QUESTION 4 (30 MARKS)

Take note that the information from questions 1, 2 and 3 should not be considered for this question.

E-Tap is an electronics manufacturer which specialises in the manufacture of silicon electronic chips that
can be used in tracking devices. As a result, WeTrack identified E-Tap to be a good fit for its business
operations which resulted in WeTrack obtaining an 80% controlling interest in E-tap (Pty) Ltd (“E-Tap”).
The acquisition date was 1 January 2021.

WeTrack obtained its 80% interest in E-Tap for R795 000. The assets acquired and liabilities assumed
were considered to be fairly valued in terms of the requirements of IFRS 3 Business Combinations, except
for land that was over valued by R25 000 and building that was undervalued by R80 000. This building
had a remaining useful life of 20 years from 1 January 2021.

On 1 January 2021, the equity of E-Tap consisted of the following categories:

Ordinary share capital R800 000
Preference share capital R275 000
Retained earnings R200 000
Revaluation surplus R5 000

Rights of ordinary and preference shares

The ordinary shares have one voting right each. All preference shares are held by non-controlling interests.
The preference shares are cumulative and has a priority over the ordinary shareholders. Preference
shareholders get one voting right if dividends are in arrears. Preference shareholders receive their
investment upon liquidation. The acquisition date fair value of the preference shares was R252 000.

Intragroup sales
WeTrack purchases silicon electronic chips from E-tap which it then uses in the production of its tracking
devices. E-tap sells to WeTrack at cost plus 20%. WeTrack had closing inventories of R240 000 and
R300 000 as at 30 June 2022 and 30 June 2023 respectively. Sales from E-Tap to WeTrack was R900 000
and R1 150 000 for the year ended 30 June 2022 and 30 June 2023 respectively.

Sale of equipment
E-Tap sold a piece of equipment to WeTrack on 1 July 2022 for R330 000. The carrying amount of the
equipment in the records of E-Tap was R300 000. The equipment has a residual value of R45 000 (which
has remained unchanged since it was purchased by E-Tap). The remaining useful life of the equipment
on the date of sale was 2 years.

Other information:
• All preference dividends up to 30 June 2022 have been paid. However, the board of directors of E-
Tap did not declare any dividends for the year-ended 30 June 2023.
• It is WeTrack’s accounting policy to classify investments in E-tap using the cost model.
• WeTrack elected to measure the non-controlling interests at their proportionate share of the
acquiree’s identifiable net assets at the acquisition date.
• Both WeTrack and E-Tap account for land using the revaluation model. All revaluations are done in
each entities’ separate records on the last day of each financial year (i.e. 30 June).
• All other property, plant and equipment items are accounted for using the cost model.
The following represents an extract of the financial statements of WeTrack and its subsidiary, E-tap for the
reporting period ended 30 June 2023 are as follows (all amounts are in Rands, unless indicated otherwise):
EXTRACT OF THE STATEMENTS OF FINANCIAL POSITION
AS AT 30 June 2023
WeTrack E-tap
ASSETS
Non-current assets
Property, plant and equipment 1 813 000 1 460 000
Investment in E-tap 795 000 -
Current assets
Inventories 485 000 346 000
Receivables 111 000 104 000
Cash and cash equivalents 96 000 159 000
TOTAL ASSETS 3 300 000 2 069 000

EQUITY AND LIABILITIES

Ordinary share capital (100 000/80 000 shares) 1 000 000 800 000
10% Preference share capital (19 500/27 500 shares) 195 000 275 000
Retained earnings 755 000 440 500
Revaluation surplus 220 000 (60 000)
Non-current liabilities
Long-term borrowings 700 000 500 000
Current liabilities
Payables 430 000 113 500
TOTAL EQUITY AND LIABILITIES 3 300 000 2 069 000

EXTRACT OF THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 June 2023
Retained earnings Revaluation surplus
WeTrack E-tap WeTrack E-tap

Balance at 1 July 2022 692 000 347 000 215 500 (49 000)
Changes in equity for 2023
Profit for the year 108 000 93 500
Other comprehensive income for 4 500 (11 000)
the year
Dividends paid - ordinary (25 500) -
Dividends paid - preference (19 500) -
Balance at 30 June 2023 755 000 440 500 220 000 (60 000)

EXTRACTS OF THE STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 June 2023
WeTrack E-tap

Profit before tax 138 000 114 500

Income tax expense (30 000) (21 000)
PROFIT FOR THE YEAR 108 000 93 500
Other comprehensive income:
Revaluation surplus on land 4 500 (11 000)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 112 500 82 500
QUESTION 4 – REQUIRED Total

4.1 Discuss the effect that the non-payment of the preference dividend by E-tap will have
on the assessment made by WeTrack about whether it would need to consolidate E- 4
Tap for the financial year-ended 30 June 2023.
4.2 As far as the information permits, prepare the consolidated statement of changes in
equity of the WeTrack Group for the year-ended 30 June 2023.

Please note:
• Comparative amounts are not required. 26
• You are not required to prepare the non-controlling interest column.
• Total columns are not required.
• Even though you are not required to prepare the equity analysis of E-tap, it is
highly recommended to do so as marks will be awarded for calculations.
Total for Question 4 30
QUESTION 4 (SUGGESTED SOLUTION)

4.1

At least one class of shares authorized and issued by a company must have voting
rights on matters that may require a decision by the shareholders. Normally 
preference shares do not carry voting rights.
The preference shares will however have voting rights while the preference

dividend remains in arrears.
WeTrack holds 64 000 ordinary shares with voting rights. The non-controlling
interests holds 16 000 ordinary shares with voting rights + 27 500 preference  -
shares with voting rights = 43 500 voting rights.
It does not affect WeTrack’s ability to exercise control over S Ltd as it still holds a

majority interest of 59.53% - 64 000/(64 000 + 43 500)
WeTrack will continue to consolidate E-Tap. 
Available for 4.1 - 5 Marks
Max for 4.1 - 4 Marks
Analysis of the owners’ equity of E-tap

WeTrack NCI
Ordinary shares Total
80% 20%
At Since

At acquisition
Share capital 800 000 640 000 160 000
Equity adjustments
(Above can be shown in reval surplus also 80 000 ✓ 64 000 16 000
and vice versa)
Revaluation surplus (5 – 25) (20 000) ✓ (16 000) (4 000)
Retained earnings 200 000 160 000 40 000
1 060 000 848 000 212 000
Gain from a bargain purchase ✓
(53 000) (53 000) -
P
Investment in E-tap 1 007 000 795 000 212 000

Since acquisition
● To beginning of current year
Retained earnings (347^ – 200^ – 40(J5)✓ 101 000 RE 80 800 20 200
– 6(J7)✓)
Revaluation surplus (-49^ – 5^ + 25(J3)✓) (29 000) RS (23 200) (5 800)
226 400

● Current year
Profit for the year after Preference
dividend (93.5✓ + 40(J5)✓ - 50(J6)✓ - 4(J8)
37 000 RE 29 600 7 400
✓ - 30(J9) ✓ +15(J10) ✓ - 27.5 (pref div) ✓
(11 000)✓ RS (8 800) (2 200)
Other comprehensive income
RE 110 400
1 163 000 231 600
RS (32 000)

Preference shares Total WeTrack NCI

0% 100%
At Since
At acquisition
Share capital 275 000 275 000
Gain from a bargain purchase (23 000) (23 000) ✓
Consideration and NCI 252 000 252 000
Since acquisition

Current year
Attributable profit 27 500 27 500
279 500 279 500
4.2
QUESTION 4 (SUGGESTED SOLUTION - CONTINUED)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 June 2023
Ordinary Preference Non-
Retained Revaluation Total
share share Total controlling
earnings surplus equity
capital capital interests

Balance at 1 June 2022 1 000 000 195 000 848 800 (W1) 192 300 (W4) 2 236 100 478 400 (W7) 2 714 500

Changes in equity for 2023

Total comprehensive income for the year – profit 137 600 (W2) 137 600 34 900 (W8) 172 500
Total comprehensive income for the year - OCI (4 300) (W5) (4 300) (2 200) (W9) (6 500)
Dividend paid – ordinary (25 500) ✓ (25 500) (25 500)
Dividend paid - preference (19 500) ✓ (19 500) (19 500)
Balance at 30 June 2023 1 000 000 195 000 941 400 (W3) 188 000(W6) 2 324 400 511 100 (W10) 2 835 500
^P ^P
✓ ✓

Calculations on next page

Retained earnings column
W1 Retained + 692 000(P) ^
earnings opening + 80 800(Analysis) ^P
balance + 53 000 (ordinary gain from bargain purchase) ✓P
+ 23 000 (preference gain from bargain purchase) ✓P
W2 Profit for the year + 108 000(P) ✓
+ 29 600(Analysis) ✓P
W3 Retained This is the balancing figure. Students should get ^P for this (awarded above on the
earnings closing face of the SFP).
balance However, IF students calculate the closing balance only, and make the opening
balance, the balancing figure, then award the marks for the calculations below as
follows and award the ^P for the opening balance (i.e. apply an either or
approach).

755 000 (P) ^

+ 110 400(Analysis) ^P
+ 53 000 (ordinary gain from bargain purchase) ✓P
+ 23 000 (preference gain from bargain purchase) ✓P

Revaluation surplus column

W4 Revaluation + 215 500 ^
surplus opening - 23 200 (Analysis) ^P
balance
W5 Other +4 500(P) ✓
comprehensive – 8 800(Analysis) ✓P
income for the year
W6 Revaluation This is the balancing figure. Students should get ^P for this (awarded above on the
surplus closing face of the SFP).
balance However, IF students calculate the closing balance only, and make the opening
balance, the balancing figure, then award the marks for the calculations below as
follows and award the ^P for the opening balance (i.e. apply an either or
approach).

+220 000 (P)^

– 32 000 (Analysis)^P

Non-controlling interests column (not required)

W7 Non-controlling + 226 400 (Analysis)
interests opening + 252 000 (Pref analysis)
balance
W8 Profit for the year +7 400 (Analysis)
+ 27 500 (Pref analysis)
W9 Other + 2 200 (Analysis)
comprehensive
income for the year
W10 Non-controlling 231 600 (Analysis)
interests closing + 279 500 (Pref analysis)
balance

Available for 4.2 = 31

Max for 4.2 = 26
QUESTION 3 (SUGGESTED SOLUTION - CONTINUED)

Pro-forma journals (not required - shown for completeness only)

IFRS 3 – at acquisition journal/s

J1 Building (S)(SFP) dr 80 000
Reval surplus – at acquisition (S)(SCE) dr 25 000
Equity adjustments – at acquisition (S)(SCE) cr 80 000
Land (S)(SFP) cr 25 000
Recognition of at acquisition fair value adjustments per
IFRS 3

Main elimination journal entry

J2 Share capital (S)(SCE) dr 800 000
Equity adjustments (S)(SCE) dr 80 000
Retained earnings (S)(SCE) cr 200 000
Revaluation surplus (S)(SCE) (5 000 – 25 000) dr 20 000
Preference shares (S)(SCE) dr 275 000
Investment in E-tap (P)(SFP) cr 795 000
Non-controlling interests (SCE) (212 000 + 252 000) cr 464 000
Gain from a bargain purchase (S)(P/L) (53 000 + cr 76 000
23 000)
Main elimination journal entry

IFRS 3 – since acquisition journal/s (land)

J3 Land (S)(SFP) dr 25 000
Revaluation surplus – since acquisition (S)(SCE) cr 25 000
Reversal of land revaluation after acquisition as it’s done
separately in E-Tap’s record.

Intragroup sales
J4 Revenue (S)(P/L) dr 1 150 000
Cost of sales (P)(P/L) cr 1 150 000
Elimination of intragroup sales (2023).

J5 Retained earnings – beginning (S)(SCE) dr 40 000

Cost of sales (S)(P/L) cr 40 000
Realisation of unrealised profit in opening inventories of
WeTrack (240 000 x 20/120).
J6 Cost of sales (S)(P/L) dr 50 000
Inventories (P)(SFP) cr 50 000
Realisation of unrealised profit in closing inventories of
WeTrack (300 000 x 20/120).
IFRS 3 – since acquisition journal/s (building)
J7 Retained earnings – opening balance (S)(SCE) dr 6 000
Accumulated depreciation (S)(SFP) cr 6 000
80 000/20 x 1.5 = 6 000
Recognition of additional depreciation recognised due to
acquisition fair value adjustment until the beginning of the
year

J8 Depreciation – other expenses (S)(P/L) dr 4 000

Accumulated depreciation (S)(SFP) cr 4 000
80 000/20 = 4 000
Recognition of additional depreciation recognised due to
acquisition fair value adjustment until the beginning of the
year

Intragroup PPE sale

J9 Profit on sale (S)(P/L) dr 30 000
Equipment (P)(SFP) cr 30 000
Elimination of intragroup profit on sale of equipment.
J Accumulated depreciation (P)(SFP) dr 15 000
10 Depreciation (S)(P/L) cr 15 000
(330 000 – 300 000)/2
Elimination of excess depreciation/realisation of intragroup
profit upon use in WeTrack’s records

Allocation of movement in reserves and profits to non-controlling interests

J Retained earnings – beginning of year (S) (SCE) dr 20 200
11 Revaluation surplus – beginning of year (S) (SCE) cr 5 800
Non-controlling interests (SCE) cr 14 400
Recognition of non-controlling interests in retained earnings
and revaluation surplus at the beginning of the year
J Non-controlling interests (P/L) (7 400 Ord + 27 500 Pref) dr 34 900
12 Non-controlling interests (OCI) cr 2 200
Non-controlling interests (SCE) cr 32 700
Recognition of non-controlling interests in S’s profit and
other comprehensive income for the year
Shown for completeness only

WETRACK GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 June 2023

ASSETS
Non-current assets
Property, plant and equipment 3 328 000 P + S +80(J1) – 6(J7) – 4(J8) – 30(J9) + 15(J10)
Current assets
Inventories 781 000 P + S – 50(J6)
Receivables 215 000 P+S
Cash and cash equivalents 255 000 P+S
4 579 000

EQUITY AND LIABILITIES

Equity attributable to owners of the parent
Ordinary share capital 1 000 000 P only – see SCE
Preference share capital 195 000 P only – see SCE
Retained earnings 941 400 See SCE
Revaluation surplus 188 000 See SCE
2 324 400
Non-controlling interest 511 100 See SCE
Total equity 2 835 500
Non-current liabilities
Borrowings 1 200 000 P+S
Current liabilities
Payables 543 500 P+S
4 579 000

WETRACK GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 June 2023
Profit before tax 223 500 P + S + 40(J5) – 50(J6) – 4(J8) -
30(J9) + 15(j10)
Income tax expense (51 000) P+S
PROFIT FOR THE YEAR 172 500

Other comprehensive income

Revaluation surplus (6 500) P+S

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 166 000

Total profit attributable to:

Owners of the parent 137 600 See SCE
Non-controlling interest 34 900 See SCE
TOTAL PROFIT FOR THE YEAR 172 500

Total comprehensive income attributable to:

Owners of the parent 133 300 See SCE (profit + oci)
Non-controlling interest 32 700 See SCE (profit + oci)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 166 000