DEPARTMENT OF ACCOUNTANCY

Accounting 22
2022

Unit 5: Group Statements

Theory and Background
QUESTION
BANK
QUESTION 5-A (20 MARKS)

The following questions must be answered by writing only one word/phrase in the attached
SCHEDULE to best answer or describe the question or statement.

8.1 The process where two companies are taken over by a third company that is founded for that
purpose.

8.2 The method used to account for the results and financial position of an investee over which the
investor exercises significant influence, in the investor’s records.

8.3 A company over which another company has sole control of the voting rights, whether pursuant to
an agreement with other members or otherwise.

8.4 - 8.8 The following group structure is presented to you:

H Ltd

10% 60% 40% 30%

A Ltd B Ltd D Ltd E Ltd

20%

55%

C Ltd

State in each case in what relationship each of the company's stand to H Ltd:

8.4 A Ltd

8.5 B Ltd

8.6 C Ltd

8.7 D Ltd

8.8 E Ltd

8.9 What is the most common form of group statements?

8.10 The type of purchasing difference that is created on consolidation when more is paid for the
investment than its net asset value.

8.11 In a partly-owned subsidiary, the shareholders other than the parent are referred to as
.................................................. (?)
QUESTION 5-A (CONTINUED)

8.12 The following case is presented to you:

H Ltd S Ltd
Share capital
100 000 R1-shares 100 000
50 000 R2-shares 100 000

H Ltd owns 26 000 shares in S Ltd for which R55 000 was paid. What is H Ltd's interest in S Ltd?

8.13 What type of purchasing difference will originate where an identifiable liability was not disclosed in
the subsidiary's statement of financial position?

___
(13)
QUESTION 5-A (SUGGESTED SOLUTION)

8.1 Amalgamation
8.2 Equity method
8.3 Wholly owned subsidiary
8.4 Simple investment
8.5 Subsidiary
8.6 Sub-subsidiary (or subsidiary)
8.7 Subsidiary
8.8 Associate
8.9 Consolidated financial statements
8.10 Goodwill
8.11 Non-controlling shareholders (or interest)
8.12 52% (26 000 / 50 000)
8.13 Gain from a bargain purchase
8.14 Dividend received in the parent company
___
(14)

(1 mark each)
QUESTION 5-B

Part A

a) What is the type of investment whereby investors have equal voting rights in and contribute equally
to the decision making around the financial and operating policies of the investment?

b) What is a business combination?

c) Puffy Ltd owns 45% of the shares issued by Soffy Ltd, each share has one voting right. Through
an arrangement with the other shareholders in Soffy Ltd, Puffy Ltd is able to appoint 7 of the 11
directors in Soffy Ltd. Based on this information answer the following questions:

i) What is the type of investment relationship between Puffy Ltd and Soffy Ltd?
ii) State the term given to the 55% shareholders in Soffy Ltd.

Part B

Mbeu Ltd is a diversified investment company. Mbeu Ltd acquired shares in 4 companies during the
course of the year, Muri Ltd (65%), Matari Ltd (30%), Snowy Ltd (40%) and Polly Ltd (59%). When
Mbeu Ltd acquired Muri Ltd, Muri Ltd owned 25.5% of Matari Ltd.

REQUIRED:

Describe the type of relationship that exists between each of the following:

i) Mbeu Ltd and Muri Ltd

ii) Muri Ltd and Matari Ltd

iii) Mbeu Ltd and Matari Ltd

iv) Mbeu Ltd and Snowy Ltd

v) Polly Ltd and Muri Ltd

(Hint: Use diagram/s to assist in illustrating your answer)

QUESTION 5-B (SUGGESTED SOLUTION)

Part A

a) Joint venture / Joint controlled entity.

b) A business combination - a transaction or another event which an acquirer obtains control of one or
more businesses by (for example), the transfer of cash, incurrence of liabilities, issue of equity
interest or by contract alone.

c) i) Puffy Ltd is the parent of Soffy Ltd, and Soffy Ltd is a subsidiary of Puffy Ltd.

This is because Puffy Ltd can appoint the majority of the directors and can therefore direct the
operations of the company.

ii) Non-controlling interest.

Part B

i) Muri Ltd is the subsidiary of Mbeu Ltd, Mbeu Ltd is the parent of Muri Ltd.
ii) Matari Ltd is an associate of Muri Ltd, Muri Ltd exercises significant influence over Matari Ltd.
iii) Matari Ltd is a subsidiary of Mbeu Ltd – combined holding in Muri Ltd and Matari Ltd is greater than
50%
iv) Snowy Ltd is an associate of Mbeu Ltd, Mbeu Ltd exercise significant influence.
v) Polly Ltd and Muri Ltd are fellow subsidiaries – they are owned by the same parent company.

Illustration of answer:

Mbeu Ltd

65% 30% 40% 59%

Muri Ltd Matari Ltd Snowy Ltd Polly Ltd

25.5%
QUESTION 5-C

The following group structure is presented to you:

H Ltd
Other shareholders: 50%
678 Individuals Z Ltd
30% 51% 50%

A Ltd X Ltd B Ltd

42%
C Ltd

ADDITIONAL INFORMATION:

1. The other shareholders in A Ltd hold less than 5% each of the issued ordinary share capital in
A Ltd.

2. X Ltd has 50 000 redeemable preference share of R1 each in issue. The redemption instalment
for the prior year is in arrears. H Ltd does not hold any preference shares in X Ltd. X Ltd has
200 000 ordinary shares of R1 each in issue.

3. H Limited owns convertible debentures in B Ltd, which, when converted will lead to H Ltd holding
65% of the ordinary shares in B Limited. The option is exercisable within 18 months.

REQUIRED:

8.1 In each case state the relationship that exists between H Ltd and the following companies:

a) A Ltd
b) X Ltd
c) C Ltd
d) B Ltd

8.2 Define the following terms:

a) Control
b) Significant influence
c) Joint control
QUESTION 5-C (SUGGESTED SOLUTION)

8.1 Relationships with H Ltd:

a) A Ltd is a subsidiary
b) X Ltd is an associate
c) No relationship / associate of an associate
d) Joint venture

8.2 Definitions:

a) Control
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.

b) Significant influence
The power to participate in the financial and operating policy decisions of the investee, but
has no control or joint control over those policies.

c) Joint control
The contractually agreed sharing of control over an economic activity, and exists only when
the strategic financial and operating decisions relating to the activity require the unanimous
consent of the parties sharing control.