ACCOUNTING 3AB

ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

FACULTY/COLLEGE College of Business and Economics

SCHOOL School of Accounting
CAMPUSES APK and SWC
MODULE NAME Accounting 3AB
MODULE CODE ADIA001, S3PACQ1, ACC3AB0, REK3AB0, REK3A01,
ACC03A3
SEMESTER Second Semester
ASSESSMENT OPPORTUNITY, Assessment Opportunity 4
MONTH AND YEAR August 2023

ASSESSMENT DATE 23 August 2023

ASSESSORS Mr. G Barnes
Ms. B Madikizela
Mr. A Ndlebe
Ms. N Singo
INTERNAL MODERATOR Mr. M van Wyk
DURATION 120 minutes TOTAL MARKS 80

NUMBER OF PAGES OF QUESTION PAPER (Including cover page) 8

INSTRUCTIONS___________________________________________________ ________________
• This is a closed book assessment.
• This assessment consists of a total of 3 questions and 8 pages.
• An answer sheet/paper is provided to you for the assessment.
❖ Answer each question in a separate book.
❖ Answer the questions on the correct colour of the answer sheet as indicated by the invigilator.
❖ Number your answers clearly and correctly as per the question paper.
❖ Write neatly and legibly on both sides of the paper in the answer book, starting on the first
page.
❖ Show all calculations clearly as marks may be awarded thereto.

• SCRATCH OUT ALL OPEN SPACES AND EMPTY PAGES IN YOUR ANSWER SHEET.
SHOULD THIS NOT BE DONE YOUR PAPER WILL NOT QUALIFY FOR A RE-MARK

GOOD LUCK
__________________________________________________________ ____ ______________
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-2–
QUESTION 1 (25 MARKS)
(37.5 MINUTES)

In February 2023, you joined the Impala Platinum Holdings Limited (“Implats Ltd”) as an intern in a
graduate program for graduates with an accounting related degree. The program is for 18 months in
the Accounting & Finance department. As a policy, all graduate interns work on the technical aspects
of any merger and/or acquisition transactions that the company may be involved in. The motivation for
the company to include the interns is due to the understanding that being the newest, youngest and
recently graduated members of the team, they are the most technically up-to-date when it comes to
International Financial Reporting Standards (IFRS).

Implats secures control of Royal Bafokeng Platinum – May 2023

Royal Bafokeng Platinum mines Platinum Group Metals (PGM) at the Merensky and UG2 reefs on the
Boschkoppie, Styldrift and Frischgewaagd farms in the Rustenburg area. PGMs comprise of iridium,
osmium, palladium, platinum, rhodium, and ruthenium. Their assets (the mines) are the only known
significant shallow high grade Merensky resources and reserves still available for mining in South
Africa. The company specializes in exploring, producing and marketing precious metal. Royal Bafokeng
Platinum’s customers include Anglo American Platinum (Amplats) to whom they sell their concentrate
as well as the end users of PGMs.

During May 2023 Implats Ltd announced the conclusion of an agreement with the Public Investment
Corporation (“PIC”) to acquire PIC’s entire shareholding of 9.26% in Royal Bafokeng Platinum. PIC is
the asset management company for the Government Employees Pension Fund and invests funds on
behalf of the fund.

In addition to the PIC shares, Implats Ltd has acquired 5.49% shares from other shareholders holding
less than 5%.

Royal Bafokeng Platinum shareholding – 31 December 2022

As at 31 December 2022, the Royal Bafokeng Platinum shareholder register had an issued share capital
of 290 334 425 ordinary shares. Of these issued ordinary shares, 245 328 817 representing 84.50% of
the total issued share capital is owned by three (3) companies with the percentages held as follows:

Beneficial shareholders with a holding greater than 5% of the issued shares

Number of shares %
Impala Platinum Holdings Limited 118 203 683 40.71
Northam Platinum Holdings Limited 100 219 552 34.52
Government Employees Pension Fund 26 905 582 9.27
Total 245 328 817 84.50
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-3–
QUESTION 1 (CONTINUED…) (25 MARKS)
(37.5 MINUTES)

Shareholders with a holding less than 5% of the issued shares

Number of shares %
Other shareholders 45 005 608 15.50
Total 45 005 608 15.50

REQUIRED

In terms of IFRS 3 Business Combinations and IFRS 10 Consolidated Financial Statements discuss
whether the aggregated acquisition of 9.26% and 5.49% of Royal Bafokeng Platinum's shares, when
viewed as a single transaction, in addition to 40.71% current shareholding by Impala Platinum Holdings
Limited (“Implats Ltd”) qualifies as a business combination.

Note: Use the 5-step approach in your discussion and apply the following criteria:
i) What is the problem?
ii) How am I going to solve the problem?
iii) Application.
iv) Conclusion. (25)
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-4-
QUESTION 2 (30 MARKS)
(45 MINUTES)

You are the financial manager at Super-Charge (Pty) Ltd (Super-Charge), a lighting manufacturer that
is looking to expand their operations through the acquisition of Sparkler (Pty) Ltd which is very well
established in KZN where Super-Charge has almost no market share.

Part A

The Managing Director has sent you the following email:

Dear Financial manager,

As you know, we’re about to pull the trigger on the Sparkler acquisition and after all these months of
due diligence, I’m starting to second guess what we are doing here. I mean, they are a fantastic
business but their ‘Sparkler’ name doesn’t carry much actual brand value…they will definitely operate
under the Super-Charge brand.

We’ve gone through the process of valuing all these assets and liabilities with the intention of purchasing
them directly…but it all seems very complicated, should we not just go in there and buy 100% of the
shares in the business? I have looked into it and we could buy 100% of the Share Capital for a cash
sum of 24 million Rand. What would the accounting look like in this scenario?

On top of that, I’m concerned by the VAT issues Sparkler has been having with SARS and they also
have that pending legal case against them for an accident caused by one of their faulty lights.

I suppose I’m just getting nervous as transaction date approaches, was hoping you’d assure me we’re
doing the right thing by buying the assets and liabilities as opposed to shares.

Looking forward to your thoughts on the matter.

Thanks

Managing Director

REQUIRED:

Respond to the financial managers email providing reasons why purchasing the assets and
liabilities is a good path to take given your knowledge of the transaction. Your email should also
address the managing director’s question about how to account for the purchase of shares by
providing the hypothetical journal that would be passed by Super-Charge at acquisition and briefly
explaining how the newly formed business combination would be subsequently accounted for.
(10)
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-5-

QUESTION 2 (CONTINUED…) (30 MARKS)

[45 MINUTES]
Part B

The management of Big-Bright (Pty) Ltd (Big-Bright) has approved a decision to acquire the assets and
liabilities of Lil-Light (Pty) Ltd (Lil-Light). The lawyers brokering the deal provide you with the following
list of Lil-Light’s assets and liabilities as well as their fair values at the date the transaction was
concluded (1 August 2023) as determined by an independent valuer:

Assets and Liabilities 1 August 2023

Additional Carrying
Information Amount Fair Value
Assets
Property Plant and Equipment 4 000 000 4 500 000
Vehicles 1 600 000 1 850 000
Intangible Assets 3 700 000 580 000
Goodwill 120 000 ?
Trade Receivables 1 200 000 1 492 000
Total Assets

Liabilities
Loan – ABSA 980 000 880 000
Deferred Tax 150 000 ?
Trade and other payables 800 000 730 000
Total Liabilities

Additional information:

The following additional information relating to the transaction is provided:

1) The listed assets and liabilities meet the definition of a business in accordance with IFRS 3
Business Combinations

2) The purchase consideration for the transaction will be settled as follows:

i) A cash amount of R3 400 000 will be paid to the former owners of Lil-Light on 1 August
2023.

ii) 60 000 Ordinary shares (with a par value of R2 per share) of Big Bright will be transferred
to the former owners of Lil-Light. On 1 August 2023 the JSE showed the shared trading
at R25 per share.

iii) The title deed to an undeveloped erf of land belonging to Big Bright will be transferred
from Big Bright to the previous owners of Lil-Light on transaction date. The land had a
carrying value of R1 400 000 but the independent valuer set the fair value of the land at
R1 800 000 on 1 August 2023.
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-6-

QUESTION 2 (CONTINUED…) (30 MARKS)

[45 MINUTES]

iv) A final payment of R2 700 000 is payable by Big Bright on 1 August 2022 to the former
owners of Lil-Light. In terms of the business combination agreement, this amount will not
attract any interest. Management has determined that the market related interest rate
for loans acquired by Big Bright is 11.5% and they correctly calculate the present value
of the amount to be R1 746 800 at 1 August 2023.

3) Lil-Light had a contingent liability of R500 000 on their Statement of Financial Position on 1
August 2023 relating to sales contracts with existing customers that would need to be cancelled
if the acquisition took place. Now that all the relevant acquisition contracts have been signed
and the deal has been concluded, there is no longer any uncertainty surrounding the contingent
liability and management is of the opinion that the liability should form part of the business
combination transaction since a present obligation exists. The independent valuer had assessed
the liability on 1 August and found the fair value to be R 400 000.

4) In addition to the Assets listed above, Lil-Light had recently expensed development costs
amounting to R336 000. The fair value of these costs was R420 000 on 1 August 2023. Big
Bright Ltd correctly determines that the costs do in fact meet the definition of an intangible asset
in terms of IAS 38 Intangible Assets and should not have been expensed by Lil-Light.

5) Legal fees incurred by Big Bright to affect the business combination amounted to R96 000. The
Valuer’s fees amounted to R50 000 and were paid on transaction date. The legal fees remain
outstanding.

6) You may ignore all VAT and Tax implications.

REQUIRED:

a) Assuming that the decision is made to purchase the assets and liabilities of Lil-Light and
constitutes a business in terms of IFRS 3 Business Combinations, prepare the journal entries
to correctly account for the transactions related to the acquisition in the separate financial
statements of Big Bright Ltd on 1 August 2023. (20)
ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-7-
QUESTION 3 (25 MARKS)
(37.5 MINUTES)

Bellissimo (Pty) Ltd (“Bellissimo”) paid R390 000 to acquire a controlling interest of 60% in Ceramix
(Pty) Ltd (“Ceramix”) on 1 January 2019 in order to secure a reliable source of components for its
manufacturing of traditional Italian floor tiles.

The following information relates to the period from 1 January 2019 to 31 December 2022, the group’s
current reporting date:

1. Subsequent to acquisition, Bellissimo started purchasing components (inventory) from Ceramix.

Ceramix’s applies a mark-up of 25% on cost. Sales of inventory from Ceramix to Bellissimo for
the year ended 31 December 2022 were R480 000. Inventory on hand in Bellissimo (at cost to
Bellissimo) that had been purchased from Ceramix at 31 December 2022 amounted to R12 000
(2021: R10 500).

2. On 1 January 2020, Bellissimo sold a delivery truck to Ceramix for R200 000. At the date of sale,
Bellissimo considered the truck to have a remaining useful life of 5 years and Ceramix agreed
with this estimate. The truck had a carrying amount of R180 000 on the date it was sold to Ceramix.

a) Bellissimo made a loan of R600 000 on 30 June 2022 to Ceramix in order to fund research into
new technologies. The loan bears interest at 10% which is payable annually in arrears.

b) The net profit of the two companies for the year ended 31 December 2022 were as follows:

Bellissimo Ltd Ceramix Ltd

Sales 1 920 000 1 320 000

Cost of Sales (1 200 000) (735 000)

Gross profit 720 000 585 000

Other operating income 150 000 135 000

Finance costs (15 000) (54 000)

Operating expenses (345 000) (258 000)

Net profit before tax 510 000 408 000

Taxation expense (189 000) (55 500)

Net profit for the year 321 000 352 500

ACCOUNTING 3AB
ASSESSMENT OPPORTUNITY 4 – AUGUST 2023 QUESTION PAPER

-8-
QUESTION 3 (Continued…) (25 MARKS)
(37.5 MINUTES)

Additional information:
• Bellissimo accounts for its investment in Ceramix on the cost basis in its own separate
financial statements.
• Assume that an income tax rate of 27% and capital gains inclusion rate of 80% have always
applied.
• The group accounts for taxation in accordance with IAS 12 Income Taxes.
• Ignore VAT.

YOU ARE REQUIRED TO:

a) Prepare the proforma consolidation journal entries required to adjust for the intragroup sale of
the delivery truck between Bellissimo Ltd and Ceramix Ltd during the preparation of the
Bellissimo Ltd Group consolidated financial statements for the period ended 31 December 2022.
(12)
• Journal narrations are required.
• Dates are not required.
• Clearly show all workings.

b) Calculate the following amounts as they would appear in the consolidated statement of profit
or loss of the Bellissimo Ltd Group for the year ended 31 December 2022 (ignore comparatives):
• Clearly show all workings.

i) Cost of sales (6)

ii) Finance Costs (1)

c) Calculate the current year profit/loss attributable to the non-controlling interest for the year
ended 31 December 2022. (6)
• Clearly show all workings.