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QUESTION 1 39 MARKS
Ignore all forms of taxation.
The financial manager of Red (Pty) Ltd has prepared the following analysis of equity of Blue (Pty) Ltd
(which is correct in all respects) as part of the preparation required for finalising the consolidated
accounts of Red (Pty) Ltd.
The financial manager has informed you that:
Red (Pty) Ltd and Blue (Pty) Ltd both have 31 December financial year ends.
Red (Pty) Ltd paid R3 200 000 (in cash) for its investment in 70% of the ordinary share capital
of Blue (Pty) Ltd on 1 January 2011.
There have been no inter-company transactions between Red (Pty) Ltd and Blue (Pty) Ltd
other than the inter-company loan referred to below.
Red (Pty) Ltd has no subsidiary companies other than Blue (Pty) Ltd.
All companies in the group measure land using the cost model. The only group company
that owns land is Blue (Pty) Ltd.
Red (Pty) Ltd declared a dividend of R1.2 million on 15 December 2013.
Analysis of equity of Blue (Pty) Ltd
Amounts presented in R000
100% 70% 30%
Share Capital 100 70 30
Retained earnings 3 700 2 590 1 110
Land 200 140 60
Net asset value at acquisition date (1/01/2011) 4 000 2 800 1 200

POST-ACQUISITION
Retained earnings 2011 1 300 910 390
Retained earnings 2012 1 700 1 190 510

2013 FINANCIAL YEAR
Profit 2013 2 300 1 610 690
Land sold to External (Pty) Ltd during 2013 (200) (140) (60)
Dividends declared: 2013 (500) (350) (150)
Balance 31/12/2013 8 600 6 020 2 580

Red (Pty) Ltd loaned Blue (Pty) Ltd R1 million on 1 January 2012. The only payment that
Blue (Pty) Ltd is required to make relating to this loan is a lump sum payment of R1.4 million. This
amount is payable on 31 December 2014.

Required: Question 1, begins on the next page
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REQUIRED: QUESTION 1

Provide answers to each of the 13 (thirteen) questions below.

If you believe that any of the answers to the questions below is NIL i.e. there is no amount to be
recognised, you should explain why that is the case. In all cases, comparatives are not required.

PAY CAREFUL ATTENTION TO THE FINANCIAL YEAR SPECIFIED IN EACH QUESTION!

1 Calculate the amount of interest that will be recognised in the separate company
accounts of Red (Pty) Ltd for the financial year ending 31 December 2012. Your
solution should indicate whether the interest is an income or an expense.



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2 Indicate how the loan from Red (Pty) Ltd will be presented on the statement of financial
position of Blue (Pty) Ltd at 31 December 2012 AND calculate the amount that will be
recognised.



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3 Indicate how the loan from Red (Pty) Ltd to Blue (Pty) Ltd will be presented on the
consolidated statement of financial position of the Red (Pty) Ltd group at
31 December 2012.


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4 Explain why the land in Blue (Pty) Ltd should be included on the consolidated statement
of financial position of the Red (Pty) Ltd group from acquisition date AND the basis on
which it should be measured from a group perspective.

- The solution includes three potential bonus marks for quality of explanations.


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5 If the original cost of Blue (Pty) Ltds land was R1,1 million (at 1 January 2009), what
amount would be reflected as Land on the consolidated statement of financial
position of Red (Pty) Ltd at 31 December 2012 i.e. prior to the sale in 2013.



2
6 If Blue (Pty) Ltds profit correctly included a profit on sale of land of R500 000 in the
2013 financial year, what should be included as profit on sale of land in the
consolidated income statement of the Red (Pty) Ltd group for the financial year ending
31 December 2013, assuming that no other land was sold?




2
7 Calculate the goodwill that would be recognised on the consolidated statement of
financial position of the Red (Pty) Ltd group at 31 December 2013, assuming that the
goodwill is estimated to have a useful life of 10 years at acquisition date.



3
8 Assuming that Red (Pty) Ltd has retained earnings of R10 million at 31 December 2013,
what amount will be reflected as retained earnings on the 2013 consolidated statement
of financial position of the Red (Pty) Ltd group.



5
9 Assuming that Red (Pty) Ltd (the company) made a profit of R4 million for the 2013
financial year, calculate the consolidated profit of the Red (Pty) Ltd group for the 2013
financial year.



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Required: Question 1, continues on the next page

10 Calculate the amount of profit attributable to the non-controlling interest in the 2013
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consolidated statement of comprehensive income of the Red (Pty) Ltd group.

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11 Assuming that Red (Pty) Ltd has issued share capital of R500 000 (which has remained
unchanged since incorporation of the company), what will be included as share capital
in the consolidated statement of financial position of the Red (Pty) Ltd group at
31 December 2013. Briefly explain your answer.




2
12 If neither Red (Pty) Ltd nor Blue (Pty) Ltd had paid the dividends they had declared
during 2013 by 31 December 2013, calculate the dividend liability that would be
reflected on the consolidated statement of financial position of the Red (Pty) Ltd group
at 31 December 2013.



2
13 Indicate the balance that will be reflected on the consolidated statement of financial
position of the Red (Pty) Ltd group at 31 December 2013 for non-controlling interest
and justify why it is recognised as an equity balance.



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TOTAL FOR QUESTION 1

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Question 2 follows on the next page

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QUESTION 2 51 MARKS
Ignore all forms of taxation.
Hustle (Pty) Ltd (Hustle) earned a net profit (before tax), of R5,250,000 for the period ended
30 June 2013. This amount has been correctly calculated in all respects but was calculated before
taking into account all of the information presented below (to the extent applicable).
The following information relates to Hustles 2013 financial year:
a) Hustle purchased 100,000 shares in Spooks Limited (Spooks), an entity listed on the JSE Ltd,
during its 2010 financial period for R55.00 per share. On 9 April 2013, Hustle sold 30,000 of
these shares to an unrelated party for R67.50 per share. Hustle used some of the cash raised
from the sale of Spooks shares to purchase 20,000 shares in another listed entity,
Sherlock Limited (Sherlock), for an amount of R45,000 on 11 April 2013 which included
transaction costs.

The following information relates to the market prices, in Rand, of a Spooks and Sherlock share
at various dates:


30 June 2012 9 April 2013 11 April 2013 30 June 2013
Spooks 62.50 67.50 67.75 70.00
Sherlock 1.95 2.05 2.00 2.10


b) On 1 July 2012, in order to finance the purchase of additional manufacturing equipment, Hustle
issued debentures and received R300,000 in cash. The terms of the instrument state that Hustle
is to pay debenture holders a fixed amount of R25,000 per annum (on 30 June) for three years
and, in addition, R350,000 on 30 June 2015 to redeem the debentures. Hustles financial
manager has prepared the following amortisation table for the debentures, which is correct in all
respects:

Year
Carrying amount
(beginning of
period)
Effective
interest
Nominal
interest
Carrying
amount (end of
period)
1 300,000 39,646 25,000 314,646
2 314,646 41,581 25,000 331,227
3 331,227 43,773 25,000 350,000



Question 2 continued:
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c) At 30 June 2013, Hustle owned three motor vehicles. All vehicles were purchased on
12 June 2011 from a dealer in Johannesburg for R75,000 each and then transported to
Cape Town for use at a total cost of R21,000. The vehicles were ready for use on 1 July 2011.
The following information relates to these vehicles:
Cost price Transport costs
Originally estimated
useful life
Originally estimated
residual value
75,000 per vehicle 21,000 in total 48 months Nil

The residual value per vehicle was estimated to be R2,500 on 30 June 2013 (the original
remaining useful life remains unchanged). It was also discovered that the transport costs had
never been capitalised to the original cost of the vehicles - this resulted in a depreciation figure
that was materially misstated.
d) Hustle owns two identical buildings which are situated next to each other in the centre of Cape
Town. Building A is used by Hustle as its head office and Building B has been divided into office
space which is rented out to third parties. Independent valuation experts have determined that
the fair value of each building at 30 June 2013 is R45 million (30 June 2012: R42 million). Where
applicable, the residual value of each building at the respective reporting dates is equal to the
buildings fair value. Each building is estimated to have a remaining useful life of 50 years from
30 June 2012.

e) During 2013 Hustle was sued by a competitor, White (Pty) Ltd (White) for allegedly copying
Whites design for a product. Hustle denied this, but a court determined that Hustle was guilty.
The decision was made by the court on 13 June 2013. Hustles management immediately
launched an online media advertising campaign in an effort to reduce the damage to the
entitys brand as a result of the decision. The campaign cost R22,000. At the 2013 reporting
date, the best estimate of the damages payable to White was R75,000.

f) After the courts decision regarding Whites claim, another competitor, Chapel (Pty) Ltd
(Chapel), sued Hustle for similar copyright infringements. Chapels claim (for R34,500 in
damages) was assessed by Hustles legal advisors who concluded that it was possible that a court
may find Hustle guilty of such copyright infringement.

g) Hustle had the following classes of shares in issue at 30 June 2013 (this had remained unchanged
since 30 June 2012):
Class A shares 200,000 Issued at
R5.00 each
Holders are entitled to a dividend when declared# and
may vote at annual shareholder meetings
Class B shares 50,000 Issued at
R7,50 each
Holders are entitled to fixed dividends of R37,500 per
annum, which is consistent with 10% market returns on
similar instruments. The shares are redeemable at par
on 30 June 2015.
# Class A dividends of R0.50 per share were declared and paid on 25 June 2013.


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Question 2 continued:
Additional information:
Subsequent to initial measurement, Hustle applies the following measurement models for the
assets specified:

Asset class Subsequent measurement model
Investment property Fair value*
Motor vehicles Cost
Buildings Revaluation Cost
Investments in equity instruments Fair value* through profit or loss
Investments in debt instruments Amortised cost
* if reliably measurable
All entities referred to in the information above have financial year ends of 30 June 2013.
Hustles retained earnings balance as reported in its financial statements for the financial year
ended 30 June 2012 was R16,500,000 (i.e. this amount is before any restatement(s) that may be
required from the information above).


The required for Question 2 follows on the next page

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Question 2 continued:
REQUIRED: QUESTION 2
1 For the information in each of points a) to g) above, identify the various transactions and
indicate whether or not the transactions will adjust the net profit before tax of
Hustle (Pty) Ltd for the period ended 30 June 2013. You should also determine the
correct net profit before tax after taking all necessary adjustments into account.

For transactions that affect net profit before tax, briefly explain why an adjustment is
required and provide the amount and direction (i.e. increase or decrease to net profit
before tax) of the adjustment.
For transactions that do not affect net profit before tax, clearly indicate that there is
no effect and briefly explain why there is no effect.

Present your answer in tabular format as follows (include the net profit before tax as
given):

Point Transaction
Effect (amount)
on net profit
before tax
Effect (direction)
[increase or
decrease]
Reason for
adjustment /
no effect
Net profit
(before tax)
5,250,000 N/A GIVEN

The following is an example of how to present and justify your answers:

Point Transaction
Effect (amount) on
net profit before tax
Effect (direction)
[increase or
decrease]
Reason for
adjustment / no
effect [N1]
X Issue of shares for
cash
NIL N/A NO EFFECT: The
issue of shares will
increase bank
(asset) and share
capital (equity).
Y Inventory
damaged in
warehouse
[amount] Decrease Inventory is
written down from
its cost to its
selling price less
costs to sell and
the effect is
recognised as cost
of sales.


Layout and communication skills










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2 To the extent of the information provided, prepare the retained earnings column as it
would appear in the statement of changes in equity of Hustle (Pty) Ltd for the period
ended 30 June 2013.

Ignore taxation.
Ignore headings, any note disclosure and comparatives.
Layout





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TOTAL FOR QUESTION 2 51
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