Faculty of Economic and Management Sciences

Department: Accounting

B Com (Acc)

Financial Accounting (FRK 201)

Examination session: Year 2016

Date: 14 November 2016

Duration: 120 minutes (2 hours)

Total marks of paper: 80 marks

Perusal: Arrangements to be advised

Internal examiners: S Coetzee, C Janse van Rensburg, A Schmulian

External examiner: Karin Leith

Instructions:

◊ Answer all the questions in separate books.

◊ The question paper consists of 11 pages, excluding the front page.
◊ No teaching materials may be taken into the venue. A calculator is permitted.
◊ Rough work may be done on the examination paper, but, please note, the question paper is
not handed in.

Question Topic Marks

1 IFRS 7
2 IFRS Discussion question 12
3 Consolidated financial statements / IFRS 34
4 IFRS 27
Total: 80
QUESTION 1 (7 marks)

The following information for JOEY LIMITED, a company that manufactures

pills for a leading pharmaceutical group, is provided to you:

1. There was no work-in-progress on 1 January 20X17. Included in the

work-in-progress of R354 350 on 31 December 20X17, are the following:

 The under allocation of fixed overheads for the year: Included in the
work-in-progress inventories balance at 31 December 20X17 is the
under allocation of fixed overheads for the year of R241 850. The
value of the work-in-progress transferred to finished goods during the
year ended 31 December 20X17 was correctly calculated and
accounted for.

 Inventories held for customer: Included in revenue is invoice no. 769

for R15 000. This full amount was paid for by the customer on
21 December 20X17. The order for these inventories was received on
17 December 20X17 and delivery will, at the request of the customer,
only take place on 5 January 20X18. The order was labelled “not
urgent” and these completed inventories were included in work-in-
progress on 31 December 20X17 at their cost of manufacture. The
normal 20% profit mark-up on cost was applied to this sales
transaction.

2. Finished goods on hand at 31 December 20X17 amounted to R384 750

(34 200 units).

3. During the financial year ended 31 December 20X17, a contract was

entered into with a customer to deliver 24 000 units of finished goods
inventories at R10,25 per unit, after a volume rebate was granted on this
contract. The total contract price amount will be received on delivery
date, 28 February 20X18, which will also be the invoice date. These
24 000 units will be supplied from the inventories of finished goods on
hand on 31 December 20X17. The normal gross profit percentage will be
maintained for all of the other finished goods inventories on hand on
31 December 20X17.

4. Raw material inventories amount to R125 800 on 31 December 20X17,

which is the same as the current cost of these raw materials. Included in
the raw materials of R125 800, are raw materials of R111 000 that were
purchased on credit on 30 November 20X17 from the main supplier of
Joey Limited. An agreement was reached with this supplier, that if this
big order was placed before year end, the amount owed would only need
to be settled on 30 November 20X18, and not, as usual, within 30 days
of date of purchase. On 31 December 20X17, the R111 000 was
included in trade creditors.

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Additional information:

a) An appropriate pre-tax discount rate is 14% per annum.

b) It is the accounting policy of Joey Limited to measure inventories at the

lower of cost and net realisable value. Joey Limited uses the perpetual
inventories system.

REQUIRED:

Based on the information provided, calculate the inventories balance that will
be included in the current asset section of the statement of financial position
of Joey Limited as at 31 December 20X17, in accordance with International
Financial Reporting Standards.

Note: - Comparative amounts are not required.

- Round calculated amounts to the nearest R1.
- Assume all amounts are material.
- Ignore all tax implications.

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QUESTION 2 (12 marks)

VINTAGE DESIGNS LIMITED (Vintage Designs) is a bridal company in

Sandton that imports wedding dresses and prides themselves in stocking the
best quality wedding dresses in South Africa. Vintage Designs also caters to
the bride that wants a custom made dress, and therefore has a team of
designers from which a bride can choose.

Vintage Designs has a 31 December reporting date. The financial statements

of Vintage Designs for the year ended 31 December 20X16 were authorised
for issue on 15 March 20X17.

On 28 December 20X16, a newspaper article on Vintage Designs reported on

an allegation that one of Vintage Designs’ dresses had been copied from a
designer dress of Queen Emporium Limited. Legal proceedings started in
December 20X16, after Queen Emporium Limited made a claim of R200 000
against Vintage Designs for the alleged stolen design. The lead designer on
this Vintage Designs dress denied this allegation.

Vintage Designs’ lawyers advised that it is probable that the entity will not be
found liable. However, the probability of being found guilty is not remote. Past
court cases have shown that where similar claims were successful, only 75%
of the claim amount was paid out to the claimant. The lawyers cannot
estimate how long this court case will be.

The financial director of Vintage Designs has decided to ignore this event in
the financial statements for the year ended 31 December 20X16 since
Vintage Designs has not yet been found liable.

REQUIRED:

Based on the information provided above, discuss, with reasons, in terms of

IAS 37, Provisions, Contingent Liabilities and Contingent Assets, how this
event should be treated and disclosed in the financial statements of Vintage
Designs Limited for the year ended 31 December 20X16.

Note: - The definitions of a liability and a provision are only required if this
event requires the recognition of a liability or a provision.
- Only the classification and treatment that you believe is correct
should be discussed.

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QUESTION 3 (34 marks)

RIO LIMITED owns a 75% interest in the ordinary shares and a 20% interest
in the preference shares of WAYDE LIMITED since 1 November 20X10. The
share capital of both companies has remained unchanged since
1 November 20X10, the accounting policies of the two companies are
identical and both companies have a 31 October reporting date. Both
companies have accounted for all transactions correctly for all years, in
accordance with International Financial Reporting Standards.

On 1 November 20X10, the following items, inter alia, were included in the
trial balance of Wayde Limited:
Note R
Investment property at carrying amount 1 17 500 000
Investment in Leclos Limited at fair value 5 507 500
Inventories at cost 6 1 850 000
Ordinary share capital 1 000 000
Cumulative preference share capital (fixed
annual preference dividend of R0,15 per share) 2 500 000
Revaluation surplus (10% attributable to land) 7 140 000
(the realisation of this surplus attributable to
buildings is R9 000 per annum)
Retained earnings 8 12 600 000

1. On 1 November 20X10, the assets and liabilities of Wayde Limited were

deemed to be fairly valued, except for the investment property that was
undervalued by R1 500 000 (R300 000 attributable to land).

It is the accounting policy of Wayde Limited to account for investment

property in terms of the cost model of IAS 40, Investment Property, and
to depreciate the buildings on the straight-line method over their
estimated useful life of 20 years (estimated insignificant current residual
value). On 1 November 20X10, the remaining estimated useful life
remained unchanged at 15 years. The cost of the land included in the
investment property amounted to R2 500 000. All accounting estimates
were revised annually and no changes were deemed necessary.

2. No preference dividends were in arrears on 1 November 20X10 and the

preference dividends have been declared and paid during each financial
year since 1 November 20X10. The preference shares were issued at R2
each.

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3. Rio Limited acquired the interest in the ordinary shares of Wayde Limited
for R11 275 000 and the interest in the preference shares for R110 000.
On 31 October 20X15, the investment in Wayde Limited was adjusted to
its fair value of R13 684 000 (R12 900 000 on 31 October 20X14) in the
separate financial statements of Rio Limited. Rio Limited irrevocably
elected at the date of acquisition of these investments, to measure them,
in its separate financial statements, at fair value through other
comprehensive income.

4. The directors of Rio Limited decided to account for the non-controlling

interests in the ordinary and preference shares of Wayde Limited on the
date of acquisition at their fair values of R3 760 000 and R405 000
respectively.

5. The investment in Leclos Limited consists of a non-controlling interest of

50 000 ordinary shares, acquired at the fair value of R507 500 on
25 October 20X10. No transaction costs were incurred by Wayde Limited
on the acquisition of the shares and these shares are held by Wayde
Limited for capital appreciation purposes. No shares in Leclos Limited
have been acquired or sold from 25 October 20X10 to
31 October 20X14. On the date of acquisition of these shares, Wayde
Limited irrevocably elected to measure them as at fair value through
other comprehensive income.

The fair values of these ordinary shares of Leclos Limited, on the JSE
Limited, were as follows:
R per share
31 October 20X10 10,15
31 October 20X11 9,80
31 October 20X12 10,12
31 October 20X13 10,33
31 October 20X14 10,56
31 October 20X15 10,74

On 31 January 20X15, Wayde Limited sold 10 000 of these shares at the

fair value of R10,61 per share. It is the accounting policy of Wayde
Limited to recycle the cumulative balance of fair value adjustments when
any shares are sold.

6. Wayde Limited sells inventories to Rio Limited at cost plus 33%. During
the year ended 31 October 20X14, Rio Limited purchased inventories for
R734 000 from Wayde Limited, and of these inventories, R266 000 were
still on hand on 31 October 20X14. During the year ended
31 October 20X15, Rio Limited purchased inventories for R1 332 500
from Wayde Limited, and of these inventories, R332 500 were still on
hand on 31 October 20X15.

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7. It is the accounting policy of Rio Limited and Wayde Limited to account
for owner-occupied property in terms of the revaluation model of IAS 16,
Property, Plant and Equipment. At revaluation, the accumulated
depreciation of the buildings is eliminated against the gross carrying
amount. The revaluation surplus on buildings realises with use and that
on the land, on sale. Depreciation on buildings is written off on the
straight-line method over their estimated useful life (estimated
insignificant current residual value). No land or buildings of either
company have been acquired or sold since the original acquisition on
1 November 20X9. The cost of the buildings of Wayde Limited on
1 November 20X9 was R16 479 000.

On 31 October 20X14, the following balances were included in the

separate financial statements of Wayde Limited:
R
Land at carrying amount 5 100 000
Buildings at carrying amount 11 400 000
Revaluation surplus 460 000
(10% attributable to land)

On 1 November 20X14, the fair value of the land and the net
replacement cost of the buildings of Wayde Limited were determined by
an independent sworn appraiser, as follows:
R
Land 5 130 000
Buildings 11 480 000

The remaining useful life of the buildings remained unchanged at ten

years on 1 November 20X14. The useful life was revised annually and
no changes were deemed necessary in any financial year.

8. The retained earnings of Rio Limited and Wayde Limited amounted to

R24 800 000 and R18 450 000 respectively on 31 October 20X14.

The profit for the year ended 31 October 20X15 of Rio Limited and
Wayde Limited, amounted to R3 589 000 and R1 840 400 respectively,
after all relevant information had been taken into account correctly.

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REQUIRED:

a) Prepare the pro-forma consolidation journal entries of the Rio Limited

Group for the year ended 31 October 20X15, in accordance with
International Financial Reporting Standards, for the following item:

1) Investment property (excluding pro-forma consolidation journals for

the effects on non-controlling interests). (7)

Note: - Journal narrations are not required.

- Round calculated amounts to the nearest R1.

b) Prepare the pro-forma consolidation journal entries of the Rio Limited

Group for the year ended 31 October 20X15, in accordance with
International Financial Reporting Standards, for the following items:

1) Mark-to-market reserve for equity instruments of Wayde Limited; (9)

2) Revaluation surplus; and (11)
3) Recognising non-controlling interests in profit for the year. (7)

Note: - Journal narrations are not required.

- Round calculated amounts to the nearest R1.

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QUESTION 4 (27 marks)

THIS QUESTION CONSISTS OF TWO INDEPENDENT PARTS.

PART A (12 marks)

The following is the capital structure of THABO LIMITED on 30 June 20X15:

R
Ordinary share capital (issued at R1,50 each) 675 000
Cumulative preference share capital (200 000 shares)
200 000
(fixed annual dividend of R0,15 per share)

Thabo Limited reported the following:

R
Profit for the year ended 30 June 20X16 980 000

Thabo Limited entered into the following transactions during the two years
ended 30 June 20X16:

1. On 30 April 20X15, Thabo Limited awarded options to acquire 75 000 of

its ordinary shares at R2,50 per share. All of these options were exercised
on 31 March 20X16. The average market price of the ordinary shares of
Thabo Limited was R3,00 during the period 30 April 20X15 to
30 June 20X15 and R3,25 during the period 1 July 20X15 to
31 March 20X16.

2. On 31 October 20X15, Thabo Limited had a capitalisation share issue of

one ordinary share for every five ordinary shares previously held.

3. On 31 January 20X16, Thabo Limited had a rights issue to all existing

ordinary shareholders on the basis of one right to one ordinary share for
every three ordinary shares held on this date, at R3,20 per share. The fair
value of one ordinary share of Thabo Limited immediately prior to the
issue of the rights was R3,20 per share. Assume that all the rights were
exercised on 31 January 20X16 and all of the cash was receivable on this
date.

Thabo Limited also issued 40 000 cumulative convertible preference

shares on 31 January 20X16. They are convertible at the option of the
issuer on 1 February 20X18 into four ordinary shares for every convertible
preference share held. The annual fixed dividend is R0,10 per share.

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Additional information:

 All of the preference dividends of Thabo Limited have been in arrears

since 1 July 20X14. No ordinary or preference dividends were declared
during the two financial years ended 30 June 20X16.

 The test for dilution is not required. Assume that all of the potential
ordinary shares will have a dilutive effect.

REQUIRED:

Calculate the basic and diluted earnings per share of Thabo Limited for the
year ended 30 June 20X16, in accordance with IAS 33, Earnings per Share.

Note: - Round all calculated amounts of earnings to the nearest R1 and

number of shares to the nearest full share.
- Round basic and diluted earnings per share to the nearest cent.

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PART B (15 marks)

THABO LIMITED manufactures machinery. The company is listed on the JSE

Limited and has a 30 June reporting date.

On 1 January 20X13, commencement date, Thabo Limited started leasing

plant from African Rentals Limited in terms of a lease contract for a non-
cancellable period of five years. The contract is a lease per IFRS 16, Leases.
The plant was available for use in Thabo Limited’s manufacturing process on
1 January 20X13.

The fair value of the plant at the commencement of the lease was R177 850.
The lease payment of R37 500 is payable annually in arrears with the first
payment payable on 31 December 20X13.

Thabo Limited and African Rentals Limited agreed, at commencement date,

that the residual value guarantee of the plant is R50 000. If the fair value of
the plant, at the end of the lease term, is less than R50 000, Thabo Limited
will be expected to pay, to African Rentals Limited, an amount equal to the
difference between R50 000 and the fair value of the plant. At commencement
date, the estimated fair value of the plant at the end of the lease term is
R57 500. African Rentals Limited estimated on commencement date that it
would be able to sell the plant to an independent third party at the end of the
lease term for R57 500.

Thabo Limited paid R5 000 to their externally appointed legal advisors on

1 January 20X13 for the preparation of the lease contract. African Rentals
Limited agreed to partially reimburse Thabo Limited for these costs incurred,
as a lease incentive, and paid a total amount of R2 000 to Thabo Limited on
1 January 20X13.

Thabo Limited has knowledge of all of the information provided above.

Additional information:

1. There have been no changes in the residual values and useful lives of the
plant. There has also not been any indicator of impairment of the plant.

2. Assume that all amounts payable and receivable have been paid and
received timeously.

3. Right-of-use assets related to plant are accounted for in accordance with

the cost model of IAS 16, Property, Plant and Equipment by Thabo Limited.
Depreciation on plant is written off on the straight-line basis over the
estimated useful life of eight years.

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4. Thabo Limited uses the following time bands to disclose its lease liabilities:
 Not later than 1 year
 Later than 1 year but not later than 5 years
 Later than 5 years

5. Thabo Limited uses a single note to disclose all matters related to leases.

REQUIRED:

Disclose the above transaction in the note to the financial statements of

Thabo Limited for the year ended 30 June 20X16, in accordance with
IFRS 16, Leases.

Note: - The accounting policy note is not required.

- Thabo Limited presents Right-of-use assets as a separate line item
on the statement of financial position.
- A “Profit before tax” note is not required.
- Ignore all taxation implications.
- Comparative amounts are not required.
- Round all calculated amounts to the nearest R1 and all
percentages to the nearest full percentage.

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