Fashion Forward $($Pty$)$ Ltd is a well$-$known clothing manufacturer with a $31$ December

financial year$-$end. The company's current focus is the manufacturing of teenage and

young adult clothing. The company's head office and manufacturing plant are situated

in Parow Industria, Cape Town. The company has a distribution warehouse in each of

the $9$ provinces, from where stock is distributed to its various retail clients.

The following relate to the $31$ December $2022$ financial year of Fashion Forward $($Pty$)$

Ltd:

Lease agreement

Fashion Forward $($Pty$)$ Ltd has a machine that they no longer use at their

manufacturing plant and has therefore decided to lease the machine to a third party.

A lease agreement was entered into with Pink Panther $($Pty$)$ Ltd for the period $1$ April

$2022$ until $31$ March $2027.$ The instalments amount to R$200000$ each and are payable

annually in arrears.

The machine had a fair value and carrying amount of R$800000$ and had an estimated

useful life of $6$ years on $1$ April $2022.$ The interest rate implicit in the agreement is

$7,93082\%.$

The lease is correctly classified as a finance lease in the records of Fashion Forward

$($Pty$)$ Ltd$.$

Summer dress production line

Fashion Forward $($Pty$)$ Ltd$\text{'}$s summer dress production line consists of two divisions,

namely the Cutting Division and Sewing Division.

The Cutting Division is responsible for cutting the panels for the summer dresses from

the required fabric and has the capacity to cut $12000$ panels per month.From the Cutting Division, the panels are transferred to the Sewing Division. The

Sewing Division is responsible for sewing together two panels per summer dress to

have one completed dress. The Sewing division has the capacity to manufacture $5000$

completed summer dresses per month.

The finished summer dresses are sold for R$600$ each and the following variable costs

apply:

$*$No selling costs per panel are incurred if the panel is transferred to the Sewing

Division.

There is$,$ however, also an external market demand for the panels only. The consum$-$

ers in the market are willing to purchase a panel for R$205.$ It is estimated that $3000$

panels can be sold each month to external consumers in the market.

Purchase of Tiny Tots $($Pty$)$ Ltd

Fashion Forward $($Pty$)$ Ltd is looking to expand its products to include baby and toddler

clothing. Management, therefore, made the proposal to acquire an established entity

that specialises in baby and toddler clothing. Tiny Tots $($Pty$)$ Ltd was identified by

Fashion Forward $($Pty$)$ Ltd as the entity to invest in$.$

In negotiating the purchase price of the Tiny Tots $($Pty$)$ Ltd shares, the following was

determined:

The combined value of the merged entities amounts to R$8500000.$

The Free Cash Flow valuation of Fashion Forward $($Pty$)$ Ltd indicated a total value

of R$6300000.$

Fashion Forward $($Pty$)$ Ltd has $200000$ issued shares with a fair value of R$33$ each.

Tiny Tots $($Pty$)$ Ltd has $150000$ issued shares with a fair value of R$11$ each.Investment in Tiny Tots $($Pty$)$ Ltd

Assume that, after the purchase price per share was determined, Fashion Forward

$($Pty$)$ Ltd purchased $100000$ shares in Tiny Tots $($Pty$)$ Ltd$.$ Tiny Tots $($Pty$)$ Ltd has an

issued share capital of $150000$ shares.

Fashion Forward $($Pty$)$ Ltd will be actively involved in Tiny Tots $($Pty$)$ Ltd$\text{'}$s daily

activities and will have the right to appoint or remove members on the board of Tiny

Tots $($Pty$)$ Ltd$.$

Thermal wear prototype

Fashion Forward $($Pty$)$ Ltd is busy developing a new thermal wear prototype to test for

effectiveness before introducing it into the market. The prototype was developed

during the $2022$ financial year at a total cost of R$55000.$ Fashion Forward $($Pty$)$ Ltd

expects to finalise the prototype early in the $2023$ financial year.

Fashion Forward $($Pty$)$ Ltd also incurred advertising costs to the value of R$20000$

during the $2022$ financial year. The purpose of the advertising was to introduce the

new thermal wear that Fashion Forward $($Pty$)$ Ltd is developing and test the public's

response to it$\mathrm{.}1\mathrm{.}1)$ With reference to the Lease agreement, prepare the journal entries required

to account for the lease agreement in the records of Fashion Forward $($Pty$)$ Ltd

for the financial year ending $31$ December $2022.$ Include the applicable dates

in your answer and round all answers to the nearest Rand.

$(9$ marks$)$

$1\mathrm{.}2)$ With reference to the Summer dress production line, advise Fashion Forward

$($Pty$)$ Ltd on how many panels should be transferred from the Cutting Division

to the Sewing Division per month and how many panels should be sold

externally to maximise Fashion Forward $($Pty$)$ Ltd$\text{'}$s profit.

$(10$ marks$)$

$1\mathrm{.}3)$ With reference to the Purchase of Tiny Tots $($Pty$)$ Ltd$,$ determine the

maximum price Fashion Forward $($Pty$)$ Ltd should be willing to pay per share

for a Tiny Tots $($Pty$)$ Ltd share on the basis of the Free Cash Flow valuation, as

well as the basis of the share price.

$(6$ marks$)$

$1\mathrm{.}4)$ Based on your answer in question $1\mathrm{.}3,$ determine the maximum exchange ratio

Fashion Forward $($Pty$)$ Ltd should be willing to agree