QUESTION 2 (50 marks) (90 minutes) FAC3764 Assessment 10 Diapers Corp Ltd (Diapers Corp) is a company that manufactures and distributes disposable baby diapers across the African continent. The company was founded in the year 2010 and is currently the largest supplier of baby diapers within the South African market. Diapers Corp is listed on the Johannesburg Stock Exchange (JSE) and currently owns shares in two other companies that are in the same industry. All companies within the group have a 30 September financial year end. Below are the trial balances for Diapers Corp, Napkins Corp and Nappies R Us for the year ended 30 September 2023: \begin{tabular}{ccc} Diapers & Napkins & Nappies \\ Corp & Corp & R Us \\ R & R & R \end{tabular} Credits: Share capital: - 200000 ordinary shares - 100000 ordinary shares - 100000 ordinary shares Retained earnings - 1 October 2022 Deferred Tax Trade and other payables Revenue. Other income Debits: Property, plant and equipment at carrying amount.... Investments in equity instruments: - Investment in Napkins Corp at cost price - Investment in Nappies R us at cost price Trade and other receivables...... Cash and cash equivalents Inventories. Cost of sales.. Other expenses Income tax expense Dividends paid - 31 March 2023 Page 7 of 10 FAC3764 Assessment 10 QUESTION 2 (continued) \begin{tabular}{rrr} 200000 & \multicolumn{1}{c}{-} & \multicolumn{1}{c}{-} \\ - & \multicolumn{1}{c}{-} & \multicolumn{1}{c}{-} \\ 1240000000 & 420000 & 205000 \\ 190400 & 95000 & 15000 \\ 275000 & 160000 & 16000 \\ 950000 & 455000 & 280000 \\ 159600 & 150000 & 9000 \\ \hline 3015000 & 1380000 & 625000 \\ \hline & & \\ 450000 & 150000 & 100000 \\ & & \\ 320000 & - & - \\ 150000 & - & - \\ 575000 & 200000 & 60000 \\ 285000 & 220000 & 95000 \\ 380000 & 245000 & 120000 \\ 425000 & 345000 & 180000 \\ 80000 & 45000 & 25000 \\ 280000 & 170000 & 20000 \\ 70000 & 5000 & 25000 \\ \hline 3015000 & 1380000 & 625000 \\ \hline \hline \end{tabular} Page 7 of 10 Investment in Napkins Corp On 1 October 2020, during the period of the COVID-19 Pandemic, the board of directors of Diapers Corp resolved to purchase 65% of the share capital in Napkins Corp in line with the company strategy to further expand their market share. As from 1 October 2020, Diapers Corp had control over Napkins Corp as per the definition of control in terms of IFRS 10: Consolidated Financial Statements. On this date, the retained earnings of Napkins Corp were R311 000 (credit). The purchase consideration was settled immediately as follows: - 40000 ordinary shares in Diapers Corp were issued to the seller. The issue price of the shares was R2,00 each and the fair value of the shares was R2,50 each on 1 October 2020; and - Cash amounting R220 000. On 1 July 2020, Napkins Corp began a research and development project for new diaper technology that will allow for the creation of a thinner and more flexible range of diapers without sacrificing absorbency. On 1 October 2020, the project met the definition of an intangible asset in accordance with IAS 38: Intangible assets but could not be recognised in the separate financial statements of Napkins Corp as the probability of future economic benefits could not be demonstrated. As of 1 October 2020, Napkins Corp had expensed development costs to the value of R45000 in its separate financial statements. The fair value of the development costs on 1 October 2020 was R50 000. The diaper technology is regarded to have an indefinite useful life. impact on their profits. However, the new entrants would struggle to match their prices and as a result they could be easily eliminated. Additional information 1. Diapers Corp measures its investments in Napkins Corp and Nappies R Us Ltd at cost in its separate accounting records in terms of IAS 27: Separate Financial Statements. 2. Diapers Corp Group accounts for associates and Joint Ventures using the equity method, in accordance with IAS 28: Investments in Associates and Joint Ventures. 3. Diapers Corp Group elected to measure non-controlling interests in an acquiree at the proportionate share of the net assets. 4. The disposal of the subsidiary does not comply with the criteria of IFRS 5: Non-Current assets held for sale and discontinued operations until the date of disposal. 5. Other investments are measured in terms of IFRS 9: Financial Instruments. Diapers Corp irrevocably elected to present subsequent changes in the fair value of the investments in other comprehensive income in a mark-to-market reserve. 6. All entities within the Diapers Corp Group accounts for property, plant and equipment and intangible assets according to the cost model. 7. You may assume that profits in all companies were earned evenly throughout the period. 8. The South African normal tax rate is 27% and capital gains tax is calculated at 80% thereof. You may assume that both the tax rates have been effective and remained unchanged since 28 February 2021. 9. All entities in the Diapers Corp Group have a 30 September year end. 10.Each share carries one vote and the share capital of each of the companies in the Diapers Corp Ltd Group has remained unchanged since incorporation. QUESTION 2 (50 marks) (90 minutes) FAC3764 Assessment 10 Diapers Corp Ltd (Diapers Corp) is a company that manufactures and distributes disposable baby diapers across the African continent. The company was founded in the year 2010 and is currently the largest supplier of baby diapers within the South African market. Diapers Corp is listed on the Johannesburg Stock Exchange (JSE) and currently owns shares in two other companies that are in the same industry. All companies within the group have a 30 September financial year end. Below are the trial balances for Diapers Corp, Napkins Corp and Nappies R Us for the year ended 30 September 2023: \begin{tabular}{ccc} Diapers & Napkins & Nappies \\ Corp & Corp & R Us \\ R & R & R \end{tabular} Credits: Share capital: - 200000 ordinary shares - 100000 ordinary shares - 100000 ordinary shares Retained earnings - 1 October 2022 Deferred Tax Trade and other payables Revenue. Other income Debits: Property, plant and equipment at carrying amount.... Investments in equity instruments: - Investment in Napkins Corp at cost price - Investment in Nappies R us at cost price Trade and other receivables...... Cash and cash equivalents Inventories. Cost of sales.. Other expenses Income tax expense Dividends paid - 31 March 2023 Page 7 of 10 FAC3764 Assessment 10 QUESTION 2 (continued) \begin{tabular}{rrr} 200000 & \multicolumn{1}{c}{-} & \multicolumn{1}{c}{-} \\ - & \multicolumn{1}{c}{-} & \multicolumn{1}{c}{-} \\ 1240000000 & 420000 & 205000 \\ 190400 & 95000 & 15000 \\ 275000 & 160000 & 16000 \\ 950000 & 455000 & 280000 \\ 159600 & 150000 & 9000 \\ \hline 3015000 & 1380000 & 625000 \\ \hline & & \\ 450000 & 150000 & 100000 \\ & & \\ 320000 & - & - \\ 150000 & - & - \\ 575000 & 200000 & 60000 \\ 285000 & 220000 & 95000 \\ 380000 & 245000 & 120000 \\ 425000 & 345000 & 180000 \\ 80000 & 45000 & 25000 \\ 280000 & 170000 & 20000 \\ 70000 & 5000 & 25000 \\ \hline 3015000 & 1380000 & 625000 \\ \hline \hline \end{tabular} Page 7 of 10 Investment in Napkins Corp On 1 October 2020, during the period of the COVID-19 Pandemic, the board of directors of Diapers Corp resolved to purchase 65% of the share capital in Napkins Corp in line with the company strategy to further expand their market share. As from 1 October 2020, Diapers Corp had control over Napkins Corp as per the definition of control in terms of IFRS 10: Consolidated Financial Statements. On this date, the retained earnings of Napkins Corp were R311 000 (credit). The purchase consideration was settled immediately as follows: - 40000 ordinary shares in Diapers Corp were issued to the seller. The issue price of the shares was R2,00 each and the fair value of the shares was R2,50 each on 1 October 2020; and - Cash amounting R220 000. On 1 July 2020, Napkins Corp began a research and development project for new diaper technology that will allow for the creation of a thinner and more flexible range of diapers without sacrificing absorbency. On 1 October 2020, the project met the definition of an intangible asset in accordance with IAS 38: Intangible assets but could not be recognised in the separate financial statements of Napkins Corp as the probability of future economic benefits could not be demonstrated. As of 1 October 2020, Napkins Corp had expensed development costs to the value of R45000 in its separate financial statements. The fair value of the development costs on 1 October 2020 was R50 000. The diaper technology is regarded to have an indefinite useful life. impact on their profits. However, the new entrants would struggle to match their prices and as a result they could be easily eliminated. Additional information 1. Diapers Corp measures its investments in Napkins Corp and Nappies R Us Ltd at cost in its separate accounting records in terms of IAS 27: Separate Financial Statements. 2. Diapers Corp Group accounts for associates and Joint Ventures using the equity method, in accordance with IAS 28: Investments in Associates and Joint Ventures. 3. Diapers Corp Group elected to measure non-controlling interests in an acquiree at the proportionate share of the net assets. 4. The disposal of the subsidiary does not comply with the criteria of IFRS 5: Non-Current assets held for sale and discontinued operations until the date of disposal. 5. Other investments are measured in terms of IFRS 9: Financial Instruments. Diapers Corp irrevocably elected to present subsequent changes in the fair value of the investments in other comprehensive income in a mark-to-market reserve. 6. All entities within the Diapers Corp Group accounts for property, plant and equipment and intangible assets according to the cost model. 7. You may assume that profits in all companies were earned evenly throughout the period. 8. The South African normal tax rate is 27% and capital gains tax is calculated at 80% thereof. You may assume that both the tax rates have been effective and remained unchanged since 28 February 2021. 9. All entities in the Diapers Corp Group have a 30 September year end. 10.Each share carries one vote and the share capital of each of the companies in the Diapers Corp Ltd Group has remained unchanged since incorporation