FAC2602/202/2/2011

SCHOOL OF ACCOUNTING SCIENCES DEPARTMENT OF FINANCIAL ACCOUNTING ACCOUNTING 2, MODULE FAC2602 SELECTED ACCOUNTING STANDARDS AND SIMPLE GROUP STRUCTURES

TUTORIAL LETTER 202/2/2011 FOR FAC2602 (SECOND SEMESTER)

Dear Student 1. GENERAL Attached hereto please find the solution to assignment 03/2011 as well as the two previous examinations papers and solutions. It is in your own interest to work through the suggested solutions in conjunction with the assignments and your own answers. Revise your tutorial matter and the assignments regularly. By repeatedly working through these questions, you will improve your knowledge of the subject. You can make use of a sms to ask your FAC2602 lecturers academic questions. Use 083 142 10119 number (this is a special sms number). Format of sms must be: FAC2602 student number message. 2. EXAMINATION TECHNIQUE The following general problems, arising from previous examinations, were evident. Study these carefully in order to improve your examination technique. 2.1 Each of the three questions in the October 2011 exam paper should be answered on a separate page and numbered clearly. The examination instructions in this regard are specific. 2.2 Illegible handwriting made marking difficult. As a result marks may have been lost.

2 2.3 In many instances, accounts, statements or calculations were incomplete or not provided with identifiable headings. We suggest that calculations are shown on the left hand side page and answers to the questions on the right hand side page of your examination book. Clear, logical and legible calculations to substantiate an answer to a question are essential in an examination. Unfortunately a disregard for this still results in marks being lost. 2.4 Try not to deviate from the suggested time-table. If you are unable to complete a question in the suggested time, leave the question and carry on with the next question. The reason for this is to obtain the maximum marks per question in the minimum time. 2.5 First read through the required section of each question before you read through the contents of the question. Make sure you answer what is required. 2.6 Do not waste unnecessary time trying to balance financial statements, as these totals usually count only a few marks. 2.7 When drafting annual financial statements, start with the framework of the statement which is required. Then do the calculations and complete the framework by using the calculated and given information. 2.8 A pocket calculator must be used but the calculation must be shown to ensure that you still earn some marks, even if you have made a mistake. (No programmable calculators with alpha-numeric keyboards will be allowed). Yours faithfully Ms AA van Rooyen Ms S Gani Ms M Pholo Mr A Rampershad LECTURES: ACCOUNTING II (FAC2602) CONTACT DETAILS Tel no: Email: (012) 429-4234 fac2602@unisa.ac.za SOLUTION ASSIGNMENT 3/2011 OCTOBER 2010 EXAMINATION PAPER SOLUTION OCTOBER 2010 EXAMINATION PAPER MAY 2011 EXAMINATION PAPER SOLUTION MAY 2011 EXAMINATION PAPER

ANNEXURE A: ANNEXURE B: ANNEXURE C: ANNEXURE D: ANNEXURE E:

3 ANNEXURE A: SOLUTION ASSIGNMENT 03/2011 QUESTION 1 1.1

FAC2602/202/2

VIOLET LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2011 Gross profit [700 000^ + 600 000^ + 880 000 880 000 (45 000 x 25/125) ] Other expenses (80 000^ + 65 000^ 16 000 + 480 000^ + 82 000^) Finance costs [7 500^ + (3 500^ 2 100) ] Profit before tax Income tax expense (104 888^ + 58 660^) Profit for the year Other comprehensive income Total comprehensive income for the year Profit attributable to: Owners of the parent^ Non-controlling interest^ Total comprehensive income attributable to: Owners of the parent^ Non-controlling interest^ R 1 291 000 (691 000) (8 900) 591 100 (163 548) 427 552 427 552

410 868 16 684 427 552 410 868 16 684 427 552

1.2 1.2.1 Property, plant and equipment [(800 000^ + 600 000^ + (600 000 ^+ 400 000^ 80 000 ) (320 000 ^+ 175 000^ 8 000 16 000) ] Inventory (60 000^ + 45 000^ 9 000 ) Retained earnings (577 000^ + 2 700 Non-controlling interest (25 000 + 300 + 10 000 + 410 868^ 50 000 ) 2 000 )

1 849 000 96 000 940 568 49 984

1.2.2 1.2.3 1.2.4

+ 16 684

4 QUESTION 1 (continued)
Calculations 1. Analysis of ordinary shareholders equity of Tulip Ltd Violet Limited 90% At Since acquisition acquisition R R 108 000 45 000 72 000 225 000 250 000 25 000 Noncontrolling interest 10% R 12 000 5 000 8 000 25 000

At acquisition Share capital Revaluation surplus (500 000 450 000) Retained earnings Investment in Tulip Ltd Goodwill Since acquisition to beginning of current year Retained earnings Balance 1/4/08 At acquisition Profit on sale Depreciation (80 000 x 20% x 6/12) Revaluation surplus (150 000 balance 1/4/10 50 000 balance at acquisition) Current year Profit for the year Calculation 2 Depreciation (80 000 x 20%) Ordinary dividend (120 000/ 3 x 50c)

Total R 120 000 50 000 80 000 250 000

3 000 155 000 (80 000) (80 000) 8 000 100 000

2 700

300

90 000

10 000

166 840 150 840 16 000 (20 000) 499 840

150 156

16 684

(18 000) 134 856 RE 90 000 OCE

(2 000) 49 984

2.

Profit of Tulip Limited R 600 000 (240 000) (3 500) (82 000) (65 000) 209 500 (58 660) 150 840

Gross profit Administration fees paid Interest paid Other expenses Depreciation Profit before tax Income tax expense

5 QUESTION 2

FAC2602/202/2

ICE LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 AUGUST 2010 Revenue (800 000 + 860 000 250 000) Cost of sales Opening inventory (60 000 + 78 000 10 000) Purchases (300 000 + 290 000 250 000) Closing inventory (66 000 + 84 000 11 000) Gross profit Other expenses [284 600 + 237 400 + 22 000 + 15 000 (20 000 x 20%)] Finance cost [(3 600 1 200) + 5 000] Profit before tax Income tax expense (62 810 + 86 710) Profit for the year Other comprehensive income Total comprehensive income for the year Profit attributable to: Owners of the parent^ Non-controlling interest (42 258 R 1 410 000 (329 000) 128 000 340 000 468 000 (139 000) 1 081 000 (555 000) (7 400) 518 600 (149 520) 369 080 369 080 ^ ^ ^ ^

+ 6 000

2 000 )

322 822 46 258 369 080 322 822 46 258 369 080

Total comprehensive income attributable to: Owners of the parent^ Non-controlling interest

6 QUESTION 2 (continued) ICE LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2010
Ordinary shares R 250 000 Preference shares R 180 000 Revaluation surplus R ^140 000 Retained earnings R 46 400 ^322 822 ^(50 000) ^(18 000) 250 000 180 000 140 000 301 222 Total R 616 400 322 822 (50 000) (18 000) 871 222 Noncontrolling interest R 84 600 46 258 ^(2 100) ^(6 000) 122 758 Total equity R 701 000 369 080 (52 100) (24 000) 993 980

Balance at 31/8/2009 Total comprehensive income for the year Ordinary dividends Preference dividends Balance at 31/8/2010

100 000 + 40 000 34 000^ - 20 000 (profit on machinery ) + (20 000 7 000 + 7 600 + 10 000 + 60 000

x 20% x 6/12 depreciation) + 30 400^

7 QUESTION 2 (continued) Calculations 1. Analysis of ordinary shareholders equity of Snow Ltd

Ice Limited 80%* At Since acquisition acquisition R ^28 000 ^30 000 2 000 R

FAC2602/202/2

Total At acquisition Share capital Investment in Snow Ltd Goodwill Since acquisition to beginning of current year Retained earnings Balance 1/9/2009 Unrealised profit in closing inventory (60 000 x 20/120) Revaluation surplus Current year Profit for the year Calculation 3 Unrealised profit in opening inventory Unrealised profit in closing inventory (66 000 x 20/120) Ordinary dividend Preference dividend R 35 000

Noncontrolling interest 20% R 7 000

38 000 48 000 ^(10 000) 50 000

30 400 RE

7 600

40 000 OCE

10 000

211 290 212 290 ^10 000 ^(11 000) (10 500) (10 000) 313 790

169 032 RE

42 258

(8 400) RE (8 000) RE 40 000 OCE 183 032 RE

(2 100) (2 000) 62 758

R35 000 = 70 000 shares 50c

56 000 shares = 80% 70 000 shares

8 QUESTION 2 (continued) 2. Analysis of preference shareholders equity of Snow Ltd

Ice Limited 40%* At Since acquisition acquisition R ^40 000 ^40 000 Nil R Noncontrolling interest 60% R 60 000

Total R At acquisition Share capital Investment in Snow Ltd Goodwill Current year Profit attributable Dividend paid 100 000

10 000 (10 000) 100 000

4 000 (4 000) -

6 000 (6 000) 60 000

* R100 000 = 50 000 shares R2

3. Profit of Snow Limited Sales Cost of sales Opening inventory Purchases Closing inventory Gross profit Management fee Other expenses Depreciation Interest paid - debentures - bank overdraft - loan Income tax expense Profit for the year

20 000 shares = 40% 50 000 shares

R ^860 000 (284 000) ^78 000 ^290 000 ^(84 000) 576 000 ^(12 000) ^(237 400) ^(15 000) ^(3 600) ^(5 000) ^(4 000) 299 000 ^(86 710) 212 290

9 QUESTION 3

FAC2602/202/2

Share capital Ordinary shares Goodwill Investment in Snow Limited Non-controlling interest Share capital Preference shares Investment in Snow Limited Non-controlling interest Elimination of shareholders equity of Snow Ltd at acquisition Retained earnings Ice Ltd Plant and machinery Snow Ltd Accumulated depreciation - Snow Ltd Depreciation Ice Ltd Retained earnings Ice Ltd Elimination of unrealised profits and depreciation associated with the sale of the machine Cost of sales/Gross profit Snow Ltd Inventory Ice Ltd Retained earnings Opening balance Snow Ltd Cost of sales/Gross profit Snow Ltd Elimination of unrealised profits in closing and opening inventories

Dr R 35 000 2 000

Cr R

30 000 7 000 100 000 40 000 60 000

20 000 20 000 6 000 4 000 2 000

11 000 11 000 10 000 10 000

10 QUESTION 4 TOMBA LTD STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 2007 R Cash flow from operating activities Cash receipts from customers Cash paid to suppliers and employees Net cash generated by operations Dividends paid (calculation 3) Normal tax paid (calculation 4) Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity Replacement of machinery Proceeds from sale of non-current assets Proceeds from sale of investments (4 800 800) Net cash outflow from investing activities Cash flow from financing activities Redemption of long-term loan Net cash outflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents beginning of year Cash and cash equivalents end of year Calculations 1.
Balance Sales *Balancing figure

353 800 (248 200) 105 600 (80 000) (10 600) 15 000 (16 000) (16 000) 5 000 4 000 (7 000) (20 000) (20 000) (12 000) ^28 000 ^16 000

Cash receipts from customers

b/d R ^30 800 Bank* ^359 000 Balance 389 800 c/d R 353 800 ^36 000 389 800

2.
Balance (inventory) Bank* Balance (payables)

Cash paid to suppliers and employees

b/d c/d R ^38 000 Balance (payables) 248 200 Cost of sales ^14 800 Administrative and selling expenses Balance (inventory) 301 000 b/d R ^22 600 ^152 400 ^96 000 ^30 000 301 000

c/d

*Balancing figure

11 QUESTION 4 (continued) 3. Dividends paid Unpaid amounts at beginning of year Amounts debited to income Unpaid amounts at end of year

FAC2602/202/2

R ^20 000 100 000 ^(40 000) 80 000

4.

Taxation paid Unpaid amounts at beginning of year Amounts debited to income Unpaid amounts at end of year

^7 600 7 830 ^(4 830) 10 600

R ^11 000 ^29 600 40 600

Balance (inventory) Bank (purchases)* *Balancing figure

Machinery at cost price R b/d ^24 600 Bank (sold) 16 000 Balance 40 600

c/d

12 QUESTION 5 SHARP LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2008 R Cash flow from operating activities Profit before tax (calculation 1) Adjustments for: Profit on sale of equipment Other income dividends received Depreciation Finance costs Increase in working capital (calculation 2) Decrease in inventory Increase in trade and other payables Increase in trade and other receivables (62 500 2 500) Net cash generated by operations Dividends received (93 750 18 750) Interest paid (25 000 6 250) Dividends paid (calculation 3) Normal tax paid (calculation 4) Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity Replacement of equipment (given) Investment to expand production capacity Additions to equipment (calculation 5) Proceeds on sale of non-current assets (250 000 + 18 750 profit) Purchase of investments (875 000 687 500) Net cash outflow from investing activities Cash flow from financing activities Proceeds on issue of shares (875 000 + 350 000) (calculation 6 and 7) Net cash inflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents beginning of year Cash and cash equivalents end of year
^ 493 750 ^ (18 750) ^ (93 750) ^503 750 ^25 000

910 000 162 500 16 250 206 250 (60 000) 1 072 500 75 000 (18 750) (218 750) (201 250) 708 750 (1 250 000) ^ (1 250 000) (1 406 250) ^ (1 406 250) 268 750 (187 500) (2 575 000)

1 225 000 1 225 000 (641 250) ^106 250 ^ (535 000)

13 QUESTION 5 (continued) Calculations 1. Profit before tax Sales Cost of sales Gross profit Profit on sale of equipment Other income dividends received Distribution expenses Administration expenses Other expenses Finance costs Profit before tax 2. Change in working capital Decrease in inventory (78 750 62 500) Increase in trade and other receivables (375 000 312 500) Decrease in prepaid expenses (12 500 10 000) Increase in trade and other payables (250 000 43 750)

FAC2602/202/2

R 2 187 500 (875 000) 1 312 500 18 750 93 750 1 425 000 (125 000) (562 500) (218 750) (25 000) 493 750

^16 250 ^(62 500) ^2 500 ^206 250

162 500 3. Dividends paid Unpaid amounts at beginning of year Amounts debited against profit Unpaid amounts at end of year

^62 500 ^312 500 ^ (156 250)

218 750 4. Taxation paid Unpaid amounts at beginning of year Amounts debited against profit Unpaid amounts at end of year

^75 000 ^207 500 ^ (81 250)

201 250 Property, plant and equipment at carrying amount R b/d ^2 250 000 Sales at carrying amount Balance Revaluation (187 500 125 000) ^62 500 Depreciation Replacement ^1 250 000 (500 000 + 3 750) Additions (2 656 250 1 250 000) ^1 406 250 Balance 4 968 750 5.

R
^250 000 ^503 750

c/d ^4 215 000 4 968 750

14 QUESTION 5 (continued) 6. Balance (given) Issued share capital R c/d 3 125 000 Balance (given) Capitalisation issue *
(1 875 000 5)

b/d

R 1 875 000 375 000 875 000 3 125 000

Issue to public (balancing figure) 3 125 000 7. Balance (given) Capitalisation issue * c/d Share premium R 475 000 Balance (given) 375 000 Issue to public
(875 000 x 40%)

b/d

R 500 000 350 000 850 000

850 000

15 ANNEXURE B: OCTOBER 2010 EXAMINATION PAPER This paper consists of 6 pages. NB: 1. 2. 3. 4. 5. 6. This paper consists of FOUR (4) questions. All questions must be answered. Basic workings, where applicable, must be shown.

FAC2602/202/2

Make sure that you are handed the correct examination answer book (blue for accounting) by the invigilator. Each question answered must be started on a new (separate) page. PROPOSED TIMETABLE: Subject Group financial statements Earnings per share Leases Time value of money Marks 34 20 29 17 100 Time in minutes 41 24 35 20 120

Question no. 1 2 3 4

16 QUESTION 1 (34 marks) (41 minutes) The following balances were obtained from the records of Kick Limited and its subsidiary Goal Limited for the year ended 30 June 2010: Kick Goal Limited Limited R R 800 000 Sales ............................................................................................. 600 000 550 000 Cost of sales ................................................................................. 450 000 Interest received Soccer Bank .................................................. 40 000 85 000 Staff cost ....................................................................................... 48 000 30 000 Auditors remuneration ................................................................. 22 000 24 000 Interest paid on loans ................................................................... 16 000 12 000 Depreciation machinery ............................................................. 18 000 28 000 Repairs ......................................................................................... 23 760 19 880 Income tax expense ..................................................................... 17 427 80 000 Dividends paid .............................................................................. 400 000 Share capital ordinary shares of R1 each ................................. 200 000 75 000 Retained earnings 1 July 2009 .................................................. 68 000 Additional information 1. Goal Limited became a subsidiary of Kick Limited on 1 November 2009, when Kick Limited acquired 80% of the shares and voting rights in Goal Limited at a cost of R240 000. It is group policy to show goodwill at cost less impairment in the financial statements. At year end the goodwill was not impaired. The profit (income and expense items) of Goal Limited was earned evenly throughout the year except when otherwise stated. During the period July 2009 to October 2009 the sales of Goal Limited were R37 500 per month. From November 2009 the sales increased by 50% and stayed the same until the end of June 2010. Gross profit percentage remained unchanged at 25% for the year. Goal Limited received interest on a fixed deposit. Both the investment and the accrued interest were paid out in full by Soccer Bank on 31 October 2009. Included in the staff cost of Goal Limited are bonuses of R12 000 paid to staff on 15 December 2009. An additional R10 000 was paid for audit work done by the auditors of Goal Limited during August 2009. The auditors also do the accounting work for both companies. Both companies acquired loans on 1 December 2009.

2. 3.

4. 5. 6. 7.

17 QUESTION 1 (continued) 8. 9. 10.

FAC2602/202/2

The repairs of both companies increased by 20% during the last six months of the financial year. On 30 June 2010 Goal Limited declared a dividend of R5 000. This transaction has not been taken into account by the two companies. Assume a taxation rate of 28% and that all income/expenses are taxable/tax deductable.

REQUIRED: a) b) Calculate the goodwill that will appear in the consolidated statement of financial position on 30 June 2010. Do all calculations to the nearest rand. (21) Draft the consolidated statement of comprehensive income of Kick Limited and its subsidiary for the financial year ended 30 June 2010 according to the requirements of the Companies Act and Generally Accepted Accounting Practice. Include only the postacquisition profit after tax in the profit after tax of the group. Ignore taxation on unrealised profits and/or losses as well as capital gains tax. Do all calculations to the nearest rand. No notes are required. (13)

QUESTION 2 (20 marks) (24 minutes) No longer part of the FAC2602 2011 syllabus. QUESTION 3 (29 marks) (35 minutes) No longer part of the FAC2602 2011 syllabus. QUESTION 4 (17 marks) (20 minutes) No longer part of the FAC2602 2011 syllabus.

18 ANNEXURE C: SOLUTION OCTOBER 2010 EXAMINATION PAPER QUESTION 1 a) Goodwill R3 539. Refer calculations 1 and 2. b) KICK LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2010 Revenue (800 000^ + 450 000^) Cost of sales (550 000^ + 337 500^) Gross profit Other expenses (85 000^ + 36 000 + 30 000^ + 8 000 + 12 000^ + 12 000 + 28 000^ + 16 560 ) Finance cost (24 000 + 16 000^) Profit before tax Income tax expense (19 880^ + 6 703^) Profit for the year Other comprehensive income Total comprehensive income for the year ^Profit attributable to: Owners of the parent (68 357 3 447) ^Non-controlling interest (calculation 2) R 1 250 000 (887 500) 362 500 (227 560) (40 000) 94 940 (26 583) 68 357 68 357

64 910 3 447 68 357

^Total comprehensive income attributable to: Owners of the parent (68 357 3 447) Non-controlling interest (calculation 2)

64 910 3 447 68 357

19 QUESTION 1 (continued) Calculations 1. Profit for the period 1 July 2009 to 31 October 2009 Sales (37 500 x 4) Cost of sales (450 000/600 000 x 150 000) or (150 000 x 0,75) Interest received Staff cost [(48 000^ 12 000 ) x 4/12 ^] Auditors remuneration [(22 000^ 10 000 ) x 4/12^] + 10 000^ Depreciation (18 000 x 4/12^) Repairs ** Income tax expense (38 300 x 28%) Profit after tax ** Repairs July to December (6 months x 100%) January to June (6 months x 120%)

FAC2602/202/2

R 150 000 (112 500) 40 000 (12 000) (14 000) (6 000) (7 200) 38 300 (10 724) 27 576

% 600 720 1 320

July to October November to June or

= [23 760 x 600/1320] x 4 months = 7 200 = 23 760 7 200 = 16 560

x + 1,2x = 23 760 2,2x = 23 760 x = 10 800 for 6 months thus 7 200

for 4 months

20 QUESTION 1 (continued) 2. Analysis of shareholders equity of Goal Ltd Kick Limited 80% At Since acquisition acquisition R 160 000 54 400 22 061 236 461 240 000 3 539 13 790 (4 000) 9 790 R Noncontrolling interest 20% R 40 000 13 600 5 515 59 115

Total At acquisition Share capital Retained earnings Profit 1 July to 31 October 2009 Investment in Goal Ltd Goodwill Current year Profit after tax Dividend declared R 200 000 68 000 27 576 295 576

17 237 (5 000) 307 813

3 447 (1 000) 61 562

3. Profit after tax of Goal Limited which should be included in the consolidated statement of comprehensive income of the group R Sales (600 000 150 000) 450 000 Cost of sales (450 000 112 500) (337 500) Staff cost (48 000 12 000) (36 000) Auditors remuneration (22 000 14 000) (8 000) Interest paid (16 000) Depreciation (18 000 6 000) (12 000) Repairs (calculation 1) (16 560) 23 940 Income tax expense (23 940 x 28%) (6 703) 17 237 QUESTION 2 No longer part of the FAC2602 2011 syllabus. QUESTION 3 No longer part of the FAC2602 2011 syllabus. QUESTION 4 No longer part of the FAC2602 2011 syllabus.

21 ANNEXURE D: MAY 2011 EXAMINATION PAPER This paper consists of six (6) pages. NB: 1. 2. 3. 4. 5. 6. This paper consists of THREE (3) questions. Answer all the questions. Show all the basic workings, where applicable.

FAC2602/202/2

Make sure that you get the correct examination answer book (blue for Accounting) from the invigilator. Start the answer to each question on a new (separate) page. PROPOSED TIMETABLE Topic Group financial statements Statement of cash flows Short questions Marks 60 20 20 100 Time in minutes 72 24 24 120

Question No. 1 2 3

22 QUESTION 1 (60 marks) (72 minutes) The following balances were extracted from the financial records of Platinum Limited and Coal Limited on 31 March 2011: Platinum Limited R 720 000 220 000 86 420 98 500 65 480 Coal Limited R 162 700 180 000 59 500 158 700 234 300 200 000 100 000 134 312 70 000 66 000 70 000 96 800 403 000 5 300 223 000 42 000 15 400 35 812 10 000 24 000

Land and buildings at cost/valuation ................................................. Plant and equipment at cost .............................................................. Trade and other receivables .............................................................. Inventories ......................................................................................... Cash and cash equivalents ............................................................... Investments in Coal Limited 190 000 80 000 ordinary shares at fair value (cost price R190 000) ............ 40 000 12% cumulative preference shares at fair value 46 000 (cost R46 000) ................................................................................ 35 000 12% R100 debentures (purchased on 1 April 2007) ....................... 300 000 Ordinary shares of R2 each .............................................................. 12% cumulative preference shares of R1 each ................................ 224 726 Retained earnings 1 April 2010 ...................................................... 20 000 Surplus on revaluation of property 1 April 2010 ............................. 350 000 Long-term loan .................................................................................. 90 000 Accumulated depreciation of plant and equipment ........................... 150 000 12% R100 debentures ....................................................................... 167 770 Trade and other payables ................................................................. Sales .................................................................................................. 1 033 000 22 500 Other income ..................................................................................... 8 000 Interest income .................................................................................. 619 800 Cost of sales ...................................................................................... 153 000 Other expenses ................................................................................. 20 000 Interest expense ................................................................................ 75 796 Income tax expense .......................................................................... 36 000 Ordinary dividends paid ..................................................................... Preference dividends paid ................................................................. Additional information 1.

Platinum Limited purchased 80 000 ordinary shares and 40 000 cumulative preference shares in Coal Limited on 1 April 2006. Each ordinary share of Coal Limited carries one vote. On that date, Coal Limited's shareholders interest was compiled as follows: R Ordinary shares 200 000 Preference shares 100 000 Retained earnings 30 000

23 QUESTION 1 (continued)

FAC2602/202/2

At the date of acquisition, there was no arrear preference dividend and the carrying amount of the assets and liabilities was equal to their fair value. It is group policy to show goodwill at cost less impairment in the consolidated financial statements. Goodwill was not impaired during the current year. 2. On 1 April 2009, Coal Limited purchased equipment from Platinum Limited at a cost of R80 000 inclusive of profit of an amount of R10 000. Both companies depreciate equipment at 10% per annum on cost. Depreciation for the year is included in Other expenses. Since April 2006, Platinum Limited has purchased some of its inventories from Coal Limited at the normal selling price, determined by Coal Limited at cost price plus 25%. In respect of the year ended 31 March 2011, total sales from Coal Limited to Platinum Limited amounted to R150 000. On 1 April 2010, Platinum Limiteds inventories on hand bought from Coal Limited, were valued at R60 000. On 31 March 2011, Platinum Limiteds Coal Limited, amounted to R40 000. closing inventories purchased from

3.

4. 5. 6. 7.

On 1 April 2010, the preference dividends for the previous year were in arrears. All arrear preference dividends were declared and paid on 31 March 2011. On 31 March 2011, there was no arrear interest on debentures.

REQUIRED (a) Draft the consolidated financial statements (statement of comprehensive income, statement of changes in equity and statement of financial position) of Platinum Limited and its subsidiary for the year ended 31 March 2011, in terms of the requirements of the Companies Act and Generally Accepted Accounting Practice. Ignore comparative figures and the taxation effect of unrealised profits and/or losses as well as capital gains tax. Do all the calculations to the nearest Rand. Notes to the financial statements are not required. (47) Draft the consolidation journal entries on 31 March 2011 to eliminate the following: the shareholders equity of Coal Limited at acquisition the transactions associated with the sale of the assets and inventory the interest on debentures the preference and ordinary dividends Journal narrations are not required. (13)

(b)

24 QUESTION 2 (20 marks) (24 minutes) The following balances were obtained from the financial records of Black Arrow Limited as at 30 April: BLACK ARROW LIMITED 2011 R Debits Land and buildings at valuation ....................................................... Plant at cost ..................................................................................... Furniture at cost ............................................................................... Inventories ....................................................................................... Investments at fair value.................................................................. Trade receivables ............................................................................ Bank................................................................................................. 1 800 000 1 500 000 380 000 76 000 66 000 278 000 4 100 000 2010 R 1 500 000 1 100 000 150 000 54 000 36 000 178 000 26 000 3 044 000

Credits Share capital .................................................................................... Retained earnings ........................................................................... Long-term loan (interest free) .......................................................... Trade payables ................................................................................ Short-term portion of long-term loan ............................................... Bank overdraft ................................................................................. SA Revenue Service ....................................................................... Shareholders for dividends .............................................................. Surplus on revaluation of property .................................................. Accumulated depreciation plant ................................................... Accumulated depreciation furniture ..............................................

1 400 000 700 000 950 000 86 000 50 000 54 000 180 000 180 000 250 000 196 000 54 000 4 100 000

1 200 000 460 000 700 000 65 000 25 000 164 000 120 000 150 000 124 000 36 000 3 044 000

Additional information 1. On 28 February 2011, land and buildings that appeared in the companys records at a value of R450 000 were sold for R750 000. Land and buildings to the value of R650 000 were acquired to expand operations. Land and buildings are not depreciated. No furniture was sold or scrapped during the current year. All new purchases were made to expand operations. A part of the plant with a cost of R420 000 was sold at a loss of R35 000 during June 2010 (when the carrying amount was R380 000). A new plant was acquired on the same day. R320 000 of the plant was purchased to expand operations.

2. 3.

25 QUESTION 2 (continued) 4. 5. 6. 7.

FAC2602/202/2

Depreciation on plant and furniture for the year ended 30 April 2011 amounted to R130 000. Income from investments amounted to R4 500 for the year ended 30 April 2011. There were no accruals or prepayments of investment income on 1 May 2010. The income tax expense for the current year is R140 000. Sales (all credit) for the current year amounted to R2 320 000 and profit before tax was R490 000. Cost of sales for the year amounted to R1 856 500 and other administrative expenses came to R113 000. On 1 August 2010, the company issued 50 000 ordinary shares at par of R4. On 31 October 2010, a special resolution was adopted to split all the ordinary shares into shares with a nominal value of R2 each. On 31 August 2010 an interim dividend of R40 000 was paid, and on 30 April 2011, a final dividend of 10c per share was declared.

8.

9.

10. On 30 April 2010 and 30 April 2011 the cost of the investments was equal to the fair value. REQUIRED Draft the statement of cash flows (using the direct method) of Black Arrow Limited for the financial year ended 30 April 2011 according to Generally Accepted Accounting Practice. Show all calculations. No notes to the statement of cash flows are required. Ignore comparative figures.

26 QUESTION 3 (20 marks) (24 minutes) Answer the following questions by only indicating whether the statement is true or false. (2 marks each) 3.1 3.2 3.3 Cash inflow from interest income would be considered a cash flow from investing activities in the statement of cash flows. An increase in share capital because of a capitalisation share issue will appear under the financing activities in the statement of cash flows. If XYZ Limited acquires a machine with a fair value of R200 000 in exchange for 50 000 ordinary shares with a fair value of R200 000, no entries will be made in the statement of cash flows. If the following are changes on the statement of financial position: a R5 000 decrease in trade and other receivables a R7 000 decrease in cash and cash receivables a R13 000 decrease in long-term loans a R10 000 increase in trade and other payables then working capital changes in the statement of cash flows will be a cash inflow of R15 000. Depreciation may appear under the investing activities in the statement of cash flows. Z Limited, a subsidiary of X Limited, is regarded as a wholly-owned subsidiary of X Limited if X Limited has acquired 100% of the cumulative preference shares of Z Limited. The non-controlling interest will be presented in the consolidated statement of financial position within equity, but separately from the equity of the owners of the parent. If a parent company revalued its property during the current financial period, it will have no impact on the opening retained earnings in the consolidated financial statements of a group. ABC Limited purchased 70% of the preference shares of XYZ Limited in 2008. A portion of the 2010 arrear preference dividends paid by XYZ Limited during 2011 will be disclosed under the sub-heading Non-controlling interest in the consolidated statement of changes in equity. The share capital of a subsidiary company may consist of either par value shares or no par value shares.

3.4

3.5 3.6

3.7

3.8

3.9

3.10

27 ANNEXURE E: SOLUTION MAY 2011 EXAMINATION PAPER QUESTION 1 PLATINUM LIMITED AND ITS SUBSIDIARY

FAC2602/202/2

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2011 R Revenue (1 033 000^ + 403 000^ - 150 000^) 1 286 000 Cost of sales (688 800) [619 800^ + 223 000^ - 150 000^ + (40 000 x 25/125)^ (60 000 x 25/125)^] Gross profit Other income (22 500^ - 9 600^ - 8 000^) Other expenses(153 000^ + 42 000^ - 1 000^) Net finance costs Interest expense(20 000^ +15 400^ - 4 200^) Interest income(8 000^ + 5 300^ - 4 200^) Profit before tax Income tax expense (75 796^ + 35 812^) Profit for the year Other comprehensive income Total comprehensive income for the year ^ Profit attributable to: Owners of the parent (274 392 24 018) Non-controlling interest (19 218 - 2 400 +7 200) ^ Total comprehensive income attributable to: Owners of the parent Non-controlling interest 597 200 4 900 (194 000) (22 100) (31 200) 9 100 386 000 (111 608) 274 392 274 392

250 374 24 018 274 392 250 374 24 018 274 392

28 QUESTION 1 (continued)
PLATINUM LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2011 Attributable to owners of the parent Surplus Nonon controlling Share Retained Total capital revaluation earnings interest equity Total R R R R R R 604 776 *129 262 734 038 Balance beginning of year 300 000^ 20 000^ #284 776 Total comprehensive income for the year 250 374^ 250 374 24 018^ 274 392 Ordinary dividends (36 000)^ (36 000) (2 000) (38 000) Preference dividends (14 400) (14 400) Balance end of year 300 000 20 000 499 150 819 150 136 880 956 030
#

Calculation (224 726^10 000^unrealised profit + (10 000 x 10%)^dep + 64 250a + 4 800h) * Calculation 1 (46 000^ + 16 062b^ + 60 000^ + 7 200f^)

PLATINUM LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2011 Calculation ASSETS Non-current assets Property, plant and equipment Goodwill (6 000^ + 6 000^) Current assets Inventories (98 500^ + 158 700^ - 8 000^) Trade and other receivables (86 420^ + 59 500^) Cash and cash equivalents (65 480^ + 234 300^) Total assets EQUITY AND LIABILITIES Total equity Equity attributable to owners of the parent Share capital Other components of equity Retained earnings Non-controlling interest Total liabilities Non-current liabilities Long-term borrowings (350 000^ + 70 000^ + 70 000^ - 35 000^ + 150 000^) Current liabilities Trade and other payables (167 770^ + 96 800^) Total equity and liabilities 1 2

R 1 130 700 1 118 700 12 000 694 900 249 200 145 920 299 780 1 825 600 956 030 819 150 300 000^ 20 000^ 499 150 136 880 869 570 605 000 264 570 1 825 600

29 QUESTION 1 (continued) Calculation 1. Analysis of ordinary shareholders equity of Coal Limited

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Total At acquisition Share capital Retained earnings Investment in Coal Limited Goodwill Since acquisition to beginning of current year Retained earnings Retained earnings beginning of year Retained earnings at acquisition Unrealised profit in opening inventories (25/125 x 60 000) Arrear preference dividends Current year Profit for the year Profit (see below) Unrealised profit in opening inventories Unrealised profit in closing inventories (25/125 x 40 000) Preference dividends Dividends R 200 000 ^ 30 000 ^ 230 000

NonPlatinum Limited controlling At Since interest acquisition acquisition 80% 20% R R R 40 000 160 000 6 000 24 000 184 000 46 000 190 000 ^ 6 000 ^
a

80 312 134 312 ^ (30 000) ^ (12 000) (12 000) ^ 96 088 92 088 12 000 ^ (8 000) (12 000) ^ (10 000) ^ 384 400

64 250

16 062b

76 870

19 218c

(9 600) (8 000) 123 520

(2 400)d (2 000)e 76 880

Profit = 403 000^ + 5 300^ 223 000^ 42 000^ 15 400^ 35 812^

30 QUESTION 1 (continued) Analysis of cumulative preference shareholders equity of Coal Limited Platinum Limited 40% At Since acquisition acquisition R R 40 000 ^46 000 6 000 Non-controlling interest 60% R 60 000

Total Preference shares At acquisition Share capital Investment in Coal Limited Goodwill Since acquisition to the beginning of current year Portion of profit for the year Current year Portion of profit for the year Preference dividends paid R 100 000^

12 000^ 12 000^ (24 000) 100 000

4 800h 4 800 (9 600) -

7 200f 7 200g (14 400) 60 000

2. Property, plant and equipment Property Platinum Limited Coal Limited Plant Platinum Limited (220 000^ 90 000^) Coal Limited [(180 000^ 66 000^) - 10 000^ profit + (1 000 x 2 depreciation^)] R 720 000 ^ 162 700 ^ 130 000 106 000 1 118 700

31 QUESTION 1 (continued)
(B) JOURNAL ENTRIES
Dr R 200 000 6 000 30 000

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Cr R

Noncontrolling interest R

Share capital - ordinary shares^ Goodwill^ Retained earnings^ Investment in Coal Limited^ Non-controlling interest^ Elimination of shareholders' equity of Coal Limited at acquisition Retained earnings Non-controlling interest (SFP) Recording of non-controlling interest in profit since acquisition to beginning of current year Share capital - preference shares^ Goodwill^ Investment in Coal Limited^ Non-controlling interest^ Elimination of shareholders' equity of Coal Limited at acquisition Retained earning Non-controlling interest Recording of non-controlling interest in preference dividends for the year ended 31 March 2010 Non-controlling interest (SCI) [(96 088 12 000) x 20%] Non-controlling interest (SFP) Recording of non-controlling interest in profit for the year ended 31 March 2011 Dividends received Platinum Limited^ Non-controllinh interest (SFP) Ordinary dividends paid Coal Limited^ Elimination of intercompany ordinary dividends Non-controlling interest (SCI) Non-controlling interest (SFP) Recording of non-controlling interest in preference dividends for the year ended 31 March 2011 Dividends received Platinum Limited^ Non-controlling interest (SFP) Preference dividends paid Coal Limited^ Elimination of intercompany preference dividends

190 000 46 000

46 000

16 062 16 062 16 062

100 000 6 000 46 000 60 000 60 000

7 200 7 200 7 200

129 262 16 818 16 818 16 818

8 000 2 000 10 000 7 200 7 200

(2 000)

7 200

9 600 14 400 24 000

(14 400)

32 QUESTION 1 (continued)
Noncontrolling interest R

Retained earnings Platinum Limited Machinery Coal Limited^ Elimination of unrealised intercompany profit included in Coal Limiteds assets Accumulated depreciation Coal Limited^ Depreciation Platinum Limited^ Retained earnings Platinum Limited^ Elimination of depreciation associated with the sale of the asset Sales Coal Limited^ Cost of sales Platinum Limited^ Elimination of intercompany sales Cost of sales Coal Limited^ Inventory Platinum Limited ^ Elimination of unrealised intercompany profit included in closing inventory of Platinum Limited (40 000 x 25/125 ) Retained earnings Coal Limited^ Cost of sales Coal Limited^ Elimination of unrealised intercompany profit included in opening inventory of Platinum Limited (60 000 x 25/125) Interest received on debentures Platinum Limited^ Interest paid on debentures Coal Limited^ Elimination of intercompany interest on debentures (35 000 x 12%)

Dr R 10 000

Cr R 10 000

2 000 1 000 1 000

150 000 150 000 8 000 8 000

12 000 12 000

4 200 4 200

136 880

33 QUESTION 2 BLACK ARROW LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 APRIL 2011 R Cash flow from operating activities Cash receipts from customers (calculation 1) Cash payments to suppliers and employees (calculation 2) Net cash generated by operations Investment income Dividends paid (calculation 3) Normal tax paid (calculation 4) Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity Replacement of plant Investment to expand production capacity Additions to land and buildings (calculation 5) Additions to plant (calculation 6) Additions to furniture (calculation 7) Proceeds on sale of land and buildings Proceeds on sale of plant (380 000^ 35 000^) Purchase of investments (66 000^ 36 000^) Net cash outflow from investing activities Cash flow from financing activities Proceeds on issue of shares (50 000 x 4) Increase in long-term loan [(950 000^ + 50 000^) (700 000^ + 25 000^)] Net cash inflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents beginning of year Cash and cash equivalents end of year

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2 220 000 (1 970 500) 249 500 ^4 500 (50 000) (124 000) 80 000 (500 000) (500 000) (1 200 000) ^ (650 000) ^ (320 000) (230 000) ^750 000 345 000 (30 000) (635 000) 200 000 275 000 475 000 (80 000) ^26 000 ^ (54 000)

34 QUESTION 2 (continued) Calculations 1. Cash receipts from customers Trade and other receivables R ^178 000 Bank* b/d ^2 320 000 Balance 2 498 000 R 2 220 000 ^278 000 2 498 000

Balance Sales *Balancing figure 2.

c/d

Cash paid to suppliers and employees R ^65 000 ^1 856 500 ^113 000 ^76 000 2 110 500 R ^120 000 110 000 ^(180 000) 50 000

Trade and other payables, inventory and expenses R b/d Balance inventory b/d ^54 000 Balance payables Bank* 1 970 500 Cost of sales Balance payables c/d ^86 000 Administrative expenses c/d Balance inventory 2 110 500 *Balancing figure 3. Dividends paid Amounts unpaid at beginning of year Amounts charged to income [40 000 Amounts unpaid at end of year

+ (1 400 000/2 x 10c)

4.

Taxation paid Amounts unpaid at beginning of year Amounts charged to income Amounts unpaid at end of year

^164 000 ^140 000 ^ (180 000) 124 000

5.

Land and buildings R Balance b/d 1 500 000 Sold 650 000 Balance New - expand 100 000 Revaluation (250 000 150 000) 2 250 000 6. Balance b/d New - expand New - replace (balancing) Plant at cost R 1 100 000 Sold 320 000 Balance 500 000 1 920 000

c/d

R 450 000 1 800 000 2 250 000

c/d

R 420 000 1 500 000 1 920 000

35 QUESTION 2 (continued) 7. Balance b/d New - expand (balancing) Furniture at cost R 150 000 Balance 230 000 380 000

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c/d

R 380 000 380 000

8.

Accumulated depreciation - plant R 40 000 Balance Sold (420 000 380 000) 196 000 Depreciation (balancing) Balance c/d 236 000 9. Balance Accumulated depreciation - furniture R c/d 54 000 Balance Depreciation (balancing) 54 000

b/d

R 124 000 112 000 236 000

b/d

R 36 000 18 000 54 000

36 QUESTION 3 3.1 3.2 3.3 3.4 3.5 False It is considered a cash flow from operating activities. False Issue of capitalisation shares is a book entry and has no effect on the statement of cash flows. True True False Depreciation is a book entry and does not appear on the statement of cash flows. It will be added back under the operating activities when you use the indirect statement of cash flows method. False Only ordinary shares are regarded as equity shares when determining control in a subsidiary. True True True True (2 marks each)

3.6 3.7 3.8 3.9 3.10

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