QUESTION 1 (50 marks)

On 1 July 2021, Bruno Ltd (“Bruno”) acquired 45% of the issued shares in a JSE-listed company, Pluto Ltd (“Pluto”) from a third party. Both Bruno and Pluto have a 30 June year-end. The cost of the 45% shareholding was R625 000 and thereby Bruno obtained significant influence over Pluto. The purchase was correctly accounted for in the accounting records of Bruno.

The following trial balance was obtained from the financial records of Pluto for the financial year ended 30 June 2023:

  Pluto Ltd
Ordinary Share capital (R1 each)   1 000 000
Retained earnings (1 July 2022)   256 620
Revaluation reserve: Land (1 July 2022)   200 000
Ordinary dividends declared and paid 100 000  
Trade and other payables   235 500
Property, plant, and equipment 1 044 521  
Trade and other receivables 300 000  
Bank 150 000  
Inventory 255 000  
Revenue   812 500
Cost of sales 406 250  
Other expenses 276 550  
Income tax expense (P/L) 35 019  
Revaluation gain on land (OCI)   80 000
Income tax expense (OCI) 17 280  
  2 584 620 2 584 620

On the acquisition date of 1 July 2021, Pluto had the following credit balances as part of equity:

Ordinary share capital (R1 each) 1 000 000
Retained earnings 145 200
Revaluation reserve (land) 175 000
  1 320 200

On 1 July 2021, the net assets of Pluto were considered to be fairly valued, except for the plant, which was considered to be R110 000 more than its carrying value. The plant had a remaining useful life of 5 years from 1 July 2021 and a nil residual value. The tax base of the plant was the same as its carrying value on 1 July 2021 and the South African Revenue Services (SARS) allowed the same annual deduction as the annual accounting depreciation recorded in the accounting records of Pluto.

Pluto Ltd was incorporated in South Africa and its principal place of business is Stellenbosch. The market price of a Pluto Ltd share was R15.85 on 30 June 2023.

Additional information:
• Dividend income was included as part of ‘other income’ in Bruno’s records.
• It is Bruno’s policy to measure its investments in associates at cost in its separate financial statements.
• The share capital (e.g. number of shares) of Pluto remained unchanged since the acquisition made by Bruno.
• Pluto depreciates its plant and equipment using a straight-line method over its useful life.
• The other comprehensive income of Pluto for the financial year contains only gains regarding the revaluation of land (property).
• Pluto Ltd is the only equity-accounted investment of the Bruno Ltd Group.
• Assume a company’s income tax rate of 27% for all financial years and 80% of capital gains are included in taxable income for all financial years.

• Ignore the effects of dividend tax and value added tax (VAT).


Prepare all the pro forma journal entries to equity account for Bruno Ltd’s investment in Pluto Ltd for the financial year ended 30 June 2023.
Dates and narrations are not required.
Round off all answers to the nearest Rand. (35 marks)

Prepare the IFRS 12, Disclosure of interests in Other Entities, note disclosure for the investment in associate to be included in Bruno Ltd’s equity-accounted financial statements for the financial year ended 30 June 2023.
Assume that Pluto Ltd is Bruno Ltd’s only equity accounted investment and that the investment is material to Bruno Ltd.
Comparative figures are not required. (15 marks)

QUESTION 2 (13 marks)

Beanie Ltd (‘’Beanie’’) and Mittens Ltd (‘’Mittens’’) entered into a joint arrangement where each entity obtained 50% ownership in Woolie Ltd (‘’Woolie’’). Woolie is a separate legal person that was incorporated to provide raw materials (wool) required by both Beanie and Mittens in their respective operations. Woolie, however, supplies the majority of their products to third parties and only an insignificant portion of their wool is supplied to Beanie and Mittens.

The legal form of Woolie indicates that the assets and liabilities of Woolie are exclusively its own assets and liabilities. The contractual arrangement between the parties further clarifies that neither Beanie nor Mittens has any rights, title, or ownership or claim over Woolie’s specific assets.

During the 2023 financial year, Woolie was financially distressed after it suffered a cash deficit. Woolie however was required to settle an overdue account to avoid a lawsuit for non-payment. Woolie did not have the cash resources to pay the account and also did not want any legal action taken against them by their supplier, who refused to negotiate repayment terms any longer. Woolie, therefore, resorted to obtaining a bank loan to fulfill this obligation during the 2023 financial year, since neither Beanie nor Mittens are liable to pay for Woolie’s debts or overdue accounts.

Woolie suffered a loss for the 2023 financial year which was shared by Beanie and Mittens according to their ownership interests.

Discuss whether the joint arrangement should be classified as a joint venture or a joint operation as per IFRS 11, Joint Arrangements. (13 marks)

Use the following suggested format (headings) to structure your discussion:

• Criteria for classification of a joint arrangement
• Analysis:
o Structure & legal form
o Contractual arrangement
o Other facts and circumstances
• Conclusion

QUESTION 3 (37 marks)

On 1 July 2022, Tranquila Ltd (“Tranquila”) acquired a 100% interest in Bluewater Ltd (“Bluewater”), gaining control over Bluewater from that date. Both entities are in the leisure industry and have a 30 June financial year-end.

At the date of acquisition, Bluewater’s equity consisted of the following credit balances:

Ordinary share capital (R1 each) 1 000 000
Retained earnings 935 000
Total equity 1 935 000

Operating lease:
At the acquisition date, Bluewater had an item of equipment with a carrying value of R115 000 (the carrying value also equals its tax base), a remaining useful life of 6 years and a nil residual value. The equipment was leased to a third party. Details of the operating lease are as follows on 1 July 2022:

Remaining lease term 3 years
Lease payment R50 000 per annum.
Market rate of lease payment R44 500 per annum

Excluding the operating lease agreement, the equipment’s fair value at acquisition was R125 540.
The South African Revenue Service (SARS) grants an annual allowance on the equipment which is the same as the annual depreciation recognised by Bluewater.

Contingent liability:
At 30 June 2022, included in the notes of Bluewater Ltd’s financial statements, was a contingent liability of R230 000 which pertained to a claimant suing for damages after falling off one of the rides at Bluewater Ltd’s amusement park. The lawyers were of the opinion that the safety of visitors at the amusement park was risky due to the absence of safety protocols such as safety checks on the rides prior to and at the time of the

claimant’s visit to the amusement park. However, due to the absence of any witnesses to the claimant’s fall, the outflow of future economic benefits was not considered to be probable. The fair value of the legal claim was considered to be R145 000 on 1 July 2022 (acquisition date) after taking all possible outcomes into account.

During the 2023 financial year, the claimant was able to present compelling evidence in court indicating that he sustained injuries that were indeed a result of the unsafe ride at the amusement park. The court verdict was subsequently reached, and the claimant awarded damages of R200 000.

Acquisition date assets and liabilities:
Tranquila’s management valued Bluewater’s competent workforce and internally generated customer database. The database contains valuable customer information such as their buying habits.

Bluewater’s customers, whose names are included in the customer database, have all signed confidentiality agreements with Bluewater, preventing Bluewater from exchanging or disposing their information on the database with third parties.

Details of the workforce and database are as follows:



Fair value Remaining useful

life from 1 July 2022

Workforce R345 000 Indefinite
Internally generated

customer database

R87 000 Indefinite

The South African Revenue Services (SARS) did not provide any allowance for the workforce nor customer database.

Apart from the above-mentioned equipment (under the operating lease), the contingent liability, workforce, and internally generated customer database; all other assets and liabilities of Bluewater were considered to be fairly valued.

Purchase consideration:
The purchase consideration for the acquisition of Bluewater Ltd comprised of the following:
• R924 560 paid in cash on 1 July 2022.
• A final once-off amount of R806 400 is payable on 1 July 2023 in cash to the seller of the 100% interest in Bluewater Ltd.

Additionally, the purchase agreement contains a performance-based clause. Tranquila will make an additional cash payment of R300 000 to the seller of Bluewater Ltd on 1 July 2023 if the net profit generated by Bluewater Ltd during the 2023 financial year increases by more than 15% from the previous year. After considering all possible outcomes, the fair value of the contingent consideration was R210 000 on 1 July 2022.

Additional information:
• Tranquila accounts for investments in subsidiaries at cost in accordance with IAS 27.10(a) in its separate financial statements.
• The pre-tax discount rate is 12% per annum compounded annually.
• Assume an income tax rate of 27% and a capital gains tax inclusion rate of 80%.
• Ignore the effects of value added tax (VAT).


Prepare all the pro-forma journal entries to account for Bluewater Ltd in the consolidated financial statements of the Tranquila Ltd Group for the financial year ended 30 June 2023. Dates and narrations are not required.
Show all workings.
Be clear, where applicable, regarding which entity the entries are referring to i.e. put the name of the entity in brackets after the account description.
Round off final answers to the nearest Rand, if necessary. (35 marks)

Answers to Above Questions on Financial Accounting

Answer 1:  The journal entries to equity account for Bruno Ltd’s investment in Pluto Ltd for the financial year ended 30 June 2023 is prepared as follows:


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