Suggested solutions

Exercise 1
QUESTION 3 (SOLUTION – 34 MARKS)
Note: 1. To earn the mark in respect of the opening and closing balances, both balances have to be correct. No ½ marks are
awarded. 2. Amounts must be indicated correctly between brackets or without brackets, otherwise no marks.
AC LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20.7
Note R
Cash flow from operating activities
Cash receipts from customers (18 429 000½ + 98 750 000✓ – 23 207 000½) 93 972 000 (2)
Cash paid to suppliers and employees (1) (86 304 000)
Cash generated from operations 30 7 668 000 (1P)
Dividends received 750 000 (1)
Interest paid (1 215 000) (1)
Income tax paid (450 000½ + 2 284 000✓ – 376 000½) (2 358 000) (2)
Dividends paid (2 500 000) (3)
(2 500 000½ + (5 000 000 = 21 205 000½ + 7 236 000✓ – 23 441 000½) – 5 000 000½)
Net cash inflow from operating activities 2 345 000

Cash flow from investing activities

Purchase of equipment to replace (4 200 000 – 3 000 000) (1 200 000) (1)
Purchase of equipment to expand (4 500 000) (3)
(38 320 000½ + 2 880 000✓ – 4 200 000✓ – 32 500 000½)
Purchase of trademarks to expand (3 600 000 – 2 880 000) (720 000) (1)
Purchase of financial investments (listed shares) to expand (2 100 000) (2)
(0 – 2 050 000✓ – 50 000✓)
Purchase of investment in subsidiary to expand (9 550 000) (1)
Net cash outflow for investing activities (18 070 000)

Cash flow from financing activities

Proceeds from shares issued (55 185 000 – 40 455 000) 14 730 000 (1)
Repayment of mortgage bond (8 534 000 – 7 706 000) (828 000) (1)
Net cash inflow from financing activities 13 902 000

Net decrease in cash and cash equivalents (1 823 000)

Cash and cash equivalents beginning of period 6 141 000
(1)
Cash and cash equivalents end of period 4 318 000

Max [20] of 22
AC LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER
20.7
30 Cash generated from operations
Reconciliation of profit before tax with cash generated from operations:
R
Profit before tax 9 520 000 (1)
Adjusted with non-cash items accounted for against profit before tax
Depreciation – equipment (11 694 000½ – 2 808 000✓ – 12 108 000½) 3 222 000 (2)
Impairment – equipment 950 000 (1)
Amortisation – trademarks (1 260 000 – 960 000) 300 000 (1)
Increase in allowance for doubtful debts (1 467 000 – 1 125 000) 342 000 (1)
Profit with fair value adjustment of investment property (740 000) (1)
(19 240 000 – 18 500 000)
Loss on fair value adjustment of listed investment 50 000 (1)
Loss due to equipment withdrawn (2 880 000 – 2 808 000) 72 000 (1)

Adjusted with items that are presented separately in the statement of

cash flows or items which form part of other separate line items
Interest expense 1 215 000 (1)
Dividend income (750 000) (1)

Elimination of the effect of the accrual basis of accounting

Increase in inventories (21 728 000 – 17 720 000) (4 008 000) (1)
Increase in payables (11 520 000 – 9 247 000) 2 273 000 (1)
Increase in receivables (23 207 000 – 18 429 000) (4 778 000) (1)

Cash generated from operations 7 668 000

[14]
CALCULATIONS:
1 Equipment
Reconstruction of equipment
Balance bd 32 500 000 ½ “Scrapped” ✓ 2 880 000
Bank (payment of payable) 1 200 000
(1)
Payable: equipment 3 000 000
 Bank – expand 4 500 000 Balance cf (½) 38320 000
41 200 000 41 200 000
Balance bd 38 320 000

2 Accumulated depreciation – equipment

Reconstruction of accumulated depreciation – equipment
“Scrapped” 2 808 000 (1) Balance bd (½) 11 694 000
Balance cf 12 108 000 (½)  Depreciation 3 222 000
 14 916 000 14 916 000
Balance bd 12 108 000

QUESTION 3 (SOLUTION – 43 MARKS)

Note: 1. To earn the mark in respect of the opening and closing balances, both balances have to be correct. No ½ marks are
awarded. 2. Amounts must be indicated correctly between brackets or without brackets, otherwise no marks.

AC LTD
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20.7
Note R
Cash flow from operating activities
Cash receipts from customers (33 320 000½ + 56 500 000 – 36 585 000½) 53 235 000 (2)
Cash paid to suppliers and employees (41 134 000)
Cash generated from operations 30 12 101 000
Dividends received ((80 000 + 11 000 = 91 000) x R4) 364 000 (1)
Interest paid (1 914 000 + 480 000 + 75 000 – 75 000) (2 394 000) (2)
Income tax paid (250 000½ + 3 900 000 – 560 000½) (3 590 000) (2)
Dividends paid (5 000 000½ + 5 500 000 – 5 500 000½) (5 000 000) (2)
Net cash inflows from operating activities 1 481 000

Cash flow from investing activities

Purchase of property to expand (3 300 000 + 8 200 000 – 6 000 000) OR (5 500 000) (3)
Construction of plant to replace (2 895 000) (1)
Incurrence of temporary investment to expand (3 105 000) (1)
Purchase of plant to expand (5 050 000) (1)
Purchase of plant to replace (3 750 000 – 1 250 000) (2 500 000) (2)
Insurance claim proceeds iro plant destroyed in a fire 1 050 000 (1)
Proceeds on sale of plant 300 000 (1)
Purchase of trademarks to expand (1 800 000) (1)
Purchase of listed investment to expand (35 000 x 48) (1 680 000) (1)
Purchase of investment in subsidiary to expand (4 950 000 – 4 400 000) (550 000) (1)
Net cash outflow for investing activities (21 730 000)

Cash flow from financing activities

Proceeds from shares issued (50 000 000 – 40 000 000) 10 000 000 (1)
Proceeds from specific loan incurred 5 800 000 (1)
Repayment of mortgage bond (221 000) (1)
Net cash inflow from financing activities 15 579 000

Net decrease in cash and cash equivalents (4 670 000)

Bank overdraft beginning of period (1 902 000) (1)
Bank overdraft end of period (6 572 000)
 Max [25] of 26
OR

Purchase of land to expand (3 300 000) (1)

Purchase of buildings to expand (8 200 000 – 6 000 000) (2 200 000) (2)
AC LTD
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER
20.7
30 Cash generated from operations
Reconciliation of profit before tax with cash generated from operations:

R
Profit before tax (10 500 000 + 3 900 000) 14 400 000 (2)
Adjusted with non-cash items accounted for against profit before tax
Depreciation (1 040 000 + 3 407 000) 4 447 000 (2)
Impairment – plant 950 000 (1)
Amortisation – trademarks 525 000 (1)
Increase in allowance for doubtful debts 650 000 (1)
Profit on fair value adjustment of investment in listed shares (385 000) (2)
((70 000 x 53) – 3 500 000) + (35 000 x (53 – 48)) or T-account
Loss on plant destroyed in a fire 1 200 000 (1)

Adjusted with items that are presented separately in the statement of

cash flows or items which form part of other separate line items
Interest expense (1 914 000 + 480 000 + 75 000) 2 469 000 (3)
Dividend income (91 000 x 4) (364 000) (1)
Insurance compensation iro plant destroyed in a fire (1 050 000) (1)
Loss on plant sold (300 000 – 325 000) 25 000 (1)

Elimination of the effect of the accrual basis of accounting

Increase in inventories (32 489 000 – 24 240 000) (8 249 000) (1)
Increase in payables (19 040 000 – 18 092 000) 948 000 (1)
Increase in receivables (36 585 000 – 33 320 000) (3 265 000) (1)
Increase in office supplies on hand (1 250 000 – 1 050 000) (200 000) (1)

Cash generated from operations 12 101 000

Max [18] of 20

CALCULATIONS:
1 Investment in listed shares (Q Ltd)
Reconstruction of investment in listed shares
Balance bd 3 500 000 ½
Bank: purchases 1 680 000 
 Profit on FV adjustment 385 000 Balance cf (½) 5565 000
5 565 000 5 565 000
Balance bd 5 565 000
Investment property, other financial investments and intangible assets

ADDITIONAL QUESTION 48 (70 MARKS)

This question comprises two independent parts, namely Part A and Part B.
PART A (35 Marks)
BB (Pty) Ltd successfully conducts business in the manufacturing of solar panels, which are
sold directly to selected merchants. The company also has a number of investments in other
companies.
On 31 December 20.7 the following balances, amongst others, appeared in the financial
records of BB (Pty) Ltd:
Additional Dr Cr
information

R R

Investment in SS (Pty) Ltd – cost price 1 18 500

000

Investment in QQ Ltd – fair value (31 Dec 20.6) 2 12 500

000

Dividend income from QQ Ltd 1 500 000

Investment in TT (Pty) Ltd – cost price 3 4 500 000

Sales 91 500
000

Cost of sales 36 600

000

Distribution costs, administrative expenses and other 31 900

expenses 000

Interest expense 1 200 000

Provisional tax payments 6 250 000

Retained earnings (31 Dec 20.6) 76 200

000

Additional information
1 The investment in SS (Pty) Ltd represents a 100% interest in the issued share capital of
1 000 000 ordinary shares of SS (Pty) Ltd. SS (Pty) Ltd is also a very successful entity.
On 30 December 20.7, SS (Pty) Ltd declared a dividend of R8 per share. The dividend
income still has to be recognised in the records of BB (Pty) Ltd.
2 The investment in QQ Ltd (500 000 ordinary shares) was acquired a few years ago. The
issued ordinary shares (50 000 000) of QQ Ltd is listed on the JSE. The investment in
QQ Ltd is measured on each reporting date at the fair value thereof. On 31 December
20.7, the fair value of a QQ Ltd share was R32 and the effect thereof still has to be
appropriately recognised in the records of BB (Pty) Ltd.
3 The investment in TT (Pty) Ltd (75 000 ordinary shares) was also acquired a few years
ago. The issued number of ordinary shares of TT (Pty) Ltd is 750 000 shares. Since the
beginning of 20.7, the profitability of TT (Pty) Ltd is under pressure. Consequently, an
impairment loss of R1 000 000 in respect of the investment in TT (Pty) still has to be
recognised in the records of BB (Pty) Ltd.
4 The current income tax expense of R6 976 000 for 20.7 still has to be recognised in the
records of BB (Pty) Ltd.

ADDITIONAL QUESTION 52 (34 MARKS)

AC Ltd is a profitable, diversified company. The company’s current reporting date is 31
December 20.7.
On 31 December 20.7 the following balances, amongst others, appeared in the records of the
company:
Info Dr Cr
R R
Property, plant and equipment at carrying amount (31 Dec 20.7) 1 32 750 000
Investment property at fair value (31 Dec 20.6) 2 11 150 000
Trademarks at cost price 3 5 280 000
Accumulated amortisation – trademarks (31 Dec 20.6) 3 2 112 000
Investment in subsidiary S (Pty) Ltd at cost price 4 9 250 000
Investment in Q Ltd at fair value (31 Dec 20.6) 5 7 500 000

Gross profit 42 250 000

Rent income – investment property 990 000
Dividend income – listed investment 5 300 000
Distribution costs, administrative and other expenses 24 500 000
Interest expense 1 850 000

Additional information
1 AC Ltd decided to withdraw (scrap) a plant item on 1 December 20.7. It was furthermore
decided to dismantle the plant item during the first two months of 20.8 and to sell the
dismantled plant item for a limited amount as scrap. The cost price of the plant item is
R4 075 000 and on 1 December 20.7 the accumulated depreciation amounted to R3 260
000.
This plant item still has to be derecognised.
2 Investment property
 2.1 AC Ltd purchased this property during 20.5 for purposes of capital appreciation as
well as to earn rent income. The property is consequently classified as an
investment property. AC Ltd furthermore decided to account for the investment
property in accordance with the fair value model.
2.2 An independent, sworn valuer determined the following fair values on the dates
indicated below:
Date Fair value
31 Dec 20.6 R11 150 000
31 Dec 20.7 R11 900 000

2.3 The fair value adjustment as at 31 December 20.7 still has to be recognised.

3 Trademarks
3.1 Trademarks comprise two trademarks, of which the detail is as follows:
Trademarks
A B Total
R R R
Cost price 3 168 000 2 112 000 5 280 000
Accumulated amortisation – 31 Dec 20.6 (1 584 000) (528 000) (2 112 000)
Total estimated useful life 12 years 12 years

3.2 Trademarks are amortised on a straight line basis over the useful life thereof. No
residual values are accounted for. The amortisation for 20.7 still has to be
recognised.
3.3 On 31 December 20.7 AC Ltd decided to recognise an impairment of R480 000 in
respect of trademark A. The impairment loss still has to be recognised.
4 Investment in S (Pty) Ltd
4.1 During 20.4 AC Ltd purchased 400 000 shares (an 80% interest) of the 500 000
issued ordinary shares in S (Pty) Ltd for R9 250 000. On 15 December 20.7,
S (Pty) Ltd declared a dividend of 150 cents per ordinary shares, which is payable
on 31 January 20.8. AC Ltd still has to recognise the dividend as at 31 December
20.7.
4.2 AC Ltd decided to account for the investment in the subsidiary in accordance with
the cost price model.
5 Investment in Q Ltd
5.1 During 20.6 AC Ltd made a strategic, long term investment in Q Ltd (a listed
company) by purchasing 400 000 ordinary shares (a 5% interest) of Q Ltd’s issued
ordinary shares.
5.2 AC Ltd decided to account for this investment in accordance with the fair value
model. The market value of a Q Ltd share was R17.00 per share on 31 December
 20.7 and R18.75 on 31 December 20.6. The fair value adjustment as at 31
December 20.7 still has to be recognised.
Required:
a) Recognise the outstanding transactions and events in the accounting records (general
journal) of AC Ltd for the reporting period ended 31 December 20.7. (16)
Note:
Appropriately indicate next to each account in the journal one of the following
abbreviations between brackets: P/L, SCE, SFP
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Dates must be indicated correctly.
Calculations must be shown clearly directly under the relevant journal entry.
b) After accounting for the journals in (a) above, present ONLY the non-current assets in
the statement of financial position of AC Ltd as at 31 December 20.7. (8)
Note:
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or
directly underneath the wording of the relevant line item.
c) After accounting for the journals in (a) above, present the statement of profit or loss of
AC Ltd for the reporting period ended 31 December 20.7. (10)
Note:
Start with the line item “Gross profit” and end with the line item “Profit before tax”.
Amounts must be presented next to the correct line item and under the correct heading.
Show the calculations of all the line items between brackets, either directly after or
directly underneath the wording of the relevant line item.
Required:
a) Recognise the outstanding transactions in the financial records (general journal) of
BB (Pty) Ltd for the reporting period ended 31 December 20.7. (9)
Note:
Appropriately indicate next to each account in the journal one of the following
abbreviations between brackets: P/L, SCE, SFP.
Journal narrations and the effect of the transactions on the accounting equation
(A = L + E), are not required.
Dates must be indicated correctly.
b) After taking the journals in (a) above into account, present the balances in:
i) the statement of profit or loss of BB (Pty) Ltd for the reporting period ended
31 December 20.7; and (10)
ii) the statement of financial position of BB (Pty) Ltd as at 31 December 20.7. (10)
c) Disclose the accounting policy notes in respect of the respective investments in the
financial statements of BB (Pty) Ltd for the reporting period ended 31 December 20.7.
(6)