ABC Ltd is a glass manufacturing company operating in Johannesburg. The management of ABC Ltd has identified external acquisition as an area of expansion. As a result, ABC Ltd purchased a 60% interest in CTC Ltd on 1 January 20.11. On this date ABC Ltd obtained control over CTC Ltd when the share capital and retained earnings of CTC Ltd amounted to R800 000 and R1 050 000 respectively. All the companies in the group have a 31 December year end. The following matters were identified to be considered in calculating the identifiable assets and liabilities of CTC Ltd at fair value at the acquisition date: 1. The fair value of the non-controlling interests was R805 000 on 1 January 20.11. 2. Machinery was valued at R300 000 more than the carrying amount. The remaining useful life from the date of acquisition is four years. CTC Ltd continued to account for machinery in accordance with the cost model as per IAS 16. 3. Land with a cost price of R300 000 had a fair value of R400 000 on 1 January 20.11. The value of the land increased to R450 000 on 31 December 20.11. It is the policy of CTC Ltd to account for land in accordance with the cost model as per IAS 40 Investment Property. 4. CTC Ltd disclosed a contingent liability of R450 000 in their financial statements on 1 January 20.11 relating to a court case involving a patent right not meeting industry standards. The claim represents a present obligation but now the attorneys of CTC Ltd are of the opinion that it is unlikely to lead to an outflow of economic benefits due to a lack of evidence to support the claim. The R450 000 is the fair value of the claim considering all possible outcomes on 1 January 20.11. As part of the purchase agreement by ABC Ltd, the shareholders have guaranteed to reimburse CTC Ltd 40% of the claim, should it be successful. On 31 December 20.11 the court case has progressed to such an extent that it is virtually certain that CTC Ltd will have to pay R550 000. CTC Ltd recognized a provision of R550 000 in its financial statements on 31 December 20.11. The related transaction has been recorded correctly in CTC Ltd.s financial statements. The claim will not be deductible for taxation purposes should it succeed. 5. Details of the consideration transferred to the shareholders of CTC Ltd are as follows: Cash consideration of R620 000 was paid on 1 January 20.11 into the lawyers trust account. ABC Ltd will make a cash payment of R225 060 on 31 December 20.12. The South African Revenue Services agrees with the accounting treatment and will allow the tax deduction for interest expense.

ABC Ltd issued 1 000 ordinary shares to the shareholders of CTC Ltd. The fair value of the shares was R460 each on 1 January 20.11. On registration date of the shares on 22 January 20.11, the shares were valued at R465 each. The total number of shares in issue by ABC Ltd was 1 000 000 on 1 January 20.11. ABC Ltd is required to make an additional cash payment of R150 000 on 30 June 20.13 if the share price of CTC Ltd increases by more than 20%. The fair value of the contingent consideration was estimated to be R60 000 on 1 January 20.11 and R85 000 on 31 December 20.11. The share price of CTC Ltd had increased by 32% by 31 December 20.11. The changes in fair values on the contingent consideration is as a result of after acquisition date events. Included in the cash consideration paid is acquisition related costs in respect of valuations and lawyers fees of R120 000 which was paid by ABC Ltd. 6. On 1 January 20.10 ABC Ltd granted CTC Ltd the right to use its trademark for a period of five years with the option to renew it for four years. CTC Ltd pays an annual fee of R50 458 for this right (a market-related fee for similar contracts is R35 000 per annum). It is expected that CTC Ltd will generate annual benefits of R125 000 using the trademark, while incurring expenses of R34 542 per annum, excluding the annual fee. Neither ABC Ltd nor CTC Ltd recognized an asset or liability in respect of the right granted. The agreement may be terminated at a penalty of R70 000. 7. The abridged statement of profit or loss and other comprehensive income of ABC Ltd and CTC Ltd for the year ended 31 December 20.11 is as follows (before taking the above information into account):

Statement of profit or loss and other comprehensive income Profit for the year after tax 2 600 000 CTC Ltd 601 876 ABC Ltd Dividends paid on 31 December 20.11 150 000 CTC Ltd

Additional information It is the groups policy to measure investment property using the fair value model as per IAS 40 Investment Property. Intangible assets are accounted for using the cost model as per IAS 38 Intangible Assets. ABC Ltd elected to measure the non-controlling interests in CTC Ltd at fair value. Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a). The company tax rate is 28% and the capital gains tax inclusion rate is 80%. Ignore Value Added Tax (VAT) and Dividend Tax. A market-related interest rate (before tax) is 10%, compounded annually. None of the companies are considered a share trader for income tax purposes or an investment entity as defined in IFRS 10 Consolidated Financial Statements.

(a) Prepare the journal entries in the separate records of ABC Ltd for the year ended 31 December 20.11, relating to the information in the question. Journal entries relating to deferred taxation are also required. 32 (b) Prepare the pro forma journal entries for the ABC Ltd Group for the year ended 31 December 20.11. Journal entries relating to deferred taxation are also required. Communication skills: Presentation and layout Please note: Round off all amounts to the nearest Rand. Your answer must comply with International Financial Reporting Standards (IFRS).