1 2
QUESTION 1 – SUGGESTED SOLUTION (30 marks) cash on redemption date, therefore preference dividends contain a
financial liability. (2)
PART A (10½ marks)
Total (5)
Maximum (4)
a. Sunbird investment
30 June 2020 PART B (16½ marks)
DR CR
R R a.
Mark-to-market reserve: Equity instrument (OCI) 40 000 LAVENDER LIMITED
Equity investment in Sunbird Limited (SFP) 40 000 GENERAL JOURNAL ENTRIES FOR THE YEAR ENDED 30 JUNE 2020
[565 000 – 525 000]
(Adjust to fair value on date of sale) [2] DR CR
R R
Bank (SFP) 525 000 1 July 2019
Equity investment in Sunbird Limited (SFP) 525 000
Mark-to-market reserve: Equity instrument (SCE) 15 000 No journal entries. [–½ if any entries here]
[(565 000 – 510 000) – 40 000 ] 15 000
1 August 2019
Retained earnings (SCE)
(Sale of investment) [4½]
J1 FEC asset (SFP) 3 000
Foreign exchange difference (P/L) 3 000
b. Pref share classification [$300 000 x (R7,98 – R7,97]
(Adjust FEC to fair value on transaction date) [2]
The two cash flow streams (components) related to preferences shares (½)
(i.e. the payment of preference dividends and the payment of the J2 Foreign exchange difference (P/L) 3 000
principal amount) are considered separately for classification purposes. Firm commitment liability (SFP) 3 000
Principal amount [$300 000 x (R7,98 – R7,97)]
When assessing the substance of the agreement between Tito Limited (½) (Adjust firm commitment to fair value on transaction [1½]
and Jetpack Limited, it is clear that Tito Limited has a contractual date)
obligation to deliver cash to Jetpack Limited on 30 June 2021 of R1,20 (1)
per preference share (the preference share agreement contains a J3 Machinery 2 385 000
mandatory redemption feature). (½) Creditor 2 385 000
The principal amount (the preference shares) therefore contains a [$300 000 x R7,95 )
financial liability. (½) (Recognise transaction at spot rate on transaction [2]
date)
OR J4 Firm commitment liability (SFP) 3 000
The substance of the agreement between Tito Limited and Jetpack (½) Machinery 3 000
Limited rather than the legal form will govern the classification of the (½) (Refer J2)
preference shares. The preference shares take the legal form of equity but (Adjust initial cost of asset acquired with firm
are liabilities in substance as the preference shares provides for commitment liability) [1½]
mandatory redemption by Modadji Limited at a fixed amount of R1,20 (½)
per share on a particular date (30 June 2021). (½) b. (9½ marks)
Therefore, the principal amount is a financial liability. (½)
Interest-expense – presented in SPLOCI as part of finance cost^
Dividends
Since all unpaid dividends will have to be paid in cash on redemption 300 000 x 11% x 3/12 = 8 250 x R7,74 (given) = R63 855 [2]
date of 30 June 2021, Tito Limited has a contractual obligation to deliver
https://d.docs.live.net/245fbacec8633570/Documents/TUKS/2020/scripts/Suppl exam 2020 Q1 Sol _perusal.docx https://d.docs.live.net/245fbacec8633570/Documents/TUKS/2020/scripts/Suppl exam 2020 Q1 Sol _perusal.docx
QUESTION 1 – SUGGESTED SOLUTION (30 marks) cash on redemption date, therefore preference dividends contain a
financial liability. (2)
PART A (10½ marks)
Total (5)
Maximum (4)
a. Sunbird investment
30 June 2020 PART B (16½ marks)
DR CR
R R a.
Mark-to-market reserve: Equity instrument (OCI) 40 000 LAVENDER LIMITED
Equity investment in Sunbird Limited (SFP) 40 000 GENERAL JOURNAL ENTRIES FOR THE YEAR ENDED 30 JUNE 2020
[565 000 – 525 000]
(Adjust to fair value on date of sale) [2] DR CR
R R
Bank (SFP) 525 000 1 July 2019
Equity investment in Sunbird Limited (SFP) 525 000
Mark-to-market reserve: Equity instrument (SCE) 15 000 No journal entries. [–½ if any entries here]
[(565 000 – 510 000) – 40 000 ] 15 000
1 August 2019
Retained earnings (SCE)
(Sale of investment) [4½]
J1 FEC asset (SFP) 3 000
Foreign exchange difference (P/L) 3 000
b. Pref share classification [$300 000 x (R7,98 – R7,97]
(Adjust FEC to fair value on transaction date) [2]
The two cash flow streams (components) related to preferences shares (½)
(i.e. the payment of preference dividends and the payment of the J2 Foreign exchange difference (P/L) 3 000
principal amount) are considered separately for classification purposes. Firm commitment liability (SFP) 3 000
Principal amount [$300 000 x (R7,98 – R7,97)]
When assessing the substance of the agreement between Tito Limited (½) (Adjust firm commitment to fair value on transaction [1½]
and Jetpack Limited, it is clear that Tito Limited has a contractual date)
obligation to deliver cash to Jetpack Limited on 30 June 2021 of R1,20 (1)
per preference share (the preference share agreement contains a J3 Machinery 2 385 000
mandatory redemption feature). (½) Creditor 2 385 000
The principal amount (the preference shares) therefore contains a [$300 000 x R7,95 )
financial liability. (½) (Recognise transaction at spot rate on transaction [2]
date)
OR J4 Firm commitment liability (SFP) 3 000
The substance of the agreement between Tito Limited and Jetpack (½) Machinery 3 000
Limited rather than the legal form will govern the classification of the (½) (Refer J2)
preference shares. The preference shares take the legal form of equity but (Adjust initial cost of asset acquired with firm
are liabilities in substance as the preference shares provides for commitment liability) [1½]
mandatory redemption by Modadji Limited at a fixed amount of R1,20 (½)
per share on a particular date (30 June 2021). (½) b. (9½ marks)
Therefore, the principal amount is a financial liability. (½)
Interest-expense – presented in SPLOCI as part of finance cost^
Dividends
Since all unpaid dividends will have to be paid in cash on redemption 300 000 x 11% x 3/12 = 8 250 x R7,74 (given) = R63 855 [2]
date of 30 June 2021, Tito Limited has a contractual obligation to deliver
https://d.docs.live.net/245fbacec8633570/Documents/TUKS/2020/scripts/Suppl exam 2020 Q1 Sol _perusal.docx https://d.docs.live.net/245fbacec8633570/Documents/TUKS/2020/scripts/Suppl exam 2020 Q1 Sol _perusal.docx