National University of Science and

Technology

FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING

SECOND SEMESTER EXAMINATION: 2014

DATE: MAY 2014

SUBJECT: ADVANCED FINANCIAL ACCOUNTING: CAC

5201

TIME ALLOWED: THREE (3) HOURS

MARKS: 100

INSTRUCTION TO THE CANDIDATES

1. Answer all questions
2. Begin each Full question on a new page
INFORMATION FOR CANDIDATES
1. All workings should be shown
2. All answers should be presented in good style
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Question one [25 Marks]

The financial controller of Don Ltd has prepared Don Ltd’s own draft Statement of Profit
or Loss for the year ended 31 March 2014 and its own Statement of Financial Position
as at that date. She has asked you, as Assistant Accountant, to prepare a Statement of
changes in equity for Don Ltd before you and she start the consolidation process. Notes
(1) to (4) below are relevant to this task
(1)Don Ltd’s draft Statement of Profit or Loss for the year ended 31 March 2014 showed
a profit for the year of $526,700. Its retained earnings at 1 April 2013 were $2,365,500

(2) During the year the company revalued a particular class of plant and machinery to a
total of $650,000. At the date of the revaluation, the plant had a cost of $456,000 and
accumulated depreciation of $215,500. Depreciation on the revalued amount of $67,800
was subsequently charged. If depreciation had been charged on cost the charge would
have been $45,600. Don Ltd wishes to make annual transfer between the revaluation
surplus and retained earnings in accordance with best practice.

(3) Don Ltd had 1 million 5% redeemable $1 preference shares in issue at 31 March
2013 and 2014, which were issued and are redeemable at par. The dividend on these
shares was paid on the last day of the year and is not reflected in the profit for the year.
(4) On 31 March 2013 Don Ltd had 2 million 50c ordinary shares in issue, also issued at
par. On 16 January 2014 the company issued a further 500,000 50c ordinary shares, at
a price of $1,10 per share
Following the preparation of Don Ltd’s Statement of changes in equity you have been
asked to calculate certain draft profit figures that will appear in Don Ltd’s Consolidated
Statement of Profit or Loss for the year ended 31 March 2014. Notes (5) and (6) below
are relevant
(5) Don Ltd has one subsidiary, Red Ltd, which was acquired on 1 October 2013, and
an associated company Cat Ltd, which has been held for a number of years the
following information is relevant.

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 Red Ltd Cat Ltd
Holding of ordinary shares by Don Ltd 75% 45%
Profit for the year ended 31 March 2014 $457,000 $103,400
Impairment in goodwill /investment in the year
Ended 31 March 2014 $50,000 $10,000
All profits are accrued evenly over the year.

(6) On 1 October 2013 Red Ltd sold an item of plant to Don Ltd. The plant had cost Red
Ltd $30,000 on 1 October 2012, which was estimated at five years, was sold to Don Ltd
for $40,000. The estimated total useful life of the plant remained unchanged.
Required:
Prepare Don’s Ltd’s own Statement of Changes in Equity for the year ended 31 March
2014. The total column is not required. [4]
Calculate the following figures as they would appear in Don’s Ltd’s Consolidated
Statement of Profit or Loss for the year ended 31 March 2014
(i) Profit attributable to the owners of Don Ltd [3]
(ii) Profit attributable to the non-controlling interest [3]
(b) Beech Ltd is a manufacturing company. During the year ended 31 March 2014 it
acquired shares in two companies Willow Ltd and Laburnum. The information relating to
the acquisition is set out below:
Willow Ltd Laburnum Ltd
Percentage of ordinary shares acquired 80% 30%
Date of acquisition 1 April 2013 1 October 2013
Issued $1 ordinary shares 100,000 200,000
Excess of fair value of land over carrying amt $50,000 $25,000
Cost of acquisition $750,000 $85,000

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Summary of the Statement of Profit or Loss for the year ended 31 March 2014 for
Beech Ltd and Willow Ltd and Laburnum Ltd are set out below:

Beech Willow Laburnum

$ $ $
Revenue 2,450,000 1,526,700 876,800
Cost of sales (1,345,700) (917,700) (679,400)
Gross profit 1,104,300 609,000 197,400
Operating expenses (877,450) (467,800) (97,200)
Profit before tax 226,850 141,200 100,200
Income tax expense (68,000) (42,500) (30,400)
Profit for the period 158,850 98,700 69,800
Additional information
• All revenue and costs accrued evenly over the year.
• All land held at the dates of acquisition was still held on 31 March 2014
• In January 2013 Beech Ltd purchased goods for $9,000 from Willow Ltd and for
$5,000 from Laburnum Ltd. All goods sold among the three companies are sold
at a gross profit margin of 20%. Half of each set of goods remained in inventory
at year end.
• Retained earnings on 31 March 2014 were: Beech Ltd $1,420,500; Willow Ltd
$567,400 and Laburnum Ltd $345,700. None of the companies has any reserves
other than retained earnings.
Required:
Calculate the following figures for Beech Ltd’s Consolidated Financial Statements for
the year ended 31 March 2014
(i) Cost of sales
(ii) Share of profits of associate
(iii) Goodwill
(iv) Investment in associate
(v) Retained earnings

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 (vi) Non-controlling interest [15]

Question two [25 Marks]

(a) The financial manager of Lion Ltd wishes to take out a forward contract to hedge a
future purchase share which is highly probable. He is uncertain about how the
transaction should be treated for accounting purposes and approaches you for advice.

Required:

Discuss how such a hedge should be treated for accounting purposes. [10]

(b) Jaguar Ltd is a company incorporated in Zimbabwe. It is involved in the manufacture

of an Anti-retroviral drug that is used to boost the immune system of people who are
infected with the Acquired Immune Deficiency Syndrome. One of its managers attended
a conference in the United Kingdom, and during the conference he met Mr. Cabaye who
is the managing director of a company that manufactures machines that produce this
drug. Mr. Cabaye informed him of the new machine that will manufacture the drug in the
shortest possible time. Mr. Moyo the manager of Jaguar became interested of the
machine such that he went on to the company board to tell them of the good news. The
board agreed at a meeting on 1 January 2013 to purchase the machine.

On 1 May 2013 the machine was ordered from France in terms of non-cancellable order
and the machine was delivered to Jaguar Ltd on 1 July 2013 at a cost of €4 million. The
amount owing to the supplier was settled in cash on 10 July 2013. Jaguar Ltd installed
and tested the machine during 1 July 2013 and 31 July 2013 (the date the machine was
ready for use) at a cost of $200,000. Production using the machine commenced on 1
September 2013.

On 1 May 2013, Jaguar Ltd entered into a Forward Exchange Contract (FEC) to
purchase €4 million for delivery on 10 July 2013. Jaguar Ltd designated this FEC as a
cash flow hedge of the changes in the spot exchange rate for the period 1 May 2013 to
30 June 2013. For the period 1 July 2013 to 10 July 2013, Jaguar Ltd designated the

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FEC as a fair value hedge of the forward exchange rate in the creditor. The hedge met
all the criteria of IAS 39 financial instruments: recognition and measurement, par .88

The fair value of the FEC was as follows:

Date fair value

Asset/Liability

1 May 2103 -

1 July 2013 (518,272)

10 July 2013 (280,000)

The following exchange rates are applied:

Date spot rate forward exchange to 10 July 2013

1€=$ 1€=$

1 May 2013 8.55 8.65

1 July 2013 8.50 8.52

10 July 2013 8.58 N/A

31 December 2013 8.80 N/A

The machine is depreciated on a straight line basis over ten years

All items of machinery are assumed to have a residual value of nil unless otherwise
indicated.

There was no impairment of assets

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Required

Prepare journal entries to record the purchase of the machine from France and to
record the Foreign Exchange Contract (FEC) from the date of inception to the date of
settlement by applying the appropriate hedge accounting principles [15]

Question three [25 Marks]

Super Cat Ltd is company that is listed on the Zimbabwe Stock Exchange. The
company operates three segments, namely, eco-tourism, manufacturing and
transportation. In addition to its own activities, the company holds investments in local
and foreign subsidiaries. The financial reporting framework that Super Cat Ltd group
uses is International Financial Reporting Standards (IFRS). The group adopted IFRS 3
(revised 2008), Business Combinations and IAS 27 Separate Financial Statements,
IFRS 10, Consolidated Financial Statements, in its separate and consolidated financial
statements for the year ended 31December 2013. All companies in the group have a 31
December reporting date. Investments in subsidiaries are measured at cost in the
separate financial statements of Super Cat Ltd.

Cheetah Ltd

Super Cat Ltd purchased an 80% controlling interest in Cheetah Ltd on 1 March 2013
for $430,000 (paid in cash on that date). Super Cat elected to measure non-controlling
interest at fair value of $128,000. The registered auditors of Cheetah performed no
external audit for the period ended 31 March 2013.

The following table shows the carrying amount of equity of Cheetah Ltd on various
dates

1 March 2013 31 December 2013

Share capital 100,000 100,000
Retained earnings 250,000 380,000
Revaluation surplus buildings 180,000 300,000

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 530,000 780,000
Cheetah revalued its buildings on 1 January 2013. An additional revaluation was
performed on 31 December 2013 to ensure that the carrying amount did not differ
materially from the fair value at the reporting date. Cheetah does not transfer
revaluation surpluses to retained earnings in its individual statements. Depreciation for
the year is not based on the most recent revaluation.
Cheetah did not declare any dividends for the year ended 31 December 2013.

Adjustments resulting from the following information are not reflected in the equity of
Cheetah:

• The fair value of the buildings of Cheetah was $800,000 on 1 March 2013, which
was $40,000 higher than its carrying amount at that date. The buildings have no
residual value. On 1 March 2013 the remaining useful life of the buildings was 20
years.
• Cheetah leases certain equipment from a farmer in terms of a finance lease. At
that date there were 18 months remaining on the lease agreement. The fair
value of the equipment on 1 March 2013 was $230,000. The carrying amount of
this equipment was $170,000 on 1 March 2008. The remaining useful life for the
farmer was four years
• No other adjustments are required at the date of acquisition.

Super Cat Ltd purchases certain inventory from Cheetah in terms of an agreement
which was concluded on January 2011. The contract expires on 30 June 2014.
Currently, the price of the inventory in terms of the agreement is lower than the market
price at which Super Cat could purchase the inventory from another supplier. The fair
value of the contract on 1 March 2013 was $180,000, which includes an off market
component of $25,000.

Assume that the tax rate is 28% and capital gains is 14%

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Required:

(a) Calculate the goodwill or gain from a bargain purchase arising on the acquisition of
Cheetah on 1 March 2013. [10]

(b) List the audit procedures that you would perform to audit the accuracy and valuation
of the amounts recognized in respect of the acquisition of Cheetah Ltd in the
consolidated annual financial statements of the Super Cat group at the date of
acquisition. [10]

(c) Super Cat acquired another entity, Zebra Ltd, on 1 May 2012. At the time of the
acquisition, Zebra was being sued as there is an alleged mis-selling case potentially
implicating the entity. The claimants are suing for damages of $10 million. Super Cat
estimates that the fair value of any contingent liability is $4 million and feels that it is
more likely than not that no outflow of funds will occur.
Super Cat wishes to know how to account for this potential liability in Zebra’s entity
financial statements and whether the treatment would be the same in the consolidated
financial statements.
Required:
Discuss, with suitable computations, the advice that should be given to Super Cat in
accounting for the above event. [5]

Question Four [25 Marks]

Buffalo Ltdis a company that is listed on the Zimbabwe Stock Exchange. It also invests
in other companies so as to diversify its risks. The consolidated annual financial
statements being in the process of being finalised, but some outstanding issues still
need to be resolved

The following selected information is made available

• The group uses the costs model to account for all items of Property, plant and
equipment.
• The non-controlling interest has been measured at fair value on the date of
acquisition and date of business combination.

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 • The following international Financial Reporting Standards are applicable
• IFRS 9 financial instruments
• IFRS 10 Consolidated Financial Statements
• IFRS 11 Joint Arrangements
• IFRS 12 Disclosure of Interests in other Entities
• IFRS 13 Fair value Measurement
• IAS 27 Separate Financial Statements
• IAS 28 Investments in Associates and Joint Ventures

Rhino Ltd

Rhino Ltd is a diversified fashion retail group listed on the Zimbabwe Stock Exchange
ZSE. Its operating and financial policies are determined by the company’s board of
directors. All directors of Rhino Ltd are appointed by the shareholders at annual general
meetings by simple majority vote. The company had 2,500,000 ordinary shares in issue
throughout the period 1 January 2009 to 31 December 2013. Each ordinary share in
Rhino Ltd entitles the holder to one vote at shareholders’ meetings.

Details of the voting rights represented at the annual general meeting of Rhino’s
shareholders are as follows:

Annual general meeting held on

30/03/2013 31/03/2012 31/03/2011 31/03/2010 31/03/2009

Voting rights
Represented, in 91% 91% 90% 89% 90%
Proxy
The next annual general meeting of Rhino will be held on 31 March 2014

On 1 March 2009 Buffalo Ltd Acquired 40% of ordinary shares of Rhino Ltd for $45
million.

The following pertains to this acquisition.

• No transaction costs were incurred.

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 • The net assets recognized by Rhino Ltd were considered to be fairly valued. No
additional assets, liabilities or contingent liabilities were identified by Buffalo Ltd
on this date.
• Elephant Ltd, an unrelated Zimbabwean company listed on the ZSE , held 10 %
of the ordinary shares of Rhino Ltd. The remaining ordinary shares were widely
held by shareholders holding less than 1% each of the ordinary share capital.
• Buffalo Ltd correctly classified the interest as an investment in associate.

On 31 December 2013 Buffalo Ltd acquired a further 8% of Rhino Ltd ordinary shares in
the open market. The following pertains to this acquisition:

• Buffalo Ltd incurred directly attributable transaction costs of $750,000

• The net assets recognized by Rhino Ltd were considered to be fairly valued
except for its production machinery, which was considered to be undervalued by
$10 million. No additional assets, liabilities or contingent liabilities were identified
by Buffalo Ltd on this date.
• Rhino Ltd ordinary shares were trading at $82.50 per share on the ZSE on 31
December 2013 and the 52% of Rhino Ltd had a fair value equal to the market
value.

Details relating to the shareholders’ equity of the Rhino group are as follows:
31/12/2013 01/01/2009
Ordinary share capital 50,000 50,000
Equity –convertible non-cumulative preference
Shares 15,000 -
Retained earnings 126,500 56,500
Foreign currency translation reserve (16,000) (6,000)
Mark to market reserve 6,000 2,000
The unlisted preference shares referred to above were issued on 1 August 2009 and
mandatorily convertible into 500,000 shares on 31 July 2014. The shares are not
convertible prior to that date. The holders of the preference shares do not have voting
rights except on matters that directly affect their rights. The preference shares had a fair

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value of $16 million on 31 December 2013. The preference shares have been held by
Elephant Ltd since August 2009

Hippo Ltd

Buffalo acquired 10% of Hippo Ltd on 1 September 2010 for R1 million. The company is
incorporated in South Africa. On the same day Buffalo Ltd acquired an option to
purchase an additional 30% of the company at any time between 1 September 2012
and 1 September 2018 at a strike price of R3 million. The cost of the option was
R500,000.

On 1 September 2010, Buffalo classified its 10% interest in Hippo Ltd as a financial
asset held at fair value through other comprehensive income.

Required

Draft a memorandum to the group Financial Accountant in which you discuss

(i) Whether Buffalo controls Rhino as a consequence of acquiring additional

shares in Rhino Ltd as at 31 December 2013 [15]
(ii) With reasons, the appropriate recognition and measurement of investment in
Hippo Ltd and an option to purchase additional shares in Hippo Ltd in the
consolidated financial statements of Buffalo for the year ended 31 December
2013. [10]

END OF EXAMINATION PAPER

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