SCHOOL OF ACCOUNTING FINAL EXAMINATION: NOVEMBER 2008 ACCOUNTING 300 (ACCT300 PY, WY) Duration: Total Pages: Internal

examiners: External examiner: 180 minutes 9 (including this page) Staff of the School of Accounting Miss T. Sneedon Total Marks: 120

INSTRUCTIONS TO CANDIDATES:

1. Your attention is drawn to the necessity to provide suitable substantiating reasons and/ or workings in support of your answers. Where workings are presented separately from your answer, these must be clearly referenced thereto. 2. Each of the three questions must be answered in a separate answer booklet. Therefore, a minimum of 3 booklets should be handed in. Answers written in the incorrect booklet may not be marked. 3. Fill in all necessary information on the front cover of each answer booklet. When you are finished please place question 2 and 3 inside the front cover of question 1. 4. Answers must be written in ink only. 5. All questions must be answered. 6. The use of a non-programmable calculator is permitted. Question 1 2 3 Marks 40 40 40 120 Suggested Time 60 minutes 60 minutes 60 minutes 180 minutes

ACCOUNTING 300 ACCT300 PY, WY QUESTION 1 (40 marks: 60 minutes)

PAGE 2 NOVEMBER 2008 FINAL EXAMINATION

On 1 January 2004 Hook Limited acquired 90% of the issued share capital of Scrooge Limited for R160 000 when the equity of Scrooge Limited was as follows: Rand Share capital 10 000 Retained earnings 115 000 Revaluation reserve 25 000 150 000 On 1 January 2004, the assets and liabilities were fairly valued, with the exception of an item of plant which was considered to be worth R20 000 more than its carrying amount. This item of plant had five years remaining useful life. On 31 December 2008 Hook Limited acquired 100 % of the shares in Charlie Brown Limited. The company is currently a dormant subsidiary of Hook Limited. The trail balances of three related companies as at 31 December 2008: Hook Limited R Debit / (credit) Share capital (R1 shares) Retained earnings (01 January 2008) Revaluation reserve Long term loans Deferred Tax Plant Cost Plant Accumulated depreciation Investment in Scrooge Investment in Charlie Limited Investment in other listed companies Long term loans: companies and individuals Current assets Sales Cost of sales, including depreciation Profit on sale of investment in Scrooge Limited Profit on sale of property, plant and equipment Investment income: dividends Taxation Dividends paid 31 December 2008 (500 000) (560 000) (31 000) 660 000 (330 000) 80 000 100 000 125 000 431 000 261 500 (550 000) 325 000 (65 000) (20 100) (15 400) 80 000 9 000 Scrooge Limited R Debit / (credit) (10 000) (215 000) (55 000) (140 000) (5 000) 150 000 (110 000) 405 000 (120 000) 90 000 9 000 1 000 Charlie Brown Limited R Debit / (credit) (100 000) (300 000) 350 000 50 000 -

ACCOUNTING 300 ACCT300 PY, WY QUESTION 1 continued

PAGE 3 NOVEMBER 2008 FINAL EXAMINATION

Additional information: 1. On 31 March 2008 Hook Limited sold 50% of the shares it owned in Scrooge Limited to VC Incorporated for R 145 000 and immediately entered into a contractual agreement with VC Incorporated to share the control of Scrooge Limited. 2. On 30 September 2008 Hook Limited cancelled their contract with VC Incorporated. Even after the contract ceased Hook Limited still had the power to control 2 of the 6 directors in Scrooge Limited. 3. On 1 October 2008 Hook Limited sold an item of plant to Scrooge Limited for R15 300. Hook Limited had acquired this item of plant on 1 January 2008 for R12 000 and had been depreciating the asset over 5 years with a nil residual value. These estimates have not changed. (ie Both companies agreed with the remaining useful life of the asset sold.) 4. Hook Limited had always sold inventories to Scrooge Limited. Total intercompany sales for 2008 were R18 000, however there was never any inventories on hand at the end of any of the months due to a very fast stock turnover by Scrooge Limiteds sales team. 5. All sales and expenses were incurred evenly throughout the year. 6. Long term loans: companies and individuals includes a R300 000 loan to Charlie Brown Limited. 7. The Hook Limited group proportionately consolidates jointly controlled entities on the line-by-line presentation format. 8. The normal income tax rate has remained constant at 30% for the all years. Ignore Capital Gains Tax. Required: Prepare, in accordance with International Financial Reporting Standards, the following statements for inclusion in the Hook Limited Groups consolidated financial statements for the year ended 31 December 2008: a) The consolidated statement of comprehensive income (use the function method and assume that all items on the trial balance are disclosable); b) The consolidated statement of changes in equity; and c) The consolidated statement of financial position, (only the assets section of the statement is required) Notes are not required. Comparatives are not required. Earnings per share disclosure is not required. You may present your workings using either the worksheet or the end-product method. For all calculations work to the nearest Rand.

ACCOUNTING 300 ACCT300 PY, WY QUESTION 2 (40 marks: 60 minutes)

PAGE 4 NOVEMBER 2008 FINAL EXAMINATION

This question consists of two unrelated parts. Both parts must be answered. PART A (10 marks 10 minutes) Persia Limited performed an indicator review on its assets (constituting two cash generating units, referred to as Carpets and Swords) that suggested that an impairment loss needs to be recognised. Carrying amounts as at 31 December 2008 Goodwill Machine Plant Vehicles Buildings CGU: Carpets R 210 000 0 390 000 300 000 600 000 1 500 000 R 1 100 000 500 000 350 000 CGU: Swords R 0 150 000 0 0 650 000 800 000

Recoverable amounts as at 31 December 2008 Cash Generating Unit: Carpets NOTE 1 Cash Generating Unit: Swords NOTE 1 Plant (fair value less costs to sell) NOTE 1

Note 1: the recoverable amounts for the individual assets, other than plant, were not possible to calculate.

Required: i) Calculate the impairment loss that is to be allocated to each of the individual assets forming part of Persia Limiteds Carpet CGU for the year ended 31 December 2008. Detailed calculations ARE required. Please remember that the calculations relating to the Sword CGU are NOT required. (7)

ii) Journalise the impairments calculated in (i) above. Please remember that the journals relating to the Sword CGU are NOT required. (3)

Part B is overleaf

ACCOUNTING 300 ACCT300 PY, WY QUESTION 2 continued

PART B (30 marks 50 minutes)

PAGE 5 NOVEMBER 2008 FINAL EXAMINATION

You are a technical consultant to Redsea Limited and have been tasked with ensuring that their company financial statements are compliant with International Financial Reporting Standards. Redsea Limited has given you the following information relating to two of its non-current assets (office buildings and land): 1. The property, plant and equipment line item at 31 December 2007 was R3 600 000, which included: Office building: R2 100 000 (this has always been used as Redsea Limiteds head office) Land (1 plot): R1 500 000 (this land is vacant) 2. The intention is to: sell the office building (although the criteria for recognition as a non-current asset held for sale are not met); and keep the vacant plot of land to earn capital appreciation.

3. The office building is used as the companys head office and is depreciated at 10% of cost per annum. Its original cost was R3 000 000 (purchased on 1 January 2005). The residual value is nil (unchanged). The value of the land on which the office building is situated is considered to be immaterial. 4. Land is not depreciated. Land consists of a single plot, described as Erf 111, Umlazi, and constitutes 5 100 square metres in extent. The plot is vacant and was purchased for capital appreciation. The intention of earning capital appreciation has remained

unchanged over the years. 5. Valuations were performed on both properties during 2008. The valuations were

performed by Mr. Blue, who is an independent valuer and a member of the SA Institute of Valuers. Neither the office building nor the land had ever been valued before. Neither

of these assets had been impaired in the past (nor had they needed to be). The following fair values, determined by Mr. Blue, were based on the potential selling prices as determined on the active market as at 31 December 2008: Office building: R4 290 000 (the residual value remained at nil). Land: R2 000 000 6. Redsea Limited has adopted the revaluation model for its property, plant and equipment, performing revaluations every 3 to 4 years. Revaluations of property, plant and

equipment are recorded using the gross replacement value method. Transfers of the realised portion of the revaluation surplus to retained earnings are to be made annually. 7. There were no purchases or sales of non-current assets during 2008. 8. There are no temporary or permanent differences other than those evident from the information provided.

ACCOUNTING 300 ACCT300 PY, WY QUESTION 2 continued

PART B continued Other information:

PAGE 6 NOVEMBER 2008 FINAL EXAMINATION

9. Any errors would need to be corrected in the 2008 General Journal because it is not possible to process journals in the prior year journals. 10. Normal corporate income tax is levied at 30% (unchanged for many years). The

inclusion rate for capital gains is 50%. The cost price is considered to be the base cost in the case of each non-current asset owned by Redsea Limited. 11. The tax authorities do not allow deductions for office buildings or land.

Required: i) Define an investment property. (1 )

ii) Write a letter to the directors of Redsea Limited in which you discuss two issues of noncompliance with the IFRSs (definite or potential) involving the property, plant and equipment line-item in the financial statements of Redsea Limited for the year ended 31 December 2007. One issue of non-compliance must relate to presentation and the other issue of non-compliance must relate to measurement. Your letter must address each of the two issues in the following way: Identify the issue of non-compliance Explain why you believe there may be non-compliance with the IFRS Suggest a way in which the potential non-compliance can be resolved/ corrected: Marks will be awarded for the correct layout of a letter and for logic in the structure of your letter. Information given in (iv) below should NOT be considered when drafting this letter. Ignore tax. (8 ) iii) Show all journal entries relating to the office building that need to be processed in Red Sea Limiteds General Journal for the year ended 31 December 2008, including the deferred tax consequences thereof (11) iv) Show all journal entries relating to the land that need to be processed in Red Sea Limiteds General Journal for the year ended 31 December 2008, including the deferred tax consequences thereof assuming the following: land is to be recognised as investment property Redsea Limited uses the fair value model for measuring its investment property the fair value of the land on 31 December 2007 was R1 800 000. (9)

ACCOUNTING 300 ACCT300 PY, WY QUESTION 3 (40 marks: 60 minutes)

PAGE 7 NOVEMBER 2008 FINAL EXAMINATION

Valid Limited, a listed book publisher, is in the process of finalising its financial statements for the year ended 31 December 2008. 1. The following information was extracted from the 2008 draft financial statements and the published financial statements for the year ended 31 December 2007:

Draft 2008 R 10 275 000

Profit after tax for the year (correctly calculated)

Published 2007 R 9 700 000

The following items of income and expense (amongst others) have been included in the abovementioned profit after tax (pre-tax figures are presented): 2008 R 250 000 225 000 150 000 100 000 2 400 000 2007 R 240 000 2 300 000

Finance costs relating to 15% convertible debentures NOTE 1 Profit on disposal of machinery (related tax expense: R30 000) Write down of inventory to net realisable value NOTE 1 Negative goodwill (not taxable) Administrative costs NOTE 1 Note 1: this expense is deductible for tax purposes.

2. On 1 January 2007, Valid Limited (lessee) and False Limited (lessor) entered into a lease agreement over an item of plant. The lease term is for five years with an annual lease rental of R1 000 000 payable on 31 December each year. Valid Limited incurred initial legal fees of R100 000 directly relating to the finance lease. The useful life of the plant is 6 years. Valid Limited depreciates its plant on a straight-line basis to nil residual value. The fair market value of the item of plant on 1 January 2007 was R3 790 787. The rate of interest implicit in the lease is 10% per annum. It is uncertain whether Valid Limited will obtain ownership of the plant at the end of the lease term. The lease was appropriately classified and accounted for in the accounting records of Valid Limited for both 2008 and 2007.

Year 1 2 3 4 5

Discount rate of R1 after n years (10%) 0.909 0.826 0.751 0.683 0.621

ACCOUNTING 300 ACCT300 PY, WY QUESTION 3 continued

PAGE 8 NOVEMBER 2008 FINAL EXAMINATION

3. On 30 June 2007, Valid Limited decided to sell their factory building and operate out of rented premises instead. This decision was made in order to raise the funds required to take advantage of an attractive business opportunity. On this date, the factory building met all the criteria to be classified as held for sale as per IFRS 5 Non-current assets held for sale and discontinued operations. In mid-2008, the business opportunity did not materialise and on 30 June 2008 Valid Limited decided to keep the factory building, from which date the building no longer met the criteria to be classified as held for sale. The factory building, which is situated in Germiston, Johannesburg, was acquired on 1 January 2000 at a cost of R10 million. Deprecation is provided at 5% pa to a nil residual value on the straight-line basis. The building is measured using the cost model and, as at 31 December 2006, had never been impaired. The relevant values at the various dates were: - 30 June 2007: Fair value is R5 million and Value in use is R4 million. - 31 December 2007: Fair value is R7.5 million. - 30 June 2008: Fair value is R5 million and Value in use is R5.7 million. - 31 December 2008: Fair value and Value in use were not calculated because there was no indication of either an impairment or a reversal thereof. At all times, the costs to sell equate to 5% of fair value. 4. Valid Limited has no other items of non-current assets other than the leased plant and the purchased building. 5. At 31 December 2006, Valid Limiteds authorised and issued share capital comprised 5 million ordinary shares with a par value of 60 cents each. There were no share issues during either 2007 or 2008. 6. The convertible debentures were issued on 1 January 2004 and are convertible at the option of the debenture-holders, into 50 000 ordinary shares on 31 December 2010. 7. On 1 January 2008, management granted their senior employees immediately vesting options to acquire 90 000 ordinary shares at an exercise price of R6.25 on or before 31 December 2012. The average price per ordinary share during 2008 was R9.00. 8. The corporate normal tax rate is 30% (unchanged since 2006). Ignore VAT.

ACCOUNTING 300 ACCT300 PY, WY QUESTION 3 continued

Required:

PAGE 9 NOVEMBER 2008 FINAL EXAMINATION

a) Prepare all the journal entries relating to the leased plant that would have been processed in the General Journal of Valid Limited for the year ended 31 December 2007 only (i.e. journals relating to 2008 are not required). Reminder: narrations, dates and detailed calculations are required. (12)

b) Prepare in accordance with International Financial Reporting Standards and the Companies Act, the following notes to the financial statements of Valid Limited for the year ended 31 December 2008, insofar as the information presented in the question permits: i) Property, Plant and Equipment note relating to buildings only (12) ii) Non-Current Assets Held-For-Sale note (7) c) Calculate the basic earnings per share and the diluted basic earnings per share for the year ended 31 December 2008 only (comparatives are not required). Detailed supporting calculations are required. (9)

IMPORTANT: Comparative figures ARE required for all parts, unless otherwise indicated. Show ALL WORKINGS. Notes on Accounting Policies are not required.