SCENARIO QUIZ 3 Black Ltd ("Black"), a sports goods manufacturer has one subsidiary, Coffee Ltd ("Coffee") which it acquired on 1 January 20.3. The following are the trial balances of Black and Coffee at 31 December 20.7: Credits Ordinary share capital 300 000 Cumulative 10% preference share capital Retained earnings - 31 December 20.6 211 600 Deferred taxation 18 400 24 000 Long-term borrowings 80 000 Operating profit 130 000 Investment income - interest and dividends 27 000 Debits Property, plant & equipment - carrying amount Investment in Coffee · 160 000 Ordinary shares, at cost 198 000 · 7 500 Preference shares, at cost 15 000 · 15% Loan receivable Other investments 60 000 Current assets 177 640 Interest expenses 18 600 10 500 Taxation expense 45 760 59 800 Dividends paid · Ordinary · Preference 767 000 674 000 Black Ltd R 767 000 192 000 20 000 40 000 - Coffee Ltd R 200 000 50 000 180 000 60 000 160 000 - 674 000 272 000 - - - - 306 700 20 000 5 000 Question continued overleaf 2
Question continued Additional Information 1. On 1 January 20.3, Black acquired 80% of the 200 000 issued ordinary shares and 30% of the preference shares in Coffee. The only reserve of Coffee at this date was retained earnings amounting to R20 000. At the date of acquisition, the only asset of Coffee that was not fairly valued was inventory which was considered to be worth R8 000 more than carrying amount. This inventory was all sold within one year. 2. On 30 June 20.5, Coffee sold an item of plant to Black for R60 000. The plant had a carrying amount of R48 000 in Coffee's accounting records immediately before the sale. The remaining life of the plant from the date of sale was considered to be 4 years. This does not represent a change in estimated life. 3. During late 20.6, Black sold inventory to Coffee. The inventory on hand as at 31 December 20.6 was R144 000. The selling price was made at a mark-up of 20%. This has been the only sale of inventory between the two companies. At 31 December 20.6, Coffee had sold 10% of the inventory and by 31 December 20.7, 80% (in total) had been sold. 4. Black advanced the loan of R20 000 to Coffee on 30 June 20.4. The loan is repayable during 20.10. 5. Black initially measured the non-controlling interest in Coffee at their proportionate share of the fair value of the identifiable net assets at acquisition. 6. Assume a tax rate of 40%. 7. The preference shares are classified as equity instruments. Question continued overleaf 3
Question continued REQUIRED Show all workings. Round off to the nearest rand. Marks 17.5 Prepare the analysis of equity worksheet of Coffee Ltd as at 31 December 20.7 using the information provided. 4