INTEGRATED PAPER 3

READING PAPER

CTA PROGRAMME – PART TIME LEVEL 2 AND FULL TIME JANUARY 2022

TEST 2

[100 Marks]

Date: Wednesday 24 August 2022 Time: Morning Paper

Time Allowances:

MARKS MINUTES BOOKLET

Reading time 30

Writing time 100 150 WHITE

Total 100 180

INSTRUCTIONS

1) Enter your student number on the front of the answer book.

2) Your name must not appear anywhere.

3) Use of non-programmable calculators is permissible.

4) Any calculations must be shown in your answer book.

5) Working papers must be handed in with the scripts.

6) Answers Must Be Written in Ink Not Pencil

7) No corrections will be made DURING THE EXAM on perceived errors/queries

on exam content, the paper is to be written as is.

Disclaimer clause: All names of persons, places and business entities mentioned in this
examination paper are fictitious and any resemblance to real persons, living or dead,
places and business entities are purely coincidental.
CTA PART TIME LEVEL 2 AND FULL TIME JANUARY – INTEGRATED PAPER 3 – 2022 TEST 2:
SCENARIO
All amounts are exclusive of Value Added Tax (VAT) unless otherwise stated. All amounts
are in the United States Dollar ($) unless otherwise stated.

Question 1 100 marks

Background information

Luigi Lavazza S.p.A. (Italian pronunciation: [luˈiːdʒi laˈvattsa ˈspa]), shortened and stylized as
LAVAZZA, is a group of companies renowned for being the Zimbabwean manufacturer of
coffee products. Founded in Harare in 1895 by Luigi Lavazza, it was initially run from a small
grocery store at Sam Levy Village. The business (Italian: S.p.A.) is currently administered by
the third and fourth generations of the Lavazza family. The company operates a number of
retail coffee shops ("Il Caffè di Roma" and "Espression"). The shops offer traditional coffee
drinks as well as whole bean and ground coffee for home use.

Lavazza is the world's twenty-seventh ranking coffee roaster and has a market share by sales
of over 36% in Zimbabwe, 3 800 employees. The company has six production sites, three in
Zimbabwe and three abroad, and operates through associated companies and distributors in
more than 90 countries. Lavazza exports 46% of its production. Lavazza credits itself with
inventing the concept of blending, "the art of combining different types of coffee from
different geographical areas", in its early years, and claims this as a distinctive feature of all
its products. The company also has 25 years’ experience in the production and sale of
portioned coffee systems. Today, through ongoing partnerships with an international
network of universities and scientific research centers, Lavazza operates four platforms in this
segment. In 1979 the company established the “Luigi Lavazza Centre for coffee research”
which is “devoted to the study of espresso” and has evolved into the Lavazza Training Centre,
a network of over 50 coffee schools worldwide, where 30 000 people receive training each
year.

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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY – INTEGRATED PAPER 3 – 2022 TEST 2:
SCENARIO
All companies in the Lavazza group have 30 May 2022 as their current year end. Lavazza is in
the process of finalizing its financial statements. Lavazza has a functional and presentation
currency of the United States Dollar ($).

Acquisition of Coffee Grinders

Lavazza acquired a 35% interest in Coffee Grinders on 1 June 2021 for $277 500, when the
fair value of the net assets of Coffee Grinders was $680 000. Below is the extract financial
information of Coffee Grinders in the separate books of Lavazza as at 30 May 2022.
$’000
Investment in associate 215.5
Share of profit from associate 52.4

The finance manager of Lavazza estimated that Coffee Grinders would pay an annual dividend
of $10 000 into the foreseeable future. A fair dividend return rate for an entity with a similar
growth and risk profile is 5%.

Below is extract financial information of the Lavazza group as at 30 May 2022 this includes all
group companies.
Extract Consolidated Statement of Financial Position as at 30 May 2022
2022 2021
$’000 $’000
Current assets
Inventory 700 575
Trade receivables 860 675
Bank 3.5 80

Current liabilities
Trade payables 350 210
Zimbabwe Revenue Authority (ZIMRA) 25 37.5
Dividend for Shareholders 185 145
Extract Consolidated Statement of Profit or Loss and Other Comprehensive Income for the
year ended 30 May 2022

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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY – INTEGRATED PAPER 3 – 2022 TEST 2:
SCENARIO
$’000
Revenue 4 750
Cost of sales 1 500
Gross profit 3 250
Other expenses 550
Finance costs 125
Share of profit from associate 52.4
Profit before tax 2 627.4
Income tax expense 250
Profit for the year 2 377.4
Profit attributable to
Parent 2 037.4
Non-controlling interests 340

Acquisition of Cocoa Hearts

On 2 February 2022 Lavazza acquired 65%, controlling stake of the issued share capital of
Cocoa Hearts. On this date the Statement of Financial Position of Cocoa Hearts included the
following current assets and current liabilities;
$’000
Inventory 85
Trade receivables 65
Bank 125
Trade payables 45

Lavazza granted 1 000 phantom shares to each of Cocoa Hearts’ five (5) management
executives at date of acquisition of Cocoa Hearts by Lavazza. Cocoa Hearts does not have any
obligation, whatsoever, in relation to this. These shares are conditional upon the
management executives completing three years of service from grant date. The fair value of
a phantom share on grant date and at year end is $35 and $37.50 respectively. At grant date,
Lavazza estimated that 80% of the management executives will meet the service condition.

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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY – INTEGRATED PAPER 3 – 2022 TEST 2:
SCENARIO
Acquisition of interest in Ground Bean Tech (GBT)
Lavazza obtained a 10% interest in GBT for $15 000, a company that explores possible
technological solutions in coffee making, on 1 January 2018. The interest was obtained so that
Lavazza would stay in the loop of emerging technologies in coffee making and coffee retailing.
Lavazza anticipated it would hold the interest into the foreseeable future with an objective to
obtain more shareholding should Ground Bean Tech consolidate its position in the market of
coffee technological solutions.

An article was published in the Newsday on 6 March 2022 highlighting financial

mismanagement at GBT. Below is an extract of the published story:

“From July 2018 through October 2018, the company raised about $2.25 million of investor
funds. Geromini − GBT’s Chief Executive Officer − who is a Chartered Accountant registered
with the Institute of Chartered Accountants Zimbabwe, misrepresented to investors that he
would use the money to pursue the company’s business plan. He instead diverted significant
portions of the funds to pay himself hundreds of thousands of dollars through unauthorized
wire transfers and make automated teller machine (ATM) cash withdrawals and debit card
transactions, prosecutors said.”

Following this publication, the share price of GBT fell from $345 to $2.50 per share. Given the
decline in value, the accountant of Lavazza, Mr. Gauro decided the investment in Lavazza was
to be impaired in accordance with IFRS 9. He processed the following journals
DR ($) CR ($)
Allowance for expected credit loss (P/L) 17 125
FVTOCI financial asset (SFP) 17 125
($345 - $2.50) X 50

Coffee sales
Lavazza had a promotion running in the months of January to March 2022. Any customer who
would purchase coffee to the value of $30 in any week would receive a coupon for a 50%
discount, to the value of $5, off their next cup of coffee. The coupon expires on 29 September
2022. Lavazza made sales of $45 000 between January and March. Customers eligible for the

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CTA PART TIME LEVEL 2 AND FULL TIME JANUARY – INTEGRATED PAPER 3 – 2022 TEST 2:
SCENARIO
promotion contributed 15% of the sales value between January and March. Based on
historical promotions only 65% of the customers claim their free cup of coffee.

Other information
• Depreciation expense for the group for the year ended 30 May 2022 was $125 000.
There were no purchases of Property, Plant and Equipment during the year, besides a
coffee grinding machine imported from Italy. The machine was ordered at a cost 15
000 Euros on 27 January 2022 and was shipped free on board on that same date.
Eighty percent of invoice was settled on 3 March 2022 when the coffee grinding
machine was delivered to Lavazza. The remainder was settled on 30 May 2022.
However, an old plant was decommissioned and sold at a loss of $85 000.
Exchange rate Euro US Dollar
27 January 2022 1.00 1.03
3 March 2022 1.00 1.025
30 May 2022 1.00 1.04
• Lavazza declared a dividend of $180 000 for the year ended 31 May 2022 to its
shareholders. Dividends are presented under investing activities in the statement of
cash flows.
• Consolidated deferred tax balances for 2022 were as follows;
Opening balance $64 000 CR
Closing balance $40 000 CR

Additional information

• All revenues and expenses accumulated and incurred evenly throughout the year
• Investments in associates are equity accounted in the consolidated financial
statements of the parent. All dividends from associates were received as cash.
• Non-controlling interests are measured at proportionate share of the acquiree’s
identifiable net assets at the acquisition date. The value of non-controlling interests
at acquisition of Cocoa Hearts was $65 000.
• It is the group’s policy to present the finance costs under the operating activities
section of the statement of cashflows.
• Assume the effective interest rate is equivalent to the coupon payment.

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