrealised intragroup profit in opening inventory, realised in current year
Tax on realisation of intragroup profit
Unrealised intragroup profit in closing inventory
Tax on unrealised intragroup profit
Share of profit from associate – Air Ltd (part b)
Share of profit from joint venture – Fire Ltd (part b)
Unrealised profit on intragroup sale of equipment (part a)
Tax on unrealised intragroup profit (part a)
Realisation of a portion of unrealised intragroup profit (part a)
Tax on realisation of intragroup profit (part a)
Minus: profit for the year attributable to NCI (C5)
C5 Profit for the year attributable to NCI
Water Ltd (profit for the year) (given)
Additional depreciation due to revaluation of building at acquisition date
Tax on additional depreciation
Impairment of goodwill (given)
Attributable to NCI (20%)
R
3 500 000
3 000
32 000
(6 000)
1 680
3 530 680
R
2 865 000
1 536 500
(40 000)
(8 000)
(3 000)
(18 000)
(5 000)
1 400
6 000
(1 680)
(12 000)
3 360
282 480
21 150
(13 500)
3 780
2 250
(630)
4 620 110
302 980
4 317 130
R
1 536 500
(5 000)
1 400
(18 000)
1 514 900
302 980
29
QUESTION 3 (SUGGESTED SOLUTION)(continued)
C6 Goodwill
Comment:
An analysis of owners’ equity is for calculation purposes only - it is not the required
disclosure. In this question only the “at acquisition” section of the analysis of owners’
equity was prepared in order to calculate the goodwill at acquisition date. The full
analysis has deliberately been omitted from this solution in order to highlight the fact
that it is not always necessary to prepare an analysis.
Analysis of owners’ equity of Water Ltd - subsidiary
100%
Total
R
At acquisition
Share capital (given)
300 000
Retained earnings (given)
446 000
Revaluation surplus (given)
120 280
Revaluation surplus
(100 000 x 72%)
72 000
938 280
Goodwill
53 720
Consideration
(650 000 + 150 000);
NCI (150 000 - 120 000) x R6,40)
992 000
Goodwill at date of acquisition
Impairment loss (given)
Goodwill at 31 December 20.17
Earth Ltd 80%
At
Since
R
R
20%
NCI
R
240 000
356 800
96 224
60 000
89 200
24 056
57 600
750 624
49 376
14 400
187 656
4 344
800 000
192 000
53 720
(18 000)
35 720
C7 Journal entries
J1
J2
J3
J4
30
Dr
R
100 000
Dr Property, plant and equipment
Cr
Deferred tax
Cr
Revaluation surplus
Recording the revaluation of the manufacturing building of Water Ltd at acquisition
Dr Share capital
Dr Retained earnings
Dr Revaluation surplus (120 280 + 72 000)
Dr Goodwill
Ct
Investment in Water Ltd
Cr
NCI (SFP)
Elimination of owner’s equity in Water Ltd at acquisition date
Dr Depreciation
Cr
Accumulated depreciation
Recording of depreciation of the manufacturing building of Water Ltd
Dr Deferred tax
Cr
Income tax expense
Recording of the tax on the depreciation of manufacturing building
Cr
R
28 000
72 000
300 000
446 000
192 280
53 720
800 000
192 000
5 000
5 000
1 400
1 400
FAC3704/103
QUESTION 3 (SUGGESTED SOLUTION)(continued)
J5
J6
J7
J8
J9
Dr Impairment loss
Cr
Goodwill
Recording of associates interest in since acquisition revaluation surplus
Dr NCI (SFP)
Cr
NCI (PL)
Recording of NCI’s interest in the impairment loss
Dr NCI (PL)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Dr Other income
Cr
NCI (SFP)
Cr
Dividend paid
Elimination of dividend received from subsidiary
Dr Investments in equity instruments
Cr
Investment in associate
Reclassification of investment in Air Ltd to investment in associate
J10 Dr Investment in associate
Cr
Retained earnings (opening balance)
Recording of associates interest in since acquisition retained earnings
J11 Dr Share of profit in associate
Cr
Investment in associate
Recording of profit for the year in the associate
18 000
18 000
3 600
3 600
306 580
306 580
40 000
10 000
50 000
45 000
45 000
32 000
32 000
282 480
282 480
J12 Dr Investment in associate
Cr
Retained earnings (opening balance)
Recording of gain on bargain purchase against previous year’s profits
3 000
J13 Dr Retained earnings (opening balance)
Cr Deferred tax
Investment in associate
Cr
Elimination of unrealised profit resulting due to sale of inventory to the
associate in previous financial year
4 320
1 680
J14 Dr Cost of sales
Dr Investment in associate
Cr
Revenue
Elimination of unrealised profit resulting due to sale of inventory to the
associate in previous financial year
18 000
6 000
J15 Dr Income tax expense
Cr
Deferred tax
Elimination of tax on the unrealised profit resulting due to sale of
inventory to the associate in previous financial year
J16 Dr Revenue
Cr
Cost of sales
Cr
Investment in associate
Elimination of unrealised profit resulting due to sale of inventory to the
associate in the current financial year
3 000
6 000
24 000
1 680
1 680
48 000
36 000
12 000
31
QUESTION 3 (SUGGESTED SOLUTION)(continued)
J17 Dr Deferred tax
Cr
Income tax expense
Elimination of the tax on the unrealised profit resulting due to sale of
inventory to the associate in the current financial year
3 360
J18 Dr Other income
Cr
Investment in associate
Elimination of dividend received from associate
8 000
J19
J20
Dr Investments in equity instruments
Cr
Investment in joint venture
Reclassification of investment in Fire Ltd to investment in joint venture
Dr Investment in joint venture
Cr
Share of profit in joint venture
Recording of profit for the year in the associate
J21 Dr Other income
Cr
Investment in joint venture
Elimination of dividend received from joint venture
J22 Dr
Share of profit of joint venture (P/L)
((180 000 -135 000) x 30%)
Cr
Property, plant and equipment (SFP)
Elimination of unrealised profit on sale of furniture
3 360
8 000
90 000
90 000
21 150
21 150
3 000
3 000
13 500
13 500
J23 Dr Deferred tax (SFP) (13 500 x 28%)
Cr
Share of profit of joint venture (P/L)
Tax effect of eliminating unrealised profit on sale of furniture
3 780
J24 Dr
2 250
Property, plant and equipment (depreciation) (SFP)
(13 500/2 x 4/12)
Cr
Share of profit of joint venture (P/L)
Depreciation adjustment
J25 Dr Share of profit of joint venture (P/L) (2 250 x 28%)
Cr
Deferred tax (SFP)
Tax effect of depreciation adjustment
32
3 780
2 250
630
630
FAC3704/103
QUESTION 4 (58 marks)(104 minutes)
The following are extracts of the trial balances of the entities in the Pearson Ltd Group for the year
ended 30 June 20.17:
Pearson
Morgan
Stanley
Fredman
Ltd
Ltd
Ltd
Ltd
Dr/(Cr)
Dr/(Cr)
Dr/(Cr)
Dr/(Cr)
R
R
R
R
Property, plant and equipment at
carrying amount
Investments in equity instruments:
- Morgan Ltd at cost
- Stanley Ltd at cost
- Fredman Ltd at cost
Trade and other receivables
Inventories
Cash and cash equivalents
Share capital:
- 600 000 ordinary shares
- 335 000 ordinary shares
- 240 000 ordinary shares
- 120 000 ordinary shares
Retained earnings/accumulated loss –
1 July 20.16
Trade and other payables
Profit before tax
Income tax expense
Dividends paid - 30 June 20.17
2 420 000
900 000
118 800
340 200
340 000
260 000
(600 000)
-
688 000
612 000
312 000
185 000
177 000
(335 000)
-
826 000
145 000
226 000
384 000
(480 000)
-
344 000
180 000
111 000
178 000
(120 000)
(1 518 000)
(377 400)
(2 845 278)
796 678
165 000
370 500
(683 600)
(1 904 028)
533 128
45 000
(625 080)
(170 500)
(463 083)
129 663
28 000
(144 000)
(330 000)
(304 167)
85 167
-
-
-
-
-
Additional information
1.
On 1 August 20.14, Pearson Ltd acquired control over Morgan Ltd by acquiring 244 550 of
Morgan Ltd's ordinary shares. On this date the retained earnings of Morgan Ltd amounted to R546
000 and the consideration was settled with R900 000 in cash. On 1 August 20.14 the market value
of Morgan Ltd’s shares were R3,20 per share.
2.
At the acquisition date the fair value of the identifiable assets and liabilities of Morgan Ltd were
considered to be equal to the carrying amounts thereof, except for the following assets:
Trade receivables
Inventory
Fair value
R
180 000
135 000
Carrying amount
R
220 000
162 000
33
QUESTION 4 (continued)
3.
On 1 January 20.17, Pearson Ltd sold a manufacturing machine to Morgan Ltd for R155 000. The
profit mark-up on the selling price was 25%. On 1 January 20.17 the machine had a remaining
useful life of 4 years. The entity’s policy is to provide for depreciation over the expected useful life
of the machinery, using the straight-line method which is in line with the allowance received from
the South African Revenue Service.
4.
On 28 February 20.16, Morgan Ltd acquired control over Stanley Ltd by acquiring 204 000 ordinary
shares in Stanley Ltd. The full consideration of R612 000 was paid in cash. At the date of
acquisition Stanley Ltd’s retained earnings amounted to R172 000 and the identifiable assets and
liabilities were considered to be fairly valued and equal to the carrying amounts thereof. On
28 February 20.16, the market value of Stanley Ltd’s shares were R3,00 per share.
5.
Since the acquisition of Stanley Ltd, Stanley Ltd sold inventory to Morgan Ltd. The inventory was
sold at a mark-up of 20% on the cost price. Included in inventory on hand on 30 June 20.17,
Morgan Ltd had inventory purchased from Stanley Ltd amounting to R112 000, excluding the
R13 000 inventory in transit (refer note 6), (30 June 20.16: R90 000).
6.
On 30 June 20.17, inventory invoiced to the value of R13 000 was still in transit between
Stanley Ltd and Morgan Ltd. This transaction had not been recorded in the accounting records of
Morgan Ltd as at 30 June 20.17. Stanley Ltd recognised the sale and included the R13 000 in
“trade and other receivables” of the current year.
7.
On 1 July 20.16, Pearson Ltd acquired 45% of the issued ordinary shares of Fredman Ltd for R118
800. At acquisition date the fair value of the identifiable assets and liabilities of Fredman Ltd were
considered to be equal to the carrying amounts thereof. In terms of a contractual agreement with
other operators, Pearson Ltd exercises joint control over the economic activities of Fredman Ltd.
The arrangement was classified as a joint venture as per IFRS 11, Joint Arrangements and the
consideration paid was equal to the fair value of the investment in Fredman Ltd on the date of
acquisition.
8.
The group measures its investments in equity instruments at cost.
9.
The Pearson Ltd group measures non-controlling interests at fair value. Goodwill relating to the
investment in Morgan Ltd was tested for impairment on 30 June 20.17 and it was determined that
the goodwill was impaired by R120 000.
10. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may assume
that the tax rate has remained unchanged since 1 August 20.14.
11. Each share carries one vote and the issued share capital of all the entities in the group remained
unchanged since 1 August 20.14.
REQUIRED:
(a) Prepare only the asset section (including the deferred tax asset) of the consolidated statement of
financial position of the Pearson Ltd Group as at 30 June 20.17.
(28)
(b) Prepare only the retained earnings and non-controlling interests’ columns of the consolidated
statement of changes in equity of the Pearson Ltd Group for the year ended 30 June 20.17. (30)
Your answer must comply with the requirements of International Financial Reporting Standards.
Comparative figures and notes to the consolidated financial statements are not required.
All calculations must be shown and amounts are to be calculated to the nearest R1.
34
FAC3704/103
QUESTION 4 (SUGGESTED SOLUTION)
PART A
PEARSON LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
30 JUNE 20.17
ASSETS
R
Non-current assets
Property, plant and equipment (2 420 000 + 688 000 + 826 000 - 38 750 + 4 844)
3 900 094
Goodwill (356 680(C2) + 68 000(C1) - 120 000) (impairment loss))
304 680
Investment in joint venture (118 800 + 98 550((304 167 – 85 167) x 45%)
217 350
Deferred tax asset (-11 200(TB) + 11 200(reversal MTMR) + 10 850 - 1 356 + 5 833)
15 327
Total non-current assets
4 437 451
Current assets
Trade and other receivables (340 200 + 312 000 + 145 000 - 13 000)
784 200
Inventories (340 000 + 185 000 + 226 000 + 13 000 - 20 833)
743 117
Cash and cash equivalents (260 000 + 177 000 + 384 000)
821 000
Total current assets
2 348 367
Total assets
6 785 818
PART B
PEARSON LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 30 JUNE 20.17
Retained
Non-controlling
earnings
interests
R
R
a
330 855b
Balance at 1 July 20.16
1 158 605
Total comprehensive income:
456 256d
Profit for the year
3 189 952c
Dividends paid
(165 000)
(16 350)e
Balance at 30 June 20.17
4 183 556
770 761
a
1 518 000 – 359 395(C2) = 1 158 605
b
289 440(C2) + 108 000(C1) – 132 927(C2) + 66 342(C1) = 330 855
c
2 048 600(2 845 278 – 796 678) + 1 370 900(1 904 028 - 533 128) + 333 420(463 083 – 129 663) +
98 550((304 167 – 85 167) x 45%) – 120 000(impairment) – 20 833(closing inventory) + 5 833(tax) +
15 000(opening inventory) – 4 200(tax) – 38 750(profit machine) + 10 850(tax) + 4 844(depreciation) –
1 356(tax) – 32 850(dividend) – 23 800(dividend) = 3 646 208 – 406 873(C2) – 49 383(C1) =
3 189 952
d
406 873(C2) + 49 383 (C1) = 456 256
e
12 150(C2) + 4 200(C1) = 16 350
35
QUESTION 4 (SUGGESTED SOLUTION)(continued)
Calculations
C1 Analysis of owners’ equity of Stanley Ltd
At acquisition: 28 February 20.16
100%
Total
R
85% Morgan Ltd
At
Since
R
R
15%
NCI
R
Share capital
480 000
408 000
72 000
Retained earnings
172 000
146 200
25 800
652 000
554 200
97 800
Equity represented by goodwill
Consideration paid & NCI at fair value
(240 000 – 204 000) x R3,00
68 000
57 800
10 200
720 000
612 000
108 000
Since acquisition
442 280
375 938
66 342
Retained earnings (625 080 – 172 000)
Unrealised profit in inventory
((90 000 x 20/120) x 72%)
453 080
385 118
67 962
Current year
329 220
279 837
49 383
Profit for the year (463 083 – 129 663)
Realisation of unrealised profit prior year
Unrealised profit in inventory
((125 000 x 20/120) x 72%)
333 420
10 800
283 407
9 180
50 013
1 620
(15 000)
(12 750)
(2 250)
Dividends paid
(28 000)
(23 800)
(4 200)
(10 800)
1 463 500
(9 180)
631 975
(1 620)
219 525
The following diagram schematically shows how the profit of Stanley Ltd is allocated to the noncontrolling interests:
PEARSON LTD
Profit from Morgan Ltd:
279 837 x 73% = 204 281 (C2)
MORGAN LTD
Profit from Stanley Ltd:
329 220 x 85% = 279 837 (C2)
STANLEY LTD
Profit for the year: R329 220 (C1)
36
NCI
Profit of Stanley Ltd
attributable to NCI:
279 837 x 27% = 75 556
(1)
329 220 x 15% = 49 383
(2)
FAC3704/103
QUESTION 4 (SUGGESTED SOLUTION)(continued)
The following diagram schematically shows how the profit of Morgan Ltd is allocated to the noncontrolling interests:
PEARSON LTD
Profit from Morgan Ltd:
1 227 100 x 73% = 895 783
MORGAN LTD
Profit for the year: R1 227 100
(1370 900(C2) – 120 000(C2) –
23 800(C2) = 1 227 100))
NCI
Profit of Morgan Ltd
attributable to NCI:
1 227 100 x 27% = 331 317
(3)
The amount that will be disclosed as “profit attributable to the non-controlling interests” in the
consolidated statement of profit or loss and other comprehensive income of the Pearson Ltd
Group is R75 556 (1) + R49 383 (2) + R331 317 (3) = R456 256.
37
QUESTION 4 (SUGGESTED SOLUTION)(continued)
C2 Analysis of owners’ equity of Morgan Ltd
At acquisition: 1 August 20.14
Share capital
Retained earnings
Retained earnings (trade receivables)
(40 000(180 000 – 220 000) x 72%)
Retained earnings (inventory)
(27 000(135 000 – 162 000) x 72%)
Equity represented by goodwill
Consideration and NCI at fair value
((335 000 – 244 550) x R3,20)
Since acquisition to current year
(20.14 – 20.16)
Accumulated loss (-370 500 - 546 000)
Realisation of trade receivables at acquisition
Realisation of inventory at acquisition
Since acquisition RE of Stanley Ltd (C1)
27%
NCI
R
100%
Total
R
73% Pearson Ltd
At
Since
R
R
335 000
546 000
244 550
398 580
(28 800)
(21 024)
(7 776)
(19 440)
832 760
356 680
(14 191)
607 915
292 085
(5 249)
224 845
64 595
900 000
289 440
1 189 440
90 450
147 420
(492 322)
(916 500)
28 8001
19 4401
375 938
(359 395)
(669 045)
21 024
14 191
274 435
(132 927)
(247 455)
7 776
5 249
101 503
Current year (20.17)
Profit for the year (1 904 028 – 533 128)
Goodwill impairment
Dividends received from Stanley Ltd
Profit for the year Stanley Ltd (C1)
1 506 937
1 370 900
(120 000)
(23 800)
279 837
1 100 064
1 000 757
(87 600)
(17 374)
204 281
406 873
370 143
(32 400)
(6 426)
75 556
Dividends paid – 30 June 20.17
(45 000)
2 101 255
(32 850)
707 819
(12 150)
551 236
Comment:
1Trade receivables and inventories are both current assets; and are therefore
expected to realise within 12 months (hence the realisation of these current assets in
the next period - “since acquisition to beginning of current year”). The write down of
the inventory and the trade receivables at the acquisition date is passed for group
purposes only in order to correctly calculate the goodwill/gain on bargain purchase
at the acquisition date (IFRS 3). The write down is not accounted for in the separate
accounting records of Morgan Ltd. Due to this write down at the acquisition date, the
carrying amounts of these assets from the perspective of the group are less than
those reflected in the separate accounting records of Morgan Ltd. When these assets
realise, due to their carrying amounts being less, the profit for the group will be more,
or the loss for the group will be less than that recognised in the separate accounting
records of Morgan Ltd.
38
FAC3704/103
QUESTION 4 (SUGGESTED SOLUTION)(continued)
C3 Journal entries
J1
J2
J3
J4
J5
J6
J7
J8
J9
Dr Share capital
Dr Retained earnings
Dr Goodwill
Ct
Investment in Stanley Ltd
Cr
NCI (SFP) (240 000 – 204 000) x R3.00
Elimination of owner’s equity in Stanley Ltd at acquisition date
Dr Retained earnings (C1)
Cr
NCI (SFP)
Recognition of NCI’s interest in since acquisition retained earnings
Dr Retained earnings
Dr NCI (SFP) (10 800 x 15%)
Dr Deferred tax
Cr
Cost of sales (90 000 x 20/120)
Adjustment to ensure that the consolidated retained earnings at the
beginning of 20.17 are in agreement with the consolidated retained
earnings at the end of 20.17
Dr
R
480 000
172 000
68 000
612 000
108 000
67 962
67 962
9 180
1 620
4 200
15 000
Dr Income tax expense
Cr
Deferred tax
Tax implication of realisation of unrealised profit in opening inventories
of Stanley Ltd
4 200
Dr Inventories
Cr
Trade receivables
Recognising the inventory in transit between Stanley Ltd and Morgan
Ltd
13 000
Dr Cost of sales (112 000 + 13 000) x 20/120))
Cr
Inventory
Elimination of unrealised intragroup profit included in the closing
inventories of Morgan Ltd at 30 June 20.17
20 833
Dr Deferred tax
Income tax expense
Cr
Tax on the elimination of unrealised intragroup profit included in the
closing inventories of Morgan Ltd at 30 June 20.17
Dr NCI (PL) (1 620 + 50 013 – 2 250)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Dr Other income
Cr
NCI (SFP)
Cr
Dividend paid
Elimination of dividend received from Stanley Ltd
Cr
R
4 200
13 000
20 833
5 833
5 833
49 383
49 383
23 800
4 200
28 000
39
QUESTION 4 (SUGGESTED SOLUTION)(continued)
J10 Dr Share capital
Dr Retained earnings (546 000 – 28 800 – 19 440)
Dr Goodwill
Ct
Investment in Morgan Ltd
Cr
NCI (SFP) (335 000 – 244 550) x R3.20
Elimination of owner’s equity in Morgan Ltd at acquisition date
J11 Dr NCI (SFP)
Cr
Retained earnings (C2)
Recognition of NCI’s interest in since acquisition retained earnings
J12
Dr Other income (155 000 x 25%)
Cr
Property, plant and equipment
Elimination of unrealised intragroup gain included in the machinery of
Morgan Ltd on 30 June 20.17
J13 Dr Deferred tax
Cr
Income tax expense
Tax implication of the elimination of unrealised intragroup gain included
in the machinery of Morgan Ltd on 30 June 20.17
J14
J15
J16
J17
132 927
132 927
38 750
38 750
10 850
10 850
4 844
Dr Income tax expense
Cr
Deferred tax
Tax implication of the recognition of the portion of the unrealised
intragroup gain realised by the depreciation process during 20.17
1 356
Dr Impairment loss
Cr
Goodwill
Impairment of goodwill as at year end
Dr NCI (PL) (C2)
NCI (SFP)
Cr
Recording of NCI’s interest in current year’s profit
Cr
R
900 000
289 440
Dr Accumulated depreciation (38 750 / 4 x 6/12)
Cr
Depreciation
Recognition of the portion of the unrealised intragroup gain realised by
the depreciation process during 20.17
J18 Dr Other income
Cr
NCI (SFP)
Cr
Dividend paid
Elimination of dividend received from Morgan Ltd
40
Dr
R
335 000
497 760
356 680
4 844
1 356
120 000
120 000
406 873
406 873
32 850
12 150
45 000
FAC3704/103
QUESTION 4 (SUGGESTED SOLUTION)(continued)
J19 Dr Investment in joint venture
Cr
Investment in Fredman Ltd
Reclassification of investment in Fredman Ltd to investment in joint
venture
J20 Dr Share of profit in joint venture
Cr
Investment in joint venture
Recording of profit for the year in the joint venture
Dr
R
118 800
Cr
R
118 800
98 550
98 550
41
QUESTION 5 (27 marks)(49 minutes)
On 1 January 20.16, Courtney Ltd acquired 35% of the issued shares of Ballantyne Ltd for R180 000.
Courtney Ltd exercised joint control over the financial and operating policy decisions of Ballantyne Ltd
since 1 January 2011. The arrangement was classified as a joint venture in accordance with IFRS 11,
Joint Arrangements.
The financial accountant of the group prepared the following section of the analysis of owner’s equity in
Ballantyne Ltd, which you may assume is correct:
At acquisition – 1 January 20.16
Share capital
Retained earnings
Mark-to-market reserve
Equity represented by gain on bargain purchase
Investment in Ballantyne Ltd at cost price
100%
Total
R
350 000
170 000
5 000
525 000
35%
At
R
122 500
59 500
1 750
183 750
3 750
180 000
At acquisition date there were no unidentified assets or liabilities and the fair value of the identifiable
assets and liabilities of Ballantyne Ltd were considered to be equal to the carrying amounts thereof.
The following is an extract from the trial balance of Ballantyne Ltd for the year ended
31 December 20.17:
Dr/(Cr)
R
Share capital – 350 000 ordinary shares
(350 000)
Retained earnings – 1 January 20.17
(190 000)
Mark-to-market reserve – 1 January 20.17
(13 192)
Deferred tax on mark-to-market reserve
(4 928)
Accumulated depreciation
(180 000)
Trade and other payables
(20 140)
Revenue
(390 000)
Other income
(8 000)
Other comprehensive income: mark-to-market reserve – fair value adjustment on
investment, net after tax
(3 880)
Property, plant and equipment
420 000
Investments in equity instruments:
- Barton Ltd at fair value
125 000
- Fletcher Ltd at fair value
150 000
Trade receivables
46 390
Cash and cash equivalents
12 070
Inventory
110 000
Dividends paid – 31 December 20.17
20 000
Cost of sales
160 000
Other expenses
69 500
Income tax expense
47 180
-
42
FAC3704/103
QUESTION 5 (continued)
Additional information
1.
During the current year Courtney Ltd started selling inventory to Ballantyne Ltd at a 30% mark-up
on the selling price. On 31 December 20.17, Ballantyne Ltd had inventory amounting to R70 000
on hand which was purchased from Courtney Ltd.
2.
On 31 December 20.17, the investment in Ballantyne Ltd was recorded at a fair value of R198 000
in the financial records of Courtney Ltd.
3.
Joint ventures are accounted for using the equity method.
4.
The group measures its investments in equity instruments at fair value through other
comprehensive income. The fair value of all equity instruments is equal to the cost thereof, unless
otherwise stated.
5.
The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may
assume that the tax rate and the capital gains tax rate has remained unchanged since
1 January 20.16.
6.
Each share carries one vote.
REQUIRED:
Prepare the pro-forma journal entries to account for the joint venture in the financial statements of the
Courtney Ltd Group for the year ended 31 December 20.17.
(27)
Journal narrations are not required.
Your answer must comply with the requirements of International Financial Reporting Standards (IFRS).
Comparative figures are not required.
Calculations are to be done to the nearest R1.
QUESTION 5 (SUGGESTED SOLUTION)
R
J1
J2
Mark-to-market reserve
(18 000 (198 000 -180 000) x 77,6%)
Dr Deferred tax (18 000 x 22,4%)
Cr
Investment in joint venture – Ballantyne Ltd (SFP)(198 000 –
180 000)
Reversal of MTMR on investment in Ballantyne Ltd
R
Dr
Dr Investment in joint venture – Ballantyne Ltd
Cr
Retained earnings (gain on bargain purchase)
Recording of gain on bargain purchase (given)
13 968
4 032
18 000
3 750
3 750
Comment on journal J2:
Courtney Ltd purchased a 35% interest in Ballantyne for R180 000. The net asset
value of the investment in Courtney Ltd was R183 750 on this date, which resulted in
a gain on bargain purchase of R3 750. The investment in Ballantyne Ltd is increased
by R3 750 to equal the value of the investment. If the investment was acquired in the
current year, the gain on bargain purchase would be included in the ‘share of profit
from joint venture’ – however as it relates to a prior period it is reflected in retained
earnings.
43
QUESTION 5 (SUGGESTED SOLUTION)(continued)
J3
J4
J5
Dr Investment in joint venture – Ballantyne Ltd (SFP)
Cr
Retained earnings (190 000 – 170 000) x 35%
Cr
Mark-to-market reserve (13 192 – 5 000) x 35%
Recording of interests in retained earnings and MTMR since acquisition
to beginning of the current year
R
9 867
7 000
2 867
Dr Investment in joint venture – Ballantyne Ltd (SFP)
Cr
Share of profit of joint venture (P/L)
Cr
Share of other comprehensive income of joint venture (OCI)
Recognition of share in profit of joint venture
(390 000 + 8 000 - 160 000 - 69 500 - 47 180) x 35%
Recognition of share in other comprehensive income of joint venture
(3 880 x 35%)
43 820
Dr
Cr
Cr
24 500
Revenue (70 000 x 35%)
Cost of Sales (70 000 x 70/100 x 35%)
Investment in joint venture – Ballantyne Ltd
(70 000 x 30/100 x 35%)
Elimination of unrealised profit in closing inventory of
Ballantyne Ltd
R
42 462
1 358
17 150
7 350
Comment on journal J5:
As the inventory in the books of Ballantyne Ltd (buyer) was overstated with the
unrealised profit at year end, the 'investment in joint venture' account should be
adjusted as this account reflects Courtney Ltd's interest in the assets and liabilities
(net assets) of Ballantyne Ltd.
J6
J7
Dr Deferred tax (SFP) (70 000 x 30/100 x 35% = 7 350 x 28%)
Cr
Income tax expense (P/L)
Tax effect of eliminating unrealised profit in closing inventory of
Ballantyne Ltd
2 058
Dr Other income (dividend received) (20 000 x 35%)
Cr
Investment in joint venture – Ballantyne Ltd (SFP)
Elimination of dividends received from joint venture (Ballantyne Ltd)
7 000
2 058
7 000
Comment on journal J7:
When Ballantyne Ltd pays dividends, its equity (net assets) is reduced by the amount
of the dividend paid. Consequently, Courtney Ltd's interest in Ballantyne Ltd's equity
(net assets) also reduces, hence the reduction in “investment in joint venture”.
44
FAC3704/103
QUESTION 5 (SUGGESTED SOLUTION)(continued)
C1 Analysis of owners’ equity of Ballantyne Ltd
(Not required – prepared for tuition purposes only)
Total
100%
At acquisition
Share capital
Retained earnings
Mark-to-market reserve
R
350 000
170 000
5 000
525 000
Equity represented by gain on bargain
purchase
Investment in Ballantyne Ltd @ cost price
(198 000 – 18 000)
(3 750)
521 250
Since acquisition to beginning of the
current year
Gain on bargain purchase
Retained earnings (190 000 – 170 000)
Mark-to-market reserve (13 192 – 5 000)
Current year
Profit for the year
Other comprehensive income for the year
Dividend paid
Courtney Ltd
35%
At
Since
R
R
122 500
59 500
1 750
183 750
35%
CA
R
(3 750)
180 000
31 942
3 750
20 000
8 192
125 390
121 320
3 880
(20 000)
658 392
180 000
Carrying amount of investment in joint venture adjusted for:
Unrealised profit in inventory
(70 000 x 30/100 x 35%)
180 000
13 617
3 750
7 000
2 867
13 843
3 750
7 000
3 093
43 820
42 462
1 358
(7 000)
50 437
43 887
42 462
1 358
(7 000)
230 437
(7 350)
223 087
Comment:
Courtney Ltd (investor) sells inventory to Ballantyne Ltd (joint venture). Therefore the
inventory is in the accounting records of Ballantyne Ltd. Only the line item “investment
in joint venture” is disclosed in the consolidated statement of financial position and
therefore the unrealised profit on sale of this inventory is adjusted against this line
item.
45
QUESTION 6 (35 marks)(63 minutes)
Mosaic Ltd is a company that manufactures mosaic furniture and invests in other similar entities in
South Africa. All the companies in the Mosaic Ltd group have a 28 February year end. The following
information was provided by the management of the Mosaic Ltd group:
Extract from the trial balances of the entities in the Mosaic Ltd group for the year ended
28 February 20.17:
Share capital:
– 250 000 ordinary shares
– 200 000 ordinary shares
– 100 000 ordinary shares
Retained earnings – 1 March 20.16
Accumulated depreciation: property, plant and equipment
Trade and other payables
Profit after tax
Property, plant and equipment at cost
Investments in equity instruments:
- Garnet Ltd at cost
- Violet Ltd at cost
- Ruby Ltd at cost
- Amethyst Ltd at cost
- Aquamarine Ltd at cost
Trade receivables
Cash and cash equivalents
Inventory
Dividends paid – 28 February 20.17
Violet Ltd
Dr/(Cr)
R
Mosaic Ltd
Dr/(Cr)
R
Garnet Ltd
Dr/(Cr)
R
(250 000)
(750 000)
(150 000)
(77 800)
(298 800)
533 600
(200 000)
(480 000)
(280 000)
(66 000)
(214 560)
948 560
(100 000)
(180 000)
(80 000)
(68 000)
(115 920)
337 920
280 000
140 000
100 000
115 000
78 000
180 000
100 000
-
25 000
45 000
85 000
87 000
50 000
-
20 000
58 000
63 000
65 000
-
Additional information
1.
On 1 January 20.14, Mosaic Ltd acquired control over Garnet Ltd by purchasing 160 000 of the
issued ordinary shares of Garnet Ltd for R280 000 when the retained earnings of Garnet Ltd
amounted to R140 000.
2.
At the acquisition date, the fair value of the identifiable assets and liabilities of Garnet Ltd were
considered to be equal to the carrying amounts thereof, except for land which was revalued by
R10 000 more than its carrying amount and inventory which was written down by R9 000 to its
net realisable value.
3.
On 1 March 20.16, Mosaic Ltd acquired a 49% interest in Violet Ltd. In terms of a contractual
agreement with the other operators, Mosaic Ltd exercises joint control over the economic
activities of Violet Ltd. The arrangement is classified as a joint venture as per IFRS 11, Joint
Arrangements. At acquisition date, the fair value of the identifiable assets and liabilities of Violet
Ltd were considered to be equal to the carrying amounts thereof.
4.
During the current year Mosaic Ltd sold inventory of R100 000 to Violet Ltd at a profit of 25% on
the cost price of the inventory. On 28 February 20.17, Violet Ltd had inventory on hand
amounting to R50 000 that was purchased from Mosaic Ltd.
46
FAC3704/103
QUESTION 6 (continued)
5.
On 1 December 20.16, Mosaic Ltd sold equipment with a carrying amount of R110 000 to
Garnet Ltd for R125 000. On this date the remaining useful life of the equipment was 3 years.
The entity’s policy is to provide for depreciation over the expected useful life of the equipment
using the straight-line method which is in line with the allowance received from the South African
Revenue Service. On 28 February 20.17, 40% of the selling price of the equipment was still
outstanding and is included in “trade receivables” and “trade and other payables” of Mosaic Ltd
and Garnet Ltd respectively.
6.
The Mosaic Ltd Group measures its investments in equity instruments at cost
7.
The Mosaic Ltd Group elected to measure non-controlling interests at fair value at acquisition
date. Goodwill was tested for impairment at 28 February 20.17 and it was determined that the
goodwill relating to Garnet Ltd was impaired by R2 000.
8.
The market value of Garnet Ltd’s shares at 1 January 20.14 was R1,75 per share.
9.
The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You may
assume that the tax rate has remained unchanged since 1 January 20.14.
10.
Each share carries one vote.
REQUIRED:
(a) Prepare only the asset section (including deferred tax asset) of the consolidated statement of
financial position of the Mosaic Ltd Group as at 28 February 20.17.
(30)
(b) Calculate the amount that will be disclosed as non-controlling interests in the consolidated
statement of financial position of the Mosaic Ltd Group as at 28 February 20.17.
(5)
Your answer must comply with the requirements of International Financial Reporting Standards (IFRS).
All amounts must be rounded off to the nearest R1.
Comparative figures and notes to the consolidated financial statements are not required.
47
QUESTION 6 (SUGGESTED SOLUTION)
PART A
MOSAIC LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT
28 FEBRUARY 20.17
R
ASSETS
Non-current assets
Property, plant and equipment (533 600 + 948 560 + 10 000 - 15 000 (125 000 110 000) - 150 000 - 280 000 + 1 250 (15 000/3 x 3/12))
1 048 410
*Investment in Ruby Red Ltd
100 000
*Investment in Amethyst Ltd
25 000
Goodwill (8 720(C1) - 2 000(impairment loss))
6 720
Investment in joint venture (140 000 + 56 801 (115 920 x 49%) – 4 900 (50 000 x 25/125 x
49%))
191 901
Deferred tax (-2 240 (10 000 x 22,4%) + 1 372 (4 900 x 28%) + 4 200 (15 000 x 28%) 350 (1 250 x 28%)
2 982
Total non-current assets
1 375 013
Current assets
Trade and other receivables (115 000 + 45 000 - 50 000 (125 000 x 40%))
Cash and cash equivalents (78 000 + 85 000)
Inventory (180 000 + 87 000)
Total current assets
Total assets
*May be combined as one line item
110 000
163 000
267 000
540 000
1 915 013
PART B
Non-controlling interests
At acquisition date fair value (200 000 x 20% x R1,75)
Since acquisition date ((480 000 - 140 000 + 6 480) x 20%)
Current year:
Profit for the year ((214 560 - 2 000) x 20%)
Dividends paid (50 000 x 20%)
Alternative calculation:
Balance at beginning of year
Total comprehensive income for the year:
Profit for the year ((214 560 - 2 000) x 20%)
Dividends paid (50 000 x 20%)
Closing balance
170
R
70 000
69 296
42 512
(10 000)
171 808
139 2961
42 512
(10 000)
171 808
000 (200 000 x 20% x R1,75) + 68 000 ((480 000 - 140 000) x 20%) + 1 296 (6 480 x 20%) =
139 296
48
FAC3704/103
QUESTION 6 (SUGGESTED SOLUTION)(continued)
Calculations
C1 Analysis of owners’ equity of Garnet Ltd
Mosaic Ltd
80%
At
Since
R
R
100%
Total
R
At acquisition
Share capital
Adjusted retained earnings
Retained earnings
Adjustment for inventory (9 000 x 72%)
Revaluation surplus (10 000 x 77,6%)
Equity presented by goodwill
Investment in Garnet Ltd and NCI
Since acquisition to beginning of the current year
Adjusted retained earnings
Retained earnings (480 000 - 140 000)
Reversal of inventory adjustment
Current year
Adjusted profit for the year
Profit for the year
Impairment of goodwill
Dividend paid
200 000
133 520
140 000
(6 480)
7 760
341 280
8 720
350 000
160 000
106 816
112 000
(5 184)
6 208
273 024
6 976
280 000
20%
NCI
R
40 000
26 704
28 000
(1 296)
1 552
68 256
1 744
70 000
346 480
340 000
6 480
277 184
272 000
5 184
69 296
68 000
1 296
212 560
214 560
(2 000)
170 048
171 648
(1 600)
42 512
42 912
(400)
(40 000)
402 048
(10 000)
171 808
(50 000)
852 560
280 000
Goodwill at acquisition date
Impairment loss
Balance as at 28 February 20.17
OR
Goodwill can be calculated using the proof of goodwill method:
Consideration transferred at acquisition date: IFRS 3.32(a)(i)
Plus: Amount of non-controlling interests (200 000 x 20% x 1,75): IFRS 3.32(a)(ii)
Less: net of assets acquired and liabilities assumed at acquisition date: IFRS 3.32(b)
Goodwill as at acquisition date
Impairment loss
Balance as at 28 February 20.17
OR
Goodwill can be calculated by preparing the at acquisition journal entry:
Dr
R
Dr Share capital
200 000
Dr Retained earnings at acquisition date (140 000 – 6 480)
133 520
Dr Revaluation surplus
7 760
Dr Goodwill (balancing)
8 720
Cr Investment in Garnet Ltd at cost
Cr Non-controlling interests
8 720
(2 000)
6 720
R
280 000
70 000
350 000
(341 280)
8 720
(2 000)
6 720
Cr
R
280 000
70 000
49
QUESTION 6 (SUGGESTED SOLUTION)(continued)
Comment:
From the above it should be clear that there are many methods that may be applied to
obtain the correct answer. It is important for you to decide which method works the best for
you and then to apply that method in an examination. Do not apply more than one method
as you will be wasting time.
It is of the utmost importance to realise that an analysis of owners’ equity is only a
calculation and will earn you no marks in an examination unless the amounts calculated in
the analysis have been correctly disclosed in the financial statements.
C2 Journal entries
J1
J2
J3
J4
J5
J6
J7
50
Dr Property, plant and equipment
Cr
Deferred tax
Cr
Revaluation surplus
Remeasurement of land of Garnet Ltd at acquisition date
Dr Share capital
Dr Retained earnings (C1)
Dr Revaluation surplus
Dr Goodwill
Ct
Investment in Garnet Ltd
Cr
NCI (SFP) (200 000 – 160 000) x R1.75
Elimination of owner’s equity in Garnet Ltd at acquisition date
Dr Retained earnings (C1)
Cr
NCI (SFP)
Recognition of NCI’s interest in since acquisition retained earnings
Dr Other income
Cr
Property, plant and equipment
Elimination of unrealised intragroup gain included in the equipment of
Garnet Ltd on 28 February 20.17
Dr Deferred tax
Cr
Income tax expense
Tax implication of elimination of unrealised intragroup gain included in
the equipment of Garnet Ltd on 28 February 20.17
Dr Accumulated depreciation
Cr
Depreciation
Recognition of the portion of the unrealised intragroup gain realised by
the depreciation process during 20.17
Dr Income tax expense
Cr
Deferred tax
Tax implication of the recognition of the portion of the unrealised
intragroup gain realised by the depreciation process during 20.17
Dr
R
10 000
Cr
R
2 240
7 760
200 000
133 520
7 760
8 720
280 000
70 000
69 296
69 296
15 000
15 000
4 200
4 200
1 250
1 250
350
350
FAC3704/103
QUESTION 6 (SUGGESTED SOLUTION)(continued)
J8
J9
J10
Dr NCI (PL)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Dr Trade payables
Cr
Trade receivables
Elimination of amount outstanding caused by intragroup sale of
equipment at year end
Dr Impairment loss
Cr
Goodwill
Impairment of goodwill as at year end
J11 Dr NCI (SFP)
Cr
NCI (PL)
NCI portion on the goodwill impairment as at year end
J12
J13
J14
J15
Dr
R
42 912
42 912
50 000
50 000
2 000
2 000
400
400
Dr Other income
Dr NCI (SFP)
Cr
Dividend paid
Elimination of dividend received from Garnet Ltd
40 000
10 000
Dr Investment in joint venture
Cr
Investment in Violet Ltd
Reclassification of investment in Violet Ltd to investment in joint venture
140 000
50 000
140 000
Dr Investment in joint venture
Cr
Share of profit of joint venture
Recognition of share in profit of joint venture
56 801
Dr Sales (50 000 x 49%)
Cr
Cost of sales (50 000 x 100/125 x 49%)
Cr
Investment in joint venture (50 000 x 25/125 x 49%)
Elimination of unrealised profit in closing inventory of Violet Ltd
24 500
J16 Dr Deferred tax
Cr
Income tax expense
Tax effect of the elimination of unrealised profit in closing inventory of
Violet Ltd
Cr
R
56 801
19 600
4 900
1 372
1 372
51
QUESTION 7 (38 marks) (68 minutes)
The following information was provided by the financial manager of the Rocky Ltd Group:
Extracts from the trial balances of the entities in the Rocky Ltd Group for the year ended
28 February 20.17:
Rocky Ltd
Trail Ltd
Cliff Ltd
R
R
R
Debits
434 400
231 169
285 200
Property, plant and equipment at carrying amount
Investment in equity instruments:
338 000
- Trail Ltd at fair value
170 000
- Cliff Ltd at fair value
72 000
176 000
226 000
Trade and other receivables
124
500
248
010
133 222
Inventories
187 800
227 300
195 660
Cash and cash equivalents
145 000
Loan to Trail Ltd
18 125
Finance costs
42 700
78 000
25 300
Other expenses
135 324
60 249
52 052
Income tax expense
26
000
34
000
18 000
Dividends paid - 28 February 20.17
1 505 724
1 242 853
935 434
Credits
Share capital - 500 000 ordinary shares
- 190 000 ordinary shares
- 220 000 ordinary shares
Retained earnings - 1 March 20.16
Deferred tax liability
Loan from Rocky Ltd
Trade and other payables
Gross profit
Other income
Other comprehensive income: revaluation surplus –
fair value adjustment of land, net after tax
(500 000)
(194 324)
(285 400)
(354 000)
(172 000)
(402 000)
(185 084)
(5 169)
(145 000)
(176 392)
(273 000)
(38 300)
(220 000)
(370 734)
(133 500)
(186 000)
(25 200)
1 505 724
(17 908)
1 242 853
935 434
Additional information
1. On 1 December 20.13, Rocky Ltd acquired control over Trail Ltd by purchasing 142 500 ordinary
shares in Trail Ltd. On this date the retained earnings of Trail Ltd amounted to R54 260. The
consideration paid was settled with R220 000 in cash and the transfer of land with a market value
of R118 000.
2. On 28 February 20.14, Trail Ltd acquired 77 000 ordinary shares in Cliff Ltd. The full consideration
of R170 000 was paid in cash. From this date Trail Ltd exercised significant influence over the
financial and operating policy decisions of Cliff Ltd. At the date of acquisition, Cliff Ltd’s retained
earnings amounted to R294 000.
52
FAC3704/103
QUESTION 7 (continued)
3. On the acquisition dates of Trail Ltd and Cliff Ltd the fair value of all assets and liabilities were
considered to be equal to the carrying amounts thereof and there were no unidentified assets,
liabilities or contingent liabilities.
4. On 1 June 20.15, Trail Ltd sold a manufacturing machine to Rocky Ltd for R152 000. The profit on
the sale of the machine amounted to R34 600 and on that date the machine had a remaining useful
life of three years. The depreciation written off on the machine was in line with the allowance
received from the South African Revenue Service.
5. On 1 March 20.16, Rocky Ltd issued an interest bearing loan (payable annually in arrears) of
R145 000 to Trail Ltd. The loan bears interest at 12,5% per annum and the interest payment
received by Rocky Ltd is included in “other income”. The interest payment made by Trail Ltd is
included in “finance charges”.
6.
Since 1 December 20.13, Rocky Ltd sold inventory to Trail Ltd at a mark-up of 15% on the cost
price. On 29 February 20.17, Trail Ltd had inventory to the amount of R92 000 on hand that was
purchased from Rocky Ltd (28 February 20.16: R69 000).
7. The Rocky Ltd Group elected to measure non-controlling interests in an acquiree at their
proportional share of the acquiree’s identifiable net assets.
8. The Rocky Ltd Group measures its investments in equity instruments at cost.
9. You may assume that the SA normal tax rate remained unchanged at 28% and the capital gains tax
inclusion rate was 80% since 1 December 20.13.
10. Each share carries one vote.
REQUIRED:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income for the
Rocky Ltd Group for the year ended 28 February 20.17.
(24)
(b) Prepare only the retained earnings column in the consolidated statement of changes in equity of
the Rocky Ltd Group for the year ended 28 February 20.17.
(14)
Your answer must comply with the requirements of International Financial Reporting Standards (IFRS).
Notes to the consolidated annual financial statements and comparative figures are not required.
Calculations are to be done to the nearest R1.
53
QUESTION 7 (SUGGESTED SOLUTION)
PART A
ROCKY LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 20.17
R
15
15
Gross profit (354 000 + 273 000 - 12 000 (92 000 x /115) + 9 000 (69 000 x /115))
624 000
Other income (172 000 + 38 300 - 25 500 (34 000 x 75%) – 6 300 (18 000 x 35%) 160 375
18 125 (145 000 x 12,5%))
Share of profit from associate ((186 000 + 25 200 - 25 300 - 52 052) x 35%(C3))
46 847
Finance cost (18 125 – 18 125)
Other expenses (42 700 + 78 000 -11 533)
(109 167)
Income tax expense (135 324 + 60 249 + 3 229 (11 533 x 28%) - 3 360 (12 000 x 28%) +
2 520 (9 000 x 28%))
(197 962)
PROFIT FOR THE YEAR
524 093
Other comprehensive income
Items that will not be reclassified to profit or loss:
Revaluation surplus: fair value adjustments on land, net after tax (given)
17 908
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
542 001
Profit attributable to:
Owners of parent
Non-controlling interests
Total comprehensive income attributable to:
Owners of parent
Non-controlling interests
473 149
50 9441
524 093
486 580
55 4212
542 001
1154
926 (273 000 + 38 300 -18 125 - 78 000 - 60 249) - 6 300 (Cliff dividend) + 11 533 (property, plant
and equipment) + 46 847 (Cliff profit) – 3 229 (tax on depreciation) = 203 777 x 25% = 50 944
2 50
944 + 4 477 (17 908 X 25%) = 55 421
PART B
ROCKY LTD GROUP
EXTRACT OF THE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR
ENDED 28 FEBRUARY 20.17
Retained
earnings
R
Balance at 1 March 20.16 (C1)
303 712
Total comprehensive income for the year
Profit for the year (Part A)
473 149
Dividends paid (given)
(26 000)
Balance at 28 February 20.17
750 860
54
FAC3704/103
QUESTION 7 (SUGGESTED SOLUTION)(continued)
C1 Opening retained earnings calculation
Retained earnings – Rocky Ltd (given)
Retained earnings – Trail Ltd Group (C2)
Gain on bargain purchase on acquisition of Trail Ltd
Unrealised profit on intragroup sale of inventory
(69 000 x 15/115) x 72% = 6 480 OR (9 000 – 2 520)
R
194 324
111 673
4 195
(6 480)
303 712
R
130 824
9 900
26 857
(34 600)
9 688
8 650
(2 422)
148 897
111 673
C2 Retained earnings – Trail Ltd Group
Retained earnings – Trail Ltd (185 084 – 54 260)
Gain on bargain purchase - Cliff Ltd
Retained earnings - Cliff Ltd (C3)
Elimination of profit on sale of machine
Tax on profit on sale of machine (34 600 x 28%)
Depreciation on machine (34 600/3 x 9/12)
Tax on depreciation (8 650 x 28%)
Retained earnings – Trail Ltd Group x 75%
C3 Analysis of owners’ equity of Cliff Ltd
At acquisition
Share capital
Retained earnings
Gain on bargain purchase
Consideration paid
Since acquisition to
beginning of current year
Gain on bargain purchase
Retained earnings: (370 737 294 000)
Current year
Profit for the year (186 000 +
25 200 - 52 052 – 25 300)
Dividends paid (given)
100%
Total
R
220 000
294 000
514 000
(9 900)
504 100
Trail Ltd
35%
At
R
77 000
102 900
179 000
(9 900)
170 000
Since
R
35%
CA
R
170 000
76 734
36 757
9 900
36 757
9 900
76 734
26 857
26 857
133 848
46 847
46 847
133 848
(18 000)
696 682
46 847
(6 300)
77 304
46 847
(6 300)
247 304
55
QUESTION 7 (SUGGESTED SOLUTION)(continued)
Comment:
The group is a vertical group. The analysis of Cliff Ltd (bottom entity) will be prepared
first. As Trail Ltd has a 35% interest in Cliff Ltd, 35% of the equity of Cliff Ltd will be
attributable to Trail Ltd.
Rocky Ltd in turn owns 75% of Trail Ltd. It is important to realise that due to Trail Ltd’s
35% interest in Cliff Ltd, Rocky Ltd also owns 75% of the 35% equity of Cliff Ltd owned
by Trail Ltd.
For example, per C3 (analysis), Cliff Ltd made a profit of R133 848. Of this profit, Trail
Ltd owns 35% (R46 847). Rocky Ltd owns 75% of Trail Ltd and is therefore entitled to
75% x R46 847 = R35 135 (or 133 848 x 35% x 75% = R35 135), and the NCI the
remaining 25% (R11 712). (Refer also to analysis of Trail Ltd).
C4 Analysis of owners’ equity of Trail Ltd
100%
Total
R
At acquisition
Share capital
Retained earnings
Gain on bargain purchase
Consideration paid and NCI
(220 000 + 118 000)
Since acquisition to beginning of
current year
Retained earnings
(185 084 - 54 260)
Gain on bargain purchase - Cliff Ltd
(C3)
Retained earnings - Cliff Ltd (C3)
Elimination of intragroup profit on sale
of machine
Tax on profit on sale of machine
(34 600 x 28%)
Depreciation on machine
(34 600/3 x 9/12)
Tax on depreciation (8 650 x 28%)
Rocky Ltd
75%
At
Since
R
R
25%
NCI
R
402 000
54 260
456 260
(4 195)
301 500
40 695
342 195
(4 195)
100 500
13 565
114 065
452 065
338 000
114 065
148 897
111 673
37 224
130 824
98 118
32 706
9 900
26 857
7 425
20 143
2 475
6 714
(34 600)
(25 950)
(8 650)
9 688
7 266
2 422
8 650
(2 422)
6 488
(1 817)
2 163
(606)
203 777
154 9261
152 833
116 195
50 944
38 731
(6 300)
(4 725)
(1 575)
11 533
(3 229)
46 847
17 908
(34 000)
788 647
1273 000 + 38 300 - 18 125 - 78 000 - 60 249 = 154 926
8 650
(2 422)
35 135
13 431
(25 500)
252 436
2883
(807)
11 712
4 477
(8 500)
198 210
Current year
Profit for the year
Dividends received from Cliff Ltd
included in Trail Ltd’s profits (C3)
Depreciation on machine
(34 600/3 years)
Tax on depreciation (11 533 x 28%)
Profit for the year - Cliff Ltd (C3)
Other comprehensive income (given)
Dividends paid (given)
56
FAC3704/103
QUESTION 7 (SUGGESTED SOLUTION)(continued)
C5 Journal entries
J1
J2
J3
J4
J5
J6
J7
Dr Investment in associate
Cr
Investment in Cliff Ltd
Reclassification of investment in Cliff Ltd to investment in associate
Dr Investment in associate
Cr
Retained earnings
Recording of the gain in bargain purchase in the associate
Dr Investment in associate
Cr
Retained earnings
Recording of associates interest in since acquisition retained earnings
Dr Investment in associate
Cr
Share of profit from associate
Recording of the associate’s profit for the current year
Dr Other income
Cr
Investment in associate
Elimination of dividends received from associate
Dr Share capital
Dr Retained earnings
Cr
Retained earnings (gain on bargain purchase)
Cr
Investment in Trail Ltd
Cr
NCI (SFP)
Elimination of owner’s equity in Trail Ltd at acquisition date
Dr
R
170 000
170 000
9 900
9 900
26 857
26 857
46 847
46 847
6 300
6 300
402 000
54 260
4 195
338 000
114 065
Dr Retained earnings
Cr
NCI (SFP)
Recognition of NCI’s interest in since acquisition retained earnings
37 224
Dr Retained earnings
Dr Deferred tax
Cr
Property, plant and equipment
Elimination of unrealised intragroup gain included in the equipment of
Rocky Ltd on 28 February 20.16
24 912
9 688
Dr Accumulated depreciation
Dr Deferred tax
Cr
Retained earnings
Recognition of the portion of the unrealised intragroup gain realised by
the depreciation process during 20.16
8 650
J10 Dr Accumulated depreciation
Depreciation
Cr
Recognition of the portion of the unrealised intragroup gain realised by
the depreciation process during 20.17
11 533
J8
J9
Cr
R
37 224
34 600
2 422
6 288
11 533
57
C5 Journal entries
J11 Dr Income tax expense
Cr
Deferred tax
Tax implication on the recognition of the portion of the unrealised
intragroup gain realised by the depreciation process during 20.17
J12 Dr
Loan from Rocky Ltd
Dr
R
3 229
3 229
145
000
Cr
Loan to Trail Ltd
Elimination of intragroup loan
J13 Dr Other income
Cr
Finance cost
Elimination of interest on the intragroup loan
J14
Dr Retained earnings
Dr Deferred tax
Cr
Cost of sales
Adjustment to ensure that the consolidated retained earnings at the
beginning of 20.17 are in agreement with the consolidated retained
earnings at the end of 20.17
J15 Dr Income tax expense
Cr
Deferred tax
Tax implication of realisation of unrealised profit in opening inventories
of Trail Ltd
J16
J17
J18
J19
J20
58
Dr Cost of sales
Cr
Inventory
Elimination of unrealised intragroup profit included in the closing
inventories of Trail Ltd at 28 February 20.17
Dr Deferred tax
Cr
Income tax expense
Tax on the elimination of unrealised intragroup profit included in the
closing inventories of Trail Ltd at 28 February 20.17
Dr NCI (PL)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Dr NCI (OCI)
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s other comprehensive
income
Dr Other income
Dr NCI (SFP)
Cr
Dividends paid
Elimination of dividend received from Trail Ltd
Cr
R
145 000
18 125
18 125
6 480
2 520
9 000
2 520
2 520
12 000
12 000
3 360
3 360
50 944
50 944
4 477
4 477
25 500
8 500
34 000
FAC3704/103
QUESTION 8 (60 marks)(108 minutes)
The following are the trial balances of Rainbow Ltd, Red Ltd and Blue Ltd for the year ended
31 December 20.17:
Debits
Property, plant and equipment
Investment in equity instruments:
- Red Ltd at fair value
- Green Ltd at fair value
- Blue Ltd at fair value
Inventory
Cost of sales
Other expenses
Income tax expense
Credits
Share capital - 200 000 ordinary shares
- 100 000 ordinary shares
- 100 000 ordinary shares
Retained earnings – 1 January 20.17
Revenue
Other income
Rainbow Ltd
R
553 000
Red Ltd
R
428 180
Blue Ltd
R
457 280
450 000
241 227
380 000
200 760
83 227
–
–
190 000
387 000
171 650
120 000
129 570
–
–
–
466 800
550 000
222 000
94 920
2 028 214
1 426 400
1 791 000
250 000
–
–
900 214
693 000
185 000
2 028 214
–
200 000
–
472 000
576 900
177 500
–
–
100 000
580 000
913 000
198 000
1 426 400
1 791 000
120 000
–
Information relating to acquisitions
Red Ltd:
1. Rainbow Ltd acquired control of Red Ltd on 1 January 20.17 by acquiring 70 000 shares in Red Ltd
for R450 000.
2. During the year Rainbow Ltd sold inventory amounting to R120 000 to Red Ltd. Rainbow Ltd sells
its inventory at cost plus 25%. At year end Red Ltd had inventory of R80 000 on hand which was
purchased from Rainbow Ltd.
Blue Ltd:
3. On 1 January 20.15, Red Ltd acquired a 45% interest in Blue Ltd. From this date Rainbow Ltd
exercised significant influence over the financial and operating policy decisions of Blue Ltd.
4. On 1 January 20.15 the retained earnings of Blue Ltd amounted to R280 000 and the consideration
paid was equal to the interest in the net assets acquired.
5. Included in "other expenses" of Blue Ltd are management fees of R60 000 paid to Red Ltd. The
management fees received are included in "other income" of Red Ltd.
59
QUESTION 8 (continued)
Green Ltd:
6. On 1 January 20.17, Rainbow Ltd entered into a joint arrangement by acquiring 40% of the issued
share capital of Green Ltd for R120 000. After considering all the requirements of IFRS 11, Joint
Arrangements, the joint arrangement was correctly classified as a joint venture.
7. The following information can be assumed to be correct relating to the joint venture, Green Ltd:
Total
40%
At acquisition - 1 January 20.17
R
R
Share capital
100 000
40 000
200
000
80
000
Retained earnings
120 000
Consideration transferred
120 000
8. The profit for the financial year ended 31 December 20.17 for Green Ltd amounted to R287 280.
9. On 31 December 20.17, a sworn appraiser valued a manufacturing building in Green Ltd with a
carrying amount of R120 000 to a fair value of R150 000. Green Ltd uses the cost model in terms of
IAS 16, Property, Plant and Equipment to account for land and buildings, while Rainbow Ltd uses
the revaluation model to account for land and buildings.
Additional information
10. On the acquisition dates of Red Ltd, Green Ltd and Blue Ltd the fair value of all assets and liabilities
were considered to be equal to the carrying amounts thereof and there were no unidentified assets,
liabilities or contingent liabilities, unless stated otherwise.
11. The Rainbow Ltd Group elected to measure any non-controlling interests in an acquiree as its
proportional share of the acquiree’s identifiable net assets at acquisition date.
12. All the entities in the group measure investments in equity instruments at cost.
13. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof.
14. Each share carries one vote and the share capital of all companies has remained unchanged.
REQUIRED:
a) Prepare the pro-forma journal entries in Rainbow Ltd Group’s financial statements for the year
ended 31 December 20.17.
(33)
b) Prepare the consolidated statement of profit or loss and other comprehensive income for the
Rainbow Ltd Group for the year ended 31 December 20.17.
(27)
Your answer must comply with the requirements of International Financial Reporting Standards.
Notes to the consolidated annual financial statements and comparative figures are not required.
Journal narrations are not required.
All amounts are to be calculated to the nearest R1.
60
FAC3704/103
QUESTION 8 (SUGGESTED SOLUTION)
PART A
Pro-forma journal for the Rainbow Ltd Group
J1
J2
J3
J4
J5
J6
J7
J8
J9
Dr Investment in associate
Cr
Investment in Blue Ltd
Reclassification of investment in Blue Ltd to investment in associate
Dr Investment in associate ((580 000 – 280 000) x 45%)
Cr
Retained earnings
Recording of associates interest in since acquisition retained earnings
Investment in associate
((913 000 – 550 000 + 198 000 – 222 000 – 94 920) x 45%)
Cr
Share of profit from associate
Recording of the associate’s profit for the current year
Dr
R
190 000
Cr
R
190 000
135 000
135 000
Dr
109 836
109 836
Dr Share capital
Dr Retained earnings (Red Ltd)
Dr Retained earnings (Blue Ltd)
Cr
Gain on bargain purchase
Cr
Investment in Red Ltd
Cr
NCI (SFP) ((200 000 + 472 000 + 135 000) x 30%)
Elimination of owner’s equity in Red Ltd at acquisition date
200 000
472 000
135 000
Dr Revenue
Cr
Cost of sales
Elimination of realised intra-group sales during the current year
120 000
Dr Cost of sales
Cr
Inventory
Elimination of unrealised profit in closing inventory
Dr Deferred tax
Income tax expense
Dr
Tax implication of the elimination of unrealised profit in closing
inventory
Dr NCI (PL) (99 954 (C3) + 32 951(109 836 x 30%))
Cr
NCI (SFP)
Recording of NCI’s interest in current year’s profit
Dr Investment in joint venture
Cr
Investment in Green Ltd
Reclassification of investment in Green Ltd to investment in joint
venture
114 900
450 000
242 100
120 000
16 000
16 000
4 480
4 480
132 905
132 905
120 000
120 000
61
QUESTION 8 (SUGGESTED SOLUTION)(continued)
J10 Dr Investment in associate (287 280 x 40%)
Cr
Share of profit from associate
Recording of the joint venture’s profit for the current year
J11 Dr Investment in associate ((150 000 – 120 000) x 72%) x 40%))
Cr
Share of other comprehensive income from associate
Recording of the joint venture’s other comprehensive income for the
current year
Dr
R
114 912
Cr
R
114 912
8 640
8 640
PART B
RAINBOW LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDING 31 DECEMBER 20.17
R
Revenue (693 000 + 576 900 – 120 000)
1 149 900
Cost of sales (380 000 + 171 650 – 120 000 + 16 000(C1))
(447 650)
Gross profit
702 250
Other income (185 000 + 177 500 + 114 900 (J4))
477 400
Share of profit of associate (J3)
109 836
Share of profit of joint venture (287 280(given) x 40%)
114 912
Other expenses (200 760 + 120 000)
(320 760)
Profit before tax
1 083 638
Income tax expense (83 227 + 129 570 – 4 480(C1))
(208 317)
PROFIT FOR THE YEAR
875 321
Other comprehensive income:
Items that will not be reclassified to profit or loss:
R
Share of other comprehensive income of joint venture; net of tax
(30 000 (150 000 – 120 000) x 72% x 40%)(C2)
8 640
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
883 961
Profit attributable to:
Owner of the parent
Non-controlling interests (J8)
Total comprehensive income attributable to:
Owners of the parent
Non-controlling interests
62
R
742 416
132 905
875 321
751 056
132 905
883 961
FAC3704/103
QUESTION 8 (SUGGESTED SOLUTION)(continued)
Calculations
C1
Unrealised profit on sale of inventory
Unrealised profit on closing inventory (80 000 x 125)
Tax on unrealised profit in closing inventory (16 000 x 28%)
R
16 000
4 480
C2
Revaluation of manufacturing building of Green Ltd
Revaluation of manufacturing building (150 000 – 120 000)
Tax on revaluation (30 000 x 28%)
Revaluation after tax
Rainbow Ltd’s share of revaluation after tax (21 600 x 40%)
R
30 000
(8 400)
21 600
8 640
C3
NCI’s share in profit for the year – Red Ltd
25/
Revenue
Other income
Cost of sales
Other expenses
Income tax expense
Profit for the year
NCI’s share in profit of Red Ltd (333 180 x 30%)
R
576 900
177 500
(171 650)
(120 000)
(129 570)
333 180
99 954
Comment:
The group is a vertical group. Rainbow Ltd has control (70%) over Red Ltd which in turn
has a 45% interest in Blue Ltd.
It is important to realise that due to Red Ltd's 45% interest in Blue Ltd, Rainbow Ltd also
owns 70% of the 50% equity of Blue Ltd owned by Red Ltd.
For example (per J3), Blue Ltd made a profit of R244 080. Of this, Red Ltd owns 45%
(R109 836). Rainbow Ltd owns 70% of Red Ltd and is therefore entitled to 70% x R109 836
= R76 885, and the NCI is entitled to the remaining 30% (R32 951) (Refer J8).
63
QUESTION 8 (SUGGESTED SOLUTION)(continued)
C4 Analysis of owners’ equity of Blue Ltd
At acquisition
Share capital
Retained earnings
Goodwill
Consideration paid
Since acquisition to
beginning of current year
Retained earnings: (580 000 280 000)
Current year
Profit for the year (J3)
Red Ltd
45%
100%
Total
R
100 000
280 000
380 000
19 000
399 000
At
R
45 000
126 000
171 000
19 000
190 000
45%
CA
R
Since
R
170 000
300 000
135 000
135 000
300 000
135 000
135 000
244 080
244 080
924 080
109 836
109 836
244 836
109 836
109 836
434 836
C5 Analysis of owners’ equity of Red Ltd
Rainbow Ltd
70%
At
Since
R
R
100%
Total
R
At acquisition
Share capital
Retained earnings (Red Ltd)
Retained earnings (Blue Ltd)
Gain on bargain purchase
Consideration paid and NCI
Current year
Profit for the year – Red Ltd
Profit for the year – Blue Ltd
200 000
472 000
135 000
807 000
(114 900)
692 100
443 016
333 180
109 836
1 135 116
Ref:/FAC3704_2020_TL_103_3.pdf
©
UNISA 2020
64
140 000
330 400
94 500
564 900
(114 900)
450 000
30%
NCI
R
60 000
141 600
40 500
242 100
242 100
310 111
233 226
76 885
310 111
132 905
99 954
32 951
375 005