lOMoAR cPSD| 49343224
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QUESTION 1 (27 marks) (32 minutes)
Arrow Ltd operates as a manufacturer of packaging and industrial cleaning materials. In order to
reduce their carbon footprint, the board of directors of Arrow Ltd decided to acquire 80% of the
shares of Cycle Ltd, a locally based recycling company. Cycle Ltd became a subsidiary of Arrow
Ltd on 1 January 2009.
The following represents a list of balances of Arrow Ltd and Cycle Ltd as at 31 December 2013:
Arrow Cycle
Ltd Ltd
R R
DEBITS
Property, plant and equipment Investment 2 846 0001 880 408
in Cycle Ltd 494 000 -
Loan: Cycle Ltd 200 000 -
Inventories 330 000 420 000
Trade and other receivables 562 952 148 952
Cash and cash equivalents 80 000 -
CREDITS
Share capital – Ordinary shares
(2 500 000/350 000 shares) 1 250 000 175 000
Other components of equity 500 000 250 000
Retained earnings 659 752 799 360
Loan: Arrow Ltd - 200 000
10% Debentures (12 000 debentures) - 120 000
An extract from the statement of profit or loss and other comprehensive income includes the
following items:
Arrow Cycle
Ltd Ltd
R4 R3
Sales 000 000 440 000
Opening inventory - 1 January 2013 300 000 390 000
Purchases 1 500 000 1 169 348
Management fees received from Cycle Ltd 60 000 -
Depreciation: Plant and equipment 110 000 75 000
Management fees paid to Arrow Ltd - 60 000
Interest paid: Debentures - 14 400
Bank overdraft - 25 000
Loan – Arrow Ltd - 20 000
Interest received: Loan – Cycle Ltd 20 000 -
You may assume that Cycle Ltd’s profit after tax amounted to R611 860 before taking into account
any intragroup transaction adjustments.
QUESTION 1 (continued)
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Additional information
1. The equity of Cycle Ltd was made up as follows on the date that Cycle Ltd became a subsidiary
of Arrow Ltd. Each share carries one voting right.
R
Share capital 175 000
Retained earnings 180 000
Revaluation surplus 250 000
It is the group’s policy to show goodwill at cost in the financial statements. Assume that the
carrying amounts of all other assets and liabilities were equal to the fair value thereof.
2. The retained earnings balances at 1 January 2013 were as follows:
R
Arrow Ltd 170 000
Cycle Ltd 240 000
3. Since acquisition, Arrow Ltd has purchased 50% of its plastic materials from Cycle Ltd in
accordance with a decision made by the board of directors. Cycle Ltd sells the inventory to
Arrow Ltd at a profit of 20% on the cost price. Cycle Ltd sold inventory amounting to R1
250 000 to Arrow Ltd for the year ended 31 December 2013.
50% of the opening and closing inventories of Arrow Ltd had been purchased from Cycle
Ltd.
4. On 1 July 2012, Arrow Ltd sold machinery at a profit of R100 000 to Cycle Ltd. Cycle Ltd
paid R250 000 for the machinery. It is the group’s policy to depreciate machinery at 20%
per year according to the straight-line method.
REQUIRED:
Draft the pro forma consolidation journal entries of the Arrow Ltd Group for the year ended 31
December 2013.
Please note:
• Exclude all journals relating to dividend transactions.
• Indicate clearly to which company each account refers.
• No journal narrations are required.
• Show all calculations.
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• Ignore the taxation effect on unrealised profits and/or losses as well as capital gains tax.
QUESTION 2 (48 marks) (58 minutes)
The following are the trial balances of Lope Ltd and Hole Ltd as at 30 April 2014:
Lope Hole
Ltd Ltd
CREDITS R R
Share capital – Ordinary shares (100 000/60 000 shares) 200 000 60 000
– 12% Cumulative preference shares
(40 000 shares) - 40 000
8% Debentures (10 000/20 000 debentures) 10 000 20 000
Revaluation surplus 140 000 40 000
Retained earnings – 1 May 2013 164 500 55 000
Gross profit 1 620 800 1 415 900
Other income 37 200 68 300
Trade and other payables 278 800 126 100
Accumulated depreciation – plant and machinery 293 800 295 000
2 745 100 2 120 300
DEBITS
Land and buildings 350 000 250 000
Plant and machinery 500 000 500 000
Inventory 76 500 80 000
Other expenses 745 000 620 000
Interest paid 18 000 15 600
Income tax expense 250 600 237 608
Trade and other receivables 395 000 370 692
Bank 35 000 26 000
Dividends paid 5 000 20 400
Investment in Hole Ltd at fair value
– 45 000 Ordinary shares (cost price: R330 000) – 18 330 000 -
000 12% Cumulative preference shares
(cost price: R25 000) 25 000 -
– 15 000 8% Debentures (cost price: R15 000) 15 000 -
2 745 100 2 120 300
Additional information
1. Lope Ltd acquired all its interest (ordinary shares, preference shares and debentures) in
Hole Ltd at 1 September 2013. At that date the carrying amounts of Hole Ltd’s assets and
liabilities were equal to the fair values thereof, except for land and buildings, which must be
revalued by R50 000. It is the policy of the group to revalue land and buildings every three
years. This increase has not yet been recorded.
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, lOMoAR cPSD| 49343224
QUESTION 1 (27 marks) (32 minutes)
Arrow Ltd operates as a manufacturer of packaging and industrial cleaning materials. In order to
reduce their carbon footprint, the board of directors of Arrow Ltd decided to acquire 80% of the
shares of Cycle Ltd, a locally based recycling company. Cycle Ltd became a subsidiary of Arrow
Ltd on 1 January 2009.
The following represents a list of balances of Arrow Ltd and Cycle Ltd as at 31 December 2013:
Arrow Cycle
Ltd Ltd
R R
DEBITS
Property, plant and equipment Investment 2 846 0001 880 408
in Cycle Ltd 494 000 -
Loan: Cycle Ltd 200 000 -
Inventories 330 000 420 000
Trade and other receivables 562 952 148 952
Cash and cash equivalents 80 000 -
CREDITS
Share capital – Ordinary shares
(2 500 000/350 000 shares) 1 250 000 175 000
Other components of equity 500 000 250 000
Retained earnings 659 752 799 360
Loan: Arrow Ltd - 200 000
10% Debentures (12 000 debentures) - 120 000
An extract from the statement of profit or loss and other comprehensive income includes the
following items:
Arrow Cycle
Ltd Ltd
R4 R3
Sales 000 000 440 000
Opening inventory - 1 January 2013 300 000 390 000
Purchases 1 500 000 1 169 348
Management fees received from Cycle Ltd 60 000 -
Depreciation: Plant and equipment 110 000 75 000
Management fees paid to Arrow Ltd - 60 000
Interest paid: Debentures - 14 400
Bank overdraft - 25 000
Loan – Arrow Ltd - 20 000
Interest received: Loan – Cycle Ltd 20 000 -
You may assume that Cycle Ltd’s profit after tax amounted to R611 860 before taking into account
any intragroup transaction adjustments.
QUESTION 1 (continued)
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Additional information
1. The equity of Cycle Ltd was made up as follows on the date that Cycle Ltd became a subsidiary
of Arrow Ltd. Each share carries one voting right.
R
Share capital 175 000
Retained earnings 180 000
Revaluation surplus 250 000
It is the group’s policy to show goodwill at cost in the financial statements. Assume that the
carrying amounts of all other assets and liabilities were equal to the fair value thereof.
2. The retained earnings balances at 1 January 2013 were as follows:
R
Arrow Ltd 170 000
Cycle Ltd 240 000
3. Since acquisition, Arrow Ltd has purchased 50% of its plastic materials from Cycle Ltd in
accordance with a decision made by the board of directors. Cycle Ltd sells the inventory to
Arrow Ltd at a profit of 20% on the cost price. Cycle Ltd sold inventory amounting to R1
250 000 to Arrow Ltd for the year ended 31 December 2013.
50% of the opening and closing inventories of Arrow Ltd had been purchased from Cycle
Ltd.
4. On 1 July 2012, Arrow Ltd sold machinery at a profit of R100 000 to Cycle Ltd. Cycle Ltd
paid R250 000 for the machinery. It is the group’s policy to depreciate machinery at 20%
per year according to the straight-line method.
REQUIRED:
Draft the pro forma consolidation journal entries of the Arrow Ltd Group for the year ended 31
December 2013.
Please note:
• Exclude all journals relating to dividend transactions.
• Indicate clearly to which company each account refers.
• No journal narrations are required.
• Show all calculations.
3
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, lOMoAR cPSD| 49343224
• Ignore the taxation effect on unrealised profits and/or losses as well as capital gains tax.
QUESTION 2 (48 marks) (58 minutes)
The following are the trial balances of Lope Ltd and Hole Ltd as at 30 April 2014:
Lope Hole
Ltd Ltd
CREDITS R R
Share capital – Ordinary shares (100 000/60 000 shares) 200 000 60 000
– 12% Cumulative preference shares
(40 000 shares) - 40 000
8% Debentures (10 000/20 000 debentures) 10 000 20 000
Revaluation surplus 140 000 40 000
Retained earnings – 1 May 2013 164 500 55 000
Gross profit 1 620 800 1 415 900
Other income 37 200 68 300
Trade and other payables 278 800 126 100
Accumulated depreciation – plant and machinery 293 800 295 000
2 745 100 2 120 300
DEBITS
Land and buildings 350 000 250 000
Plant and machinery 500 000 500 000
Inventory 76 500 80 000
Other expenses 745 000 620 000
Interest paid 18 000 15 600
Income tax expense 250 600 237 608
Trade and other receivables 395 000 370 692
Bank 35 000 26 000
Dividends paid 5 000 20 400
Investment in Hole Ltd at fair value
– 45 000 Ordinary shares (cost price: R330 000) – 18 330 000 -
000 12% Cumulative preference shares
(cost price: R25 000) 25 000 -
– 15 000 8% Debentures (cost price: R15 000) 15 000 -
2 745 100 2 120 300
Additional information
1. Lope Ltd acquired all its interest (ordinary shares, preference shares and debentures) in
Hole Ltd at 1 September 2013. At that date the carrying amounts of Hole Ltd’s assets and
liabilities were equal to the fair values thereof, except for land and buildings, which must be
revalued by R50 000. It is the policy of the group to revalue land and buildings every three
years. This increase has not yet been recorded.
4
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