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MODULE NAME: MODULE CODE:

FINANCIAL ACCOUNTING 2B FIAC6212

ASSESSMENT TYPE: EXAMINATION (PAPER ONLY)

TOTAL MARK ALLOCATION: 180 MARKS
TOTAL HOURS: 3 HOURS (+15 minutes reading time)
INSTRUCTIONS:
1. Please adhere to all instructions in the assessment booklet.
2. Independent work is required.
3. Five minutes per hour of the assessment to a maximum of 15 minutes is dedicated to reading
time before the start of the assessment. You may make notes on your question paper, but not
in your answer sheet. Calculators may not be used during reading time.
4. You may not leave the assessment venue during reading time, or during the first hour or
during the last 15 minutes of the assessment.
5. Ensure that your name is on all pieces of paper or books that you will be submitting. Submit all
the pages of this assessment’s question paper as well as your answer script.
6. Answer all the questions on the answer sheets or in answer booklets provided. The phrase
‘END OF PAPER’ will appear after the final set question of this assessment.
7. Remember to work at a steady pace so that you are able to complete the assessment within
the allocated time. Use the mark allocation as a guideline as to how much time to spend on
each section.
Additional instructions:
1. This is a CLOSED BOOK assessment.
2. Calculators are allowed.
3. Answer All Questions.
4. Show all calculations, where applicable (marks may be awarded for this).
5. Round all calculations to the nearest Rand, where applicable.

© The Independent Institute of Education (Pty) Ltd 2020

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Question 1 (Marks: 60)

Candle Ltd and Light Ltd are part of a group of companies. Both companies manufacture and supply
lighting products to businesses in the Midrand region. The following represents extracts from the
financial statements of Candle Ltd and its subsidiary Light Ltd:

Statements of financial position as at 30 September 2020

Candle Ltd Light Ltd

R R
Assets
Property, plant and equipment 5 550 000 4 700 000
Investment in Light Ltd at cost – 480 000 ordinary shares 2 600 000 ‐
Investment in Light Ltd at cost – 50 000 10% cumulative preference 80 000 ‐
shares
Inventory 600 000 1 000 000
Trade and other receivables 2 668 000 2 680 000
Bank – Fortune Bank 400 000 ‐
11 898 000 8 380 000

Equity and Liabilities

Share capital – ordinary shares (400 000 / 600 000 shares) 800 000 1 000 000
Share capital – 10% Cumulative preference shares (200 000 shares) ‐ 200 000
Retained earnings 6 680 000 5 600 000
Revaluation surplus 3 450 000 600 000
Trade and other payables 968 000 940 000
Bank overdraft – Fortune Bank ‐ 40 000
11 898 000 8 380 000

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Statements of changes in equity for the year ended 30 September 2020

Retained Retained
earnings earnings
Candle Ltd Light Ltd
R R
Balance at 1 October 2019 4 096 000 3 090 000
Changes in equity for 2020
Total comprehensive income for the year
Profit for the year 2 744 000 2 700 000
Dividends paid:
Ordinary (160 000) (90 000)
Preference (100 000)
Balance at 30 September 2020 6 680 000 5 600 000

Additional information:
1. Investment in Light Ltd

On 1 October 2016, Candle Ltd obtained control over Light Ltd by acquiring 480 000 of the
ordinary shares of Light Ltd. On the date of acquisition, the retained earnings of Light Ltd
amounted to R1 700 000.

On 1 October 2016, equipment of Light Ltd, which had a carrying amount of R600 000, was
valued at R1 100 000. This revaluation was not recorded in the financial records of Light Ltd.
Since 1 October 2016, Light Ltd has not purchased or sold any equipment. On 1 October 2016,
the remaining useful life of equipment was five years.

At the date of acquisition, consider the carrying amounts of all other assets and liabilities of
Light Ltd to be equal to the fair values.

No dividend was declared or paid by Light Ltd during the period 1 October 2015 to 30
September 2019.

© The Independent Institute of Education (Pty) Ltd 2020

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Candle Ltd elected to measure the non‐controlling interest in Light Ltd at its proportionate
share of net assets at acquisition date.

2. Intragroup transactions
Inventory
Since acquisition, Light Ltd sold inventories to Candle Ltd. The following details applied to the
intra‐group inventory sales:
 Gross profit percentage of 25% on cost price;
 Inventories on hand (30 September 2020) of Candle Ltd which were purchased from
Light Ltd amounted to R400 000 (30 September 2019: R320 000).

Machinery
On 1 April 2018, Candle Ltd sold a machine to Light Ltd for R590 000. The machine was
purchased by Candle Ltd for R800 000 on 1 April 2016 and on this date, the useful life was
estimated to be five years, with a residual value of zero. The estimated useful life has remained
unchanged since 1 April 2016. Depreciation is provided on a straight‐line basis over the
estimated useful life.

Office Building
Candle Ltd had surplus space available in their office building and decided to lease the extra
office space at R20 000 per month to Light Ltd, payable in arrears, with effect from 1 December
2018. Light Ltd also agreed to pay a deposit equal to two months of instalments. The deposit
has been recorded as trade and other receivables and trade and other payables in the
respective accounting records.

3. General
 The share capital of the companies in the group has remained unchanged since 1
October 2016.
 Assume that each share carries one vote.
 It is the group’s policy to show goodwill at cost in the consolidated financial statements.
 The parent guarantees the overdraft of the subsidiary’s bank account.

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Required:

Q.1.1 Prepare only the retained earnings column of the consolidated statement of (30)
changes in equity of the Candle Ltd Group for the year ended 30 September 2020.

Q.1.2 Prepare the consolidated statement of financial position of the Candle Ltd Group as (25)
at 30 September 2020.

Q.1.3 Discuss the accounting treatment of arrear preference dividends in the consolidated (5)
financial statements of the Candle Ltd Group.

Your answer must comply with the requirements of International Financial

Reporting Standards (IFRS).
Show all calculations as marks are awarded for calculations.
Round all amounts to the nearest Rand.
Ignore any tax implications.
Comparative figures are not required.

Question 2 (Marks: 60)

Crystal Ltd is a manufacturer of sugar and owns a small sugar refinery in KwaZulu‐Natal. The raw
sugar is stored in a warehouse and then transported to the sugar refinery by means of transport belts.
Crystal Ltd acquired a controlling interest in both Syrup Ltd and Cane Ltd in order to expand their
business operations. The financial year end for the companies in the Crystal Ltd group is 31 March.
The financial manager of Crystal Ltd extracted the following information from the accounting records
of Crystal Ltd, Syrup Ltd and Cane Ltd at 31 March 2020:
Crystal Syrup Ltd Cane Ltd
Debits R R R
Land and buildings 2 672 000 1 142 800 2 640 000
Machinery 903 800 440 000 559 500
Current account: Syrup Ltd 80 000 ‐ ‐
Bank 10 852 ‐ 8 500

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Investment in Syrup Ltd at cost – 70 000 ordinary shares 700 000 ‐ ‐

Investment in Cane Ltd at cost – 112 500 ordinary shares 2 000 000 ‐ ‐
Inventories (including raw materials) 49 600 49 600 42 000
Trade and other receivables 300 286 204 000 150 000
Other expenses 144 668 14 880 12 500
Income tax expense 112 366 84 000 371 000
Finance cost 10 560 1 920 ‐
Dividends paid ‐ 250 000 120 000
6 984 132 2 187 200 3 903 500

Credits
Share capital – ordinary shares (350 000 / 100 000 / 150 000) 3 500 000 800 000 1 500 000
Retained earnings – 1 April 2019 1 237 172 440 000 925 000
Current account: Crystal Ltd ‐ 80 000 ‐
Current tax payable 86 400 43 200 21 000
Trade and other payables 260 800 107 040 120 000
Other income 299 760 48 000 30 000
Bank overdraft ‐ 44 960 ‐
Gross profit 1 600 000 624 000 1 307 500
6 984 132 2 187 200 3 903 500

Additional information:

Investment in Syrup Ltd

1. Crystal Ltd acquired its interest in Syrup Ltd on 1 August 2015 for R700 000. On this date, the
retained earnings of Syrup Ltd amounted to R80 000. The share capital of Syrup Ltd has remained
unchanged since 1 August 2015.

2. Assume that the carrying amount of all assets and liabilities were equal to the fair values. Non‐
controlling interests is measured at their proportionate share of net assets at acquisition.

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3. The operations of the two companies are similar in that both Crystal Ltd and Syrup Ltd are involved
in the manufacturing and refining of sugar. Due to this, an agreement exists between the two
companies whereby Crystal Ltd purchases its raw materials from Syrup Ltd at cost plus 25%.

The following information of Crystal Ltd is available:

R
Raw materials purchased during the year 180 800
Raw material inventories – 31 March 2020 24 000

4. Current year sales of Crystal Ltd amounted to R9 600 000 (at a profit mark‐up of 20% on cost) and
R3 120 000 for Syrup Ltd (at a profit mark‐up of 25% on cost).

5. All finance costs paid by Syrup Ltd were to Crystal Ltd. The finance costs paid related to a loan made
by Crystal Ltd to Syrup Ltd, that was repaid on 31 July 2019.

6. Crystal Ltd and Syrup Ltd do not bank with the same financial institution.

Investment in Cane Ltd

7. Crystal Ltd acquired 75% of the ordinary shares in Cane Ltd on 1 April 2019 for R2 000 000. On the
acquisition date of Cane Ltd a portion of land with a carrying amount of R1 800 000 was valued at
R2 000 000 by a sworn appraiser. The revaluation was not recorded in the records of Cane Ltd. This
was the only item in the records of Cane Ltd that was not fairly valued at the date of acquisition.
The carrying amounts of all other assets and liabilities were equal to the fair values.

8. Crystal Ltd elected to measure the non‐controlling interest in Cane Ltd at fair value on the
acquisition date. On 1 April 2019 the fair value of a share in Cane Ltd was R18 per share.

9. Current year sales of Cane Ltd amounted to R6 537 500.

10. Crystal Ltd purchased a machine from Cane Ltd with a selling price of R120 000 on 30 September
2019, at a profit margin of 25% on selling price. The remaining useful life of the machine on 30

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September 2019 was three years. Depreciation is provided on a straight‐line basis over the
estimated useful life.

General
 The share capital of the companies in the group has remained unchanged since 1 August 2015.
 Assume that each share carries one vote.
 It is the group’s policy to show goodwill at cost in the consolidated financial statements.

The inexperienced financial account of the Crystal Ltd group prepared the following extract from the
consolidated statement of profit or loss and other comprehensive income of the Crystal Ltd group for
the year ended 31 March 2020:

Crystal Ltd group

Extract of the consolidated statement of profit or loss and other comprehensive income for the year
ended 31 March 2020

R
Revenue (R9 600 000 + R3 120 000 + R6 537 500) 19 257 500
Cost of sales (R8 000 000 + R3 900 000 + R5 230 000 + R180 800) (17 310 800)
Gross profit 1 946 700
Other income (R299 760 + R48 000 + R30 000 – R1 920 – R24 000) 351 840
Other expenses (R144 668 + R14 880 + R12 500 – R10 000) (162 048)
Finance costs (R10 560 + R1 920) (12 480)
Profit before tax 2 124 012
Income tax expense (R112 366 + R84 000 + R371 000) (567 366)
Profit for the year 1 556 646

Required:

Q.2.1 Prepare the pro‐forma consolidation journal entries for the investment in Syrup Ltd by (30)
Crystal Ltd for the year ended 31 March 2020.

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Q.2.2 The accountant has made several errors in the preparation of the consolidated (15)
statement of profit or loss and other comprehensive income of the Crystal Ltd group
for the financial year ended 31 March 2020. Identify each error in the statement and
briefly explain why each error is incorrect. Support your explanation with calculations,
where necessary.

Q.2.3 Prepare the non‐current asset section only of the consolidated statement of financial (15)
position of the Crystal Ltd Group as at 31 March 2020.

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).
Show all calculations as marks are awarded for calculations.
Round all amounts to the nearest Rand.
Journal narrations are required.
Comparative figures are not required.

Question 3 (Marks: 40)

MAV SA is a prominent professional services firm in South Africa and provides assurance, tax,
accounting and advisory services to its clients. You have recently been promoted to the head of the
business advisory services department.

Ms. D Walsh, one of the clients of this firm wishes to expand her share portfolio. She has emailed the
firm, and below is an extract of her email detailing some of her concerns. Her email has been forwarded
to you.

“….. I have saved up some surplus cash and am keen to expand my share portfolio. I have heard that
measuring the performance of an entity is more than simply looking at its profit or loss figure. It also
includes analysing and understanding profitability ratios, such as earnings per share and dividends per
share. Can you explain these ratios to me so that I am able to assess whether a company is profitable?

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I have looked at some portfolios and have seen a possible company (Grower Ltd) that I may want to
invest in and I have attached some information for you to look at.

Your assistance in this regard will be greatly appreciated.

Kind regards
Diane Walsh”

The following information was extracted from the accounting records of Grower Ltd, a company in
operation for the past five years. The current financial year end is 30 September 2020.

Grower Ltd’s issued share capital on 1 October 2018 was as follows:

2020 2019
Ordinary shares amounting to R1 710 000 (2019: R900 000) 630 000 450 000
30 000 10% Preference shares issued at R10 each 30 000 30 000

Additional information:

 Profit for the current year, R479 580 (2019: R395 170).
 On 31 March 2020 there was a rights issue on a basis of 2 ordinary shares for every 5 held at a
price of R4.50. The market price before the rights issue was R7.50. The fair value of each share
was R6.00. All the shares in this offer were taken up.
 Dividends were declared every year except in the previous year. On 30 September 2020, a
dividend of R157 000 was declared. The preference dividend declared, is R60 000.

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Required:
Q.3.1 Draft an email to Ms Walsh in which you explain: (15)
 What earnings per share (EPS) is used for, what it measures and how it assists
an investor to decide which company to invest in.
 How the ratio EPS is calculated.
 How each component of the ratio EPS is determined, considering the financial
information of Grower Ltd that has been provided by Ms Walsh. (no
calculations are required)
 What dividends per share (DPS) is and how the ratio is calculated.

Q.3.2 Calculate the following ratios for Grower Ltd: (25)

 Earnings per share (EPS)
 Dividends per share (DPS)

Comparative figures are required.

Round off ratios to two decimal places. Round off all other amounts to the nearest
Rand.

Your answer must comply with the requirements of International Financial Reporting
Standards (IFRS).

Question 4 (Marks: 20)

Atlantic Ltd is a diversified retail group, that operates mainly in the southern region.

The junior accountant is in the process of drafting the financial statements for Atlantic Ltd for the
current financial year ended 30 June 2020. He highlighted the information below and emailed it to you
“the financial manager”. In his email he stated that he was uncertain whether the following information
included any related parties. He was also unsure of what information to include in the disclosure of
related parties as per IAS 24, if the information below did contain related parties.

Information relating to Atlantic Ltd for the year ended 30 June 2020:

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1. Kelp Ltd is responsible for the administration services of Atlantic Ltd. Mrs Coral is the financial
director of Atlantic Ltd. She also serves on the board of directors of Kelp Ltd as a non‐executive
director.
2. A loan of R2.5 million was obtained from Marine Bank at year end. The loan was negotiated by
Ms Clearwater, the general manager, who was formerly employed as a senior executive of
Marine Bank. The loan will be paid back over 10 years in equal instalments at a market related
interest rate.
3. Atlantic Ltd sold one of its old vehicles to Compu Ltd, at its market value of R85 000. Atlantic
Ltd purchases all its computers from Compu Ltd. During the current year, Atlantic Ltd
purchased 30 computers for R300 000 less a trade discount of 10%.
A third of this amount is still outstanding at year end. Compu Ltd is owned by Mr Benguela, a
well‐known successful businessman. Mr Benguela’s niece, Ms Whirlpool serves as a non‐
executive director on the board of directors of Atlantic Ltd.
4. Ms Coral, the daughter of the financial director of Atlantic Ltd, was hired to conduct a 5‐day
workshop on time management for the staff of the company. The workshop was scheduled for
08 – 12 June 2020. The fee of R115 000, is market related. 60% of the outstanding balance was
paid on 15 June 2020 and the rest was settled on 03 July 2020.
5. Atlantic Ltd buys 30% of all its inventory from Agulhas Ltd. Atlantic Ltd owns 75% of the shares
in this company. One share carries one vote. Total purchases for this year are R480 000, of
which 10% was returned. Agulhas Ltd sells its inventory at a mark‐up of 25% on cost. Atlantic
Ltd still owes 20% of the amount purchased at year end.

Required:
In your response to the junior accountant’s email, critically discuss, with reasons, whether each of the
parties identified above are related parties of Atlantic Ltd and if so, include the required disclosure, in
accordance with IAS 24 Related Party Disclosure.

Your answer must comply with the requirements of International Financial Reporting Standards
(IFRS).

END OF PAPER

© The Independent Institute of Education (Pty) Ltd 2020

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