QUESTION 1 (63 marks) Fixbox Ltd (“Fixbox”) and Gearup Ltd (“Gearup”) are two companies that sell tools. Both entities have a 31 December financial year-end.

The following trial balances were obtained from the financial records of Fixbox and Gearup for the financial year ended 31 December 2023:

Notes:

1. On 1 July 2022, Fixbox acquired 60% of the ordinary share capital of Gearup for R815 000 in cash from another third-party entity and thereby obtained control over Gearup. On 1 July 2022 (acquisition date), Gearup’s retained earnings was R284 000 and the ordinary share capital was R1 000 000.

At the acquisition date, all the assets and liabilities of Gearup were considered to be fairly valued except for machinery which had a carrying value of R196 000 and a remaining useful life of 7 years from 1 July 2022. The fair value of the machinery on 1 July 2022 was R252 000. It is Gearup’s accounting policy to depreciate machinery using the straight-line method based on the useful life.

The tax base of the machinery is equal to its carrying value at the acquisition date. The South African Revenue Service (SARS) also allows a wear and tear allowance which is equal to the depreciation i.e., R28 000 p.a. with regard to the machinery.

2. On 1 April 2023, Fixbox sold equipment with a carrying value of R180 000 to Gearup for R220 000. The profit on the sale is included as part of ‘other income’ on the trial balance. On this date, the remaining useful life of the equipment was
4 years. It is Fixbox’s and Gearup’s accounting policy to depreciate all equipment on a straight-line basis, based on the asset’s useful life which is in line with (the same as) the SARS’s write-off periods.

3. Fixbox provided Gearup a loan of R250 000 on 1 October 2023. The interest rate on the loan is 10% per annum. All the interest for the 2023 financial year is still due at the financial year-end. No loan repayments were made during the
2023 financial year.

4. Ordinary dividends were declared on 31 December 2023 by both Fixbox and Gearup. The ‘’other income’’ of Fixbox includes the ordinary dividend income from Gearup.

5. Gearup sold equipment to Fixbox for R120 000 on 31 December 2023. The carrying amount thereof was R90 000. Fixbox classified these assets purchased from Gearup as inventory. The inventory was sold by Fixbox during the 2024 financial year and therefore still on hand at 31 December 2023.

Additional information:

• Fixbox accounts for investments in subsidiaries at cost in accordance with

IAS 27.10(a) in its separate financial statements.

• Assume that any goodwill arising as a result of a business combination, is not deductible for tax purposes.
• Fixbox elected to measure the non-controlling interest in Gearup at its proportionate share of Gearup’s identifiable net assets at the acquisition date.
• All fixed assets have a nil residual value.

• There have been no changes to the share capital (e.g., number of shares in

issue) of Gearup since Fixbox’s initial investment in Gearup on 1 July 2022.

• For all financial years, assume an Income Tax rate of 27%.

• Ignore the effects of Dividends Tax and Value Added Tax (VAT).

REQUIRED:

1.1 Calculate the goodwill or gain on bargain purchase, in terms of IFRS 3, that arose on the acquisition of Gearup Ltd.
• Round off to the nearest Rand, if applicable.(6 marks)

1.2 Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income of the Fixbox Ltd Group for the year ended 31 December 2023 in terms of the International Financial Reporting Standards. Include all totals and sub- totals, for example, gross profit.
• Show and reference all your calculations clearly.

• Comparative figures are not required.

• Notes to the financial statements are not required.

• Round off to the nearest Rand, where applicable.(42 marks)

1.3 Prepare the Consolidated Statement of Changes in Equity of the Fixbox Ltd Group for the year ended 31 December 2023 in terms of the International Financial Reporting Standards. Use and reference your workings from 1.1 and
1.2 as far as possible. Ignore all totals e.g. the total column is not required.

• Round off to the nearest Rand, if applicable.(15 marks)

QUESTION 2 (37 marks) Candy Ltd (‘Candy’) and Cocoa Ltd (‘Cocoa’) are two companies in the confectionery industry who have a 31 December financial year end.

The following trial balances were obtained from the financial records of Candy Ltd

(‘Candy’) and Cocoa Ltd (‘Cocoa’) for the financial year ended 31 December 2023:

Notes:

On 1 January 2023, Candy acquired 80% of the ordinary share capital of Cocoa from a third party and thereby obtained control over Cocoa.

1. The following information relates to the at-acquisition matters: The purchase consideration was paid in cash by Candy.
At the acquisition date, all the assets and liabilities of Cocoa were considered to be fairly valued except for the following:
• Inventory which was considered to be R25 000 higher than its carrying value.

• Land which was considered to have a fair value of R615 000. The land is

Cocoa’s only piece of land which they purchased for R600 000 on 1 December 2022.

2. The fair value of Cocoa’s land on 31 December 2022 was still the same as the cost however on 31 December 2023, it was considered to be R650 000. Cocoa therefore subsequently revalued the land in its own records for the first time on 31
December 2023.

3. Cocoa sold all of its at acquisition inventory to third parties at a profit of R35 000 by the end of 31 December 2023.

4. Since the acquisition date, a monthly management fee of R15 000 is paid by Cocoa to Candy. There were no management fees outstanding at the financial year end.

5. From 1 September 2023, Cocoa started to sell inventory to Candy which Candy then sells to third parties. All inventory sales to Candy are made at cost plus 25%. R40 000 of the closing inventory of R720 500 in Candy’s records was purchased from Cocoa.

Additional information:

• Candy accounts for investments in subsidiaries at cost in accordance with IAS

27.10(a) in its separate financial statements.

• Both Candy and Cocoa measure their plant and equipment using the cost model as per IAS 16 in their respective separate financial statements
• Cocoa measures their Land using the revaluation model as per IAS 16 in their separate financial statements.
• Candy elected to measure the non-controlling interest in Cocoa at its proportionate share of Cocoa’s identifiable net assets at acquisition date.
• There have been no changes to the share capital (e.g., number of shares in issue) of Cocoa since Candy’s initial investment in Cocoa on 1 January 2023.

• For all financial years, the company Income Tax rate is 27% and 80% of Capital

Gains are included in taxable income.

• Ignore the effects of Dividend Tax and Value Added Tax (VAT).

REQUIRED:

Prepare the pro forma journal entries required to prepare the consolidated financial statements of the Candy Ltd group for the year ended 31 December 2023, in accordance with the International Financial Reporting Standards.

Instructions:

• Where pro forma journal entries affect the Profit and Loss accounts, be specific as to which account it is (e.g. Depreciation: Vehicles (Cocoa Ltd) (P/L)). In other words, do not merely write ‘Profit before tax’.
• Show and reference all your workings and calculations clearly.

• Date and narrations are not required.

• Round off to the nearest Rand, where applicable. (37 marks)

Answers to Above Questions on Financial Accounting

Answer 1: The calculation of the goodwill or gain on bargain purchase, in terms of IFRS 3, that arose on the acquisition of Gearup Ltd is performed as follows:

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