UNIVERSITY OF THE WESTERN CAPE

ASSESSMENT 2

14 SEPTEMBER 2013

MODULE NAME : FINANCIAL ACCOUNTING 324

MODULE CODE : FIA 324

DURATION: 180 MINUTES (30 MINUTES READING TIME; 150 MINUTES

WRITING TIME)
MARKS: 100

EXAMINERS: MRS JA PRETORIUS

MR S KLEIN

INTERNAL MODERATOR: MRS M OTTO

QUESTION MARKS MINUTES

1 40 60
2 30 45
3 30 45

LECTURER(S) INSTRUCTIONS TO STUDENTS:

1. Answer all questions.
2. All questions must be answered in a separate book.
3. Answers must be in black or blue ink.
4. Show all workings clearly.
5. Show workings to the nearest Rand.
6. Students are allowed to bring in their International Financial Reporting Standards
(IFRS) handbooks with them.

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QUESTION 1 [40 MARKS] [60 MINUTES]

Princess Ltd is an investment company with a 30 June year end.

Alpheas Ltd
On 1 July 2010, Princess Ltd acquired 40% of the ordinary share capital of
Alpheas Ltd for R1 200 000, thereby giving Princess Ltd significant influence of
Alpheas Ltd. At this date Alpheas Ltd’s retained earnings were R500 000. On 1 July
2010 Princess Ltd considered all of the assets of Alpheas Ltd to be fairly valued
except for their land which was estimated to be undervalued by R150 000.

On 1 January 2013, Princess Ltd acquired an additional 20% of the ordinary share

capital of Alpheas Ltd for R1 000 000 and as a result caused Princess Ltd to gain
control of Alpheas Ltd. At this date all of the assets of Alpheas Ltd were considered
to be fairly valued except for land which was now estimated to be undervalued by
R250 000.

Since July 2010 Princess Ltd has been selling inventory to Alpheas Ltd at a mark up
of 25% on cost. Details of these sales are as follows:

R     
Sales from 1 July 2012 to 31 December 2012 670 000
Sales from 1 January 2013 to 30 June 2013 790 000

Inventory purchased by Alpheas Ltd from Princess Ltd and not yet sold at:
30 June 2012 200 000
31 December 2012 250 000
30 June 2013 400 000

Jo-jo Ltd
On 1 January 2012, Princess Ltd entered into a contract with two other organisations
to jointly run Jo-jo Ltd. This company was incorporated and Princess Ltd paid
R400 000 for their 40% share of the ordinary share capital. In terms of the contract,
Jo-jo Ltd would clearly meet the definition of a joint arrangement.

On 1 March 2013 Jo-jo Ltd sold a vehicle to Princess Ltd for R210 000. This vehicle
was originally acquired on 1 March 2011 for R250 000 and had a total useful life of
five years. Princess Ltd agreed with the vehicles remaining useful life.

Other information:
1. Non-controlling interests are measured at their proportionate share of the
subsidiary’s identifiable net assets.
2. The corporate tax rate is 28% and capital gains are included in taxable income at
a rate of 66.67%. Ignore VAT and all forms of dividend tax.
3. None of the above companies has issued shares since incorporation.
4. Alpheas Ltd earned its income and incurred its expenses evenly over the 2013
financial year.
5. All three companies have a 30 June year end.

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The trial balances of the three companies, for the year ended 30 June 2013, are
given below:

Princess Ltd Alpheas Ltd Jo-jo Ltd

R R R
Share capital (5 000 000) (2 000 000) (1 000 000)
Retained earnings, at 1 July 2012 (7 625 000) (1 250 000) (1 130 000)
Land 2 315 000 950 000 600 000
Buildings, at carrying amount 4 135 000 1 050 000 850 000
Plant and equipment, at carrying amount 3 655 000 2 345 000 1 250 000
Vehicles, at carrying amount 1 510 000 785 000 430 000
Investment in Alpheas Ltd, at cost 2 200 000 - -
Investment in Jo-jo Ltd, at cost 400 000 - -
Inventory 2 350 000 923 000 527 000
Accounts receivable 1 980 000 861 000 489 000
Cash and cash equivalents 2 120 000 916 000 434 000
Non-current liabilities (1 640 000) (875 000) (600 000)
Deferred tax (460 000) (345 000) (250 000)
Accounts payable (1 740 000) (735 000) (325 000)
Sales (16 300 000) (8 200 000) (4 500 000)
Cost of sales 8 150 000 4 100 000 2 250 000
Operating costs 2 200 000 1 350 000 750 000
Other income (incl dividends rec.) (2 750 000) (1 670 000) (580 000)
Finance costs 1 500 000 80 000 60 000
Taxation expense 2 000 000 1 215 000 545 000
Dividends declared and paid 1 000 000 500 000 200 000
- - -

End of Question 1

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QUESTION 2 [30 MARKS] [45 MINUTES]

The South African property sector is worth a whopping R4.9 trillion according to a
new study undertaken to discover the size of the country's property sector. South
Africa has seen its share of ups and downs, however, for the past several years the
South Africa property market has seen more prosperity than anything else. This
sunny outlook has been, in large part, influenced by the favourable tax incentives
that the South African government has instituted in a big push to revitalise the real
estate markets in sixteen South African cities including such troubled spots as
Johannesburg.

The South African property market has seen tremendous growth in the coastal
regions including places such as Cape Town where plush golf courses line the
shores. One such company, Redo Limited, a local company involved in buying and
selling properties, is known for its smart investments, and is considered by many in
the industry as the leading property trader in South Africa. The following extract of
information is available for the financial year ended 31 December 2012.

At 1 January 2011 there were 40 000 shares in issue, issued at R4 each.

On 1 February 2011, 60 000 ordinary shares were issued at a price of R4 per share.
Market value of shares immediately prior to issue was R5.

Redo had a rights issue on 31 May 2012 in terms of which one share was offered at
an exercise price of R3 for every 4 shares held on 31 May 2012. The market price
immediately before the issue was R5 per share. All shares offered were taken up.

There are 4 000 convertible debentures in issue, issued at 27 September 2010.

These debentures may be converted into ordinary shares in a ratio of 20 ordinary
shares for every 1 debenture held on 31 December 2018, at the option of the
debenture holder. Any debentures not converted at this date will be redeemed at
original issue price. Finance charges incurred on these debentures were R15 000
during 2012 and may be deducted for tax purposes.

5000 options were granted to the directors of the company on 1 January 2012.
These options, which have vested, offer the shares at an exercise price of R4 and
will expire on 31 December 2017. The average market price during 2012 was R5 per
share.

On 1 April 2012, Redo Limited undertook to make a capitalisation issue in order to

capitalise excess reserves by utilising retained earnings of R100 000, and involved
an issue of 1 share for every 2 shares held.

During 2012 there were 200 000 (2011: 200 000) 10% cumulative non-redeemable
Preference shares of R2.50 each in issue.

The profit for the period earned by Redo Limited for the year ended
31 December 2012 was R5million (2011: R4million).

Page 4 of 7
Redo Limited also acquired a building for R3million on 10 September 2011, with the
intention of renting it to third parties under an operating lease. The useful life of the
building is 30 years, with a R500 000 residual value. Redo Limited was unable to find
a tenant and thus, a few months later as at 28 February 2012, Redo Limited decided
it would sell the building as soon as possible.

Assume a normal tax rate of 28% is applicable.

End of Question 2

Page 5 of 7
QUESTION 3 [30 MARKS] [45 MINUTES]

Bale Ltd was established in 1903 and was acquired by the Group in 1988.  Bale Ltd
is one of South Africa’s longest standing manufacturers, having been in business for
over a decade and comprises of more than 9 stores in major towns and cities
throughout South Africa boasting over 140 employees. Bale Ltd has further
differentiated itself through its modern store design and product offering. This
company services the middle to upper end of the middle-mass market as a provider
of aspirational furniture. The chain’s pursuit of customer excellence and a personal
in-store experience is encompassed in its value proposition – “You’re the
Difference”.

On 1 January 2011 Bale Ltd started with the erection of a new plant, Isco, to be used
in a manufacturing process. The contract for the erection of Isco was concluded with
a third party for R1 800 000. The erection of Isco was completed on 30 September
2012 and it was available for use on 1 November 2012. Depreciation on plant is
calculated at 15% p.a. on the straight line method and is allocated on a pro-rata
basis. The SARS grants a capital allowance on a 40:20:20:20 basis in terms of
S12C of the Income Tax Act.

The expenses incurred in respect of the plant are as follows:

ISCO R
01 January 2011 400 000
31 July 2011 600 000
06 January 2012 475 000
18 March 2012 145 000
01 July 2012 180 000
1 800 000

On 1 January 2011 Bale Ltd obtained a loan with the specific purpose to finance the
Isco project of R1 800 000, the capital is repayable 1 January 2015, an interest rate
of 22% p.a. The interest is payable on 31 December of each year. Surplus funds
were invested on a temporary basis and interest of R45 000 and R15 000 were
earned on surplus funds during the 2011 and 2012 financial years respectively.  
Assume a normal tax rate of 28%. Assume a related market rate is 25%.

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Bale Ltd decided to erect a second plant in 2012, Sturridge. Construction on
Sturridge commenced on 1 April 2012 and will be completed on 1 June 2014. The
total estimated expenses for the Sturridge project will amount to R3million. Bale Ltd
decided that it would use a general loan to finance expenses on the Sturridge
project. The loan carries market related interest at 15% per annum compounded
quarterly.

Expenses on the project were incurred over each period as follows:

R
Sturridge

1 April 2012 - 30 June 2012 Actual 366 000

1 July 2012 - 30 September 2012 Actual 450 000
1 October 2012 - 31 December
2012 Actual 390 000
1 January 2013 - 31 March 2013 Budgeted 354 000

On 1 January 2011 Bale Ltd obtained a loan with the specific purpose to finance the
Isco project of R1 800 000, the capital is repayable 1 January 2015, an interest rate
of 22% p.a. The interest is payable on 31 December of each year. Surplus funds
were invested on a temporary basis and interest of R45 000 and R15 000 were
earned on surplus funds during the 2011 and 2012 financial years respectively.  
Assume a normal tax rate of 28% and a related market interest rate of 25%.

End of Question 3

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