COURSE: ACCOUNTANCY 3B

Q1 (AO5 2019)
-2-

QUESTION 1 (70 MARKS)

WRITING TIME: [84 MINUTES]

Belgotex Group Ltd (“Belgotex”) is a leader in the development and distribution of floorcovering
solutions for residential and commercial customers. Belgotex collaborates with international partners
and machinery suppliers to supply/manufacture the latest high-precision carpet machinery capable
of producing large volumes of high-quality floorcoverings at competitive prices.

The following condensed financial statements are provided:

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE

REPORTING PERIOD ENDED 31 AUGUST 2019
Belgotex Waltex Crossley
Revenue 324 521 292 320 230 071
Cost of Sales (263 239) (238 615) (187 515)
Gross profit 61 282 53 705 42 556
Other income 6 857 - -
Other expenses (28 101) (26 551) (20 167)
Profit before tax 40 039 27 154 22 389
Income tax expense (11 211) (7 603) (6 269)
TOTAL COMPREHENSIVE INCOME FOR THE
REPORTING PERIOD 28 828 19 551 16 120

STATEMENTS OF CHANGES IN EQUITY FOR THE REPORTING PERIOD ENDED

31 AUGUST 2019
Mark to Retained earnings
market Belgotex Waltex Crossley
Balance at 1 September 2018 4 117 468 589 103 055 102 887
Changes in equity for 2019
Total comprehensive income for the
year:
Profit for the year 28 828 19 551 16 120
Transfer to marked-to-market reserve –
Waltex 2 091 - - -
Preference Dividend paid
 outstanding in 2018 and paid
on 31/08/2019 - - (1 000)
 on 31/08/2019 - - (1 000)
Balance at 31 AUGUST 2019 6 208 497 417 122 606 117 006
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-3-

QUESTION 1(CONTINUED…) (70 MARKS)

WRITING TIME: [84 MINUTES]

STATEMENTS OF FINANCIAL POSITION AS AT 31 AUGUST 2019

Belgotex Waltex Crossley
ASSETS
Property, plant and equipment 219 634 150 377 144 590
Investment in Waltex at fair value 200 000 - -
Investment in Crossley at cost 70 000 - -
Inventories 88 581 90 937 67 382
Trade Receivables 74 155 66 312 37 910
Bank 64 853 60 548 35 376
Total assets 871 166 368 174 285 258

EQUITY AND LIABILITIES

Share capital: (R1 par value ordinary shares) 205 714 137 143 61 714
Share capital: 10% Preference (10 000 shares) 10 000
Retained Earnings 497 417 122 606 116 571
Marked to Market Reserve 6 208 - -
Trade Payables 161 827 108 425 96 972
Total equity and liabilities 871 166 368 174 285 258

Additional information:

Waltex (Pty) Ltd (“Waltex”)

Belgotex acquired 82 286 shares in Waltex on 1 September 2012 for R192 000, when the retained
earnings of Waltex amounted to R150 000. Belgotex elected to measure the non-controlling interest
at their proportionate share of the acquiree’s identifiable net assets at acquisition date. On acquisition
date, machinery purchased 3 years ago with a cost price of R870 000 was revalued by a sworn
appraiser. The fair value of machinery on acquisition date was noted to be R650 000. The original
useful life of the machinery was deemed to be 10 years and the useful life of the machinery had
remained unchanged on acquisition date.

Belgotex bought equipment for R13 800 from Waltex on 1 January 2019. Waltex applies a 15% mark
up on the cost of all inventories sold. Depreciation on equipment is provided according to the straight-
line method at 10% per year. Belgotex classifies the equipment as property, plant and equipment
whilst Waltex classifies the equipment as inventories.
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-4-

QUESTION 1(CONTINUED…) (70 MARKS)

WRITING TIME: [84 MINUTES]
Crossley (Pty) (“Crossley”)

During 2005, Belgotex acquired 55% equity interest in the ordinary share capital of Crossley for
R70 000 and no preference share capital. At that stage the retained earnings of Crossley amounted
to R37 800. The preference shareholders have a prior right to their dividend payment and will receive
the return of their investment upon liquidation of the acquiree. All preference dividends have been
paid up to and including 31 August 2019. The fair value of the preference shares at acquisition date
is R12 000.

General

1. Belgotex classifies the investment in Waltex under IFRS 9 in its separate financial statements
and fair value adjustments are recognised in a mark-to-market reserve through other
comprehensive income.
2. Belgotex classifies the investment in Crossley in its separate financial statements using the cost
price method and elected to measure the non-controlling interests in the acquire at their
proportionate share of the acquiree’s identifiable net assets at the acquisition date.
3. It is Waltex’s accounting policy to carry machinery in accordance with the cost model as per IAS
16: Property, Plant and Equipment in their separate financial statements.
4. You may assume a company tax rate of 28% and a CGT inclusion rate of 80% where applicable.

REQUIRED:

a) Provide ALL the pro-forma consolidation journal entries as at 31 August 2019 to correctly
account for the consolidation of Waltex into the Belgotex Group. (30)

 Please note: Journal narrations and statement references are NOT required
 The analysis of owners equity is not required

b) Present the Statement of Comprehensive Income of the Belgotex Group for the reporting
period ended 31 August 2019 to comply with the minimum requirements of IFRS. (25)

 Please note: Show all calculations as marks may be awarded thereto

c) Present only the retained earnings and non-controlling interest columns as it would
appear in the consolidated Statement of Changes in Equity of the Belgotex Group for the
reporting period ended 31 August 2019. (15)

 Please note: Show all calculations as marks may be awarded thereto

COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-5-

QUESTION 2 (30 MARKS)

WRITING TIME: [36 MINUTES]

Answer ANY two (2) of the following three independent elective questions (parts).

Do NOT answer all three questions.

The topics per question are:

A. Ethics
B. Business Combinations
C. Control in terms of IFRS 10 Commented [PZ1]: Markers, Please take note of this when you
are marking the solution to this.
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-6-

2A (30 MARKS)
WRITING TIME: [36 MINUTES]

Ethics (15 MARKS)

WRITING TIME: [18 MINUTES]

You are the senior accountant (SA) at VGS Bank. The financial manager (FM) pays you a visit in
your office on a Tuesday morning and the following short conversation takes place:

SA: Morning Ma’am!

FM: Hi SA, I need you to process an urgent payment for me this morning before 11am please.

SA: No problem, can I have the signed payment release form please?

FM: No this one is a bit different, we don’t need a form, I have spoken to Financial Director (FD) and
he says you can please go ahead without the usual red tape. We are buying 200 000 shares in
Tenda Ltd. I need you to make a payment of R500 000 to Zumela Inc. Zumela Inc. are the lawyers
taking care of the transaction, the partner there is a close friend of mine so shout if you need
anything.

SA: Oh wow…um, I saw Tenda Ltd in the news last night, the directors are under investigation for
alleged mismanagement of government funds! The report mentioned they might need to file for
business rescue if things don’t go their way…share price was down to R1 per share!

FM: Yes, yes, we all know the story…it’s all conspiracies and fake news! That is why I need this
done ASAP. Don’t you worry about the details, just do your job please and release the payment.
Here I’ve jotted down the bank details, come and see me when it’s done!

REQUIRED

a) Use the quick test discuss the financial manager’s request from an ethical perspective. (10)
b) Describe how you would approach the above situation. (5)
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-7-

2B (30 MARKS)
WRITING TIME: [36 MINUTES]

Business Combination (15 MARKS)

WRITING TIME: [18 MINUTES]

Growth of businesses can occur for various reasons. This growth manifests itself mainly in two ways,
where a company can either grow in size through organic growth, by formation of branches or by
acquiring other companies. (Group statements 17th Edition, Volume 1)

The following depicts the Mr Price Group Ltd Timeline:

•Laurie Chiappini & Stewart Cohen open the very first Mr Price Factory Shop in Klerksdorp
1985:

•Laurie Chiappini & Stewart Cohen, together with BOE, acquire a major shareholding in John Orrs
1986 Holdings. The Hub & Miladys are the main trading operations in John Ors Holding

•Laurie Chiappini & Stewart Cohen acquire control of the Group from BOE. The Red Cap, a symbol
1991 of attitude, youthfulness and fun is created.

•The Group acquires Sheet Street

1996

•mrpHome launches
1998

•mrpSport launches
2006

•mrp online store is launched - "Hot fashion ... Delivered"

2013

•mrpMobile launches
2015

Source:
MrPrice Group Ltd Website: https://www.mrpricegroup.com/mr-price-group-about us.aspx?loc=timeline.
Accessed in September 2019

REQUIRED

Considering the above statement as well as the information provided of the Mr Price Group Ltd,
discuss how an entity shall account for a business combination in terms of IFRS 3 Business
Combinations. (15)

 Please note: Your discussion should consider the acquisition method and how the Mr Price
Group Limited Group grew by taking into account the different growth methods for businesses as
mentioned above.
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-8-

2C (30 MARKS)
WRITING TIME: [36 MINUTES]

Control in terms of IFRS 10 15 MARKS)

WRITING TIME: [18 MINUTES]

Wooden Ltd is a company that manufactures and installs Jungle Gyms. During April 2015 the
company incurred technical problems during the consolidation process for the year ended 31 March
2015. In the process of restoring the information, the following pro-forma journal appeared on the
screen

Main Elimination Journal - Logs Ltd R R

Description DR CR
Dr Share Capital 500 000
Dr Retained Earnings 250 000
Dr Goodwill 237 500
Cr Investment in Logs Ltd 575 000
Cr Non- Controlling Interest ????????

The above journal indicates that Wooden Ltd has an investment at cost in Logs Ltd. During the
reporting period ended 31 March 2015, Logs Ltd declared and paid a dividend of R50 000 to its
shareholders. When reviewing the minutes of a meeting held during the year, the accountant noted
the following information:

 Two new financial managers were appointed in Logs Ltd. Wooden Ltd had a right to vote in
respect of this appointment.
 The board of directors consists of 12 directors of which 9 are directors of Wooden Ltd. All the
directors are appointed by the shareholders at the annual general meeting by means of a simple
majority vote where one vote for each ordinary share held is applicable.
 The remaining shareholding of Logs Ltd is held by a large number of other shareholders, none
of whom have the ability to direct the relevant activities of Logs Ltd due to their individually
insignificant shareholdings.

REQUIRED

Discuss, with calculations and reasons with reference to IFRS 10 Consolidated Financial Statements
only, the relationship between Wooden Ltd and Logs Ltd for the reporting period ended 31 March
2015. (15)
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-2-

QUESTION 1 (SUGGESTED SOLUTION)

a)

Pro-forma consolidation journal entries as at 31 AUGUST 2019 – Waltex

Dr Cr
J1 Mark-to-market reserve opening balance (SCE) 4 117 (1P)
Deferred tax (SFP) (1) 1 188 Commented [PZ2]: Please don’t forget this mark
Investment in Waltex (SFP) 5 305 (1)
Reversal of fair value adjustment on investment in Waltex at
beginning of year at group level

J2 Mark-to-market reserve (OCI) 2 695 (1P)

Investment in Waltex (SFP) 2 695 (1)
Reversal of fair value adjustment on investment in Waltex
Ltd for current year at group level

J3 ***Deferred tax (SFP) 604

Income tax relating to OCI (OCI) 604 (1P)
Tax effect on reversal of fair value adjustment on
investment in Waltex for current year at group level

J4 Machinery (SFP) (S) 41 000 (1) Commented [PZ3]: Be on a look out as some student may do
calculations in this journal. Please award the marks from the
Deferred Tax (SFP) (S) 11 480 (1) calculations below to the journal.
Equity at acquisition / Revaluation reserve (SCE) (S) 29 520 (1P)
Pro forma remeasurement of plant of S Ltd at date of
acquisition (See calculation 1)

J5 Retained earnings – Since acquisition (S)(SCE) 4 217 (1P)

Deferred tax (S)(SFP) 1 640 (1)
Accumulated depreciation (S)(SFP) 5 857
Additional depreciation since acquisition to beginning of
current year (41 000 /7 (1)) (See calculation 1) Commented [PZ4]: Don’t forget this mark please

J6 Depreciation (S)(P/L) (1) (See calculation 1) 5 857 Commented [PZ5]: Don’t forget this mark as well.
Accumulated depreciation (S)(SFP) 5 857 (1)
Additional depreciation for the current year

J7 Deferred tax (S)(SFP) 1 640

Income tax expense (S)(P/L) 1 640 (1P) Commented [PZ6]: The mark is provided for the entire journal.
Please ensure that the journal direction is correct. The inverse
Tax implications of additional deprecation for the current journals incorrect and marks should not be awarded.
year (See calculation 1)
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-3-

QUESTION 1 (SUGGESTED SOLUTION)

J8 Share capital (SCE) 137 143 (1)

Retained earnings (SCE) 150 000 (1)
Equity at Acquisition / Revaluation reserve 29 520 (1P)
Goodwill (F/P) 2 002 (1P)
Investment in Waltex (F/P) 192 000 (1)
Non-controlling interest (F/P) 126 665 (1P)
Elimination of owners' equity of Waltex on acquisition

J9 Sales (P/L) (Waltex) 13 800 (1)

Cost of Sales (P/L) (Waltex) 12 000 (1)
Equipment (F/P) (Belgotex) 1 800 (1) Commented [PZ7]: This line should be equipment and NOT
inventory for the mark to be awarded.
Elimination of intragroup sales and the unrealised gain
included in the equipment of Belgotex
(13 800 X 15/115)
/
J10 Deferred Tax (F/P) 504
Income tax expense (P/L) 504 (1)
Tax implication of the elimination of the unrealised gain
included in the equipment of Belgotex (1,800 X 28%)

J11 Accumulated depreciation (F/P) (Belgotex) 120

Other expenses (P/L) (Depreciation) 120 (1P) Commented [PZ8]: Mark awarded for entire journal. Ensure
journal direction is correct
Realisation of the unrealised gain included in the
equipment of Belgotex as a result of depreciation
(1,800 X 10%X 8/12 (1)) Commented [PZ9]: Don’t forget this mark please

J12 Income tax expense (P/L) 34

Deferred Tax (F/P) 34 (1P) Commented [PZ10]: Mark awarded for entire journal. Ensure
journal direction is correct
Tax implication of the realisation of unrealised gain
included in the equipment of Belgotex as a result of
depreciation (120 X 28%)

J13 Non-controlling interest (F/P) 20 465

Retained Earnings (SCE) 20 465 (1P)
Non-controlling interest’s portion of retained
earnings/losses since acquisition to beginning of
current year (103 055 – 150 000 (1) – 4 217 J5) x 40%
Commented [PZ11]: Mark awarded for entire journal. Ensure
journal direction is correct
Commented [PZ12]: Don’t forget this mark please

J14 Non-controlling interest (P/L)# 5 615

Non-controlling interest (F/P)# 5 615 (1P)
Non-controlling interest’s portion of profit after
acquisition (See calculation 2)

Please note the below calculation may be provided in the analysis. Kindly look out for it.
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-4–

QUESTION 1 (SUGGESTED SOLUTION)

[CALC 1] Calculations for revaluation and depreciation thereon: Commented [PZ13]: These calculations could be given in the
journal as well. Please ensure all marks are awarded where
applicable
Cost of Machinery R870 000
Accumulated depreciation (870 000/10 (1) x 3 years (1)) (R261 000)
Carrying Value at acquisition date R609 000 (1P)
Fair Value R650 000
Revaluation R41 000

3 years have already been depreciated and therefore 7 years remain

Depreciation per year would be as follows:

R41 000/7years = R5 857

[CALC 2] Calculation of profit for year that needs to be split between parent and NCI Commented [PZ14]: This calculation might be presented in the
analysis under the current year profit. Please mark correct where
Profit for the year 19 551 applicable if the student ha shown the calculation in the analysis.
Adjustment to Revenue (Intragroup journal) (13 800) (1P)
Adjustment to Cost of Sales (Intragroup journal) 12 000 (1P)
Adjustment to Income Tax Expense (Intragroup journal) 504 (1P)
Adjustment to Depreciation (Revaluation journal) (5 857) (1P)
Adjustment to income tax expense (Revaluation journal 1 640 (1P)
Amount must link to analysis 14 038
Therefore NCI applicable portion (14 038 x 40%) = 5 615

Analysis of owner’s equity of Waltex:

*Not required: Shown for purposes of completion only
Belgotex 60%
Total NCI
At Since
At acquisition (1 Jan 2012)
Share Capital 137 143 88 258 54 857
Equity at acquisition 29 520 17 712 11 808
Retained earnings 150 000 90 000 60 000

316 663 189 998 126 665

Equity represented by goodwill:
Parent 2 002 2 002 -
Consideration and NCI 318 665 192 000 126 665

Since acquisition
Beginning of current year:
Retained earnings (51 162) (30 697) (20 465)
(103 055 - 150,000 – 4 217)

Current year
Profit for the year 14 038 8 423 5 615 Commented [PZ15]: Student might have done the above
calculation on this line item. Please award the marks where
applicable.
281 541 (22 274) 111 815
Available marks 38
Maximum Marks 30
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 5 -

QUESTION 1 (SUGGESTED SOLUTION)

Consolidated Statement of profit or loss and other comprehensive income

BELGOTEX GROUP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE REPORTING
PERIOD ENDED 31 AUGUST 2019 (1) Commented [PZ16]: Don’t forget this mark please

Revenue
833 112
[(324 521(1) + 292 320 (1) + 230 071(1)) - 13 800] (1P)
Cost of Sales
[(263 239(1) + 238 615(1) + 187 515 (1) - 12 000] (1P) (677 369)
Gross profit 155 743 (1P) Commented [PZ17]: Don’t forget this mark please
Other income 6 857(1) Commented [PZ18]: Don’t forget this mark please
Other expenses
(80 556)
[(28 101 + 26 551(1) + 20 167(1)) - 120(1P) + 5 857 (1P)
Profit before tax 82 044
Income tax expense
[(11 211 + 7 603 + 6 269) (1) - 504(1) + 34(1)– 1 640 (1) (22 973)
PROFIT/(LOSS) FOR THE YEAR 59 071 (1P) Commented [PZ19]: Don’t forget this mark please

Profit attributable to (1)

Parent 45 102
NCI (+ 5 615 (1P) (Waltex) +
[7 254 (1P) + 2 000 (1P) – 900 (1P)] Crossley) 13 969
Refer to the NCI Journals and analysis for these figures Commented [PZ20]: These marks should be carried from the
Available marks 25 analysis or the workings that the student has done.

Maximum marks 25
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 6 -

QUESTION 1 (SUGGESTED SOLUTION)

d)

Workings Commented [PZ21]: These workings could be shown anywhere

in the solution. Some students done them before part b. wherever
the calculations are shown please label
Analysis of owner’s equity of Crossley “Marked for part c)”
And award the marks where applicable.
Belgotex 55% 45%
Total
At Since NCI
At purchase (2005)
Share Capital 61 714 33 943 27 771
Retained earnings 37 800 20 790 17 010
99 514 54 733 (1) 44 781
Goodwill 15 267
Investment in Crossley 70 000 (1)

Since purchase
 Beginning of current year:
Retained earnings (102 887 – 37 800) 65 087 35 798 29 289

 Current year:
Profit for the year 16 120 8 868 7 254 (1) Commented [PZ22]: Mark awarded for the entire line.
Less profit allocation to preference shareholders (2 000) (1) (1 100) (900) Commented [PZ23]: Candidate might have shown this as a
calculation on the profit line item. Therefore they wold have said
Carrying amount at 31 AUGUST 2019 178 721 43 564 35 643 (16120 – 2000). Please award the marks where applicable.

Belgotex 0% 100%
Total
At Since NCI
At purchase (2005)
Preference Share Capital 10 000 10 000
2 000
12 000
Consideration and NCI
(1)
Since purchase
 Current year:
Profit for the year 2 000 2 000
(1 for both (2 000)
Preference Dividends (2 000) lines)

Carrying amount at 31 AUGUST 2019 10 000 12 000

COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 7 -

QUESTION 1 (SUGGESTED SOLUTION)

BELGOTEX GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 31 AUGUST 2019 (1) Commented [PZ24]: Don’t forget this mark please
Retained
earnings NCI
Opening balance - 1 September 2018 473 690 C1 (1P) 192 270 (1P)
Total comprehensive income for the year:
Profit for the year 47 425(1P) 14 964 (1P)
Preference Dividend (2 000) (1)
Balance at 31 AUGUST 2019 521 125 205 234

C1 Retained earnings at the beginning Commented [PZ25]: Ensure all calculations are marks and
[(468 589 (Belgotex) (1)– 30 697 (1) (Waltex) + 35 798 (1) (Crossley)] marks are carried from the students analysis or calculations.

C2 NCI beginning of year

[ ([126 665 – 20 465] (1P) (Waltex) + [44 781 + 29 289] (1P) Crossley ] + 12 000 (1)Preference
dividends

Available marks 18
Maximum marks 15
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)

‘- 8 -
QUESTION 2 (SUGGESTED SOLUTION) Commented [PZ26]: Please note that students were required to
choose 2 out of the 3 theory questions. Therefore they would have
answered either 2A and 2B
2A - Ethics Or 2B and 2C or 2A and 2C, etc.

To determine if the action proposed by the financial manager is ethical, I will apply the ‘Ethical Quick- Therefore you should mark only 2 of the theory questions.
If a student answered 3 of them (almost impossible due to time)
test’ to the scenario: then you will mark the forts 2 only.
If you are unclear on this, please phone Zaheera or Garth and we will
explain
Note to marker: 1 Mark for providing each of the ‘Quick test’ criteria and 1 mark for providing a
relevant motivation. Students may provide reasons not listed in the solution, provided they are valid. Commented [PZ27]: It is important that you award marks
where you see applicable and use your accounting background to
help determine if you would want to want the mark or not.
1) Is it legal (1)
The following guideline are provided but should not be used as a
There is not sufficient information to make a determination of the legality of the transaction,
main and only basis for awarding marks.
however, there are indicators that something is not above board: The FM does not want to follow
the usual payment procedure, why not? The FM wants to rush the transaction through before the
directors Tenda Ltd are implicated. Furthermore, the partner at the legal firm is a close friend of
the FM suggesting a potential conflict of interest with a related party. (1)

2) How will it look in the newspaper? (1)

The directors of Tenda are currently the subject of an investigation into potentially fraudulent
activities, weather found guilty or not, association with the company may have a negative impact
on the image/reputation of VGS bank. If this were made known to the media, it would not be
favorable for VGS. (1)

3) Is it consistent with the organisations values? (1)

The FM is requesting that the normal controls and procedures be circumnavigated by ignoring
the ‘payment release’ form suggesting the transaction is not aligned with the organisations values.
(1)

4) Is it fair to all? (1)

The FM is suggesting a transaction price of R2.50 per share. The current share price is R 1 per
share. That means VGS is set to pay more than double the market value for shares in a company
that is potentially headed for business rescue. At face value this does not make business sense
and suggests that the transaction is not fare to one or more groups of stakeholders (1)

5) If I act, how will it feel? (1)

The aggressive attitude of the FM coupled with the above indicators give one a sense that
something is ‘wrong’ with this transaction. It is likely that your conscience will not be clean if you
act on the FM’s instructions. (1)

Available Marks 10
Maximum Marks 10
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
-9-
QUESTION 2 (SUGGESTED SOLUTION)

2A – Ethics… Continued

b)
It is often difficult to know how one should proceed in situations where you are asked to be a party
to unethical behavior, particularly where the request is coming from a person of authority (1) as is
the case in this scenario.

However, if you do not confront the issue, you may become party to the transgression which could
have serious future implications (disciplinary action, loss of job and even criminal prosecution) (1).

If as the senior accountant, you do not feel comfortable confronting the FM about the issue, you
should discuss the matter with a line manager or another senior employee (1) on what actions you
should take. Many corporate entities have an anonymous ‘Whistle-blower’ line (1) where you may
report unethical activity without having to reveal your identity.

If you are ever unsure as to the weather or not an issue is ethically acceptable, you should seek
advice before acting (1).

Note to marker: Award marks for valid any argument not listed in the solution. Commented [PZ28]: It is important that you award marks
where you see applicable and use your accounting background to
Available Marks 5 help determine if you would want to want the mark or not.
Maximum marks 5
The following guideline are provided but should not be used as a
main and only basis for awarding marks.
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 10 -
QUESTION 2 (SUGGESTED SOLUTION) Commented [PZ29]: Please note that students were required to
choose 2 out of the 3 theory questions. Therefore they would have
answered either 2A and 2B
2B - Business Combination Or 2B and 2C or 2A and 2C, etc.

Therefore you should mark only 2 of the theory questions.

IFRS 3 prescribes that an entity shall account for each business combination by applying the If a student answered 3 of them (almost impossible due to time)
acquisition method (1). then you will mark the forts 2 only.
If you are unclear on this, please phone Zaheera or Garth and we
will explain
This method requires 4 steps to be executed: Commented [PZ30]: Please don’t forget the marks for the
(2) Marks for listing all 4 steps. acquisition steps.
(1) Mark if 2 or more steps are listed and
No marks are awarded if less than 2 steps are listed.

Step 1: Identify the acquirer

In a business combination the acquirer needs to be identified. The acquirer is the entity that obtains
control of the acquiree (1).
Mr Prices, Laurie Chiappini & Stewart Cohen, is the acquirer in the question (1)

Step 2: Determine the acquisition date

The acquisition date is the date that the acquirer obtains control of the acquiree (1).
This is normally the closing date meaning that it is the date that the acquirer legally transfers the
consideration acquires the assets and assumes the liabilities of the acquiree (1).
If suspensive legal conditions have to be satisified, control is only transferred once these conditions
have been met (1).

From the question above, 1986, 1991 and 1996 are the acquisition dates for the relative
shareholdings. Control of the group was acquired by Laurie Chiappini & Stewart Cohen in 1991. (1)

Step 3: Recognising and measuring the identifiable assets acquired, the liabilities assumed
and any non-controlling interests in the acquiree, and

The identifiable assets acquired, the liabilities assumed and any non-controlling interests shall be
recognised separately from goodwill on acquisition date (1).

Firstly, the identifiable assets and liabilities assumed must meet the definition of assets and liabilities
in the conceptual framework (1).

Secondly, the identifiable assets and liabilities assumed must be part of what the acquirer and
acquiree exchanged in the business combination transaction and not the result of separate
transactions (1).

Thirdly, the acquirer’s application of the recognition principle and conditions may result in recognising
some assets and liabilities that the acquiree had previously not recognised as assets and liabilities
in its pre-acquisition financial statements (1).

The acquirer shall measure the identifiable assets acquired and liabilities assumed at their
acquisition-date fair values (1).
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 11 -
QUESTION 2 (SUGGESTED SOLUTION)

2B - Business Combination… Continuation

Step 4: Recognising and measuring goodwill or gain from bargain purchase

Goodwill is an asset representing the future economic benefits arising from other assets acquired in
a business combination that are not individually identified and separately recognised (1).

The calculation of goodwill or a gain from a bargain purchase is equal to the consideration transferred
plus any non-controlling interest less total net assets (1).

From the timeline information provided it can be noted that the Mr Price Group had initially grown
through a business combination (1) as Laurie Chiappini & Stewart Cohen, together with BOE,
acquired a major shareholding in John Orrs Holdings in 1986 (1).

In 1991, control of BOE Group was obtained by Laurie Chiappini & Stewart Cohen and therefore
control was obtained in this year (1) and in 1996 the group obtained Sheet Street (1).
The Group then expanded its operations by the formation of branches and by launching different
branches such as Mr Price Home, Mr Price Sport and recently the on-line store (1).

(Available marks 21)

(Maximum marks 15)
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 12 -
QUESTION 2 (SUGGESTED SOLUTION) Commented [PZ31]: Please note that students were required to
choose 2 out of the 3 theory questions. Therefore they would have
answered either 2A and 2B
2C – Control Or 2B and 2C or 2A and 2C, etc.

TOTAL WOODEN NCI Therefore you should mark only 2 of the theory questions.
If a student answered 3 of them (almost impossible due to time)
LTD then you will mark the forts 2 only.
AT SINCE If you are unclear on this, please phone Zaheera or Garth and we
will explain
Share Capital R500 000
Retained Earnings R250 000
R750 000 (1) R337 500 R412 500
Equity representation by goodwill- Parent R237 500 (1)
Consideration and NCI R575 000 (1)

The percentage shareholding is

337 500 / 750 000 x 100
= 45% (1)

Note to marker: If a student uses NCi to calculate the colution, please be aware of that as well
and award marks accordingly.
IFRS 10 defines Control as - An investor controls an investee when the investor is exposed, or
has rights, to variable returns from its involvement with the investee and has the ability to
affect those returns through its power over the investee (1).
Commented [PZ32]: Students might even do a journal to
calculate NCI or % shareholding. Please award marks where
applicable as journals may also be used. You would use the basis of
marks from the analysis above as a guideline for where marks should
be awarded.

An investor controls an investee if, and only if, the investor has all the following:
 power over the investee;
 exposure, or rights to, variable returns from involvement with the investee; and
 the ability to use power over the investee to affect the amount of the investor’s returns/ Link
between Power and Returns
(1) marks for listing all the 3 elements of control. No marks if not 3 listed

Power is defined as existing rights that give the current ability to direct the relevant activities
(1).

According to IFRS 10, relevant activities are activities of the investee that significantly affect the
investee’s returns. (1)

Power arises from rights (1). Such rights can be straightforward (e.g. through voting rights) or be
complex (e.g. embedded in contractual arrangements and other substantive decision making rights)

 In the scenario Wooden Ltd has a 45% shareholding in Logs Ltd which indicates that Wooden
Ltd may have control over Logs Ltd, but is not conclusive (1)

 In addition, the remaining 55% shareholding consists of shareholders that individually hold an
insignificant number of shares that will not direct the relevant activities (1)
COURSE: ACCOUNTANCY 3B
Q1 (AO5 2019)
‘- 13 -
QUESTION 2 (SUGGESTED SOLUTION)

2C – Control… Continued

 Currently, 9 of the 12 directors on the board of Logs Ltd are that of Wooden Ltd. It will be
difficult for other shareholders to remove these directors due to their insignificant
shareholding and large numbers. (1)

 And lastly, Wooden Ltd has the right to appoint key management evident from the right to
appoint the financial managers in Logs Ltd. (1)

Power arises from rights; therefore, Wooden Ltd has power over Logs Ltd through voting rights and
being involved in the relevant activities of decision making through its contractual agreement. (1)

An investor is exposed to or has rights to the variable returns from its involvement with the investee
as the parent’s returns from its involvement with the investee have the potential to vary as a result
of the investee’s performance (1).

In the scenario, Wooden Ltd has rights to variable returns from Logs Ltd in the form of dividends
that is declared and paid of R50 00 by Logs Ltd. (1)

By preparing a main elimination journal that indicates a consolidation process (1), it illustrates that
there is a parent - subsidiary relationship that exists between Wooden Ltd and Logs Ltd. (1)
Available marks (18)
Maximum marks (15)