Fac3762 2020 TL 108 0 B

FAC3762/108/0/2020
Tutorial Letter 108/0/2020

INTERNATIONAL GROUP AND FINANCIAL
ACCOUNTING
FAC3762
Year module
Department of Financial Accounting
IMPORTANT INFORMATION
This tutorial letter contains important information about your module.
Please register on myUnisa, activate your myLife e-mail address and make sure
that you have regular access to the myUnisa module website.
This is an online year module and therefore it 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
FAC3762/108
CONTENTS
INTRODUCTION ............................................................................................................................ 3
CONTACT DETAILS ...................................................................................................................... 3
GENERAL ...................................................................................................................................... 4
EXAMINATION PREPARATION AND APPROACH ...................................................................... 5
QUESTION BANK .......................................................................................................................... 8
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FAC3762/108
INTRODUCTION
This tutorial letter consists of a question bank with questions that are based on the work
covered in Tutorial Letters 101 to 107. It is in your best interests to attempt the questions on
your own before marking them using the solutions provided. This way you will identify what
you don’t understand, so that you can go back to that section of the work, revise it and
attempt the question again.
CONTACT DETAILS
Please use only the following e-mail address for all communication with the lecturers:
FAC3762@unisa.ac.za
Please use only the following telephone number for all communication with the lecturers:
012 429 4250 or 012 429 4246
You may also contact the lecturers of FAC3762 by telephone on the contact numbers
provided below:
Telephone
Lecturer Office
number
Mrs M Scott Simon Radipere Building, 2-59 012 429 3943

Mrs S Noor Mahomed Simon Radipere Building, 2-59 012 429 3943
Mrs T Sebeelah Simon Radipere Building, 2-59 012 429 2468
Mr J van Staden Simon Radipere Building, 2-72 012 429 3298
Mrs B Qheya Simon Radipere Building, 2-44 012 429 4633
Mr A Steyn Simon Radipere Building, 2-70 012 429 3729
Mrs L Botha Simon Radipere Building, 2-65 012 429 4412
Mr G Diale Simon Radipere Building, 2-64 012 429 6793
Mrs N Mashile Simon Radipere Building, 2-60 012 429 4844
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GENERAL
1.1 ABBREVIATIONS USED IN THE STUDY MATERIAL
The following abbreviations are used in the study material:
SP/LOCI statement of profit or loss and other comprehensive income

SFP statement of financial position
SOCIE statement of changes in equity
SCF statement of cash flows
NCI non-controlling interests
SC share capital
RE retained earnings
FV fair value
CA carrying amount
CGT capital gains tax
PREFS preference shares
DEP depreciation
REV revaluation
P/L profit or loss section of the statement of profit or loss and other comprehensive
income
OCI other comprehensive income section of the statement of profit or loss and
other comprehensive income
FVTPL fair value through profit or loss
FVTOCI fair value through other comprehensive income
1.2 TAXATION
Since 1 March 2008, the South African normal tax rate for companies has been 28%.
Another tax rate could, however, be used in the study material. Read the questions carefully
and ensure you use the correct tax rates in your answers.
On 1 March 2016, the capital gains tax (CGT) inclusion rate changed from 66.6% to 80%.
As a result, the effective CGT rate increased from 18,648% (66.6% x 28%) to 22.4% (80%
x 28%). In the questions you have to answer, the tax rate will be stated in the additional
information. You must use the tax rate given in the questions to work out their solutions.
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EXAMINATION 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 not all the
principles are tested in them.
Make that you have received the following study material:

1. Tutorial Letter 101/0/2020
8. Tutorial Letter 108/0/2020 (this tutorial letter)
The following study material will only be available online (after the due dates of the
compulsory assignments and due to the Covid-19 lockdown) under the Additional
Resources tab:

CHOICE OF CORRECT PAPER: FAC3762

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 October/November 2020 examination paper will consist of 100 marks and the duration
will be 3 hours.
SUPPLEMENTARY EXAMINATIONS AND RE-MARKING OF SCRIPTS

Take note of the following important information regarding supplementary examinations and
re-marks:
- 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
FAC3762).
- 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.
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FAC3762/108
- Supplementary examinations will be conducted in January/February 2021 for students

who fail the October/November 2020 examination paper and achieve a final mark of
40% - 49% for FAC3762.
- Only those students who obtain a final mark of 35% - 49% or 68% - 74% in a module
may apply for a re-mark of that examination answer book.
- A student will not be entitled to a supplementary examination (if applicable) on the
grounds of a re-mark result.
For more information refer to the general rules for study and examinations in the Study @
Unisa publication.
RE-MARKING OF EXAM SCRIPTS

Students who apply for the re-marking of their scripts should provisionally register for the
module as if they have failed. Registration can be cancelled if the re-mark 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, 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 they have been disclosed in that specific way. 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 their accounting
treatment and disclosure.
- 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 it
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.
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- 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 you apply the correct exam technique, you will be able to complete the answer within the
time frame allowed and your answers will be structured to obtain the marks in the shortest
time possible.
How should you answer a question?
- Read the REQUIRED section first. Make sure that you are clear about what is required
from you. 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.
- 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 are 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.
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- Show all calculations, even if it is as simple as adding two figures together. Marks
cannot be awarded 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, that you must prepare the statement of
financial position, then marks will not be awarded for calculations that have not been
transferred to the layout (disclosure). If the REQUIRED section has asked for
calculations, then the calculations will be marked.
- You will only lose marks once for an error. When the figure that you have calculated is
used (even though calculated incorrectly) in other calculations or disclosures, marks will
be awarded 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!
QUESTION BANK
The following questions are based on the work covered in Tutorial Letters 105 and 106:
Question Topic Marks Minutes Done

1 Consolidation of a vertical group 50 90
2 Consolidation of a group of entities 46 83
3 Consolidation of a vertical group 20 36
4 Change in degree of control 29 52
5 Consolidation of a group of entities 51 92
6 Financial instruments, borrowing costs,
54 97
related parties and employee benefits
7 Leases 46 83
8 Leases and related parties 50 90
9 Employee benefits and borrowing costs 24 43
10 Financial instruments 26 47
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QUESTION 1 (50 marks) (90 minutes)
The following are extracts from the financial statements of the entities in the Smith Ltd Group
for the year ended 31 December 2018:
EXTRACT FROM THE STATEMENTS OF FINANCIAL POSITION AS AT

31 DECEMBER 2018
Smith Warner Bancroft
Ltd Ltd Ltd
R R R
ASSETS
Non-current assets
Property, plant and equipment ................................ 3 055 800 2 145 000 980 555
Investment in Warner Ltd .................................... 910 000 - -
Investment in Bancroft Ltd................................... - 1 300 000 -
Investments in other equity instruments .............. 258 000 175 000 98 000
Total non-current assets .................................. 4 223 800 3 620 000 1 078 555
Current assets
Loan to Bancroft Ltd ............................................ - 95 500 -
Inventories........................................................... 522 800 485 000 365 000
Cash and cash equivalents ................................. 389 400 251 000 211 700
Trade and other receivables................................ 175 440 152 800 87 420
Total current assets .......................................... 1 087 640 984 300 664 120
TOTAL ASSETS ................................................. 5 311 440 4 604 300 1 742 675
EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR

ENDED 31 DECEMBER 2018
Smith Warner Bancroft
Ltd Ltd Ltd
R R R
RETAINED EARNINGS
Balance as at 1 January 2018 ........................... 3 258 745 2 658 741 1 215 961
Profit for the year ................................................. 952 247 588 700 325 899
Dividends paid – 31 December 2018 .................. (120 000) (85 000) (30 000)
Balance as at 31 December 2018 ..................... 4 090 992 3 162 441 1 511 860
SHARE CAPITAL
Balance as at 1 January 2018 ........................... 100 000 80 000 60 000
Balance as at 31 December 2018 ..................... 100 000 80 000 60 000
Additional information
Warner Ltd
1. On 1 January 2015, Smith Ltd acquired control of Warner Ltd with the acquisition of
96 000 of the 160 000 issued ordinary shares of Warner Ltd. On this date, all the
identifiable assets and liabilities of Warner Ltd were considered to be equal to their
carrying amounts. On 1 January 2015, the retained earnings of Warner Ltd amounted
to R1 385 920 and the fair value of one Warner Ltd share was R9,40.
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Bancroft Ltd
2. On 1 August 2018, Warner Ltd acquired control of Bancroft Ltd by acquiring an 80%
interest in the ordinary share capital of Bancroft Ltd. The share capital of Bancroft Ltd
consisted of 60 000 issued ordinary shares. On the acquisition date, the fair value of
one Bancroft Ltd share was R27,00 (31 December 2018: R28,00).
3. On the acquisition date, the identifiable assets and liabilities of Bancroft Ltd were
considered to be equal to their carrying amounts, except for the following assets:
Carrying Fair
amount value
R R
Land .................................................................................... 950 200 1 025 000
Trade receivables (debtor: Aston Ltd) ................................. 122 000 111 000
On 31 December 2018, Bancroft Ltd accounted for the impairment of the debtor,
Aston Ltd, from R122 000 to R111 000 in its separate financial records.
Intragroup transactions
4. Smith Ltd is a manufacturer of motor vehicles. Smith Ltd sold a manufactured motor
vehicle to Warner Ltd at a profit mark-up of 25% on the selling price. Warner Ltd uses
the motor vehicle to deliver inventory to customers.
The following information regarding the motor vehicle was obtained from the asset
register of Warner Ltd at 31 December 2018:
Remaining
Asset Consideration useful life on Depreciation
number Purchase paid date of method
date purchase
Straight-line over
MV123 1 July 2017 R175 000 5 years the remaining
useful life
5. On 1 December 2018, Warner Ltd granted a loan of R95 500 to Bancroft Ltd. The loan
is repayable on demand and bears interest at 9% per year. The interest for
December 2018 is still outstanding at year-end. Warner Ltd has correctly accounted for
the interest receivable in “other income” and “trade and other receivables”, respectively.
Bancroft Ltd has correctly accounted for the loan from Warner Ltd as follows in its
separate accounting records:
Debit Credit
R R
Bank ..................................................................................... 95 500
Loan from Warner Ltd ........................................................... 95 500
Accounting for the capital portion of the loan received
Finance charges ................................................................... 716
Trade and other payables ..................................................... 716
Accounting for the outstanding interest payable at year-end
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Other information
6. The profit for the year of Bancroft Ltd was earned evenly during the current year.
7. The Smith Ltd Group and Warner Ltd measure investments in subsidiaries in their
separate accounting records at cost price in accordance with IAS 27, Separate Financial
Statements.
8. Investments in other equity instruments are measured at fair value through profit or loss,
in accordance with IFRS 9, Financial Instruments. The fair value of all equity
investments can be assumed to be equal to their cost price.
9. The Smith Ltd Group elected to measure all non-controlling interests at their fair value
at the acquisition dates.
10. The SA normal tax rate is 28% and capital gains tax is calculated at 80% of this. You
may assume that both the tax rates have remained unchanged since 1 January 2015.
11. Each share carries one vote and the issued share capital of all the entities in the group
remained unchanged since 1 January 2015.
REQUIRED:
Marks
(a) Prepare only the pro forma consolidation journal entries relating to the
intragroup loan and interest (additional information point 5) of the Smith
Ltd Group for the year ended 31 December 2018. 7
Journal narrations are required.
(b) Prepare only the asset section of the consolidated statement of financial
position of the Smith Ltd Group as at 31 December 2018. 23
You may assume that the deferred tax balance as at 31 December 2018
was not an asset.
(c) Prepare the consolidated statement of changes in equity of the
Smith Ltd Group for the year ended 31 December 2018. 20
Total columns are not required.
TOTAL [50]
Please note:
Your answer must comply with the requirements of International Financial
Reporting Standards (IFRS).
Notes to the annual financial statements and comparative figures are not
required.
All calculations must be shown and amounts must be rounded to the nearest
rand.
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SUGGESTED SOLUTION 1
QUESTION 1
PART A
CONSOLIDATION JOURNAL ENTRIES TO ELIMINATE THE INTRAGROUP LOAN AND

INTEREST
Debit Credit
R R
Loan from Warner Ltd 95 500
Loan to Bancroft Ltd 95 500
Eliminate intragroup balances
Other income/Interest received 716

Finance costs/Interest paid 716
Eliminate intragroup interest on loan
Trade and other payables 716

Trade and other receivables 716
Eliminate intragroup outstanding interest payable
Other income/Interest received 716

Trade and other receivables 716
Eliminate intragroup interest on loan
Trade and other payables 716

Finance costs/Interest paid 716
Eliminate intragroup outstanding interest payable
PART B
SMITH LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
ASSETS R
Non-current assets
Property, plant and equipment (3 055 800 + 2 145 000 + 980 555 +
74 800(1 025 000 - 950 200) – 43 750(25/100 x 175 000) + 13 125(8 750
(43 750/5) x 18/12)) 6 225 530
Goodwill (102 769 (C1) + 45 680 (C1)) 148 449
Investments in other equity instruments (258 000 + 175 000 + 98 000) 531 000
Total non-current assets 6 904 479
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Current assets
Loan to Bancroft Ltd (95 500 - 95 500) -
Inventories (522 800 + 485 000 + 365 000) 1 372 800
Cash and cash equivalents (389 400 + 251 000 + 211 700) 852 100
Trade and other receivables 441 944
(175 440 + 152 800 + 87 420 – 11 000 + 11 000 - 716 (Part A))
Total current assets 2 639 844
TOTAL ASSETS 9 544 823
CALCULATIONS
C1 Goodwill (Proof of goodwill method)
R
Warner Ltd
Consideration received 910 000
Non-controlling interests ((160 000 - 96 000) x R9,40) 601 600
Net assets assumed (80 000 + 1 385 920) (1 465 920)
Goodwill 45 680
Bancroft Ltd
Consideration received 1 300 000
Non-controlling interests ((20% x 60 000) x R27) 324 000
Net assets assumed (1 521 231)
Share capital
Retained earnings 60 000
- Given 1 215 961
- Write down of trade receivables ((122 000 - 111 000) x 72%) (7 920)
- Current year (325 899 + 7 920 + 716 = 334 525 x 7/12) 195 145
Revaluation surplus ((1 025 000 - 950 200) x 77.6%) 58 045
Goodwill 102 769
Total goodwill (45 680 + 102 769) 148 449
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PART C
SMITH LTD GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2018
Non-
Share Retained controlling
capital earnings interests Total
R R R R
Balance as at 1 January 2018 100 000 3 994 088C2 1 110 728C3 5 204 816
Changes in equity for 2018: -
Acquisition of subsidiary 324 000 324 000
-
Profit for the year 1 312 930C4 297 990C5 1 610 921
Dividend paid (120 000) (40 000)C6 (160 000)

Balance as at
31 December 2018 100 000 5 187 018 1 692 719 6 979 737
CALCULATIONS
C2 Opening retained earnings
R
Smith Ltd - parent 3 258 745
Warner Ltd - subsidiary (since acq to beg c-year)
(2 658 741 - 1 385 920) + 1 272 821 x 80% 763 693
Bancroft Ltd – sub-subsidiary (not yet acquired) -
Unrealised profit on sale of motor vehicle
(43 750 x 72%) (31 500)
Add: realisation of a portion of depreciation
(8 750 x 6/12 x 72%) 3 150
3 994 088
C3 Opening NCI
R
NCI at acquisition - Warner 601 600
Warner Ltd - subsidiary (since acq to beg c-year)
(1 272 821 x 40%) 509 128
1 110 728
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C4 & C5 Profit attributable to parent and NCI

C5 C4
Profit Profit
attributable attributable
to parent to NCI
R R R
Bancroft Ltd - sub-subsidiary 138 674 x 20% 27 735
Profit for the year (given)
(139 390(334 535 x 5/12) - 7 920 - 130 754
716)
Reversal of impairment of TR already
made at acquisition date 7 920
Warner Ltd – subsidiary 675 639 x 60% 405 383 270 256
Bancroft – Profit for the year
((130 754 + 7 920) x 80%) 110 939
Profit for the year (given) 588 700
Less: intragroup dividend from
Bancroft Ltd (30 000 x 80%) (24 000)
Smith Ltd – parent 907 547 x100% 907 547
Warner Ltd (85 000 x 60%) (51 000)
Add: realisation of a portion of
depreciation (8 750 x 72%) 6 300
1 3124 930 297 900
OR
Profit C5 C4
for the Profit att Profit att
year to parent to NCI
R R R
Smith Ltd - parent 907 547 x 100% 907 547
Warner Ltd (85 000 x 60%) (51 000)
Add: realisation of a portion of
depreciation (8 750 x 72%) 6 300
Bancroft Ltd – sub-subsidiary 138 674 x 80% 66 563 72 110
x 60%
Profit for the year (139 390(334 535 130 754
x 5/12) - 7 920 - 716)
Reversal of impairment of TR
already made at acquisition date 7 920
Warner Ltd – subsidiary 564 700 x 60% 338 820 225 880
Bancroft Ltd (30 000 x 80%) (24 000)
1 312 930 297 990
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OR
Profit att to
parent
R
Smith Ltd – parent 907 547
Less: intragroup dividend from Warner Ltd (85 000 x 60%) (51 000)
Add: realisation of a portion of depreciation (8 750 x 75%) 6 300
Warner Ltd - subsidiary 564 700

Less: intragroup dividend from Bancroft Ltd (30 000 x 80%) (24 000)
Bancroft Ltd - sub-subsidiary 138 674

Profit for the year (given) ((334 525 x 5/12) - 7 920 - 716) 130 754
Reversal of impairment of TR already made at acquisition date 7 920
Total consolidated profit 1 610 921
Less: Non-controlling interests in the profit for the year C4 (297 990)
Non-controlling interests in Bancroft Ltd (138 674 x 20%) (27 735)
Less: Non-controlling interests in Warner Ltd [675 639(564 700 +
110 936(138 674 x 80%)) x 40%] (270 256)
Profit attributable to the parent C5 1 312 930
C6 Dividend paid – NCI

R
Bancroft Ltd (85 000 x 40%) 34 000
Warner Ltd (30 000 x 20%) 6 000
40 000
myUnisa – Lessons
Log on to myUnisa and navigate to the Lessons Tool for a recording on

this question.
The recording is under the Lessons Smith Ltd Group tab on myUnisa.
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FAC3762/108
The following are extracts from the trial balances of the entities in the Chase Ltd Group for
the year ended 28 February 2019:
Chase Marshall Rubble
Ltd Ltd Ltd
Dr/(Cr) Dr/(Cr) Dr/(Cr)
R R R
Property, plant and equipment at cost price ..... 2 795 242 2 342 910 3 193 321
Investments in equity instruments:
- Marshall Ltd at cost price ............................... 500 000 - -
- Rubble Ltd at cost price ................................. 400 000 - -
- Skye Ltd at fair value...................................... 200 000 - -
- Rocky Ltd at fair value.................................... - 150 000 -
- Everest Ltd at fair value ................................. - - 250 000
Trade and other receivables............................. 328 264 188 700 116 550
Cash and cash equivalents .............................. 212 750 196 180 37 740
Inventories........................................................ 140 046 196 920 58 460
Cost of sales .................................................... 1 339 200 1 908 000 1 356 000
Finance costs ................................................... - - 120 000
Other expenses ................................................ 323 750 358 900 424 642
Income tax expense ......................................... 426 874 357 000 110 445
Dividends paid – 28 February 2019 ................. 277 500 92 500 66 500
Share capital:
- 400 000 ordinary shares ................................ (800 000) - -
- 200 000 ordinary shares ................................ - (200 000) -
- 100 000 ordinary shares ................................ - - (370 000)
Retained earnings – 1 March 2018 .................. (1 449 390) (473 862) (1 053 294)
Mark-to-market reserve – 1 March 2018 .......... (15 520) (46 560) -
Accumulated depreciation ................................ (825 200) (903 526) (605 776)
Deferred tax ..................................................... (155 110) (46 222) (24 600)
Trade and other payables ................................ (503 146) (548 000) (287 402)
Long-term borrowings ...................................... - - (1 090 900)
Revenue ........................................................... (2 537 500) (3 220 000) (2 200 000)
Other income.................................................... (650 000) (321 900) (95 090)
Other comprehensive income – fair value
adjustments on equity instruments, net after
tax .................................................................... (7 760) (31 040) (6 596)
- - -
1. On 1 December 2016, Chase Ltd acquired 130 000 of the issued ordinary shares in
Marshall Ltd for a cash amount of R500 000. Chase Ltd acquired control of Marshall Ltd
on this date. On 1 December 2016, the equity of Marshall Ltd consisted of the following:
R
Share capital ............................................................................................ 200 000
Retained earnings ..................................................................................... 650 731
Mark-to-market reserve ............................................................................. 38 800
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2. On 1 December 2016, Marshall Ltd had no unidentifiable assets or liabilities. The fair
values of all assets and liabilities of Marshall Ltd were equal to their carrying amounts.
3. On 1 March 2017, Chase Ltd acquired 35% of the issued ordinary shares in Rubble Ltd
for a cash amount of R400 000. At the date of acquisition, the retained earnings of
Rubble Ltd amounted to R850 123. From 1 March 2017, Chase Ltd exercised significant
influence over the financial and operating policy decisions of Rubble Ltd.
4. From 1 March 2017, Rubble Ltd sold inventory to Chase Ltd at a profit mark-up of 50%
on the selling price. The following relates to the sales of inventory from Rubble Ltd to
Chase Ltd:
2019 2018
R R
Total sales for the year ..................................................... 220 000 185 000
Inventory on hand at year-end .......................................... 44 000 37 000
You may assume that the inventory on hand at 28 February 2018 of R37 000 was sold
by 28 February 2019 to outside parties.
5. During the current year, Chase Ltd purchased inventory of R450 000 from Marshall Ltd
at a profit mark-up of 25% on the cost price. On 28 February 2019, 20% of this inventory
was still on hand and Chase Ltd made the decision to write this inventory down to its net
realisable value of R76 000 in its separate accounting records.
6. Chase Ltd measures its investments in Marshall Ltd and Rubble Ltd at cost price in its
separate accounting records in accordance with IAS 27, Separate Financial Statements.
7. The Chase Ltd Group measures investments in associates using the equity method in
accordance with IAS 28, Investments in Associates and Joint Ventures.
8. The entities in the Chase Ltd Group classify their investments in equity instruments at
fair value, in accordance with IFRS 9, Financial Instruments, and any fair value
adjustments are recognised in a mark-to-market reserve (other comprehensive income).
9. The Chase Ltd Group elected to measure the non-controlling interests in an acquiree at
their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
10. The SA normal tax rate is 28% and capital gains tax is calculated at 80% thereof. You
may assume that the tax rates have remained unchanged since 1 December 2016.
11. Each share carries one vote and the issued share capital of all entities in the group has
remained unchanged since 1 December 2016.
12. All the companies in the Chase Ltd Group have a 28 February year-end.
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REQUIRED:
Marks
(a) Briefly discuss, with reasons, whether any of the transactions or events of
Chase Ltd, described in the additional information, constitute a business
combination, in terms of IFRS 3, Business Combinations. 4
(b) Prepare the consolidated statement of profit or loss and other comprehensive
income of the Chase Ltd Group for the year ended 28 February 2019.
31
(c) Prepare only the retained earnings column of the consolidated statement of
changes in equity of the Chase Ltd Group for the year ended
28 February 2019. 11
TOTAL [46]
Please note:
Notes to the annual financial statements and comparative figures are not required.
All calculations must be shown and amounts must be rounded off to the nearest
rand.
PART A
A business combination is a transaction or other event in which an acquirer obtains control

of one or more businesses.
Marshall Ltd meets the definition of a business as it is an integrated set of activities and
assets that are capable of being managed in order to provide a return (e.g. through dividends
or other economic benefits).
On 1 December 2016, Chase Ltd acquired control over Marshall Ltd.
Thus, this transaction meets the definition of a business combination.
The acquisition of the shares in Rubble Ltd does not constitute a business as the acquisition
did not give Chase Ltd control over Rubble Ltd (only significant influence).
19
FAC3762/108
PART B
CHASE LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 2019
R
Revenue (2 537 500 + 3 220 000 - 450 000 (given)) 5 307 500
Cost of sales (1 339 200 + 1 908 000 - 450 000 + 4 000(18 000(450 000
x 20% x 25/125)) - 14 000(90 000 - 76 000)) (2 801 200)
Gross profit 2 506 300
Other income (650 000 + 321 900 – 60 125(92 500 x 65% (130 000/
200 000)) (sub div) - 23 275(66 500 x 35%) (ass div)) 888 500
Share of profit from associate (2 200 000 + 95 090 - 1 356 000 -120 000 -
424 642 -110 445) = 284 003 x 35% = 99 101 + 4 662 (3 700 x 50/100 x 72%
x 35%) (opening inv) - 5 544(44 000 x 50/100 x 72% x 35%) (closing inv) 98 519
Other expenses (323 750 + 358 900) (682 650)
Profit before tax 2 810 669
Income tax expense (426 874 + 357 000 - 357 000 - 1 120(4 000 x 28%)) (782 754)
PROFIT FOR THE YEAR 2 027 915
Other comprehensive income

Items that will not be reclassified to profit and loss
Fair value adjustment on investments; net after tax (7 760 + 31 040) 38 800
Share of other comprehensive income from joint venture (6 596 x 35%) 2 309
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2 069 024
Profit for the year attributable to:

Owners of the parent 1 707 623
Non-controlling interests (3 220 000 + 321 900 - 1 908 000 - 358 900 -
357 000 = 918 000 - 4 000 + 1 120 = 915 120 x 35%) 320 292
2 027 915
Total comprehensive income attributable to: 1 737 868

Owners of the parent 331 156
Non-controlling interests (320 292 + 10 864(31 040 x 35%)) 2 069 024
20
FAC3762/108
PART C
CHASE LTD GROUP
28 FEBRUARY 2019
Retained
earnings
R
Balance as at 1 March 2018 1 506 111
Changes in equity for 2019
Profit of the year 1 707 623
Other comprehensive income for the year -
Dividend paid (given) (277 500)
Balance as at 28 February 2019 2 936 234
CALCULATIONS
C1 Retained earnings opening balance
R
Chase Ltd (given) 1 449 390
Rubble Ltd (associate)(gain or bargain purchase)

(427 043(1 220 123(370 000(SC) + 850 123(RE)) x 35%) - 400 000)
27 043
Rubble Ltd (associate since acq to beg of current year)

(1 053 294 - 850 123 = 203 171 x 35% = 71 110 - 4 662 from share of
profit from associate) 66 448
Marshall Ltd (sub) (gain on bargain purchase)

(578 195 (889 531(200 000 (SC) + 650 731 (RE) + 38 800 (M2M)) x 68%)
- 500 000) 78 195
Marshall Ltd (sub since acq to beg of current year)

(473 862 - 650 731 = -176 569 x 65%) (114 965)
1 506 111
21
FAC3762/108
C1 – Analysis of owner’s equity of Marshall Ltd

Chase Ltd
100% 65% 35%
Total At Since NCI
At acquisition – 1 December 2016
Share capital 200 000 130 000 70 000
Retained earnings 650 731 422 975 227 756
Mark-to-market reserve 38 800 25 220 13 580
889 531 578 195 311 336
Gain on bargain purchase (78 195) (78 195) -
Investment in Marshall Ltd 811 336 500 000 311 336
Since acquisition date to beginning
of the current year:
(169 109) (109 921) (59 188)
Retained earnings (473 862 – 650 731) (176 869) (114 965) (61 904)
Mark-to-market reserve (46 560 –
38 800) 7 760 5 044 2 716
Current year: 2019 915 120 594 828 320 292
Profit for the year – Marshall Ltd 918 000 596 700 321 300
Unrealised profit on sale of inventory to
Chase Ltd (4 000) (2 600) (1 400)
Tax effect of unrealised profit
(4 000 x 28%) 1 120 728 392
Other comprehensive income for the
year – fair value adjustments on
investments in equity instruments, net
after tax 31 040 20 176 10 864
Dividends paid (92 500) (60 125) (32 375)
1 495 887 500 000 444 958 550 929
UNREALISED PROFIT INCLUDED IN CLOSING INVENTORY

Calculation of unrealised profit on sale of inventory to Chase Ltd:
20% x R450 000 = R90 000 x 25/125 = R18 000
Calculation of the cost price of the inventory for Marshall Ltd:
R90 000 – R18 000 (profit on sale of inventory) = R72 000.
This inventory was written down to net realisable value (NRV) of R76 000 in
the separate financial statements of Chase Ltd. Thus, this inventory is not
measured at R90 000 (cost price for Chase Ltd) in the separate financial
statements of Chase Ltd but at net realisable value of R76 000. In the
consolidated financial statements this inventory should be recognised at the
cost price of the inventory for Marshall Ltd (R72 000) (cost price of inventory
where it first entered the group). Therefore, the unrealised profit recognised
in the group’s financial statements will be limited to R4 000 (R76 000 –
R72 000).
22
FAC3762/108
C4 - Analysis of owner’s equity of Rubble Ltd - ordinary shares

Chase Ltd
100% 35% 35%
Total At Since CA
At acquisition – 1 December 2016 R R R R
Share capital 370 000 129 500
Retained earnings 850 123 297 543
1 220 123 427 043
Gain on bargain purchase (27 043) (27 043) 27 043
Investment in Rubble Ltd 1 193 080 400 000 400 000
Since acquisition to the beginning of

the year:
Retained earnings (1 053 294 - 850 123) 203 171 71 110 71 110
Current year 281 483 98 5199

Profit for the year 918 000 99 401 99 401
Unrealised profit in opening inventory
(37 000 x 50/100 x 72%) 13 320 4 662 -
Unrealised profit in closing inventory
(44 000 x 50/100 x 72%) (15 840) (5 544) -
Other comprehensive income, fair value

adjustments on equity instruments 6 596 2 309 2 309
Dividends paid (66 500) (23 275) (23 275)
1 617 830 148 663 576 588
Carrying amount of investment associate
Rubble Ltd at 28 Feb 2019 576 588
myUnisa – Lessons
Log on to myUnisa and navigate to the Lessons Tool for a recording on

this question.
The recording is under the Lessons Chase Ltd Group tab on myUnisa.
23
FAC3762/108
The following are extracts from the financial statements of the entities in the Gold Ltd Group
for the year ended 28 February 2018:
EXTRACT FROM THE STATEMENTS OF PROFIT OR LOSS AND OTHER

COMPREHENSIVE INCOME FOR THE YEAR ENDED 28 FEBRUARY 2018
Gold Diamond Platinum
Ltd Ltd Ltd
R R R
Revenue ....................................................... 9 000 000 4 320 000 2 160 000
Cost of sales ................................................... (6 300 000) (2 880 000) (1 060 000)
Gross profit...................................................... 2 700 000 1 440 000 1 100 000
Other income................................................... 450 000 108 000 -
Other expenses ............................................... (1 080 000) (576 000) (540 000)
Profit before tax ............................................... 2 070 000 972 000 560 000
Income tax expense ........................................ (579 600) (272 160) (156 800)
PROFIT FOR THE YEAR ............................... 1 490 400 699 840 403 200
Other comprehensive income for the year,
net after tax .................................................... 360 000 180 000 27 000
TOTAL COMPREHENSIVE INCOME FOR
THE YEAR ...................................................... 1 850 400 879 840 430 200
1. Gold Ltd acquired 80% of the ordinary share capital of Diamond Ltd on 1 March 2016
when the retained earnings of Diamond Ltd amounted to R60 000. On this date, there
were no unidentifiable assets or liabilities and the fair values of all assets and liabilities
of Diamond Ltd were considered to be equal to their cost price, unless otherwise stated.
2. Diamond Ltd acquired 60% of the ordinary share capital of Platinum Ltd on 1 March 2017
when the retained earnings amounted to R75 000. On this date, there were no
unidentifiable assets or liabilities and the fair values of all assets and liabilities of
Platinum Ltd were considered to be equal to their cost price, unless otherwise stated.
3. The Gold Ltd Group measures non-controlling interests at fair value at acquisition date.
The fair value of the non-controlling interests in Diamond Ltd amounted to R45 000 on
1 March 2016. The fair value of the non-controlling interests in Platinum Ltd amounted
to R75 000 on 1 March 2017.
Other information
4. During the financial year ended 28 February 2018, Diamond Ltd paid dividends of
R240 000, and Platinum Ltd paid dividends of R105 000.
5. The Gold Ltd Group measures investments in subsidiaries in their separate accounting
records at cost price in terms of IAS 27, Separate Financial Statements.
6. The investments in other equity instruments are measured at fair value through profit or
loss, in terms of IFRS 9, Financial Instruments. The fair value of all equity investments
can be assumed to be equal to their cost price.
24
FAC3762/108
7. Goodwill arose on both the acquisition of Diamond Ltd and Platinum Ltd. The directors
of the Gold Ltd Group determined that there was no impairment of goodwill since
acquisition date.
may assume that both the tax rates have remained unchanged since 1 March 2016.
9. Each share carries one vote and the issued share capital of all the entities in the group
remained unchanged since 1 March 2016.
REQUIRED:
Marks
Prepare the consolidated statement of profit or loss and other comprehensive
income of the Gold Ltd Group for the year ended 28 February 2018. 20
TOTAL [20]
Please note:
required.
All calculations must be shown and amounts must be rounded to the nearest
rand.
25
FAC3762/108
GOLD LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 28 FEBRUARY 2018
R
Revenue (9 000 000 + 4 320 000 + 2 160 000) 15 480 000
Cost of sales (6 300 000 + 2 880 000 + 1 060 000) (10 240 000)
Gross profit 5 240 000
Other income (450 000 + 108 000 - 192 000(240 000 x 80%) – 63 000
(105 000 x 60%)) 303 000
Other expenses (1 080 000 + 576 000 + 540 000) (2 196 000)
Profit before income tax 3 347 000
Income tax expense (579 600 + 272 160 + 156 800) (1 008 560)
PROFIT FOR THE YEAR 2 338 440
Other comprehensive income for the year, net after tax (360 000
+ 180 000 + 27 000) 567 000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2 903 440
Total profit for the year attributable to:

Owners of the parent (balancing figure) 2 001 408
Non-controlling interests (C1) 337 032
2 338 440
Total other comprehensive income for the year attributable to:

Owners of the parent (balancing figure) 2 518 368
Non-controlling interests (C2)(337 032 + 50 040) 387 072
2 905 440
CALCULATIONS
C1 – Non-controlling interests in current year’s profits
R
Profit of Platinum Ltd (403 200 x 40%) 161 280
Profit of Diamond Ltd (699 840 – 63 000 = 636 840 x 20%) 127 368
Profit of Platinum Ltd in Diamond Ltd (403 200 x 12%(60% x 20%)) 48 384
337 032
C2 – Non-controlling interests in current year’s other comprehensive income

R
Other comprehensive income of Platinum Ltd (27 000 x 40%) 10 800
Other comprehensive income of Diamond Ltd (180 000 x 20%) 36 000
Profit of Platinum Ltd in Diamond Ltd (27 000 x (60% x 20%)12%) 3 240
50 040
26
FAC3762/108
The following balances were extracted from the financial statements of the entities in the
Rock Ltd Group for the year ended 31 October 2018:
Rock Sand
Ltd Ltd
Dr/(Cr) Dr/(Cr)
R R
Property, plant and equipment at carrying amount ........ 162 100 46 200
Investment in equity instrument:
- Sand Ltd at cost price ................................................. 20 900 -
Current assets ............................................................... 31 138 32 932
Dividends paid – 31 October 2018 ................................ 2 200 2 000
Share capital:
- 16 000 ordinary shares ............................................... (16 000) -
- 3 000 ordinary shares ................................................. (3 000)
Retained earnings – 1 November 2017 ......................... (150 106) (65 680)
Current liabilities ............................................................ (42 634) (7 700)
Profit for the year ........................................................... (7 598) (4 752)
- -
1. On 1 November 2014, Rock Ltd acquired 1 800 of the issued ordinary shares in Sand Ltd
for R5 900. On this date the retained earnings of Sand Ltd amounted to R4 100.
Rock Ltd exercised control over Sand Ltd since the acquisition date. There were no
unidentified assets, liabilities or contingent liabilities on acquisition date and the fair
value of all assets and liabilities was considered to be equal to the carrying amounts
except for the equipment. The equipment had a carrying amount of R120 500 and a fair
value of R123 000 on the acquisition date. Sand Ltd purchased the equipment on
1 November 2008 and depreciated it over 10 years using the straight-line method. On
1 November 2014 there was no change in the remaining useful life of the equipment.
The equipment had no residual value. Sand Ltd did not account for the fair value
adjustment in its separate financial records.
2. Sand Ltd purchased some of its inventory from Rock Ltd at cost price plus 25%.
Sand Ltd had the following inventory on hand that was purchased from Rock Ltd:
31 October 2017 ................................................................................ R15 000

31 October 2018 ................................................................................ R10 000
Inventory is generally realised within 3 months of purchase. Total sales of inventories

from Rock Ltd to Sand Ltd for the current reporting period amounted to R100 000.
3. On 30 June 2018, Rock Ltd acquired a further 600 ordinary shares (20% interest) in
Sand Ltd for R15 000 from the non-controlling interests.
4. Rock Ltd measures its investment in Sand Ltd at cost price in its separate accounting
records in terms of IAS 27, Separate Financial Statements.
27
FAC3762/108
5. The Rock Ltd Group elected to measure the non-controlling interests in an acquiree at
fair value on acquisition date. On 1 November 2014 the fair value of the non-controlling
interests amounted to R3 920.
may assume that the tax rates have remained unchanged since 1 November 2014.
7. Each share carries one vote and the issued share capital of all entities in the group has
remained unchanged since 1 November 2014.
REQUIRED:
Marks
(a) Multiple-choice questions 4
(b) Prepare the consolidated statement of changes in equity of the
Rock Ltd Group for the year ended 31 October 2018. 25
The total columns are not required.

TOTAL [29]
Please note:
required.
rand.
28
FAC3762/108
QUESTION 4(a) – MULTIPLE-CHOICE QUESTIONS
REQUIRED:
Answer the following questions by choosing the correct option out of the five options given
for each question. There is only ONE correct answer for each question.
All answers should comply with the requirements of International Financial Reporting
Standards (IFRS).
QUESTION 4.1
The following is not a condition that needs to be met for Rock Ltd to be exempt from
preparing consolidated financial statements in terms of IFRS 10, Consolidated Financial
Statements:
(a) Rock Ltd’s debt or equity instruments are not traded on a public stock market.
(b) Rock Ltd’s operating activities are vastly different from those of Sand Ltd.
(c) The parent company of Rock Ltd prepares consolidated financial statements for public
use that comply with IFRS.
(d) Rock Ltd is not in the process of filing its financial statements to issue any instruments
in a public stock market.
(e) Rock Ltd is either a wholly owned subsidiary or a partially owned subsidiary and all its
shareholders agree not to present consolidated financial statements.
(1)
QUESTION 4.2
The amount that will be recognised as goodwill/gain on bargain purchase on acquisition date
of Sand Ltd in terms of IFRS 3.32 is …
(a) gain on bargain purchase amounting to R560.

(b) goodwill amounting to R560.
(c) goodwill amounting to R920.
(d) gain on bargain purchase amounting to R920.
(e) gain on bargain purchase amounting to R3 000.
(1)
QUESTION 4.3
The non-controlling interests will be disclosed in the consolidated statement of financial

position as at 31 October 2018 as follows:
(a) as a separate item within the liability section

(b) not recognised separately in any section of the consolidated statement of financial
position, as 100% of the parent and 100% of the subsidiary is included for every line
item in the consolidated statement of financial position
(c) as a deduction from goodwill in the non-current assets section
(d) as a separate line item within the equity section (separate from the parent’s share)
(e) only disclosed by means of notes to the consolidated statement of financial position
(1)
29
FAC3762/108
QUESTION 4.4
Which of the following is not an example of an intragroup balance?
(a) a loan made by a parent company to a subsidiary

(b) a loan made by one subsidiary to another subsidiary
(c) a trade payable owing to a subsidiary by its parent company
(d) a trade receivable owing to a subsidiary by another subsidiary that is one of its
customers
(e) a current bank account of the subsidiary and the overdraft account of the parent
company
(1)
PART A
QUESTION 4.1
The correct option is (b).
It is not a requirement that the operating activities from the parent and the subsidiary must
be the same in order not to present consolidated financial statements.
Study
Group statements (volume 1), 17th edition
- Chapter 1: Circumstances when consolidated financial statements need not be
prepared by the parent (p. 21)
QUESTION 4.2
The correct option is (c).
Proof of goodwill of Sand Ltd (IFRS 3.32)

R
Consideration transferred at acquisition date 5 900
Non-controlling interests (given) 3 920
9 820
Net amount of identifiable assets acquired and liabilities assumed at
acquisition date (3 000(SC) + 4 100(RE) + 1 800(RS)(2 500(123 000 –
120 500) x 72%)) (8 900)
Goodwill 920
30
FAC3762/108
OR
Analysis of owner’s equity of Sand Ltd
Rock Ltd
(1 800/ 3 000 = 60%) 100% 60% 40%
Total At Since NCI
R R R R
At acquisition
Share capital 3 000 1 800 1 200
Revaluation of equipment (2 500(123 000 –
120 500) x 72%) 1 800 1 080 720
8 900 5 340 3 560
Equity represented by goodwill 920 560 360
Consideration and NCI 9 820 5 900 3 920
OR
Debit Credit
R R
Property, plant and equipment (123 000 – 120 500) 2 500
Deferred tax liability (SFP) 700
Revaluation surplus 1 800
Revaluation of equipment at acquisition date
Share capital 3 000

Revaluation surplus 1 800
Non-controlling interests (SFP) 3 920
Investment in Sand Ltd 5 900
Goodwill 920
Elimination of common items at acquisition date and
recognising goodwill at acquisition date
QUESTION 4.3
The correct option is (d).
Non-controlling interests are recognised as a separate item in the equity section of the
consolidated statement of financial position. This item will be presented separately from the
equity attributable to the parent.
QUESTION 4.4
The correct option is (e).
The set-off of bank accounts within a group does not constitute intragroup transactions.
Study
Group statements (volume 1), 17th edition
- Chapter 5: Bank overdrafts and guarantees (p. 210)
31
FAC3762/108
PART B
ROCK LTD GROUP

31 OCTOBER 2018
Change in Non-
Share Retained ownership controlling
capital earnings reserve interests
R R R R
Balance as at
1 November 2017 16 000 184 084 - 28 012
Changes in equity for
2017/2018:
Acquisition of an additional
interest in a subsidiary (421) (14 580)
Total comprehensive income

for the year: 9 586 1 434
- Profit for the year 9 586 1 434
- Other comprehensive income
for the year - -
Dividend paid (2 200) (400)
Balance as at
31 October 2018 16 000 191 470 (421) 14 466
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The total columns are not required in Part B and are therefore not included
in the solution provided. If the consolidated statement of changes in equity
were required without any mention of the total columns, you would have
to provide the total columns (this will include the split between the parent
and NCI).
DIVIDEND PAID IN THE RETAINED EARNINGS

Only include the parent’s dividend paid in the retained earnings column.
Remember that the dividend paid by the subsidiary is eliminated in the
journal entries for intragroup transactions.
Debit Credit
R R
Dividend received by Rock Ltd (2 000 x 80%) 1 600
Non-controlling interests (SFP) (2 000 x 20%) 400
Dividend paid by Sand Ltd 2 000
Thus in the consolidated trial balance – dividend paid: Rock Ltd R2 200 +
Sand Ltd R2 000 = R4 200 – R2 000 (journal entry above) = R2 200.
32
FAC3762/108
CALCULATIONS
C1 Opening retained earnings
R
Rock Ltd (parent) 150 106
Adjustment for opening inventory (10 000 x 25/125 x 72%) (2 160)
147 946
Sand Ltd (subsidiary) 65 680

Less: at acquisition date RE (4 100)
Movement in retained earnings since acquisition date to beginning of
current year 61 580
Additional depreciation equipment re-measured at acquisition date
(2 500/4 x 3 years x 72%) or (1 800/4 x 3 years) 1 350
60 230
Less: non-controlling interests’ share in the since-acquisition movement
in RE (60 230 x 40%) (24 092)
Parent’s share in the since-acquisition retained earnings 36 138
Opening retained earnings (147 946 + 36 138) 184 084
C2 Opening NCI
R
At acquisition date 3 920
Non-controlling interests’ share in the since-acquisition movement in RE
(60 230 x 40%) (C1) 24 092
28 012
C3 NCI’s share in the profit of Sand Ltd for the year

R
Sand Ltd 4 752
Additional depreciation on re-measurement of equipment, net after tax
(2 500/4 x 1 = 625 x 72%) or (1 800/4 x 1) (450)
Total consolidated profit for the year 4 302
Apportioned for 8 months (4 302 x 8/12) – before the change in control 2 868
Apportioned for 4 months (4 302 x 8/12) – after the change in control 1 434
4 302
NCI’s share in the profit before the change in control (2 868 x 40%) 1 147
NCI’s share in the profit after the change in control (1 147 x 20%) 287
NCI’s share in the profit for the year 1 434
33
FAC3762/108
NCI’s SHARE IN THE PROFIT FOR THE YEAR

Only look at the profit of the subsidiary. The non-controlling interests
cannot share in the profit of the parent. Don’t use the consolidated profit
for the year when you calculate NCI’s share in the profit for the year.
C4 Profit for the year attributable to the parent

R
Rock Ltd 7 598
Sand Ltd 4 752
12 350
Elimination of intragroup dividend received from Sand Ltd (2 000 x 80%) (1 600)
Additional depreciation on re-measurement of equipment, net after tax
(2 500/4 x 1 = 625 x 72%) or (1 800/4 x 1) (450)
Realisation of profit included in opening inventory, net after tax
(15 000 x 25/125 x 72%) 2 160
Unrealised profit included in closing inventory, net after tax
(10 000 x 25/125 x 72%) (1 440)
Total consolidated profit for the year 11 020
Less: NCI’s share in the profit for the year (C3) (1 434)
Profit for the year attributable to the parent 9 586
PROFIT FOR THE YEAR ATTRIBUTABLE TO THE PARENT

It is important to use the consolidated profit for the year when you calculate
the parent’s share in the profit for the year. Then you will deduct the non-
controlling interests’ share in the profit for the year. Refer to calculation
C3.
INTRAGROUP SALE OF INVENTORY

The elimination of the sale of intragroup inventory will have a zero effect
on the profit for the year line item. You will debit the revenue line item with
R100 000 and you credit the cost of sales line item with R100 000, i.e. +
R100 000 – R100 000 = R0.
34
FAC3762/108
C5 Adjustment to NCI due to the change in degree of control

R
Asset pool 1: Net asset value of subsidiary
Using the TOTAL column:
At acquisition date equity (3 000(SC) + 4 100(RE) + 1 800(RS)) 8 900
Since acquisition date equity (C1) 60 230
Current year (first 8 months before change in control) (C3) 2 868
71 998
Change in % interest (71 998 x 20%) 14 400
Asset pool 2: Goodwill

(360 x 20/40) 180
Adjustment to NCI 14 580
OR
R
Using the NCI column:
At acquisition date equity (NAV at acquisition and goodwill included here –
both asset pools) 3 920
Since acquisition date equity (C1) 24 092
Current year (first 8 months before change in control) (C3) (4 302 x 8/12 =
2 868 x 40%) 1 147
29 159
Change in % interest (29 159 x 20/40) 14 580
Adjustment to NCI 14 580
NCI MEASURED AT FAIR VALUE ON ACQUISITION DATE

The group elected to measure the NCI in Sand Ltd at fair value on
acquisition date. This will impact the calculation of the adjustment to NCI.
There will be two asset pools that need to be transferred:
the net asset value pool and the goodwill pool.
C6 Change in ownership equity reserve

R
Consideration paid 15 000
Less: adjustment to NCI (14 580)
421
C7 NCI’s share in dividend paid

R
Dividend paid by Sand Ltd 2 000
NCI’s share in dividend paid (2 000 x 20%) 400
35
FAC3762/108
NCI’s SHARE IN THE DIVIDEND PAID

The non-controlling interests’ percentage interest here is 20% and not
40%. The dividend was paid after the change in percentage occurred. It
is very important that you look at the timing of the dividend paid and the
timing of when the change in degree of control occurred.
Analysis of owner’s equity of Sand Ltd

(1 800/3 000 = 60%) Rock Ltd
(1800 + 600 = 2 400/3 000 = 80%) 100% 60% - 80% 40% - 20%
Total At Since NCI
R R R R
At acquisition
Share capital 3 000 1 800 1 200
Revaluation of equipment (2 500(123 000 –
120 500) x 72%) 1 800 1 080 720
8 900 5 340 3 560
Equity represented by goodwill 920 560 360
Consideration and NCI 9 820 5 900 3 920
Since acquisition to beginning of the
current year 60 230 36 138 24 092
Retained earnings (65 680 – 4 100) 61 580 36 948 24 632
Additional depreciation on equipment, net
after tax (1 800/4 x 3) or (2 500/4 x 3 x 72%) (1 350) (810) (540)
70 050 36 138 28 012
Current year 2 868 1 721 1 147
(1 November 2017 – 30 June 2018)
Profit for the year (4 752 x 8/12) 3 168 1 901 1 267
after tax 1 800/4 x 8/12) or
(2 500/4 x 72% x 8/12) (300) (180) (120)
72 918 37 859 29 159
Change in degree of control
Consideration paid 15 000
Adjustment to NCI
NCI column: (29 159 x 20/40) (14 580) (14 580)
Change in ownership equity reserve 421 14 579
Current year 1 434 1 147 287
(1 July 2018 – 31 October 2018)
Profit for the year (4 752 x 4/12) 1 584 1 267 317
after tax 1 800/4 x 4/12) or
(2 500/4 x 72% x 4/12) (150) (120) (30)
Dividend paid (2 000) (1 600) (400)

72 352 37 406 14 466
36
FAC3762/108
Buck Ltd was established in 1995 and is a manufacturer and distributor of medication in
Gauteng. The following is an extract from the annual financial statements of Buck Ltd and
its related group investment companies for the year ended 31 December 2018:
BUCK LTD GROUP

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR
THE YEAR ENDED 31 DECEMBER 2018
Buck Ltd Nanny Kid
Group Ltd Ltd
R R R
Revenue .......................................................... 1 928 000 1 290 000 1 161 000
Cost of sales .................................................... (1 285 333) (645 000) (872 932)
Gross profit....................................................... 642 667 645 000 288 068
Other income.................................................... 30 000 - 12 800
Other expenses ................................................ (123 000) (89 456) (80 510)
Profit before tax .............................................. 551 667 555 544 220 358
Income tax expense ......................................... (154 467) (155 552) (61 700)
PROFIT FOR THE YEAR ................................ 397 200 399 992 158 658
Profit and total comprehensive income

for the year attributable to:
Owners of the parent ........................................ 341 592 399 992 158 658
Non-controlling interests................................... 55 608 - -
397 200 399 992 158 658
BUCK LTD GROUP

EXTRACT OF THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2018
Buck Ltd Nanny Kid
Group Ltd Ltd
Retained Non- Retained Retained
earnings controlling earnings earnings
interests
R R R R
Balance as at 1 January 2018 ......... 240 000 165 000 80 000 205 200
Changes in equity for 2018:
Profit for the year ............................... 341 592 55 608 399 992 158 658
Dividends paid (30 November 2018) . (123 456) (1 118) (45 678) (25 200)
Balance as at 31 December 2018 ... 458 136 219 490 434 314 338 658
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BUCK LTD GROUP

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
Buck Ltd Nanny Kid
Group Ltd Ltd
R R R
ASSETS
Non-current assets
Property, plant and equipment ......................... 920 305 647 314 376 303
Investment in Nanny Ltd................................... 200 000 - -
Investment in Kid Ltd ........................................ 102 000 - -
Total non-current assets................................... 1 222 305 647 314 376 303
Current assets
Cash and cash equivalents .............................. 123 321 101 100 76 543
Inventory .......................................................... 520 000 412 800 288 000
Trade and other receivables............................. 312 000 88 300 58 200
Total current assets ....................................... 955 321 602 200 422 743
Total assets .................................................... 2 177 626 1 249 514 799 046
EQUITY
Equity attributable to owners of the parent . 1 458 136 934 314 638 658
Share capital:
- 500 000 ordinary shares ................................ 1 000 000 - -
-1 000 000 ordinary shares .............................. - 500 000 -
- 300 000 ordinary shares ................................ - - 300 000
Retained earnings ............................................ 458 136 434 314 338 658
Non-controlling interests................................... 219 490 - -
Total equity ..................................................... 1 677 626 934 314 638 658
LIABILITIES
Non-current liabilities
Deferred tax liability .......................................... 120 000 81 200 34 500
Total non-current liabilities ........................... 120 000 81 200 34 500
Current liabilities
Trade and other payables ................................ 380 000 234 000 125 888
Total current liabilities ................................... 380 000 234 000 125 888
Total liabilities ................................................ 500 000 315 200 160 388
Total equity and liabilities ............................. 2 177 626 1 249 514 799 046
1. Nanny Ltd was incorporated in 2016 and has a huge distribution network of pharmacies
in South Africa. Nanny Ltd’s head office is in Polokwane, South Africa.
On 31 March 2018, Buck Ltd acquired 350 000 of the ordinary shares of Nanny Ltd for
R200 000. Since this date, Buck Ltd has exercised significant influence over the financial
and operating decisions of Nanny Ltd. On the acquisition date all the assets and liabilities
of Nanny Ltd were considered to be fairly valued. The strategic reason for the purchase
of the shares was to take advantage of Nanny Ltd’s distribution network to distribute
38
FAC3762/108
Buck Ltd’s latest product range, product X2341 (ointment for measles). The published
market price for the investment in Nanny Ltd was R245 000 on 31 December 2018.
2. On 1 June 2015, Buck Ltd acquired 75 000 of the issued ordinary shares of Kid Ltd for
R102 000. In terms of a contractual arrangement with other operators, Buck Ltd
exercises joint control over the economic activities of Kid Ltd. The arrangement was
correctly classified as a joint venture in terms of IFRS 11, Joint Arrangements. On the
acquisition date all the assets and liabilities of Kid Ltd were considered to be fairly
valued. On 1 June 2015, the retained earnings of Kid Ltd amounted to R105 200.
Goodwill amounting to R700 arose on the acquisition of Kid Ltd on 1 June 2015.
Intragroup transactions
3. During the current year, Nanny Ltd purchased product X2341 from Buck Ltd for
R250 000. Buck Ltd sold this product to Nanny Ltd at a profit mark-up of 15% on the cost
price. On 31 December 2018, Nanny Ltd had inventory of X2341 that was purchased
from Buck Ltd on hand amounting to R20 000.
4. From 1 June 2015, Buck Ltd purchased inventory from Kid Ltd. Kid Ltd sold the inventory
at a profit margin of 20% on the selling price. Total sales amounted to R310 000 in the
2017 financial year and R350 000 in the 2018 financial year.
Inventory purchased from Kid Ltd that was still on hand at year-end was as follows:
31 December 2017: R57 000

31 December 2018: R75 000
Other information
5. Buck Ltd measures investments in associates and joint ventures at cost price in terms
of IAS 27, Separate Financial Statements.
6. The Buck Ltd Group accounts for investments in associates and joint ventures using the
equity method in terms of IAS 28, Investments in Associates and Joint Ventures.
7. The share capital of the companies in the group has remained unchanged since the
acquisition dates of the companies. Assume that each share carries one vote.
8. The SA normal tax rate remained unchanged at 28% since 1 June 2015 and capital
gains tax is calculated at 80% thereof.
39
FAC3762/108
REQUIRED:
Marks
(a) Prepare the pro forma journal entries to account for the intragroup
transactions of inventory (as per additional information points 3 and 4) for
the year ending 31 December 2018. 18
Journal narrations are required.
(b) Prepare the consolidated statement of financial position of the

Buck Ltd Group as at 31 December 2018. 23
(c) Prepare the “Investment in associate” note to the consolidated financial
statements of the Buck Ltd Group as at 31 December 2018:
10
The following information is not required:
- unrecognised share of losses
- risks relating to associates
TOTAL [51]
Please note:
required.
rand.
PART A
JOURNAL ENTRIES TO ACCOUNT FOR THE INTRAGROUP TRANSACTION OF

INVENTORY BETWEEN THE INVESTOR AND THE ASSOCIATE
Debit Credit
R R
Revenue (P/L)(20 000 x 115/115 x 35%) 7 000
Cost of sales (P/L)(20 000 x 100/115 x 35%) 6 087
Investment in associate (SFP) (20 000 x 15/115 x 35%) 913
Eliminate unrealised profit included in the closing inventory
Deferred tax asset (SFP) (913 x 28%) 256

Income tax expense (P/L) 256
Tax effect of the unrealised profit included in the closing
inventory
40
FAC3762/108
REALISED TRANSACTION BETWEEN THE INVESTOR AND

ASSOCIATE
Realised intragroup transactions between the associate and the investor
will not be eliminated.
When you apply the equity method in a group, you start with the trial
balance of the investor and then you add the investor’s share in the equity
reserves of the associate since acquisition date to the investment in
associate at cost price in the trial balance of the parent.
The intragroup transactions between the investor and associate cannot be
eliminated because you don’t include the trial balance of the associate in
the group.
DIRECTION OF THE SALE OF INVENTORY IS IMPORTANT

The direction of the sale of inventory between the associate and the
investor is important because it will determine the line items that need to
be adjusted.
JOURNAL ENTRIES TO ACCOUNT FOR THE INTRAGROUP TRANSACTION OF

INVENTORY BETWEEN THE INVESTOR AND THE JOINT VENTURE
Debit Credit
R R
20
Retained earnings (57 000 x /100 x 25%) 2 850
Share in profit of joint venture 2 850
Restate retained earnings with the unrealised profit included
in opening inventory.
Share in profit of joint venture 798
Retained earnings 798
Tax effect on unrealised profit included in opening inventory
OR
Retained earnings (57 000 x 20/100 x 25% x 72%) 2 052
Restate retained earnings with the unrealised profit included
in opening inventory.
Share in profit of joint venture (P/L) (75 000 x 20/100 x 25%) 3 750
Inventory (SFP) 3 750
Unrealised profit included in closing inventory.
Deferred tax asset (SFP) (3 750 x 28%) 1 050
Share in profit of joint venture (P/L) 1 050
Tax effect on unrealised profit included in closing inventory
OR
Share in profit of joint venture (P/L) (75 000 x 20/100 x 25% x
72%) 2 700
Deferred tax asset (SFP) (3 750 x 28%) 1 050
Inventory (SFP) (75 000 x 20/100 x 25%) 3 750
Unrealised profit included in closing inventory.
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FAC3762/108
THE DIRECTION OF THE TRANSACTION BETWEEN THE INVESTOR

AND JOINT VENTURE IS IMPORTANT
Realised intragroup transactions between the associate and the investor
will not be eliminated.
When you apply the equity method in a group, you start with the trial
balance of the investor and then you add the investor’s share in the equity
reserves of the associate since acquisition date to the investment in
associate at cost price in the trial balance of the parent.
The intragroup transactions between the investor and associate cannot
be eliminated because you don’t include the trial balance of the associate
in the group.
PART B
BUCK LTD GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018
ASSETS R
Non-current assets
Property, plant and equipment 920 305
Investment in associate (C1) 326 097
Investments in joint venture (C2) 160 364
Total non-current assets 1 406 766
Current assets
Inventories (520 000 – 3 750(Part A)) 516 250
Cash and cash equivalents 312 000
Trade and other receivables 123 321
Total current assets 951 571
TOTAL ASSETS 2 358 337
EQUITY AND LIABILITIES

Equity attributable to owners of the parent 1 640 153
Share capital 1 000 000
Non-controlling interests 219 490
Total equity 1 859 643
Non-current liabilities
Deferred tax liability (120 000 – 256(Part A) – 1 050(Part A)) 118 694
Total non-current liabilities 118 694
Current liabilities
Trade and other payables 380 000
Total current liabilities 380 000
Total equity and liabilities 2 358 337
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CALCULATIONS
C1 Investment in associate
R
Cost price of investment in associate 200 000
Gain on bargain purchase (200 000(cost price) – 237 999 (6 79 998
(500 000(SC) + 80 000(RE) + 99 998(RE)(399 992 x 3/12)) x 35%
(350 000/1 000 000))) 37 999
Share in profit of associate (299 994(399 992 x 9/12) x 35%) 104 998
Dividend paid (45 678 x 35%) (15 987)
Unrealised profit included in closing inventory (Part A) (913)
326 097
C2 Investment in joint venture
R
Cost price of investment in associate 102 000
Since acquisition retained earnings (100 000(205 200 – 105 200) x 25%
(75 000/300 000)) 25 000
Share in profit of joint venture (158 657 x 25%) 39 664
Dividend paid (25 200 x 25%) (6 300)
160 364
C3 Retained earnings R
Opening balance:
Buck Ltd 240 000
Kid Ltd (joint venture) 25 000
265 000
Profit for the year:
Buck Ltd 341 592
Share in profit of associate (Nanny Ltd) (104 998 + 37 999) 142 997
Share in profit of joint venture (Kid Ltd) 39 664
Dividend received from associate (15 987)
Dividend received from joint venture (6 300)
Unrealised profit included in closing inventory, net after tax (657)
Unrealised profit included in closing inventory (913)
Unrealised profit included in closing profit - adjustment against revenue (7 000)
Unrealised profit included in closing profit - adjustment against cost of sales
6 087
Tax effect on unrealised profit included in closing inventory 256
Unrealised profit included in closing inventory, net after tax (2 700)
Unrealised profit included in closing inventory – adjustment against share in
profit of joint venture (3 750)
Tax effect on unrealised profit included in closing inventory 1 050
Dividend paid
Buck Ltd (123 456)
640 153
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EFFECT OF OPENING INVENTORY ON RETAINED EARNINGS

The unrealised profit included in the opening inventory will have a zero
effect on the closing retained earnings line item.
Refer to the journal entry below:
Debit Credit
R R
Retained earnings (57 000 x 20/100 x 25%
x 72%) 2 052
Restate retained earnings with the unrealised profit included in
opening inventory.
C4 Analysis of owner’s equity of Nanny Ltd

Buck Ltd Carrying
100% 35% amount
Total At Since (CA)
R R R R
At acquisition
Share capital 500 000
Beginning of the year 80 000
Current year (399 992 x 3/12) 99 998
679 998 237 999
Gain on bargain purchase (37 999)
Investment in Nanny Ltd 200 000 200 000
Current year
Gain on bargain purchase 37 999
Dividends paid (45 678) (15 987) (15 987)

934 314 89 011 327 010
Unrealised profit in inventory
(20 000 x 15/115 x 35%) - - (913)
89 011 89 011 326 097
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FAC3762/108
C5 Analysis of owner’s equity of Kid Ltd

Buck Ltd Carrying
100% 25% amount
Total At Since (CA)
R R R R
At acquisition
Share capital 300 000 75 000
Retained earnings 105 200 26 300
405 200 101 300
Goodwill 700
Investment in Nanny Ltd 102 000 102 000
Since acquisition to beginning of

the current year
Retained earnings (205 200 – 105 200) 100 000 25 000 25 000
Current year
Dividends paid (25 200) (6 300) (6 300)

638 658 102 000 58 364 160 364
PART C
BUCK LTD GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT FOR THE YEAR ENDED
31 DECEMBER 2018
1. Investment in associate
Buck Ltd has a 35% interest in the associate, Nanny Ltd, a company operating in the
pharmaceutical industry. Nanny Ltd is accounted for in accordance with the equity method.
It is incorporated in South Africa and its principal place of business is in Polokwane.
Nanny Ltd acts as a distribution agent for the products of Buck Ltd.
1.1 The summarised financial information of Nanny Ltd
R
Non-current assets 647 314
Current assets 602 200
Total assets 1 249 514
Non-current liabilities -
Current liabilities 315 200
Total liabilities 315 200
Revenue 1 290 000

Profit for the year 399 992
Total comprehensive income for the year 399 992
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FAC3762/108
1.2 Reconciliation of the summarised financial information and the carrying amount
of the investment in associate
R
Summarised financial information: net assets as at 31 December 2018
(1 249 514 – 315 200) 934 314
35% interest in the net asset value 327 010
Plus: goodwill -
Minus: intercompany sales of inventory (913)
Carrying amount of investment in associate 326 097
1.3 Fair value of the investment of associate

R
The fair value of the investment in associate (published price quotations) 245 000
Arthur Ltd, a company based in Johannesburg, manufactures and sells designer

sunglasses. The founder of the company is Arthur Lubisi, the first African designer to
establish a sunglasses brand that is admired and sold all over the world. Arthur is the chief
executive officer and owns 15% of the issued shares of Arthur Ltd. Arthur Ltd has a 30 June
financial year-end.
Employee benefits
Arthur Ltd has 48 employees. The total gross salaries per month for the financial year ended
30 June 2019 for all 48 employees combined amounted to R1 200 000. No employee left
the employ of Arthur Ltd and no new employees were appointed during the financial year
ended 30 June 2019. Management estimates that the number of employees will remain 48
for the financial year ending 30 June 2020. Arthur Ltd gives annual increases to all its
employees on 1 July of each year, the start of the new financial year. The increase on 1 July
2018 was 6% and the increase on 1 July 2019 was 8%.
The employees contribute 7.5% of their gross salaries to a defined contribution plan and
Arthur Ltd contributes 7.5% of the gross salaries to the defined contribution plan to bring the
total contribution to 15%.
Arthur Ltd pays a bonus to all employees at the end of December each year which is equal
to one month’s salary. At the end of December, each employee receives double their normal
salary due to the salary and the bonus that is paid on the same day.
All employees of Arthur Ltd are entitled to 24 vacation leave days per calendar year. It is the
policy of Arthur Ltd that a maximum of 5 vacation leave days that were not taken by
31 December of each year may be transferred to the next leave cycle. Any unused leave
days exceeding 5 days will be forfeited. Employees are only allowed to have their unused
leave paid out when they resign or retire.
The following unused vacation leave days on 31 December 2018 were transferred to the
next leave cycle:
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FAC3762/108
 For employees who earn 30% of the gross monthly salaries, 5 days were transferred.
For the period from 1 January 2019 to 30 June 2019, these employees took an average
of 6 days’ vacation leave.
 For employees who earn 20% of the gross monthly salaries, 3 days were transferred.
For the period from 1 January 2019 to 30 June 2019, these employees took an average
of 7 days’ vacation leave.
 The remainder of the employees had no unused vacation leave days. For the period
from 1 January 2019 to 30 June 2019, these employees took an average of 8 days’
vacation leave.
The prior year leave pay accrual amounted to R431 800. There are 252 working days in a
financial year.
Investment in shares of Polar Ltd
On 1 September 2018, Arthur Ltd acquired 200 000 ordinary shares in Polar Ltd, a company
that makes polarised lenses for sunglasses. On 1 September 2018, Arthur Ltd paid R24 per
share and paid broker’s commission of R40 000. Arthur Ltd made this investment for
strategic purposes as Polar Ltd manufactures the lenses for certain models of Arthur Ltd’s
sunglasses. The investment in Polar Ltd shares represents a 55% investment in Polar Ltd.
Arthur Ltd has control over Polar Ltd as defined in IFRS 10, Consolidated Financial
Statements. On 1 September 2018, Arthur Ltd made the irrevocable election in terms of
IFRS 9, Financial Instruments (paragraph 5.7.5), to measure the investment in shares of
Polar Ltd at fair value through other comprehensive income in Arthur Ltd’s separate
accounting records.
On 15 April 2019, Polar Ltd declared and paid a dividend of R1,80 per share to all ordinary
shareholders. At 30 June 2019, the fair value per share of Polar Ltd amounted to R26,50.
For the financial year ended 30 June 2019, Arthur Ltd acquired polarised lenses at their
market-related (arm’s-length) price of R1 600 000 from Polar Ltd. The lenses were paid for
in cash.
Construction of the new manufacturing machine
On 1 August 2018, Arthur Ltd ordered a new manufacturing machine that is able to print
models of the sunglasses in three dimensions and cast the frames of the sunglasses. The
machine will also be used to polish the frames to the desired finish and fit the lenses to the
sunglasses. The cost of the new manufacturing machine amounted to R9 600 000. The
construction was done by MR Ltd and took 6 months to complete. The new manufacturing
machine meets the definition of a qualifying asset in terms of IAS 23, Borrowing Costs.
Arthur Ltd applied for a loan from Bob Bank on 1 August 2018 to finance the construction of
the new manufacturing machine. James Lubisi, the brother of Arthur Lubisi, is the financial
director of Bob Bank. The loan was approved on 14 August 2018 and Bob Bank advanced
the loan as needed by Arthur Ltd to pay the construction costs. The construction
commenced on 1 September 2018.
47
FAC3762/108
The invoices for the construction are listed below:

Invoice Date invoice received Amount Date paid by
from MR Ltd R Bob Bank to MR Ltd
Invoice 1 1 September 2018 6 000 000 1 October 2018

Invoice 2 28 February 2019 3 600 000 28 February 2019
9 600 000
The loan from Bob Bank bears interest at a fixed rate of 12% per annum, compounded
annually, starting on 30 September 2019. According to the loan agreement, interest accrued
on the loan until 30 September 2019 will be settled in cash on 30 September 2019. The loan
of R9 600 000 is repayable in four annual instalments of R3 160 651 (capital and interest)
starting on 30 September 2020. The terms of the loan agreement were at arm’s length.
The new manufacturing machine was ready for use on 28 February 2019 and was brought
into use on 1 July 2019. It is the policy of Arthur Ltd to depreciate its new manufacturing
machine using the straight-line method over its expected useful life of 6 years. The new
manufacturing machine has a residual value of R250 000.
REQUIRED:
Marks
(a) Discuss when the capitalisation of borrowing costs on the new manufacturing
machine should commence and cease in the accounting records of Arthur Ltd. 5
(b) Discuss the classification, measurement and initial recognition of the loan
from Bob Bank in the accounting records of Arthur Ltd. 3
(c) Prepare all the journal entries relating to the investment in Polar Ltd in the
separate accounting records of Arthur Ltd for the financial year ending 30 June
2019.
 Indicate the date of each journal.
 Journal narrations are not required. 9
(d) Disclose the above information in the following notes to the separate annual
financial statements of Arthur Ltd for the financial year ended 30 June 2019:
 Profit before tax (including finance costs and finance income)
 Property, plant and equipment
 Related parties 37
TOTAL [54]
Please note:
Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Comparative figures are not required
Ignore income tax and value-added tax
Round all amounts off to the nearest rand.
48
FAC3762/108
PART A
Capitalisation of borrowing costs should commence when all three of the following
conditions have been met:
1. Expenditure for asset is being incurred, 1 September 2018.
2. Borrowing costs are being incurred, 1 October 2018.
3. Activities to prepare asset for its intended use are in progress from 1 September 2018.
As a result, the borrowing costs can be capitalised from 1 October 2018.
The capitalisation of borrowing costs must cease when substantially all the activities
necessary to prepare the asset for its intended use have been completed or the asset is
ready for use, which is 28 February 2019.
PART B
The loan from Bob Bank meets the definition of a financial liability as it is a contractual
obligation to deliver cash to another entity, being Bob Bank.
Arthur Ltd will only recognise the liability once it becomes party to contractual provisions.
Even though the loan was approved on 14 August 2018, it was only drawn down from 1
October 2018.
The loan (financial liability) will be initially measured at its fair value of R6 000 000 on 1
October 2018.
In terms of IFRS 9, financial liabilities will be classified (and subsequently measured) at
amortised cost using the effective interest rate method.
PART C
Dr Cr
R R
1 September 2018
Investment in shares of Polar Ltd (SFP) (200 000 x R24) + R40 000 4 840 000
Bank (SFP) 4 840 000
Initial recognition and capitalisation of transaction costs
15 April 2019
Bank (SFP) (200 000 x R1,80) 360 000
Dividends received (P/L) 360 000
Recognition of dividends received
30 June 2019
Investment in shares of Polar Ltd (SFP) (200 000 x R26,40)R4 840 000 460 000
Fair value adjustment (OCI) 460 000
Recognise increase in fair value at year-end
49
FAC3762/108
PART D
ARTHUR LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019
2. Profit before tax

R
Profit before tax includes the following:
Income
Dividends received from Polar Ltd (200 000 x 1,80) 360 000
Expenses
Employee benefits 15 673 966
Short-term employee benefits
Post-employment benefits (1 200 000 x 12 x 7.5%) 1 080 000
Depreciation (see PPE note below) 536 111
Net finance costs 384 000

Total finance costs [1 Mar '19 - 30 Jun '19: 384 000[9 600 000(6 000 000 + 684 000
3 600 000) x 12% x 4/12] + 300 000]
Borrowing costs capitalised (300 000)
Capitalisation rate used for the capitalisation of borrowing costs is 12% per annum
3. Property, plant and equipment

R
-
Carrying amount at the start of the year -
Cost -
Accumulated depreciation -
Additions (6 000 000 + 3 600 000) 9 600 000

Borrowing costs capitalised 1 Oct 2018 - 28 Feb 2019: 6 000 000 x 12% x 300 000
5/
12
Depreciation (9 600 000 + 300 000) = 9 900 000 - 250 000 = 9 650 000/6 x (536 111)
4/
12
Carrying amount at the end of the year 9 363 889

Cost 9 900 000
Accumulated depreciation (536 111)
Related parties
Polar Ltd is a related party as it is a subsidiary of Arthur Ltd/Arthur Ltd controls Polar Ltd.
Bob Bank is a related party of Arthur Ltd because Arthur Lubisi, CEO of Arthur Ltd, is the
brother of James Lubisi, the financial director of Bob Bank
50
FAC3762/108
Transactions
R
Dividends received from Polar Ltd 360 000
Purchase of lenses from Polar Ltd 1 600 000
Finance costs incurred on loan from Bob Bank 684 000
Outstanding balances
Loan and interest payable to Bob Bank (9 600 000 + 684 000) 10 284 000
The transactions with Polar Ltd and Bob Bank were entered into at arm’s length.
CALCULATIONS
C1 Short-term employee benefits
R R
Salaries (1 200 000 x 12 months) 14 400 000
Movement in bonus accrual 1 248 000

Reverse prior year accrual (1 200 000 x 6/
12) (600 000)
paid on 31 Dec 2018
Bonus paid 1 200 000
Current year accrual to be paid (1 200 000 x 1,08 x 6/
12) 648 000
on 31 Dec 2019
Movement in leave accrual 25 966

Reverse prior year accrual (431 800)
Current year accrual 457 766
15 673 966
Number of unused vacation leave days at year-end

Percentage Leave days Leave days Leave taken Total unused
of transferred to 1 accrued (24/12 leave days at Y/E
employees Jan 2019 x 6 months)
30% 5 12 -6 11
20% 3 12 -7 8
50% 0 12 -8 4
Total salary per day (1 200 000 x 12 months x 1,08 increase x 1,075
employer contribution)/252 days 66 343
Percentage of Salary per day Total unused leave Leave pay accrual
employees days at Y/E at 30 June 2019
30% 66 343 11 218 931
20% 66 343 8 106 149
50% 66 343 4 132 686
457 766
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FAC3762/108
Eggs Aplenty Ltd is a producer, packager and distributor of organic eggs and has a 30 June
year-end. The company is passionate about delivering quality eggs that are farmed using
environmentally friendly methods. The information below is relevant to the financial year
ended 30 June 2019.
Due to the increased awareness of food safety and criticism of the use of antibiotics and
hormones in food products, the demand for organic eggs has increased. As a result of this
increased demand, Eggs Aplenty Ltd decided to invest in an additional delivery truck for the
distribution and delivery of eggs to different retailers.
Since Eggs Aplenty Ltd could not afford to purchase a new delivery truck in cash,
negotiations were entered into with Balemi Ltd, a neighbouring milk distributor, who had
extra delivery trucks.
On 1 October 2018, Eggs Aplenty Ltd entered into a 4-year lease agreement with
Balemi Ltd, whereby Eggs Aplenty Ltd would lease one of Balemi Ltd’s trucks. The lease
agreement contains a lease in terms of IFRS 16, Leases. The specific truck to be leased by
Eggs Aplenty Ltd from Balemi Ltd had a cash price (fair value) of R1 200 000 and a
remaining useful life of 4 years, as at 1 October 2018.
The truck had originally been purchased by Balemi Ltd on 1 October 2014 at a cost of
R2 290 000, with a total useful life of 8 years and a residual value of Rnil. The useful life and
residual value of the delivery truck remained unchanged and Eggs Aplenty Ltd agreed with
these estimates. Balemi Ltd has a 30 June year-end.
The lease agreement was signed, and the delivery truck was delivered to Eggs Aplenty Ltd
on 1 October 2018. It was ready for use on the same date. Eggs Aplenty Ltd incurred and
paid legal fees of R25 000 relating to the drafting of the lease agreement. In terms of the 4-
year lease agreement, Eggs Aplenty Ltd would be required to make 8 bi-annual payments
of R195 000 each, with the first payment being due on 31 March 2019. At the end of the
lease term, Eggs Aplenty Ltd will acquire legal ownership of the delivery truck subject to the
payment of the residual value guaranteed of R146 974.
52
FAC3762/108
REQUIRED:
Marks
(a) Calculate the interest expense on the lease liability that will be recognised
in Eggs Aplenty Ltd’s statement of profit or loss for the year ended
30 June 2019 5
(b) Disclose the “leases” note to the annual financial statements of Eggs
Aplenty Ltd for the year ended 30 June 2019. 23
(c) Prepare all the journal entries required to account for the lease of the
delivery truck in the accounting records of Balemi Ltd, for the year ended
30 June 2019.
 The journal entry relating to the current year depreciation expense
for the delivery truck is not required.
 Journal narrations and dates are required for all journals. 16
(d) Multiple-choice questions 2

TOTAL [46]
Please note:
Comparative figures are not required.
Ignore income tax and value-added tax.
Round all amounts off to the nearest rand.
QUESTION 7(d) – MULTIPLE-CHOICE QUESTIONS
The following two multiple-choice questions are based on the information provided in
question 7 on page 56. Answer the following questions by choosing the correct option for
each question. There is only ONE correct answer for each question.
QUESTION 7.1
For this question only, assume that Eggs Aplenty Ltd had only leased Balemi Ltd’s delivery
truck for a period of six months and had elected to apply all the recognition exemptions in
terms of IFRS 16, Leases. Eggs Aplenty Ltd would …
a) account for the lease as an operating lease.

b) be required by IFRS 16, Leases to recognise a right-of-use asset and lease liability for
the six-month lease period.
c) account for the lease as one relating to a low-value asset, in terms of the
IFRS 16, Leases, practical expedient.
d) account for the lease as a short-term lease, in terms of IFRS 16, Leases, practical
expedient.
e) account for the lease as a finance lease.
(1)
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QUESTION 7.2
For this question only, assume that ownership of the delivery truck will not transfer to
Eggs Aplenty Ltd at the end of the lease term and at lease inception, Eggs Aplenty Ltd has
the option to extend the four-year lease term by two years. It was reasonably certain, at the
lease inception date, that Eggs Aplenty Ltd would exercise this option. The lease term would
be determined as …
a) four years for both Eggs Aplenty Ltd and Balemi Ltd as this is the non-cancellable period
of the lease.
b) six years for both Eggs Aplenty Ltd and Balemi Ltd.
c) four years for Eggs Aplenty Ltd and six years for Balemi Ltd.
d) six years for Eggs Aplenty Ltd and four years for Balemi Ltd.
e) five years for both Eggs Aplenty Ltd and Balemi Ltd.
(1)
PART A
Interest expense calculation
R
6/
1 200 000 x 16%(C1) x 12 = 96 000
(1 200 000 + 96 000 - 195 000) x 16% x 3/12 = 44 040
140 040
PART B
EGGS APLENTY LIMITED
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2019
3. Leases
3.1 Right of use of asset R
Carrying amount at the beginning of the year -
Additions 1 225 000
Depreciation (229 688)
Carrying amount at the end of the year 995 313
3.2 Maturity analysis of lease payments

R
Future (undiscounted) lease payment
For the year ended 30 June 2020 390 000
Total future lease payments 1 511 974
Total future finance costs 366 934
Lease liability balance as at 30 June 2019 1 145 040
Current portion of lease liability 231 289
Non-current portion of lease liability 913 751
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3.3 Total cash flows relating to leases (extract from the statement of cash flows for
the year ended 30 June 2019)
R
Presented under cash flows from operating activities
Cash payments of legal fees paid at lease inception (25 000)
Cash payments of interest portion of lease liability (96 000)
Presented under cash flows from financing activities
Cash payments made towards capital portion of finance lease (99 000)
Total cash outflows relating to lease (220 000)
CALCULATIONS
C1 Determine the interest rate implicit in the lease (IRIL)
Pmt R195 000
N 8 (2 payments x 4 years)
PV (R1 200 000)
FV R146 974
Compute i 16% per annum
C2 Amortisation table
Instalments Finance costs Capital Balance
R R R R
1-Oct-18 1 200 000
31-Mar-19 195 000 96 000 99 000 1 101 000
30-Jun-19 44 040 1 145 040
30-Sep-19 195 000 44 040 106 920 994 080
31-Mar-20 195 000 79 526 115 474 878 606
30-Jun-20 35 144 913 751
70 288
30-Sep-20 195 000 35 144 124 711 753 895
31-Mar-21 195 000 366 934 60 312 134 688 619 207
30-Jun-21 24 768 643 975
49 536
30-Sep-21 195 000 24 768 145 463 473 743
31-Mar-22 195 000 37 899 157 101 316 642
30-Jun-22 12 666 329 308
25 332
30-Sep-22 195 000 12 666 169 669 146 974
30-Sep-22 146 974 -
1 560 000 506 974 1 200 000
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PART C
Journal entries for Balemi Limited (Lessor)
Dr Cr
R R
1 October 2018
Gross investment in lease (SFP) (195 000 x 8) = 1 560 000 + 146 974 1 706 974
Accumulated depreciation on delivery truck (SFP) (2 290 000 x 4/8 1 145 000
years)
Unearned finance income (SFP) (R 1706 974 – R120 000) 360 000
Delivery truck: Cost (SFP) 2 290 000
Profit on disposal of delivery truck (P/L) [1 200 000 – (2 290 000 55 000
– 1 145 000)]
Disposal of delivery truck and net investment in finance lease
31 March 2019
Unearned finance income (SFP) (From Amort table C2) 96 000
Finance income (P/L) 96 000
Recognition of finance income earned (1 Oct – 31 March)
31 March 2019
Bank (SFP) 195 000
Gross investment in lease (SFP) 195 000
Recognition of lease payment received from lessee
30 June 2019
Unearned finance income (SFP) (From Amort table C2) 44 040
Finance income (P/L) 44 040
Recognition of finance income earned (1 Apr – 30 June)
PART D
QUESTION 7.1
The correct option is (d): account for the lease as a short-term lease, in terms of
IFRS 16, Leases, practical expedient.
QUESTION 7.2
The correct option is (b): six years for both Eggs Aplenty Ltd and Balemi Ltd.
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Dance Ltd is an international dance company based in Johannesburg. The company has
a 31 December financial year-end. During the financial year that ended
31 December 2018, Dance Ltd secured a contract to teach various dancing styles to
school children who attend school within the Loro School Group.
The contract with the Loro School Group was signed on 1 May 2018 and dance lessons
started on 1 June 2018. To fulfil the requirements of the contract, three new dance
instructors were employed.
Dance Ltd entered into a lease agreement to lease three motor vehicles from
KL Costumes Ltd for the three new dance instructors. (KL Costumes Ltd no longer had a
use for the three motor vehicles.) KL Costumes Ltd is a company owned by Mrs Martin,
who is also the majority shareholder of Dance Ltd. The lease of the three motor vehicles
contains a lease as defined in terms of IFRS 16, Leases.
The lease agreement contains the following information:
Fair value of the three motor vehicles on 1 June 2018

(R160 000 x 3) R480 000
Effective date of agreement 1 June 2018
Lease term 4 years
Payment intervals starting on 31 May 2019 Annually in arrears
Instalment per annum R150 000
At the end of the lease term, ownership of the three motor vehicles will be transferred to
Dance Ltd. Legal fees of R4 500 were incurred by Dance Ltd when negotiating the lease
transaction. KL Costumes Ltd paid a commission fee of R6 000 to an agent to enter into
the lease agreement. The lease agreement had been entered into at arm’s length.
KL Costumes Ltd originally purchased the three motor vehicles on 1 June 2016 at a total
cost of R900 000 (R300 000 x 3). On this date, KL Costumes Ltd estimated the total
residual value of the three motor vehicles to be R60 000 (R20 000 x 3). KL Costumes Ltd
provides for depreciation on motor vehicles using the straight-line method over the useful
life of 6 years.
Dance Ltd provides for depreciation on motor vehicles using the straight-line method over
the useful life of the asset. On 1 June 2018, Dance Ltd estimated the remaining useful life
of the three motor vehicles to be 5 years with an estimated residual value of Rnil for each
motor vehicle.
The accounting profit before tax of Dance Ltd for the financial year ended
31 December 2018 after taking all the above transactions into account amounted to
R1 080 000. The current tax expense of Dance Ltd was R186 452, after taking all the
above transactions into account.
KL Costumes Ltd also has a 31 December year-end. The accounting profit before tax of
KL Costumes Ltd for the financial year ended 31 December 2018 after taking all the above
transactions into account amounted to R855 000. The current tax expense of
KL Costumes Ltd was R235 712, after taking all the above transactions into account.
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The SA normal income tax rate is 28%. The South African Revenue Service allows a tax
deduction over five years on motor vehicles using the straight-line method, apportioned
for part of a year. The balance for deferred tax as at 1 January 2018 for Dance Ltd was
Rnil and for KL Costumes Ltd was R17 733 (deferred tax liability). Both Dance Ltd and
KL Costumes Ltd had no non-taxable and non-deductible items for tax purposes for the
financial year ended 31 December 2018.
REQUIRED:
Marks
(a) Prepare the journal entries for the year ended 31 December 2018 in the
accounting records of Dance Ltd to account for the lease of the three motor
vehicles from KL Costumes Ltd.
Journal narrations and tax implications are not required. 13

(b) Disclose the following notes to the annual financial statements of
KL Costumes Ltd for the year ended 31 December 2018:
 Profit before tax
 Net investment in finance leases
 Related parties 20
(c) Calculate the deferred tax balance of KL Costumes Ltd as at

31 December 2018 using the statement of financial position approach.
Indicate whether the balance is a deferred tax asset or liability. 5
(d) Disclose the income tax expense note to the annual financial statements of
KL Costumes Ltd for the year ended 31 December 2018. 4
(e) Multiple-choice questions 8
TOTAL [50]
Please note:
Round all interest rates to four decimal places.
Round all amounts to the nearest rand.
Ignore value-added tax (VAT).
QUESTION 8(e) – MULTIPLE-CHOICE QUESTIONS
The four multiple-choice questions are based on the information given below.
On 1 March 2018, Coffee House Ltd entered into a lease agreement with Fresh Bakers
Ltd, whereby Coffee House Ltd would rent a portion of Fresh Bakers Ltd’s building that is
currently not in use. The renting of the building contains a lease as defined in terms of
IFRS 16, Leases.
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The terms of the lease agreement for the building are as follows:
Lease term 3 years

Effective date of agreement 1 March 2018
Instalment intervals Monthly in arrears
Instalment on 31 March 2018 R60 000
Date of first payment 31 March 2018
Last payment to be made on 28 February 2021
Annual escalation effective on 1 March 10%
Fresh Bakers Ltd incurred legal fees amounting to R3 600 to secure the lease agreement.
The building owned by Fresh Bakers Ltd was acquired on 30 June 2015 for R7 000 000.
The estimated residual value of the building for purposes of depreciation is R2 300 000.
Fresh Bakers Ltd provides for depreciation using the straight-line method over the useful
life of the building of 10 years.
Coffee House Ltd and Fresh Bakers Ltd both have a 30 June year-end.
Answer the following questions by choosing the correct option for each question.
There is only ONE correct answer for each question.
QUESTION 8.1
Which one of the following indicates that a lease is an operating lease?
a) Ownership will be transferred at the end of the lease.

b) The lease term is for a major part of the economic life of the underlying asset.
c) At inception date, the present value of the lease payments amount to at least
substantially all of the fair value of the underlying asset.
d) The underlying asset is of such a specialised nature that only the lessee can use
it without major modifications.
e) Not all risks and rewards incidental to ownership are transferred to the lessee.
(1)
QUESTION 8.2
The operating lease income that will be disclosed in profit before tax of Fresh Bakers Ltd for
the year ended 30 June 2018 amounts to …
a) R264 800.
b) R291 200.
c) R240 000.
d) R198 600.
e) R149 211.
(1)
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QUESTION 8.3
The depreciation that will be disclosed in profit before tax of Fresh Bakers Ltd for the year
ended 30 June 2018 amounts to …
a) R470 000.
b) R470 120.
c) R470 400.
d) R470 300.
e) R471 200.
(1)
QUESTION 8.4
The lease of the office building in the accounting records of Coffee House Ltd will be
accounted for as …
a) a short-term lease using the practical expedient exemption.

b) a low-value lease asset using the practical expedient exemption.
c) a right-of-use asset and lease liability using an interest rate of 10% per annum.
d) a right-of-use asset and lease liability using the incremental borrowing rate of
Coffee House Ltd.
e) an operating lease.
(1)
PART A
DANCE LTD
JOURNAL ENTRIES FOR THE YEAR ENDED 31 DECEMBER 2018
Dr Cr
R R
1 June 2018
Right-of-use asset (SFP) 486 000
Lease liability(SFP) 486 000
Right-of-use asset (SFP) 4 500

Bank (SFP) 4 500
31 December 2018
Depreciation (P/L) 57 225
Accumulated depreciation (SFP) 57 225
Finance costs (P/L) 25 504

Lease liability (SFP) 25 504
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CALCULATIONS
C1 Determine the interest rate implicit in lease (IRIL)
N= 4
PMT = (150 000)
FV = -
PV = 486 000 (480 000 + 6 000)
I= 8.9961%
C2 PV of lease liability
N= 4
PMT = (150 000)
I= 8.9961%
FV = 0
PV = 486 000
C3 Finance costs
486 000 x 8.9961% x 7/12 = 25 504
C4 Depreciation
486 000 + 4 500 = 490 500/(60 x 7) = 57 225
OR
486 000 + 4 500 = 490 500/5 x 7/12 = 57 225
PART B
KL COSTUMES LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 2018
2018
R
Profit before tax includes the following
Income
Finance income 25 504
Expenses
Depreciation (900 000 – 60 000 = 840 000/6 x 5/12) 58 333
Loss on disposal of asset (480 000 – 620 000) 140 000
3. Net investment in finance leases

3.1 Reconciliation of net investment in the finance leases
R
Opening balance -
New leases entered 486 000
Finance income 25 504
Lease instalments received -
Closing balance 511 504
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3.2 Maturity analysis of future lease instalments receivable at reportable date

2019 2020 2021 2022
R R R R
Undiscounted lease payments 150 000 150 000 150 000 150 000
Unearned finance income (38 144) (28 081) (17 113) (5 158)
Net investment in the lease 111 856 121 919 132 887 144 842
4. Related parties
KL Costumes Ltd is related to Dance Ltd as Mrs Martin, who is the owner of
KL Costumes Ltd, is also the majority shareholder of Dance Ltd.
R
Transactions
Finance income from Dance Ltd 25 504
Loss on disposal of asset (140 000)
Outstanding balances
Investment in the lease payable by Dance Ltd 511 504
The related party transaction was entered into at arm's length.
CALCULATIONS
C1 Profit on disposal of assets
R
Cost 900 000
Accumulated depreciation (900 000 – 60 000)/72 x 19 (221 667)
Carrying amount beginning of the year 678 333
Current year depreciation (900 000 – 60 000)/72 x 5 58 333
Carrying amount on date of disposal 620 000
OR
Cost 900 000 900 000
Residual value (60 000)
840 000 900 000
2016 depreciation (840 000/6 x 7/12) (81 667)
2017 depreciation (840 000/6) (140 000)
2018 depreciation (840 000/6 x 5/12) (58 333)
Carrying amount 620 000
C2 Amortisation table
Date Instalment Interest Capital Balance
R R R R
31-May-18 486 000
31 Dec-18 25 504 511 504
31-May-19 150 000 18 217 106 279 379 721
31 Dec-19 19 927 399 648
31-May-20 150 000 14 233 115 840 263 881
31-Dec-20 13 848 277 729
31-May-21 150 000 9 891 126 261 137 620
31-Dec-21 7 222 144 842
31-May-22 150 000 5 158 137 620 -
(486 000 x 8.9961%) x 5/12 = 18 217
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PART C
KL COSTUMES LTD
Deferred tax Carrying Temporary Deferred
amount Tax base difference tax
R R R R
31 December 2018
Net investment in the 511 504 - 511 504 (143 221)
lease
Motor vehicles - 435 000 (435 000) 121 800
Deferred tax liability (21 421)
Tax base of motor vehicles
Cost 900 000
Tax deduction 31 December 2016 (900 000/5 x 7/12) (105 000)
Tax deduction 31 December 2017 (900 000/5) (180 000)
Tax deduction 31 December 2018 (900 000/5) (180 000)
Tax base 31 December 2018 435 000
or 900 000 - 900 000/(5 x 12 = 60 months) x (7 + (12 + 12) = 31 months) = 435 000
PART D
KL COSTUMES LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 2018
2. Income tax expense
2018
Major components of tax expense R
SA normal tax
Current tax 235 712
- Current year
Deferred tax
- Movement in temporary difference (21 421 (Part (c) - 17 733) 3 688
239 400
Tax reconciliation
Accounting profit/profit before tax 855 000
Tax at 28% 239 400
PART D
QUESTION 8.1
The correct option is (e): not all risks and rewards incidental to ownership are transferred
to the lessee.
QUESTION 8.2
The correct option is (a): R264 800.
QUESTION 8.3
The correct option is (c): R470 400
QUESTION 8.4
The correct option is (d): the lease of the office building in the accounting records of
Coffee House Ltd will be accounted for as a right-of-use asset and lease liability using the
incremental borrowing rate of Coffee House Ltd.
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Storage Solutions Ltd is a company based in Gauteng that rents storage space to
companies and individuals. Storage Solutions Ltd has a 31 March financial year-end. The
company decided to expand its business by constructing a new storage facility in Umhlanga,
KwaZulu-Natal. The new storage facility is a qualifying asset as defined in IAS 23, Borrowing
Costs.
Storage Solutions Ltd purchased land in Umhlanga on 1 April 2017 for R2 000 000 cash and
began designing the new storage facility which would be built on the land. The estimated
construction costs of the storage facility amounted to R3 900 000.
The construction costs were funded with a loan from VV Bank. The loan agreement with
VV Bank was concluded on 1 May 2017 with the following terms and conditions:
 The land in Umhlanga and the new storage facility will serve as security to VV Bank
until the loan and interest have been repaid in full.
 The loan amount of R3 900 000 will be advanced in progress payments during the
construction period.
 The loan bears interest at 13% per annum. The interest on the loan will be
compounded annually starting on 31 December 2017.
 The loan and interest will be repaid in full with one instalment on 30 April 2020.
The construction of the storage facility commenced on 1 June 2017 and the storage facility
was ready for use on 28 February 2018. Storage Solutions Ltd decided that the new storage
facility will only be rented out from 1 April 2018.
VV Bank paid the following invoices on behalf of Storage Solutions Ltd during the
construction period:
Invoice Date of payment Amount
R
Invoice 1 1 June 2017 600 000
Invoice 2 30 September 2017 1 800 000
Invoice 3 28 February 2018 1 500 000
3 900 000
Storage Solutions Ltd’s accounting policy is to depreciate assets over their estimated useful
life. The estimated useful life of the new storage facility is 10 years and the estimated
residual value is R800 000.
Employee benefits
The gross salaries per month for all the employees of Storage Solutions Ltd for the financial
year ended 31 March 2018 were as follows:
Employees Gross salaries per month
Directors and managers 180 000
Sales representatives 175 000
Storage personnel
Packers 115 000
Security guards (up to 30 September 2017) 60 000
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All employees received a salary increase of 5% on 1 April 2017 which is included in the
amounts reflected in the table above. A salary increase of 6% will take effect on 1 April 2018.
Storage Solutions Ltd decided to outsource its security service to FDP Security Ltd and as
a result the services of the security guards were no longer required. All the security guards
were retrenched on 1 October 2017 and received two months’ salary as a retrenchment
package.
It is the policy of Storage Solutions Ltd to pay a bonus to all its employees on 30 November,
equal to the gross salary of November. Employees who resign before 30 November forfeit
the bonus payable on 30 November. Bonuses were duly paid on 30 November 2017.
All the employees are entitled to 24 vacation leave days per calendar year (1 January to
31 December). No employees took any leave from 1 January 2018 until 31 March 2018.
Leave not taken during a leave cycle, limited to five days, may be transferred to the next
leave cycle to be used within the next six months. The average number of unused leave
days as at 31 December 2017 was two days per employee. At 31 March 2018, it is estimated
that all the unused leave days will be utilised by the employees.
Leave days are only paid out when employees resign and an amount of R14 300 was paid
to the security guards that were retrenched on 1 October 2017. There are 252 working days
in a financial year. The leave accrual as at 31 March 2017 amounted to R158 200.
REQUIRED:
Marks
(a) Disclose the property, plant and equipment note to the financial statements
of Storage Solutions Ltd for the financial year ended 31 March 2018 . 10
(b) Disclose employee benefits in the profit before tax note to the financial
statements of Storage Solutions Ltd for the financial year ended 31 March 14
2018.
TOTAL [24]
Please note:
Ignore value-added tax (VAT).
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PART A
STORAGE SOLUTIONS LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2018
6. Property, plant and equipment
2018
Land Buildings
R R
Carrying amount at the beginning of the year - -
Cost - -
Accumulated depreciation - -
Additions 2 000 000 3 900 000

Borrowing costs capitalised 158 253
Depreciation (27 152)
Carrying amount at the end of the year 2 000 000 4 031 101
Cost 2 000 000 4 058 253
Accumulated depreciation - (27 152)
Land and storage facility in Umhlanga, KwaZulu-Natal serves as security for the loan
from VV Bank.
CALCULATIONS
C1 Borrowing costs capitalised
Capitalise from 1 June 2017 – 28 Feb 2018
R
Alternative 1
1 June 2017 – 30 September 2017
600 000 x 13% x 4/12 26 000
30 September 2017 – 31 December 2017 (compounding date)
(600 000 + 1 800 000) x 13% x 3/12 78 000
1 January 2018 – 28 February 2018
(600 000 + 1 800 000) + (26 000 + 78 000) = 2 504 000 x (13% x 2/12) 54 253
158 253
Alternative 2
1 June 2017 – 31 December 2017
600 000 x 13% x 7/12 45 500
30 September 2017 – 31 December 2017
1 800 000 x 13% x 3/12 58 500
1 January 2018 – 28 February 2018
(600 000 + 1 800 000) + (45 500 + 58 500) = 2 504 000 x (13% x 2/12) 54 253
158 253
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PART B
STORAGE SOLUTIONS LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 MARCH 2018
After taking the following items into account:
R
Employee benefits
Short-term employee benefits 6 505 290
Termination benefits/retrenchment benefits (60 000 x 2 months) 120 000
CALCULATIONS
C1 Short-term employee benefits
R
Salaries and wages 6 000 000
Directors and managers 180 000 12 2 160 000
Sales reps 175 000 12 2 100 000
Manufacturing personnel
Packers 115 000 12 1 380 000
Security guards 60 000 6 360 000
Bonus
Current year provision for 30 Nov 2018
(180 000 + 175 000 + 115 000 = 470 000) x 1.06 x 4/12 166 067
Reversal of prior year provision for 30 Nov 2017
(180 000 + 175 000 + 115 000 = 470 000) + 60 000 = 530 000 x 4/12 (176 667)
Bonus paid in current year on 30 Nov 2017
(180 000 + 175 000 + 115 000) 470 000
Vacation leave
Current year leave accrual 189 790
(470 000(180 000 + 170 000 + 115 000 ) x 12 months/252 days x 1.06
x 8 days (2 + 6 days))
Reversal of prior year leave accrual (158 200)
Leave paid out in current year 14 300
6 505 290
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Investco Ltd is a company that sells online and paper magazines and has a 31 December
financial year-end.
Investment in Tego Ltd debentures
On 1 January 2018, Investco Ltd purchased 10 000 12% debentures in Tego Ltd at their
fair value of R550 per debenture. The coupon interest on the debentures is payable on
31 December of each year. The debentures were originally issued by Tego Ltd on
1 January 2016 at their face value of R600 each. The principal amount is mandatorily
redeemable on 31 December 2022 at face value and as a result, the future cash flows
pertaining to the debentures are solely interest and capital.
On 1 January 2018, Investco Ltd paid transaction costs amounting to R150 000 to
conclude the investment in the debentures of Tego Ltd.
The investment in the debentures of Tego Ltd is held within a business model whose
objective is to collect contractual cash flows of interest and principal on specified dates.
Investco Ltd’s chief financial officer is of the opinion that the debentures should be
classified and measured at fair value through profit or loss since the value of the
debentures is expected to increase over time.
Investment in Yellow Star Ltd shares
On 1 July 2018, Investco Ltd acquired 2 000 shares in Yellow Star Ltd at a price of R12
per share. The investment in Yellow Star Ltd represents 2% of the issued shares of
Yellow Star Ltd. On the same day, Investco Ltd paid transaction costs of R0,20 per share
to acquire the shares in Yellow Star Ltd. On 31 December 2018, the market value of one
Yellow Star Ltd share amounted to R13,50.
Trade receivables
Investco Ltd uses the simplified approach when assessing expected credit losses. At
reporting date, Investco Ltd’s trade receivables amounted to R6 600 000. Trade receivables
do not include a significant financing component.
Age analysis of trade receivables at 31 December 2018 R

Current .............................................................................................. 3 600 000
30 days .............................................................................................. 1 800 000
60 days .............................................................................................. 1 200 000
6 600 000
Based on past experience (adjusted for forward looking estimates), Investco Ltd expects
that, over the expected lifetime of the trade receivables, the default rate of the trade
receivables will be as follows:
Trade receivables Default rate

Current 0.2%
30 days 0.5%
60 days 1%
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REQUIRED:
Marks
(a) Discuss, in terms of IFRS 9, Financial Instruments, whether you agree with
the opinion of Investco Ltd’s chief financial officer regarding the classification
and measurement of the investment in the debentures of Tego Ltd. 5
(b) Prepare all journal entries required to account for the investment in the
debentures of Tego Ltd, in the accounting records of Investco Ltd, for the
financial year ended 31 December 2018. 11
(c) Prepare all journal entries required to account for the investment in
Yellow Star Ltd shares, in the accounting records of Investco Ltd, for the
financial year ended 31 December 2018. 7
(d) Calculate the balance of the expected credit loss allowance for trade
receivables in the statement of financial position of Investco Ltd as at
31 December 2018. 3
TOTAL [26]
Please note:
Ignore income tax and value-added tax (VAT).
Round the effective interest rate to two decimal places.
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PART A
The investment in debentures of Tego Ltd meets the definition of a financial asset as it
provides Investco Ltd with the contractual right to receive cash from Tego Ltd.
In terms of IFRS 9 par 4.1.1, financial assets must be classified and subsequently measured
on the basis of the entity’s business model for managing the financial asset and the
contractual/cash flow characteristics of the financial asset.
A financial asset must be measured at amortised cost if both of the following conditions are
met (IFRS 9.4.1.2):
a) The asset is held within a business model whose objective is to hold assets in order to
collect contractual cash flows.
b) The contractual terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount outstanding.
The debentures are held within a business model whose objective is to hold assets in order
to collect contractual cash flows; as a result, the first condition is met.
The cash flows are made up of interest and principal only at specified dates; as a result, the
second condition is also met.
Conclusion
The investment should be classified as a financial asset subsequently measured at
amortised cost as both the conditions are met (IFRS 9 par. 4.1.2).
As a result, I do not agree with the chief financial officer’s opinion with regard to the
classification and subsequent measurement of the investment in debentures.
PART B
Dr Cr
R R
1 January 2018
Investment in debentures (SFP) 5 650 000
Bank (SFP) (10 000 x R550) + R150 000 5 650 000
Initial recognition of bonds at fair value, plus transaction costs
31 December 2018
Bank (SFP) (10 000 x R600 x 12%) 720 000
Investment in debentures (SFP) (R773 280 – R720 000) 53 280
Finance income (P/L) (R5 650 000 x 13.69%) 773 280
Recognition of coupon interest received and effective interest
income earned
ALTERNATIVE FOR JOURNAL 2
Investment in debentures (SFP) 773 280
Finance income (P/L) (R5 650 000 x 13.69%) 773 280
Recognition of effective finance income earned
Bank (SFP) (10 000 x R600 x 12%) 720 000
Investment in debentures 720 000
Recognition of coupon payment received
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CALCULATIONS
C1 Effective interest rate
PV = -5 650 000 (5 500 000 + 150 000)
FV = 6 000 000 (10 000 x R600)
PMT = 720 000 (10 000 x R600 x 12%)
n =5
i = 13.69% per annum
PART C
Dr Cr
R R
1 July 2018
Investment in Yellow Star Ltd shares (SFP) (2000 shares x R12) 24 000
Transaction costs (P/L) (2000 x 0.20) 400
Bank (SFP) 24 400
Recognition of investment in shares and transaction costs separately
in P/L
31 December 2018
Investment in Yellow Star Ltd shares (SFP) (13.5 x 2000) – (R12 x 2 000) 720 000
Fair value adjustment on trading portfolio (P/L) 773 280
Recognition of movement in fair value at year-end
PART D
R
Current: R3 600 000 x 0.2% 7 200

30 days: R1 800 000 x 0.5% 9 000
60 days: R1 200 000 x 1% 12 000
Expected credit loss on trade receivables as at 31 December 2018 28 200
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FAC3762/108/0/2020

Tutorial Letter 108/0/2020

Department of Financial Accounting

This is an online year module and therefore it is available on myUnisa. However,

CONTACT DETAILS ...................................................................................................................... 3

EXAMINATION PREPARATION AND APPROACH ...................................................................... 5

QUESTION BANK .......................................................................................................................... 8

012 429 4250 or 012 429 4246

Mrs M Scott Simon Radipere Building, 2-59 012 429 3943

1.1 ABBREVIATIONS USED IN THE STUDY MATERIAL

The following abbreviations are used in the study material:

SP/LOCI statement of profit or loss and other comprehensive income

EXAMINATION PREPARATION AND APPROACH

Make that you have received the following study material:

9. Tutorial Letter 201/0/2020

CHOICE OF CORRECT PAPER: FAC3762

FORMAT OF THE EXAMINATION PAPER

SUPPLEMENTARY EXAMINATIONS AND RE-MARKING OF SCRIPTS

- Supplementary examinations will be conducted in January/February 2021 for students

RE-MARKING OF EXAM SCRIPTS

Question Topic Marks Minutes Done

QUESTION 1 (50 marks) (90 minutes)

EXTRACT FROM THE STATEMENTS OF FINANCIAL POSITION AS AT

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR

CONSOLIDATION JOURNAL ENTRIES TO ELIMINATE THE INTRAGROUP LOAN AND

Other income/Interest received 716

Trade and other payables 716

Other income/Interest received 716

Trade and other payables 716

Total goodwill (45 680 + 102 769) 148 449

SMITH LTD GROUP

Dividend paid (120 000) (40 000)C6 (160 000)

C4 & C5 Profit attributable to parent and NCI

Warner Ltd - subsidiary 564 700

Bancroft Ltd - sub-subsidiary 138 674

Total consolidated profit 1 610 921

Profit attributable to the parent C5 1 312 930

C6 Dividend paid – NCI

Log on to myUnisa and navigate to the Lessons Tool for a recording on

QUESTION 2 (46 marks) (83 minutes)

A business combination is a transaction or other event in which an acquirer obtains control

On 1 December 2016, Chase Ltd acquired control over Marshall Ltd.

Thus, this transaction meets the definition of a business combination.

CHASE LTD GROUP

Other comprehensive income

Profit for the year attributable to:

Total comprehensive income attributable to: 1 737 868

Rubble Ltd (associate)(gain or bargain purchase)

Rubble Ltd (associate since acq to beg of current year)

Marshall Ltd (sub) (gain on bargain purchase)

Marshall Ltd (sub since acq to beg of current year)

C1 – Analysis of owner’s equity of Marshall Ltd

UNREALISED PROFIT INCLUDED IN CLOSING INVENTORY

C4 - Analysis of owner’s equity of Rubble Ltd - ordinary shares

Since acquisition to the beginning of

Current year 281 483 98 5199

Other comprehensive income, fair value

Log on to myUnisa and navigate to the Lessons Tool for a recording on

QUESTION 3 (20 marks) (36 minutes)