NMU – ACCOUNTING III

TOPIC : Group Financial Statements RGV301

NMU 30 (RG) (42 marks: 76 minutes)

You are the newly appointed group accountant for Harvey Holdings Limited (Harvey). You
have obtained the following information in preparation for the financial year ended
31 December 2018.

On 1 January 2015, Harvey acquired 60% of the issued ordinary shares of Specter Limited
(Specter), a listed industrial company, for R800 000. At that date, Specter had an
accumulated deficit of R1 200 000. No shares were issued by Specter since acquisition.

At acquisition, all the identifiable assets and liabilities of Specter were fairly valued, except
for certain plant, which was considered to be undervalued by R500 000. The plant was
purchased on 2 January 2010 and depreciated over 10 years on a straight line basis to a nil
residual value. There was no change in the originally estimated useful life.

The trial balances for both companies at 31 December 2018 were as follows:
Harvey Specter
Dr/(Cr) Dr/(Cr)
R’000 R’000
Sales (25 000) (8 100)
Other income (1 944) (1 500)
Fair value adjustment (net of taxation) - other comprehensive income (170) -
Cost of sales 16 000 4 550
Administration expenses 800 300
Interest expense 2 500 400
Selling and distribution costs 930 750
Tax expense 1 800 1 080
Dividend paid – ordinary 2 800 300
– preference - 48

Share capital (issued for R1 each) (6 000) (1 600)

Preference share capital - (600)
Retained earnings - 1/1/2018 (16 185) (700)
Fair value adjustment reserve (85)
Property, plant and equipment, carrying amount 37 000 7 200
Investment in Specter – ordinary shares 1 100 -
– preference shares 300 -
Investment in debentures 5 000
Deferred tax (12 725) 680
Accounts receivable 13 500 700
Inventory 9 500 1 400
Bank 4 864 420
12.5% debentures (20 000) (3 000)
Accounts payable (8 985) (7 328)
– –

Additional information:

1. Non-controlling interest is measured at their share of the net identifiable assets.

2. On 31 December 2017, goodwill relating to Specter was considered to be impaired by

R50 000 and on 31 December 2018 it was impaired by a further R100 000.

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 NMU – ACCOUNTING III

TOPIC : Group Financial Statements RGV301

REVISION QUESTION 1 (continued)

3. Harvey rents office space for its sales agents from Specter. The rental expense for the
year ended 31 December 2018 was R8 000 and is included in administration
expenses.

4. During 2016, Specter took up 25% of the 12.5% debentures issued by Harvey. The
debentures were issued and will be redeemed at R1. Debenture interest has been
correctly accounted for and is included in interest expense.

5. On 1 January 2017 Harvey sold a five year old manufacturing plant to Specter for
R150 000. The plant originally cost Harvey R80 000 and was depreciated at R10 000
p.a. to a nil residual value until the sale to Specter. The accumulated depreciation on
the plant amounts to R100 000 in Specter’s statement of financial position at
31 December 2018. The estimated useful life has not changed. Depreciation expense
is correctly included in the cost of sales amounts.

6. Specter supplies goods to Harvey at cost plus 25%. Details of such sales and
inventories held are as follows:
R’000
- Sales by Specter to Harvey
- Year ended 31 December 2017 1 250
- Year ended 31 December 2018 1 700

- Balance of inventories purchased from Specter by Harvey

- Year ended 31 December 2017 300
- Year ended 31 December 2018 950

7. Harvey acquired 50% of the preference shares of Specter on 1 June 2017. The
preference shares are classified as a liability instrument. A compulsory dividend of
R48 000 p.a. is payable.

8. Harvey accounts for Specter in terms of IFRS9 with fair value adjustments included in
other comprehensive income in its separate financial statements. The value of Specter
was R1 100 000 on 31 December 2018 (R900 000 on 31 December 2017).

9. The normal tax rate is 30%. Capital gains are taxed at 50% of the normal tax rate.

REQUIRED:
Prepare the pro-forma journal entries necessary to consolidate Specter into the Harvey
group at 31 December 2018.

Accounting should be in conformity with International Financial Reporting Standards (IFRS),

insofar as the information permits.

Show ALL workings clearly.

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