DISCUSSION QUESTION

Scooby Ltd is a company that produces dog food. Scooby Ltd invested in a dog food distributing
company, called Scrappy Ltd. Both of the entities had a 31 December year end.

The following are extracts from the trial balances of Scooby Ltd and Scrappy Ltd for the year
ended 31 December 2015:
Scooby Scrappy
….Ltd ……..Ltd
R R
DEBITS
Long term loan – Scrappy Ltd ................................................. - -
Property, plant and equipment at carrying amount .................. 1 036 322 663 600
Investment in Scrappy Ltd at fair value.................................... 810 000 -
Investment in Goofy Ltd at fair value ....................................... - 50 000
Investment in Droopy Ltd at fair value 62 500 -
Inventory ............................................................................... 793 000 255 200
Trade receivables .................................................................... 480 000 349 971
Cash and cash equivalents ..................................................... 334 514 -
Accumulated loss – 1 January 2015 ........................................ - 170 387
Cost of sales............................................................................ 867 000 804 000
Other expenses ....................................................................... 1 236 761 537 500
Income tax expense ................................................................ 612 650 -
Dividends paid – 31 December 2015 ...................................... 120 000 -
6 352 747 2 830 658
CREDITS
Share capital- 600 000 ordinary shares ................................... 1 500 000 -
- 760 000 ordinary shares................................... - 950 000
Retained earnings – 1 January 2015 ....................................... 417 805 - .
Mark-to-market reserve – 1 January 2015............................... 10 000 12 338
Deferred tax ............................................................................ 42 500 12 333
Long term loan – Scooby Ltd................................................... - 330 000
Trade payables ........................................................................ 86 405 281 200
Bank overdraft – Courage bank ............................................... - 117 800
Revenue ............................................................................... 3 334 800 995 000
Other income ........................................................................... 957 000 123 987
Other comprehensive income – fair value adjustment on equity
investments, net of tax............................................................. 4 237 8 000
6 352 747 2 830 658

Additional information
1. On 1 June 2013, Scooby Ltd acquired control over Scrappy Ltd by acquiring 570 000 of the
issued ordinary shares of Scrappy Ltd. The consideration paid was settled in a cash amount
of R810 000. On this date the retained earnings of Scrappy Ltd amounted to R125 000 and
the mark-to-market reserve amounted to R1 333. At the acquisition date the market value of
a Scrappy Ltd share was R1,42 per share.

2. On 31 December 2013, due to the poor financial position of Scrappy Ltd, Scooby Ltd wrote
off the loan made to Scrappy Ltd, against the retained earnings in its own separate accounting
records.

Open Rubric
3. During the current year Scooby Ltd started selling inventory to Scrappy Ltd at a profit mark-
up of 40% on the selling price. During the current year the total sales of inventory from Scooby
Ltd to Scrappy Ltd amounted to R350 000. At 31 December 2015, Scrappy Ltd had inventory
on hand of R120 000 which was purchased from Scooby Ltd.

4. On 30 June 2015, Scooby Ltd sold a delivery vehicle at a profit of R25 000 to Scrappy Ltd.
The delivery vehicle had a remaining useful life of 4 years on the date of sale. Both companies
depreciate their vehicles over the expected useful life of the asset using the straight line
method. This is consistent with the allowance received by the South African Revenue Service.
The profit on the sale of the vehicle is included in “other income” in the accounting records of
Scooby Ltd.

5. At the end of the current year Scrappy Ltd urgently needed stationary and the supplier could
not supply stationary to Scrappy Ltd in time, therefore Scrappy Ltd purchased stationary,
amounting to R50 000, from Scooby Ltd. The sales from the stationary in the accounting
records of Scooby Ltd were included in “other income” and the purchase of stationary in the
accounting records of Scrappy Ltd were included in “other expenses”.

6. The Scooby Ltd Group measures their investments in equity instruments at fair value through
other comprehensive income. The fair value adjustments on the investments in equity
instruments in the records of Scooby Ltd relates only to the investment in Droopy Ltd.

7. The Scooby Ltd Group measures non-controlling interests in an acquiree at is proportional

share of the aquiree’s identifiable net assets at acquisition date.

8. On 31 December 2015 the goodwill was tested for impairment and it was determined by the
directors of Scooby Ltd that the goodwill was impaired with R2 750 at the end of the current
financial year.

9. You may assume that the SA normal tax rate is 28% and the capital gains inclusion rate is
calculated at 80% of the normal tax rate. You may assume that both tax rates have remained
unchanged since 1 June 2013.

10. Each share carries one vote and the share capital has remained unchanged since
1 June 2013.