ANNEXURE I FORMATIVE ASSESSMENT 2 QUESTION 1 (100 marks) Hotdog Ltd (Hotdog) is a diverse food company soon to be listed on the JSE. Hotdog holds a share investment in Buns Ltd (Buns). The reporting dates of both companies in the group are 31 December. The following are extracts of the financial statements of the companies for the year ended 31 December 2021: Hotdog Ltd Buns Ltd Rand Rand Sales 609 200 120 000 Cost of sales (176 300) (30 000) Gross profit 432 900 90 000 Other income 500 1 000 Finance income 1 800 Other expenses (17 700) (7 400) Finance costs (3 600) Income tax expense (116 900) (20 000) Profit for the year 300 600 60 000 Other comprehensive income: Items that will not be reclassified to profit or loss Mark-to- market reserve (net of tax) 23 000 25 800 Other comprehensive income for the year, net of tax 23 000 25 800 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 323 600 85 800 The following represents the equity of Buns on various dates: 01/01/2018 01/01/2021 30/06/2021 31/12/2021 Carrying Fair value amount Rand Rand Rand Rand Share capital (100 000 shares) 400 000 400 000 400 000 400 000 Retained earnings 120 000 180 000 210 000 230 000 Revaluation surplus (land) 150 000 184 400 184 400 184 400 Mark-to-market reserve 172 000 180 600 197 800 206 400 842 000 945 000 992 200 1 020 800 99 HFAC333-1-Jan-Jun 2022-FA2-LVN-V2-30112021 ANNEXURE E FORMATIVE ASSESSMENT 2 Investment in Buns On 1 January 2018, Hotdog purchased a 40% interest in Buns' share capital for R350 000. Buns' assets and liabilities were valued at market value on that date. Since 1 January 2018, Hotdog has been exercising significant influence over Buns' financial and operating policy decisions. On 1 July 2018, Hotdog sold equipment to Buns at a profit of 10% on the carrying amount. The carrying amount on 1 July 2018 of the equipment in the records of Hotdog was R35 000. The remaining useful life of the equipment was set at five years on 1 July 2018. Buns sold this equipment on 31 March 2021 for R18 000. On 30 June 2021, Hotdog sold a 35% interest in Buns for R364 000 Hotdog classified the investment in Buns under IFRS 9 in its separate financial statements at "fair value through other comprehensive income' and recognised fair value adjustments in the mark-to-market reserve (other comprehensive income). Fair value adjustments are recognised annually. Details of the fair value of the investment are as follows: Cost on 01/01/2018 on Fair value Fair value Fair value on on 01/01/2021 | 30/06/2021 31/12/2021 R382 000 R416 000 N/A R52 000 R55 000 R350 000 Original interest 40% Remaining interest 5% Hotdog had already remeasured the investment in Buns to its fair value of R364 000 and accounted for the cash proceeds from the disposal of the interest in its separate financial statements. On 31 December 2021, Buns declared a dividend of R10 000 and made a provision for the dividends declared. The mark-to-market reserve in Buns relates to fair value gains on financial assets at fair value through other comprehensive income. It is the policy of Buns and the group to transfer these gains to retained earnings on the disposal of the financial asset ANNEXURE I FORMATIVE ASSESSMENT 2 Other information: Hotdog accounts for all investments in associates in accordance with the equity method in its consolidated financial statements, as none of the exceptions in AS 28.17 apply. Buns' profit was earned evenly throughout the year. Hotdog measures the investments in Buns at fair value through other comprehensive income. Assume a tax rate of 28% for all periods, and CGT is 66.6% thereof. Ignore Dividend tax REQUIRED: Prepare all the pro forma journal entries for the year ended 31 December 2021 to account for Hotdog Ltd's investment in Buns Ltd under the equity method. Round to the nearest R1) Please make sure to show and reference your workings and calculations for marks to be allocated accordingly. (100 marks) ) Competency Framework Reference: B1 REPORTING FUNDAMENTALS B1.1 Fundamental reporting concepts Identify users' needs and develop a reporting approach by selecting suitable reporting and regulatory framework(s) which satisfies most users' needs in general purpose a) reporting by: 0 Applying the fundamental theories related to reporting, (in) Applying the objective, usefulness and limitations of the available reporting frameworks, (ii) Applying the objective, nature and characteristics of regulatory frameworks and requirements b) Apply the qualitative characteristics and principles of useful information identify, define and evaluate appropriate reporting boundaries d) identify, define and evaluate the different elements in reporting frameworks e) Apply the recognition and de-recognition criteria to an element c) ANNEXURE I FORMATIVE ASSESSMENT 2 QUESTION 1 (100 marks) Hotdog Ltd (Hotdog) is a diverse food company soon to be listed on the JSE. Hotdog holds a share investment in Buns Ltd (Buns). The reporting dates of both companies in the group are 31 December. The following are extracts of the financial statements of the companies for the year ended 31 December 2021: Hotdog Ltd Buns Ltd Rand Rand Sales 609 200 120 000 Cost of sales (176 300) (30 000) Gross profit 432 900 90 000 Other income 500 1 000 Finance income 1 800 Other expenses (17 700) (7 400) Finance costs (3 600) Income tax expense (116 900) (20 000) Profit for the year 300 600 60 000 Other comprehensive income: Items that will not be reclassified to profit or loss Mark-to- market reserve (net of tax) 23 000 25 800 Other comprehensive income for the year, net of tax 23 000 25 800 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 323 600 85 800 The following represents the equity of Buns on various dates: 01/01/2018 01/01/2021 30/06/2021 31/12/2021 Carrying Fair value amount Rand Rand Rand Rand Share capital (100 000 shares) 400 000 400 000 400 000 400 000 Retained earnings 120 000 180 000 210 000 230 000 Revaluation surplus (land) 150 000 184 400 184 400 184 400 Mark-to-market reserve 172 000 180 600 197 800 206 400 842 000 945 000 992 200 1 020 800 99 HFAC333-1-Jan-Jun 2022-FA2-LVN-V2-30112021 ANNEXURE E FORMATIVE ASSESSMENT 2 Investment in Buns On 1 January 2018, Hotdog purchased a 40% interest in Buns' share capital for R350 000. Buns' assets and liabilities were valued at market value on that date. Since 1 January 2018, Hotdog has been exercising significant influence over Buns' financial and operating policy decisions. On 1 July 2018, Hotdog sold equipment to Buns at a profit of 10% on the carrying amount. The carrying amount on 1 July 2018 of the equipment in the records of Hotdog was R35 000. The remaining useful life of the equipment was set at five years on 1 July 2018. Buns sold this equipment on 31 March 2021 for R18 000. On 30 June 2021, Hotdog sold a 35% interest in Buns for R364 000 Hotdog classified the investment in Buns under IFRS 9 in its separate financial statements at "fair value through other comprehensive income' and recognised fair value adjustments in the mark-to-market reserve (other comprehensive income). Fair value adjustments are recognised annually. Details of the fair value of the investment are as follows: Cost on 01/01/2018 on Fair value Fair value Fair value on on 01/01/2021 | 30/06/2021 31/12/2021 R382 000 R416 000 N/A R52 000 R55 000 R350 000 Original interest 40% Remaining interest 5% Hotdog had already remeasured the investment in Buns to its fair value of R364 000 and accounted for the cash proceeds from the disposal of the interest in its separate financial statements. On 31 December 2021, Buns declared a dividend of R10 000 and made a provision for the dividends declared. The mark-to-market reserve in Buns relates to fair value gains on financial assets at fair value through other comprehensive income. It is the policy of Buns and the group to transfer these gains to retained earnings on the disposal of the financial asset ANNEXURE I FORMATIVE ASSESSMENT 2 Other information: Hotdog accounts for all investments in associates in accordance with the equity method in its consolidated financial statements, as none of the exceptions in AS 28.17 apply. Buns' profit was earned evenly throughout the year. Hotdog measures the investments in Buns at fair value through other comprehensive income. Assume a tax rate of 28% for all periods, and CGT is 66.6% thereof. Ignore Dividend tax REQUIRED: Prepare all the pro forma journal entries for the year ended 31 December 2021 to account for Hotdog Ltd's investment in Buns Ltd under the equity method. Round to the nearest R1) Please make sure to show and reference your workings and calculations for marks to be allocated accordingly. (100 marks) ) Competency Framework Reference: B1 REPORTING FUNDAMENTALS B1.1 Fundamental reporting concepts Identify users' needs and develop a reporting approach by selecting suitable reporting and regulatory framework(s) which satisfies most users' needs in general purpose a) reporting by: 0 Applying the fundamental theories related to reporting, (in) Applying the objective, usefulness and limitations of the available reporting frameworks, (ii) Applying the objective, nature and characteristics of regulatory frameworks and requirements b) Apply the qualitative characteristics and principles of useful information identify, define and evaluate appropriate reporting boundaries d) identify, define and evaluate the different elements in reporting frameworks e) Apply the recognition and de-recognition criteria to an element c)