FACULTY OF MANAGEMENT & LAW

SCHOOL OF ACCOUNTANCY

DEPARTMENT OF ACCOUNTING

MODULE: CACC032 TEST 2 : 2021

FINANCIAL ACCOUNTING III
TIME: 2.5 HOURS MARKS : 100
INTERNAL EXAMINER : MS ML LAMOLA
MR S MUTYAMBIZI
INTERNAL MODERATOR : MS M RAMOLOBE
MS I DE BEER

THIS PAPER CONSISTS OF 8 PAGES INCLUDING COVER PAGE

INSTRUCTIONS:

1. Answer all the questions.

2. Write neatly and legibly.
3. Number questions correctly.
4. Work done in pencil will not be marked.
5. This examination is an open IFRS book examination, but no writing is allowed in the IFRS
books.
 CACC032 (TEST 2 – 11 OCTOBER 2021)

QUESTION 1 45 MARKS | 67.50 MINUTES

On 1 October 2019 Melza Ltd (hereafter “Melza”) acquired a 65% shareholding in Crazy
Settlement (hereafter “Crazy”), a leading provider of stationery to government schools.
Below is information relating to the acquisition:
1. Melza paid R11 000 000 in cash to the former owners of Crazy on the acquisition date.
2. The total equity (ordinary share capital and retained earnings) of Crazy at the date of
acquisition amounted to R16 000 000 of which retained earnings amounted to R9 150 000.
3. Melza elected to measure the non-controlling interests in the acquiree at their fair value of
R6 000 000 at acquisition date.
4. All the identifiable assets and liabilities of Crazy were stated at their fair value at acquisition
date with the exception of the following:
The remaining useful life of the equipment at acquisition date was estimated at 3 years.
No fair value adjustments were recorded in the separate accounting records of Crazy.

Carrying amount in Crazy’s Fair value at acquisition

separate financial statements date

Equipment R90 000 R150 000

5. Melza accounts for investments in subsidiaries at cost in its separate financial statements.
6. The opening balance of retained earnings on 1 October 2020 amounted to R14 500 000
and profit after tax of Crazy for the financial year ended 30 September 2021 amounted to
R2 400 000. There were no changes in other items of equity since the acquisition date.
7. The shareholders’ equity (and comparative amounts) of Melza in its individual financial
statements as at 30 September 2021 and 2020 consisted of the following:
Melza
2021 2020
R R
Share capital 8 000 000 8 000 000
Retained earnings 4 200 000 3 500 000
Total equity 12 200 000 11 500 000

8. Melza and Crazy declared dividends of R180 000 and R90 000 respectively for the
financial year ended 30 September 2021.
9. Assume a normal tax rate of 28% and capital gains inclusion tax rate of 80%.

2
 CACC032 (TEST 2 – 11 OCTOBER 2021)

Marks
QUESTION 1 – REQUIRED: Sub- Total
total
(a)
Prepare all the pro-forma consolidation journal entries for the Melza
group for the financial year ended 30 September 2021

An indication in which entity’s financial statements and adjustment is

processed and journal narrations and dates are not required,
30 30
however an indication of where the journal entry will be recognised (P/L,
OCI, SFP or SCE) is required.

Show all calculations clearly.

(b) Present the consolidated statement of changes in equity of the Melza 13

group for the financial year ended 30 September 2021 as far as the
information can permit.
Note: Comparative figures and a total column are NOT required

2 15
Communication skills: presentation
TOTAL FOR QUESTION 1 45

3
 CACC032 (TEST 2 – 11 OCTOBER 2021)

QUESTION 2 25 MARKS | 37.50 MINUTES

Ignore taxation
I-Believe-I-Can Ltd (hereafter “IBIC”) is a company listed on the technology sector of the
Johannesburg Securities Exchange (JSE). IBIC develops software applications and
programmes which it markets both locally and internationally. During 2020, IBIC’s business
boomed owing to the exceptional performance of its innovative application, Zoum. Zoum is a
leader in modern enterprise video communications, with an easy, reliable cloud for video and
audio conferencing, chat, and webinars. The COVID-19 pandemic which forced governments
to introduce national lockdowns forced people to work and study from home. This informed
the success of the Zoum application. IBIC has a 30 September financial year end.
The following information relate to IBIC:
An extract from the accounting policies of IBIC pertaining to financial instruments reads:
1. Financial assets are held within a business model whose objective is to collect contractual
cash flows and sell the investments.
2. IBIC only invests in financial assets which are not credit impaired at the time of the
investment.
The following transaction relates to IBIC:

Investment in the debentures of Apex Ltd

The continued success of the Zoum application gave IBIC excess funds. A directors’ resolution
was made to invest some of the funds in the debentures of Apex Ltd (“Apex”). Accordingly,
IBIC acquired 10 000 9% debentures of Apex on 1 October 2019. Each debenture has a face
value of R200 and coupon interest on the debentures is payable annually in arrears on
30 September. Transaction costs amounting to R30 000 were incurred by IBIC in relation to
the acquisition of the debentures. The debentures are compulsorily redeemable at a discount
of 5% on 30 September 2025. Similar debentures were trading at 11% on 1 October 2019.
Apex was experiencing some financial challenges due to the effects of COVID-19 on
30 September 2020. Consequently, the credit risk on the debentures had increased
significantly on 30 September 2020, although there was no objective evidence that the
debentures were credit impaired. A reassessment performed on 30 September 2021 correctly
determined that credit risk associated with the debentures of Apex was no longer significantly
increased, compared to the credit risk on 1 October 2019.
The following information relate to the debentures:

12-month expected credit loss Lifetime expected credit loss

30 September 2020 R19 450 R124 000
30 September 2021 R9 570 R95 000

Fair value per Apex debenture

30 September 2020 R1 760 000
30 September 2021 R1 890 000

4
 CACC032 (TEST 2 – 11 OCTOBER 2021)

Marks
QUESTION 2 – REQUIRED: Sub- Total
total
(a) Discuss the identification and classification of the investment in the
debentures of Apex in the financial statements of IBIC in terms of IFRS
9 Financial Instruments.
7
Please note:
You ARE NOT required to discuss recognition, measurement,
presentation and disclosure issues.

Communication skills: logical argument 1 8

(b) Prepare journal entries to account for the investment in the debentures
of Apex in the financial statements of IBIC for the financial year ended
16
30 September 2021 ONLY. Note: journal entries for the 2020 financial
year ARE NOT required.

Communication skills: presentation 1 17

TOTAL FOR QUESTION 2 25

5
 CACC032 (TEST 2 – 11 OCTOBER 2021)

QUESTION 3 28 MARKS | 42.00 MINUTES

You recently completed your BCom Accounting degree and have just been appointed as a
trainee accounting consultant at Duro consultants. Duro consultants has a variety of well-
trained consultants in the fields of Law, Accounting and Engineering.
During your first week, you were assigned to two clients (Konka Ltd and Rockets (Pty) Ltd)
who need urgent assistance with some of the principles relating to IFRS 3 Business
Combinations and IFRS 10 Consolidated Financial Statements.
KONKA LTD
Konka Ltd (hereafter “Konka’’) operates in the entertainment industry. Konka’s main source of
income is the rental of sound systems for special events. Since the start of the COVID-19
pandemic, Konka has been experiencing a decline in revenue since large gatherings are
prohibited by the lockdown restrictions.
The COVID-19 pandemic made the directors of Konka to appreciate the importance of
diversification in investments and revenue streams. After much deliberation, on 1 October
2020, Konka acquired 60% of the controlling interest in Sumo Ltd (hereafter “Sumo”). Sumo
is a successful talent management agency that has managed to place actors and actresses
in soapie’s and drama shows that are very popular in Africa.
After the negotiation process was completed with Sumo’s previous owners, Konka agreed to
settle the purchase consideration in the following manner:
 R750 000 will be settled in cash, payable upon the acquisition date;
 Konka transferred legal title of a 16 seater mini-bus on the acquisition date to one of the
former owners of Sumo. The carrying amount of the 16 seater mini-bus in the financial
statements of Konka was R175 000 as at date of transfer. The fair value of the 16 seater
mini-bus at that date was estimated to be R180 000.
 Konka will issue 10 000 ordinary shares to the sellers of the 60% interest on 31 October
2020. The fair value of these shares at 1 October 2020 was R40 per share. The value
had increased to R65 per share by 31 October 2020.
 Konka is required to make an additional cash payment of R230 000 on 30 September 2022
if Sumo manages to increase its permanent placement of new talent to South African
soapies by more than 10% per year for two consecutive years. The fair value of this
obligation was estimated at R190 000 on the 1 October 2020.
On 30 September 2021, Sumo had managed to increase its permanent placement of new
talent to South African soapies by 12%. The fair value of the obligation was remeasured to
R200 000 on 30 September 2021.
The accountant at Konka, Ms Poppie, prepared the following journal in the separate
accounting records of Konka to account for the acquisition and the change in the fair value of
the contingent consideration of Sumo on 1 October 2020. Ms Poppie managed to change the
journal that was processed on 1 October 2020 because the Accounting system that is used
by Konka allows users to change prior month’s data.

6
 CACC032 (TEST 2 – 11 OCTOBER 2021)

Description DR CR
Investment in Sumo Ltd (SFP) 1 590 000
Bank (SFP) 750 000
Vehicle (SFP) 180 000
Share capital (SCE) (10 000*65) 650 000
Contingent consideration (SFP) (200 000 – 10 000
190 000)

ROCKETS (PTY) LTD

Rockets (Pty) Ltd (hereafter “Rockets”) is a car rental company that operates in Pretoria.
Rockets rents out cars to both companies and individuals. The duration of the rental can be
anything from a day up to 5 years. Rockets has a 30 June financial year end.
On 1 July 2020, Rockets acquired 47% of the issued share capital of Blue Moon Ltd (hereafter
“Blue”). Blue operates in the logistics industry and its relevant activities include:
 Planning (Storage, warehousing and materials handling);
 Packaging and unitisation;
 Inventory Control;
 Transportation and
 Customer relations
Blue’s issued ordinary share capital consist of 75 000 shares. Each ordinary share qualifies
for one vote at the annual general meeting (AGM). Rockets also holds 20 000 convertible
debentures in Blue. Rockets is the only company that holds convertible debentures in Blue.
These convertible debentures were acquired a few years back when Rockets started
diversifying its investments. The debentures are convertible at any time from issue date until
maturity at the discretion of the holder at the ration of one ordinary share for every two
debentures held.
The relevant activities of Blue are directed by the board of directors who are appointed by
shareholders at AGMs.
Marks
QUESTION 3 – REQUIRED: Sub- Total
total
(a) Critically evaluate the journal entry processed to account for the
15
investment in Sumo by Konka in the financial statements of Konka for
the year ended 30 September 2021. Your solution should be aimed at:

 identifying concerns in the accounting treatment;

 providing reasons to justify why the issues identified are concerns;
and
 Providing recommendations to correct the concerns identified.

Please note:

Include computations as part of your solution.

PLEASE TURN OVER THE PAGE

7
 CACC032 (TEST 2 – 11 OCTOBER 2021)

Structure your solution as follows:

Concerns and justifications Recommendations

(In many cases, there will be (In many cases, there will be
more than one justification for more than one recommendation
each concern identified) for each concern identified) 2 17

Communication skills: logical argument and layout

(b) Rockets contacted Duro consultants because the whole finance

department of Rockets could not come to a conclusion of whether or 9
not Rockets has power over Blue.

Draft an email to the head of finance at Rockets, Tau Maponya,

discussing whether or not Rockets has power over Blue in accordance
with IFRS 10 Consolidated Financial Statements.

Include calculations as part of your solution.

Communication skills: logical argument and layout 2 11

TOTAL FOR QUESTION 3 28