FAC2602/202/1/2010

DEPARTMENT OF FINANCIAL ACCOUNTING

SELECTED GENERALLY ACCEPTED ACCOUNTING STANDARDS

AND THE VALUATION OF FINANCIAL INSTRUMENTS

TUTORIAL LETTER 202 FOR FAC2602

(FIRST SEMESTER)

Dear Student

1. GENERAL

Attached hereto please find the solution to assignment 03/2010 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 now make use of sms to ask your FAC2602 lecturers academic questions.
Please no admin related questions!!!
Use 083 142 10119 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 May 2010 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.

2.3 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.
 2

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 cal-
culated 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

Tel no E-mail
Mrs AA van Rooyen (012) 429 4539 fac2602@unisa.ac.za
Mrs M De Beer (012) 429 6409 fac2602@unisa.ac.za
Mrs C Molate (012) 429 8885 fac2602@unisa.ac.za
Mrs E Zitha (Administrative officer) (012) 429 4677

LECTURES: ACCOUNTING II (FAC2602)

ANNEXURE A: SOLUTION ASSIGNMENT 3/2010

ANNEXURE B: MAY 2009 EXAMINATION PAPER
ANNEXURE C: SOLUTION MAY 2009 EXAMINATION PAPER
ANNEXURE D: OCTOBER 2009 EXAMINATION PAPER
ANNEXURE E: SOLUTION OCTOBER 2009 EXAMINATION PAPER
 3 FAC2602/202/1

ANNEXURE A: SOLUTION ASSIGNMENT 03/2010

QUESTION 1

BLUE LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
29 FEBRUARY 2008

Note R
Revenue (900 000^ + 600 000^ - 475 500^ - 50 000^) 974 500
Cost of sales [(510 000^ + 330 000^ – 475 000^) –
(27 000 x 33⅓/133⅓9) + (30 000 + 7 500 x 33⅓/133⅓9)] (367 125)
Gross profit 607 375
Other expenses [(27 000 + 24 0009 - 6 000^) + 32 500^ +
45 000^ + 54 000^ + 36 000^ + 12 000^ + 10 500^] (235 000)
Finance cost (6 000^ + 30 000^ - 15 0009) (21 000)
Profit before tax 1 351 375
Income tax expense (101 400 + 49 200)9 (150 600)
Profit for the year 200 775
Other comprehensive income -
Total comprehensive income for the year 200 775

Profit attributable to:

Owners of the parent^ (200 775 – 16 260) 184 515

Non-controlling interest^ (calculation 1)(b) 16 260
200 775

Total comprehensive income attributable to:

Owners of the parent^ (200 775 – 16 260) 184 515

Non-controlling interest^ (calculation 1)(b) 16 260
200 775

NOTES FOR THE YEAR ENDED 29 FEBRUARY 2008

R
1. Profit before tax

Profit before tax is arrived at after taking into account the following:

Expenses
Auditors’ remuneration (12 000 + 10 500) 22 500
Depreciation (27 000 + 24 000 – 6 000) 45 000
Staff cost (54 000 + 36 000) 90 000
 4
QUESTION 1 (continued)

BLUE LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
29 FEBRUARY 2008
Attributable to owners of the parent Non-
Share Retained controlling Total
capital earnings Total interest equity
R R R R R
Balance at 1 March 2007 9150 000 112 350# 262 350 ^36 900 (a) 299 250
Total comprehensive income for the
year ^184 515 184 515 ^16 260 (b) 200 775
Dividend paid 9(15 000) (15 000) 9(6 000)(c) (21 000)
Balance at 29 February 2008 150 000 281 865 431 865 47 160 (d) 479 025
(e)
#(67 500^ - 6 7509) + 51 600^

Calculations:

1. Analysis of shareholders’ equity of Green Ltd

Blue Limited
80% Non-
Total controlling
At Since interest
acquisition acquisition 20%
At acquisition R R R R
Share capital ^120 000 96 000 24 000
120 000 96 000 24 000 (a)
Investment in Green Ltd ^96 000
Goodwill Nil^

Since acquisition until

beginning of year
Retained earnings 64 500 51 600 (e) 12 900 (a)
Given ^88 500
At acquisition -
88 500
Unrealised profit on sale of
equipment ^(30 000)
Depreciation on unrealised
profit (30 000 x 20%) 96 000
Current year 81 300 65 040 16 260 (b)
Profit after tax 75 300 (2)
Depreciation on unrealised profit 96 000
Dividend paid 9(30 000) (24 000) (6 000)(c)
235 800 92 640 47 160 (d)
 5 FAC2602/202/1

QUESTION 1 (continued)

2. Profit after tax – Green Ltd

R
Sales ^600 000
Cost of sales ^(330 000)
Repairs and maintenance ^(45 000)
Depreciation - equipment ^(24 000)
Staff cost ^(36 000)
Interest paid ^(30 000)
Auditors’ remuneration ^(10 500)
Taxation ^(49 200)
75 300
 6
QUESTION 2

Non-
Dr Cr controlling
R R interest
R
Share capital9 120 000
Investment in Green Ltd9 96 000
Non-controlling interest9 24 000 24 000
Elimination of shareholders’ equity of Green Ltd at
acquisition
Retained earnings^ 12 900
Non-controlling interest^ 12 900 12 900
Recording of non-controlling interest in Green Ltd for the
period ended 28 February 2007
36 900 (a)
Retained earnings - Green Ltd9 30 000
Equipment - Blue Ltd9 30 000
Elimination of unrealised profit on sale of equipment
Accumulated depreciation - Blue Ltd9 6 000
Retained earnings - Green Ltd9 6 000
Elimination of depreciation associated with sale of
equipment for the period ended 28 February 2007
Accumulated depreciation - Blue Ltd9 6 000
Depreciation - Green Ltd9 6 000
Elimination of depreciation associated with sale of
equipment for the year ended 29 February 2008
Sales - Blue Ltd^ 475 500
Cost of sales - Green Ltd^ 475 500
Elimination of intercompany sales
*Inventory - Green Ltd9 7 500
Loan from Blue Ltd9 7 500
Recording of inventory in transit
Retained earnings - Blue Ltd9 6 750
Cost of sales - Blue Ltd9 6 750
Elimination of unrealised profits of opening inventory
*Cost of sales - Blue Ltd9 9 375
Inventory - Green Ltd9 9 375
Elimination of unrealised profit in closing inventory
Non-controlling interest (SCI) ^ 16 260
Non-controlling interest (SFP) ^ 16 260 16 260 (b)
Recording of non-controlling interest in Green Ltd for the
current year
 7 FAC2602/202/1

QUESTION 2 (continued)

Non-
Dr Cr controlling
R R interest
R
Dividend received - Blue Ltd^ 24 000
Non-controlling interest^ 6 000 (6 000)(c)
Dividend paid - Green Ltd^ 30 000
Elimination of intercompany dividend and recording of
non-controlling interest in the dividend
Interest received - Blue Ltd^ 15 000
Interest paid - Green Ltd^ 15 000
Elimination of intercompany interest on loan
Loan from Blue Ltd - Green Ltd9 330 000
Loan to Green Ltd - Blue Ltd^ 330 000
Elimination of intercompany balances on loan accounts
Sales - Blue Ltd9 50 000
Property - Green Ltd9 50 000
Elimination of unrealised profit on sale of property
47 160(d)

*Alternative

Dr Cr
R R
Cost of sales - Blue Ltd9 7 500
Inventory - Green Ltd9 7 500
Elimination of unrealised profit in closing inventory
Cost of sales - Blue Ltd^ 1 875
Inventory - Green Ltd^ 5 625
Loan from Blue Ltd9 7 500
Elimination of unrealised profit in inventory in transit
 8
QUESTION 3

ROUNDABOUT LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2001
R R
Cash flow from operating activities

Profit before tax (calculation 1) 308 500

Adjustments for
Depreciation 935 000
Interest expense 911 500
Investment income 9(20 000)
Operating profit before working capital changes 335 000
Working capital changes 57 500
Increase in inventory (60 000 - 58 000) 9(2 000)
Decrease in receivables (245 000 - 190 000) 955 000
Increase in prepaid expenses (3 000 - 2 500) 9(500)
Decrease in accrued expenses (1 500 - 1 200) 9(300)
Increase in payables (40 300 - 35 000) 95 300
Cash generated from operations 392 500
Interest paid 9(11 500)
Dividends paid (calculation 2) (85 000)
Normal tax paid (calculation 3) (110 000)
Net cash inflow from operating activities 186 000

Cash flow from investing activities

Investment to maintain production capacity (100 000)
Replacement of equipment (calculation 4) 9(100 000)
Investment to expand production capacity (300 000)
Additions to property and equipment (calculation 4) 9(300 000)
Proceeds from sale of equipment 956 000
Proceeds from sale of investments (250 000 - 200 000) 950 000
Net cash outflow from investing activities (294 000)

Cash flow from financing activities

Proceeds on issue of shares (400 0009 + 40 0009) 440 000
Redemption of debentures 9(80 000)
Net cash inflow from financing activities 360 000
Net increase in cash and cash equivalents 252 000
Cash and cash equivalents beginning of year 9(140 000)
Cash and cash equivalents end of year 112 000
 9 FAC2602/202/1

QUESTION 3 (continued)

Calculations

1. Profit before tax

R
Sales ^1 450 000
Income from investments ^20 000
Cost of sales ^(750 000)
Administrative expenses ^(120 000)
Salaries and wages ^(180 000)
Other expenses ^(65 000)
Depreciation ^(35 000)
Finance cost ^(11 500)
308 500

2. Dividends paid
Unpaid amounts at beginning of year ^35 000
Amounts debited against profit 9150 000
Unpaid amounts at end of year ^(100 000)
85 000

3. Tax paid

Unpaid amounts at beginning of year ^34 000

Amounts debited against profit [92 000 – (10 000 – 8 000)] 9 90 000
Unpaid amounts at end of year ^(14 000)
110 000

4. Property and equipment at carrying amount

R R
Balance (833 000 – 100 000) b/d 733 000 Sales at carrying amount 56 000
Revaluation (325 000 – 75 000) 250 000 Depreciation 35 000
Replacement 100 000 Balance c/d 1 292 000
Additions* 300 000
1 383 000 1 383 000
*Balancing figure
 10
QUESTION 4

1. Calculations

1.1 Earnings 2000 1999

R R
Profit for the year ^200 000 ^150 000
Preference dividends (R100 000 x 16%) ^(16 000) ^(16 000)
Earnings 184 000 134 000

1.2 Weighted number of shares Total 2000 1999

Balance on 1 March 1999 9300 000
Rights issue on 31 Dec 1999 975 000
(300 000/4)
375 000
(300 000 x 1,119 x 10/12^) 277 500
(300 000 x 1,11^) 333 000
(375 000^ x 2/12^) 62 500
Sub total 375 000 340 000 333 000
Theoretical ex-rights value per share
Fair value of all outstanding shares +
Total amount received from exercise of rights /
number of shares outstanding prior to the exercise +
number of shares issued in the exercise

(R2 x 300 000 shares) + (R1 x 75 000)9

300 000 + 75 0009
= 1,8

Adjustment factor:

Fair value per share prior to the exercise of rights9

Theoretical ex-rights value per share9
= R2 / 1,8
= 1,11
Capitalisation issue on 31 January 2000
(375 000 / 3) 125 000
(340 000 / 3)^ 113 333
(333 000 / 3)^ 111 000
Weighted number of shares 500 000 453 333 444 000

1.3 Dividends 2000 1999

Given R50 000 -

Issued shares at date of dividend declaration 500 000
 11 FAC2602/202/1

QUESTION 4 (continued)

1.4 Basic earnings and dividends per share 2000 1999

Basic earnings per share

(R184 000 / 453 333) ^40,6c
(R134 000 / 444 000) ^30,18c
Dividends per share
(R50 000 / 500 000) ^10c ^Nil

2. Disclosure

2.1 On the face of the statement of comprehensive income underneath total

comprehensive income for the year
2000 1999
Basic earnings per share9 40,6c 30,18c

2.2 Part of the notes:

Basic earnings per share

The calculation of earnings per share is based on earnings of R184 000^ (1999:
R134 000^) and a weighted average of 453 333^ ordinary shares after an adjustment for
the rights issue and a capitalisation issue on 31 January 2000 (1999: 444 000).^

2.3 Reconciliation of amounts used to calculate basic earnings per share with amounts
in statement of comprehensive income:
2000 1999
R R
Earnings - basic earnings per share ^184 000 ^134 000
Cumulative preference dividend ^16 000 ^16 000
Profit per statement of comprehensive income 200 000 150 000

Dividends per share 10c Nil

 12

QUESTION 5

Journal entries

Dr Cr
R R
Help Bank

Operating lease expenses(1)9 60 000

Bank9 60 000

Operating lease expenses(2)9 12 000

Operating lease expenses deferred9 12 000

Easy Bank

Operating lease expenses(3)9 30 000

Bank9 30 000

Office equipment9 15 000

Bank9 15 000

Depreciation(4)9 500
Accumulated depreciation9 500
(1)
R5 000 x 12 = R60 0009
(2)
R72 000 – R60 000 = R12 0009
(3)
R3 000 x 10 = R30 0009
(4)
R15 000 x 20% x 2/12 = R5009

Calculations

1. Equalising of operating lease payments – Help Bank

R
First lease payment in advance 60 000
Total monthly lease payments [(R5 000 x 12) x 5] 300 000
Total lease expense 360 000

Thus per month: 360 000/60 = R6 000

Thus per year: R6 000 x 12 = R72 0009
 13 FAC2602/202/1

QUESTION 6

E1
6.1 Vo = 9
K

E1
300c9 =
0,123

E1 = 300 x 0,12
= 36 cents

6.2 FV = 2209
i = 129
n = 59
pmt = 159
PV = 178,91 cents

Dps
6.3 Po = 9
Kps

5c3
=
0,083

= 62,50 cents

6.4
Value of 1 ordinary share now: 9300,00c

Preference dividends still to be received:

n = 49
i = 109
pmt = 189
FV =0
PV = 57,06 57,06c
357,06c

6.5 PV = -20 0009

FV = 60 000 (20 000 x 3)9
i = 3 (12 ÷ 4)9
PMT = 0
n = ? = 37,17 periods
= 111,51 months (37,17 x 3) 9
 14
QUESTION 6 (continued)

6.6 n = 12 (3 x 4)9
i = 3 (12 ÷ 4)9
PMT = 100 (4 000 x 10% ÷ 4)9
FV = 4 0009
PV = ? = R3 800,92

6.7 n = 8 (2 x 4)9
i = 39
PMT = 1009
FV = 4 0009
PV = ? = R3 859,61

6.8 Interest income

(4 000 x 10%) = 9400 ,00

Amortisation of discount
(3 859,619 – 3 800,929) = 58,69
458,69
 15 FAC2602/202/1

ANNEXURE B: MAY 2009 EXAMINATION PAPER

This paper consists of 7 (SEVEN 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. Ensure that you are handed the correct examination answer book (blue colour for
accounting) by the invigilator.
5. Each question attempted must be commenced on a new (separate) page.
6. You must obtain at least 50% to pass this paper.

7. PROPOSED TIMETABLE:
Question Subject Marks Time in
No. minutes
1 Group financial statements 30 36
2 Earnings per share 27 32
3 Leases 28 34
4 Valuations 15 18
100 120
 16

QUESTION 1 (30 Marks) (36 Minutes)

The following represent the trial balances of Violet Limited and Tulip Limited at
31 March 2009:

Violet Tulip
Ltd Ltd
Credits R R
5 000 14% Debentures of R5 each .................................................... - 25 000
Accumulated depreciation – plant and equipment ............................. 320 000 175 000
Administration fees received .............................................................. 240 000 -
Bank overdraft – Flower Bank ............................................................ 60 000 -
Interest received on debentures ......................................................... 2 100 -
Issued share capital – ordinary shares of R3 each ............................ 300 000 120 000
Loan – Violet Limited (interest free) ................................................... - 175 000
Retained earnings – 1 April 2008 ....................................................... 577 000 155 000
Surplus on revaluation of property – 1 April 2008 .............................. 80 000 150 000
Gross profit ......................................................................................... 700 000 600 000
Taxation payable ................................................................................ 100 000 48 000
Trade and other payables................................................................... 267 400 122 000
2 646 500 1 570 000
Debits
Cash in bank – Flower Bank .............................................................. - 20 000
Plant and equipment at cost ............................................................... 600 000 400 000
Property at valuation ........................................................................... 800 000 600 000
Investments in Tulip Limited at fair value ........................................... 440 000 -
- shares (cost price R250 000) ........................................................... 250 000 -
- debentures (cost price R15 000) ...................................................... 15 000 -
- loan ................................................................................................... 175 000 -
Administration fees paid to parent company ...................................... - 240 000
Depreciation – plant and equipment ................................................... 80 000 65 000
Income tax expense ........................................................................... 104 888 58 660
Interest paid - bank overdraft.............................................................. 7 500 -
Interest paid - debentures................................................................... - 3 500
Inventories .......................................................................................... 60 000 45 000
Other expenses .................................................................................. 480 000 82 000
Trade and other receivables ............................................................... 74 112 55 840
2 646 500 1 570 000
Additional information

1. Violet Limited acquired 36 000 ordinary shares and 3 000 debentures in Tulip Limited on
31 January 2005 when Tulip Limited’s retained earnings was R80 000. At the date of
acquisition the property of Tulip Limited, which had a carrying value of R450 000, was
valued at R500 000. It is group policy to revalue property every three years, at 31 January.
Since date of acquisition 31 January 2005 Tulip Limited had not purchased or sold any
property. On the date of acquisition, consider the carrying amount of the assets and
liabilities to be equal to the fair values thereof.
 17 FAC2602/202/1

QUESTION 1 (continued)

2. It is group policy to show goodwill at cost in the financial statements.

Goodwill was not impaired.

3. Since 1 May 2008 Tulip Limited purchased all of its inventories for resale from
Violet Limited at cost plus 25%. Intercompany sales for the period amounted to
R880 000.

Inventories on hand at 31 March 2008 were as follows:

R
Violet Limited .................................................................................................... 25 000
Tulip Limited ..................................................................................................... 35 000

4. On 1 October 2007 Tulip Limited sold a machine to Violet Limited at a profit of R80 000.
The group provides for depreciation on equipment at 20% per annum according to the
straight-line method.

5. On 31 March 2009 the directors of both companies decided to declare a dividend of 50c
per share. No entries have been made in this regard.

6. Tulip Limited guarantees the overdraft of Violet Limited.

7. Each share carries one vote.

REQUIRED:

1.1 Draft the consolidated statement of comprehensive income of Violet Limited and its
subsidiary for the year ended 31 March 2009 according to the requirements of the
Companies Act and Generally Accepted Accounting Practice. Ignore comparative figures
and the taxation effect on unrealised profits and/or losses as well as capital gains tax. Do
all calculations to the nearest Rand. (12)

1.2 Calculate the following items as they will appear on the consolidated statement of
financial position of Violet Limited and its subsidiary as at 31 March 2009:

1.2.1 Property, plant and equipment (6)

1.2.2 Inventory (2)
1.2.3 Retained earnings (3)
1.2.4 Non-controlling interest (7)
 18

QUESTION 2 (27 marks)(32 minutes)

Opera Limited was incorporated in January 1999 with an authorised share capital of:
- 1 250 000 ordinary shares of R1 each
- 375 000 8% cumulative preference shares of 50c each
- 250 000 15% redeemable preference shares of R1 each
- 62 500 8% non-cumulative preference shares of R1,50 each

The following information was extracted from the financial statements of Opera Limited for the
year ended 31 December 2007:

EXTRACT FROM THE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED 31 DECEMBER 2007

2007 2006
R R
Profit before tax 670 000 555 000
Income tax expense (201 250) (168 750)
Profit for the year 468 750 386 250
Other comprehensive income - -
Total comprehensive income for the year 468 750 386 250

The following changes to the capital structure took place:

1) The company made a rights issue whereby 100 000 ordinary shares were offered to
existing shareholders at a fair value of R1,30 per share. On 30 September 2006 all the
shareholders exercised their options.
2) On 1 July 2007 the company issued 100 000 ordinary shares to the public at a premium
of 10%.
3) On 1 November 2007 the company made a capitalisation issue to ordinary
shareholders of one ordinary share at par for every five ordinary shares held. The
capital redemption reserve fund was utilised for this purpose.
4) On 30 November 2007 the company decided to have a share consolidation and
changed the par value of its shares to R2 each.

Additional information:
1. The issued share on 1 January 2006 was as follows:
- 625 000 Ordinary shares
- 375 000 Cumulative Preference shares
- 62 500 Non-cumulative Preference shares
2007 2006
R R
2. Total dividends declared on 31 December 136 500 -
There were no dividends in arrears on 1 January 2006

REQUIRED:
Calculate and disclose basic earnings and dividends per share in the annual financial
statements of Opera Limited for the year ended 31 December 2007 in compliance with
Generally Accepted Accounting Practice. Comparative figures are required. Show all
calculations.
 19 FAC2602/202/1

QUESTION 3 (28 marks) (34 minutes)

PART A (16 marks)

The following details, relate to a machine acquired by Frankan Ltd in terms of a finance lease
agreement:

Date of commencement - 1 July 2007

Cash price - R360 000
Lease period - 4 years
Payments of R70 000 are payable half yearly in arrears.

The machine was available for use and put into use on 1 July 2007. The machine will be
depreciated over its expected useful life of 5 years on the straight line method. The company’s
financial year ends on 30 June.

REQUIRED:

a) Calculate the nominal interest rate using a financial calculator. Round off to 2nd decimal.
(4)
b) Prepare an amortisation table up until 30 June 2008. (4)
c) Prepare all the journal entries for the year ended 30 June 2008. (Narrations are not
required) (8)

PART B (12 marks)

Buildcor Limited is in the manufacturing of kitchen units. During the year ended
31 December 2008 they entered into an operating lease agreement for machinery.

Agreement details:
Commencement date of lease 1 August 2008
Cash price of asset R380 000
Period of lease 24 months
Payment terms 1-18 R22 000 per month
Payment terms 19-24 R5 000 per month
The instalments are payable monthly in advance.

REQUIRED:

Prepare the following notes to the financial statements of Buildcor Limited for the year ended
31 December 2008 in accordance with the requirements of the Companies Act and Generally
Accepted Accounting Practice:

1. Profit before tax

2. Operating lease agreements
 20

QUESTION 4 (15 marks) (18 minutes)

4.1 Do the necessary calculations to the nearest second decimal, answer the following
multiple questions and only write the correct option (choose only A, B, C, D or E) in your
answer book.
a) At what rate of simple interest will R350 increase to R420 after 2 years and three months?

A. 20%
B. 8,89%
C. 8,44%
D. 9,44%
E. None of the above

b) At what rate of interest will R350 increase to R420 after 2 years and three months, if
interest is compounded?
A. 20%
B. 8,89%
C. 8,44%
D. 9,44%
E. None of the above
c) A debenture has a nominal value of R250, is redeemable at par after 3 years, with annual
interest payments of R12,50 and a before tax fair rate of return of 9%. Calculate the value
of the debenture:
A. R250
B. R287,50
C. R237,50
D. R224,69
E. None of the above
d) Calculate the present value of a deferred annuity if R3 000 is invested annually for 3 years
at the end of years 3 to 5, at an interest rate of 12% per annum:
A. R9 000
B. R7 205,49
C. R4 214,78
D. R10 814,33
E. None of the above
e) A loan of R5 000 at a nominal interest rate of 18% per annum, compounded monthly, is to
be repaid in 4 monthly instalments of R1 000 plus a final 5th instalment. The amount of the
final instalment is?
A. R1 234,15
B. R1 000
C. R1 215,91
D. R1 015
E. None of the above (2 marks each)
 21 FAC2602/202/1

QUESTION 4 (continued)

4.2 Mr Rich is the sole shareholder of Glamour (Pty) Ltd. At 28 February 2009, the end of the
current financial year, he is of the opinion that the expected future earnings and next
dividend of his company is likely to be R30 000 and R3 000 respectively and that this will
probably be sustained into the future. A fair dividend yield is considered to be 20%, while a
fair earnings yield is 25%.

REQUIRED:

a) Calculate the value of Mr Rich’s 100% shareholding. (2)

b) Mr Cheap is interested in buying a 10% share from Mr Rich. Calculate the value of a
10% shareholding. (3)
 22

ANNEXURE C: SOLUTION MAY 2009 EXAMINATION PAPER

QUESTION 1.1

VIOLET LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 MARCH 2009

R
Gross profit [(700 000^ + 600 000^ + 880 000 – 880 0009 –
[(45 000 x 25/125)9] 1 291 000
Other expenses [80 000^ + 65 000^ – 16 0009 + 480 000^ + 82 000^] (691 000)
Finance costs [7 500^ + (3 500^ – 2 100)9] (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 9 -
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

QUESTION 1.2

1.2.1 Property, plant and equipment

[(800 000^ + 600 000^ + (600 000 ^+ 400 000^ – 80 0009) –
[(320 000 ^+ 175 000^ – 8 0009 – 16 000)9] 1 849 000

1.2.2 Inventory (60 000^ + 45 000^ – 9 0009) 96 000

1.2.3 Retained earnings (577 000^ + 2 7009 + 410 868^ – 50 0009) 940 568

1.2.4 Non-controlling interest (25 00099 + 30099 + 10 0009 + 16 6849

– 2 0009) 49 984
 23 FAC2602/202/1

QUESTION 1 (continued)

Calculations
1. Analysis of ordinary shareholders’ equity of Tulip Ltd
Violet Limited Non-
90% controlling
Total At Since interest
At acquisition acquisition acquisition 10%
Share capital 120 000 108 000 12 000
Revaluation surplus
(500 000 – 450 000) 50 000 45 000 5 000
Retained earnings 80 000 72 000 8 000
250 000 225 000 25 000
Investment in Tulip Ltd 250 000
Goodwill 25 000

Since acquisition to
beginning of current year
Retained earnings 3 000 2 700 300
Balance 1/4/08 155 000
At acquisition (80 000)
Profit on sale (80 000)
Depreciation 8 000
(80 000 x 20% x 6/12)
Revaluation surplus 100 000 90 000 10 000
(150 000 – 50 000)
Current year
Profit for the year 166 840 150 156 16 684
Calculation 2 150 840
Depreciation 16 000
(80 000 x 20%)
Ordinary dividend (20 000) (18 000) (2 000)
(120 000/ 3 x 50c)
499 840 134 856 RE 49 984
90 000 OCE

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
 24

QUESTION 2

1. Basic earnings 2007 2006

Profit for the year ^468 750 ^386 250

Cumulative preference dividends 9(15 000) 9(15 000)
Non cumulative preference dividends 9 (7 500) -
446 250 371 250

2. Number of shares Total 2007 2006

Balance at 1 January 625 000 ^625 000 ^625 000

Rights issue on 30 September 2006
(100 000 x 3/12) 100 000 9100 000 9 25 000
725 000 725 000 650 000

Cash issue on 1 July 2007 (100 000 x 6/12) 100 000 950 000 -
825 000 775 000 650 000
Capitalisation issue on 1 November 2007
(650 000/5) 9130 000
(775 000/5) 9155 000
(825 000/5) 9165 000
990 000 930 000 780 000

Share consolidation on 30 November 2007

(990 000/2) 9495 000
(930 000/2) 9465 000
(780 000/2) 9390 000
Ordinary shares in issue at 31 December 2007 495 000 465 000 390 000

3. Dividends
2007 2006

Total – given ^136 500 -

Cumulative preference shares 9 (30 000) -
Preference ^(7 500) -
Ordinary 99 000

Shares in issue on date of declaration of dividend 495 000

4. Earnings and dividends per share 2007 2006

Basic earnings per share
(446 250/465 000) 96c
(371 250/390 000) 95c

Dividends per share

(99 000/495 000) 20c
 25 FAC2602/202/1

QUESTION 2 (continued)

Disclosure

1. On the statement of comprehensive income under total comprehensive income for the year:

2007 2006
Basic earnings per share 996c 995c

2. Part of the notes to the financial statements:

Earnings per share

The calculation of earnings per share was based on earnings of R446 250^
(2006: R371 250^) and a weighted average of 465 000^ (2006: 390 000^) ordinary shares
in issue after a capitalisation issue on 1 November 20079 and a share consolidation on
30 November 20079. The earnings per share for 2006 were adjusted accordingly9.

3. Reconciliation of amounts used to calculate basic earnings per share with amounts
in the statement of comprehensive income:
2007 2006
Earnings – basic earnings per share ^446 250 ^371 250
Cumulative Preference dividend ^15 000 ^15 000
Preference dividends ^7 500 ^-
Profit for the year 468 750 386 250

2007 2006
Dividend per share adjusted for consolidation of shares 920c -
 26

QUESTION 3
Part A

a) The nominal interest rate is calculated on the financial calculator as follows:

PV = 360 0009
FV = 0
N = 8 (2x4)9
PMT = -70 0009
comp i = 11,02% per half year^
22,04% per year^
b)
Amortisation Table Instalment Interest Capital Bal
Bal 1 July 2007 9360 000
31 Dec 2007 ^70 000 ^39 672 ^30 328 329 672
30 June 2008 ^70 000 ^36 330 ^33 670 296 002
31 Dec 2008 70 000 32 619 37 389 258 621
30 June 2009 70 000 28 500 41 500 217 121
c)
Dr Cr
Journal entries R R
Machinery-finance lease assets^ 360 000
Liability under finance lease agreement^ ^360 000
Finance charges^ ^76 002
Liability under finance lease agreement^ ^63 998
Bank^ 9140 000
Depreciation^ 72 000
Accumulated depreciation^ ^72 000
Liability under finance lease agreement^ 78 881
Current portion of liability under finance lease agreement^ ^78 881

Part B

Calculations

Equalisation of lease payments:

Months (1-18) (22 000 x 18) 9396 000
Months (19-24) (5 000 x 6) 930 000
426 000
Spread evenly over 24 months (426 000/24) 17 750

Equalise Deferred
Instalment lease lease
paid payment payment
Year end 31 December 2008 ^c110 000 ^d88 750 ^21 250
Year end 31 December 2009 ^e264 000 ^f213 000 ^51 000
Year end 31 December 2010 g 52 000 h124 250 (72 250)
-
 27 FAC2602/202/1

QUESTION 3 (continued)

c 22 000 x 5 = 110 000

d 17 750 x 5 = 88 750
e 22 000 x 12 = 264 000
f 17 750 x 12 = 213 000
g 22 000 + (6 x 5 000) = 52 000
h 17 750 x 7

Notes for the year ended 31 December 2008:

1. Profit before tax

Profit before tax is stated after taking the following items into account: R
Lease instalments on machinery 88 750
Paid for the year 9110 000
Deferred 9(21 250)

2. Operating lease agreements

Machinery is leased monthly from 1 August 2008 to 31 July 2010^. The period of the lease
is 24 months, payable in advance^. The payment terms are:
Month 1-18 R22 000 per month^
Month 19-24 R5 000 per month.^

The future minimum lease payments are:

Up to 1 year 1-5 years

R R
9264 000 952 000

Deferred lease payments in terms of operating lease agreement ^21 250

Add: short term portion ^51 000
72 250
 28

QUESTION 4

4.1 (a) B99

Total interest over the period: R420 – R350 = R70

70
Therefore: = 20%
350
3
Total period: 2 years and = 2,25
12
20%
Simple interest = 8,89%
2,25

b) C99

N = 2,25
PV = -350
FV = 420
Pmt =0
Comp i = 8,44%

c) D99

N =3
i = 9%
PMT = 12,50
FV = 250
Comp PV = R224,69

d) E99

N =3
i = 12%
PMT = -3 000
FV =0
Comp PV = 7 205,49

N =2
i = 12%
PMT =0
FV = 7 205,49
Comp PV = 5 744,17

e) A99

N =4
i = 1,5% (18% /12)
PV = 5 000
PMT = -1 000
Comp FV = 1 215,91
 29 FAC2602/202/1

QUESTION 4 (continued)

N =1
i = 1,5%
PV = 1215,91
PMT =0
Comp FV = 1234,15
Final instalment will be R1 234,15

4.2 (a)Earnings yield method

E
Po = ¹
K
R30 000
=
0,25
= 120 000

The total value of the 100% shareholding is R120 000.

(b)Dividend yield method

D
Po = ¹
K
R3 000
=
0,20
= 15 000

A 10% shareholding is therefore valued at R15 000.

 30

ANNEXURE D: OCTOBER 2009 EXAMINATION PAPER

This paper consists of 8 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. Ensure that you are handed the correct examination answer book (blue colour for
accounting) by the invigilator.
5. Each question attempted must be commenced on a new (separate) page.
6. You must obtain at least 50% to pass this paper.

7. PROPOSED TIMETABLE:
Question Subject Marks Time in
No. minutes
1 Group financial statements 40 48
2 Statement of cash flows 16 19
3 Earnings and dividends per share 24 29
4 Valuations 20 24
100 120
 31

QUESTION 1 (40 marks) (48 minutes)

M Limited acquired its total shareholding in D Limited on 1 January 2006.

On that date D Limited’s retained earnings amounted to R70 000.

The following are the trial balances of the two companies at 31 December 2008:

M LIMITED D LIMITED
DR/(CR) DR/(CR)
Investments in D Limited
300 000 ordinary shares at fair value (cost price R252 500) 252 500 -
25 000 cumulative preference shares at fair value
(cost price R55 000) 55 000 -
Property at cost 910 000 462 800
Plant and equipment at cost 850 000 460 000
Issued capital
Ordinary shares of 50c each (500 000) (200 000)
10% Cumulative preference shares of R2 each (300 000) (100 000)
Retained earnings (686 000) (120 000)
Revenue (1 800 000) (1 400 000)
Trade and other payables (174 600) (66 800)
Dividends received (27 500) -
Loan from parent company - (100 000)
Interest received from D Limited (8 000) -
Interest received from ABAB Bank (2 000) (1 000)
Profit on sale of machine - (60 000)
Accumulated depreciation: plant and equipment (362 000) (212 000)
Tax payable (360 000) (210 000)
Administrative fees received (120 000) -
Inventory- 01/01/2008 90 000 105 000
Bank – ABAB Bank 50 000 30 000
Purchases 590 000 425 000
Trade and other receivables 84 000 96 000
Provisional tax payments 300 000 200 000
Staff costs 146 000 128 000
Administrative fees paid - 120 000
Interest paid - 8 000
Loan to subsidiary company 100 000 -
Income tax expense 222 000 183 200
Administrative expenses 400 000 100 000
Other expenses 46 600 35 800
Ordinary dividends paid 40 000 30 000
Preference dividends paid 30 000 10 000
Depreciation 174 000 76 000
 32

QUESTION 1 (continued)

Additional information

1. Inventory on hand at 31 December 2008:

- M Limited R150 000
- D Limited (all purchased from M Limited) R180 000
D Limited started to purchase all its inventory from M Limited during the year at a mark-up
of 20% on cost price.

2. It is group policy to show goodwill at cost less impairment in the consolidated financial
statements. Goodwill was not impaired during the year.

3. D Limited sold machine A on 1 January 2006 and machine B on 1 June 2008 to M Limited
at a profit of R40 000 and R60 000 respectively. Depreciation on machinery is provided at
25% per annum according to the straight-line method.

REQUIRED:

Draft the following financial statements of M Limited and its subsidiary:

1. Consolidated statement of financial position as at 31 December 2008

2. Consolidated statement of comprehensive income for the year ended 31 December 2008
3. Consolidated statement of changes in equity for the year ended 31 December 2008

Your answer must comply with the requirements of the Companies Act and Generally
Accepted Accounting Practice. Do all calculations to the nearest Rand. No journal entries or
notes are required. Ignore the taxation effects and comparative figures.
 33 FAC2602/202/1

QUESTION 2 (16 marks) (19 minutes)

The following balances appeared in the books of Sharp Limited for the financial year ended
30 June:

2008 2007
DEBITS R R
Property, plant and equipment 5 218 750 3 125 000
Available-for-sale financial assets - Investments 875 000 687 500
Inventory 62 500 78 750
Trade and other receivables 375 000 312 500
Prepaid expenses 10 000 12 500
Dividends receivable 18 750 -
Cash and cash equivalents - 106 250
Cost of sales 875 000 600 000
Administrative expense (including depreciation) 562 500 106 250
Other expenses 218 750 150 000
Finance cost 25 000 25 000
Income tax expense 207 500 166 250
Distribution expenses 125 000 118 750
Dividends declared 312 500 62 500
8 886 250 5 551 250
CREDITS
Issued share capital – ordinary shares of R1 each 3 125 000 1 875 000
Share premium 475 000 500 000
Surplus on revaluation of land 187 500 125 000
Retained earnings beginning of year 506 250 178 750
10% Long-term loan 225 000 250 000
Deferred tax 10 000 10 000
Accumulated depreciation: Property, plant and equipment 1 003 750 875 000
Short-term portion of long-term loan 25 000 -
Tax payable 81 250 75 000
Dividends payable 156 250 62 500
Trade and other payables 250 000 43 750
Accrued interest on long-term loan 6 250 -
Bank overdraft 535 000 -
Sales (credit) 2 187 500 1 500 000
Profit on sale of equipment 18 750 -
Other income – dividends received 93 750 56 250
8 886 250 5 551 250
 34

QUESTION 2 (continued)

Additional information

1. On 1 May 2008 the company issued capitalisation shares at par to the ordinary
shareholders in the ratio of 1 share for every 5 shares held. The share premium account
was utilized for this purpose.

2. On 31 May 2008 ordinary shares were issued to the public at a premium of 40%.

3. Property, plant and equipment on 1 July 2007 are made up as follows:

Total Land Buildings Equipment

R R R R
Carrying amount: 1 July 2007 2 250 000 1 000 000 187 500 1 062 500
Cost 3 125 000 1 000 000 250 000 1 875 000
Accumulated depreciation (875 000) - (62 500) (812 500)

The following changes took place during the year ended 30 June 2008

• Plant and equipment with a cost price of R2 656 250, was purchased, of which
R1 250 000 represent replacement of equipment disposed of.

• Plant and equipment with a carrying amount of R250 000 was disposed of.

• Depreciation for the year:

Plant and equipment R500 000
Buildings R 3 750

4. New investments were purchased close to year-end, but none were sold. No fair value
adjustments were necessary as the fair values of investments are equal to the cost thereof.

REQUIRED:

After taking the abovementioned information into account, answer the following multiple
choice questions (choose only A, B, C, or D) concerning the Statement of cash flows of Sharp
Limited, prepared according to the direct method, for the financial year ended 30 June 2008.
You are not required to draft the cash flow statement.

1. Cash receipts from customers amount to:

(A) R2 250 000
(B) R2 187 000
(C) R2 125 000
(D) Not one of the above
 35 FAC2602/202/1

QUESTION 2 (continued)

2. The change in working capital represents a:

(A) Cash outflow of R162 500
(B) Cash inflow of R225 000
(C) Cash outflow of R225 000
(D) Not one of the above

3. Cash payments to suppliers and employees amount to:

(A) R1 052 500
(B) R1 556 250
(C) R1 033 750
(D) Not one of the above

4. Dividends paid amount to:

(A) R218 750
(B) R312 500
(C) R406 250
(D) Not one of the above

5. Dividends received amount to

(A) R93 750
(B) R75 000
(C) R112 500
(D) Not one of the above

6. Normal tax paid amounts to

(A) R201 250
(B) R207 500
(C) R213 750
(D) Not one of the above

7. The proceeds on sale of equipment amount to

(A) R268 750
(B) R231 250
(C) R250 000
(D) Not one of the above

8. The issue of ordinary shares represent a

(A) Cash inflow of R1 225 000
(B) Cash inflow of R875 000
(C) Cash inflow of R1 250 000
(D) Not one of the above
 36

QUESTION 3 (24 marks) (29 minutes)

1. Magnolia Ltd was incorporated in 2000 with an authorised share capital of 3 000 000
ordinary shares of R1 each, 1 000 000 14% cumulative preference shares of R1 each and
200 000 10% non-cumulative preference shares of R2 each.

2. On 1 January 2007 the issued share capital of Magnolia Ltd consisted of 2 000 000
ordinary shares of R1 each, 1 000 000 14% cumulative preference shares of R1 each and
50 000 10% non-cumulative preference shares of R2 each and remained unchanged
during the year.

3. The following changes in share capital occurred during 2008:

• Magnolia Ltd had a rights issue on 30 April 2008 of one ordinary share for every five
ordinary shares held at R3 per share, the market price of the shares immediately prior
to the exercise of the rights was R4 per share.

• On 31 October 2008 the company had a capitalisation issue of one ordinary share for
every one hundred ordinary shares held.

• On 30 November 2008 the ordinary share capital was consolidated into R2 par value
shares.

4. The following information relates to Magnolia Ltd for the year ended 31 December 2008:

Magnolia Ltd declare and paid an ordinary dividend of R100 000 (2007 – R80 000) at year
end. The total dividends paid for the year amounted to R250 000 (2007 – 230 000).
Taxation for the year ended 31 December 2008 amounted to R320 000 (2007 – R210 000),
while the profit for the year (after tax) amounted to R1 450 000 (2007 – R1 000 000).

REQUIRED:

Calculate and disclose basic earnings and dividends per share in the annual financial
statements of Magnolia Limited for the year ended 31 December 2008 in compliance with
Generally Accepted Accounting Practice. Comparative figures are required. Show all
calculations.

Please note: Round off to the third decimal when calculating the adjustment factor for the
theoretical ex-rights value per share.
 37 FAC2602/202/1

QUESTION 4 (20 marks) (24 minutes)

Do all calculations to the nearest second decimal.

4.1 You deposit R10 000 in a savings account that offers you interest at 9% per annum
calculated annually. If you do not withdraw any of the interest, but allow it to be added to
the principal amount at the end of every year, what will the balance on the account be
after three years. (2)

4.2 Calculate the present value if the compounded amount (future value) is R150 000,
invested at 18% per annum for 3½ years and interest is calculated monthly. (3)

4.3 You purchased property for R350 000. The deposit to be paid is R70 000. You secure a
mortgage bond at the bank for the balance at 20% per annum compounded quarterly,
with a term of 15 years. Calculate the monthly installment. (3)

4.4 Ms Green (currently 20 years old) decided to save for an overseas trip when she turns 25.
All she can afford to save now, on a monthly basis, is R1 500. Her employer promised her
a substantial salary increase when she obtains her degree in two years time. After that
increase she can afford to save R2 500 per month for the last three years. The financial
institution offers her an interest rate of 15% per annum on her investment. Determine the
value of her investment at the end of year 5 if the interest is compounded monthly. (6)

4.5 Calculate the value of an ordinary share, based on the following information:

Situation 1:
Mr Fish has 25% of the shares in Bass Limited
Issued shares – 5 000 ordinary shares of R1 each
Expected future dividend per share – 25c
Fair dividend yield – 10%
Fair earnings yield – 12%
Expected future earnings per share – 30c (3)

Situation 2:
Ms Barbie has 75% of the shares in Ken Limited
Issued shares – 3 000 ordinary shares of R1,50 each
Expected future dividend per share – 30c
Fair dividend yield – 16%
Fair earnings yield – 19%
Expected future earnings per share – 33c (3)
 38

ANNEXURE E: SOLUTION OCTOBER 2009 EXAMINATION PAPER

QUESTION 1

M LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2008

R
ASSETS
Non-current assets 2 101 300
Property, plant and machinery [(910 000^ + 462 800^ + 850 000^ + 460 000^
- 40 000^ - 60 000^) - (362 000^ + 212 000^ - 30 000^ - 7 500^)] 2 046 300
^ Goodwill (50 000 + 5 000) 55 000

Current assets 560 000

Inventory (150 000^ + 180 000^ – 30 000^) 300 000
Bank (50 000^ + 30 000^) 80 000
Trade and other receivables (84 000^ + 96 000^) 180 000

TOTAL ASSETS 2 661 300

EQUITY AND LIABILITIES

Total Equity 2 349 900

Equity attributable to owners of the parent 2 130 525
Share capital (500 000 + 300 000) ^800 000
Retained earnings 1 330 525
^ Non-controlling interest 219 375

Current liabilities 311 400

Trade and other payables (174 600^ + 66 800^) 241 400
Tax payable (360 000^ + 210 000^ - 300 000^ - 200 000^) 70 000

TOTAL EQUITY AND LIABILITIES 2 661 300

 39 FAC2602/202/1

QUESTION 1 (continued)

M LIMITED AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED
31 DECEMBER 2008
R
Revenue (1 800 000 + 1 400 000) 3 200 000^

Cost of sales (910 000)

Opening inventory (90 000 + 105 000) 195 000^
Purchases (590 000 + 425 000) 1 015 000^
Closing inventory [(150 000^ + 180 000^) + (180 000 x 20 )^] (300 000)
120

Gross profit 2 290 000

Other income (2 000^ + 1 000^) 3 000

Administrative expenses
(400 000 + 100 000^ + 146 000 + 128 000^ + 174 000 + 76 000^ – 10 000 – 7 500^) (1 006 500)
Other expenses (46 600^ + 35 800^) (82 400)
Profit before tax 1 204 100
Income tax expense (222 000 + 183 200) (405 200)^
Profit for the year 798 900
Other comprehensive income -
Total comprehensive income for the year 798 900

^ Attributable to:
Owners of the parent (798 900 – 106 875) 692 025
Non-controlling interest (104 375 – 2 500 + 5 000) 106 875
798 900

M LIMITED AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2008
Attributable to owners of the parent
Non-
Ordinary Preference Retained control- Total
shares shares earnings Total ling equity
interest
Balance at 1/1/2008 500 000^ 300 000^ 708 500c 1 508 500 125 000d 1 633 500
Total comprehensive
income for the year 692 025^ 692 025 106 825^ 798 900
Ordinary dividends (40 000)^ (40 000) (7 500)^ (47 500)
Preference dividends (30 000)^ (30 000) (5 000)^ (35 000)
500 000 300 000 1330 525 2 130 525 219 375 2 349 900

c 686 000^ + 22 500^

d 67 500^ + 7 500^ + 50 000^
 40

QUESTION 1 (continued)

Calculations

1. Analysis of owners’ equity

M Ltd Non-
75% controlling
Ordinary shares Total At Since interest
acquisition acquisition 25%
R R R R
At date of acquisition
Share capital 200 000 ^ 150 000 50 000
Retained earnings 70 000 ^ 52 500 17 500
270 000 202 500 67 500
Investment in D limited 252 500^
Goodwill 50 000

Since acquisition until

beginning of current year
Retained earnings 30 000 22 500 7 500
Balance 1/1/2008 120 000 ^
At acquisition (70 000)^
Profit on sale of machine (40 000)^
Depreciation 20 000 ^

Current year
Profit for the year 417 500 313 125 104 375
Calculation 2 460 000
Profit on sale of machine (60 000)^
Depreciation :Machine A 10 000 ^
:Machine B 7 500 ^

Preference dividends (10 000)^ (7 500) (2 500)

Ordinary dividends (30 000)^ (22 500) (7 500)
667 500 305 625 169 375
 41 FAC2602/202/1

QUESTION 1 (continued)

M Ltd Non-
50% controlling
Preference shares Total At Since interest
acquisition acquisition 50%
R R R R
At date of acquisition
Share capital 100 000 50 000^ 50 000
Investment in D Limited 55 000^
Goodwill 5 000

Since acquisition until

beginning of current year
Profit for the year 20 000 10 000 10 000
Dividends paid (20 000) (10 000) (10 000)
Current year
Profit for the year 10 000^ 5 000 5 000
Dividends paid (10 000)^ (5 000) (5 000)
100 000 - 50 000

2. Profit for D Limited for the current year

Revenue 1 400 000^

Cost of sales (350 000)
Opening inventory 105 000 ^
Purchases 425 000 ^
Closing inventory (180 000)^
Gross profit 1 050 000
Other income (1 000 + 60 000) 61 000 ^
Administrative expenses (128 000 + 120 000 + 100 000 + 76 000) (424 000)^
Other expenses (35 800)^
Finance costs (8 000)^
Profit before tax 643 200
Income tax expense (183 200)^
Profit for the year 460 000
 42

QUESTION 2

1. C 99
2. D 99
3. A 99
4. A 99
5. B 99
6. A 99
7. A 99
8. A 99

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

R R
Cash flow from operating activities
Cash receipts from customers (calculation 1) 2 125 000
Cash payments to suppliers and employees (calculation 2) (1 052 500)
Net cash generated by operations 1 072 500
Dividends received (93 750 – 18 750) 75 000
Interest paid (25 000 – 6 250) (18 750)
Dividends paid (calculation 3) (218 750)
Normal tax paid (calculation 4) (201 250)
Net cash inflow from operating activities 708 750

Cash flow from investing activities

Investment to maintain production capacity (1 250 000)
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) 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) 1 225 000
Net cash inflow from financing activities 1 225 000
Net decrease in cash and cash equivalents (641 250)
Cash and cash equivalents beginning of year 106 250
Cash and cash equivalents end of year (535 000)
 43 FAC2602/202/1

QUESTION 2 (continued)

Calculations

1. Cash receipts from customers

Trade and other receivables

R R
Balance b/d 312 500 Bank* 2 125 000
Sales 2 187 500 Balance c/d 375 000

2 500 000 2 500 000

*Balancing figure

2. Cash paid to suppliers and employees

Trade and other payables, inventory and expenses

R R
Balance – inventory b/d 78 750 Balance – payables b/d 43 750
Balance – prepaid expenses b/d 12 500 Cost of sales 875 000
Bank* 1 052 500 Distribution expenses 125 000
Balance – payables c/d 250 000 Administrative expenses
(562 500 – 503 750) 58 750
Other expenses 218 750
Balance – inventory c/d 62 500
Balance – prepaid expenses c/d 10 000
1 393 750 1 393 750
*Balancing figure

3. Dividends paid R
Unpaid amounts at beginning of year 62 500
Amounts debited against profit 312 500
Unpaid amounts at end of year (156 250)
218 750

4. Taxation paid
Unpaid amounts at beginning of year 75 000
Amounts debited against profit 207 500
Unpaid amounts at end of year (81 250)
201 250

5. Property, plant and equipment at carrying amount

R R
Balance b/d 2 250 000 Sales at carrying amount 250 000
Revaluation (187 500 – 125 000) 62 500 Depreciation (500 000 + 3 750) 503 750
Replacement 1 250 000 Balance c/d 4 215 000
Additions (2 656 250–1 250 000) 1 406 250
4 968 750 4 968 750
 44

QUESTION 2 (continued)

6. Change in working capital R

Decrease in inventory 16 250
Increase in trade and other receivables (62 500)
Decrease in prepaid expenses 2 500
Increase in trade and other payables 206 250
Cash inflow 162 500
 45 FAC2602/202/1

QUESTION 3

1. Basic earnings 2008 2007

R R
Profit for the year 1 450 000^ 1 000 000^
Cumulative preference dividends (R1 000 000 x 14%) (140 000)^ (140 000)^
Preference dividends [(50 000 x 2) x 10%)] (10 000)^ (10 000)^
1 300 000 850 000

2. Weighted average number of shares Total 2008 2007

Balance on 1 January 2007 2 000 000 ^2 000 000 ^2 000 000
Rights issue on 30 April 2008
(2 000 000/5) 9400 000
[(2 000 000 x 1.044) – 2 000 000] 988 000
[(2 000 000 x 4/12 x 1.044)
+ (2 400 000 x 8/12) – 2 000 000] 9296 000
Sub total 2 400 000 2 296 000 2 088 000

Theoretical ex-rights value per share

(R3 x 400 000 shares + R4 x 2 000 000 shares)

2 000 000 + 400 000
= 3.833

Adjustment factor:
= R4/3.833
= 1.0449

Capitalisation issue on 31 October 2007

(2 400 000 / 100) 924 000
(2 296 000 / 100) 922 960
(2 088 000 / 100) 920 880
2 424 000 2 318 960 2 108 880

Share consolidation on 30 November 2008

(2 424 000/2) 91 212 000
(2 318 960/2) 91 159 480
(2 108 880/2) 91 054 440
Ordinary shares in issue at 31 December 2008 1 212 000 1 159 480 1 054 440
 46

QUESTION 3 (continued)

3. Dividends
2008 2007
Total – given 250 000 230 000
Cumulative preference dividends (140 000) (140 000)
Preference dividends (10 000) (10 000)
Ordinary dividends 100 000 80 000
Shares in issue on date of declaration of dividend 1 212 000 2 000 000

4. Earnings and dividends per share

2008 2007
Basic earnings per share
(1 300 000 / 1 159 480) 9 112,12c
(850 000 / 1 054 440) 9 80,61c
Dividends per share
Paid: (100 000 / 1 212 000) 9 8,25c
(80 000 / 2 000 000) 9 4,00c
Adjusted: (100 000 / 1 212 000) 8,25c
(80 000 / 1 010 000) 7,92c

Disclosure

1. 9 On the statement of comprehensive income under total comprehensive income

for the year:

9 2008 2007
Basic earnings per share 112,12c 80,61c
Dividends per share 8,25c 4,00c

2. Part of the notes to the financial statements:

Earnings per share

The calculation of earnings per share was based on earnings of R1 300 000^ (2007:
R850 000^) and a weighted average of 1 159 480^ (2007: 1 054 440^) ordinary shares in
issue after a capitalisation issue on 31 October 2008^ and a share consolidation on
30 November 2008^. The earnings per share for 2007 were adjusted accordingly.
 47 FAC2602/202/1

QUESTION 3 (continued)

3. ^Reconciliation of amounts used to calculate basic earnings per share with

amounts in statement of comprehensive income.

2008 2007
R R
Earnings – basic earnings per share 1 300 000 850 000
Cumulative preference dividend 140 000 140 000
Preference dividends 10 000 10 000
Profit for the year 1 450 000 1 000 000

^The dividend per share as adjusted for capitalisation Paid Adjusted

issue and consolidation of shares
2008 8,25c 8,25c
2007 4,00c 7,92c
 48

QUESTION 4

4.1 n = 3^
i = 9% ^
PV = 10 000 ^
Pmt = 0
Comp FV = ?
= R12 950,29 ^

4.2 n = 42 (3 ½ x 12)9
i = 1,5% (18% /2)9
FV = 150 0009
Pmt = 0
Comp PV = ?
= R80 263,39

4.3 n = 60 (15 x 4)9

i = 5% (20% /4)9
PV = -280 000 (350 000 – 70 000)9
FV = 0
Comp Pmt = ?
= R14 791,89

4.4.(1) Future value of annuity of R1 500 for 2 years at 15% p.a.

n = 24 (12 x 2)^
i = 1,25% (15% /12)^
PV = 0
Pmt = - 1 500 ^
Comp FV = ?
= R41 682,13

(2) Future value of the future value of annuity after 3 years

n = 36 (12 x 3)^
i = 1,25% (15 /12)^
PV = 41 682,13^
Pmt = 0
Comp FV = ?
= R65 188,51
 49 FAC2602/202/1

QUESTION 4 (continued)

(3) Future value of annuity of R2 500 for 3 years at 15% p.a.

n = 36 (12 x 3)^
i = 1,25 (15% /12)^
Pmt = - 2 5009
Pv = 0
Comp FV = ?
= R112 788,76

Value of investment at the end of year 5: R65 188,51^ + R112 788,76 ^ = R177 977,27

4.5 Situation 1:
Non-controlling interest
D1
Value Po = ^^
K
25 c
= ^^
0,10
= R2,50 9

Situation 2:
Majority interest
E1
Value Vo = ^^
K
33 c
= ^^
0,19
= R1,74 9

FAC2602_2010_TL_201_1_E