1
PAPER 1
QUESTION 1 45 marks
African Trust Ltd is listed in the Investment Companies sector of the JSE Securities Exchange South
Africa. Shares in the group are held as follows:
Southern Trade Union Investment Company 51%
Institutions 26%
Management and staff 10%
General public 13%
Based on its shareholding structure as well as the composition of its management team, African Trust Ltd
is recognised as a leading black empowerment entity in the South African business environment.
Accordingly, companies in the group have been successful in securing a number of government contracts
and licences over the past six years.
The abridged trial balance as at 31 December 2002 of the African Trust Ltd group of companies is as
follows:
TRIAL BALANCE AS AT 31 DECEMBER 2002
(Credit)
African
Trust Ltd
Gaming
Focus Ltd
Sound
Waves Ltd
R000 R000 R000
Profit before taxation (521 500) (287 000) 25 000
Income tax expense 140 000 115 000 0
Dividends
30 June 2002 0 80 000 0
31 December 2002 150 000 20 000 0
Share capital and premium (205 000) (340 000) (100 000)
Retained earnings: 1 January 2002 (358 000) (145 000) 110 000
Interest bearing borrowings (300 000) (125 000) (100 000)
Deferred taxation (31 500) 2 800 0
Accounts payable (74 500) (28 000) (23 000)
Property, plant and equipment 886 000 570 000 11 500
Licences 0 72 000 35 000
Goodwill 42 000 0 0
Investment in Gaming Focus Ltd 95 000 0 0
Investment in Sound Waves Ltd 64 503 0 0
Inventories 26 600 7 400 1 800
Accounts receivable 65 900 18 400 7 200
Cash and cash equivalents 20 497 39 400 32 500
0 0 0
NOTES
1 The investments in Gaming Focus Ltd and Sound Waves Ltd, contained in the trial balance of
African Trust Ltd, consist of both equity and debt investments. These investments have been
accounted for on a cost basis.
2 Gaming Focus Ltd: The following details relating to the investment of African Trust Ltd in Gaming
Focus Ltd are at your disposal:
2
2.1 On 1 March 1997, African Trust Ltd was a founding member of Gaming Focus Ltd, a
company that has since been awarded three different casino licences. African Trust Ltd
subscribed for 45% of the 100 million ordinary shares in Gaming Focus Ltd on this date at a
cost of R45 million. In addition to this, African Trust Ltd was granted the right to appoint four
directors (out of a total of seven) to the board of Gaming Focus Ltd.
2.2 During the first half of 2002, Gaming Focus Ltd made a strategic decision to diversify into
new businesses. In order to finance this expansion, Gaming Focus Ltd issued a further
80 million R1 ordinary shares at a premium of R2 per share. African Trust Ltd was not
convinced of the viability of this strategy and the remaining shareholders of Gaming Focus
Ltd therefore took up all the new shares on 30 June 2002.
2.3 The abridged trial balance of Gaming Focus Ltd at 30 June 2002 immediately before the
rights issue, was as follows:
Property, plant and equipment
Licenses
Inventories
Accounts receivable
Cash and cash equivalents
Interest bearing borrowings
Deferred taxation
Accounts payable
Share capital
Retained earnings
R000
336 600
35 000
10 500
15 400
7 500
(130 000)
(1 500)
(22 500)
(100 000)
(151 000)
0
2.4 You may assume that profit after tax of Gaming Focus Ltd has accrued evenly throughout the
2002 financial year. You may also assume that the tax expense has been correctly
determined in respect of all taxes.
2.5 As from 1 July 2002, African Trust Ltd only had the right to appoint three directors (out of a
total of seven) on the board of Gaming Focus Ltd.
3 Sound Waves Ltd: The following details relating to the investment of African Trust Ltd in Sound
Waves Ltd are at your disposal:
3.1 Information pertaining to the date of acquisition, 1 January 1998:
3.1.1 African Trust Ltd acquired 60% of the equity in Sound Waves Ltd for R7,38 million.
Sound Waves Ltd has licences to operate a number of regional radio stations.
Although most of the radio stations have been reasonably profitable, the ones in
Gauteng and the Western Cape have been suffering because of a very competitive
environment. As a result, Sound Waves Ltd had never made a net profit.
3.1.2 The equity of Sound Waves Ltd comprised the following:
R1 ordinary shares
Accumulated losses
R000
50 000
(26 500)
3.1.3 African Trust Ltd estimated the fair value of the broadcasting licences to be
R20 million. African Trust Ltd decided to amortise this amount on a straight line basis
over four years in the consolidated financial statements of the group. The group
considered the carrying value of the rest of the assets and liabilities of Sound Waves
Ltd to be stated at their fair values.
3
Sound Waves Ltd had acquired the broadcasting licences on 1 January 1997 for
R40 million. This amount is amortised in the companys records on a straight line
basis over ten years, being the period of the licences. It was decided not to reflect
either the revaluation or the shortened period of amortisation in the records of
Sound Waves Ltd.
3.1.4 Sound Waves Ltd had an assessed loss. As the activities of the company were
expected to result in limited positive cash flows only during the last three years of
the term of the broadcasting licences, African Trust Ltd did not place any value on
the assessed loss.
3.2 African Trust Ltd and the 40% shareholder in Sound Waves Ltd agreed that the two parties
would assist Sound Waves Ltd by means of loans, which were subordinated in favour of
other creditors of Sound Waves Ltd. At 31 December 2002, interest bearing borrowings
include a R40 million loan due to the 40% shareholder.
3.3 At the end of 2002 newly appointed management of Sound Waves Ltd presented a plan to
the shareholders to save the companys operations. The bankers of Sound Waves Ltd were
prepared to finance this plan, provided that shareholders injected a further R50 million of
new share capital. The 40% shareholder in Sound Waves Ltd had lost its patience and was
not prepared to commit any further funding to Sound Waves Ltd. African Trust Ltd, on the
other hand, was concerned about the impact on future business opportunities of the group, if
one of its subsidiaries were unable to meet its licensing conditions. African Trust Ltd
therefore subscribed for R50 million of shares at par on 31 December 2002.
REQUIRED
(a) Prepare the abridged consolidated annual financial statements of African Trust Ltd, dealing in the
appropriate manner with the income, expenses, assets and liabilities of Sound Waves Ltd and
Gaming Focus Ltd, as follows:
(i) Consolidated income statement for the year ended 31 December 2002; (13)
(ii) Consolidated statement of changes in equity for the year ended 31 December 2002; and (5)
(iii) Consolidated balance sheet as at 31 December 2002. (13)
(b) Indicate how the issue of new shares by Gaming Focus Ltd should be disclosed in the consolidated
cash flow statement and accompanying notes of the African Trust Ltd group for the year ended
31 December 2002. (6)
(c) The 40% shareholder in Sound Waves Ltd is keen to dispose of its interest to African Trust Ltd. In
the proposed transaction its loan account to Sound Waves Ltd would be taken over by African Trust
Ltd at a discount to face value. Discuss the tax implications for African Trust Ltd if the full face
value of this loan is eventually repaid to it by way of several payments over a period of time. (8)
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