QUESTION 1 (65 MARKS)

This question consists of 2 parts (PART A and PART B)

PART A (35 MARKS)

(10.5 MINUTES READING TIME)
(42 MINUTES WRITING TIME)

You are currently studying towards your BCom degree, and you were recently employed as
the junior accountant, by Dalbany Ltd, a company that bakes and sells breads, rolls and
various other bakery and confectionery items to wholesalers and the public.

You always speak fondly about group statements and how much you enjoy this part of your
studies. Mr. Dylan, the senior accountant, has been extremely stressed over the past few
weeks, with all the reports he has to give to Mr. Jacob, the financial controller. He sent you
the following email and attachments for your urgent attention

E-MAIL

Hi there Super Newbie (I know you don’t mind me calling you this) 

Boy, am I glad that you enjoy group statements!!!

Mr. Jacob is on my case again in recent weeks as we work toward meeting our deadline in preparing our
2021 consolidated financial statements.

I urgently require your assistance with some consolidation workings and I have detailed your tasks in the
required below.

Attached to this email are the documents with the information that would assist you in completing the
tasks. The attachments consist of the following:
Attachment 1 – Company’s financial statements
Attachment 2 – Group history and accounting policies
Attachment 3 – Intragroup transactions
Attachment 4 – Possible acquisition and strategy (PART B)

I can’t thank you enough for your assistance. Wish me luck for the upcoming weeks as we finalise our
consolidated financial statements.

Kind Regards
D
PART A (Continued…) (35 MARKS)
(10.5 MINUTES READING TIME)
(42 MINUTES WRITING TIME)

ATTACHMENT 1 – COMPANIES CONDENSED FINANCIAL STATEMENTS

Condensed statement of financial position for the reporting period ended 30 June
2021
Dalbany Ltd Jasko
Assets
Non-Current Assets
Property, plant and equipment 2 348 000 1 976 000
Investment in 2 275 000 of Jasko Ltd's Ordinary shares at
cost 3 000 000
Investment in Jasko Ltd's 10% Preference shares 600 000
Current assets
Inventories 2 500 000 1 980 000
Receivables 4 040 000 1 475 000
Bank 1 292 000 837 000
13 760 000 6 268 000
Equity and Liabilities
Ordinary share capital: R1 shares 5 120 000 3 500 000
10% Preference share capital: R1 shares 2 300 000 2 000 000
Retained earnings/(Accumulated loss) 4 129 000 462 000
Non-Current Liabilities
Deferred tax 1 051 000 20 000
Current liabilities
Payables 1 160 000 286 000
13 760 000 6 268 000

Condensed statement of profit or loss for the reporting period ended 30 June 2021
Dalbany Ltd Jasko
Profit for the year 1 110 800 507 000
Preference dividends received 60 000
Ordinary dividends received 22 750
Profit before tax 1 193 550 507 000
Income tax expense (628 100) (80 000)
Total comprehensive income for the year 565 450 427 000
PART A (Continued…) (35 MARKS)
(10.5 MINUTES READING TIME)
(42 MINUTES WRITING TIME)

ATTACHMENT 1 - COMPANIES CONDENSED FINANCIAL STATEMENTS

Condensed statement of changes in equity for the reporting period ended 30 June 2021
Retained earnings
Dalbany Ltd Jasko Ltd
Balance at the beginning of the year: 1 July 2020 3 643 550 270 000
Total comprehensive income for the year 565 450 427 000
Preference dividend paid - (200 000)
Ordinary dividend paid (80 000) (35 000)
Balance at the end of the year: 30 June 2021 4 129 000 462 000

ATTACHMENT 2 – GROUPS HISTORY AND ACCOUNTING POLICIES

1. On 1 July 2018, Dalbany acquired 65% of the ordinary shares and 30% of the preference
shares of Jasko Ltd, a bakery specializing in gourmet bakes. On acquisition date the equity
of Jasko consisted of the following:
Ordinary share capital R3 500 000
Preference share capital R2 000 000
Retained Earnings R 619 000
Dalbany paid R3 000 000 and R600 000 for the investments in the ordinary shares and
preference shares respectively.
2. On acquisition date all assets and liabilities were deemed to be fairly valued in terms of
IFRS 3: Business Combinations except for a piece of land owned by Jasko. The carrying
value of this land amounted to R500 000 and the appraiser valued it at R550 000. It is Jasko’s
accounting policy to carry non-current assets on the cost model in their separate financial
statements.
3. Jasko’s management made a decision to sell some assets and after the board meeting held
in January 2020, the above piece of land was sold to an independent company for R650
000.The profit made on the sale of this land was included in “Other Income” in the current
reporting period

Accounting policies
 All companies depreciate machinery and equipment at 5% per annum on the straight-line
method.
 Assume a tax rate of 28% and a CGT inclusion rate of 80% where applicable.
 Dalbany Ltd recognised the equity investment in Jasko Ltd in its separate records using the
cost price method.
 Dalbany Ltd elected to measure the non-controlling interests in the acquiree at their fair values
of R1 500 000 for ordinary shares and R1 450 000 for preference shares at the acquisition
date.
PART A (Continued…) (35 MARKS)
(10.5 MINUTES READING TIME)
(42 MINUTES WRITING TIME)

ATTACHMENT 3 – INTRAGROUP TRANSACTIONS

In order to maximise the benefit of synergies between Dalbany and Jasko, the following transactions
took place:
1. Since July 2018, Jasko purchased inventories from Dalbany. Dalbany sold these inventories
at cost plus 10%. During the 2020 financial year, Jasko purchased R370 000 worth of
inventories from Dalbany of which R57 000 were still on hand on 1 July 2020.
During the 2021 financial year, Jasko Ltd had not purchased any inventories from Dalbany
Ltd.

2. In February 2021, Jasko’s industrial baking mixer was damaged and no longer operational. Mr.
Jacob was insistent that Dalbany should sell one of their mixers to Jasko as Jasko had been
“going through a lot this year”. Hence on 1 April 2021, the mixer was sold with a small profit
margin of 2% to Jasko and a profit of only R8 000 was recorded.

REQUIRED

For all journals to be prepared below please note:

 Company/Entity references ARE required
 Journal dates, financial statement references and narrations are NOT required
 Ignore VAT implications.

a) From the information provided to you in the email and attachment 2 above, prepare only
the following pro-forma journal entries for purposes of consolidation of the Dalbany Group
for the reporting period ended 30 June 2021: (5)
 Revaluation of Land
 Subsequent sale of the Land

b) Prepare the pro-forma journals to eliminate the intragroup transactions (excluding

any dividends paid) identified in attachment 3 for purposes of consolidation of Dalbany
Group for the reporting period ended 30 June 2021. (10)

c) From the information provided to you in the email and attachments 1 & 2 above, prepare
only the following pro-forma journal entries for purposes of consolidation of Dalbany
Group for the reporting period ended 30 June 2021 (12)
 Main Elimination journals of both classes of shares
 Elimination of the dividends paid to Dalbany Ltd.

d) Taking the above journals (a to c) into account, prepare the condensed consolidated
statement of profit or loss of the Dalbany Group of companies for the reporting period
ended 30 June 2021. (8)

Hint: start the statement with the profit for the year and make the necessary adjustments
to each line item of the financial statement.
PART B (30 MARKS)
(9 MINUTES READING TIME)
(36 MINUTES WRITING TIME)

ATTACHMENT 4 – POSSIBLE ACQUISITION AND STRATEGY

GlutFri is a small company that bakes gluten free breads, rolls and the South African favourite
rusks.

Over the past year, Dalbany has been looking to invest in GlutFri by purchasing a 25% interest of
the ordinary shares of the company. The executive management’s wish is to have some
representation on the Board of directors of GlutFri and participate in the policy making processes
of the company. In this way, they can still have some sort of influence without obtaining complete
power over the company.

You are a recent BCom Accounting graduate from the University of Johannesburg and have just
been appointed as an accountant at Dalbany. During your first few days of working at Dalbany,
you held your first meeting with your manager and one of the tasks allocated to you was to assist
the manager with how the potential investment in GlutFri will be presented in the books of Dalbany.
The manager insisted that the acquisition should be accounted for as a joint venture. He indicated
to you that he is not so sure about the accounting treatment of this acquisition but he believes that
since they are only acquiring a potion of 25%, this means that they are investing in a joint venture
with whoever owns the remaining 75%.

Management had requested a summarised version of the financial information and the following
are the line items of relevance for this exercise

Statement of changes in equity for the reporting period ending 30 June 2021
Share Capital Retained earnings
Balance at the beginning of the year: 1 July 2020 900 000 1 000 860
Total comprehensive income for the year 47 016
Ordinary dividend paid (17 000)
Balance at the end of the year: 30 June 2021 900 000 1 030 876

Balances on 30 June 2021 R

Total Assets for the year 1 438 900
Total liabilities for the year 1 218 200
Total equity for the year 1 876 876
PART B (Continued…) (30 MARKS)
(9 MINUTES READING TIME)
(36 MINUTES WRITING TIME)
REQUIRED
a) Discuss your understanding of an investment in an associate and an investment in a
joint arrangement. As part of your answer, discuss the different types of joint
arrangements that exist.
(5)

b) Based on your discussion in (a) above and the information presented to you in
attachment 4 only, discuss whether the potential investment in GlutFri would be an
investment in an associate or joint venture. (5)

c) Based on your discussion in (b) above and the information presented to you in
attachment 4 only, explain whether the decision to be taken by the manager to present
the potential acquisition of GlutFri as a joint venture is ethical or unethical. (10)

d) Assuming that the investment is an investment in an associate, discuss how the

investment in GlutFri would be accounted for in the consolidated financial statements
of the Dalbany Group. In your discussion consider both initial and subsequent
measurement of the investment. (4)

e) If Dalbany had paid R480 000 for a 25% interest in the ordinary shares of GlutFri on 1
July 2020, determine whether the investment in GlutFri would have been favourable
to the Dalbany Group for the reporting period ended 30 June 2021 by calculating the
total balances that would be presented on the consolidated statement of financial
position and the consolidated statement of profit or loss. (6)
Please note: An analysis of owners’ equity and financial statements are NOT required.
You have to only show the accounts to be presented in the financial statements, the
balances of these accounts, calculations you used to get these balances and concluded
if it would be favourable or not for the group.
QUESTION 1 (SUGGESTED SOLUTION)

a) From the information provided to you in the email and attachment 2 above, prepare only the
following pro-forma journal entries for purposes of consolidation of the Dalbany Group for the
reporting period ended 30 June 2021
• Revaluation of Land
• Subsequent sale of the Land

Debit Credit
Revaluation of land
Land (J) (550 000 - 500 000) 50 000 (1)
Equity at acquisition (J) 38 800 (1)
Deferred tax (J) (50 000 x 28% x 80%) 11 200 (1)
Remeasurement of land of subsidiary at acquisition date

Subsequent sale of land

Gain on sale of land (J)(Other income) (1) 50 000
Land (J) 50 000 (1P)
Sale of land remeasured at acquisition
Profit for company (650 000 - 500 000) = 150 0000
Profit for group (650 000 - 550 000) = 100 000
Therefore, profit needs to be adjusted for by R50 000

Tax Implications on subsequent sale

Deferred tax (J) 11 200
(1P)
Income tax expense (J) 11 200
Tax implications on subsequent sale of land remeasured at acquisition date
Available marks 6
Maximum marks 5
 QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

b) Prepare the pro-forma journals to eliminate the intragroup transactions (excluding any
dividends paid) identified in attachment for purposes of consolidation of Dalbany Group for the
reporting period ended 30 June 2021.

Intragroup Transactions - Inventory to Inventory

Debit Credit
Retained earnings - beginning of the year (D) 3 731
(1P)
Deferred tax (D) 1 451
Cost of Sales (D) 5 182 (1)
57 000 x 10/110
Adjustment to ensure that the opening balance of retained earnings is in agreement with the
consolidated retained earnings at end of the year

Income tax (D) 1 451

(1P)
Deferred tax (D) 1 451
Tax implications on the realisation of the unrealised gain

Intragroup Transactions - Equipment to Equipment

Other income (D) 8 000 (1)
Equipment (J) 8 000 (1)
Elimination of unrealised gain on sale of equipment

Deferred tax (D) 2 240

(1P)
Income tax (D) 2 240
Tax implications on elimination of unrealised gain

Accumulated depreciation (J) 100 (1)

(1P
Depreciation (D) 100 )
(8 000 x 5% x 3/12 (1))
Realisation of unrealised gain through use

Income tax (D) 28

(1P)
Deferred tax (D) 28
Tax implications on the realisation of the unrealised gain
Available marks 10
Maximum marks 10
QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

c) From the information provided to you in the email and attachments 1 & 2 above, prepare only
the following pro-forma journal entries for purposes of consolidation of Dalbany Group for the
reporting period ended 30 June 2021
 Main Elimination journals of both classes of shares
 Elimination of the dividends paid to Dalbany Ltd.

Debit Credit
Ordinary shares
Share Capital (J) 3 500 000 (1)
Retained earnings (J) 619 000 (1)
Equity at acquisition 38 800 (1P)
Goodwill 342 200 (1P)
Investment in Jasko (D) 3 000 000
Non-controlling interest 1 500 000 (1)
Main elimination of ordinary share capital

Preference share capital

Share Capital (J) 2 000 000 (1)
Goodwill 50 000 (1P)
Investment in Jasko (D) 600 000 (1)
Non-controlling interest 1 450 000 (1)
Main elimination of preference share capital

Dividends elimination
Dividends received (D)
60 000 (0.5) + 22 750 (0.5)) 82 750
Non-controlling interest 152 250 (1P)
Dividends Paid (J)
(200 000 (0.5) + 35 000 (0.5) 235 000
Elimination of dividends paid within the group
Available marks 12
Maximum marks 12
QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

d) Taking the above journals into account where necessary, prepare the condensed consolidated
statement of profit or loss of the Dalbany Group of companies for the reporting period ended 30
June 2021.

Dalbany Group of companies

Consolidated statement of profit or loss for the reporting period ended 30 June 2021
R
Profit for the year
(1 110 800 (D) + 507 000 (J) (1) - 50 000 (Gain on land) (0.5) + 5 182
(COS) (0.5P) - 8 000 Equipment (0.5) + 100 (Depreciation) (0.5P)) 1 565 082
Preference dividends received 0
Ordinary dividends received 0
Profit before tax 1 565 082 (1P)
Income tax expense
(628 100 (D) + 80 000 (J) (1) - 14 000 (Land) (0.5P) + 1 451 (COS) (0.5)
- 2 240 Equipment (0.5P) + 28 (Depreciation) (0.5)) (696 139)
Total comprehensive income for the year 868 943
Profit attributable to
Owners of parent 649 493 (1P)
NCI [O/S - (427 000 - 200 000) (1) x 35%] + [ P/S - (200 000 x 70%) (1) ] 219 450
Available marks 10
Maximum marks 8
QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

PART B
a) Discuss what is an investment in an associate and an investment in a joint arrangement. In your
answer, discuss the different types of joint arrangements that exist.

Investment in an Associate: This is an entity in which the investor has significant

influence and that is neither a subsidiary nor a joint venture. (1)

Significant influence: Is the power participate in the financial and operating policy
decisions of the investee but is not control or joint control over these policies. (1)

Joint arrangement: is an arrangement where two or more parties exercise joint control
that is the contractually agreed sharing of control. This means that the unanimous consent
of the parties sharing control is required for all decisions about the relevant activities. (1)

There are two types of joint arrangements: joint operations and joint ventures.

A joint operation is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the assets and obligations for the liabilities relating to the
arrangement. Those parties are called joint operators. (1)

A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called
joint venturers. (1)
Available marks 5
Maximum marks 5

b) Based on your discussion in a) above and attachment 4 only, discuss whether the investment in
GlutFri would be an investment in an associate or joint venture.

The first indicator is that of the 25% interest. (1) As this is more than 20% but less than
49%, the investment could either be an investment in an associate or a joint venture.

As noted in a) above, we would need to determine if Dalbany would have significant

influence or joint control. (1)

From the information provided in attachment 4, it can be noted that the executive
management’s wish is to have some representation on the Board of directors of GlutFri
(1) and to participate in the policy making processes of the company (1).

Both these factors evidence that Dalbany would have significant influence in GlutFri. (1)

Therefore, the potential investment in GlutFri would an Investment in an associate. (1)

Available marks 6
Maximum marks 5
QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

c) Based on your discussion in (b) above and the information presented to you in attachment 4
only, explain whether the decision to be taken by the manager to present the potential acquisition
of GlutFri as a joint venture is ethical or unethical.
As per the discussion in part (b) above, the potential investment in GlutFri would be an
Investment in an associate (1). By insisting that the acquisition should be accounted for
as a joint venture, the manager is misrepresenting the financials (1)

But for this specific situation, in order for one to conclude if the misrepresentation will be
ethical or not, we will have to look at whether the misrepresentation was made intentionally
or unintentionally (1)

From the scenario given, it is fair to conclude that the manager lacks knowledge on when
to account for an associates or a joint venture (1). This can be indicated from the scenario
by the manager “indicating that he is not so sure about the accounting treatment of the
acquisition” (1) including the explanation given by the manager stating that “the acquisition
should be accounted for as a Joint venture since they are only acquiring a potion of 25%
meaning that they are in a joint venture with whoever owns the remaining 75%.” (1).

It would therefore be my responsibility as a recent Accounting graduate to explain to the

manager the difference between associates and joints ventures and when to account for
them (1).

Since the decision to account for the acquisition as a joint venture was unintentional (1),
and that the acquisition has not yet occurred since it is a potential acquisition (1) it can
therefore be concluded that the decision to be taken is ethical (1)
Any other relevant answer
Available marks 10
Maximum marks 10

d) Assuming that the investment is an investment in an associate, discuss how the investment in
GlutFri would be accounted for in the consolidated financial statements of the Dalbany Group. In
your discussion consider both the initial and subsequent measurement of the investment

An investment in an associate is accounted for in accordance with the equity method in

the consolidated financial statements. (1)

Initial measurement:
According to the equity method the investment in initially measured at cost (1)

Subsequent measurement:
Subsequently, in the group financial statements, the investment will be carried at
The initial recognition price (or cost/consideration paid) (1)
Plus: Dalbany’s share of the post-acquisition net assets (or since acquisition
reserves/changes in equity since acquisition) (1)
Less: any dividends received from the associate (1)
Note to marker: (A student could say plus the increases or decreases in the since column of the
analysis (You can award 1 mark for this)
Available marks 5
Maximum marks 4
QUESTION 1 (Continued…) (SUGGESTED SOLUTION)

e) If Dalbany had paid R480 000 for a 25% interest in the ordinary shares of GlutFri on 1 July 2020,
determine whether the investment in GlutFri would have been favourable to the Dalbany Group
for the reporting period ended 30 June 2021 by calculating the total balances that would be
presented on the consolidated statement of financial position and the consolidated statement
of profit or loss. Please note: An analysis of owners’ equity is NOT required.

The amount to be presented on the consolidated statement of profit of loss would be:
Share of profit of associate (1) R 11 754 (1)
(47 016 x 25%)

The amount to be presented on the consolidated statement of financial position would be:
Investment in Associate (1) R 487 504
(480 000 (1) + 11 754 (Profit) (1) – 4 250 (1) (Dividend (17 000 x 25%])

Based on the above, it appears that the potential investment would have contributed
positively / favorably to the financial statements of the Dalbany Group of companies. (1)

Available marks 7
Maximum marks 6