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MODULE NAME: MODULE CODE:

FINANCIAL ACCOUNTING 2B FIAC6212

ASSESSMENT TYPE: EXAMINATION (PAPER ONLY)

TOTAL MARK ALLOCATION: 180 MARKS
TOTAL HOURS: 3 HOURS (+15 minutes reading time)
INSTRUCTIONS:
1. Please adhere to all instructions in the assessment booklet.
2. Independent work is required.
3. Five minutes per hour of the assessment to a maximum of 15 minutes is dedicated to
reading time before the start of the assessment. You may make notes on your question
paper, but not in your answer sheet. Calculators may not be used during reading time.
4. You may not leave the assessment venue during reading time, or during the first hour or
during the last 15 minutes of the assessment.
5. Ensure that your name is on all pieces of paper or books that you will be submitting. Submit
all the pages of this assessment’s question paper as well as your answer script.
6. Answer all the questions on the answer sheets or in answer booklets provided. The phrase
‘END OF PAPER’ will appear after the final set question of this assessment.
7. Remember to work at a steady pace so that you are able to complete the assessment within
the allocated time. Use the mark allocation as a guideline as to how much time to spend on
each section.
Additional instructions:
1. This is a CLOSED BOOK assessment.
2. Calculators are allowed.
3. Answer All Questions.
4. Show all calculations, where applicable (marks may be awarded for this).
5. Round all calculations to the nearest Rand, where applicable.

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Question 1 (Marks: 65)

Health-Wise Ltd, is a company specialising in the production of health foods and drinks. The
directors of Health-Wise Ltd are diversifying the activities of the company by acquiring
investments in other health food related companies.

The following information relates to the companies with the Health-Wise Ltd group for the year
ended 31 December 2018:

Health-Wise Slim-Wise Ltd Carb-Wise Ltd

Ltd
R R R
Debits
Property, plant and equipment 517 170 395 252 476 000
Investment in Slim-Wise Ltd at cost – 210 000 - -
ordinary shares
Investment in Slim-Wise at cost – 4 000 - -
preference shares
Investment in Carb-Wise at cost – 175 000 - -
ordinary shares
Investment in Sugar-Wise Ltd at fair 60 000 - -
value
Loan to Slim-Wise Ltd 31 000 - -
Inventories 75 000 49 000 12 000
Trade and other receivables 250 000 112 000 17 596
Cash and cash equivalents 81 618 125 200 20 000
Dividends paid – ordinary shares - - 9 000
Dividends paid – preference shares - 4 000 -
Cost of sales 430 000 350 000 150 000
Other expenses 188 500 70 900 62 850
Income tax expense 99 106 85 358 43 806
2 121 394 1 191 710 791 252
Credits
Ordinary share capital (500 000; 200 500 000 200 000 150 000
000; 150 000 shares)

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10% Cumulative preference share 200 000 10 000

capital (100 000; 10 000 shares)
Retained earnings – 1 January 2018 215 000 90 000 70 000
Accumulated depreciation 120 000 98 500 165 000
Long-term borrowings – Health-Wise - 15 000 -
Ltd
Trade and other payables 88 944 32 460 36 952
Dividends payable – ordinary shares 25 000 20 000 -
Revenue 944 700 710 000 365 000
Other income 27 750 15 750 4 300
2 121 394 1 191 710 791 252

Additional information:

1. Slim-Wise Ltd – ordinary shares

On 1 January 2015 Health-Wise Ltd acquired 160 000 of the ordinary shares of Slim-Wise
Ltd for R210 000. On that date the retained earnings of Slim-Wise Ltd amounted to
R40 000.

On the acquisition date of Slim-Wise Ltd, there were no unidentified assets and liabilities
and the fair values of all assets and liabilities were equal to the carrying amounts.

2. Slim-Wise Ltd – preference shares

On 1 January 2015 Health-Wise Ltd acquired 4 000 cumulative preference shares in Slim-
Wise Ltd. At 1 January 2018 the preference dividends of Slim-Wise Ltd for the previous
three years were in arrears. All arrear preference dividends were paid in cash on 31
December 2018.

Both companies classified the 10% cumulative preference share capital as equity.

3. Carb-Wise Ltd
On 1 January 2018 Health-Wise Ltd acquired 75% of the ordinary shares of Carb-Wise Ltd
for R175 000.

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At the date of acquisition, a portion of land with a carrying amount of R322 000 was
valued by a sworn appraiser by R10 000 more. The revaluation was not recorded in the
accounting records of Carb-Wise Ltd. This was the only item in the accounting records of
Carb-Wise Ltd that had a fair value not equal to its carrying amount on the date of
acquisition.

On the date of acquisition, there were no unidentified assets and liabilities and the fair
values of all other assets and liabilities were equal to the carrying amounts.

4. Sugar-Wise Ltd
On 1 January 2017 Health-Wise Ltd acquired 5% of the ordinary shares in Sugar-Wise Ltd
for R55 000. This investment was fair value adjusted by Health-Wise Ltd for the year ended
31 December 2017. No fair value adjustments were required for the year ended 31
December 2018.

5. Intragroup transactions
Inventories
During the current financial year Slim-Wise Ltd sold inventories to Health-Wise Ltd. The
following details applied to the intragroup sales:
- A profit mark-up of 35% on the selling price was applied.
- Total intragroup sales for 2018 amounted to R115 000 and,
- Inventories on hand of Health-Wise Ltd that were purchased from Slim-Wise Ltd
amounted to R45 000 (31 December 2018).

Machinery
On 1 April 2017, Slim-Wise Ltd sold machinery with a carrying amount of R55 000 to Carb-
Wise Ltd for R73 000. The machinery was acquired On 1 April 2016 by Slim-Wise Ltd and
had an expected useful life of five years at the original purchase date, which has remained
unchanged. The entities’ policy is to provide for depreciation over the expected useful life
of machinery using the straight-line method.

Ordinary dividends receivable

The ordinary dividends receivable from Slim-Wise Ltd was debited against the loan account
in the accounting records of Health-Wise Ltd.

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6. Accounting policies
- The Health-Wise Ltd group measures investments in subsidiaries at cost and
investments in financial assets at fair value through other comprehensive income in
the separate financial statements.
- Assume each ordinary share carries one vote and that voting rights determine control.
- The issued share capital of both companies has not changed since incorporation.
- The Health-Wise Ltd Group elected to use the partial method to recognise goodwill.
- The non-controlling interests are measured at their proportionate share of net assets
at acquisition date.

Q.1.1 Calculate the total goodwill / gain from bargain purchase that arose on the (8)
acquisition of Slim-Wise Ltd and Carb-Wise Ltd by Health-Wise Ltd.

Q.1.2 Prepare the consolidated statement of financial position of the Health-Wise Ltd (50)
Group as at 31 December 2018.

Q.1.3 Discuss how the intercompany loan account should be eliminated in the (7)
consolidated statement of financial position of the Health-Wise Ltd Group as at 31
December 2018. Journal entries should be used to support your discussion.

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Show all calculations as marks are awarded for calculations.
Round all amounts to the nearest Rand.
Ignore any tax implications.
Comparative figures are not required.

© The Independent Institute of Education (Pty) Ltd 2019

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Question 2 (Marks: 55)

Flo Ltd is a manufacturer and retailer of haircare products. Mist Ltd is a manufacturer of perfumes
and other fragrances. On 1 July 2017, Flo Ltd purchased a controlling interest in Mist Ltd to take
advantage of diversifying its portfolio within the cosmetic industry.

The trial balances of the above companies for the year ended 30 June 2019 are as follows:
Flo Ltd Mist Ltd
R R
Debits
Property, plant and equipment 2 881 800 2 720 000
(at carrying amount)
Investment in Mist Ltd at cost – 390 000 ordinary 1 197 000 -
shares
Investment in Mist Ltd at cost – 7.5% Debentures 130 000 -
Loan to Mist Ltd 80 000 -
Inventories 235 000 230 000
Trade and other receivables 543 000 394 600
Cash and cash equivalents 159 208 183 000
Dividends paid 125 000 45 000
Cost of sales 2 177 500 1 463 600
Other expenses 363 695 129 000
Finance costs 22 500 8 400
Income tax expense 433 777 281 400
8 348 480 5 455 000
Credits
Ordinary share capital (R2.50 per share) 2 500 000 1 500 000
Retained earnings – 1 July 2018 1 117 180 764 000
7.5% Debentures 300 000 200 000
Loan from Flo Ltd - 80 000
Trade and other payables 318 400 305 000
Revenue 3 940 000 2 546 000
Other income 172 900 60 000
8 348 480 5 455 000

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Additional information:

1. Mist Ltd – ordinary shares

Flo Ltd acquired its interest in Mist Ltd on 1 July 2017 when the retained earnings of Mist
Ltd was R44 600. The directors of Flo Ltd agreed that the carrying amounts of the net
identifiable assets of Mist Ltd were equal to their fair values except for the value of land
and buildings. A sworn appraiser valued the land and buildings at R200 000 more than the
amount reflected in the accounting records of Mist Ltd. No adjustment was made in the
accounting records of Mist Ltd.

On 1 July 2017, Mist Ltd.’s shares were trading at a market value of R3 per share.

2. Mist Ltd – debentures

Flo Ltd invested in 65% of the debentures of Mist Ltd on 1 July 2017. The interest on the
debentures for the year ended 30 June 2019 has not yet been accounted for in the
accounting records of Mist Ltd.

3. Inventory sales
Since 2016, Flo Ltd purchases some of its inventory from Mist Ltd at a gross profit of 55%
on selling price. Inventory on hand purchased from Mist Ltd is included in Flo Ltd.’s current
assets for 2018 and 2019 as follows:

30 June 2018 R45 000

30 June 2019 R52 500

Sales from Mist Ltd to Flo Ltd during the 2019 financial year amounted to R225 000.

4. Machinery
Mist Ltd sold a machine with a carrying amount of R144 000 to Flo Ltd on 1 April 2018 for
an amount of R160 000. On this date, the estimated remaining useful life of the machine
was 2.5 years. It is the policy of the group to depreciate machinery over the useful life of
the machinery using the straight-line method.

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5. Loan
Flo Ltd granted a loan to Mist Ltd on 1 February 2016 at an interest rate of 10.5% per
annum. The loan will be repaid to Flo Ltd on 1 February 2021.

6. Management fees
Flo Ltd assists with the day-to-day management of Mist Ltd at an agreed fee of R30 000 per
annum.

7. Accounting policies
- The Flo Ltd group measures investments in subsidiaries at cost.
- Assume each ordinary share carries one vote and that voting rights determine control.
- The issued share capital of both companies has not changed since incorporation.
- The Flo Ltd Group elected to use the full goodwill method to recognise goodwill.
- The non-controlling interests are measured at fair value at acquisition.

Q.2.1 Prepare the journal entry to account for the interest on debentures in the (3)
separate financial statements of Mist Ltd for the year ended 30 June 2019.
Journal narrations are not required.

Q.2.2 Prepare the proforma consolidation journal entries of the Flo Ltd Group for (48)
the year ended 30 June 2019.

Q.2.3 Assuming that the Flo Ltd Group’s consolidated profit for the year ended 30 (4)
June 2019 is R1 548 247, calculate the retained earnings balance at 30 June
2019 as it would be disclosed in the consolidated statement of changes in
equity of the Flo Ltd Group for the year ended 30 June 2019.

Your answer must comply with the requirements of International Financial

Reporting Standards (IFRS).
Show all calculations as marks are awarded for calculations.
Round all amounts to the nearest Rand.
Ignore any tax implications.
Comparative figures are not required.

© The Independent Institute of Education (Pty) Ltd 2019

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Question 3 (Marks: 20)

Zama Ltd is an electrical company operating in the Eastern Cape. The management of Zama Ltd
has identified external acquisitions as an area of expansion. As a result, Zama Ltd purchased a 60%
interest in Zamele Ltd on 1 January 2018. On this date Zama Ltd obtained control over Zamele Ltd.

The abridged statement of financial position of Zamele Ltd was as follows on 1 January 2018:

DR CR
R R
Share capital - 750 000
Retained earnings - 1 100 000
Net assets 1 850 000

The follows adjustments need to be accounted for on 1 January 2018:

1. The fair value of the non-controlling interest was R820 000.

2. Machinery was valued at R300 000 more than the carrying amount. The remaining useful
life of the machinery from the date of acquisition is four years. Zamele Ltd continued to
account for machinery in accordance with the cost model as per IAS 16.

3. Land with a cost price of R600 000 had a fair value of R800 000. It is the policy of Zamele
Ltd to account for land in accordance with the cost model as per IAS 16.

4. Details of the consideration transferred to the shareholders of Zamele Ltd are as follows:

- Cash of R1 200 000 was paid.

- Zama Ltd issued 1 000 ordinary shares. The fair value of the shares was R220 each on
1 January 2018. The shares were valued at R200 each, on the registration date of the
shares on 18 January 2018.
- Zama Ltd transferred a motor vehicle with a carrying amount of R180 000 in its
accounting records. The motor vehicle had a fair value of R195 000.
- Zama Ltd will settle an outstanding liability of R50 000 on behalf of Zamele Ltd.

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Q.3.1 Discuss the differences between the partial method of goodwill and the full (7)
method of goodwill according to IFRS 3 Business Combinations.

Note: The differences in accounting treatment in the consolidated financial

statements should be included as part of your discussion.

Q.3.2 Prepare the journal entry to account for the acquisition of Zamele Ltd in the (8)
separate accounting records of Zama Ltd for the year ended 31 December
2018. Journal narrations are not required.

Q.3.3 Calculate the total goodwill / gain from bargain purchase that arose on the (5)
acquisition of Zamele Ltd by Zama Ltd on 1 January 2018 using the full
goodwill method.

Your answer must comply with the requirements of International Financial

Reporting Standards (IFRS).
Show all calculations as marks are awarded for calculations.
Round all amounts to the nearest Rand.
Ignore any tax implications.
Comparative figures are not required.

Question 4 (Marks: 20)

PART A
Q.4.1 Define ‘key management personnel’ in terms of IAS 24, Related party (3)
disclosures.

Q.4.2 Define a related party transaction and provide two examples of transactions (5)
between related parties that requires disclosure. Your answer must comply
with the requirements of IAS 24, Related party disclosures.

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PART B
Miss Rendani is the senior manager in charge of the purchasing department of Warrior
Ltd. This department makes substantial purchases for its manufacturing and retail
departments. Miss Rendani entered into a contract to purchase raw materials and
finished products from Perseverance Ltd, a company she controls.

Q.4.3 Discuss whether Miss Rendani and Perseverance Ltd are related parties (8)
of Warrior Ltd. Your answer must comply with the requirements of IAS 24,
Related party disclosures.

Q.4.4 In terms of IAS 24, Related party disclosures, information about related party (4)
transactions and outstanding balances must be disclosed. This disclosure
includes the amount of the transaction. Provide any other four minimum
disclosure requirements.

Question 5 (Marks: 20)

Mrs Whydawake, an investor and director of Soughtafter Ltd, is trying stop a hostile takeover,
initiated by Byers Ltd. The shareholders meeting will be held shortly and Mrs Whydawake needs
to know the earnings per share for the current year. The financial accountant has resigned and
your help is needed to supply the required information.

The following information has been provided for Saughtafter Ltd for the financial years ended 31
October 2018 and 2019:
R R
2019 2018
Profit before tax 145 500 120 250
Tax (40 740) (33 670)
Profit for the year 104 760 86 580

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Additional information:
1. On 1 November 2017, the issued share capital consisted of:
400 000 Ordinary shares R800 000
200 000 6% Cumulative preference shares (R2 each) R400 000
2. On 31 December 2018, a rights issue of one share for every five shares was made for cash
at R3.00 per share. The market price prior to the announcement of the rights issue was
R5.20 per share. Management considered that they could have issued the shares at the fair
value of R4.50 per share.
3. On 1 January 2019, a capitalisation of one ordinary share for every four held, was made.
4. On 1 May 2019, 50 000 ordinary shares were issued at their fair value.
5. The retained earnings column in the statement of changes in equity was as follows:

R R
2019 2018
Opening balance 1 November 75 000 55 000
Total comprehensive income for the year 104 760 86 580
Dividend paid (78 000) (15 000)
Preference dividend paid 31 October (48 000) -
Ordinary dividend declared 31 October (30 000) (15 000)
Closing balance 31 October 101 760 126 580

Q.5.1 Calculate the basic earnings per share in the annual financial statements of
Soughtafter Ltd for the years ended 31 October 2018 and 2019. (15)

Q.5.2 Disclose the basic earnings per share in the annual financial statements of
Soughtafter Ltd for the year ended 31 October 2019. Comparatives are
required. (5)

END OF PAPER

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