QUESTION 1 (25 MARKS, 45 MINUTES) Hill (Pty) Ltd ("Hill) is a successful company in the construction industry, situated in the Limpopo Province. In December 2017 Hill heard of a great business opportunity during their yearend function. The opportunity entailed the acquiring of shares in another company in the same industry which will result in a competitive advantage for Hill. This opportunity will lead towards the expansion of their business operations within the construction industry. On 2 January 2018 Hill acquired 65% shares in Crest (Pty) Ltd (Crest). Both companies have a 31 December year end. You are presented with the following abridged financial statements of the two related companies for the year ended 31 December 2019. STATEMENT OF FINANCIAL POSITION Hill (Pty) Crest (Pty) Ltd AT 31 DECEMBER 2019 Ltd 2019 2019 ASSETS R R Non-current assets 1 150 000 1 555 600 Property Plant & Equipment Cost 925 000 500 000 (100 000) 1 300 000 (225 000) 120 000 50 000 90 000 Accumulated depreciation Investment in Crest (Pty) Ltd Investment in Preference shares Crest (Pty) Ltd Investment in Debentures Hill (Pty) Ltd Loan: Crest (Pty) Ltd Current assets Trade and other receivables Inventory Cash and cash equivalents TOTAL ASSETS 40 000 117 600 18 000 24 000 80 000 3 198 000 2 447 200 2 100 000 1 500 000 EQUITY AND LIABILITIES Equity Share Capital 8% Preference shares Retained earnings Market-to-market reserve 300 000 619 000 480 000 194 000 Non-current liabilities 10% Debentures 150 000 Deferred tax 65 000 7 400 90 000 Loan: Hill (Pty) Ltd Current liabilities Trade and other payables Taxation payable Bank Overdraft 37 500 30 000 5 000 4 800 35 000 Shareholders for dividends 27 500 TOTAL EQUITY AND LIABILITES 3 198 000 2 447 200 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2019 Retained earnings Hill (Pty) Ltd Crest (Pty) Ltd 2019 2019 R R Balance at 1 January 2019 430 500 311,500 Changes in equity for 2019 Profit for the year 225 000 153,500 Dividends (36 500) (45,000) Balance at 31 December 2019 19 000 480 000 Additional information: 1. On the date of acquisition, 1 January 2018, the equity of Crest was as follows: Equity Value in Rand Share Capital R 1 500 000 (Credit balance) Retained earnings R 550 000 (Credit balance) Total R2 050 000 2. The cost price of the investment in Crest was R1 050 000. The fair value of the investment in Crest amounted to R1 200 000 on 2 January 2019. 3. At the date of acquisition, the directors of Hill were of the opinion that all the assets and liabilities, as they appeared in the financial records of Crest, were stated at fair value except for the value of land and plant. Land was revalued at R200 000 more than it's carrying amount while the plant was revalued to R550 000. The carrying value of the plant amounted to R450 000 and at this stage, Hill also confirmed the original useful life of the plant to be 10 years. Crest Ltd depreciate the plant at 10% per annum on cost price. The cost price of the plant amounted to R600 000. It is the policy of both companies to account for revaluations based on the net replacement value method. Crest did not recognise this revaluation in their financial records. 4. The Investment in Preference shares and debentures consists out of 80 000 shares and 15 000 10% debentures respectively. 5. Since acquisition there were no changes to the issued share capital of either the companies. The ordinary shares have been issued at R2.50 per share and the 8% preference shares at R1.50 per share. 6. Hill had R20 000 inventory on hand on 31 December 2019 (31 December 2018: R10 000) which was purchased from Crest. The inventory was sold at a cost price plus 20%. 7. Hill make use of Pen Bank while Crest banks at Pencil Bank and there is no agreement between the two companies for setting off of unfavourable bank balances against favourable bank balances. Accounting policies and other information 1) The share capital remained unchanged during the periods under review. 2) Non-controlling interest is measured at its proportionate share of the net identifiable assets of the subsidiary 3) It is the policy of Hill to account for its investments in ordinary equity shares at the fair value through other comprehensive income in accordance with IFRS 9 Financial Instruments. The fair value adjustments of this investment were correctly accounted in the separate financial statements of Hill. MARKS REQUIRED: Sub- total Total Prepare only the at acquisition pro-forma journals which is required to consolidate Crest (Pty) Ltd into the Hill (Pty) Ltd Group. Show all your calculations. 10 10 Journal narrations are not required. (b) Calculate the growth in retained earnings of Crest (Pty) Ltd on 1 January 2019 as it would appear in the consolidated statements of changes in equity of the Hill Ltd 4 4 Group (c) Prepare all the pro forma journals which is required to account for the preference shares and it's relating dividends for the group. 5 5 Journal narrations are not required. (d) Discuss how the bank overdraft of Crest (Pty) Ltd should be accounted for in the consolidated financial statements for the year ended 31 December 2019. 5 Communication Skills- layout and structure 4 1 co TOTAL MARKS QUESTION 1 25 QUESTION 1 (25 MARKS, 45 MINUTES) Hill (Pty) Ltd ("Hill) is a successful company in the construction industry, situated in the Limpopo Province. In December 2017 Hill heard of a great business opportunity during their yearend function. The opportunity entailed the acquiring of shares in another company in the same industry which will result in a competitive advantage for Hill. This opportunity will lead towards the expansion of their business operations within the construction industry. On 2 January 2018 Hill acquired 65% shares in Crest (Pty) Ltd (Crest). Both companies have a 31 December year end. You are presented with the following abridged financial statements of the two related companies for the year ended 31 December 2019. STATEMENT OF FINANCIAL POSITION Hill (Pty) Crest (Pty) Ltd AT 31 DECEMBER 2019 Ltd 2019 2019 ASSETS R R Non-current assets 1 150 000 1 555 600 Property Plant & Equipment Cost 925 000 500 000 (100 000) 1 300 000 (225 000) 120 000 50 000 90 000 Accumulated depreciation Investment in Crest (Pty) Ltd Investment in Preference shares Crest (Pty) Ltd Investment in Debentures Hill (Pty) Ltd Loan: Crest (Pty) Ltd Current assets Trade and other receivables Inventory Cash and cash equivalents TOTAL ASSETS 40 000 117 600 18 000 24 000 80 000 3 198 000 2 447 200 2 100 000 1 500 000 EQUITY AND LIABILITIES Equity Share Capital 8% Preference shares Retained earnings Market-to-market reserve 300 000 619 000 480 000 194 000 Non-current liabilities 10% Debentures 150 000 Deferred tax 65 000 7 400 90 000 Loan: Hill (Pty) Ltd Current liabilities Trade and other payables Taxation payable Bank Overdraft 37 500 30 000 5 000 4 800 35 000 Shareholders for dividends 27 500 TOTAL EQUITY AND LIABILITES 3 198 000 2 447 200 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2019 Retained earnings Hill (Pty) Ltd Crest (Pty) Ltd 2019 2019 R R Balance at 1 January 2019 430 500 311,500 Changes in equity for 2019 Profit for the year 225 000 153,500 Dividends (36 500) (45,000) Balance at 31 December 2019 19 000 480 000 Additional information: 1. On the date of acquisition, 1 January 2018, the equity of Crest was as follows: Equity Value in Rand Share Capital R 1 500 000 (Credit balance) Retained earnings R 550 000 (Credit balance) Total R2 050 000 2. The cost price of the investment in Crest was R1 050 000. The fair value of the investment in Crest amounted to R1 200 000 on 2 January 2019. 3. At the date of acquisition, the directors of Hill were of the opinion that all the assets and liabilities, as they appeared in the financial records of Crest, were stated at fair value except for the value of land and plant. Land was revalued at R200 000 more than it's carrying amount while the plant was revalued to R550 000. The carrying value of the plant amounted to R450 000 and at this stage, Hill also confirmed the original useful life of the plant to be 10 years. Crest Ltd depreciate the plant at 10% per annum on cost price. The cost price of the plant amounted to R600 000. It is the policy of both companies to account for revaluations based on the net replacement value method. Crest did not recognise this revaluation in their financial records. 4. The Investment in Preference shares and debentures consists out of 80 000 shares and 15 000 10% debentures respectively. 5. Since acquisition there were no changes to the issued share capital of either the companies. The ordinary shares have been issued at R2.50 per share and the 8% preference shares at R1.50 per share. 6. Hill had R20 000 inventory on hand on 31 December 2019 (31 December 2018: R10 000) which was purchased from Crest. The inventory was sold at a cost price plus 20%. 7. Hill make use of Pen Bank while Crest banks at Pencil Bank and there is no agreement between the two companies for setting off of unfavourable bank balances against favourable bank balances. Accounting policies and other information 1) The share capital remained unchanged during the periods under review. 2) Non-controlling interest is measured at its proportionate share of the net identifiable assets of the subsidiary 3) It is the policy of Hill to account for its investments in ordinary equity shares at the fair value through other comprehensive income in accordance with IFRS 9 Financial Instruments. The fair value adjustments of this investment were correctly accounted in the separate financial statements of Hill. MARKS REQUIRED: Sub- total Total Prepare only the at acquisition pro-forma journals which is required to consolidate Crest (Pty) Ltd into the Hill (Pty) Ltd Group. Show all your calculations. 10 10 Journal narrations are not required. (b) Calculate the growth in retained earnings of Crest (Pty) Ltd on 1 January 2019 as it would appear in the consolidated statements of changes in equity of the Hill Ltd 4 4 Group (c) Prepare all the pro forma journals which is required to account for the preference shares and it's relating dividends for the group. 5 5 Journal narrations are not required. (d) Discuss how the bank overdraft of Crest (Pty) Ltd should be accounted for in the consolidated financial statements for the year ended 31 December 2019. 5 Communication Skills- layout and structure 4 1 co TOTAL MARKS QUESTION 1 25