Professional Documents
Culture Documents
Flower Power Limited (FP) is the ultimate parent of a group of companies that are
involved in growing and selling various types of flowers. FP, itself, comprises of two
separate divisions, each of which is a separate cash generating unit (CGU).
The financial manager of FP has provided the following information relating to two
issues that have not yet been accounted for in the current financial year ended 31
December 2017.
Issue 1:
The Fresh Flower division grows and sells fresh flowers for the retail industry. Over the
past year there has been a steady decrease in the availability of flowers for sale due to
the drought that South Africa has encountered. As a result, there has been a 30%
decrease in sales during the current financial year. Management also fears that with
the weather forecasts that predict further drought conditions, the sales will decrease
even more during the next financial year.
The Fresh Flower division has been correctly identified as a separate CGU and
comprises of the following assets only:
- Land
- Factory buildings
- Plant
- Inventory
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Financial Accounting III
November Exam 2017
Question
The financial manager has correctly summarised the information relating to the Fresh
Flower division’s assets below:
The cost of inventory in the fresh flower division at 31 December 2017 was R650 000.
The net realisable value of this inventory is R700 000 at 31 December 2017.
Goodwill that arose previously on the acquisition of a subsidiary has been correctly
allocated to each of FP’s divisions, as they represent the CGUs that are expected to
benefit from the synergies of the business combination. Management monitors the
goodwill at a divisional level.
The goodwill balance allocated to the Fresh Flower Division as at 31 December 2017
was R450 000.
The following amounts in respect of the Fresh Flower division CGU, comprising all the
assets and the goodwill, have been determined at 31/12/2017:
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Financial Accounting III
November Exam 2017
Question
Issue 2:
At the monthly board meeting on 1 August 2017, the directors decided to sell the
Compost division’s specialised compost manufacturing machine. In the last six months,
there has been a significant increase in demand for compost, resulting in the current
machine needing to be replaced with a machine that is equipped with the latest
technology. The new machine will be imported from Switzerland in January 2018. The
purchasing manager was assigned the task of locating a buyer for the machine before
the new one arrived. He was highly confident that a buyer would be found.
Details of the existing specialised compost manufacturing machine are provided below:
The machine was revalued to fair value, for the first time, on 1 January 2017. The
estimated useful life remained unchanged. The realised portion of the revaluation
surplus is transferred to retained earnings when the asset is sold.
The fair value of the machine at 1 August 2017 was considered to be R4 600 000.
Costs to sell could not be determined at this date and were considered to be negligible.
In November 2017 a buyer was found who signed a contract to purchase the machine
on the 31 January 2018 for R 4 600 000; costs to sell of R50 000 would be incurred.
Depreciation on the machine has been provided up until 31 July 2017. However, no
further adjustments in respect of the decision to sell have been made to the accounting
records of Flower Power.
Assessed loss
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Financial Accounting III
November Exam 2017
Question
Additional information:
1. Flower Power’s net operating profit (including depreciation, but excluding any
impairments) for the year ended 31 December 2017 was R 6.5 million.
2. The tax rate remained constant at 28% throughout the period under review. The
capital gains tax inclusion rate is 80%.
3. There are no other temporary or exempt differences other than those apparent from
the above information.
4. Assume the base cost equals the historic cost for all items of Property, plant and
equipment.
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Financial Accounting III
November Exam 2017
Question
The Tumi Group consists of Tumi Limited (Tumi), Bongani Limited (Bongani) and Xolani
Limited (Xolani) and the company relationships at 1 October 2016 are shown as:
Tumi Ltd
75%
Bongani Ltd
20%
60%
Xolani Ltd
Transactions in Tumi:
Tumi is in the business of manufacturing tools for the construction industry. Although
the company is profitable, it has been struggling to manage its cash flows. In an effort to
generate additional cash needed in the business, Tumi entered into two new
agreements during the current financial year. Management has approached your
consulting firm for advice regarding the accounting implications of these agreements.
Details of the two agreements are provided below.
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Financial Accounting III
November Exam 2017
Question
The terms and conditions of the sale are such that the transfer of the building by Tumi to
XCap satisfies the requirements for determining when a performance obligation is
satisfied in IFRS 15 Revenue from Contracts with Customers. SARS treats the
transaction as a normal sale of a building.
• Tumi adopted IFRS 15 Revenue from contracts with customers and IFRS 16
Leases in the previous financial year.
• Tumi applies a straight-line method of deprecation to all owned and leased items
of Property, plant and equipment (PPE). All items of PPE have a residual value
of zero.
• The historic cost is equal to the base cost for all owned assets.
• SARS grants a deduction for all lease payments made.
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Financial Accounting III
November Exam 2017
Question
Land and buildings at carrying amount 20 500 000 13 800 000 3 450 000
Equipment at carrying amount 7 250 000 5 791 740 2 350 000
Investment in Bongani 6 150 000 - -
Investment in Xolani 665 000 - -
Net current assets 664 740 421 376 206 950
Loan from Tumi (9.25% p.a.) 500 000 - -
Dividends paid - 28 February 2017 250 000 50 000 25 000
Dividends paid - 30 September 2017 600 000 200 000 100 000
36 579 740 20 263 116 6 131 950
Investment in Bongani:
Tumi purchased 75% of the 100 000 shares in Bongani on 1 January 2010 for
R6 150 000. The following relates to the acquisition of the shares on 1 January 2010:
• The balance on stated capital was R200 000 and on retained earnings was
R7 600 000.
• Shares in Bongani were trading on the Johannesburg Stock Exchange (JSE) at
R81.90.
• Bongani owns a two acre vacant plot of land in Cosmo City, Johannesburg
reflected in the financial statements at R600 000 on 1 January 2010. It was
decided that this land would be sold to a housing developer at its current market
price of R750 000. The estate agent who arranged the sale earned commission
of R37 500. The land was sold and transferred to Renico Construction on
3 March 2010. Bongani has accounted for the sale correctly.
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Financial Accounting III
November Exam 2017
Question
• All remaining identifiable assets and liabilities were considered to be fairly valued
at acquisition.
• Tumi has elected to measure the non-controlling interest on acquisition of
Bongani at fair value.
Investment in Xolani:
On 1 July 2014 both Tumi and Bongani acquired shares in Xolani as follows:
• Number of shares acquired:
Tumi Bongani
Consideration R665 000 R2 000 000
Shares purchased 60% 20%
• The balance on stated capital was R100 000 and on retained earnings was
R3 100 000.
• Shares in Xolani were trading on the JSE at R33.15.
• The net identifiable assets of Xolani were considered to be fairly valued.
• Both Tumi and Bongani elected to measure the non-controlling interest in Xolani
on acquisition at fair value.
On 2 July 2014 Xolani sold a new piece of equipment to Tumi at a mark-up on cost of
25%. The equipment had been purchased on 1 July 2014 at a cost of R600 000 for
Xolani’s Pretoria factory. Management decided to rather sell the equipment to Tumi
because they urgently needed to replace equipment that had been stolen on
30 June 2014. Tumi determined that the useful life of this equipment was 6 years.
Bongani raised additional funds to expand their Pretoria factory (to meet an increase in
demand for specialised equipment) by selling all of their shares held in Xolani on
31 March 2017 at the listed market price of R51.60 per share. Bongani has accounted
for the sale of the shares in their separate financial statements correctly.
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Financial Accounting III
November Exam 2017
Question