FINANCIAL ACCOUNTING 278

GROUP STATEMENTS – CHAPTER 3-7

CLASS QUESTION 34½ marks

Zürich Limited is a company that operates in Stellenbosch, and expands its operations through
the acquisition of subsidiaries. All companies have a 30 September year-end.

Acquisition of Lucerne Limited

On 1 October 2014 Zürich Limited acquired 80% of the issued ordinary shares of Lucerne
Limited for R1 400 000. On 1 October 2014 Zürich Limited also acquired 100% of the issued
10% cumulative preference shares of Lucerne Limited for R360 000. On 1 October 2014,
Zürich Limited therefore obtained control over Lucerne Limited, as defined in IFRS 10
Consolidated Financial Statements.

On 1 October 2014, the date of the acquisition of the interest in Lucerne Limited, the equity in
the financial statements of Lucerne Limited was as follows:

Equity R
Ordinary share capital (R1-shares) 1 300 000
10% Cumulative preference share capital (R1-shares) 240 000
Retained earnings (175 000)
Revaluation surplus 200 000
1 565 000

Acquisition of Paris Limited

On 1 October 2016 Zürich Limited acquired 75% of the issued ordinary shares of Paris Limited
for R675 000. On 1 October 2016, Zürich Limited therefore obtained control over Paris Limited,
as defined in IFRS 10 Consolidated Financial Statements.

No goodwill or gain on bargain purchase arose from the investment in Paris Limited.

On 1 October 2016, the date of the acquisition of the interest in Paris Limited, the equity in the
financial statements of Paris Limited was as follows:

Equity R
Ordinary share capital (R1-shares) 500 000
Retained earnings 400 000

General information

It is the entity’s policy to measure any non-controlling interest in an acquiree at the proportional
share of the acquiree’s identifiable net assets on the acquisition date.

The accountants of Zürich Limited, Lucerne Limited and Paris Limited respectively provided
you with the following in respect of the 30 September 2018 financial year:

1
STATEMENTS OF FINANCIAL POSITION ON 30 SEPTEMBER 2018
Zürich Lucerne Paris
Limited Limited Limited
R R R
ASSETS
Non-current assets 7 318 000 3 319 400 2 200 000
Property, plant and equipment 4 931 000 2 896 400 2 200 000
Investment in Lucerne Limited at cost price
- Ordinary shares 1 400 000 - -
- 10% Cumulative preference shares 312 000 - -
Investment in Paris Limited 675 000 - -
Loan to Zürich Limited - 423 000 -

Current assets 5 228 000 2 798 700 2 960 000

Inventory 2 410 000 855 000 2 410 000
Trade and other debtors 1 998 000 1 463 700 250 000
Cash and cash equivalents 820 000 480 000 300 000

Total assets 12 546 000 6 118 100 5 160 000

EQUITY AND LIABILITIES

Equity 8 128 600 4 047 100 4 250 000
Ordinary share capital (R1-shares) 2 500 000 1 300 000 500 000
10% Cumulative preference share capital (R1-shares) - 240 000 -
Retained earnings 5 628 600 2 107 100 3 750 000
Revaluation surplus - 400 000 -

Non-current liabilities 423 000 - -

Loan from Lucerne Limited 423 000 - -

Current liabilities 3 994 400 2 071 000 910 000

Trade and other creditors 3 994 400 2 071 000 910 000

Total equity and liabilities 12 546 000 6 118 100 5 160 000

EXTRACTS FROM THE STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR

ENDED 30 SEPTEMBER 2018
Zürich Lucerne Paris
Retained earnings Limited Limited Limited
R R R
Balance on 1 October 2017 4 752 600 2 039 300 1 840 000
Total comprehensive income for the year 2 796 000 1 007 800 1 910 000
Profit for the year 2 796 000 1 007 800 1 910 000
Other comprehensive income - - -
Dividends declared (1 920 000) (940 000) -
Balance on 30 September 2018 5 628 600 2 107 100 3 750 000

2
Additional information – Lucerne Limited

1. Assume that the identifiable assets acquired and the liabilities taken over on the acquisition
date are shown at their fair values at acquisition date, as determined in terms of IFRS 3
Business Combinations, except for the following assets:
Carrying
Note Asset on 1 October 2014 (Lucerne Limited) amount Fair value
R R
1.1 Inventory 741 000 823 000
1.2 Equipment 841 500 910 000

1.1 All the inventory on hand in the records of Lucerne Limited on 1 October 2014 was sold
during the year ending 30 September 2015.

1.2 Lucerne Limited originally purchased the equipment for R935 000 on 31 March 2014.
On 1 October 2014 the remaining useful life of the equipment was four and a half years.
It is Lucerne Limited’s accounting policy to depreciate equipment on a straight-line
basis over its useful life. The equipment has no residual value.

Lucerne Limited sold the equipment for R362 000 to Munich Limited on 1 June 2018.
Lucerne Limited includes any profit or loss on sale of property, plant and equipment in
‘other income’ or ‘other expenses’ respectively. Munich Limited is not part of the Zürich
Limited group.

None of the abovementioned fair value adjustments was recorded in the separate
accounting records of Lucerne Limited.

2. Lucerne Limited declared and paid their dividends on 30 September 2018. The last dividend
declaration, before the current year’s declaration, was 30 September 2012.

3. The revaluation surplus, as included in Lucerne Limited’s accounting records on

1 October 2014, arose during the revaluation of a piece of land on 1 October 2012. It is the
Zürich Limited group's policy not to depreciate land. The value of the land increased and it
was therefore further revalued upwards with R200 000 on 30 September 2018.

4. On 31 March 2017 Zürich Limited sold inventory for R480 000 to Lucerne Limited. Zürich
Limited recognises a profit mark-up of 20% on the cost price of inventory. Since Lucerne
Limited will use the goods as part of their computer equipment, Lucerne Limited included
the goods in the company’s fixed asset register. It is Lucerne Limited’s accounting policy to
depreciate computer equipment on a straight-line basis over four years. The computer
equipment has no residual value. The computer equipment was still included in Lucerne
Limited’s property, plant and equipment on 30 September 2018.

5. Lucerne Limited granted the loan to Zürich Limited on 1 January 2018. The loan bears no
interest.

3
Additional information – Paris Limited

6. Assume that the identifiable assets acquired and the liabilities taken over on the acquisition
date are shown at their fair values at acquisition date, as determined in terms of IFRS 3
Business Combinations.

7. Paris Limited has been selling inventory to Zürich Limited since 1 October 2016. Paris
Limited’s sales to Zürich Limited is R3 740 000 for the 2018 financial year
(2017: R2 655 000). Paris Limited recognises a profit margin of 25% on the selling price of
all inventory sold. On 30 September 2017 the carrying amount of Zürich Limited’s inventory
on hand, as purchased from Paris Limited, is R850 000. All the inventory was sold to third
parties during the 2018 financial year.

70% of Zürich Limited’s inventory balance on 30 September 2018 consists of inventory

purchased from Paris Limited. The rest of the inventory balance was purchased from
companies outside of the Zürich Limited group.

4
 Marks
REQUIRED Sub Total
total
(a) Calculate the opening balance of retained earnings, as at
1 October 2017, as it would appear in the consolidated statement of
changes in equity of the Zürich Limited group for the year ended
30 September 2018.
Show all calculations clearly and cross-reference to your answer as
needed.
Round all amounts off to the nearest Rand.
Ignore any tax implications. 10 10

(b) Compile an extract from the consolidated statement of changes in

equity of the Zürich Limited group for the year ended
30 September 2018, which only shows the ‘ordinary share capital’ and
‘non-controlling interest’ columns.
Notes are not required.
Comparative figures are not required.
Show all calculations clearly and cross-reference to your answer as
needed.
Round all amounts off to the nearest Rand.
Ignore any tax implications. 16.5
Communication skills – presentation 0.5 17

(c) Compile an extract from the consolidated statement of financial

position of the Zürich Limited group on 30 September 2018. The
extract must show only the non-current assets.
Notes are not required.
Comparative figures are not required.
Show all calculations clearly and cross-reference to your answer as
needed.
Round all amounts off to the nearest Rand.
Ignore any tax implications. 7
Communication skills – presentation 0.5 7.5
TOTAL MARKS 34.5