QUESTION 1

IGNORE VAT

Thuto (Pty) Ltd (‘Thuto’) is a company based in South Africa that offers high quality short
courses to both companies and individuals. Thuto’s vision and mission are to build sustainable
education models that will contribute positively towards taking the country forward during the
digital transformation brought about by the Fourth Industrial Revolution (4IR).

Thuto offers courses on, amongst others, coding, artificial intelligence (AI) and big data
analysis. The courses are delivered in high-tech lecture venues. Thuto has a 31 December
financial year end. Its financial statements are prepared in accordance with International
Financial Reporting Standards (IFRS).

During the 2021 financial year, Thuto earned profits of R2 500 000 and declared a dividend of
R1 050 000.

Investment in Sabelo
Thuto had done some research and found that companies that supplied do-it-yourself (DIY)
equipment reported an increase in profits during the 2020 financial year period. This was
attributed to the increase in home renovations that took place during the lockdown periods,
with people converting areas in their homes into dedicated office spaces. As a result, Thuto
decided to invest in Sabelo (Pty) Ltd (‘Sabelo’), a manufacturer and supplier of DIY equipment,
to diversify its revenue streams.

On 31 December 2020, Thuto obtained control over Sabelo by acquiring 80% of Sabelo’s
issued ordinary share capital. The purchase price for the 80% controlling interest was settled
as follows:

 A cash payment of R3,5 million.

 The issue of ordinary shares in Thuto with a fair value of R500 000 on the acquisition
date.

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Sabelo’s CFO provided the following extract of Sabelo’s statement of financial position on the
date of acquisition:

Extract
Statement of financial position of Sabelo at 31 December 2020
Notes R’000
Assets
Land a 900
Factory building a 4 500
Plant and equipment 300
Non-current asset held for sale f ?

Equity
Ordinary share capital 350
Retained earnings 4 805

Notes

(a) The fair value of assets and liabilities in the statement of financial position are equal to
their carrying amounts, except for the following:

o Land = R1,25 million

o *Factory buildings = R4,6 million

*The factory buildings have a remaining useful life of 10 years at 31 December 2020.

(b) Sabelo continuously looks for ways to improve its business and the products being
offered to the public. The company invested in internal research and innovation in the
DIY space to assist clients with DIY ideas for their projects. The objective had been to
publish the ideas as part of strategic marketing for the company. The expenditure to
date was expensed by the company. At 31 December 2020, the research output could
be sold for R45 000 to an interested party. The research has an expected useful life of
4years. The amount of R45 000 is not deductible for tax purposes.
(c) During December 2020, Sabelo was in the process of entering into a contract to deliver
DIY equipment to an overseas buyer. It was highly probable that the contract would have
been signed during December 2020. The fair value of this contract was R800 000 as at
31 December 2020.

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(d) Sabelo owns a database, used in managing its loyalty scheme, which captures
information on customer demographics, preferences, relationship histories and past
buying patterns. The database cannot be sold or licensed due to regulatory laws. The
fair value of the database was R500 000 as at 31 December 2020.

(e) Sabelo is involved in a legal dispute with a customer who complained that a series of
carports they built, based on a DIY idea obtained from Sabelo’s website, collapsed. The
customer sued Sabelo to recover the costs incurred in building the carports. Sabelo did
not include a note on the company’s website stating that it will not be held liable for any
of its ideas, suggestions or advice that do not work as indicated. However, Sabelo’s
legal team has indicated that it is highly unlikely (constituting a 10% probability) that a
court of law would uphold the customer’s claim. The fair value of Sabelo’s obligation was
estimated to be R150 000 as at 31 December 2020.

(f) Based on the low level of utilisation of a building during 2020 financial year, the CFO of
Sabelo proposed that the office building be sold as soon as possible.

On 30 September 2020, the board of directors approved the proposal and started the
advertising process immediately. All criteria for classification as held for sale in
accordance with IFRS 5 Non- current Assets Held for Sale and Discontinued Operations
were met on 30 September 2020.

The building was acquired on 30 November 2018 at a cost of R7,5 million. The value of
the land is insignificant. The building was available for use as intended by management
immediately and is accounted for in accordance with the cost model of IAS 16 Property,
Plant and Equipment. The building is depreciated on a straight-line basis over an
estimated useful life of 20 years and has an insignificant residual value. SARS grants
unapportioned wear and tear allowances of 5% per annum as per S13(1)

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The details of the fair value and costs to sell are as follows:

Fair value less cost to sell

R’000
30 September 2020 5 750
31 December 2020* 6 600

* The fair value has subsequently increased because residential property is in high demand
and property developers are converting office space into residential units. Sabelo’s property
is in a prime location for residential use.

The building was subsequently sold for R7 200 000 on 31 January 2021.

Sabelo measures the non-controlling interest at its proportionate share of the identifiable net
assets.

On 1 July 2021, Sabelo sold DIY office furniture to Thuto for a total consideration of
R1 500 000. A mark-up on cost of 30% was applied in determining the total consideration.
Thuto classified the office furniture as property, plant, and equipment with an expected useful
life of 3 year and no residual value.

Additional information

 During the 2021 financial year, Sabelo earned profits of R1 250 000 and declared a
dividend of R250 000.

 The tax rate is 28% and the inclusion rate for capital gains is 80%.

 It is the accounting policy of all companies within the Thuto Group to apply a threshold of
5% when considering whether an outcome is remote for financial reporting purposes.

ADAPTED: SAICA 2022

END OF QUESTION 1.

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QUESTION 1 (50 MARKS)
50 x 1.5 = 75 minutes

You are required to:

a) Prepare the journal entries required to account for the building held for sale 13
in Sabelo (Pty) Limited’s separate financial statements for the year ending
31 December 2020.

 Narrations are not required

 Present your journal entries in date order/sequence

 Round your answers to the nearest rand

b) Discuss the appropriate accounting treatment of the legal dispute in the 7

following financial statements as at 31 December 2020:

 Sabelo (Pty) Limited’s separate financial statements

 Thuto (Pty) Limited’s consolidated financial statements
Communication: Logical argument 1

c) Calculate the goodwill / gain on bargain purchase that should be recognised 10

upon the acquisition of Sabelo (Pty) Limited by Thuto (Pty) Limited.

(END OF QUESTION 1)