RHODES UNIVERSITY

DEPARTMENT OF ACCOUNTING

EXAMINATION: JUNE 2019

ACCOUNTING 3

Internal Examiners: Mr S Mabaso MARKS: 100

Miss L Dube DURATION: 180 Minutes
Mr G Masindi

Internal Moderator: Prof K Maree

External Moderator: Prof J Jansen

GENERAL INSTRUCTIONS TO CANDIDATES

1. There are 3 questions on 8 pages in this paper.

2. All questions must be answered.

3. Please start the answer to each question on a new page.

4. Questions must be answered in ink. No erasable pens, pencils or Tipp-ex may be used.

5. All workings form part of your answer and must be submitted.

6. It is in the candidate’s interest to write legibly.

7. The Oxford Concise English dictionary may be used during this examination.

8. Under no circumstances may questions relating to this paper be raised after the initial
reading time. Thereafter, candidates must use their initiative to deal with any perceived
errors or ambiguities in the paper. Any assumptions made by the candidate should be
clearly stated.

QUESTION MARKS TIME (in minutes)

1 20 36
2 30 54
3 50 90
TOTAL 100 180

Accounting 3 June 2019 Page 1 of 8

QUESTION 1 20 marks: 36 minutes
Part A
A friend of yours, Vuyo Makalima is the financial director of Africa Shine Ltd (“Africa Shine”)
and he has asked you to look at his accounting numbers for the financial year ending
30 April 2019.
Africa Shine was founded in 2016. Their primary business is manufacturing furniture and toys.
They have strategically placed some of their workshops close to South African townships in
order to create jobs and help with teaching new technical skills to many South Africans.
Africa Shine has been making losses since its incorporation due to operational and set-up
costs. As a result, Africa Shine had an assessed loss for tax purposes at 30 April 2019 of
R3 323 000 (30 April 2018: R12 500 000). As at 30 April 2018, they did not expect sufficient
taxable profit to be available in the future against which the tax loss could be utilised. However,
during the 2019 financial year the company secured a contract that has been very profitable
and has led them to forecast that future taxable profits will be available against which any
assessed loss can be utilised.
Additional information:

 The company provides for deferred tax in accordance with IAS 12 - Income Taxes; and
 A tax rate of 28% and capital gains inclusion rate of 80% have always applied.

Part B
Below is a summary of Africa Shine’s investments in two distinct (separate and independent)
companies.
For both investments, the financial director is of the view that since the shareholder voting
rights held by Africa Shine in each one of the companies is below 50%, Africa Shine has no
power over the investee companies (and therefore no control).
Investment in Blazing Mzantsi
Africa Shine holds 30% of the shareholder voting rights in Blazing Mzantsi Ltd, whose activities
are directed by voting rights. Moreover, Africa Shine holds an option to acquire an additional
25% of the voting rights in Blazing Mzantsi that is deeply in the money (i.e. at a favourable
price). The option is currently exercisable and there are no other barriers to prevent Africa
Shine from exercising its option.
Investment in Millennia Stars
Africa Shine Ltd also holds 30% of the voting rights in Millennia Stars Ltd. Five other
shareholders hold the remaining 70% of the voting rights equally amongst them. A
shareholders’ agreement determines that Africa Shine has the right to appoint three of the five
directors and terminate their services at its discretion. The shareholders’ agreement may only
be amended if three-quarters of the votes are cast in its favour. The board of directors direct
the relevant activities of Millennia Stars.

Accounting 3 June 2019 Page 2 of 8

QUESTION 1 CONTINUES
REQUIRED:
Part A
Explain and quantify the income tax and deferred tax implications of the assessed loss which
arose in the 2019 tax year only.
(Support your answer by including calculations and providing journal entries where
necessary.)
9 marks
Communication skills and logical argument 1 mark
Part B
With reference to IFRS 10 (Consolidated Financial Statements), comment on the accuracy of
the view held by the financial director about the two investments discussed above. Where you
disagree, provide an alternative or correct assessment. 9 marks

Communication skills and logical argument 1 mark

Accounting 3 June 2019 Page 3 of 8

QUESTION 2 30 marks: 54 minutes
Michy Dee, Lisa Dee and Adonia Dee grew up as the only three girls in their family. They were
very passionate about starting their own company that specialises in classy and elegant
clothing. After obtaining their Bachelor of Commerce degrees at prestigious universities, they
established a company called Maduve Limited (“Maduve”) in 2010.
Within a very short space of time, Maduve’s brand became well known in South Africa. The
focus of Maduve was to provide quality clothing and the best customer service to their
customers in order to remain highly competitive. As a result, by 2015, Maduve was recording
revenue of over R10 million per annum and Maduve’s directors decided to expand their
business outside of South Africa for the company to grow globally.
The company considered various investment options and found that acquiring a company in
Australia will be the most lucrative deal for Maduve. Maduve acquired a 60% controlling
interest in Chihera Limited (“Chihera”) on 1 May 2016 for R600 000. All the assets and
liabilities of Chihera had carrying amounts which equated their fair values at the acquisition
date, except for machinery that had a fair value of AUD45 000 (Australian Dollars) and a
carrying amount of AUD30 000 in the accounting records of Chihera. Maduve agreed with the
remaining useful life of 5 years for the machinery on 1 May 2016.
At the acquisition date, the equity of Chihera was as follows:

AUD
Share capital 40 000
Retained earnings 35 000

The following amounts have been extracted from the trial balances of the two companies as
at 30 April 2019:

Maduve Chihera
R AUD
Dr / (Cr) Dr / (Cr)
Share capital (at R1 each, at AUD1 each) (150 000) (40 000)
Retained earnings (850 000) (65 500)
Profit before tax (960 000) (46 900)
Tax expense 175 000 6 900
Deferred tax asset 27 000 8 700
Other assets 8 700 000 86 000
Loan (350 000) (200 000)
Dividends paid - 30 April 2019 10 000 1 500

There were no intercompany transactions between Maduve and Chihera, apart from those
evident in the scenario.

Accounting 3 June 2019 Page 4 of 8

QUESTION 2 CONTINUES
The following exchange rates may be applicable:

AUD1 to ZAR
1 May 2016 10.30
30 April 2018 9.90
30 April 2019 10.40
Average 1 May 2016 to 30 April 2018 10.25
Average 1 May 2018 to 30 April 2019 10.15

Additional Information:

 Maduve carries all investments at cost in its separate accounting records;

 There has been no impairment on any investment;
 Goodwill has never been impaired;
 The corporate tax rate is 28% and the capital gains inclusion rate is 80% in South
Africa and Australia. These have been the tax rates for all periods concerned;
 Non-controlling interests are measured at fair value and their translated fair value on
1 May 2016 was R400 000; and
 The functional currency of Maduve is the Rand and for Chihera the Australian dollar
(AUD). The presentation currency of the Maduve group is the South African Rand.

REQUIRED:
Prepare the pro-forma journal entries required to consolidate Chihera into the financial
statements of the Maduve Group for the year ended 30 April 2019. 29 marks

Narrations are not required.

SHOW AND REFERENCE ALL WORKINGS!

Presentation 1 mark

Accounting 3 June 2019 Page 5 of 8

QUESTION 3 50 marks: 90 minutes
Forever Monate Ltd (“Forever Monate”) is a sweet and chocolate manufacturing business,
with its headquarters in Midrand, Johannesburg and with manufacturing plant in Durban and
Port Elizabeth.
As part of growing their business and brand, Forever Monate acquired 80% (160 000) of the
shares in Best Sugar Manufacturers (Pty) Ltd (“Best Sugar”), a sugar manufacturing business
in KwaZulu-Natal on 1 May 2014 for R3 000 000, thereby obtaining control. On this date Best
Sugar’s retained earnings and other reserves amounted to R2 000 000 and R1 250 000
respectively. All of Best Sugar’s assets and liabilities were considered fairly valued on this
date, except for sugar mill machinery which was considered to be valued at R40 000 more
than its carrying amount of R680 000. Best Sugar did not process the revaluation in their
separate financial records. Forever Monate agreed with Best Sugar’s remaining useful life of
8 years on 1 May 2014.
In facilitating this acquisition, Forever Monate incurred expenditure amounting to R270 000 in
legal, advisory, consulting and valuation fees. R50 000 of the expenditure relating to consulting
fees was incurred during the 2013 reporting period and paid for during 2014 reporting period.
The remaining expenditure was incurred in the months leading up to the conclusion of the deal
during the 2014 reporting period and was fully paid on 1 May 2014.
On 31 July 2018, Best Sugar sold the sugar milling machinery revalued by Forever Monate at
acquisition for R325 000. This transaction is correctly accounted for in the separate records of
Best Sugar.
Following implementation of advanced production techniques, reformulation and rebranding,
Forever Monate sold 100 000 of its shares in Best Sugar for R10 000 000 (calculated based
on the fair value of each share) on 31 December 2018, retaining only 60 000 shares, resulting
in a remaining 30% shareholding.
Below is an extract of the two companies’ trial balances on 30 April 2019:

Forever Monate Best Sugar

Dr / (Cr) Dr / (Cr)
R R
Share capital (at R1 each) (500 000) (200 000)
Retained earnings (940 000 000) (8 000 000)
Other reserves (4 000 000) (3 250 000)
Property, plant and equipment 350 000 000 8 450 000
Investment in Best Sugar - cost 1 125 000 -
Inventory 4 350 000 1 940 000
Sales (78 000 000) (23 500 000)
Cost of sales 34 000 000 11 000 000
Other income (7 000 000) (1 700 000)
Operating expenses 18 600 000 7 400 000
Taxation 8 500 000 1 800 000
Transfer to other reserves 50 000 20 000

Since acquisition, Best Sugar began to sell large quantities of sugar to Forever Monate at cost
plus a 20% mark-up. During the 2019 reporting period, Best Sugar made sales of R1 200 000
per month to Forever Monate.

Accounting 3 June 2019 Page 6 of 8

QUESTION 3 CONTINUES
Included in Forever Monate’s inventory on hand is inventory purchased from Best Sugar
amounting to the following, on these respective dates.

R
30 April 2018 190 000
31 December 2018 370 000
30 April 2019 -

Forever Monate revalued their own land on 30 April 2019 by R220 000. In carrying out this
revaluation exercise, Forever Monate employed the services of LEJ Revaluers who charged
an amount of R5 600. The amount was paid immediately. No entries have been processed by
Forever Monate in relation to the revaluation. The R5 600 has been expensed correctly.
Additional information:

 Income and expenses occur evenly throughout the year;

 The issued share capital of both companies has remained unchanged;
 Forever Monate carries its investment in Best Sugar at cost in their separate financial
statements;
 Non-controlling interests are measured at the proportionate share of recognised net
identifiable assets; and
 The normal tax rate of 28% is applicable and the capital gains tax inclusion rate is 80%.
 Round off amounts to the nearest Rand.

REQUIRED:

1. With reference to IFRS 3 (Business Combinations), discuss and quantify how the
expenditure incurred to facilitate the acquisition of the shares in Best Sugar and paid
at future dates should be accounted for. 5 marks

2. Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive

Income of Forever Monate Group for the year ended 30 April 2019. 44 marks

Presentation (format, layout and communication) 1 mark

END OF THE EXAMINATION PAPER

Accounting 3 June 2019 Page 7 of 8

Student No.:

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