Department of Commercial Accounting

Financial Accounting 3B
SUBJECT CODE: FAC33B3/FAC3BB3

Final Assessment Opportunity 2017

Date: November 2017

Time: 180 minutes Marks: 100

Assessors: S Adam
L Khumalo
L Mphahlele

Internal Moderator: T Mkhumbeni

External Moderator: M Mpetshwa

INSTRUCTIONS:
 This paper consists of 10 pages (including the cover page).
 Answer all questions. Show all calculations and workings clearly.
 Start each question on a new page in your answer book.
 Silent, non-programmable calculators may be used.
 Where applicable, round all calculations to the nearest Rand.

Question Topic Marks Time

1 Theory 10 18 minutes
2 Cash Flow 20 36 minutes
3 EPS and Financial Instruments 10 18 minutes
4 Consolidations and Financial Statement Analysis 35 63 minutes
5 Consolidation – Statement of Changes in equity 25 45 minutes

100 180 minutes

FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Question 1 (10 marks)

PART A

1. A potential ordinary share is:

A. An ordinary share that has not been paid
B. A preferential share
C. An authorized, but not issued ordinary share
D. A financial instrument which may entitle the holder to ordinary shares

2. Diluted EPS can be equal to Basic EPS, but not higher.

A. True
B. False

3. Which of the following is included in the adjustment of net income to obtain cash flow
from operating activities
A. Accounts payable
B. Prepaid expenses
C. Inventory
D. All of the above

4. The change in retained income (SOCIE) is affected by which of the following?

A. Payments of dividend and dividends received
B. Net income and payments from share issue
C. Net income and payment of dividends
D. None of the above

5. In the consolidated Statement of financial position, what balance should appear in

relation to dividends payable?
A. All dividends payable
B. All dividends payable to entities outside the consolidated entity
C. The dividends payable related to post-acquisition profits only of all entities within
the group
D. The dividends payable related to pre-acquisition profits only of all entities within
the group
E. Dividends relating to non-controlling interest

___________________________________________________________________
2
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

6. It is assumed that control exists if the parent company has more than 50% of the
ordinary (equity) shares of the subsidiary therefore giving them more than 50% of the
voting rights. Which of the following circumstances can still lead to control existing
even though the shareholding of the parent is below 50%?
A. The power to govern the financial and operating policies of the entity under
statute or an agreement.
B. The power to appoint or remove the majority of the members of the board of
directors.
C. The power to cast the majority of the votes at meetings of the board of directors.
D. All of the above
E. A and B

7. Cash investments are included as part of Cash and cash equivalents when?
A. When held for short-term cash commitments and not for investments or other
purposes
B. Have a maturity of less than12 months
C. Have maturity of 3 months or less
D. A and B
E. A and C

8. The method adopted in combining the separate financial statements of entities in a

group form to form a set of consolidated financial statements is:
A. Set-off all assets and liabilities and recognise a single net investment
B. Line-by-line addition of the elements of the financial statements
C. Combine all assets and liabilities of the parent and subsidiary/ies into one net
assets item and combine all profits and losses into one profit or loss item
D. Line-by- line recognition if the elements of the financial statements that existed at
acquisition date

9. Which of the following events requires no adjustment to the prior period’s EPS
calculations
A. Share split
B. New share issue
C. Share capitalization/bonus share issue
D. Share consolidation

10. In two points, explain the difference between liquidity and solvency.

___________________________________________________________________
3
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Question 2 (20 marks)

PART A (8 marks)

The following information relates to the cash flow statement and notes of Lala Ltd for the
financial year ended 31 December 2016. Each scenario must be considered
independently.

1. Lala sold an item of property, plant and equipment for R200 000, resulting in a profit
on disposal of R20 000. The company received R150 000 of the selling price on the date
that the asset was sold; the remaining R50 000 is to be paid in January 2017 and has
been included in accounts receivable balance as at 31 December 2016.

2. Lala Ltd bought 200 000 R10 10% debentures on 1 July 2016. Interest is payable
annually in arrears on 30 June until the redemption of the debentures on 30 June 2021.
An effective interest rate of 12.05% applies.

REQUIRED:

Your answer for both 2.1 and 2.2 should indicate whether the transaction will be
shown as a cash inflow or cash outflow, and within which category of the cash flow
statement the transaction will appear.

2.1 Discuss how scenario 1 would be treated in the preparation of the cash flow
statement for the financial year ended 31 December 2016. (5)

2.2 With respect to the acquisition of the debentures and the related interest, discuss
and calculate the amounts that will be included in the cash flow statement of Lala
for the year ended 31 December 2016. (Scenario 2).
(3)

___________________________________________________________________
4
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

PART B (12 marks)

Please note that PART A and PART B are not related.

Extract of Statement of Financial Position as at 31 December 2015

2015 2014
R R
Buildings: cost: Note 3 4 000 000 2 800 000
Inventory : Note 2 4 700 000 3 100 000
Accounts payable 4 100 000 4 800 000
Accrued operating expenses 230 000 150 000
Prepaid operating expenses 75 000 50 000

Extract of Statement of Comprehensive Income for the year ended 31 December 2015
2015
R
Sales 17 000 000
Cost of sales 8 000 000
Net operating costs : Note 1 750 000

Note 1:
Net operating costs include:
1. Interest received of R150 000
2. Depreciation expense of R310 000
3. Bad debt expense of R10 000
Note 2:
During the year the company capitalized R640 000 operating costs to inventory. These
costs are not included in the Statement of Comprehensive income.

Note 3:
Charlie Limited revalues it’s building every two years. The first revaluation cycle was in
the current year and resulted in a revaluation deficit of R300 000.
Charlie Limited acquired all buildings for cash.

REQUIRED:

2.3 Calculate the cash paid to suppliers’ amount that would appear on the cash flow
statement of Charlie Limited for the year ended 31 December 2015 (8)

2.4 Prepare the investing activities section that would appear on the cash flow
statement of Charlie Limited for the year ended 31 December 2015 (4)

___________________________________________________________________
5
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Question 3 (10 Marks)

Diggers (Pty) Limited (“Diggers”) is in the mining industry. They have 50 000 class A
ordinary shares in issue on 31 December 2016. The following information has been
provided about the entity:

Extract from the statement of profit or loss for the reporting period ended
31 December 2016
2016
Profit before finance costs 800 000
Income tax expense (224 000)

Due to the downturn in the economy, the directors of the entity have decided to amend
the capital structure. They achieved this by doing the following:

- On 1 March 2016 Diggers bought back 60 000 class A shares for R5.00 each.

- On 31 December 2016, there was a share consolidation of one class A share for
every four held.

- On 1 January 2016, 10 000 class B (Preference shares) were issued for R95 000.
They are redeemable at the option of the shareholders. These shares pay a
coupon of 12% per annum. A similar instrument would incur an effective interest
rate of 15% per annum.

A recently graduated accounting intern calculated the basic earnings per share as
R11,52. As his senior, you’ve been requested to review his work to ensure that he’s
calculated the figure correctly.

REQUIRED:

3.1 Re-calculate the earnings per share figure of Diggers (Pty) Limited for the reporting
period ended 31 December 2016.

SHOW ALL WORKINGS

[10]

___________________________________________________________________
6
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Question 4 (35 marks)

Louis (Pty) Ltd acquired 78 000 Class A shares in Button (Pty) Ltd on 31 March 2016 for
R220 000. On this date Louis had 400 000 Class A shares in issue and Button had
120 000 Class A shares in issue.

Their respective financial statements for the reporting period ended 31 March 2017 were
as follows:

Statement of Financial Position for the reporting period ended 31 March 2017:

Louis(Pty) Button
Ltd (Pty) Ltd

Property, plant and equipment 750 000 220 000

Investment in Button 240 000 -
Loan to Button 100 000 -
Inventories 337 500 245 000
Bank 25 200 2 500
1 452 700 467 500

Share capital 550 000 150 000

Retained earnings 840 000 174 000
Loan from Louis 100 000
Trade and other payables 62 700 43 500
1 452 700 467 500

Extract from Statement of Profit or Loss and Other Comprehensive Income for the
reporting period ended 31 March 2017:
Louis (Pty) Button (Pty)
Ltd Ltd

Gross Profit 344 000 362 400

Other Income 42 000 20 600
Other Expenses (92 000) (219 000)
Finance Costs (60 000) (10 000)
Interest Income 10 000 -
Profit before tax 244 000 154 000
Tax (34 000) (45 000)

___________________________________________________________________
7
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Additional Information:
1. The Investment in Button (Pty) Ltd is measured at fair value through profit and
loss. All fair value adjustments are included in Other Income in the Statement of
Profit or Loss. At the date of acquisition, Button (Pty) Ltd had a Share capital of
R150 000 and Retained Earnings of R 65 000.

2. Interest is payable on the Loan to Button (Pty) Ltd at a rate of 10% per annum.
The interest for the year was paid and correctly recorded. The loan is repayable
after 10 years.

3. No dividends were declared by Button (Pty) Ltd for the reporting period ended 31
March 2017.

REQUIRED:

4.1 Prepare the pro-forma journal entries for the Louis Group as at 31 March
2017. (9)

4.2 Prepare the consolidated Statement of Profit and Loss for the Louis Group for the
reporting period ended 31 March 2017. (11)

4.3 Comment on the liquidity of Louis (Pty) Ltd in comparison with Button (Pty) Ltd for
the reporting period ended 31 March 2017 by means of applicable ratios. (9)

4.4 Comment on the profitability of Louis (Pty) Ltd in comparison with Button (Pty) Ltd
for the reporting period ended 31 March 2017 by means of applicable ratios. (6)

___________________________________________________________________
8
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

Question 5 (25 marks)

Potty Designs (Pty) Ltd (“Potty”) is a manufacturer of bathroom accessories. They

manufacture and fit custom-designed bathrooms for clients.

On 1 July 2014, Potty paid R1 450 000 to acquire 60% of the shares in Scents (Pty) Ltd
(“Scents”). Scents is a company that specialises in creating customised air fresheners.
The assets and liabilities of Scents were fairly valued on this date.

On the date of acquisition, the financial statements of Scents showed the following credit
balances:

Share capital R 300 000

Retained earnings R2 200 000
R2 500 000

The following is an extract from the accounting records of Scents on

30 June 2017:
Scents Potty
Debits
Property, plant and equipment 2 522 000 ?
Debentures in Airoma (Pty) Ltd 268 000 -
Investments in shares at fair value 220 000 1 600 000
Trade receivables 210 000 ?
Bank 60 000 ?
Inventories 240 000 ?
Dividends declared and paid 50 000 80 000
3 570 000 ?
Credits
Share capital 300 000 700 000
Retained earnings (1 July 2016) 2 660 000 800 000
Trade payables 130 000 ?
Profit after tax 480 000 900 000
3 570 000 ?

Additional information:

 On 1 July 2015, Scents sold a truck to Potty for R360 000. The truck had a carrying
amount of 240 000. Potty depreciates all of its motor vehicles on a straight line
basis over a four (4) year period to a zero residual value.
 Scents recognised a revaluation surplus of R30 000 on its buildings for the year
ended 30 June 2017.
 The investment in Scents is the only investment that Potty has. No fair value
adjustments were recognised in prior years.

___________________________________________________________________
9
FINANCIAL ACCOUNTING 3B: FAC33B3/FAC3BB3 Final assessment opportunity
2017
___________________________________________________________________

 Scents does not own more than 10% of the shares in any of the companies in
which it has invested.

REQUIRED:

5.1 Prepare the consolidated Statement of Changes in Equity of the Potty Group for the
reporting period ended 30 June 2017 as far as the information permits.

Ignore all tax effects.

Show ALL workings, including the Analysis of Owner’s equity.

[25]

___________________________________________________________________
10