1 SUGGESTED SOLUTION TO SELF ASSESSMENT QUESTION

PART A
MUFASA LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017
ASSETS R
Non-current assets 1 074 759
Property, plant and equipment (532 228 + 868 000 – 228 098 – 325 500 +
3 000(J1)(unrealised loss)(11 500 – 8 500) – 146(realisation of unrealised
loss)(J2)((3 000/41(60 – 19) months) = 73 x 2 months) 849 484
Goodwill (33 775 + 7 000) 40 775
Investments is equity instruments:
- Investment in Rafiki Ltd at fair value (given) 109 500
- Investment in Zazu Ltd at fair value (given) 75 000

Current assets 323 576

Inventory (90 000 + 87 050 + 10 500(J3) – 3 474(J5)(14 000(3 500 + 10 500) x 184 076
33/
133))
Trade and other receivables (21 000 + 57 750 – 8 500 – 10 500(J7)) 59 750
Cash and cash equivalents (32 500 + 47 250) 79 750

TOTAL ASSETS 1 398 335

PART B
MUFASA LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
31 DECEMBER 2017
Non-
controlling
interests
R
Balance at 1 January 2017 259 0001
Changes in equity for 2017
Total comprehensive income: 38 624
Profit for the year 38 6242
Other comprehensive income for the year -
Dividends paid (12 688)3
Balance at 31 December 2017 284 936
1 170 275(NCI at acquisition – ordinary shares) + 1 225(NCI since acquisition date – ordinary shares)
(3 500(140 000 – 136 500) x 35%) = 171 500 + 87 500(NCI at acquisition – preference shares) =
259 000.
2 259 000(revenue) – 105 000(cost of sales) – 14 000(other expenses) – 39 200(income tax) = 100 800
– 17 500(profit attributable to preference shareholders) + 3 000(unrealised loss on sale of machine) –
840(3 000 x 28%)(tax effect of unrealised loss on sale of machine) – 146(additional depreciation) +
41(tax effect of additional depreciation) = 85 355 x 35% = 29 874 + 8 750(17 500 x 50%)(profit
attributable to non-controlling interests of the preference shareholding) = 38 624.
3 3 938(11 250 x 35%)(ordinary dividend paid to non-controlling interests) + 8 750(17 500 x 50%)
(preference dividend paid to non-controlling interests) = 12 688.

1
 Comment
Sarabi Ltd sold a machine to Mufasa Ltd and made a loss of R3 000 on the sale. The
sale of the machine has already been accounted for in the separate accounting
records of Sarabi Ltd as follows:
Dr Cr
R R
Bank 8 500
Other expenses (loss on sale of machine) 3 000
Property, plant and equipment 11 500
Accounting for loss on sale of machine

The purchase of the machine has already been accounted for in the separate
accounting records of Mufasa Ltd as follows:
Property, plant and equipment 8 500
Bank 8 500
Accounting for purchase of machine

The consolidated (group) financial statements are prepared as if Mufusa Ltd and
Sarabi Ltd are one entity. From this group perspective, you cannot enter into a
transaction with yourself. Hence, consolidation journal entries need to be passed to
eliminate the sale of the machine (i.e. from the groups perspective there was no sale of
machine). Thus the carrying amount of the machine for group purposes is thus the cost
price for the entity that acquired the machine first within the group.
If the sale had not occurred, the machine would still have a carrying amount of
R11 500. There would also be no loss on the sale of the machine. Thus the loss on the
sale of the machine needs to be unrecognized (unrealised loss).
Depreciation expense of R8 500/41 months x 2 months = R415 has been accounted
for by Mufasa Ltd (the buyer) for the period from 31 October 2017 –
31 December 2017 based on the cost price of R8 500. However, if the sale had not
occurred, Sarabi Ltd would have depreciated the machine based on the carrying
amount before the sale of R11 500. The depreciation expense for this period would
then be R11 500/41 months x 2 months = R561. Thus we have to adjust the
depreciation for the group with R146(R561 – R415) by debiting the depreciation
account.
Another explanation is that the unrealised loss on the sale of the machine will be
realised through the use of the machine. Thus we need to recognise a portion of the
unrealised loss through the depreciation account. Thus the portion of the loss
recognised will be the unrealised loss amounting to R3 000/41 x 2 = R146. The loss
will be recognised in the depreciation account by debiting depreciation with R146.
Note: The remaining useful life on 1 April 2016 (date the machine was originally
acquired by Sarabi Ltd) was 5 years (60 months). Therefore the remaining useful life
on 31 October 2017 is 41 months (60 months – 19 months).
The following consolidation journal entries will be passed:
Dr Cr
R R
J1 Property, plant and equipment 3 000
Other expenses (loss on sale of machine) 3 000
Elimination of unrealised loss on sale of machine
J2 Other expenses (depreciation)
(561 – 415) OR (3 000/41 x 2) 146
Property, plant and equipment (accumulated depreciation) 146
To account for the additional depreciation that arises due to the increase in the
carrying amount of the machine (J1) or realisation of unrealised loss through the
use of the machine.

2
 FAC3704/201/2/2018

Comment

As stated in the given information, Mufasa Ltd has already correctly accounted for the
sale of the inventory, which is still in transit at year end, in its separate accounting
records.

Sarabi Ltd has however not yet accounted for the purchase of the inventory in its
separate accounting records at year end.

We cannot eliminate the intragroup sale of inventory between Mufasa Ltd and
Sarabi Ltd unless all sales and purchases have been correctly recorded in both
entities seperate accounting records at year end. Therefore the first step, before
the consolidation process begins, is to account for the purchase of the inventory in
transit in the separate accounting records of Sarabi Ltd.

Dr Cr
R R
J3 Inventory 10 500
Trade and other payables 10 500
Accounting for the purchase of inventory

The total purchases from Mufasa Ltd in the accounting records of Sarabi Ltd
(before accounting for the inventory in transit) amounted to R52 500. After accounting
for the purchase of the inventories in transit, the total purchases that need to be
eliminated on consolidation amount to R52 500 + R10 500 = R63 000.

The closing inventory purchased from Mufasa Ltd in the accounting records of
Sarabi Ltd (before accounting for the inventory in transit) is R3 500. After accounting
for the purchase of the inventories in transit, the closing stock purchased from
Mufasa Ltd at year end is R3 500 + R10 500 = R14 000. The unrealised profit included
in these closing inventories that needs to be eliminated on consolidation amounts to
33/
133 x 14 000 = 3 474.

The following consolidation journal entries will be passed:

Dr Cr
R R
J4 Revenue 63 000
Cost of sales 63 000
To eliminate the total intragroup sales for the year
(52 500 + 10 500)
J5 Cost of sales 3 474
Inventory 3 474
To eliminate the unrealised profit including in closing
inventory (33/133 x 14 000(3 500 + 10 500))
J6 Deferred tax 973
Income tax 973
Deferred tax effect on elimination of unrealised profit
(3 474 x 28%)
J7 Trade and other payables 10 500
Trade and other receivables 10 500
To eliminate the intragroup payable/receivable
Calculations
C1 - Analysis of owners’ equity of Sarabi Ltd – ordinary shareholders
Mufasa Ltd NCI
100% 65% 35%
Total At Since
R R R R
At acquisition – 1 September 2014
Share capital 350 000 227 500 122 500
Retained earnings 136 500 88 725 47 775
486 500 316 225 170 275
Equity represented by goodwill 33 775 33 775 -
Consideration paid and NCI 520 275 350 000 170 275
Since acquisition to beginning of the current
year
Retained earnings (140 000 – 136 500) 3 500 2 275 1 225
523 775 2 275 171 500
Current year profit attributable to ordinary
shareholders 85 355 55 481 29 874
Profit for the year
(259 000 – 105 000 – 14 000 – 39 200) 100 800 65 520 35 280
Profit attributable to preference shareholders (17 500) (11 375) (6 125)
Unrealised loss on sale of machine, net after tax
(3 000 x 72%) 2 160 1 404 756
Realisation of unrealised loss through depreciation,
net after tax (3 000/41 months x 2 months x 72%) (105) (68) (37)
Dividends paid (11 250) (7 313) (3 938)
597 880 50 443 197 436

C2 - Analysis of owners’ equity of Sarabi Ltd – preference shareholders

Mufasa Ltd NCI
100% 50% 50%
Total At Since
R R R R
At acquisition – 1 January 2015
Preference share capital 175 000 87 500 87 500
Equity represented by goodwill 7 000 7 000 -
Consideration paid and NCI 182 000 94 500 87 500
Since acquisition to beginning of the current
year
Retained earnings attributable to preference
shareholders (175 000 x 10% x 2 years) 35 000 17 500 17 500
Preference dividends paid (35 000) (17 500) (17 500)

Current year
Profit for the year attributable to preference
shareholders (175 000 x 10% x 1 year) 17 500 8 750 8 750
Preference dividends paid (17 500) (8 750) (8 750)
182 000 - 87 500

4
 FAC3704/201/2/2018

Comment
The preference shareholders receive the return on their investment upon liquidation of
Sarabi Ltd. This means that when calculating goodwill or gain on bargain purchase on
acquisition of the preference shares, the non-controlling interests are measured at fair
value. In order to simplify this concept, for the purposes of this question, the fair value
of the non-controlling interests was assumed to be equal to their proportionate share of
at acquisition equity attributable to them (i.e. 50% x 175 000 = 87 500).

As all preference dividends have been paid up to and including 31 December 2018, the
equity of Sarabi Ltd at 31 December 2018 that is attributable to the preference
shareholders is R87 500.

©
UNISA 2018