DEPARTMENT OF ACCOUNTANCY

Accounting 22
2022

Unit 6: Group Statements

Intragroup transactions
QUESTION
BANK
QUESTION 6-A (30 MARKS)

On 1 August 2008 H Ltd acquired a 100% investment in S Ltd for R300 000 cash. On the date of
acquisition, S Ltd’s reserves consisted of retained earnings of R35 000. There have been no changes to
S Ltd’s share capital since acquisition. Assume that the identifiable assets acquired and liabilities
assumed at acquisition date are shown at their acquisition-date fair values, as determined in terms of
IFRS 3 Business combinations. The following information is provided to you:

Trial balance on 31 July 2010

H Ltd S Ltd
Debits
Property, plant and equipment at cost price 220 000 135 000
Investment in S Ltd: 200 000 ordinary shares 300 000 -
Investment in S Ltd: Loan 65 000 -
Inventories 150 000 100 000
Dividends declared and paid 50 000 20 000

Credits
Share capital: R1 ordinary shares 400 000 200 000
Retained earnings - 31 July 2010 500 000 130 000
Loan from H Ltd - 65 000
Accumulated depreciation 40 000 27 000
Dividend received from subsidiary 20 000 -

 S Ltd purchased non-depreciable property at a cost of R75 000 from H Ltd at the beginning of the
current reporting period. The property had originally cost H Ltd R50 000.

 H Ltd purchased all its depreciable plant and equipment from S Ltd on 1 August 2009. S Ltd
realised a profit of R20 000 on the transaction. Depreciation is provided on the straight line basis
at a rate of 10% per annum.

 R100 000 of the closing inventory of H Ltd was purchased from S Ltd at cost price plus 25%. Total
sales of inventory from S Ltd to H Ltd for the current reporting period amounted to R200 000.

ADDITIONAL INFORMATION:

a) Ignore tax implications.

b) Show all calculations.

REQUIRED:

12.1 In the books of H Ltd, prepare the journal entry at acquisition of S Ltd on 1 August 2008, the
purchase date. (2)

12.2 Prepare all the pro-forma consolidation journal entries for the reporting period ended 31 July 2010.

(28)

Journal descriptions are not required.

___
(30)
QUESTION 6-A (SUGGESTED SOLUTION)

12.1 Journal - H Ltd

1/8/2008 Dr. Investment in S Ltd 300 000

Cr. Bank 300 000
Recognition of the investment in S Ltd
(2)

12.2 Consolidation journal

J1 Dr. Share capital (S) 200 000

Dr. Retained earnings (S) 35 000
Dr. Goodwill (S) 65 000
Cr. Investment in S Ltd (H) 300 000
Elimination of owners equity of S Ltd at acquisition date

J2 Dr. Loan from H Ltd (S) 65 000

Cr. Investment in S Ltd: Loan (H) 65 000
Elimination of the intra-group loan

J3 Dr. Dividend received (H) 20 000

Cr. Dividend paid (S) 20 000
Elimination of intra-group dividend

J4 Dr. Gain on sale of fixed property (H) 25 000

Cr. Property, plant and equipment (S) 25 000
Elimination of the unrealised intra-group profit included
in the property, plant and equipment of S Ltd

J5 Dr. Gain on sale of plant & equipment (S) 20 000

Cr. Property, plant and equipment (H) 20 000
Elimination of unrealised intra-group profit included in
the plant & equipment of S Ltd at 31/7/2010

J6 Dr. Accumulated depreciation: PPE (H) 2 000

Cr. Depreciation (S) 2 000
Recording the portion of the unrealised intra-group
profit realised in 2010 (20 000 x 10%)

J7 Dr. Revenue (S) 200 000

Cr. Cost of sales (H) 200 000
Elimination of intra-group sales

J8 Dr. Cost of sales (S) 20 000

Cr. Inventories (H) 20 000
Elimination of unrealised profit included in closing
inventories) (100 000 x 25/125)
(28)
___
(30)
QUESTION 6-B (50 MARKS)

On 1 January 2006 Puff Ltd acquired 80% of the ordinary shares of Sow Ltd for R110 000 when the
retained earnings of Sow Ltd was R25 000.

1. Puff Ltd classified the investments in Sow Ltd as available for sale financial assets and recognised
all fair value adjustments in equity in its individual records.

2. At the acquisition date, the assets and liabilities were considered to be fairly valued and there were
no unaccounted contingent liabilities in terms of IFRS 3. The company however measured the fair
value of the non-controlling interest (NCI) at R30 000 based on current market prices.

3. On 1 April 2008 Sow Ltd sold a section of its property with a carrying value of R42 000 to Puff Ltd
for R50 000.

4. On 1 January 2009 Sow Ltd sold plant with a carrying amount of R25 000 to Puff Ltd for R40 000.
The remaining useful life of the plant was estimated at 3 years with no residual value. Both
companies use the plant for production purposes.

5. Ignore tax implications.

Statements of financial position at 30 September 2009

Puff Ltd Sow Ltd
R R
ASSETS
Non-current assets
Property, plant and equipment 291 000 252 000
Investment: other financial assets - 131 000
Investment in Sow Ltd: Ordinary shares (Fair value) 110 000 -

Total non-current assets 401 000 383 000

Current assets
Current account: Sow Ltd 28 000 -
Bank 65 000 -
Total current assets 93 000 -

Total assets 494 000 383 000

EQUITY AND LIABILITIES

Equity
Issued capital:
Ordinary shares 150 000 100 000
Preference shares 70 000
Retained earnings 162 000 108 000
Total equity 382 000 208 000

Current liabilities
Payables 102 000 112 000
Current account: Puff Ltd - 28 000
Overdraft bank 10 000 35 000
Total current liabilities 112 000 175 000

Total equity and liabilities 494 000 383 000

QUESTION 6-B (CONTINUED)

Statements of comprehensive income for the reporting period ended on 30 September 2009
Puff Ltd Sow Ltd
R R
Gross profit 230 000 180 000
Other income 71 000 13 000
Other expenses (140 000) (90 000)
Profit before tax 161 000 103 000
Tax expense (49 000) (28 000)
Total comprehensive income for the period 112 000 75 000

Statements of changes in equity for the reporting period ended 30 September 2009
Retained earnings
Puff Ltd Sow Ltd
R R
Balance - 1 October 2008 85 000 53 000
Total comprehensive income for the period 112 000 75 000
Ordinary dividends (30 000) (20 000)
Preference dividend paid (5 000)
Balance - 30 September 2009 162 000 108 000

REQUIRED:

12.1. Prepare the analysis of owner’s equity of Sow Ltd for the reporting period ended
30 September 2009. (15)

12.2. Present the consolidated statement of comprehensive income and the consolidated statement of
changes in equity (only retained earnings and NCI columns) for Puff Ltd and its subsidiaries for the
reporting period ended 30 September 2009 in accordance with the requirements of IFRS. (20)

12.3. Present the consolidated statement of financial position for Puff Ltd and its subsidiaries at
30 September 2009 in accordance with the requirements of IFRS. (15)
___
(50)

Show all calculations.

Comparative figures are not required.
QUESTION 6-B (SUGGESTED SOLUTION)

12.1
Analysis of equity: Sow Ltd
Puff Ltd NCI
Total
80% 20%
At Since
At date of acquisition
Share capital 100 000 80 000 20 000
Retained earnings 25 000 20 000 5 000
125 000 100 000 25 000

Equity represented by goodwill 10 000 10 000

Equity represented by goodwill
attributable to NCI 5 000 5 000
Consideration and NCI 140 000 110 000 30 000

Since acquisition
 To beginning of current year
Retained earnings (53 000 - 25 000 -
8 000 (Jnl 1)) 20 000 16 000 4 000

 Current year
Profit for the year
$ (75 000 - 15 000 (Jnl 2) + 3 750 (Jnl 63 750 51 000 12 750
3))
Dividends (20 000) (16 000) (4 000)
203 750 51 000 42 750

(15)

12.2
Consolidated statement of comprehensive income
for the reporting period ended 30 September 2009

Gross profit (230 000 + 180 000) 410 000

Other income (71 000 - 16 000 (div) + 13 000 - 15 000 (Jnl 2)) 53 000
Other expenses (140 000 + 90 000 - 3 750 (Jnl 3)) (226 250)
Profit before tax 236 750
Tax (49 000 + 28 000) (77 000)
Comprehensive income for the reporting period 159 750

Attributable to:
Equity holders of parent 147 000
NCI 12 750
159 750
QUESTION 6-B (SUGGESTED SOLUTION - CONTINUED)

Consolidated statement of changes in equity

for the reporting period ended 30 September 2009

Preferenc
Ordinary
e Retained
share Total NCI
share earnings
capital
capital
Balance - 1 October 2009 150 000 70 000 * 101 000 322 792 34 000
Comprehensive profit 147 000 12 750
Dividends paid: ordinary shares (30 000) (4 000)
preference
shares (5 000)
Balance - 30 September 2009 150 000 70 000 213 000 332 792 42 750

* 85 000 + 16 000 (P)

(20)

12.3
Consolidated statement of financial position at 30 September 2009

ASSETS R
Non-current assets
Property, plant & equipment (291 000 - 15 000 + 3 750) + (252 000 - 8 000 (Jnl 1)) 523 750
Intangible assets or Goodwill 15 000
Other financial assets 131 000
Total non-current assets 669 750

Current assets
Cash & cash equivalents 65 000

Total assets 734 750

EQUITY AND LIABILITIES

Share capital 150 000
Preference shares 70 000
Retained earnings 213 000
NCI 42 750
Total equity 475 750

Current liabilities
Payables (102 000 + 112 000) 214 000
Overdraft (10 000 + 35 000) 45 000
Total current liabilities 259 000

Total equity and liabilities 734 750

(15)
___
(50)
QUESTION 6-B (SUGGESTED SOLUTION - CONTINUED)

Calculations:

J1 Dr. Retained earnings (Sow) 8 000

Cr. Property (Puff) 8 000
Elimination of unrealised intra-group profit in property

J2 Dr. Profit on sale of plant (Sow) (40 - 25) 15 000

Cr. Plant (Puff) 15 000
Elimination of unrealised intra-group profit in plant

J3 Dr. Accumulated depreciation (15 000/3 x 9/12) 3 750

Cr. Depreciation 3 750
Realisation of unrealised profit in plant through the depreciation
process
QUESTION 6-C (20 MARKS)

The following transactions took place between H Ltd and S Ltd (its subsidiary) during the reporting
period ended 30 September 2010:

Since 1 October 2009, H Ltd purchased all its inventories from S Ltd at normal selling prices, cost price
plus 25%. Total sales from S Ltd to H Ltd for the current reporting period amounted to R150 000.
Inventory on hand at the end of the current reporting period was R100 000.

H Ltd sold machinery to S Ltd on 1 October 2009 for R200 000. The carrying amount of the machinery
was R145 000. The subsidiary classifies the machinery as property, plant and equipment, while the
parent also classifies it as property, plant and equipment. The remaining useful life of the plant is
estimated at 5 years at the date of sale.

REQUIRED:

Prepare the pro-forma consolidation journal entries for H Ltd group for the reporting period ended
30 September 2010 to account for the intra-group transactions above. (Clearly indicate the entity
affected).

Journal narrations are not required.

Dates are not required.
Ignore tax implications.
QUESTION 6-C (SUGGESTED SOLUTION)

Inventory
J1 Revenue(S) 150 000
Cost of sales (H) 150 000

J2 Cost of sales (S) 20 000

Inventory (H) 20 000
(100 000 x 25/125)

Property, plant and equipment

J3 Profit on sale of machinery (H) 55 000

Machinery (S) 55 000

J4 Accumulated depreciation (S) 11 000

Depreciation (H) 11 000
(55 000/5)
___
(20)
QUESTION 6-D (50 MARKS)

On 1 January 2005 Five Ltd purchased 180 000 ordinary shares in Roses Ltd. At that stage the equity of
Roses Ltd was as follows:

Share capital: R1 ordinary shares R200 000

Retained earnings R30 000

At acquisition date, management determined the market value of the non-controlling interest of Roses
Ltd as R25 000 based on current market prices.

Assume that the identifiable assets acquired and the liabilities assumed at acquisition date are shown at
their acquisition date fair values, as determined in terms of IFRS 3.

The abridged financial statements of Five Ltd and Roses Ltd for the reporting period ended
30 June 2009 are as follows:

Statements of comprehensive income for the reporting period ended 30 June 2009

Five Ltd Roses Ltd

R R
Revenue 400 000 255 000
Cost of sales (248 000) (153 000)
Gross profit 152 000 102 000
Other expenses (60 000) (32 000)
Finance cost (20 000) (10 000)
Income received - dividends 8 000 -
Profit before tax 80 000 60 000
Income tax expense (24 000) (18 000)
Profit for the year 56 000 42 000

Total comprehensive income 56 000 42 000

Statements of changes in equity for the reporting period ended 30 June 2009

Ordinary Retained
share capital earnings Total
Five Ltd Roses Five Ltd Roses Five Ltd Roses
R Ltd R Ltd R Ltd
R R R
Balance on 1 July 2008 430 000 200 000 58 000 75 000 488 000 275 000
Total comprehensive 56 000 42 000 56 000 42 000
income
Dividends paid (8 000) (5 000) (8 000) (5 000)
Balance on 30 June 2009 430 000 200 000 106 000 112 000 536 000 312 000
QUESTION 6-D (CONTINUED)

Statements of financial position at 30 June 2009

Five Ltd Roses Ltd

R R
ASSETS
Non-current assets
Property, plant and equipment 320 000 298 000
Land and buildings at cost 210 000 150 000
Plant at carrying amount 110 000 148 000
Investment in Roses Ltd - 180 000 shares of R1 each at fair value 220 000 -
Total non-current assets 540 000 298 000

Current assets
Trade and other receivables 30 000 12 000
Inventories 95 000 83 000
Total current assets 125 000 95 000

Total assets 665 000 393 000

EQUITY AND LIABILITIES

Share capital: R1 ordinary shares 430 000 200 000
Retained earnings 106 000 112 000
Total equity 536 000 312 000

Non-current liabilities
Long-term loan 45 000 23 000

Current liabilities
Trade and other payables 84 000 58 000

Total equity and liabilities 665 000 393 000

Additional information:

1. Since April 2005 Five Ltd purchases all its inventories from Roses Ltd at the normal selling price,
which is cost plus 25%. In respect of the current year sales from Roses Ltd to Five Ltd amounted
to R200 000.

2. At 30 June 2008 the inventories on hand of Five Ltd amounted to R60 000.

3. Included in revenue of Five Ltd is a non-taxable profit of R20 000 from the sale of land to Roses Ltd
on 1 June 2009.

4. Ignore tax implications.

REQUIRED:

Present the consolidated financial statements of Five Ltd and its subsidiary Roses Ltd for the reporting
period ended 30 June 2009. (50)

Please note:

Your answer should include the analysis of owner’s equity of Roses Ltd.
Journal entries are not required.
Notes and comparative figures are not required.
QUESTION 6-D (SUGGESTED SOLUTION)

Consolidated statement of comprehensive income of Five Ltd and its subsidiary for the reporting
period ended 30 June 2009

Revenue (400 000 + 255 000 - 200 000 - 20 000) 435 000
Costo f sales (248 000 + 153 000 - 200 000 - 12 000 + 19 000) (208 000)
Gross profit 227 000
Other expenses (60 000 + 32 000) (92 000)
Finance cost (20 000 + 10 000) (30 000)
Income received - dividends (8 000 - 4 500) 3 500
Profit before tax 108 500
Income tax expense (24 000 + 18 000) (42 000)
Profit for the year 66 500

Total comprehensive income 66 500

Attributable to:
Equity holders of parent 63 000
Non-controlling interest 3 500
66 500

Consolidated statement of changes in equity for Five Ltd and its subsidiary for the reporting
period ended 30 June 2009

Share Retained
capital earnings Total NCI Total
Balance on 1 July 2008 430 000 * 87 700 517 700 28 300 546 000

Total comprehensive income 63 000 63 000 3 500 66 500

Dividends paid (8 000) (8 000) (500) (8 500)
Balance on 30 June 2009 430 000 142 700 572 700 31 300 604 000

* = 58 000 + 29 700
QUESTION 6-D (SUGGESTED SOLUTION - CONTINUED)

Consolidated statement of financial position of Five Ltd and its subsidiary for the reporting
period ended 30 June 2009

R
ASSETS
Non-current assets
Property, plant and equipment 598 000
Land and buildings at cost (210 000 + 150 000 - 20 000) 340 000
Plant at carrying amount (110 000 + 148 000) 258 000
Goodwill (13 000 + 2 000) 15 000
Total non-current assets 613 000

Current assets
Trade and other receivables (30 000 + 12 000) 42 000
Inventories (95 000 + 83 000 - 19 000) 159 000
Total current assets 201 000

Total assets 814 000

EQUITY AND LIABILITIES

Equity attributable to owners of parent
Share capital: R1 ordinary shares 430 000
Retained earnings 142 700
572 700
Non-controlling interest 31 300
Total equity 604 000

Non-current liabilities
Long-term loan (45 000 + 23 000) 68 000

Current liabilities
Trade and other payables (84 000 + 58 000) 142 000

Total equity and liabilities 814 000

QUESTION 6-D (SUGGESTED SOLUTION - CONTINUED)

Journal entries (not part of the answer)

J1 Revenue (Roses) 200 000

Cost of sales (Roses) 200 000
Elimination of intra-group sales

J2 Retained earnings (Roses) 12 000

Cost of sales (Roses) 60 000 x 25/125 12 000
Adjustment to ensure that opening retained earnings agree
with that of last year

J3 Cost of sales (Roses) 19 000

Inventory (Five) 95 000 x 25/125 19 000
Elimination of unrealised profit in opening

J4 Revenue/Profit from sale of land (Five) 20 000

Land (Roses) 20 000
Elimination of unrealised profit in sale of land

Analysis of owner’ equity of Roses Ltd

90%
Total At Since NCI
At acquisition – 1 Jan 05
Share capital 200 000 180 000 20 000
Retained earnings 30 000 27 000 3 000
230 000 207 000 23 000
Equity represented by goodwill - parent 13 000 13 000
Equity represented by goodwill - NCI 2 000 2 000
Consideration and NCI 245 000 220 000 25 000

Since acquisition
To beginning of current year -
2 Jan 05 - 30 Jun 06
Retained earnings
(75 000 - 30 000 - 12 000) 33 000 29 700 3 300

Current year - 1 Jul 08 - 30 Jun 09

Profit for the year (42 000 + 12 000 -
19 000) 35 000 31 500 3 500
Dividend paid (5 000) (4 500) (500)
308 000 56 700 31 300
___
(50)