Fashion Forward (Pty) Ltd is a well-known clothing manufacturer with a 31 December financial year-end. The companys current focus is the manufacturing of teenage and young adult clothing. The companys 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 R200 000 each and are payable annually in arrears. The machine had a fair value and carrying amount of R800 000 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) Ltds 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 12 000 panels per month. 3 HBACC330-1- Jul-Dec2023-SA1-CP_ELK-V1-09072023 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 5 000 completed summer dresses per month. The finished summer dresses are sold for R600 each and the following variable costs apply: Cutting Division Variable manufacturing cost per panel R90 Variable selling costs per panel* R50 Sewing Division Variable manufacturing cost per dress R190 Variable selling cost per dress R150 *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 consumers in the market are willing to purchase a panel for R205. It is estimated that 3 000 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 R8 500 000. The Free Cash Flow valuation of Fashion Forward (Pty) Ltd indicated a total value of R6 300 000. Fashion Forward (Pty) Ltd has 200 000 issued shares with a fair value of R33 each. Tiny Tots (Pty) Ltd has 150 000 issued shares with a fair value of R11 each. 4 HBACC330-1- Jul-Dec2023-SA1-CP_ELK-V1-09072023 Investment in Tiny Tots (Pty) Ltd Assume that, after the purchase price per share was determined, Fashion Forward (Pty) Ltd purchased 100 000 shares in Tiny Tots (Pty) Ltd. Tiny Tots (Pty) Ltd has an issued share capital of 150 000 shares. Fashion Forward (Pty) Ltd will be actively involved in Tiny Tots (Pty) Ltds 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 R55 000. 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 R20 000 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 publics response to it. 5 HBACC330-1- Jul-Dec2023-SA1-CP_ELK-V1-09072023 REQUIRED: 1.1) 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) 1.2) 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) Ltds profit. (10 marks) 1.3) 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) 1.4) Based on your answer in question 1.3, determine the maximum exchange ratio Fashion Forward (Pty) Ltd should be willing to agree to for the share capital of Tiny Tots (Pty) Ltd on the basis of the Free Cash Flow valuation, as well as the basis of the share price. (7 marks) 1.5) With reference to the Investment in Tiny Tots (Pty) Ltd, discuss whether Tiny Tots (Pty) Ltd will qualify as a subsidiary of Fashion Forward (Pty) Ltd in terms of the requirements of IFRS 10: Consolidated Financial Statements. (10 marks) 1.6) With reference to the Thermal wear prototype, Fashion Forward (Pty) Ltd requested that you advise them on whether the prototype costs and the advertising costs may be capitalised in accordance with the requirements of IAS 38: Intangible assets