202_2011_2_e

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: (012) 429-4234 Email: [email protected] ANNEXURE A: SOLUTION ASSIGNMENT 3/2011 ANNEXURE B: OCTOBER 2010 EXAMINATION PAPER ANNEXURE C: SOLUTION OCTOBER 2010 EXAMINATION PAPER ANNEXURE D: MAY 2011 EXAMINATION PAPER ANNEXURE E: SOLUTION MAY 2011 EXAMINATION PAPER

3 FAC2602/202/2 ANNEXURE A: SOLUTION ASSIGNMENT 03/2011 QUESTION 1 1.1 VIOLET LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2011 R Gross profit [700 000^ + 600 000^ + 880 000 – 880 000 – (45 000 x 25/125) ] 1 291 000 Other expenses (80 000^ + 65 000^ – 16 000 + 480 000^ + 82 000^) (691 000)Finance costs [7 500^ + (3 500^ – 2 100) ] (8 900)Profit before tax 591 100 Income tax expense (104 888^ + 58 660^) (163 548)Profit for the year 427 552 Other comprehensive income - Total comprehensive income for the year 427 552 Profit attributable to: Owners of the parent^ 410 868 Non-controlling interest^ 16 684 427 552 Total comprehensive income attributable to: Owners of the parent^ 410 868 Non-controlling interest^ 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) ] 1 849 000

1.2.2 Inventory (60 000^ + 45 000^ – 9 000 ) 96 000

1.2.3 Retained earnings (577 000^ + 2 700 + 410 868^ – 50 000 ) 940 568

1.2.4 Non-controlling interest (25 000 + 300 + 10 000 + 16 684 – 2 000 ) 49 984

4

QUESTION 1 (continued) Calculations 1. Analysis of ordinary shareholders’ equity of Tulip Ltd

Total

Violet Limited 90%

Non-

controlling interest

10%

At acquisition

At acquisition

Since acquisition

Share capital Revaluation surplus (500 000 – 450 000) Retained earnings

R 120 000

50 000 80 000

R 108 000

45 000 72 000

R R 12 000

5 000 8 000

Investment in Tulip Ltd

250 000 225 000 250 000

25 000

Goodwill 25 000 Since acquisition to beginning of current year Retained earnings

3 000

2 700 300 Balance 1/4/08 At acquisition Profit on sale Depreciation (80 000 x 20% x 6/12)

155 000 (80 000) (80 000)

8 000

Revaluation surplus (150 000 balance 1/4/10 – 50 000 balance at acquisition)

100 000 90 000 10 000

Current year Profit for the year

166 840

150 156 16 684

Calculation 2 Depreciation (80 000 x 20%)

150 840 16 000

Ordinary dividend (120 000/ 3 x 50c)

(20 000) (18 000)

(2 000)

499 840 134 856 RE 90 000 OCE

49 984

2. Profit of Tulip Limited

R Gross profit 600 000 Administration fees paid (240 000)Interest paid (3 500)Other expenses (82 000)Depreciation (65 000)Profit before tax 209 500 Income tax expense (58 660) 150 840

5 FAC2602/202/2 QUESTION 2 ICE LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 AUGUST 2010 R Revenue (800 000 + 860 000 – 250 000) Cost of sales

1 410 000 (329 000)

^

Opening inventory (60 000 + 78 000 – 10 000) Purchases (300 000 + 290 000 – 250 000)

128 000 340 000

^ ^

Closing inventory (66 000 + 84 000 – 11 000)

468 000 (139 000)

^

Gross profit Other expenses [284 600 + 237 400 + 22 000 + 15 000 – (20 000 x 20%)] Finance cost [(3 600 – 1 200) + 5 000]

1 081 000 (555 000)

(7 400)

Profit before tax Income tax expense (62 810 + 86 710)

518 600 (149 520)

Profit for the year Other comprehensive income

369 080 -

Total comprehensive income for the year 369 080 Profit attributable to:

Owners of the parent^ Non-controlling interest (42 258 + 6 000 – 2 000 )

322 822 46 258

369 080 Total comprehensive income attributable to: Owners of the parent^ Non-controlling interest

322 822 46 258

369 080

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

Prefe-rence

shares R

Reva-luation surplus

R

Retained earnings

R Total

R

Non-controlling

interest R

Total equity

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

250 000 180 000 ^140 000 46 400^322 822

^(50 000)^(18 000)

616 400 322 822

(50 000) (18 000)

84 600 46 258

^(2 100) ^(6 000)

701 000369 080

(52 100)(24 000)

Balance at 31/8/2010 250 000 180 000 140 000 301 222 871 222 122 758 993 980

100 000 + 40 000 34 000^ - 20 000 (profit on machinery ) + (20 000 x 20% x 6/12 depreciation) + 30 400^ 7 000 + 7 600 + 10 000 + 60 000

7 FAC2602/202/2 QUESTION 2 (continued) Calculations 1. Analysis of ordinary shareholders’ equity of Snow Ltd

Total

Ice Limited 80%*

Non-controlling

interest 20%

At acquisition

At acquisition

Since acquisition

Share capital Investment in Snow Ltd

R 35 000

R ^28 000 ^30 000

R R 7 000

Goodwill 2 000 Since acquisition to beginning of current year Retained earnings 38 000

30 400

RE

7 600 Balance 1/9/2009 Unrealised profit in closing inventory (60 000 x 20/120)

48 000

^(10 000)

Revaluation surplus Current year Profit for the year

50 000

211 290

40 000

169 032

OCE RE

10 000

42 258 Calculation 3 Unrealised profit in opening inventory Unrealised profit in closing inventory (66 000 x 20/120)

212 290

^10 000

^(11 000)

Ordinary dividend Preference dividend

(10 500)(10 000)

(8 400) (8 000)

RE RE

(2 100) (2 000)

313 790 40 000183 032

OCE RE

62 758

* c5000035R = 70 000 shares

shares00070shares00056 = 80%

8

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

Total

Ice Limited 40%*

Non-controlling

interest 60%

At acquisition

Since acquisition

At acquisition Share capital Investment in Snow Ltd

R

100 000

R

^40 000 ^40 000

R R

60 000

Goodwill Nil Current year Profit attributable Dividend paid

10 000 (10 000)

4 000 (4 000)

6 000 (6 000)

100 000 - 60 000

R2000 R100* = 50 000 shares

shares 000 50shares 000 20 = 40%

3. Profit of Snow Limited

Sales Cost of sales

R ^860 000 (284 000)

Opening inventory Purchases Closing inventory

^78 000 ^290 000 ^(84 000)

Gross profit Management fee Other expenses Depreciation Interest paid - debentures - bank overdraft - loan

576 000 ^(12 000)

^(237 400)^(15 000)^(3 600)^(5 000)^(4 000)

Income tax expense

299 000 ^(86 710)

Profit for the year 212 290

9 FAC2602/202/2 QUESTION 3 Dr

R Cr R

Share capital – Ordinary shares Goodwill

Investment in Snow Limited Non-controlling interest

35 000 2 000

30 000 7 000

Share capital – Preference shares

Investment in Snow Limited Non-controlling interest

Elimination of shareholders’ equity of Snow Ltd at acquisition

100 000

40 000 60 000

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

20 000

6 000

20 000

4 000 2 000

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

11 000

10 000

11 000

10 000

10

QUESTION 4 TOMBA LTD STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 28 FEBRUARY 2007 R R Cash flow from operating activities Cash receipts from customers Cash paid to suppliers and employees

353 800

(248 200) Net cash generated by operations Dividends paid (calculation 3) Normal tax paid (calculation 4)

105 600 (80 000) (10 600)

Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity

(16 000)

15 000

Replacement of machinery (16 000) Proceeds from sale of non-current assets Proceeds from sale of investments (4 800 – 800)

5 000 4 000

Net cash outflow from investing activities Cash flow from financing activities Redemption of long-term loan

(20 000)

(7 000)

Net cash outflow from financing activities (20 000)Net decrease in cash and cash equivalents Cash and cash equivalents beginning of year

(12 000)^28 000

Cash and cash equivalents end of year ^16 000 Calculations 1. Cash receipts from customers Balance b/d Sales

R ^30 800

^359 000

Bank* Balance c/d

R 353 800^36 000

389 800 389 800*Balancing figure 2. Cash paid to suppliers and employees Balance (inventory) b/d Bank* Balance (payables) c/d

R ^38 000248 200^14 800

Balance (payables) b/d Cost of sales Administrative and selling expenses Balance (inventory) c/d

R ^22 600

^152 400

^96 000^30 000

301 000 301 000*Balancing figure

11 FAC2602/202/2 QUESTION 4 (continued) 3. Dividends paid

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

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

Machinery at cost price

Balance (inventory) b/d Bank (purchases)*

R ^24 600 16 000

Bank (sold) Balance c/d

R ^11 000^29 600

40 600 40 600*Balancing figure

12

QUESTION 5 SHARP LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2008 R 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

^ 493 750

^ (18 750) ^ (93 750) ^503 750

^25 000 Increase in working capital (calculation 2)

910 000 162 500

Decrease in inventory Increase in trade and other payables Increase in trade and other receivables (62 500 – 2 500)

16 250 206 250 (60 000)

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)

1 072 500 75 000

(18 750) (218 750) (201 250)

Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity

(1 250 000)

708 750

Replacement of equipment (given) ^ (1 250 000) Investment to expand production capacity (1 406 250) Additions to equipment (calculation 5) ^ (1 406 250) Proceeds on sale of non-current assets (250 000 + 18 750 profit)

268 750

Purchase of investments (875 000 – 687 500) (187 500) Net cash outflow from investing activities (2 575 000) 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

1 225 000

1 225 000 (641 250)^106 250

Cash and cash equivalents end of year ^ (535 000)

13 FAC2602/202/2 QUESTION 5 (continued) Calculations 1. Profit before tax

Sales Cost of sales

R 2 187 500 (875 000)

Gross profit Profit on sale of equipment Other income – dividends received

1 312 500 18 750 93 750

Distribution expenses Administration expenses Other expenses Finance costs

1 425 000 (125 000)(562 500)(218 750)

(25 000) Profit before tax 493 750

2. Change in working capital Decrease in inventory (78 750 – 62 500) ^16 250 Increase in trade and other receivables (375 000 – 312 500) ^(62 500) Decrease in prepaid expenses (12 500 – 10 000) ^2 500 Increase in trade and other payables (250 000 – 43 750) ^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 5. Property, plant and equipment at carrying amount

Balance Revaluation (187 500 – 125 000) Replacement Additions (2 656 250– 1 250 000)

b/d

R ^2 250 000

^62 500^1 250 000^1 406 250

Sales at carrying amount Depreciation (500 000 + 3 750) Balance

c/d

R ^250 000^503 750

^4 215 000 4 968 750 4 968 750

14

QUESTION 5 (continued) 6. Issued share capital

Balance (given)

c/d

R 3 125 000

Balance (given) Capitalisation issue * (1 875 000 ÷ 5) Issue to public (balancing figure)

b/d

R 1 875 000

375 000

875 000

3 125 000 3 125 000 7. Share premium

Balance (given) Capitalisation issue *

c/d

R 475 000375 000

Balance (given) Issue to public (875 000 x 40%)

b/d

R 500 000350 000

850 000 850 000

15 FAC2602/202/2 ANNEXURE B: OCTOBER 2010 EXAMINATION PAPER This paper consists of 6 pages. NB: 1. This paper consists of FOUR (4) questions. 2. All questions must be answered. 3. Basic workings, where applicable, must be shown. 4. Make sure that you are handed the correct examination answer book (blue for

accounting) by the invigilator. 5. Each question answered must be started on a new (separate) page. 6. PROPOSED TIMETABLE:

Question no. Subject Marks Time in

minutes1 Group financial statements 34 41 2 Earnings per share 20 24 3 Leases 29 35 4 Time value of money 17 20

100 120

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

Limited R

GoalLimited

RSales ............................................................................................. Cost of sales ................................................................................. Interest received – Soccer Bank .................................................. Staff cost ....................................................................................... Auditors’ remuneration ................................................................. Interest paid on loans ................................................................... Depreciation – machinery ............................................................. Repairs ......................................................................................... Income tax expense ..................................................................... Dividends paid .............................................................................. Share capital – ordinary shares of R1 each ................................. Retained earnings – 1 July 2009 ..................................................

800 000 550 000

- 85 000 30 000 24 000 12 000 28 000 19 880 80 000 400 000 75 000

600 000 450 000 40 000 48 000 22 000 16 000 18 000 23 760 17 427

- 200 000 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.

2. The profit (income and expense items) of Goal Limited was earned evenly throughout

the year except when otherwise stated. 3. 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.

4. 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. 5. Included in the staff cost of Goal Limited are bonuses of R12 000 paid to staff on

15 December 2009. 6. 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. 7. Both companies acquired loans on 1 December 2009.

17 FAC2602/202/2 QUESTION 1 (continued) 8. The repairs of both companies increased by 20% during the last six months of the

financial year. 9. On 30 June 2010 Goal Limited declared a dividend of R5 000. This transaction has not

been taken into account by the two companies. 10. Assume a taxation rate of 28% and that all income/expenses are taxable/tax deductable. REQUIRED: a) 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) b) 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 post-acquisition 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

R Revenue (800 000^ + 450 000^) Cost of sales (550 000^ + 337 500^)

1 250 000 (887 500)

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^)

362 500

(227 560) (40 000)

Profit before tax Income tax expense (19 880^ + 6 703^)

94 940 (26 583)

Profit for the year 68 357 Other comprehensive income - Total comprehensive income for the year 68 357 ^Profit attributable to:

Owners of the parent (68 357 – 3 447) ^Non-controlling interest (calculation 2)

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 FAC2602/202/2 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 **

R 150 000

(112 500) 40 000

(12 000) (14 000) (6 000) (7 200)

Income tax expense (38 300 x 28%)

38 300 (10 724)

Profit after tax 27 576 ** Repairs

July to December (6 months x 100%) January to June (6 months x 120%)

% 600 720

1 320 July to October = [23 760 x 600/1320] x 4 months = 7 200 November to June = 23 760 – 7 200 = 16 560 or 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

Total

Kick Limited 80%

Non-controlling

interest 20%

At acquisition

At acquisition

Since acquisition

Share capital Retained earnings Profit 1 July to 31 October 2009

R 200 000

68 000 27 576

R 160 000 54 40022 061

R R 40 000

13 600 5 515

Investment in Goal Ltd

295 576 236 461 240 000

59 115

Goodwill 3 539 Current year Profit after tax 17 237 13 790 3 447 Dividend declared (5 000) (4 000) (1 000) 307 813 9 790 61 562 3. Profit after tax of Goal Limited which should be included in the consolidated

statement of comprehensive income of the group Sales (600 000 – 150 000) Cost of sales (450 000 – 112 500) Staff cost (48 000 – 12 000) Auditors’ remuneration (22 000 – 14 000) Interest paid Depreciation (18 000 – 6 000) Repairs (calculation 1)

R 450 000

(337 500) (36 000)

(8 000) (16 000) (12 000) (16 560)

Income tax expense (23 940 x 28%)

23 940 (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 FAC2602/202/2 ANNEXURE D: MAY 2011 EXAMINATION PAPER This paper consists of six (6) pages. NB: 1. This paper consists of THREE (3) questions. 2. Answer all the questions. 3. Show all the basic workings, where applicable. 4. Make sure that you get the correct examination answer book (blue for Accounting) from

the invigilator. 5. Start the answer to each question on a new (separate) page. 6. PROPOSED TIMETABLE

Question No. Topic Marks Time in

minutes1 Group financial statements 60 72 2 Statement of cash flows 20 24 3 Short questions 20 24

100 120

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

Coal Limited

R Land and buildings at cost/valuation .................................................Plant and equipment at cost ..............................................................Trade and other receivables ..............................................................Inventories .........................................................................................Cash and cash equivalents ...............................................................Investments in Coal Limited 80 000 ordinary shares at fair value (cost price R190 000) ............ 40 000 12% cumulative preference shares at fair value (cost R46 000) ................................................................................ 12% R100 debentures (purchased on 1 April 2007) .......................Ordinary shares of R2 each ..............................................................12% cumulative preference shares of R1 each ................................Retained earnings – 1 April 2010 ......................................................Surplus on revaluation of property – 1 April 2010 .............................Long-term loan ..................................................................................Accumulated depreciation of plant and equipment ...........................12% R100 debentures .......................................................................Trade and other payables .................................................................Sales ..................................................................................................Other income .....................................................................................Interest income ..................................................................................Cost of sales ......................................................................................Other expenses .................................................................................Interest expense ................................................................................Income tax expense ..........................................................................Ordinary dividends paid .....................................................................Preference dividends paid .................................................................

720 000 220 000 86 420 98 500 65 480

190 000

46 000 35 000

300 000 -

224 726 20 000

350 000 90 000

150 000 167 770

1 033 000 22 500

8 000 619 800 153 000 20 000 75 796 36 000 -

162 700180 000

59 500158 700234 300

- - -

200 000100 000134 312

- 70 00066 00070 00096 800

403 000- 5 300

223 00042 00015 40035 81210 00024 000

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 FAC2602/202/2 QUESTION 1 (continued)

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”.

3. 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.

4. On 1 April 2010, Platinum Limited’s inventories on hand bought from Coal Limited,

were valued at R60 000. 5. On 31 March 2011, Platinum Limited’s closing inventories purchased from

Coal Limited, amounted to R40 000. 6. 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. 7. 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)

(b) 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)

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 2010

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 -

1 500 0001 100 000

150 00054 00036 000

178 00026 000

4 100 000 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

1 200 000

460 000700 000

65 00025 000-

164 000120 000150 000124 000

36 000 4 100 000 3 044 000 Additional information 1. On 28 February 2011, land and buildings that appeared in the company’s 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.

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

to expand operations. 3. 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.

25 FAC2602/202/2 QUESTION 2 (continued)

4. Depreciation on plant and furniture for the year ended 30 April 2011 amounted to R130 000.

5. 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.

6. The income tax expense for the current year is R140 000.

7. 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. 8. 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.

9. 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. 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 Cash inflow from interest income would be considered a cash flow from investing

activities in the statement of cash flows. 3.2 An increase in share capital because of a capitalisation share issue will appear under

the financing activities in the statement of cash flows. 3.3 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.

3.4 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.

3.5 Depreciation may appear under the investing activities in the statement of cash flows. 3.6 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.

3.7 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. 3.8 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.

3.9 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”.

3.10 The share capital of a subsidiary company may consist of either par value shares or no

par value shares.

27 FAC2602/202/2 ANNEXURE E: SOLUTION MAY 2011 EXAMINATION PAPER QUESTION 1 PLATINUM LIMITED AND ITS SUBSIDIARY CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2011 Revenue (1 033 000^ + 403 000^ - 150 000^) Cost of sales [619 800^ + 223 000^ - 150 000^ + (40 000 x 25/125)^ – (60 000 x 25/125)^]

R

1 286 000 (688 800)

Gross profit Other income (22 500^ - 9 600^ - 8 000^) Other expenses(153 000^ + 42 000^ - 1 000^) Net finance costs

597 200

4 900 (194 000)

(22 100)Interest expense(20 000^ +15 400^ - 4 200^) Interest income(8 000^ + 5 300^ - 4 200^)

(31 200)9 100

Profit before tax Income tax expense (75 796^ + 35 812^)

386 000

(111 608)Profit for the year Other comprehensive income

274 392 -

Total comprehensive income for the year 274 392 ^ Profit attributable to: Owners of the parent (274 392 – 24 018) Non-controlling interest (19 218 - 2 400 +7 200)

250 374 24 018

274 392

^ Total comprehensive income attributable to: Owners of the parent 250 374 Non-controlling interest 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

Share capital

Surplus on

revaluation

Retained earnings

Total

Non-controlling

interest

Total

equity Balance beginning of year Total comprehensive income for the year Ordinary dividends Preference dividends

R 300 000^

R 20 000^

R #284 776

250 374^ (36 000)^

R 604 776

250 374 (36 000) -

R *129 262

24 018^ (2 000)

(14 400)

R 734 038

274 392 (38 000)(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

R

ASSETS Non-current assets

1 130 700

Property, plant and equipment Goodwill (6 000^ + 6 000^)

2

1 118 700 12 000

Current assets 694 900 Inventories (98 500^ + 158 700^ - 8 000^) Trade and other receivables (86 420^ + 59 500^) Cash and cash equivalents (65 480^ + 234 300^)

249 200 145 920 299 780

Total assets 1 825 600 EQUITY AND LIABILITIES Total equity

956 030

Equity attributable to owners of the parent 819 150 Share capital Other components of equity Retained earnings

300 000^ 20 000^

499 150 Non-controlling interest 1 136 880

Total liabilities 869 570 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^)

605 000

264 570

Total equity and liabilities 1 825 600

29 FAC2602/202/2 QUESTION 1 (continued) Calculation 1. Analysis of ordinary shareholders’ equity of Coal Limited

Total

Platinum Limited Non- controlling

interest At

acquisitionSince

acquisition 80% 20% At acquisition Share capital Retained earnings

R 200 000

30 000

^ ^

R 160 00024 000

R

R 40 000 6 000

Investment in Coal Limited

230 000

184 000190 000

^

46 000

Goodwill 6 000 ̂ Since acquisition to beginning of current year Retained earnings 80 312

64 250

a 16 062b

Retained earnings beginning of year Retained earnings at acquisition Unrealised profit in opening inventories (25/125 x 60 000) Arrear preference dividends

134 312 (30 000)(12 000)

(12 000)

^ ^

^

Current year Profit for the year 96 088

76 870

19 218c

Profit (see below) Unrealised profit in opening inventories Unrealised profit in closing inventories (25/125 x 40 000)

92 088 12 000 (8 000)

^

Preference dividends Dividends

(12 000)(10 000)

^ ^

(9 600) (8 000)

(2 400)d

(2 000)e

384 400 123 520 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

Total

Platinum Limited

40%

Non-controllinginterest

60% Preference shares

At acquisition

Since acquisition

At acquisition Share capital Investment in Coal Limited

R 100 000^

R 40 000 ^46 000

R

R 60 000

Goodwill 6 000 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

12 000^

12 000^ (24 000)

4 800h

4 800 (9 600)

7 200f

7 200g (14 400)

100 000 - 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 FAC2602/202/2 QUESTION 1 (continued) (B) JOURNAL ENTRIES

Dr R

Cr R

Non-controlling

interest R

Share capital - ordinary shares^ Goodwill^ Retained earnings^

200 0006 000

30 000

Investment in Coal Limited^ Non-controlling interest^ Elimination of shareholders' equity of Coal Limited at acquisition

190 000 46 000 46 000

Retained earnings Non-controlling interest (SFP) Recording of non-controlling interest in profit since acquisition to beginning of current year

16 062 16 062

16 062

Share capital - preference shares^ Goodwill^

100 0006 000

Investment in Coal Limited^ Non-controlling interest^ Elimination of shareholders' equity of Coal Limited at acquisition

46 000 60 000 60 000

Retained earning Non-controlling interest Recording of non-controlling interest in preference dividends for the year ended 31 March 2010

7 200 7 200 7 200

129 262 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

16 818 16 818 16 818

Dividends received Platinum Limited^ Non-controllinh interest (SFP)

8 0002 000

(2 000)

Ordinary dividends paid Coal Limited^ Elimination of intercompany ordinary dividends

10 000

Non-controlling interest (SCI) Non-controlling interest (SFP) Recording of non-controlling interest in preference dividends for the year ended 31 March 2011

7 200 7 200 7 200

Dividends received Platinum Limited^ Non-controlling interest (SFP)

9 60014 400

(14 400)

Preference dividends paid Coal Limited^ Elimination of intercompany preference dividends

24 000

32

QUESTION 1 (continued)

Dr R

Cr R

Non-controlling

interest R

Retained earnings Platinum Limited Machinery Coal Limited^ Elimination of unrealised intercompany profit included in Coal Limited’s assets

10 000 10 000

Accumulated depreciation Coal Limited^ 2 000 Depreciation Platinum Limited^ Retained earnings Platinum Limited^ Elimination of depreciation associated with the sale of the asset

1 000 1 000

Sales Coal Limited^ 150 000 Cost of sales Platinum Limited^ Elimination of intercompany sales

150 000

Cost of sales Coal Limited^ 8 000 Inventory Platinum Limited ^ Elimination of unrealised intercompany profit included in closing inventory of Platinum Limited (40 000 x 25/125 )

8 000

Retained earnings Coal Limited^ 12 000 Cost of sales Coal Limited^ Elimination of unrealised intercompany profit included in opening inventory of Platinum Limited (60 000 x 25/125)

12 000

Interest received on debentures Platinum Limited^ 4 200 Interest paid on debentures Coal Limited^ Elimination of intercompany interest on debentures (35 000 x 12%)

4 200

136 880

33 FAC2602/202/2 QUESTION 2 BLACK ARROW LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 APRIL 2011 R R Cash flow from operating activities Cash receipts from customers (calculation 1) Cash payments to suppliers and employees (calculation 2)

2 220 000

(1 970 500) Net cash generated by operations Investment income Dividends paid (calculation 3) Normal tax paid (calculation 4)

249 500 ^4 500 (50 000)

(124 000) Net cash inflow from operating activities Cash flow from investing activities Investment to maintain production capacity

(500 000)

80 000

Replacement of plant (500 000) Investment to expand production capacity (1 200 000) Additions to land and buildings (calculation 5) Additions to plant (calculation 6) Additions to furniture (calculation 7)

^ (650 000) ^ (320 000) (230 000)

Proceeds on sale of land and buildings Proceeds on sale of plant (380 000^ – 35 000^)

^750 000 345 000

Purchase of investments (66 000^ – 36 000^) (30 000) Net cash outflow from investing activities (635 000) 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

200 000 275 000

475 000 (80 000)

^26 000 Cash and cash equivalents end of year ^ (54 000)

34

QUESTION 2 (continued) Calculations 1. Cash receipts from customers

Trade and other receivables

Balance Sales

b/d

R ^178 000

^2 320 000

Bank* Balance

c/d

R 2 220 000 ^278 000

2 498 000 2 498 000*Balancing figure 2. Cash paid to suppliers and employees

Trade and other payables, inventory and expenses Balance – inventory Bank* Balance – payables

b/d

c/d

R ^54 000

1 970 500 ^86 000

Balance – payables Cost of sales Administrative expenses Balance – inventory

b/d

c/d

R ^65 000

^1 856 500 ^113 000

^76 000 2 110 500 2 110 500*Balancing figure 3. Dividends paid

Amounts unpaid at beginning of year Amounts charged to income [40 000 + (1 400 000/2 x 10c) ] Amounts unpaid at end of year

R ^120 000

110 000 ^(180 000)

50 000 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 Balance b/d New - expand Revaluation (250 000 – 150 000)

R 1 500 000 650 000 100 000

Sold Balance c/d

R 450 000 1 800 000

2 250 000 2 250 000 6. Plant at cost Balance b/d New - expand New - replace (balancing)

R 1 100 000 320 000 500 000

Sold Balance c/d

R 420 0001 500 000

1 920 000 1 920 000

35 FAC2602/202/2 QUESTION 2 (continued) 7. Furniture at cost Balance b/d New - expand (balancing)

R 150 000 230 000

Balance c/d

R 380 000

380 000 380 000 8. Accumulated depreciation - plant Sold (420 000 – 380 000) Balance c/d

R 40 000

196 000

Balance b/d Depreciation (balancing)

R 124 000 112 000

236 000 236 000 9. Accumulated depreciation - furniture Balance c/d

R 54 000

Balance b/d Depreciation (balancing)

R 36 000 18 000

54 000 54 000

36

QUESTION 3 3.1 False – It is considered a cash flow from operating activities. 3.2 False – Issue of capitalisation shares is a book entry and has no effect on the statement of cash flows. 3.3 True 3.4 True 3.5 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. 3.6 False – Only ordinary shares are regarded as equity shares when determining control in a subsidiary. 3.7 True 3.8 True 3.9 True 3.10 True (2 marks each) FAC2602_2011_TL_202_2_E