Question 1 (50 marks)
Costa Ltd is a company with a 30 June year end. The following information relates to Costa Ltd and its subsidiary Jumbo for the year ended 30 June 20.22.
| Costa Ltd | Jumbo Ltd | |||
| Dr | Cr | Dr | Cr | |
| Property at cost | 600 000 | 160 000 | ||
| Equipment at cost | 300 000 | 180 000 | ||
| Inventories | 100 000 | 80 000 | ||
| Investment in Jumbo Ltd @ fair value – 30 000 ordinary shares
(Cost is equal to fair value) |
204 000 | |||
| Bank – Obese Bank | 1200 | 12 000 | ||
| Trade and other receivables | 124 400 | 406 800 | ||
| Income tax expense | 190 000 | 170 000 | ||
| Provisional tax payments | 100 000 | 90 000 | ||
| Loan to parent (interest free) | 140 000 | |||
| Dividends paid – ordinary
shares |
40 000 | 30 000 | ||
| Dividends paid – preference
shares |
12 000 | 7 500 | ||
| 1 671 600 | 1 276 300 | |||
| Issued share capital – Ordinary
shares of R2 each |
200 000 | 100 000 | ||
| Issued – 15% Cumulative
preference shares, R1 each |
80 000 | 50 000 | ||
| Retained earnings – beginning
of year |
190 000 | 138 000 | ||
| Accumulated depreciation –
Equipment |
128 000 | 94 000 | ||
| Bank overdraft – GG Bank | 48 000 | |||
| Trade and other payables | 175 600 | 238 300 | ||
| Taxation paid | 190 000 | 170 000 | ||
| Loan from subsidiary | 120 000 | |||
| Profit before tax | 540 000 | 486 000 | ||
| 1 671 600 | 1 276 300 | |||
Additional information:
1. Costa Ltd acquired its interest in Jumbo Ltd at 1 July 20.18. at that date, Jumbo Ltd’s retained earnings amounted to R55 000. Costa Ltd paid R204 000, R75 000 of which was paid for goodwill. The balance was attributable to the revaluation of Jumbo Ltd’s property. The carrying amount of the assets and liabilities were equal to the fair value thereof. At the date of acquisition there was no arrear preference dividend. Each share carries one vote.
2. Costa Ltd has bought all its inventories from Jumbo Ltd since 1 July 20.21. jumbo Ltd made a profit of 25% on the cost price of inventories sold to Costa Ltd.
3. Jumbo Ltd paid no preference dividends for the period 1 July 20.18 to 30 June 20.20. on 30 June 20.21 Jumbo Ltd paid a preference dividend of R22 500.
4. On 29 June 20.22 Jumbo Ltd sent inventories to the value of R20 000 to Costa Ltd, Costa Ltd only received the inventories on 3 July 20.22.
5. On 2 January 20.21, Costa Ltd sold a machine to Jumbo Ltd at a profit of R40 000. It is group policy to provide for depreciation at 25% per annum according to the reducing balance method.
Ignore all forms of taxes.
QUESTION 2 (39 marks)
Roundworm Ltd is a group of companies with a 31 December year-end. The Roundworm group financial statements for the years 20.21 and 20.22 are given below:
Roundworm Group Ltd
Consolidated statement of comprehensive income for the year ended 31 December 20.22 (Extract)
| R | ||
| Revenue | 600 000 000 | |
| Cost of sales | (300 000 000) | |
| Gross profit | 300 000 000 | |
| Operating expenses | (150 000 000) | |
| Finance costs | (44 000 000) | |
| Share of profits from associate | 17 000 000 | |
| Profit before tax | 123 000 000 | |
| Taxation | (35 000 000) | |
| 88 000 000 | ||
| Other comprehensive income: Gain on revaluation of PPE | 15 000 000 | |
| 103 000 000 | ||
| Profit attributable to: | ||
| – Non-controlling interests | 10 000 000 | |
| – Parent shareholders | 78 000 000 | |
| 88 000 000 | ||
| Total comprehensible income attributable to: | ||
| – Non-controlling interest | 12 000 000 | |
| – Parent shareholders | 91 000 000 | |
| 103 000 000 |
Roundworm Group Ltd
Consolidated statement of financial position as at 31 December 20.21 and 20.22 (Extract)
| 20.22 | 20.21 | |
| ASSETS | R | R |
| Non-Current Assets | ||
| – Property, plant and equipment | 240 000 000 | 280 000 000 |
| – Investments in associates | 80 000 000 | 70 000 000 |
| – Goodwill | 25 000 000 | 19 000 000 |
| 345 000 000 | 369 000 000 | |
| Current Assets | ||
| – Inventory | 105 000 000 | 90 000 000 |
| – Receivables | 120 000 000 | 100 000 000 |
| – Cash and cash equivalents | 30 000 000 | 75 000 000 |
| 255 000 000 | 265 000 000 | |
| TOTAL ASSETS | 600 000 000 | 634 000 000 |
| EQUITY AND LIABILITIES | ||
| Equity | ||
| – Share capital | 100 000 000 | 100 000 000 |
| – Retained earnings | 194 000 000 | 142 000 000 |
| – Revaluation reserve | 103 000 000 | 90 000 000 |
| – Non-controlling reserve | 72 000 000 | 40 000 000 |
| Total Equity | 469 000 000 | 372 000 000 |
| Non-current Liabilities | ||
| – 12% debentures | 90 000 000 | |
| – Deferred taxation | 30 000 000 | 24 000 000 |
| Total Non-current Liabilities | 30 000 000 | 114 000 000 |
| Current Liabilities | ||
| – Trade payables | 65 000 000 | 55 000 000 |
| – Taxation | 10 000 000 | 8 000 000 |
| – Bank overdraft | 26 000 000 | 85 000 000 |
| Total Current Liabilities | 101 000 000 | 148 000 000 |
| Total Liabilities | 131 000 000 | 262 000 000 |
| TOTAL EQUITY AND LIABILITIES | 600 000 000 | 634 000 000 |
Additional information:
1. Acquisition of subsidiary
During the year ended 31 December 20.22, Roundworm purchased 80% of the issued equity share capital of Chong Ltd for R100 000 000, payable in cash. The net assets of Chong at the date of acquisition were assessed at fair value as follows:
| R | ||
| Property, plant and equipment | 60 000 000 | |
| Inventory | 30 000 000 | |
| Receivables | 25 000 000 | |
| Bank and cash | 10 000 000 | |
| Trade payables | (15 000 000) | |
| Taxation | (5 000 000) | |
| 105 000 000 |
It is group policy to measure NCI at the proportionate share of the fair value of net assets at acquisition.
2. Goodwill
Goodwill suffered an impairment during the year.
3. Property, plant and equipment
The only disposal in the year was of land with a carrying value of R90 million. The profit on disposal of R10m is included within operating expenses. Depreciation of R58m was charged on PPE in the year.
QUESTION 3 (11 marks)
Midrand Ltd acquired a 90% interest in Bramely Ltd on 2 December 20.21 for R2 million. The consideration was settled as follows:
| R | |
| Cash payment, | 1000 000 |
| Issue of 100 000 shares to the seller | 650 000 |
| Issue of debentures to the seller | 450 000 |
Legal and other costs incurred in relation to the acquisition of the shares in relation to Bramely Ltd amounted to R126 000. Costs to issue the shares and the debentures amounted to R89 000 and R77 500 respectively.
Answers to Above Questions on Financial Accounting
Answer 1: The consolidated financial statements of Costa Ltd and its subsidiary for the year ended 30 June 20.22 is calculated as follows:
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