FAC2602/102/3/2011

DEPARTMENT OF FINANCIAL ACCOUNTING

SELECTED ACCOUNTING STANDARDS AND SIMPLE GROUP STRUCTURES

TUTORIAL LETTER 102/2011 FOR FAC2602

(FIRST AND SECOND SEMESTER)

Dear Student

The purpose of this tutorial letter is to provide you with additional questions which may assist you
in your studies.

We wish you a pleasant study period – persevere with the view to success.

Yours faithfully
Tel no E-mail
Ms AA van Rooyen (012) 429 4539 fac2602@unisa.ac.za
Ms S Gani (012) 429 4633 fac2602@unisa.ac.za
Ms C Molate (012) 429 8885 fac2602@unisa.ac.za
Ms M Pholo (012) 429 8767 fac2602@unisa.ac.za
Ms D Kruger (Administrative officer) (012) 429 4596

ANNEXURE A: ADDITIONAL QUESTIONS AND ANSWERS

 2

ANNEXURE A: ADDITIONAL QUESTIONS AND ANSWERS

Question Topic

1 Group statements – Financial statements

2 Group statements – Statement of financial position
3 Group statements – Statement of financial position
4 Group statements – Statement of financial position
5 Group statements – Statement of financial position
6 Group statements – Statement of comprehensive income and statement of changes
in equity
7 Group statements – Financial statements
8 Group statements – Statement of comprehensive income and statement of changes
in equity
9 Group statements – Statement of financial position
10 Group statements – Financial statements
11 Statement of cash flows
12 Statement of cash flows
13 Statement of cash flows
14 Statement of cash flows
 3 FAC2602/102

QUESTION 1 (20 marks)

Diamond Limited acquired 60 000 of the ordinary shares in Pearl Limited on 1 March 19.4. On
this date Pearl Limited had retained earnings of R15 000 and the carrying amounts of the assets
and liabilities were equal to the fair values.

The following represent the abridged trial balances of Diamond Limited and Pearl Limited at
28 February 19.6:

Diamond Pearl
Ltd Ltd
Debits R R
Land and buildings 31 500 90 000
Machinery and equipment - 10 000
Investment in Pearl Limited at fair value (cost price: R160 000) 160 000 -
Bank 153 500 -
Trade and other receivables - 65 000
Inventories 500 112 000
Taxation 10 500 10 000
Dividends paid 9 000 8 000
365 000 295 000

Credits
Ordinary share capital (R2 shares) 150 000 160 000
Retained earnings 31 500 34 000
Revaluation surplus 21 200 -
Trade and other payables 125 600 23 750
Bank - 48 250
Profit before tax 30 700 29 000
Dividends received 6 000 -
365 000 295 000

REQUIRED

Draft the consolidated financial statements of Diamond Limited and its subsidiary Pearl Limited at
28 February 19.6. Notes to the financial statements are not required. Show all calculations.
 4

SOLUTION: QUESTION 1

DIAMOND LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
28 FEBRUARY 19.6
R
Profit before tax (30 700^ + 29 000^) 59 700
Income tax expense (10 500^ + 10 000^) (20 500)

Profit for the year 39 200

Other comprehensive income -
Total comprehensive income for the year 39 200

Profit attributable to:

Owners of the parent 34 450
Non-controlling interest 4 750 g^
39 200

Total comprehensive income attributable to:

Owners of the parent 34 450
Non-controlling interest 4 750
39 200
DIAMOND LIMITED AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 19.6
Non-
Attributable to owners of the parent control
ling Total
interest equity
Revalua-
tion
Share surplus Retained Total
capital earnings
R R R R R R
Balance 28 February 19.5 150 000 ^ 21 200 ^ 45 750 (a) 216 950 48 500 (b) 265 450
Total comprehensive income
for the year 34 450 ^ 34 450 4 750 ^ 39 200
Dividends paid ( 9 000) (9 000) (2 000) f^ (11 000)

Balance 28 February 19.6 150 000 21 200 71 200 242 400 51 250 293 650

(a) (31 500^ + 14 250d ^)

(b) (43 750e^ + 4 750c^)
 5 FAC2602/102

SOLUTION: QUESTION 1 (continued)

DIAMOND LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 28 FEBRUARY 19.6

ASSETS R
Non-current assets 160 250
Property, plant and equipment 131 500
- Land and buildings (31 500^ + 90 000^) 121 500
- Machinery and equipment 10 000 ^
Goodwill 28 750 ^
Current assets 331 000
Inventory (500^ + 112 000^) 112 500
Trade and other receivables 65 000 ^
Cash and cash equivalents 153 500 ^
Total assets 491 250

EQUITY AND LIABILITIES

Total equity 293 650
Equity attributable to owners of the parent 242 400
Share capital 150 000 ^
Other components of equity 21 200 ^
Retained earnings 71 200 ^
Non-controlling interest 51 250 ^
Current liabilities 197 600
Trade and other payables (125 600^ + 23 750^) 149 350
Bank overdraft 48 250 ^
Total equity and liabilities 491 250
 6

SOLUTION: QUESTION 1 (continued)

Calculation

Analysis of ordinary shareholders’ equity of Pearl Limited

Diamond Limited
At Since Non-
acquisition acquisition controlling
Total interest
(75%) * (25%)
At acquisition R R R R
Ordinary share capital 160 000 120 000 ^ 40 000 ^
Retained earnings 15 000 11 250 ^ 3 750 ^
175 000 131 250 43 750 e
Investment in Pearl Limited 160 000 ^
Goodwill 28 750 ^
Since acquisition to beginning
of current year
Retained earnings 19 000 14 250 d 4 750 c
(34 000^ - 15 000^)
Current year
Profit before tax 29 000^
Income tax expense (10 000)^ 19 000 14 250 4 750 g
Ordinary dividends (8 000) ^ (6 000) (2 000) f
205 000 22 500 51 250

160 000 60 000

* = 80 000 shares ∴ is a 75% interest.
2 80 000

Note: Please note that the analysis contains three different periods, namely at acquisition, since
acquisition to beginning of current year and current year. This is because we have to do
the statement of financial position, the statement of comprehensive income and the
statement of changes in equity. The current year figures help you to do the statement of
comprehensive income.
 7 FAC2602/102

QUESTION 2 (22 marks)

The following balances were taken from the books of Lion Limited and its subsidiary
Puma Limited on 31 December 20.1:
Lion Ltd Puma Ltd
R R
Ordinary share capital - R5 shares 200 000 150 000
Revaluation of land and buildings 220 000 100 000
Distributable reserve - Retained earnings 266 000 174 000
Long-term loan - Lion Limited - 100 000
Property, plant and equipment 400 000 500 000
Investment in Puma Limited
- 22 500 ordinary shares 280 000 -
- loan 112 000 -
Trade and other payables 201 000 116 000
Trade and other receivables 35 000 56 000
Inventories 60 000 84 000

Additional information

1. Lion Limited acquired its interest in Puma Limited on 1 January 19.5, on which date
Puma Limited had retained earnings of R106 000. The carrying amounts of the assets and
liabilities were equal to the fair values, except the value of the land and buildings which was
deemed to be R100 000 more than the cost thereof. The accounting records were adjusted
accordingly.

2. Since Lion Limited acquired its interest in Puma Limited, Puma Limited has purchased all its
inventories from Lion Limited. On 1 January 20.1 Puma Limited had R60 000 inventories on
hand. Lion Limited sells all its inventories at cost plus 20%. Inventories to the value of
R12 000 was on its way to Puma Limited at 31 December 20.1.

3. The following decisions taken by the directors of the companies must still be accounted for:

- R5 000 interest payable by Puma Limited to Lion Limited

- A dividend of 10c per share must be declared by both companies on 31 December 20.1.
No entry in this regard was passed by any of the companies.

REQUIRED:

Draft the consolidated statement of financial position of Lion Limited and its subsidiary at
31 December 20.1 in accordance with the requirements of the Companies Act, and Generally
Accepted Accounting Practice. Ignore taxation on unrealised profits and/or losses as well as
capital gains tax. Comparative figures and notes are not required.

Show the consolidated journal entry at 31 December 20.1 to eliminate the intercompany
transactions regarding the inventory.
 8

SOLUTION: QUESTION 2

LION LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20.1

R
ASSETS
Non-current assets 913 000
Property, plant and equipment (400 000^ + 500 000^) 900 000
Goodwill9 13 000
Current assets 231 000
Trade and other receivables (35 000^ + 56 000^) 91 000
Inventory (60 000^ + 84 000^ + 12 000^ - 16 000^) 140 000
Total assets 1 144 000

EQUITY AND LIABILITIES

Total equity 822 250
Equity attributable to owners of the parent 718 250
Share capital 200 000 ^
Other components of equity 220 000 ^
Retained earnings (Calculation 2) 298 250
Non-controlling interestd 104 000 9
Current liabilities 321 750
Trade and other payables (201 000^ + 116 000^) 317 000
Dividends payable (4 000^ + 750^) 4 750
Total equity and liabilities 1 144 000

Journal entries
Dr Cr
R R
Retained earnings (Lion Ltd) 9 16 000 ^
Inventory (Puma Ltd) 9 16 000 ^
Elimination of unrealised intercompany profit in closing inventory
of Puma Ltd
 9 FAC2602/102

SOLUTION: QUESTION 2 (continued)

Calculations

1. Analysis of ordinary shareholders’ equity of Puma Limited

Lion Limited
At Since Non-
Total acquisition acquisition controlling
Interest
75%* 25%
R R R R
At acquisition
Share capital 150 000 112 500 ^ 37 500 ^
Retained earnings 106 000 79 500 ^ 26 500 ^
Revaluation reserve 100 000 75 000 ^ 25 000 ^
356 000 267 000 89 000
Investment in Puma Limited 280 000 ^
Goodwill 13 000 ^
Since acquisition to end of
current year
Retained earnings 63 000 47 250 15 750
- Given 174 000 ^
- At acquisition (106 000) ^
68 000
- Interest (5 000) ^
Dividends [(150 000/5) x 10c] (3 000) 9 (2 250) (750)
416 000 45 000 c 104 000 2

150 000 22 500

* = 30 000 ∴ is a 75% interest
5 30 000

2. Retained earnings
R
Lion Limited 251 000
Given 266 000 ^
Interest receivable 5 000 9
Dividends declared [(200 000/5) x 10c] (4 000) 9
Unrealised profit in closing inventory (16 000) 9
20
[(84 000 + 12 000) x ]
120
Puma Limited 47 250 c9
298 250
 10

QUESTION 3 (28 marks)

At date of incorporation of Stream Limited (1 July 19.7), River Limited acquired 80 000 ordinary
shares of 50c each in Stream Limited.

The following represented the trial balances of River Limited and Stream Limited at 30 June 19.9:
River Stream
Limited Limited
R R
Credits
Ordinary shares of 50c each 200 000 50 000
Retained earnings 70 000 55 000
Trade and other payables 90 000 50 000
Accumulated depreciation 86 000 64 000
Revaluation of land and buildings 50 000 24 000
Interest bearing borrowing - River Limited - 100 000
Bank overdraft - Waterfall Bank 100 000 -
596 000 343 000

Debits
Land and buildings at valuation 200 000 67 000
Plant and equipment at cost price 110 000 170 000
Trade and other receivables 20 000 26 000
Bank - Rapids Bank - 46 000
Inventories 68 000 34 000
Loan - Stream Limited 150 000 -
Investment in Stream Limited at fair value (cost price R48 000) 48 000 -
596 000 343 000

Additional information

1. Since River Limited acquired its interest in Stream Limited, River Limited has purchased all its
inventories from Stream Limited. Stream Limited sells all its inventories at cost plus 25%. On
30 June 19.8 River Limited had R80 000 inventories on hand.

2. River Limited posted a cheque of R50 000 to Stream Limited on 25 June 19.9. The cheque
got lost in the post and the cheque was cancelled.

3. Stream Limited bought a machine from River Limited on 30 June 19.9. River Limited made a
profit of R30 000 on the sale. Both companies depreciate plant and equipment at 20% on the
straight-line method.
 11 FAC2602/102

QUESTION 3 (continued)

REQUIRED:

After taking the abovementioned information into account, answer the following multiple choice
questions (choose only A, B, C or D) concerning the consolidated statement of financial position
of River Limited and its subsidiary for the financial year ended 30 June 19.9 in compliance with
the requirements of the Companies Act and Generally Accepted Accounting Practice. Ignore
taxation on unrealised profits and/or losses as well as capital gains tax.

1. Ordinary share capital in the consolidated statement of financial position amounts to:

A. R200 000
B. R250 000
C. R240 000
D. None of the above.

2. Revaluation reserve of land and buildings in the consolidated statement of financial position
amounts to:

A. R69 200
B. R74 000
C. R50 000
D. None of the above.

3. Unrealised profit adjustment on closing inventories in the analysis of shareholders’ equity of

Stream Limited amounts to:

A. R16 000
B. R13 600
C. R 6 800
D. None of the above.

4. Retained earnings in the consolidated statement of financial position amount to:

A. R103 120
B. R 84 000
C. R114 000
D. None of the above.

5. Non-controlling interest in the consolidated statement of financial position amounts to:

A. R21 000
B. R25 800
C. R23 080
D. None of the above.
 12

QUESTION 3 (continued)

6. Land and buildings in the consolidated statement of financial position amount to:

A. R291 000
B. R267 000
C. R253 600
D. None of the above.

7. Plant and equipment in the consolidated statement of financial position amount to:

A. R130 000
B. R108 800
C. R100 000
D. None of the above.

8. Trade and other receivables in the consolidated statement of financial position amount to:

A. R 40 800
B. R 96 000
C. R146 000
D. None of the above.

9. Inventories in the consolidated statement of financial position amount to:

A. R102 000
B. R 81 600
C. R 95 200
D. None of the above.

10. Cash and cash equivalents/bank overdraft in the consolidated statement of financial position
amount to:

A. Bank overdraft R54 000

B. Cash and cash equivalents R46 000,
Bank overdraft R100 000
C. Cash and cash equivalents R46 000,
Bank overdraft R50 000
D. None of the above.

11. Trade and other payables in the consolidated statement of financial position amount to:

A. R130 000
B. R140 000
C. R190 000
D. None of the above.
 13 FAC2602/102

QUESTION 3 (continued)

12. Investment in Stream Limited in the consolidated statement of financial position amounts to:

A. Nil
B. R48 000
C. R 8 000
D. None of the above.

13. Goodwill in the consolidated statement of financial position amounts to:

A. R 8 000
B. R90 000
C. Nil
D. None of the above.

14. Long-term borrowing - River Limited in the consolidated statement of financial position
amounts to:

A. R100 000
B. R150 000
C. R 80 000
D. None of the above.

SOLUTION: QUESTION 3

1. A 6. B 11. B
2. A 7. C 12. A
3. B 8. D 13. A
4. D 9. D 14. D
5. C 10. C
(2 marks each)
 14

SOLUTION: QUESTION 3 (continued)

Calculation

Analysis of ordinary shareholders’ equity of Stream Limited

River Limited
Non-
At Since controlling
Total acquisition acquisition interest
80% 20%
R R R R
At acquisition
Share capital 50 000 40 000 10 000
50 000 40 000 10 000
Investment in Stream Limited 48 000
Goodwill 8 000
Since acquisition to end of
current year
Retained earnings 41 400 33 120 RE 8 280
Closing balance 55 000
Unrealised profit (13 600)
(25/125 x 68 000)
Revaluation of land and
buildings 24 000 19 200 OCE 4 800
115 400 33 120 RE 23 080
19 200 OCE
SOLUTION: QUESTION 3 (continued)

RIVER LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 19.9

ASSETS R
Non-current assets 375 000
Property at valuation(200 000 + 67 000) 267 000
Plant and equipment at carrying amount 100 000
[(110 000 + 170 000 - 30 000) - (86 000 + 64 000)]
Goodwill 8 000
Current assets 180 400
Inventories (68 000 - 13 600 + 34 000) 88 400
Trade and other receivables (20 000 + 26 000) 46 000
Cash and cash equivalents 46 000
Total assets 555 400

EQUITY AND LIABILITIES

Total equity 365 400

Equity attributable to owners of the parent 342 320

Share capital 200 000
Other components of equity (50 000 + 19 200) 69 200
Retained earnings (70 000 - 30 000 + 33 120) 73 120
Non-controlling interest 23 080

Current liabilities 190 000

Trade and other payables (90 000 + 50 000) 140 000
Bank overdraft (100 000 - 50 000) 50 000
Total equity and liabilities 555 400
 16

QUESTION 4 (22 marks)

The following represented the abridged statements of financial position of Kansas Limited and its
subsidiary:

STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 19.7

Kansas New York
Ltd Ltd
R R
ASSETS
Property at valuation 450 000 140 000
Plant at carrying amount 124 000 152 000
Investment in New York Ltd – 37 500 ordinary shares at fair value
(cost price R180 000) 180 000 -
Loan - Kansas Ltd - 40 000
Inventory 100 000 140 000
Bank - Chili Bank 80 000 -
Trade and other receivables 10 000 48 000

Total assets 944 000 520 000

EQUITY AND LIABILITIES

Ordinary shares of R2 each 400 000 100 000
Revaluation of property 100 000 -
Retained earnings 192 000 164 000
Long-term borrowings 200 000 164 000
Loan - New York Ltd 20 000 -
Other 180 000 164 000
Trade and other payables 52 000 22 000
Bank overdraft - Chili Bank - 70 000
Total equity and liabilities 944 000 520 000

Additional information

1. Kansas Ltd acquired its interest in New York Ltd on 1 March 19.4. At that date the retained
earnings of New York Ltd amounted to R64 000. On that date the property of New York Ltd
was revalued at R200 000. The books were not adjusted accordingly and no purchases or
sale of property took place since that date.

2. On 26 February 19.7 Kansas Ltd mailed a cheque of R20 000 to New York Ltd. New York Ltd
received the cheque on 6 March 19.7.

3. Kansas Ltd sold a machine to New York Ltd on 31 August 19.6 at a profit of R20 000. The
group provides for depreciation at 20% per annum according to the straight-line method.
 17 FAC2602/102

QUESTION 4 (continued)

4. The companies declared and paid the following dividends during the current year:

Kansas Limited
Ordinary dividends on 28 February 19.7 - 10c per share
Ordinary dividends on 30 June 19.6 - 5c per share

New York Limited

Ordinary dividends on 28 February 19.7 - 5c per share.

5. Kansas Ltd guarantees the bank overdraft of New York Ltd for an unlimited amount.

REQUIRED:

Draft the consolidated statement of financial position of Kansas Ltd and its subsidiary at
28 February 19.7 according to the requirements of the Companies Act and Generally Accepted
Accounting Practice. Ignore comparative figures and the taxation effect on unrealised profits
and/or losses as well as capital gains tax.

Do the consolidated journal entries at 28 February 19.7 to eliminate the profit and depreciation
associated with the sale of the machine.
 18

SOLUTION: QUESTION 4

KANSAS LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 19.7

Calcu-
lation R
ASSETS
Non-current assets 920 000
Property, plant and equipment 2 908 000
Goodwill 1 12 000
Current assets 328 000
Inventories (100 000^ + 140 000^) 240 000
Trade and other receivables (10 000^ + 48 000^) 58 000
Cash and cash equivalents (80 000^ - 70 000^ + 20 000^) 30 000
Total assets 1 248 000
EQUITY AND LIABILITIES
Total equity 830 000
Equity attributable to owners of the parent 749 000
Share capital 400 000^
Other components of equity 100 000^
Retained earnings 3 249 000
Non-controlling interest 1 81 0009
Total liabilities 418 000
Non-current liabilities
Long-term borrowings (180 000^ + 164 000^) 344 000
Current liabilities
Trade and other payables (52 000^ + 22 000^) 74 000

Total equity and liabilities 1 248 000

 19 FAC2602/102

SOLUTION: QUESTION 4 (continued)

Calculations

1. Analysis of ordinary shareholders’ equity of New York Ltd

Kansas Limited - 75% Non-

Total controllin
At Since g
acquisition acquisition interest
25%

At acquisition R R R R
Share capital 100 000 75 000 ^ 25 000
Retained earnings 64 000 48 000 ^ 16 000
Revaluation of property
(200 000 – 140 000) 60 000 45 000 9 15 000
224 000 168 000 56 000
Investment in New York Limited 180 000 9
Goodwill 12 000

Since acquisition to end of current year

Retained earnings (164 000^ - 64 000^) 100 000 75 000 25 000

324 000 75 000 81 000

According to additional information 4 in the question, the “companies declared and paid” the
dividends – this means it has already been deducted from the retained earnings and thus the
dividends do not appear in the analysis.

2. Property, plant and equipment

Property R
Kansas Limited 450 000 ^
New York Limited (140 000^ + 60 000 revaluation^) 200 000
Plant
Kansas Limited 124 000 ^
New York Limited (152 000^ - 20 000 profit^ + 2 000 depreciation^) 134 000
908 000

3. Retained earnings
Kansas Limited 192 000 ^
Profit on sale of machine (20 000) ^
Depreciation adjustment (20 000 x 6/12 x 20%) 2 000 9^
New York Limited 75 000 ^
249 000
 20

SOLUTION: QUESTION 4 (continued)

4. Journal entries
28 February 19.7 Dr Cr
R R
Retained earnings - Kansas Ltd 20 000 9
Plant - New York Ltd 20 000 9
Elimination of intercompany profit on sale of plant
Accumulated depreciation - New York Ltd 2 000 9
Depreciation - Kansas Ltd 2 000 9
Reversal of depreciation charged on inter-company profit

QUESTION 5 (30 marks)

Pink Limited purchased 160 000 ordinary shares and 4 000 cumulative preference shares in
Panther Limited on 1 January 19.6. On that date the balances on Panther Limited’s retained
earnings and share premium amounted to R75 000 and R5 000 respectively. Each share in
Panther Limited has one vote.

On 31 December 19.9 the following balances appeared in the books of both companies:
Pink Limited Panther Limited
Dr Cr Dr Cr
R R R R
Ordinary share capital (50c shares) 500 000 100 000
Share premium 15 000 5 000
Capital redemption reserve fund 10 000 -
Retained earnings 175 000 126 000
Loan - Pink Limited - 15 000
10% cumulative preference share capital
(R1 shares) 100 000 10 000
Land and buildings 330 000 160 000
Equipment 220 000 110 000
Accumulated depreciation - equipment 90 000 22 000
Investment in Panther Ltd at fair value
- ordinary shares (cost price R166 000) 166 000 -
- preference shares (cost price R4 000) 4 000 -
- loan 31 000 -
Inventory 120 000 60 000
Trade and other receivables 56 000 22 000
Dividends payable – ordinary shares 25 000 20 000
Trade and other payables 52 000 30 000
Bank 40 000 24 000
967 000 967 000 352 000 352 000
 21 FAC2602/102

QUESTION 5 (continued)

Additional information

1. At acquisition Pink Limited valued the land and buildings of Panther Limited at R180 000. No
entry was made in respect of this in the books of Panther Limited. No purchases of land and
buildings by Panther Limited took place since that date.

2. Since acquisition Panther Limited purchased all its inventory from Pink Limited at cost plus
20%. On 31 December 19.8 Panther Limited’s inventory on hand amounted to R84 000.

3. On 1 January 19.7 Pink Limited purchased equipment from Panther Limited at cost price plus
10% for an amount of R220 000. Both companies depreciate equipment at 10% per annum on
cost.

4. At 1 January 19.8 the preference dividends of Panther Limited for the previous two years were
in arrears. All arrear preference dividends were paid in cash on 31 December 19.9. The
ordinary dividends receivable from Panther Limited was debited against the loan account in
the books of Pink Limited.

REQUIRED:

Draft the consolidated statement of financial position of Pink Limited and its subsidiary at
31 December 19.9 to comply with the requirements of the Companies Act and Generally
Accepted Accounting Practice. Ignore comparative figures, notes, taxation on unrealised profits
and/or losses and capital gains tax. Clearly show all workings.

Do the consolidated journal entries at 31 December 19.9 to eliminate the unrealised profits on
inventory and intercompany sales.
 22

SOLUTION: QUESTION 5

PINK LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 19.9

Calcu- R
lation
ASSETS
Non-current assets 720 000
Property, plant and equipment 3 714 000
Goodwill 1 6 000 9
Current assets 288 000
Inventories [120 000^ + 60 000^ - (20/120 x 60 0009)] 170 000
Trade and other receivables (56 000^ + 22 000^) 78 000
Cash and cash equivalents 40 000 ^
Total assets 1 008 000

EQUITY AND LIABILITIES

Total equity 873 000

Equity attributable to owners of the parent 819 600

Share capital (500 000 + 100 000 + 15 000) 615 000 9^
Other components of equity 10 000 ^
Retained earnings 4 194 600 ^

Non-controlling interest (47 4009 + 6 000 9) 1+2 53 400

Current liabilities 135 000
Trade and other payables (52 000^ + 30 000^) 82 000
Bank overdraft 24 000 ^
Dividends payable (25 000^ + 20 000^ - 16 0009) 29 000
Total equity and liabilities 1 008 000
 23 FAC2602/102

SOLUTION: QUESTION 5 (continued)

Calculations

1. Analysis of ordinary shareholders’ equity of Panther Limited

Pink Limited - 80%

Non-
At Since
Total controlling
acquisition acquisition
interest
20%
Ordinary shares R R R R
At acquisition
Share capital (160 000 x 50c) 100 000 80 000 ^ 20 000
Share premium 5 000 4 000 ^ 1 000
Retained earnings 75 000 60 000 ^ 15 000
Revaluation of property 20 000 16 000 9 4 000
(180 000 - 160 000)
200 000 160 000 40 000
Investment in Panther Ltd 166 000 9
Goodwill 6 000
Since acquisition to end of current year
Retained earnings 37 000 29 600 7 400
Since acquisition (126 000^ - 75 000^) 51 000
10
Profit on sale of equipment ( /110 x 220 000) (20 000) 9
Depreciation adjustment 6 000 9
(10% x 20 000 x 3 years)
237 000 29 600 47 400

2. Analysis of preference shareholders’ equity of Panther Limited

Pink Limited - 40% Non-
Total controllin
At Since
g
acquisition acquisition
interest
60%
R R R R
Preference shares
Share capital 10 000 4 000 ^ 6 000
Investment in Panther Limited 4 000 ^
Goodwill NIL
 24

SOLUTION: QUESTION 5 (continued)

3. Property, plant and equipment

R
Land and buildings (330 000^ + 160 000^ + 20 000^) 510 000
Equipment - at cost (220 000^ - 20 000^ + 110 000^) 310 000
- accumulated depreciation (106 000)
(90 000^ - 6 000^ + 22 000^)
714 000

4. Retained earnings
Pink Limited - per trial balance 175 000 ^
unrealised profit in closing inventories (20/120 x 60 000) (10 000) 9
Panther Limited - per analysis 29 600 ^

194 600

5. Journal entries
31 December 19.9 Dr Cr
R R
Cost of sales - Pink Ltd 10 000 9
Inventory - Panther Ltd 10 000 9
Elimination of unrealised profits in closing inventory of Panther Ltd.
R R
Retained earnings - Pink Ltd 14 000 9
Cost of sales - Pink Ltd 14 000 9
Elimination of unrealised profits in opening inventory of Panther Ltd
 25 FAC2602/102

QUESTION 6 (11 marks)

The following represent the abridged financial statements of A Limited and B Limited:

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 19.9

A Ltd B Ltd
ASSETS R R
Non-current assets 570 000 300 000
Property, plant and equipment 240 000 300 000
Investment in B Ltd at fair value - 192 000 ordinary shares (cost price
R330 000) 330 000 -
Current assets 390 000 390 000
Inventory 135 000 165 000
Trade and other receivables 255 000 225 000
Total assets 960 000 690 000

EQUITY AND LIABILITIES

Total equity 675 000 600 000
Issued capital - ordinary shares of R1 each 300 000 240 000
Retained earnings 375 000 360 000
Non-current liabilities
Long-term loan 75 000 -
Current liabilities
Trade and other payables 210 000 90 000

Total equity and liabilities 960 000 690 000

STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 19.9

A Ltd B Ltd
R R
Gross profit 270 000 420 000
Dividend received from subsidiary 96 000 -
Profit before tax 366 000 420 000
Income tax expense (108 000) (120 000)

PROFIT FOR THE YEAR 258 000 300 000

OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 258 000 300 000
 26

QUESTION 6 (continued)

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 19.9
Share Retained
capital Earnings
A Ltd B Ltd A Ltd B Ltd
R R R R
Balance on 31 December 19.8 300 000 240 000 225 000 180 000
Total comprehensive income for the year 258 000 300 000
Ordinary dividend (108 000) (120 000)
Balance on 31 December 19.9 300 000 240 000 375 000 360 000

Additional information

1. On 1 January 19.5, the date on which A Limited acquired its interest in B Limited, B Limited’s
share capital and reserves were as follows:
R
Issued ordinary share capital 240 000
Retained earnings 135 000

2. B Limited purchases some of its inventory from A Limited since 1 January 19.9. A Limited
supplies the inventories at cost plus 50% mark-up. Inventory on hand of B Limited, purchased
from A Limited, amounted to R90 000 on 31 December 19.9.

REQUIRED:

Draft the consolidated statement of comprehensive income and consolidated statement of

changes in equity of A Limited and its subsidiary B Limited for the year ended 31 December 19.9
in compliance with the requirements of the Companies Act and Generally Accepted Accounting
Practice.

Ignore taxation on unrealised profits and/or losses and comparative figures.

 27 FAC2602/102

SOLUTION: QUESTION 6

A LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED

31 DECEMBER 19.9
R
Profit before tax (Calculation 1) 660 000
Income tax expense (108 000^ + 120 000^) (228 000)
PROFIT FOR THE YEAR 432 000
OTHER COMPREHENSIVE INCOME -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 432 000

Profit attributable to:

Owners of the parent (432 000 - 60 000) 372 000 9
Non-controlling interest 60 000 9
432 000
Total comprehensive income attributable to 372 000
Owners of the parent 60 000
Non-controlling interest 432 000

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED

31 DECEMBER 19.9

Attributable to owners of the parent Non- Total

controlling equity
interest
Share Retained Total
capital earnings
R R R R R
Balance - beginning of
year 300 000 ^ #261 000 561 000 84 000 9 645 000
Total comprehensive
income for the year 372 000 ^ 372 000 60 000 ^ 432 000
Ordinary dividend (108 000)^ (108 000) (24 000) ^ (132 000)
Balance - end of year 300 000 525 000 825 000 120 000 945 000

# 225 000 9 + 36 000 9

 28

SOLUTION: QUESTION 6 (continued)

Calculations

1. Profit before tax

R
A Limited 270 000 ^
B Limited 420 000 ^
Unrealised profit in closing inventory (50/150 x 90 000) (30 000) 9^
660 000

2. Analysis of ordinary shareholders’ equity of B Limited

A Limited
At Since Non-
Total acquisition acquisition controlling
interest
80% 20%
R R R R
At acquisition
Share capital 240 000 192 000 48 000
Retained earnings 135 000 108 000 27 000
375 000 300 000 75 000
Investment in B Limited 330 000
Goodwill 30 000
Since acquisition to beginning of
current year
Retained earnings 45 000 36 000 9 000
Beginning of year 180 000
At acquisition (135 000)
Current year
Profit for the year 300 000 240 000 60 000
Dividend paid (120 000) (96 000) (24 000)
600 000 180 000 120 000
 29 FAC2602/102

QUESTION 7 (60 marks)

A Limited became a subsidiary of B Limited on 1 April 20.2. The following are the trial balances
of B Limited and A Limited at 30 September 20.2:
B Limited A Limited
R R
Credits
Share capital
- ordinary shares of R2 each 250 000 150 000
- 10% preference shares of 50c each 80 000 20 000
7,5% debentures 100 000 60 000
Long-term loan
- Safe Bank (from 1 January 20.2) - 100 000
Retained earnings - 1 October 20.1 950 000 380 000
Sales 1 106 000 940 000
Interest received - debentures - 1 500
- financial institutions - 6 000
Trade and other payables 107 750 75 000
Dividends payable
- ordinary shares 15 000 7 500
- preference shares 16 000 2 000
Bank 25 000 -
Accumulated depreciation 150 000 80 000
2 799 750 1 822 000
Debits
Property, plant and equipment 773 500 650 000
Inventories 220 000 160 000
Cost of sales 740 000 564 000
Administrative expenses 65 000 48 000
Depreciation 30 000 20 000
Staff costs 160 000 100 000
Interest paid - debentures 7 500 4 500
- overdraft 3 000 -
Income tax (30%) 60 000 59 925
Trade and other receivables 311 244 135 575
Bank - 40 000
Dividends declared - 30 September 20.2 16 750 -
Investment in A Limited at fair value
- 45 000 ordinary shares (cost price R397 756) 397 756 -
- 18 000 10% preference shares (cost price R15 000) 15 000 -
Investment in B Limited at fair value
- 7,5% debentures (since 1 April 20.2) - 40 000
2 799 750 1 822 000
 30

QUESTION 7 (continued)

Additional information

1. The sales of A Limited for the year was earned as follows:

- during the first three months of the financial year, 40% of the sales figure
- for the next three months, 15% of the sales figure
- for the rest of the financial year (the remaining six months), 45% of the sales figure

A Limited maintains a gross profit percentage of 40%. All other income and expenditure were
received and spent evenly throughout the year. Income tax must be apportioned according to
the profit before tax for that period.

2. A Limited applied for a loan at Safe Bank Limited and it was granted at an interest rate of
15% per annum (fair interest rate) for a period of 5 years. The interest for the year ended
30 September 20.2 is not recorded yet.

3. Cheques to pay the outstanding dividends (declared 30 September 20.1) were sent to the
shareholders by both of the companies but not recorded in the records yet.

B Ltd: Ordinary shareholders R6 250

Preference shareholders R8 000

A Ltd: Ordinary shareholders R7 500

Preference shareholders R2 000

4. A Limited has decided to declare dividends for the year ended 30 September 20.2 and the
amount for dividends to the ordinary shareholders is decided on R7 500. This transaction
was not taken into account by both companies when the trial balances were drafted.

5. No guarantee was given by the subsidiary for the overdraft of the parent’s bank account.

6. Ignore any tax implications.

REQUIRED:

Draft the consolidated annual financial statements of B Limited and its subsidiary for the year
ended 30 September 20.2. Your answer must comply with the requirements of the Companies
Act and Generally Accepted Accounting Practice. Include only the post-acquisition profit after tax
in the profit after tax of the group. Notes to the financial statements are not required. Do all
calculations to the nearest rand.
 31 FAC2602/102

SOLUTION: QUESTION 7

B LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20.2

ASSETS R
Non-current assets 1 228 940
Property, plant and equipment (773 500^ + 650 000^ - 80 000^ - 150 000^) 1 193 500
Goodwill 35 440
Current assets 857 319
Trade and other receivables (311 244^ + 135 575^) 446 819
Cash and cash equivalents (40 000^ - 7 500 dividends^ - 2 000 dividends^) 30 500
Inventory (220 000^ + 160 000^) 380 000
Total assets 2 086 259

EQUITY AND LIABILITIES

Total equity 1 612 159
Equity attributable to owners of the parent 1 337 029
Share capital (250 000 + 80 000) 330 000 ^
Retained earnings 1 007 029 ^
Non-controlling interest (264 130 + 11 000) 275 130 9
Total liabilities 474 100
Non-current liabilities 220 000
7,5% debentures (100 000^ + 60 000^ - 40 000^) 120 000
Long-term loan 100 000 ^
Current liabilities 254 100
Trade and other payables (107 750^ + 75 000^ + 11 250 interest^) 194 000
Dividends payable 20 850
(15 000^ + 16 000^ - 6 250^ - 8 000^ + 3 000^ + 1 100^)
Bank overdraft (25 000^ + 6 250^ + 8 000^) 39 250
Total equity and liabilities 2 086 259
 32

SOLUTION: QUESTION 7 (continued)

B LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
30 SEPTEMBER 20.2

Notes R
Revenue (1 106 000^ + 423 000^) 1 529 000
Cost of sales (740 000^ + 253 800^) (993 800)
Gross profit 535 200
Other income 3 000 9
Administrative expenses (30 000^ + 10 000^ + 65 000^ (339 000)
+ 24 000^ + 160 000^ + 50 000^)
Finance costs (7 500^ - 1 500^ + 3 000^ + 2 250^ + 7 500^) (18 750)
Profit before tax 1 180 450
Income tax expense (60 000^ + 23 985^) (83 985)
PROFIT FOR THE YEAR 96 465
OTHER COMPREHENSIVE INCOME -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 96 465

Profit attributable to:

Owners of the parent (96 465 - 22 686) 73 779 9
Non-controlling interest (22 386 - 800 + 1 100) 22 686 9
96 465
Total comprehensive income attributable to: 73 779
Owners of the parent 22 686
Non-controlling interest 96 465

B LIMITED AND ITS SUBSIDIARY

NOTES FOR THE YEAR ENDED 30 SEPTEMBER 20.2
1. Profit before tax
Included in profit before tax are the following items:
Income
Interest received from financial institutions 3 000
Expenses
Depreciation (30 000 + 10 000) 40 000
Staff cost (160 000 + 50 000) 210 000
Interest paid - debentures (7 500 + 2 250 - 1 500) 8 250
- bank 3 000
- Safe Bank 7 500
 33 FAC2602/102

SOLUTION: QUESTION 7 (continued)

B LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
30 SEPTEMBER 20.2

Attributable to owners of the parent

10%
Ordinary Prefe- Non-
share rence Retained Total controlling Total
capital shares earnings interest equity

R R R R R R
Balance at 30 Sept 20.1 250 000^ 80 000^ 950 000 ^ 1 280 000 - 1 280 000
Equity on date of
acquisition 256 544 9 256 544
Total comprehensive ^
income for the year 73 779 73 779 22 686 ^ 96 465
Ordinary dividends 9
declared (8 750) (8 750) (3 000) 9 (11 750)
Preference dividends 9
declared (8 000) (8 000) (1 100) 9 (9 100)
Balance at 30 Sept 20.2 250 000 80 000 1 007 029 1 337 029 275 130 1 612 159

Calculations

1. Analysis of ordinary shareholders’ equity of A Limited

B Limited - 60% Non-

Total controlling
At Since
interest
acquisition acquisition
40%
At acquisition R R R R
Share capital 150 000 90 000 ^ 60 000
Retained earnings 1/10/20.1 380 000 228 000 ^ 152 000
Profit for the year 1/10/20.1 - 31/3/20.2 83 860 c 50 316 ^ 33 544
(76 1439 + 7 7179)
613 860 368 316 245 544
Investment in A Limited 397 756 ^
Goodwill 29 440
Current year
Profit for the year 55 965 d 33 579 22 386
Dividends
- Preference dividends (2 000) ^ (1 200) (800)
- Ordinary dividends (7 500) ^ (4 500) (3 000)
660 325 27 879 264 130
 34

SOLUTION: QUESTION 7 (continued)

2. Analysis of preference shareholders’ equity of A Limited

B Limited - 45% Non-

Total At Since controlling
acquisition acquisition interest
55%
At acquisition R R R R
Share capital 20 000 9 000 ^ 11 000
Investment in A Limited 15 000 ^
Goodwill 6 000
Current year
Profit attributable to preference shares 2 000 900 1 100
Dividends declared (2 000) (900) (1 100)
20 000 - 11 000

3. Allocation of comprehensive income items.

Total 1/10/20.1 - 1/1/20.2 - 1/4/20.2 -

31/12/20.1 31/3/20.2 30/9/20.2
(3 months) (3 months) (6 months)
R R R R
Sales 940 000 d 376 000 (40%)9 141 000 (15%)9 423 000 (45%)9
Cost of sales 60% (564 000) (225 600) 9 (84 600) 9 (253 800) 9
Gross profit 40% 376 000 150 400 56 400 169 200
Administrative expenses (48 000) (12 000) ^ (12 000) ^ (24 000) ^
Depreciation (20 000) (5 000) ^ (5 000) ^ (10 000) ^
Staff costs (100 000) (25 000) ^ (25 000) ^ (50 000) ^
Profit from operations 208 000 108 400 14 400 85 200
Interest paid debentures (4 500) (1 125) ^ (1 125) ^ (2 250) ^
Interest paid Safe Bank (11 250) - (3 750) 9 (7 500) 9
(100 000 x 15% x 9/12)
Interest received
- Financial institutions 6 000 1 500 ^ 1 500 ^ 3 000 ^
- Debentures 1 500 1 500 ^
Profit before tax 199 750 108 775 11 025 79 950
Income tax expense (59 925) (32 632) 9 (3 308) 9 (23 985) 9
PROFIT FOR THE YEAR 139 825 76 143 c 7 717 c 55 965 d
OTHER COMPREHENSIVE
INCOME - - - -
TOTAL COMPREHENSIVE
INCOME FOR THE YEAR 139 825 76 143 7 717 55 965
 35 FAC2602/102

QUESTION 8 (27 marks)

The following balances were obtained from the records of Aquila Limited and its subsidiary Rana
Limited for the year ended 28 February 20.7:
Aquila Rana
Limited Limited
R R
Sales 900 000 500 000
Cost of sales 600 000 350 000
Interest received – Survivor Bank - 5 000
Profit on sale of machine - 20 000
Staff cost 75 000 35 000
Auditors’ remuneration 25 000 20 000
Interest paid on loans 15 000 15 600
Depreciation – machinery 20 000 12 000
Repairs 30 000 12 400
Income tax expense 39 150 23 200
Dividends paid 40 000 -
Share capital – ordinary shares of R1 each 300 000 100 000
Retained earnings – 1 March 20.6 45 000 29 000

Additional information

1. Rana Limited became a subsidiary of Aquila Limited on 1 December 20.6, when Aquila
Limited acquired 75% of the shares and voting rights in Rana Limited at a cost of R140 000.

2. It is group policy to show goodwill at cost in the financial statements. Assume the cost of all
other assets and liabilities equals to fair value.

3. The profit (income and expense items) of Rana Limited was earned evenly throughout the
year except when otherwise stated.

4. Rana Limited received interest on a fixed deposit. Both the investment and accrued interest
were paid out in full, on 31 March 20.6, by Survivor Bank.

5. On 31 December 20.6 Rana Limited sold a machine to Aquila Limited at a profit. Both
companies write off depreciation on machinery at 20% per annum according to the reducing
balance method.

6. Included in the staff cost of Rana Limited are bonusses of R10 000 paid to staff on
18 December 20.6.
 36

QUESTION 8 (continued)

7. An additional R5 000 was paid for audit work done by the auditors of Rana Limited during
July 20.6.

8. Both companies acquired loans on 1 January 20.7.

9. The repairs of both companies increased by 10% during the last four months of the financial
year.

10. On 28 February 20.7 Rana Limited declared a dividend of R7 000. This transaction was not
yet taken into account.

11. Assume a taxation rate of 29% and that all income/expenses are taxable/tax deductable.

REQUIRED:

a) Calculate the retained earnings of Rana Limited on 1 December 20.6.

b) Calculate the profit after tax of Rana Limited which should be included in the consolidated
statement of comprehensive income of the group.

c) Show the applicable journal entries to eliminate common items and intercompany
transactions.

Clearly show all calculations and do all calculations to the nearest rand. Ignore the tax
implications of unrealised profits/losses as well as capital gains tax.
 37 FAC2602/102

SOLUTION: QUESTION 8

a) Retained earnings of Rana Limited on 1 December 20.6

R
9
Sales (500 000 x /12) 9375 000
Cost of salaes (350 000 x 9/12) 9(262 500)
Interest received ^5 000
Staff cost [(35 000 – 10 000) x 9/12] 9(18 750)
Auditors’ remuneration [(15 000 x 9/12) + 5 000] 9(16 250)
Depreciation (12 000 x 9/12) 9(9 000)
Repairs (calculation 1) 9^(9 100)
64 400
Income tax expense (64 400 x 29%) ^(18 676)
45 724
Retained earnings 1 March 20.6 ^29 000
Retained earnings 1 December 20.6 74 724

b) Profit after tax of Rana Limited which should be included in the consolidated statement
of comprehensive income of the group
R
3
Sales (500 000 x /12) 9125 000
3
Cost of sales (350 000 x /12) 9(87 500)
Profit on sale of machine ^20 000
3
Staff cost [(35 000 – 10 000) x /12] + 10 000 9^(16 250)
3
Auditors’ remuneration (15 000 x /12) 9(3 750)
Interest paid ^(15 600)
3
Depreciation (12 000 x /12) 9(3 000)
Repairs (calculation 1) 99(3 300)
15 600
Income tax expense (15 600 x 29%) ^(4 524)
11 076

Calculations
1. Repairs
%
March to October (8 months x 100%) 800
November to February (4 months x 110%) 440
1 240
March to October = R12 400 x 100/1240 = R1 000 per month
November to February = R12 400 x 110/1240 = R1 100 per month

March to November = (R1 000 x 8) + (R1 100 x 1) = R9 100

December to February = (R1 100 x 3) = R3 300
 38

SOLUTION: QUESTION 8 (continued)

c) Journal entries
Non-
controlling
Dr Cr interest
R R R
Share capital^ 100 000
Retained earnings^ (29 000 + 45 724) 974 724
Goodwill^ (Balancing figure) 8 957
Investment in Rana Limited^ 140 000
Non-controlling interest^ 9^43 681 43 681
[(100 000+29 000+45 724) x 25%]
Elimination of shareholders equity at acquisition

Profit – Rana Limited^ 20 000

Machinery – Aquila Limited^ 20 000
Elimination of unrealised intercompany profit on sale of
machinery

Accumulated depreciation – Aquila Limited^ 667

Depreciation–Rana Ltd^ 667
(R20 000x20%x2/12)
Elimination of depreciation associated with the sale of
the machinery

Non-controlling interest (SFP)^ 2 064 (2 064)

Non-controlling interest (SCI) ^ 2 064
[(R11 076 – R20 000 + R667) x 25%]
Recording of non-controlling interest in loss after tax

Non-controlling interest^ 1 750 (1 750)

Shareholders for dividends^ 91 750
(R7 000 x 25%)
Provision for dividend payable to minority shareholders
 39 FAC2602/102

QUESTION 9 (30 Marks)

The following represent the abridged statement of financial position of Bravo Limited and its
subsidiary Charlie Limited:
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2005 BRAVO CHARLIE
LIMITED LIMITED
R R
ASSETS
Property at cost/valuation ................................................................ 750 000 400 000
Machinery........................................................................................ 340 000 190 000
At cost ........................................................................................... 500 000 240 000
Accumulated depreciation ............................................................. (160 000) (50 000)
Plant at carrying amount ................................................................. 680 000 370 000
Investments in Charlie Limited
80 000 ordinary shares at fair value (cost price R650 000) .......... 650 000 -
25 000 12% cumulative preference shares at fair value (cost
price R40 000)............................................................................... 40 000 -
9% debentures (since 2003) ........................................................ 50 000 -
unsecured loan at fair value ......................................................... 80 000 -
Current account - Bravo Limited...................................................... - 75 000
Inventory ......................................................................................... 170 000 150 000
Trade and other receivables............................................................ 220 000 260 000
Bills receivable - Charlie Limited ..................................................... 20 000 -
Bank - Alpha Bank .......................................................................... 30 000 -
3 030 000 1 445 000

EQUITY AND LIABILITIES

Ordinary shares of R5 each ............................................................ - 500 000
Ordinary shares of R2 each ............................................................ 900 000 -
12% cumulative preference shares of 75c each.............................. - 75 000
Revaluation of property ................................................................... - 150 000
Retained earnings ........................................................................... 1 816 750 306 000
Interest bearing borrowings ............................................................. 64 750 170 000
9% debentures .............................................................................. - 100 000
Loan Bravo Limited ....................................................................... - 70 000
Current account - Charlie Limited.................................................. 64 750 -
Trade and other payables ............................................................... 220 000 140 000
Bills payable - Bravo Limited ........................................................... - 25 000
Bank overdraft - Alpha Bank ........................................................... - 60 000
Shareholders for dividends - ordinary shares .................................. 28 500 10 000
- preference shares (current year) ....... - 9 000
3 030 000 1 445 000
 40

QUESTION 9 (continued)

Additional information

1. Bravo Limited acquired its interest in Charlie Limited on 1 July 2002. At that date the
retained earnings of Charlie Limited amounted to R120 000. On the same day the property
of Charlie Limited, which had a carrying amount of R250 000, was revalued at R350 000.

It is company policy to revalue Charlie Limited’s property on 30 June every second year.
Since 1 July 2002 Charlie Limited has not purchased or sold any property. At the date of
acquisition, consider the carrying amount of all the other assets and liabilities of
Charlie Limited to be equal to the fair value thereof.

2. No dividend was declared or paid by Charlie Limited during the period 1 July 2001 and
30 June 2002.

3. Assume each ordinary share carries one vote.

4. It is group policy to show goodwill at cost in the financial statements.

5. Since September 2002, Charlie Limited purchases all its inventories from Bravo Limited at
the normal selling price, determined by Bravo Limited, which is cost plus 20%.

6. Charlie Limited sold a machine to Bravo Limited on 1 January 2004 at a profit of R25 000.
The group provides for depreciation at 20% per annum according to the reducing balance
method.

7. Bravo Limited discounted R5 000 of the bills receivable from Charlie Limited at the bank
before the expiry date of 31 July 2005.

8. On 29 June 2005, Charlie Limited repaid R10 000 of the existing loan from Bravo Limited.
Bravo Limited received the repayment on 7 July 2005.

9. The parent guarantees the overdraft of the subsidiary’s bank account.

REQUIRED:

Draft the consolidated statement of financial position of Bravo Limited and its subsidiary as at
30 June 2005 according to the requirements of the Companies Act and Generally Accepted
Accounting Practice. Ignore comparative figures and the taxation effect on unrealised profits
and/or losses as well as capital gains tax. Do all calculations to the nearest rand.
 41 FAC2602/102

SOLUTION: QUESTION 9

BRAVO LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2005

ASSETS R
Non-current assets 2 812 200
Property, plant and equipment [(750 000^ + 400 000^) + (680 000^ + 370 000^)] + 2 712 000
[(500 000^ + 240 000^ - 25 000^) - (160 000^ + 50 000^ - 7 000^)]
Goodwill (81 200 + 19 000)^ 100 200
Current assets 775 000
Inventory [(170 000^ + 150 000^) - (150 000 x 20/120)]9 295 000
Trade and other receivables (220 000^ + 260 000^) 480 000
Total assets 3 587 200

EQUITY AND LIABILITIES

Total equity 3 114 950
Equity attributable to owners of the parent 2 871 100
Share capital ^900 000
Other components of equity 940 000
Retained earnings [(1 816 750^ - 25 000^) + (141 600^ - 2 250^)] 1 931 100
Non-controlling interest (187 600 + 56 250) 243 850
Total liabilities 472 250
Non-current liabilities
9% Debentures (100 000^ - 50 000^) 50 000
Current liabilities 422 250
Trade and other payables [(220 000^ + 140 000^) + (25 000^ - 20 000^)] 365 000
Bank overdraft [60 000^ - (30 000^ + 10 000^)] 20 000
Dividends payable [28 500^ + (10 000 x 20%)^ + (9 000 x 75%)]9 37 250
Total equity and liabilities 3 587 200
 42

SOLUTION: QUESTION 9 (continued)

Calculations

1. Analysis of ordinary shareholders’ equity of Charlie Limited

Ordinary shares
Bravo Limited
80% Non-controlling
Total At Since interest
Ordinary shares acquisition acquisition 20%
At acquisition R R R R
Share capital 500 000 ^400 000 100 000
Revaluation reserve 100 000 ^80 000 20 000
(350 000 - 250 000)
Retained earnings 111 000 88 800 22 200
Given ^120 000
Preference dividend ^(9 000)

711 000 568 800 142 200

Investment in Charlie Ltd ^650 000
Goodwill ^81 200

Since acquisition to end of

current year
Retained earnings 177 000 141 600 35 400
Given (306 000^ - 111 000^) 195 000
Intercompany profit-machinery 9(25 000)
Depreciation-machinery 97 000
Revaluation reserve 950 000 40 000 10 000
(400 000 - 350 000)/
(150 000 - 100 000)
40 000 OCE
938 000 141 600 RE 9187 600
 43 FAC2602/102

SOLUTION: QUESTION 9 (continued)

Cumulative preference shares

Bravo Limited
25% Non-
Total At Since controlling
Preference shares Acquisition acquisition interest
75%
R R R R
At acquisition
Share capital 75 000 ^18 750 56 250
Arrear preference dividend 9 000 ^2 250 6 750
84 000 21 000 63 000
Investment in Charlie Ltd ^40 000
Goodwill ^19 000
Since acquisition to end of
current year
Arrear dividend paid (9 000) (2 250) (6 750)
Profit attributable to preference
shares 27 000 6 750 20 250
Preference dividend paid (27 000) (6 750) (20 250)
75 000 9 (2 250) 956 250

2. Depreciation
R
Profit on sale of machine 25 000
Depreciation - 1/1/2004 - 30/6/2004 (25 000 x 20% x 6/12) (2 500)
Carrying amount - 30/6/2004 22 500
Depreciation - 1/7/2004 - 30/6/2005 (22 500 x 20%) (4 500)
18 000

Depreciation up to 30 June 2005 for which an adjustment has to be made

(2 500 + 4 500) 7 000
 44

QUESTION 10 (42 marks)

On 1 January 19.6, Lipton Ltd purchased ordinary shares in Glen Ltd. At that stage Glen Ltd's
shareholders' interest was compiled as follows:

R
R1 ordinary shares 200 000
Retained earnings 30 000

Lipton Limited paid an amount of R4 000 to Glen Limited in order to gain control over
Glen Limited's operations. The remaining difference between cost price and reserves is
attributable to a revaluation of Glen Limited's land and buildings, which took place on date of
acquisition. The revaluation was not recorded in Glen Limited's records.

The condensed statements of comprehensive income of the two companies for the year ended
30 June 20.0 were as follows:

Lipton Ltd Glen Ltd

R R
Revenue 400 000 255 000
Cost of sales (248 000) (153 000)
Gross profit 152 000 102 000
Income received – dividend 8 000 (24 000)
Administrative expenses (40 000) (8 000)
Depreciation (20 000)
Finance cost (10 000)
(20 000)
Profit before tax 80 000 60 000
Income tax expense (40 000) (30 000)
PROFIT FOR THE YEAR 40 000 30 000
OTHER COMPREHENSIVE INCOME - -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 40 000 30 000

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20.0

Ordinary share Retained Total
capital earnings
Lipton Glen Lipton Glen Lipton Glen
Ltd Ltd Ltd Ltd Ltd Ltd
R R R R R R
Balance on 30 June 19.9 430 000 200 000 58 000 75 000 488 000 275 000
Total comprehensive income for the year 40 000 30 000 40 000 30 000
Dividend paid (8 000) (5 000) (8 000) (5 000)
Balance on 30 June 20.0 430 000 200 000 90 000 100 000 520 000 300 000
 45 FAC2602/102

QUESTION 10 (continued)

On 30 June 20.0 the following items appeared in the statement of financial position of the two
companies:
Lipton Ltd Glen Ltd
ASSETS R R
Non-current assets 540 000 298 000
Property, plant and equipment 320 000 298 000
Land and buildings at cost 210 000 150 000
Plant 110 000 148 000
Cost price 160 000 180 000
Accumulated depreciation (50 000) (32 000)
Investment in Glen Limited
180 000 shares at fair value (cost price R220 000) 220 000 -
Current assets 125 000 95 000
Trade and other receivables 30 000 12 000
Inventories 95 000 83 000
Total assets 665 000 393 000

EQUITY AND LIABILITIES

Total equity 520 000 300 000
Share capital 430 000 200 000
Retained earnings 90 000 100 000
Non-current liabilities
Long-term loan 45 000 23 000

Current liabilities
Trade and other payables 100 000 70 000
Total equity and liabilities 665 000 393 000

Additional information

1. Included in Lipton Limited's plant is a machine sold on 1 July 19.8 by Glen Limited to
Lipton Limited. Glen Limited made a profit of R20 000 on this transaction. Plant is depreciated
at 10% per annum on cost price.

2. Since April 19.6, Lipton Limited has purchased some of its inventories from Glen Limited at
the normal selling price, determined by Glen Limited at cost price plus 25%. In respect of the
year ended 30 June 20.0, sales from Glen Limited to Lipton Limited amounted to R200 000.

3. At 30 June 19.9, the inventories on hand of Lipton Limited were valued at R60 000.

4. Opening and closing inventories of Lipton Limited were purchased from Glen Limited.
 46

QUESTION 10 (continued)

REQUIRED:

Draft the consolidated financial statements of Lipton Limited and its subsidiary for the financial
year ended 30 June 20.0 according to the requirements of the Companies Act and Generally
Accepted Accounting Practice. Ignore comparative figures, taxation on unrealised profits and/or
losses and capital gains tax. Show all calculations.

Do the consolidated journal entries at 30 June 20.0 to eliminate the transactions associated with
the sale of the assets and inventory.

SOLUTION: QUESTION 10

LIPTON LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.0
R
ASSETS
Non-current assets 616 000
Property, plant and equipment
Land and buildings at valuation (210 000^ + 150 000^ + 10 0002^) 370 000
Plant at carrying amount (110 000^ + 148 000^ - 20 000^ + 4 000^) 242 000
Goodwill 4 000 ^
Current assets 201 000
Inventories (95 000^ + 83 000^ - 19 000^) 159 000
Trade and other receivables (30 000^ + 12 000^) 42 000
Total assets 817 000
EQUITY AND LIABILITIES
Total equity 579 000
Equity attributable to owners of the parent 551 500
Share capital 430 000 ^
Retained earnings 121 500 ^
Non-controlling interest 27 500 ^
Total liabilities 238 000
Non-current liabilities
Long-term loan (45 000^ + 23 000^) 68 000

Current liabilities
Trade and other payables (100 000^ + 70 000^) 170 000
Total equity and liabilities 817 000
 47 FAC2602/102

SOLUTION: QUESTION 10 (continued)

LIPTON LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED

30 JUNE 20.0
R
Revenue (400 000^ + 255 000^ - 200 000^) 455 000
Cost of sales (248 000^ + 153 000^ - 200 000^ - 12 000^ + 19 000^) (208 000)
Gross profit 247 000
Other income (8 000^ - 4 500^) 3 500
Administrative expenses (40 000^ + 24 000^ + 20 000^ + 8 000^ - 2 000^) (90 000)
Finance cost (20 000^ + 10 000^) (30 000)
Profit before tax 130 500
Income tax expense (40 000^ + 30 000^) (70 000)
PROFIT FOR THE YEAR 60 500
OTHER COMPREHENSIVE INCOME -
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 60 500

Profit attributable to:

Owners of the parent (60 500 - 2 500) 58 000 ^
Non-controlling interest (Calculation 1) 2 500 ^
60 500

Total comprehensive income attributable to: 58 000

Owners of the parent 2 500
Non-controlling interest 60 500
 48

SOLUTION: QUESTION 10 (continued)

LIPTON LIMITED AND ITS SUBSIDIARY

NOTES FOR THE YEAR ENDED 30 JUNE 20.0

1. Profit before tax R
Included in profit before tax are the following items:
Income
Dividends received 3 500

Expenses
Depreciation (20 000 + 8 000 - 2 000) 26 000

LIPTON LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE

20.0
Attributable to owners of the parent Non- Total
controlling equity
interest
Ordinary
share Retained
capital earnings Total
R R R R R

Balance at 30 June 19.9 430 000^ 71 500* ^ 501 500 25 500 9 527 000
Total comprehensive income for the
year 58 000 9 58 000 2 500 ^ 60 500
Dividend paid (8 000) (8 000) (500) 9 (8 500)
Balance at 30 June 20.0 430 000 121 500 551 500 27 500 579 000

* 58 000^ + 13 500^
 49 FAC2602/102

SOLUTION: QUESTION 10 (continued)

Calculation
1. Analysis of ordinary shareholders’ equity of Glen Limited

Lipton Limited Non-

At Since controlling
Total acquisition acquisition interest

90% 10%
R R R R
At acquisition
Share capital 200 000 180 000 ^ 20 000
Revaluation reserve 10 0002 9 0001 ^ 1 000
Retained earnings 30 000 27 000 ^ 3 000
240 000 216 000 24 000
Investment in Glen Limited 220 000 ^
Goodwill 4 000
Since acquisition to beginning of
current year (1/1/19.6 - 30/6/19.9)
Retained earnings 15 000 13 500 1 500
Retained earnings beginning of year 75 000 ^
Retained earnings at acquisition (30 000) ^
Unrealised profit in machinery (20 000) ^
Depreciation 19.9 2 0003 ^
Unrealised profit in opening inventories (12 0004) ^
Current year
Profit for the year 25 000 22 500 2 500
Profit 30 000 ^
Unrealised profit in opening inventories 12 0004 ^
Unrealised profit in closing inventories (19 0005) ^
Depreciation 20.0 2 0003 ^
Dividends (5 000) ^ (4 500) (500)
275 000 31 500 27 500

References 1 - 5 appear on next page.

 50

SOLUTION: QUESTION 10 (continued)

1
Goodwill = 4 000 (given)
Cost of investment = 220 000 (given)
90% of at acquisition = 220 000 - 4 000
= 216 000

216 000 - 180 000 (share capital) - 27 000 (retained earnings)

= 9 000 (90%)

2 9 000
= 10 000 revaluation reserve
90%

3
20 000 x 10%
4
60 000 x 25/125
5
95 000 x 25/125

2. Journal entries
30 June 20.0 Dr Cr
R R
Retained earnings - Glen Ltd 12 000 9
Cost of sales - Glen Ltd 12 000 9
Elimination of unrealised intercompany profit included in opening
inventory of Lipton Ltd (60 000 x 25/125)
Retained earnings - Glen Ltd 20 000 9
Machinery - Lipton Ltd 20 000 9
Elimination of intercompany profit of Glen Limited’s sale of
machine to Lipton Ltd.
Cost of sales - Glen Ltd 19 000 9
Inventory - Lipton Ltd 19 000 9
Elimination of unrealised intercompany profit included in closing
inventory of Lipton Ltd (95 000 x 25/125)
Accumulated depreciation - Lipton Ltd 4 000 9
Depreciation - Glen Ltd 2 000 9
Retained earnings - Glen Ltd 2 000 9
Reversal of depreciation charged on inter-company profit
 51 FAC2602/102

QUESTION 11 (25 marks)

The following balances appeared in the books of Milestone Limited for the financial year ended:
28 Feb 20.1 29 Feb 20.0
R R
Property, plant and equipment 1 575 000 800 000
Investments 198 000 15 000
Preliminary expenses 16 500 24 000
Inventory 182 000 69 000
Trade receivables 192 500 250 000
Prepaid administration expenses 2 000 4 000
Dividends receivable 12 000 -
Bank - 55 000
2 178 000 1 217 000
Ordinary share capital of R1 each 1 000 000 400 000
Share premium - 10 000
10% debentures of R200 each 80 000 150 000
Surplus on revaluation of land 275 000 75 000
Retained earnings 335 500 325 000
18% long-term loan 30 000 40 000
Deferred tax 5 000 12 000
Accumulated depreciation- property, plant and equipment 175 000 100 000
Short-term portion of long-term loan 10 000 10 000
Tax payable 14 000 34 000
Dividends payable 50 000 20 000
Trade payables 25 000 41 000
Bank overdraft 178 500 -
2 178 000 1 217 000

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 20.1

20.1 20.0
R R
Revenue 1 100 000 588 000
Cost of sales (400 000) (200 000)
Gross profit 700 000 388 000
Expenses (578 000) (342 000)
Directors’ remuneration 50 000 30 000
Distribution expenses 150 000 125 000
Administrative expenses 100 000 75 000
Auditors’ remuneration 60 000 38 000
Depreciation 195 000 55 000
Finance charges 23 000 19 000
Other income 42 000 9 000
Profit on sale of plant and equipment 30 000 -
Dividends on investments 12 000 9 000
Profit before tax 164 000 55 000
Income tax expense (56 000) (22 000)
- Current year 63 000 21 000
- Deferred (7 000) 1 000
PROFIT FOR THE YEAR 108 000 33 000
OTHER COMPREHENSIVE INCOME 200 000 75 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 308 000 108 000
 52

QUESTION 11 (continued)

The following additional information is available:

1.1 500 000 Ordinary shares were issued to the public at a premium of 10% on 1 April 20.0.

1.2 The company issued capitalisation shares at par to the ordinary shareholders on
30 June 20.0 in the ratio of 1 ordinary share for every 9 ordinary shares held. The share
premium account were utilised for this purpose.

1.3 R7 500 of the preliminary expenses was written off against retained earnings on
28 February 20.1 and an ordinary dividend of 5 cents per share was declared.

2. The following changes in property, plant and equipment took place:

Plant and
Land equipment
R R
Carrying amount beginning of year 400 000 300 000
Cost 400 000 400 000
Accumulated depreciation - (100 000)
Purchases at cost 75 000 800 000
Disposals at carrying amount - (180 000)
Revaluations during the year 200 000 -
Depreciation for the year - (195 000)
Carrying amount end of year 675 000 725 000
Valuation/Cost 675 000 900 000
Accumulated depreciation - (175 000)

R500 000 of the purchases of property, plant and equipment represent replacements of
assets disposed of.
3. The debentures were redeemed at par on 1 March 20.0.
4. The long-term loan was incurred on 1 January 19.6 and the capital portion is repayable in five
equal annual instalments starting on 30 June 20.0.
5. New investments were purchased during the year.

6. Revenue consists of cash sales amounting to R400 000 (20.0 : R134 000) and credit sales of
R700 000 (20.0 : R454 000).

REQUIRED:

Draft the statement of cash flows of Milestone Limited for the financial year ended
28 February 20.1 according to the direct method. Your answer must comply with Generally
Accepted Accounting Practice. Show the following calculations:

1. Cash receipts from customers

2. Cash payments to suppliers and employees
3. Dividends paid
4. Tax paid
 53 FAC2602/102

SOLUTION: QUESTION 11

MILESTONE LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 20.1
R R
Cash flow from operating activities
Cash receipts from customers (calculation 1) 1 157 500
Cash payments to suppliers and employees (calculation 2) (887 000)
Cash generated from operations 270 500
Interest paid 9(23 000)
Dividends paid (calculation 3) (20 000)
Normal tax paid (calculation 4) (83 000)
Net cash inflow from operating activities 144 500

Cash flow from investing activities

Investment to maintain production capacity (500 000)
Replacement of property, plant and equipment (calculation 5) 9(500 000)
Investment to expand production capacity (375 000)
Additions to property, plant and equipment (calculation 5) 99(375 000)
Proceeds from sale of property, plant and equipment
(180 000 + 30 000) 99210 000
Purchase of investments (198 000 - 15 000) 99(183 000)
Net cash outflow from investing activities (848 000)

Cash flow from financing activities

Proceeds on issue of shares (500 000 + 10% premium) 99550 000
Redemption of debentures 9(70 000)
Repayment of long-term loan (50 000 - 40 000) 99(10 000)
Net cash inflow from financing activities 470 000
Net decrease in cash and cash equivalents (233 500)
Cash and cash equivalents beginning of year 955 000
Cash and cash equivalents end of year 9(178 500)

Calculations

1. Cash received from customers

Trade and other receivables

R R
Balance b/d ^250 000 Bank* 1 157 500
Sales ^1 100 000 Balance c/d ^192 500
1 350 000 1 350 000
*Balancing figure
 54

SOLUTION: QUESTION 11 (continued)

2. Cash payments to suppliers and employees

Trade and other payables, inventory and expenses

R R
Balance - inventory b/d ^69 000 Balance - creditors b/d ^41 000
Balance – prepaid expenses b/d ^4 000 Cost of sales ^400 000
Bank* 887 000 Distribution expenses ^150 000
Balance - creditors c/d ^25 000 Directors’ remuneration ^ 50 000
Administrative expenses ^100 000
Auditor’s remuneration ^60 000
Balance - inventore c/d ^182 000
Balance – prepaid expenses c/d ^2 000
985 000 985 000
*Balancing figure

3. Dividends paid
R

Unpaid amounts at beginning of year ^20 000

Amounts debited against profit (additional information 1.3 – 1 000 000 x 5c) ^ 50 000
Unpaid amounts at end of year ^(50 000)
20 000

4. Tax paid

Unpaid amounts at beginning of year ^34 000

Amounts debited against profit ^63 000
Unpaid amounts at end of year ^(14 000)
83 000

5. Property, plant and equipment at carrying amount

R R
Balance b/d 700 000 Sales at carrying amount 180 000
Revaluation 200 000 Depreciation 195 000
Replacement 500 000 Balance c/d 1 400 000
Additions* 375 000
1 775 000 1 775 000
*R75 000 + 800 000 - 500 000

6. Ordinary share capital

R R
Balance c/d 1 000 000 Balance b/d 400 000
New issue 500 000
Capitalisation issue 100 000
[(400 000 + 500 000) ÷ 9]
1 000 000 1 000 000
 55 FAC2602/102

QUESTION 12 (24 marks)

The following balances appeared in the books of Genius Limited for the financial year ended
30 June:
2006 2005
R R
Property, plant and equipment ................................................................ 4 175 000 2 500 000
Investments ............................................................................................. 700 000 550 000
Inventory ................................................................................................. 50 000 63 000
Trade and other receivables .................................................................... 300 000 250 000
Prepaid expenses .................................................................................... 8 000 10 000
Dividends receivable ............................................................................... 15 000 -
Cash and cash equivalents ..................................................................... - 85 000
Cost of sales ............................................................................................ 700 000 480 000
Administrative expenses .......................................................................... 175 000 120 000
Distribution expenses .............................................................................. 100 000 95 000
Other expenses (including depreciation) .................................................. 450 000 85 000
Finance cost ............................................................................................ 20 000 20 000
Income tax expense ................................................................................ 166 000 133 000
Dividends declared and paid .................................................................... 250 000 50 000
7 109 000 4 441 000
Ordinary share capital of R1 each ............................................................ 2 500 000 1 500 000
Share premium ......................................................................................... 380 000 400 000
Surplus on revaluation of land .................................................................. 150 000 100 000
Retained earnings beginning of year ........................................................ 405 000 143 000
10% Long-term loan ................................................................................. 180 000 200 000
Deferred tax.............................................................................................. 8 000 8 000
Accumulated depreciation: Property, plant and equipment ...................... 803 000 700 000
Short-term portion of long-term loan......................................................... 20 000 -
Tax payable .............................................................................................. 65 000 60 000
Dividends payable .................................................................................... 125 000 50 000
Trade and other payables ........................................................................ 200 000 35 000
Accrued interest on long-term loan........................................................... 5 000 -
Bank overdraft .......................................................................................... 428 000 -
Sales (credit) ........................................................................................... 1 750 000 1 200 000
Profit on sale of equipment ....................................................................... 15 000 -
Income from investments - Dividends ...................................................... 75 000 45 000
7 109 000 4 441 000
Additional information

1. On 1 May 2006, the company issued capitalisation shares at par to the ordinary
shareholders in the ratio of 1 share for every 5 shares held. The share premium account
was utilised for this purpose.

2. On 1 June 2006, ordinary shares were issued to the public at a premium of 40%.
 56

QUESTION 12 (continued)

3. During the financial year the following changes took place in non-current assets:
Total Land Buildings Equipment
R R R R
Carrying amount beginning of year 1 800 000 800 000 150 000 850 000
Cost 2 500 000 800 000 200 000 1 500 000
Accumulated depreciation (700 000) - (50 000) (650 000)
Purchases at cost 2 125 000 - - 2 125 000
Disposals at carrying amount (200 000) - - (200 000)
Revaluation during year 50 000 50 000 - -
Depreciation for the year (403 000) - (3 000) (400 000)
Carrying amount end of year 3 372 000 850 000 147 000 2 375 000
Cost/Valuation 4 175 000 850 000 200 000 3 125 000
Accumulated depreciation (803 000) - (53 000) (750 000)

R1 000 000 of the purchases of plant and equipment represent replacements of

equipment disposed of.

4. The long-term loan was incurred on 1 January 2000 and the capital portion is repayable in
ten equal annual instalments starting on 31 July 2006.

5. New investments were purchased during the year.

REQUIRED:

After taking the abovementioned information into account, answer the following multiple choice
questions (choose only A, B, C or D) concerning the statement of cash flows prepared on the
direct method of Genius Limited for the financial year ended 30 June 2006.

1. Cash receipts from customers amount to:

(A) R1 800 000
(B) R1 700 000
(C) R1 702 000
(D) Not one of the above

2. Cash payments to suppliers and employees amount to:

(A) R 842 000
(B) R1 245 000
(C) R 827 000
(D) Not one of the above

3. The change in working capital represents a:

(A) Cash outflow of R130 000
(B) Cash inflow of R180 000
(C) Cash outflow of R180 000
(D) Not one of the above
 57 FAC2602/102

QUESTION 12 (continued)

4. Dividends received amount to:

(A) R60 000
(B) R75 000
(C) R90 000
(D) Not one of the above

5. Interest paid amounts to:

(A) R25 000
(B) R15 000
(C) R20 000
(D) Not one of the above

6. Dividends paid amount to:

(A) R325 000
(B) R250 000
(C) R175 000
(D) Not one of the above

7. Normal tax paid amounts to:

(A) R161 000
(B) R166 000
(C) R171 000
(D) Not one of the above

8. Replacement of equipment amounts to:

(A) R2 125 000
(B) R1 000 000
(C) R1 925 000
(D) Not one of the above

9. Additions to equipment amount to:

(A) R1 125 000
(B) R2 125 000
(C) R1 175 000
(D) Not one of the above

10. The proceeds on sale of equipment amount to:

(A) R200 000
(B) R185 000
(C) R215 000
(D) Not one of the above

11. The change in investments represents a:

(A) Cash inflow of R150 000
(B) Cash outflow of R150 000
(C) Cash outflow of R700 000
(D) Not one of the above
 58

QUESTION 12 (continued)

12. The issue of ordinary shares represent a:

(A) Cash inflow of R1 000 000
(B) Cash inflow of R700 000
(C) Cash inflow of R980 000
(D) Not one of the above
(2 marks each)

SOLUTION: QUESTION 12

ANSWERS

1. B
2. A
3. D
4. A
5. B
6. C
7. A
8. B
9. A
10. C
11. B
12. C
 59 FAC2602/102

SOLUTION: QUESTION 12 (continued)

GENIUS LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2006
R R
Cash flow from operating activities
Cash receipts from customers (calculation 1) 1 700 000
Cash payments to suppliers and employees (calculation 2) (842 000)
Cash generated by operations 858 000
Dividends received (75 000 – 15 000) 60 000
Interest paid (20 000 – 5 000) (15 000)
Dividends paid (calculation 3) (175 000)
Normal tax paid (calculation 4) (161 000)
Net cash inflow from operating activities 567 000

Cash flow from investing activities

Investment to maintain production capacity (1 000 000)
Replacement of equipment (given) (1 000 000)
Investment to expand production capacity (1 125 000)
Additions to equipment (calculation 5) (1 125 000)
Proceeds on sale of non-current asset (200 000 + 15 000) 215 000
Purchase of investments (700 000 – 550 000) (150 000)
Net cash outflow from investing activities (2 060 000)

Cash flow from financing activities

Proceeds on issue of shares (calculation 7)(700 000 + 40%) 980 000
Net cash inflow from financing activities 980 000
Net decrease in cash and cash equivalents (513 000)
Cash and cash equivalents beginning of year 85 000
Cash and cash equivalents end of year (428 000)

Calculations

1. Cash received from customers

Trade and other receivables

R R
Balance b/d 250 000 Bank* 1 700 000
Sales 1 750 000 Balance c/d 300 000
2 000 000 2 000 000
*Balancing figure
 60

SOLUTION: QUESTION 12 (continued)

2. Cash payments to suppliers and employees

Trade and other payables, inventory and expenses
R R
Balance – inventory b/d 63 000 Balance – creditors b/d 35 000
Balance – prepaid expenses b/d 10 000 Cost of sales 700 000
Bank* 842 000 Distribution expenses 100 000
Balance – creditors c/d 200 000 Administrative expenses 175 000
Other expenses (450 000 - 403 000) 47 000
Balance - inventory c/d 50 000
Balance – prepaid expenses c/d 8 000
1 115 000 1 115 000
*Balancing figure

3. Dividends paid R
Unpaid amounts at beginning of year 50 000
Amounts debited against profit 250 000
Unpaid amounts at end of year (125 000)
175 000
4. Tax paid
Unpaid amounts at beginning of year 60 000
Amounts debited against profit 166 000
Unpaid amounts at end of year (65 000)
161 000

5. Property, plant and equipment at carrying amount

R R
Balance b/d 1 800 000 Sales at carrying amount 200 000
Revaluation 50 000 Depreciation 403 000
Replacement 1 000 000 Balance c/d 3 372 000
Additions* 1 125 000
3 975 000 3 975 000
*Balancing figure

6. Change in working capital R

Decrease in inventory 13 000
Increase in trade receivables (50 000)
Decrease in prepaid expenses 2 000
Increase in trade payables 165 000
Cash inflow 130 000

7. Ordinary share capital

R R
Balance (given) c/d 2 500 000 Balance b/d *1 500 000
Capitalisation issue (1 500 000 ÷ 5) *300 000
New issue 700 000
[2 500 000 – (1 500 000* + 300 000*)]
2 500 000 2 500 000
 61 FAC2602/102

QUESTION 13 (26 marks)

The following balances appear in the books of Chop-Chop Limited for the financial year ended
31 December:
19.9 19.8
R R
Property, plant and equipment 1 095 000 695 000
Investments 23 500 15 000
Inventory 80 000 63 000
Trade receivables 65 500 60 000
Prepaid expenses 1 200 4 000
Dividends receivable 3 250 -
Bank - 13 000
1 268 450 850 000

Ordinary share capital of R2 each 500 000 200 000

Share premium 12 500 5 000
10% debentures of R100 each 100 000 125 000
Surplus on revaluation of land 100 000 30 000
Retained earnings 217 500 255 000
18% long-term loan 20 000 25 000
Deferred taxation 12 000 15 000
Accumulated depreciation - property, plant and equipment 125 000 100 000
Tax payable 39 000 34 000
Dividends payable 20 000 20 000
Trade payables 68 500 41 000
Accrued interest on long-term loan 2 250 -
Bank overdraft 51 700 -
1 268 450 850 000

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 19.9

19.9 19.8
R R
Revenue 1 160 000 588 000
Cost of sales (400 000) (200 000)
Gross profit 760 000 388 000
Expenses (704 500) (338 250)
Directors’ remuneration 60 000 30 000
Salaries and wages 200 000 125 000
Administrative expenses 150 000 75 000
Auditors’ remuneration 105 000 38 000
Depreciation 165 000 55 000
Loss on sale of plant and equipment 10 000 1 500
Finance charges 14 500 13 750
Other income
Dividends on investment 5 000 9 000
Profit before tax 60 500 58 750
Income tax expense (13 000) (22 000)
- Current year 16 000 21 000
- Deferred (3 000) 1 000
Profit for the year 47 500 36 750
Other comprehensive income - -
Total comprehensive income for the year 47 500 36 750
 62

QUESTION 13 (continued)

EXTRACT FROM THE STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 19.9:
Ordinary Surplus
share Share on revaluation Retained
capital premium of land earnings
R R R R
Balance 1/1/19.9 200 000 5 000 30 000 255 000
Surplus on revaluation of land 70 000
Ordinary shares issued on 1/2/19.9 250 000 12 500
Capitalisation shares issued on
28/2/19.9 50 000 (5 000) (45 000)
Total comprehensive income for the year 47 500
Ordinary dividends
- Interim paid (20 000)
- Final declared (20 000)
Balance 31/12/19.9 500 000 12 500 100 000 217 500

The following additional information is available:

1. Equipment which originally cost R250 000 and on which R140 000 depreciation has been
written off, was sold. It was replaced with new equipment costing R200 000. Additional
equipment was also purchased to increase the production capacity of the company.

2. The debentures were redeemed at par on 31 December 19.8.

3. The long-term loan was incurred on 1 January 19.3 and the capital portion is repayable in five
equal annual instalments starting on 31 December 19.9.

4. Revenue consists of cash sales amounting to R740 000 (19.8 : R134 000) and credit sales of
R420 000 (19.8 : R454 000).

REQUIRED:

Draft the statement of cash flows of Chop-Chop Limited for the year ended 31 December 19.9,
using the indirect method, in compliance with the requirements of the Companies Act and
Generally Accepted Accounting Practice. Ignore comparative figures but show all calculations.
 63 FAC2602/102

SOLUTION: QUESTION 13

CHOP-CHOP LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
31 DECEMBER 19.9
R R
Cash flow from operating activities
Profit before tax ^60 500
Adjustments for:
Depreciation ^165 000
Finance charges ^14 500
Loss on sale of plant and equipment ^10 000
Investment income ^ (5 000)
Operating profit before changes in working capital 245 000
Changes in working capital 7 800
Increase in inventory (80 000 – 63 000) 9 (17 000)
Increase in receivables (65 500 – 60 000) 9 (5 500)
Decrease in pre paid expenses (4 000 – 1 200) 92 800
Increase in payables (68 500 – 41 000) 9 27 500
Cash generated from operations 252 800
Income from investments [5 000 – 3 250 (dividends receivable)] 9 1 750
Finance charges [14 500 – 2 250 (accrued interest)] 9 (12 250)
Dividends paid (40 000)
Normal taxation paid (11 000)
Net cash inflow from operating activities 191 300

Cash flow from investing activities

Investment to maintain production capacity (200 000)
Replacement of equipment (calculation 3) 200 000
Investment to expand production capacity (380 000)
Additions to equipment (calculation 3) 380 000
Proceeds from sale of equipment 9100 000
[(250 000 – 140 000) – 10 000]
Purchase of investments (23 500 – 15 000) 9 (8 500)
Net cash outflow from investing activities (488 500)

Cash flow from financing activities

Proceeds on issue of shares (250 000 + 12 500) 9 262 500
Redemption of debentures (125 000 - 100 000) 9 (25 000)
Repayment of long-term loan (25 000 - 20 000) 9 (5 000)
Net cash inflow from financing activities 232 500
Net decrease in cash and cash equivalents (64 700)
Cash and cash equivalents beginning of year 913 000
Cash and cash equivalents end of year 9 (51 700)
 64

SOLUTION: QUESTION 13 (continued)

Calculations

1. Dividends paid

Unpaid amounts at beginning of year ^20 000

Amounts debited against profit 940 000
Unpaid amounts at end of year ^ (20 000)
40 000

2. Tax paid

Unpaid amounts at beginning of year ^34 000

Amounts debited against profit ^16 000
Unpaid amounts at end of year ^ (39 000)
11 000

3. Property, plant and equipment at carrying amount

R R
Balance (695 000 - 100 000) b/d 9 595 000 Sales at carrying amount 9 110 000
Revaluation 9 70 000 (250 000 - 140 000)
Replacement 9 200 000 Depreciation 9 165 000
Additions* 9 380 000 Balance c/d 9 970 000
(1 095 000 - 125 000)
1 245 000 1 245 000
*Balancing figure
 65 FAC2602/102

QUESTION 14 (30 Marks)

The following balances were obtained from the financial records of ABC Limited as at 30 April:

ABC LIMITED
2009 2008
R R
Debits
Land and buildings at valuation 1 400 000 1 100 000
Plant at cost 1 200 000 800 000
Furniture at cost 680 000 450 000
Inventories 86 000 44 000
Investments at cost 56 000 36 000
Trade and other receivables 145 000 88 000
Bank - 46 000
3 567 000 2 564 000

Credits
Share capital 1 000 000 800 000
Retained earnings 630 000 460 000
Long-term loan (interest-free) 850 000 600 000
Trade and other payables 93 000 70 000
Bank overdraft 224 000 -
SA Revenue Service 230 000 144 000
Shareholders for dividends 200 000 240 000
Revaluation surplus 200 000 150 000
Accumulated depreciation – Plant 56 000 34 000
Accumulated depreciation – Furniture 84 000 66 000
3 567 000 2 564 000
 66

QUESTION 14 (continued)

Additional information

1. On 28 December 2008 land and buildings, that appeared in the company’s records at a value
of R400 000, were sold for R460 000. Land and buildings to the value of R650 000 were
acquired to expand operations.

2. No furniture was sold or scrapped during the current year. All new purchases were to expand
operations.

3. Income from investments amounted to R4 500 for the year ended 30 April 2009.

4. The income tax expense for the current year is R89 000.

5. Sales for the current year amounted to R1 320 000 and profit before tax was R319 000.

6. On 1 March 2009, the company issued 50 000 ordinary shares at par of R4.

7. On 30 September 2008, an interim dividend of R20 000 was paid and on 30 April 2009 a final
dividend of R40 000 was declared.

8. Some of the plant with a cost of R320 000 was sold during June 2008 (when the carrying
amount was R300 000) at a loss of R12 000. New plant was acquired on the same day.
R420 000 of the plant was purchased to expand operations.

9. Depreciation on plant and furniture for the year ended 30 April 2009 amounted to R60 000.

10. Assume cost of all other assets and liabilities equal to their fair value.

REQUIRED:

Draft the statement of cash flows of ABC Limited for the year ended 30 April 2009, using the
indirect method, in compliance with the requirements of the Companies Act and Generally
Accepted Accounting Practice. Ignore comparative figures but show all calculations.
 67 FAC2602/102

SOLUTION: QUESTION 14

ABC LIMITED
STATEMENT OF CASH FLOW FOR THE YEAR ENDED 30 APRIL 2009

R R
Cash flow from operating activities
Profit before tax ^ 319 000
Adjustments for:
Depreciation ^ 60 000
Profit on sale of property (460 000 – 400 000) 9 (60 000)
Loss on sale of plant ^ 12 000
Investment income ^ (4 500)
Operating profit before changes in working capital 326 500
Changes in working capital (76 000)
Increase in inventory (86 000 – 44 000) 9 (42 000)
Increase in receivables (145 000 – 88 000) 9 (57 000)
Increase in payables (93 000 – 70 000) 9 23 000
Cash generated from operations 250 500
Income from investments ^ 4 500
Dividends paid (100 000)
Normal taxation paid (3 000)
Net cash inflow from operating activities 152 000

Cash flow from investing activities

Purchase of property, plant and equipment (1 600 000)
Replacement of plant ^ (300 000)
Additions to plant ^ (420 000)
Additions to land and buildings ^ (650 000)
Additions to furniture ^ (230 000)
Proceeds on sale of land and buildings 460 000
Proceeds on sale of plant (300 000 - 12 000) 9288 000
Additions to investments (56 000 – 36 000) 9 (20 000)
Net cash outflow from investing activities (872 000)

Cash flow from financing activities

Proceeds from issue of share capital (1 000 000 – 800 000) 9 200 000
Increase in long-term loan (850 000 – 600 000) 9 250 000
Net cash inflow from financing activities 450 000
Net decrease in cash and cash equivalents (270 000)
Cash and cash equivalents beginning of year 9 46 000
Cash and cash equivalents end of year 9 (224 000)
 68

SOLUTION: QUESTION 14 (continued)

Calculations:

1. Profit before tax R

Profit (given) 319 000
Income tax expense (89 000)
Profit for the year 230 000

Retained earnings beginning of year 460 000

Profit for the year (balancing) 230 000
Dividends (20 000 + 40 000) (60 000)
Retained earnings end of the year 630 000

2. Dividends paid
Amounts unpaid at beginning of year ^240 000
Amounts charged to income (20 000 + 40 000) 960 000
Amounts unpaid at end of year ^ (200 000)
100 000

3. Taxation paid
Amounts unpaid at beginning of year ^144 000
Amounts charged to income ^89 000
Amounts unpaid at end of year ^ (230 000)
3 000

4. Land and buildings

R R
Balance b/d ^1 100 000 Sold ^400 000
New - expand 9 650 000 Balance c/d ^1 400 000
Revaluation (200 000–150 000) 9 50 000
1 800 000 1 800 000

5. Plant at cost
R R
Balance b/d ^800 000 Sold ^320 000
New - expand 9420 000 Balance c/d ^1 200 000
New - replace (balancing) 9300 000
1 520 000 1 520 000

6. Furniture at cost
R R
Balance b/d ^450 000 Balance c/d ^ 680 000
New - expand (balancing) 9230 000
680 000 680 000
 69 FAC2602/102

SOLUTION: QUESTION 14 (continued)

7. Accumulated depreciation - plant

R R
Sold (320 000 – 300 000) 9 20 000 Balance b/d ^34 000
Balance c/d ^56 000 Depreciation (balancing) ^ 42 000

76 000 76 000

8. Accumulated depreciation - furniture

R R
Balance c/d ^84 000 Balance b/d ^66 000
Depreciation (balancing) ^18 000
84 000 84 000