FAC 2602

SEMESTER 1 – ASSESSMENT 4
SOLUTION
2023

Open Rubric
Dear Students

Please find the solution attached.

It is in your own interest to work through the suggested solution together with the question and your
own answer. Compare your answer with the solution and make sure you understand why the solution
is correct where your answer differs. Revise the tutorial matter and the assessments regularly. By
repeatedly working through these questions under examination conditions (i.e., with no interruptions
and within the time allowed), you will improve your knowledge of the subject and your examination
technique.

You can reach us at fac2602@unisa.ac.za with any queries.

Kind regards

Ms R Grobler
Ms N Mahomed
Ms K Nkome
Ms C Wolfaardt

FAC 2602 Lecturers

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PART A:
Dr Cr
R R
(a) Revaluation Surplus 16 178
Non-controlling interests 16 178
(480 888 – 400 000) x 20%

(b) Profit on sale/Other income – CUP Ltd 60 000

PPE – BOX Ltd 60 000
(290 000 – 230 000)

(c) Cost of sales – BOX Ltd 40 000

Inventory – CUP Ltd 40 000
(200 000 x 25/125%)

CUP LTD GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 28 FEBRUARY 2023

R
Revenue (7 000 000 + 5 500 000 – 700 000) 11 800 000
Cost of sales
(2 800 000 + 2 200 000 – 700 000 – 22 000 (110 000 x 25/125) + 40 000) (4 318 000)
Gross profit 7 482 000
Other income (300 000 + 250 000 – 96 000 (120 000 x 80%) – 13 440 (1 680 x 8)
– 60 000 380 560
Other expenses (530 000 + 410 000 – 3 000 (60 000 x 20% x 3/12) – 13 440 (923 560)
Finance costs (90 000 + 100 000) (190 000)
Profit before tax 6 749 000
Income tax expense (1 086 400 + 851 200) (1 937 600)
PROFIT FOR THE YEAR 4 811 400
Other comprehensive income for the year
Revaluation surplus (480 888 – 400 000) 80 888
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 4 892 288

Total comprehensive income attributable to:

Owners of the parent (4 892 288 – 450 338) 4 441 950
Non-controlling interests (434 160 + 16 178) 450 338
4 892 288

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Calculations:

% Interest: 320 000/400 000 x 100 = 80%

1. Analysis of owners’ equity of BOX Ltd

CUP Ltd 80%

Total At Since NCI 20%
At acquisition
Share capital 400 000 320 000 80 000
Retained earnings 1 200 000 960 000 240 000
Revaluation surplus 400 000 320 000 80 000
2 000 000 1 600 000 400 000
Equity represented by goodwill – parent 700 000 -
Consideration and NCI 2 300 000 400 000

Since aquistion to beginning of year

Retained earnings movement 1 278 000 1 022 400 255 600
Opening retained earnings 2 500 000
Retained earnings at acquisition (1 200 000)
Opening inventory elimination
(110 000 x 25/125) (22 000)

Current year 2 170 800 1 736 640 434 160

Profit for the year (given) 2 188 800
Realization of opening inventory 1 300 000
22 000
Closing inventory elimination
(200 000 x 25/125) (40 000)

Revaluation (CY) (480 888 – 400 000) 80 888 64 710 16 178

Dividend paid (120 000) (96 000) (24 000)
RE: 2 663 040 1 081 938
R/S: 64 710

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CUP LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED
28 FEBRUARY 2023

Non-
Share Revalua- Retained controlling Total
capital tion surplus earnings Total interests equity
R R R R R R
Balance at 1/3/2022 600 000 430 000 5 322 400* 6 352 400 655 600# 7 008 000
Changes in equity for 2022
Total comprehensive income 64 710 4 377 240 4 441 950 450 338 4 892 288
for the year
Profit for the year 4 377 240@ 4 377 240 434 160 4 811 400
Other comprehensive income 64 710 - 64 710 16 178 80 888
Dividends paid (150 000) (150 000) (24 000) (174 000)
Balance at 28/2/2023 600 000 494 710 9 549 640 10 644 350 1 081 938 11 726 288

*: 4 300 000 +1 022 400 = 5 322 400

#: 400 000 + 255 600 = 655 600
@: 4 811 400 – 434 160 = 4 377 240

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CUP LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 28 FEBRUARY 2022
R
ASSETS
Non-current assets
Property, plant and equipment (4 383 100 + 5 499 688 – 60 000 + 3 000) 9 825 788
Goodwill 700 000
10 525 788

Current assets
Inventory (1 020 000 + 880 000 – 40 000) 1 860 000
Trade and other receivables (1 200 500 + 930 000 – 1 680) 2 128 820
Cash and cash equivalents (400 000 + 700 000) 1 100 000
5 088 820
Total assets 15 614 608

EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Share capital 600 000
Other components of equity 494 710
Retained earnings 9 549 640
10 644 350
Non-controlling interests 1 081 938
Total equity 11 726 288

Liabilities
Non-current liabilities
Long-term borrowings (980 000 + 1 850 000) 2 830 000

Current liabilities
Trade and other payables (550 000 + 510 000 – 1 680) 1 058 320
Total liabilties 3 888 320
Total equity and liabilities 15 614 608

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NARRATIVE EXPLAINING THE ABOVE SOLUTION

Journal (a)

The revaluation in the current year amounts to R80 888 (480 888 – 400 000). Eighty percent of this
amount belongs to the parent and the remaining 20% accrues to the non-controlling interests. To
record the non-controlling interests’ portion, we debit revaluation surplus and crediting non-
controlling interests with R16 178 (80 888 x 20%). This amount will be separately disclosed in the
group financial statements.

Journal (b)

CUP Ltd sells a machine to BOX Ltd, therefore the profit on sale is initially included in the books of
CUP Ltd. On consolidation, we eliminate this intragroup transaction by debiting other income in CUP
Ltd and crediting PPE in BOX Ltd with R60 000 (290 000 – 230 000).

Journal (c)

BOX Ltd sells inventory to CUP Ltd at a profit of 25%. Both CUP Ltd's inventory at year-end and
BOX Ltd's profit include this intragroup profit. Since we evaluate the companies as a single entity,
we need to eliminate the intragroup profit as it was earned between group entities. At year-end,
CUP Ltd has inventory obtained from BOX Ltd in its financial records amounting to R40 000
(200 000 x 25/125). To eliminate the unrealized profit, CUP Ltd has to subtract the R40 000 from its
closing inventory in the statement of financial position. We therefore credit inventory to decrease it.
We should also decrease BOX Ltd's profit by debiting cost of sales. Profit decreases when we debit
cost of sales. By debiting cost of sales, we increase expenses which in turn results in a reduction to
the profits of the group.

Consolidation process

On consolidation, the group is regarded as one economic entity and will not enter into transactions
with itself. When a transaction takes place between companies in the group, it should be eliminated.
Note that 20% of the equity in BOX Ltd is attributable to outside shareholders and therefore this
portion of the equity at acquisition and profits subsequent to acquisition will be allocated to non-
controlling interests.

The analysis of owners’ equity

The analysis of owners’ equity reflects the equity and profits earned by BOX Ltd, which is then
allocated between the parent and non-controlling interests in accordance with their shareholding
ratios. The analysis is therefore a tool to calculate the equity and profit attributable to the parent and
the non-controlling interests.

Consolidated financial statements

In the consolidated statements, we include 100% of the parent and subsidiary's income, expenses,
assets, and liabilities and then eliminate any intragroup transactions.

‘Total comprehensive income attributable to’

This section forms part of the disclosure in the consolidated statement of profit or loss and other
comprehensive income. It is important to remember to include this section when preparing the
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statement. The profit of both companies is allocated to the parent and the non-controlling interests
in this section. The non-controlling interests’ figure comes directly from the analysis of equity of BOX
Ltd and the balance of total comprehensive income is attributable to CUP Ltd.

In the consolidated statement of financial position, here again, we include 100% of the assets and
liabilities of both companies and reverse out any intragroup transactions. The equity section
represents the equity of the group and reflects each category of equity and reserves attributable to
the parent separate from that attributable to the NCI. This helps users understand the financial
position of the group in a clearer, more concise manner.

Dividends paid to non-controlling interests

The portion of the dividend paid by BOX Ltd to CUP Ltd amounting to R96 000 (120 000 x 80%) will
not be included in the consolidated financial statements. The R96 000 is eliminated as it represents
an intragroup transaction (common item). We therefore only need to disclose the dividend owing to
the non-controlling interests amounting to R24 000 (120 000 x 20%).

Management Fees

The intragroup rentals represent a transaction within the group. In one a company, it is an expense
and in the other, it is an income. These transactions are not transactions with outside parties and
therefore it should be set off on consolidation.

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Part B:

MZANSI LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MAY 2022

R R
Cash flows from operating activities
Cash receipts from customers (calculation 1) 2 748 950
Cash paid to suppliers and employees (calculation 2) (2 290 210)
Cash generated from operations 458 740
Interest paid (33 900)
Interest received 96 400
Dividends paid (99 330)
Tax paid (414 764)
Proceeds from the sale of financial assets at fair value through profit
or loss: held for trading (calculation 3) 268 570
Purchase of financial assets at fair value through profit or loss: held
for trading (calculation 3) (445 870)
Net cash used in operating activities (170 154)

Cash flows from investing activities

Investment to maintain production capacity (957 620)
Replacement of plant and machinery (calculation 4&5) (957 620)
Investment to expand production capacity (104 360)
Additions to land (calculation 6) (104 360)
Proceeds from sale of plant and machinery (calculation 5) 558 120
Net cash used in investing activities (503 860)

Cash flows from financing activities

Proceeds from issue of share capital (1 455 000 – 1 300 000) 155 000
Proceeds from long-term borrowings (375 600 – 180 860) (194 740)
Proceeds from issue of debentures (360 000 – 0) 360 000
Net cash from financing activities 320 260
Net decrease in cash and cash equivalents (353 754)
Cash and cash equivalents at the beginning of the year 1 103 884
Cash and cash equivalents at the end of the year (725 530 + 24 600) 750 130

Calculations:

1. Cash receipts from customers

Trade and other receivables

R R
Balance 854 160 Bank* 2 748 950
b/d
Sales 2 930 210 Balance [1 103 420 – (17 000 x 4)] c/f 1 035 420
3 784 370 3 784 370
* Balancing figure

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2. Cash paid to suppliers and employees

Trade and other payables, inventory and expenses

R R
Balance (inventory) 822 000 Balance (payables) 1 281 450
b/d b/d
Balance (payables) c/f 1 395 030 Cost of sales 2 049 330
(1 370 430 + 24 600) Other expenses (341 210 – 177 710
Bank* 2 290 210 132 300 – 18 200 – 13 000)
Prepaid expenses (17 000 x 4) c/f 68 000
Balance (inventory) c/f 930 750
4 507 240 4 507 240
* Balancing figure

3.
Financial assets at fair value through profit or loss
R R
Balance 486 800 Sold 202 170
b/d
New investment* 445 870 Impairment 13 000
Balance 717 500
c/f
932 670 932 670
* Balancing figure

Proceeds from sale of investment: 202 170 + 66 400 = 268 570

4.
Plant and machinery – at cost
R R
Balance 2 323 200 Sale of machinery** (calculation 5) 693 220
b/d
Replacements* 957 620 Balance 2 587 600
c/f
3 280 820 3 280 820
* Balancing figure

5.
Plant and machinery – accumulated depreciation
R R
Depreciation on machinery sold* 116 900 Balance 687 000
b/d
Balance 702 400 Depreciation – given 132 300
c/f
819 300 819 300
* Balancing figure

** Therefore, cost of machinery sold: 576 320 (given) + 116 900 (above) = 693 220

Proceeds on sale of machinery are: 576 320 (given) – 18 200 (loss) = 558 120

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 OR
Plant and machinery – at carrying amount
R R
Balance (2 323 200 – 687 000) b/d 1 636 200 Sale of machinery 576 320

Replacements* 957 620 Depreciation – given 132 300

Balance (2 587 600 – 702 400) 1 885 200
c/f
2 593 820 2 593 820
* Balancing figure

6.
Land and buildings
R R
Balance 2 230 500 Balance 2 435 000
b/d c/f
Revaluation (804 500 – 704 360) 100 140
Additions* 104 360
2 435 000 2 435 000
* Balancing figure

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 NARRATIVE EXPLANATIONS

  Always show your calculations! This will ensure you earn all possible
marks, even though the final amount may be incorrect. Amounts
should be shown with the correct signs on the cash flow statement to
indicate whether the amount increases or decreases cash.

 Cash flows from operating activities:

 The trade debtor closing balance included prepaid expenses of
R68 000. We subtract it, as it does not form part of cash received
from customers. Then we include it as a line item in the calculation
of cash paid to suppliers, as it falls in this category.
 Non-cash items initially included in other expenses should be
subtracted in the calculation of cash paid to suppliers. This
includes depreciation of R132 300 and the impairment loss on
financial assets of R13 000. The loss on sale of equipment is also
subtracted, as we deal with the cash flow of this transaction under
investing activities. This is done to obtain only the transactions that
had a cash flow impact.
 The purchase of financial assets should be included under
operating activities and not investing activities, as the question
stated that these assets are held for trading.

 Cash flow from investing activities:

 Ensure you understand and disclose separately investments to
‘expand’ or ‘maintain’ production capacity.
 Revaluations, impairment and depreciation (which are non-cash
items) should be included in T-account calculations in order to
calculate the balancing figures of cash for the expansion and
replacement of assets.
 Students often forget to include the proceeds on sale of an asset
as an inflow of cash, i.e. added to cash. For machinery this
amount was calculated as: R576 320 (carrying value) – 18 200 (loss
on sale). Remember, on the cash basis of accounting, we are not
interested in the profit amount but rather the actual cash flow.

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Associates and Joint Ventures

MCQ
When the cost paid by an investor exceeds equity acquired in an associate:

Goodwill is not treated the same manner as when a subsidiary is acquired. It is not recognised as a
separate asset with a separate line item. It is included in the carrying amount of the asset when the
investment in the associate is recognised.

MCQ
When an intragroup profit of R5 000 was recognised by an investor that owns 25% of
an associate:

Only 25% of the intragroup profit is eliminated. It is eliminated only to the extent of the investor’s
interest in the associate. The other 75% that belongs to unrelated investors can still be included, as
that does not form part of the group.

MCQ
Significant influence:
Please refer to the theory in the learning unit.

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