Help with question 1 (b) will truly be appreciated.

QUESTION 1 37 MARKS Ignore value-added tax and dividend tax. You are currently busy with your articles in order to qualify as a chartered accountant (CA(SA)'). Your cousin is a second year financial accounting student and she sees you as her hero for completing your CA degree. She had an online zoom class today and phoned you for assistance as she is struggling with the homework. The homework question is about the TikTok Ltd Group (T&T Group'), a group of companies offering a social networking service focusing on the sharing of short videos. Apart of this main service, the T&T Group also sells computer equipment and acts as an IT services provider. She has provided you with the following information that she has, to prepare the consolidated financial statements before class tomorrow: Investment in Tok Ltd ('Tok") The current financial year end for all the companies in the T&T Group is 31 December 2020 (FY2020'). Tik Ltd ('Tik") has experienced significant growth in the last few years and was ranked as the third fastest growing brand of 2020, with Zoom and Teams in first and second place. Tik therefore decided to purchase 90% of Tok on 1 January 2019 for an amount of R3 500 000 (paid in cash). This acquisition met the definition of a business combination in accordance with FRS 3 Business Combinations. All the identifiable assets and liabilities of Tok were fairly va ued in accordance with IFRS 3 on acquisition date. Tok had a retained earnings balance of R1 250 000 and a mark-to-market reserve of R80 000 on acquisition date (both credit balances). Subsequent to the acquisition of Tok, Tik decided to change suppliers to rather purchase its printer inventory from Tok. Tok sells its printer inventory at a 25% profit based on its selling price. The total of these sales between Tik and Tok amounted to R325 000 for FY2020 (R452 000 for FY2019). Of these sales, Tik had the following balances at year-end: FY2020 FY 2019 Printer inventory on hand at year end R550 000 R455 000 On 1 January 2019, Tik sold two Nissan NP200 1.6 8V vehicles to Tok for an amount of R170 000 each. The carrying amount of these vehicles was R180 000 each on the date of the sale. Assume capital gains tax is not applicable. The remaining useful life of both vehicles are four years as at 1 January 2019. On 1 January 2020, Tok sold one of the vehicles to Facebook Ltd (not part of the T&T Group) for R165 000. These vehicles are classified as property, plant and equipment in terms of IAS 16 Property, plant and Equipment for both companies. Tok sold a HPE Expert ML340 Gen 10 Server with 16GB RAM and 500W to Tik on 31 December 2020 for an amount of R30 000, resulting in a profit of R5 000. This server is recognised as inventory by Tok and as equipment by Tik. Depreciation is recognised by Tik over five years to an insignificant residual value. On 31 December 2020. Tik declared and paid a dividend amounting to R130 000 whereas Tok declared a final dividend of R90 000 to all existing shareholders. Below is an extract from the separate statements of financial position as at 31 December 2020 of Tik and Tok: 2019 R Tik Tok 2020 2019 2020 R R R EQUITY Share capital 6 720 000 6 720 000 3 500 000 Retained earnings 10 570 000 8 200 000 4 160 000 Mark-to-market reserve 115 000 Total number of shares in issue: Tik - 160 000 shares; Tok - 100 000 shares. 3 500 000 2 500 000 80 000 * An extract from the separate statement of profit or loss and other comprehensive income for the year ended 31 December 2020 is provided below: Tok 2020 2019 R R Profit for the year 1 750 000 1 250 000 Other comprehensive income for the year 35 000 Items that may not be reclassified to profit or loss: Mark-to-market reserve, net of tax 35 000 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 785 000 1 250 000 The T&T Group is facing a legal challenge over how it gathers and uses the data of children. The claim was filed on 30 September 2020 on behalf of thousands of under-age children in South Africa who have used the incredibly popular video-sharing app. The lawsuit alleges that the T&T Group collects children's personal information (e.g. phone numbers, videos, precise location and biometric data) without being transparent or with the necessary consent. Under-age users and their parents also do not know what the T&T Group is doing with the data obtained. The T&T Group has contracted the well-known law firm Suits Ltd to represented them. Mr Harvey Specter, one of the partners, believes that the data collected by the T&T Group represents "a serious breach in South Africa's data protection law". According to him, it is highly probable that the claim will be successful, and he estimates the total payment by the T&T Group as R2 320 000, resulting in the children affected each be owed thousands of Rands. In response to the lawsuit, the board published a statement: "The T&T Group values privacy and safety as our top values and we follow strict policies, processes and technologies to protect our users, especially our under-age users. We take these allegations very serious". The T&T Group have not recognised any journal entry with regards to the claim. The court proceedings will commence in FY2021. The South African Revenue Services (SARS) will not allow a deduction for the claim. Accounting policies and other information Tik accounts for investments in subsidiaries at cost in its separate financial statements in accordance with IAS 27 Separate Financial Statements. T&T Group elected to measure the non-controlling interests of subsidiaries at its proportionate share of the net assets at the acquisition date. All companies, including the group of companies, account for simple equity investments at fair value through other comprehensive income in accordance with IFRS 9 Financial instruments. All the companies in the T&T Group account for owner-occupied land and buildings on the revaluation model and vehicles on the cost model in accordance with IAS 16 in their separate and in the consolidated financial statements. Depreciation is accounted for on the straight-line method by all the companies in the T&T Group All initial useful life and residual value estimates remained unchanged to date. Assume a normal tax rate of 28% and that 80% of capital gains are taxed (i.e. an effective capital gains tax rate of 22.4%) during all financial years under consideration for all the companies in the T&T Group REQUIRED: MARKS Sub- total Total 9 1 10 (a) Discuss the classification of the lawsuit against the T&T Group during FY2020 in the consolidated financial statements of the T&T Group with specific reference to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. You may assume that the recognition criteria are met if applicable. Communication skills - logical argument (b) Prepare the equity section as an extract of the consolidated statement of financial position of the T&T Group as at 31 December 2020. Comparative figures are not required. Communication skills - presentation and layout TOTAL MARKS 26 1 27 37 QUESTION 1 37 MARKS Ignore value-added tax and dividend tax. You are currently busy with your articles in order to qualify as a chartered accountant (CA(SA)'). Your cousin is a second year financial accounting student and she sees you as her hero for completing your CA degree. She had an online zoom class today and phoned you for assistance as she is struggling with the homework. The homework question is about the TikTok Ltd Group (T&T Group'), a group of companies offering a social networking service focusing on the sharing of short videos. Apart of this main service, the T&T Group also sells computer equipment and acts as an IT services provider. She has provided you with the following information that she has, to prepare the consolidated financial statements before class tomorrow: Investment in Tok Ltd ('Tok") The current financial year end for all the companies in the T&T Group is 31 December 2020 (FY2020'). Tik Ltd ('Tik") has experienced significant growth in the last few years and was ranked as the third fastest growing brand of 2020, with Zoom and Teams in first and second place. Tik therefore decided to purchase 90% of Tok on 1 January 2019 for an amount of R3 500 000 (paid in cash). This acquisition met the definition of a business combination in accordance with FRS 3 Business Combinations. All the identifiable assets and liabilities of Tok were fairly va ued in accordance with IFRS 3 on acquisition date. Tok had a retained earnings balance of R1 250 000 and a mark-to-market reserve of R80 000 on acquisition date (both credit balances). Subsequent to the acquisition of Tok, Tik decided to change suppliers to rather purchase its printer inventory from Tok. Tok sells its printer inventory at a 25% profit based on its selling price. The total of these sales between Tik and Tok amounted to R325 000 for FY2020 (R452 000 for FY2019). Of these sales, Tik had the following balances at year-end: FY2020 FY 2019 Printer inventory on hand at year end R550 000 R455 000 On 1 January 2019, Tik sold two Nissan NP200 1.6 8V vehicles to Tok for an amount of R170 000 each. The carrying amount of these vehicles was R180 000 each on the date of the sale. Assume capital gains tax is not applicable. The remaining useful life of both vehicles are four years as at 1 January 2019. On 1 January 2020, Tok sold one of the vehicles to Facebook Ltd (not part of the T&T Group) for R165 000. These vehicles are classified as property, plant and equipment in terms of IAS 16 Property, plant and Equipment for both companies. Tok sold a HPE Expert ML340 Gen 10 Server with 16GB RAM and 500W to Tik on 31 December 2020 for an amount of R30 000, resulting in a profit of R5 000. This server is recognised as inventory by Tok and as equipment by Tik. Depreciation is recognised by Tik over five years to an insignificant residual value. On 31 December 2020. Tik declared and paid a dividend amounting to R130 000 whereas Tok declared a final dividend of R90 000 to all existing shareholders. Below is an extract from the separate statements of financial position as at 31 December 2020 of Tik and Tok: 2019 R Tik Tok 2020 2019 2020 R R R EQUITY Share capital 6 720 000 6 720 000 3 500 000 Retained earnings 10 570 000 8 200 000 4 160 000 Mark-to-market reserve 115 000 Total number of shares in issue: Tik - 160 000 shares; Tok - 100 000 shares. 3 500 000 2 500 000 80 000 * An extract from the separate statement of profit or loss and other comprehensive income for the year ended 31 December 2020 is provided below: Tok 2020 2019 R R Profit for the year 1 750 000 1 250 000 Other comprehensive income for the year 35 000 Items that may not be reclassified to profit or loss: Mark-to-market reserve, net of tax 35 000 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1 785 000 1 250 000 The T&T Group is facing a legal challenge over how it gathers and uses the data of children. The claim was filed on 30 September 2020 on behalf of thousands of under-age children in South Africa who have used the incredibly popular video-sharing app. The lawsuit alleges that the T&T Group collects children's personal information (e.g. phone numbers, videos, precise location and biometric data) without being transparent or with the necessary consent. Under-age users and their parents also do not know what the T&T Group is doing with the data obtained. The T&T Group has contracted the well-known law firm Suits Ltd to represented them. Mr Harvey Specter, one of the partners, believes that the data collected by the T&T Group represents "a serious breach in South Africa's data protection law". According to him, it is highly probable that the claim will be successful, and he estimates the total payment by the T&T Group as R2 320 000, resulting in the children affected each be owed thousands of Rands. In response to the lawsuit, the board published a statement: "The T&T Group values privacy and safety as our top values and we follow strict policies, processes and technologies to protect our users, especially our under-age users. We take these allegations very serious". The T&T Group have not recognised any journal entry with regards to the claim. The court proceedings will commence in FY2021. The South African Revenue Services (SARS) will not allow a deduction for the claim. Accounting policies and other information Tik accounts for investments in subsidiaries at cost in its separate financial statements in accordance with IAS 27 Separate Financial Statements. T&T Group elected to measure the non-controlling interests of subsidiaries at its proportionate share of the net assets at the acquisition date. All companies, including the group of companies, account for simple equity investments at fair value through other comprehensive income in accordance with IFRS 9 Financial instruments. All the companies in the T&T Group account for owner-occupied land and buildings on the revaluation model and vehicles on the cost model in accordance with IAS 16 in their separate and in the consolidated financial statements. Depreciation is accounted for on the straight-line method by all the companies in the T&T Group All initial useful life and residual value estimates remained unchanged to date. Assume a normal tax rate of 28% and that 80% of capital gains are taxed (i.e. an effective capital gains tax rate of 22.4%) during all financial years under consideration for all the companies in the T&T Group REQUIRED: MARKS Sub- total Total 9 1 10 (a) Discuss the classification of the lawsuit against the T&T Group during FY2020 in the consolidated financial statements of the T&T Group with specific reference to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. You may assume that the recognition criteria are met if applicable. Communication skills - logical argument (b) Prepare the equity section as an extract of the consolidated statement of financial position of the T&T Group as at 31 December 2020. Comparative figures are not required. Communication skills - presentation and layout TOTAL MARKS 26 1 27 37