ACC2243ACC2643 Tutorial Question 31 July 2024

The following are the condensed financial statements of P Ltd and its subsidiary S Ltd for the
reporting period ended 31 December 20.17:
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
P Ltd S Ltd
ASSETS
Investment in S Ltd: 8 000 shares at fair value 10 000 –
Inventories 15 000 15 000
Trade receivables 9 000 6 200
Total assets R34 000 R21 200
EQUITY AND LIABILITIES
Share capital (10 000/10 000 shares) 10 000 10 000
Mark-to-market reserve 2 000 –
Retained earnings 20 400 11 200
Deferred tax 1 600 –
Total equity and liabilities R34 000 R21 200

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 20.17
P Ltd S Ltd
Revenue 50 000 60 000
Cost of sales (25 000) (40 000)
Gross profit 25 000 20 000
Other expenses (5 000) (10 000)
Profit before tax 20 000 10 000
Income tax expense (28%) (5 600) (2 800)
PROFIT FOR THE YEAR 14 400 7 200
Other comprehensive income:
Items that will not be reclassified to profit or loss
Mark-to-market reserve (fair value adjustment on investment) 500 –
Other comprehensive income for the year, net of tax 500 –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R14 900 R7 200

EXTRACT FROM THE STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 20.17
Mark-to-
Retained
market
earnings
reserve
P Ltd P Ltd S Ltd
Balance at 1 January 20.17 1 500 6 000 4 000
Changes in equity for 20.17
Total comprehensive income for the year:
Profit for the year – 14 400 7 200
Other comprehensive income for the year 500 – –
Balance at 31 December 20.17 R2 000 R20 400 R11 200

1. P Ltd acquired the interest in S Ltd on S Ltd’s incorporation on 2 January 20.6.

2. Since 2 January 20.17, S Ltd has acquired all its inventories from P Ltd at cost price plus
25%. S Ltd’s total inventories have therefore been acquired from P Ltd during the reporting
period.
3. Total sales of inventories from P Ltd to S Ltd amounted to R30 000.
P Ltd classifies all financial assets as financial assets at fair value through OCI. Such financial assets
are carried at fair value. Changes in fair value are recognised in other comprehensive income and
accumulated in equity through the mark-to-market reserve.
Required:
1. Prepare the analysis for S Ltd
2. Prepare the consolidated pro-forma journal entries
3. Prepare the consolidated statements for P Ltd Group

Suggested Solution
1. Analysis of owners’ equity of S Ltd
P Ltd 80%
Total NCI
At Since
i At acquisition
Share capital 10 000 8 000 2 000
Retained earnings – – –
10 000 8 000 2 000
Purchase difference – – –
Consideration
(10 000 – 1 500(J1) – 500(J2)) and NCI 10 000 R8 000 2 000
ii Since acquisition
 To beginning of current year :

Retained earnings (4 000 – 0) 4 000 3 200 800

2 800
 Current year :

Profit for the year 7 200 5 760 1 440

R21 200 R8 960 R4 240

Comment
As P Ltd is the seller, the intragroup sale of inventories has no effect on the analysis of
the equity of S Ltd.
2.
3.
4.
5.
2. Pro forma consolidation journal entries

Dr Cr
J1 Mark-to-market reserve – Beginning of year
(P)(SCE) 1 500
Investment in S Ltd (P)(SFP) (9 500 – 8 000) 1 500
Reversal of fair value adjustment on investment
in S Ltd at beginning of year at group level
J2 Mark-to-market reserve (P)(OCI) (10 000 – 9 500) 500
Investment in S Ltd (P)(SFP) 500
Reversal of fair value adjustment on investment
in S Ltd for current year at group level
J3 Revenue (P)(P/L) 30 000
Cost of sales (S)(P/L) 30 000
Elimination of intragroup sales
J4 Cost of sales (P)(P/L) 3 000
Inventories (S)(SFP) 3 000
Elimination of unrealised intragroup profit included
in the closing inventories of S Ltd at 31/12/20.17
(15 000 × 25/125)

J5 Share capital (S)(SCE) 10 000

Investment in S Ltd (P)(SFP) 8 000
Non-controlling interests (SFP) 2 000
Elimination of owners’ equity at acquisition of S Ltd
 J6 Retained earnings – Beginning of year (S)(SCE) 800
Non-controlling interests (SFP) 800
Recognition of non-controlling interests in retained
earnings of the subsidiary for the period since
acquisition until beginning of current year
J7 Non-controlling interests (P/L) 1 440
Non-controlling interests (SFP) 1 440
Recognition of non-controlling interests in profit
for the year
3.
4.
5.
6.
7.
3.Consolidated statements
P LTD GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20.17
ASSETS
Current assets
Inventories (15 000(P) + 15 000(S) – 3 000(J4)) 27 000
Trade receivables (9 000(P) + 6 200(S)) 15 200
42 200
Total assets R42 200
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 10 000
Retained earnings 26 360
36 360
Non-controlling interests 4 240
Total equity 40 600
Non-current liabilities
Deferred tax (1 600(P) 1 600
Total equity and liabilities R42 200

8.
P LTD GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 20.17
Revenue (50 000(P) + 60 000(S) – 30 000(J3)) 80 000
Cost of sales (25 000(P) + 40 000(S) – 30 000(J3) + 3 000(J4)) (38 000)
Gross profit 42 000
Other expenses (5 000(P) + 10 000(S)) (15 000)
Profit before tax 27 000
Income tax expense (5 600(P) + 2 800(S)) (8 400)
PROFIT FOR THE YEAR 18 600
Other comprehensive income for the year –
TOTAL COMPREHENSIVE INCOME FOR THE YEAR R18 600
Profit attributable to:
Owners of the parent 17 160
Non-controlling interests 1 440
R18 600
Total comprehensive income attributable to:
Owners of the parent 17 160
Non-controlling interests 1 440
R18 600
9.
10.
11.
12.
13.
14.
15.
16.
P LTD GROUP
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
 FOR THE YEAR ENDED 31 DECEMBER 20.17
Non-
Share Retained con- Total
Total
capital earnings trolling equity
interests
Balance at 1 January 20.17 10 000 *9 200 19 200 2 800 22 000
Changes in equity for 20.17
Total comprehensive income
for the year:
Profit for the year – 17 160 17 160 1 440 18 600
Balance at 31 December 20.17 R10 000 R26 360 R36 360 R4 240 R40 600

* 6 000 + 3 200 (analysis) = 9 200

 20 400 + 8 960 (analysis) – 3 000(J5) = 26 360