FACULTY OF COMMERCE, MANAGEMENT AND LAW QUESTION 1 [40 MARKS] You were recently appointed as the group financial accountant of the Strawberry Ltd group of companies. The accountants of the various companies in the group finalised the trial balances of the individual companies and handed them to you for preparation of the consolidated financial statements for publication. The financial year-end of the group is 31 March 2021. The summarised trial balances are as follows: CREDITS Strawberry Grape Peach Mango Ltd Ltd Ltd Ltd N$'000 NS'000 NS'000 N$'000 2 850 710 1510 500 840 2 640 1 200 150 2 250 1 000 250 1 450 Ordinary R1 shares Retained earnings - 1 April 2020 Sales Investment income Creditors Deferred taxation 760 678 1 200 1 583 250 75 564 7072 95 5 275 30 2 980 5 258 1 475 1 025 602 800 1 050 980 1 932 1 645 1 200 400 DEBITS Land and buildings - at carrying amount Machinery and equipment - at carrying amount Investment in Peach Ltd - cost Investment in Grape Ltd - cost Investment in Mango Ltd - cost Cost of sales Operating expenses Finance costs Income tax expense Ordinary dividends declared Inventories Debtors Bank 950 1 117 580 20 400 8 165 570 410 57 128 125 200 245 160 7072 1 400 160 80 300 200 775 68 17 5 275 475 60 88 238 20 400 85 55 5 258 2 980 Page 13 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW ADDITIONAL INFORMATION 1. Grape Ltd 1.1 Strawberry Ltd acquired a 40 % interest in Grape Limited on 1 April 2012 for N$400 000. The retained earnings of Grape Ltd amounted to N$300 000 at that date. All assets and liabilities, were regarded as being fairly valued. 1.2 Strawberry Ltd sold inventories from 1 April 2019 on a regular basis to Grape Ltd at a profit of 25% on cost. Total sales from Strawberry Ltd to Grape Ltd amounted to N$500 000 for the current financial year. Inventories to the value of N$100 000 which was sold by Strawberry Ltd to Grape Ltd was still on hand at 31 March 2020 and N$200 000 at 31 March 2021. 1.3 On 1 April 2019 machinery with a carrying value of N$125 000 was sold to Strawberry Ltd for N$150 000. The machine was still included in the property, plant and equipment of Strawberry Ltd at 31 March 2021. Depreciation is provided at 20% per annum on the cost price of machinery 2. Peach Ltd 2.1 Strawberry Ltd acquired 960 000 ordinary shares in Peach Ltd for N$1 200 000 a number of years ago when Peach Ltd's retained earnings amounted to N$120 000. On this date Strawberry Ltd valued vacant land of Peach Ltd N$50 000 higher than the book value at that stage. Peach did not recognise the revaluation in their records. All other assets and liabilities were regarded as being fairly valued. 2.2 Peach Ltd sells inventories to Strawberry Ltd at cost price plus 25%. Included in inventories of Strawberry Ltd are the following inventories purchased from Peach Ltd: 1 April 2020 N$ 40 000 31 March 2021 N$ 80 000 The inventories on 1 April 2020 were sold fully to third parties by 31 March 2021. Total sales of inventories by Peach Ltd to Strawberry Ltd amounted to N$500 000 during the 2021 financial year. 3. Mango Ltd 3.1 Peach Ltd acquired 600 000 ordinary shares in Mango Ltd for N$950 000 on 1 October 2020. All assets and liabilities were regarded as being fairly valued. 3.2 The monthly sales and associated cost of sales of Mango Ltd increased with 25% from 1 August 2020. The operating expenses of Mango Ltd accrued evenly throughout the year. 4. General Accounting policies 4.1.1 Investments are accounted for at cost in the separate financial statements of Strawberry Ltd Group. 4.1.2 It is the accounting policy of the Strawberry Ltd group to measure the non-controlling interest at its proportionate share of the acquiree's identifiable net assets. 4.1 Page 14 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW 4.1.3 Investments in associated companies are accounted for in accordance with the equity method. 4.2 Taxation 4.2.1 Assume that the statutory tax rate has remained unchanged at 28% for a number of years. 4.3 Dividends The dividends of all companies in the group were approved and authorised at directors meetings held on 15 March 2021. The dividends will be paid on 30 April 2021. The dividends were correctly accounted for by all companies in the group. Dividends payable and receivable are included in creditors and debtors respectively in the trial balances of the individual companies. Marks 35 REQUIRED: (a) Prepare all the pro-forma consolidation journal entries in the books of the group for the reporting period ended 31 March 2021. Journal narrations are not required. (b) Indicate at what amounts the following line items will be included in the consolidated financial statements of the Strawberry Ltd Group as at 31 March 2021: i. Investment in associate ii. Share of profit of associate 5 TOTAL MARKS 40 QUESTION 2 [30 MARKS] Vambo Limited is a manufacturing company listed on the Namibia Stock Exchange. The carrying amounts of tangible assets of the company were as follows: 31 December 31 December 2021 2020 N$ N$ Land (Note 1) 4 500 000 4 000 000 Office buildings (Note 2) 1 800 000 1 472 000 Industrial buildings (Note 3) 3 520 000 3 840 000 Machinery (Note 4) 1 950 000 2 900 000 Additional information: 1. Land is vacant and is classified as investment property and accounted for on the fair value model in accordance with IAS 40 Investment Property. The land was acquired on 1 June 2020 at N$3 500 000. The fair value adjustments were recorded at the respective year-ends. Page 15 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW 2. Office buildings are carried on the revaluation model. It was revalued for the first time on 31 December 2021 to its fair value of N$1 800 000. The office buildings were acquired on 1 July 2020 at N$1 500 000 and are depreciated on the straight-line basis over 25 years to the residual value of N$100 000. In 2020 management expected to use the asset up to the end of its economic life. In 2021 the estimated useful life changed to 5 years (applied prospectively as from 2 January 2021) and the residual value to N$400 000 (change in estimate also applied prospectively as from 2 January 2021). The company uses the re-allocation method to account for changes in estimates. However, in December 2021 management changed their intention and decided to sell the building. No capital allowances are available for office buildings. Ignore IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. 3. Industrial buildings are measured using the cost model and are depreciated on the straight-line basis over 15 years. An allowance of 5% applies to the industrial buildings in terms of the Income Tax Act. These buildings were bought on 1 January 2018 for an amount of N$4 800 000. The residual value was and is estimated to be N$nil. No further buildings have been acquired since then. 4. The machinery is carried at the cost model. The Wear and tear allowance of 33 1/3% applies to plant and machinery in terms of the Income Tax Act. Plant and machinery are depreciated on the straight-line basis at 20% per year to N$nil residual value. The tax base of the remaining machinery amounted to N$950 000 at 31 December 2021. The tax base was N$1 900 000 on 31 December 2020. No additional machinery was acquired in 2021. 5. Other Statement of financial position items: 31 December 2021 31 December 2020 Prepaid insurance N$32 000 N$23 000 6. The accounting profit before tax, which included dividends received of N$45 000, amounted to N$3 175 000 for the year ended 31 December 2021. All above mentioned depreciation, amortisation and movements in statement of financial position items were taken in account in arriving at the accounting profit. 7. The deferred taxation asset balance as at 31 December 2020 was N$328 950 due to an assessed loss of N$2 million that existed at the time. Vambo expected to make sufficient taxable profits in 2021 and onwards to fully utilise assessed losses and other deductible temporary differences. 8. Assume a normal tax rate of 28% for the 2021 year (2020 year: 27%) and that 0% (2021) and (2020 year: 0%) of capital gains are taxable. Marks REQUIRED: Prepare the INCOME TAX EXPENSE note in the financial statements of Vambo Ltd for the year ended 31 December 2021 in compliance with International Financial Reporting Standards. Presentation and disclosure of comparative amounts are not required. Page 16 of 27 30 FACULTY OF COMMERCE, MANAGEMENT AND LAW Calculation of deferred tax amounts must be shown on the statement of financial position method. TOTAL MARKS 30 QUESTION 3 (30 marks) Transaction 1 The 100 employees of NAM JEWELS LIMITED are each entitled to 5 working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year's entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 2019 the average unused entitlement is 2 days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leave in 2020 and that the remaining 8 will take an average an of six and a half days each. In December 2020 to restructure its workforce (which was immediately communicated) in such a way that all employees of the age of 55, but below the age of 60 at the reporting date, could retire immediately should they choose to do so. Employees of 60 years and older, up to 65 years at the statement of financial position date, will be forced to retire immediately, but will receive the post-employment benefits they would have been entitled to had they retired at the age of 65. A directive on the matter was obtained from NAMRA beforehand, and amounts will therefore be allowed for tax purposes. Tax rate is 32%, payment of any benefits associated with early or voluntary retirement will take place one week after statement of financial position date (end of reporting period). The information below is applicable: Employees between 55 years and 59 years and 364 days: Total number of employees in age bracket 40 Average payment per employee to encourage retirement N$20 000 Percentage of employees expected to take advantage of the offer 60% Employees with ages between 60 and 64 years and 364 days: Total number of employees 20 Additional contribution to defined contribution fund made on 7 January 2021 To ensure promised post-employment benefits as at 65 years of age N$600 000 Transaction 2 Westlife Ltd mainly operates in Windhoek. As part of its expansion strategy both locally and internationally, the following investments have been made: Page 17 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW Investment in Waverly Ltd (Waverly) The management of Westlife has approached Jamie Ltd (Jamie) to form a partnership to manufacture sporting goods from 1 January 2021. A separate entity Waverly, has been formed. Each entity will have a 50% shareholding in Waverly and Waverly is a separate legal entity. The companies have signed an agreement that outlines the activities of the arrangement and establishes a joint operating committee. A representative from each company sits on the joint operating committee and decisions require unanimous consent. Westlife and Jamie will each be responsible for their own area of expertise. The companies carry out different parts of the manufacturing process, each using its own resources and expertise in order to manufacture and distribute the goods jointly. The two companies share the revenues from sales and jointly incur expenses. The revenues and common costs are shared as contractually agreed in the agreement. A separate bank account is established through which revenue will be received and shared costs will be paid. The bank account is in the name of both companies. Each company incurs their own separate costs such as labor costs, manufacturing costs, supplies, inventory of unused parts and work in progress and recognizes their separately incurred costs fully. Westlife and Jamie have committed to purchase Waverly's entire product line. The products must therefore to the quality control of both Westlife and Jamie. Any cash shortages that the partnership may incur will be financed by both parties in accordance with their shareholding. Marks Required: In respect of transaction 1 3 Calculate the sick leave related liability as at 31 December 2019 Prepare journal entries for the year 31 December 2020 and 7 January 2021 12 15 15 14 15 Provide a memorandum to the management of Westlife, dealing with the following questions: i. Is the agreement with Jamie a joint arrangement? ii. If yes, what is the classification thereon and if not, what is it? 1 Page 18 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW QUESTION 1 [40 MARKS] You were recently appointed as the group financial accountant of the Strawberry Ltd group of companies. The accountants of the various companies in the group finalised the trial balances of the individual companies and handed them to you for preparation of the consolidated financial statements for publication. The financial year-end of the group is 31 March 2021. The summarised trial balances are as follows: CREDITS Strawberry Grape Peach Mango Ltd Ltd Ltd Ltd N$'000 NS'000 NS'000 N$'000 2 850 710 1510 500 840 2 640 1 200 150 2 250 1 000 250 1 450 Ordinary R1 shares Retained earnings - 1 April 2020 Sales Investment income Creditors Deferred taxation 760 678 1 200 1 583 250 75 564 7072 95 5 275 30 2 980 5 258 1 475 1 025 602 800 1 050 980 1 932 1 645 1 200 400 DEBITS Land and buildings - at carrying amount Machinery and equipment - at carrying amount Investment in Peach Ltd - cost Investment in Grape Ltd - cost Investment in Mango Ltd - cost Cost of sales Operating expenses Finance costs Income tax expense Ordinary dividends declared Inventories Debtors Bank 950 1 117 580 20 400 8 165 570 410 57 128 125 200 245 160 7072 1 400 160 80 300 200 775 68 17 5 275 475 60 88 238 20 400 85 55 5 258 2 980 Page 13 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW ADDITIONAL INFORMATION 1. Grape Ltd 1.1 Strawberry Ltd acquired a 40 % interest in Grape Limited on 1 April 2012 for N$400 000. The retained earnings of Grape Ltd amounted to N$300 000 at that date. All assets and liabilities, were regarded as being fairly valued. 1.2 Strawberry Ltd sold inventories from 1 April 2019 on a regular basis to Grape Ltd at a profit of 25% on cost. Total sales from Strawberry Ltd to Grape Ltd amounted to N$500 000 for the current financial year. Inventories to the value of N$100 000 which was sold by Strawberry Ltd to Grape Ltd was still on hand at 31 March 2020 and N$200 000 at 31 March 2021. 1.3 On 1 April 2019 machinery with a carrying value of N$125 000 was sold to Strawberry Ltd for N$150 000. The machine was still included in the property, plant and equipment of Strawberry Ltd at 31 March 2021. Depreciation is provided at 20% per annum on the cost price of machinery 2. Peach Ltd 2.1 Strawberry Ltd acquired 960 000 ordinary shares in Peach Ltd for N$1 200 000 a number of years ago when Peach Ltd's retained earnings amounted to N$120 000. On this date Strawberry Ltd valued vacant land of Peach Ltd N$50 000 higher than the book value at that stage. Peach did not recognise the revaluation in their records. All other assets and liabilities were regarded as being fairly valued. 2.2 Peach Ltd sells inventories to Strawberry Ltd at cost price plus 25%. Included in inventories of Strawberry Ltd are the following inventories purchased from Peach Ltd: 1 April 2020 N$ 40 000 31 March 2021 N$ 80 000 The inventories on 1 April 2020 were sold fully to third parties by 31 March 2021. Total sales of inventories by Peach Ltd to Strawberry Ltd amounted to N$500 000 during the 2021 financial year. 3. Mango Ltd 3.1 Peach Ltd acquired 600 000 ordinary shares in Mango Ltd for N$950 000 on 1 October 2020. All assets and liabilities were regarded as being fairly valued. 3.2 The monthly sales and associated cost of sales of Mango Ltd increased with 25% from 1 August 2020. The operating expenses of Mango Ltd accrued evenly throughout the year. 4. General Accounting policies 4.1.1 Investments are accounted for at cost in the separate financial statements of Strawberry Ltd Group. 4.1.2 It is the accounting policy of the Strawberry Ltd group to measure the non-controlling interest at its proportionate share of the acquiree's identifiable net assets. 4.1 Page 14 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW 4.1.3 Investments in associated companies are accounted for in accordance with the equity method. 4.2 Taxation 4.2.1 Assume that the statutory tax rate has remained unchanged at 28% for a number of years. 4.3 Dividends The dividends of all companies in the group were approved and authorised at directors meetings held on 15 March 2021. The dividends will be paid on 30 April 2021. The dividends were correctly accounted for by all companies in the group. Dividends payable and receivable are included in creditors and debtors respectively in the trial balances of the individual companies. Marks 35 REQUIRED: (a) Prepare all the pro-forma consolidation journal entries in the books of the group for the reporting period ended 31 March 2021. Journal narrations are not required. (b) Indicate at what amounts the following line items will be included in the consolidated financial statements of the Strawberry Ltd Group as at 31 March 2021: i. Investment in associate ii. Share of profit of associate 5 TOTAL MARKS 40 QUESTION 2 [30 MARKS] Vambo Limited is a manufacturing company listed on the Namibia Stock Exchange. The carrying amounts of tangible assets of the company were as follows: 31 December 31 December 2021 2020 N$ N$ Land (Note 1) 4 500 000 4 000 000 Office buildings (Note 2) 1 800 000 1 472 000 Industrial buildings (Note 3) 3 520 000 3 840 000 Machinery (Note 4) 1 950 000 2 900 000 Additional information: 1. Land is vacant and is classified as investment property and accounted for on the fair value model in accordance with IAS 40 Investment Property. The land was acquired on 1 June 2020 at N$3 500 000. The fair value adjustments were recorded at the respective year-ends. Page 15 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW 2. Office buildings are carried on the revaluation model. It was revalued for the first time on 31 December 2021 to its fair value of N$1 800 000. The office buildings were acquired on 1 July 2020 at N$1 500 000 and are depreciated on the straight-line basis over 25 years to the residual value of N$100 000. In 2020 management expected to use the asset up to the end of its economic life. In 2021 the estimated useful life changed to 5 years (applied prospectively as from 2 January 2021) and the residual value to N$400 000 (change in estimate also applied prospectively as from 2 January 2021). The company uses the re-allocation method to account for changes in estimates. However, in December 2021 management changed their intention and decided to sell the building. No capital allowances are available for office buildings. Ignore IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. 3. Industrial buildings are measured using the cost model and are depreciated on the straight-line basis over 15 years. An allowance of 5% applies to the industrial buildings in terms of the Income Tax Act. These buildings were bought on 1 January 2018 for an amount of N$4 800 000. The residual value was and is estimated to be N$nil. No further buildings have been acquired since then. 4. The machinery is carried at the cost model. The Wear and tear allowance of 33 1/3% applies to plant and machinery in terms of the Income Tax Act. Plant and machinery are depreciated on the straight-line basis at 20% per year to N$nil residual value. The tax base of the remaining machinery amounted to N$950 000 at 31 December 2021. The tax base was N$1 900 000 on 31 December 2020. No additional machinery was acquired in 2021. 5. Other Statement of financial position items: 31 December 2021 31 December 2020 Prepaid insurance N$32 000 N$23 000 6. The accounting profit before tax, which included dividends received of N$45 000, amounted to N$3 175 000 for the year ended 31 December 2021. All above mentioned depreciation, amortisation and movements in statement of financial position items were taken in account in arriving at the accounting profit. 7. The deferred taxation asset balance as at 31 December 2020 was N$328 950 due to an assessed loss of N$2 million that existed at the time. Vambo expected to make sufficient taxable profits in 2021 and onwards to fully utilise assessed losses and other deductible temporary differences. 8. Assume a normal tax rate of 28% for the 2021 year (2020 year: 27%) and that 0% (2021) and (2020 year: 0%) of capital gains are taxable. Marks REQUIRED: Prepare the INCOME TAX EXPENSE note in the financial statements of Vambo Ltd for the year ended 31 December 2021 in compliance with International Financial Reporting Standards. Presentation and disclosure of comparative amounts are not required. Page 16 of 27 30 FACULTY OF COMMERCE, MANAGEMENT AND LAW Calculation of deferred tax amounts must be shown on the statement of financial position method. TOTAL MARKS 30 QUESTION 3 (30 marks) Transaction 1 The 100 employees of NAM JEWELS LIMITED are each entitled to 5 working days of paid sick leave for each year. Unused sick leave may be carried forward for one calendar year. Sick leave is taken first out of the current year's entitlement and then out of any balance brought forward from the previous year (a LIFO basis). At 31 December 2019 the average unused entitlement is 2 days per employee. The entity expects, on the basis of experience that is expected to continue, that 92 employees will take no more than five days of paid sick leave in 2020 and that the remaining 8 will take an average an of six and a half days each. In December 2020 to restructure its workforce (which was immediately communicated) in such a way that all employees of the age of 55, but below the age of 60 at the reporting date, could retire immediately should they choose to do so. Employees of 60 years and older, up to 65 years at the statement of financial position date, will be forced to retire immediately, but will receive the post-employment benefits they would have been entitled to had they retired at the age of 65. A directive on the matter was obtained from NAMRA beforehand, and amounts will therefore be allowed for tax purposes. Tax rate is 32%, payment of any benefits associated with early or voluntary retirement will take place one week after statement of financial position date (end of reporting period). The information below is applicable: Employees between 55 years and 59 years and 364 days: Total number of employees in age bracket 40 Average payment per employee to encourage retirement N$20 000 Percentage of employees expected to take advantage of the offer 60% Employees with ages between 60 and 64 years and 364 days: Total number of employees 20 Additional contribution to defined contribution fund made on 7 January 2021 To ensure promised post-employment benefits as at 65 years of age N$600 000 Transaction 2 Westlife Ltd mainly operates in Windhoek. As part of its expansion strategy both locally and internationally, the following investments have been made: Page 17 of 27 FACULTY OF COMMERCE, MANAGEMENT AND LAW Investment in Waverly Ltd (Waverly) The management of Westlife has approached Jamie Ltd (Jamie) to form a partnership to manufacture sporting goods from 1 January 2021. A separate entity Waverly, has been formed. Each entity will have a 50% shareholding in Waverly and Waverly is a separate legal entity. The companies have signed an agreement that outlines the activities of the arrangement and establishes a joint operating committee. A representative from each company sits on the joint operating committee and decisions require unanimous consent. Westlife and Jamie will each be responsible for their own area of expertise. The companies carry out different parts of the manufacturing process, each using its own resources and expertise in order to manufacture and distribute the goods jointly. The two companies share the revenues from sales and jointly incur expenses. The revenues and common costs are shared as contractually agreed in the agreement. A separate bank account is established through which revenue will be received and shared costs will be paid. The bank account is in the name of both companies. Each company incurs their own separate costs such as labor costs, manufacturing costs, supplies, inventory of unused parts and work in progress and recognizes their separately incurred costs fully. Westlife and Jamie have committed to purchase Waverly's entire product line. The products must therefore to the quality control of both Westlife and Jamie. Any cash shortages that the partnership may incur will be financed by both parties in accordance with their shareholding. Marks Required: In respect of transaction 1 3 Calculate the sick leave related liability as at 31 December 2019 Prepare journal entries for the year 31 December 2020 and 7 January 2021 12 15 15 14 15 Provide a memorandum to the management of Westlife, dealing with the following questions: i. Is the agreement with Jamie a joint arrangement? ii. If yes, what is the classification thereon and if not, what is it? 1 Page 18 of 27