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- Jan-Jun2023-SA1-CP_ELK-V2-12052023 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.

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.

(8 marks)