Tutorial 2.

1 (no solution provided to parts b to c)

Cultivate Ltd (“Cultivate”) is an unlisted South African company that operates several early childhood
development centres throughout South Africa. Cultivate also owns shares in other companies that
offer a range of educational services.

The following information applies to Cultivate, the company and the group, for the financial year
ended 30 November 2024 (“FY2024”):

Cultivate

Bosch Ltd Ubomi Ltd

("Bosch") ("Ubomi")
[75% to 90%] [60% to 52%]

Various listed Summer Ltd

companies ("Summer")
[all < 5%] [35%]

Bosch

Cultivate acquired 75% of the ordinary shares of Bosch for R50 million (cash) on 1 January 2022. On
that date, the non-controlling interest in Bosch was measured at its fair value of R20 million and the
net assets of Bosch were considered fairly valued except for the following:

• A plot of owner-occupied land with a cost to Bosch of R4 million and a carrying amount of
R6 million was considered undervalued by R3 million. Bosch’s policy is to revalue owner-occupied
land periodically. Bosch did not revalue the plot of land at 30 November 2022, but did so on
1 December 2023, when Bosch revalued the land to its fair value of R13 million.

• Equipment which had been acquired new by Bosch for R12 million on 1 January 2021, had a
carrying amount of R10 million and a fair value of R10,75 million. Cultivate agreed with Bosch that
the equipment had a remaining useful life of five years (with no residual value) on 1 January 2022.

• Trademarks with an indefinite useful life had a gross carrying amount of R10 million and a fair
value of R11,5 million.

• A portfolio of listed investments, over which Bosch does not exert control or significant influence.
Consequently, Bosch measures the investments at fair value at each reporting date with gains and
losses recognised in profit or loss. Details relating to the portfolio of listed investments are as
follows:

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 Rands
Purchase price (excluding transaction costs) 7 500 000
Transaction costs 250 000
Fair value on 30 November 2021 9 000 000
Fair value on 1 January 2022 10 000 000
Fair value on 30 November 2022 13 500 000
Fair value on 30 November 2023 15 000 000
Fair value on 30 November 2024 14 800 000

Cultivate acquired a further 15% of the ordinary shares of Bosch on 1 October 2024 for R10 million
(cash).

The goodwill relating to Bosch was impaired for the first and only time by R2,5 million on 30 November
2024.

The following information was extracted from the financial statements of Bosch for FY2024:

Rands
Ordinary stated capital 5 000 000
Retained earnings (30 November 2023) (*) 68 500 000
Dividends declared (1 December 2023) 6 500 000
Profit for 1 December 2023 to 30 September 2024 12 560 000
Profit for 1 October 2024 to 30 November 2024 2 143 800

(*) The retained earnings balance of Bosch on 1 January 2022 was R46 500 000 (including the
profit for December 2021).

Ubomi

Cultivate acquired 60% of the ordinary shares of Ubomi for R19 million (cash) on 1 February 2024
resulting in a bargain purchase gain of R2 million. On 1 February 2024, the net assets of Ubomi and
were fairly valued and the non-controlling interest in Ubomi was measured at its proportionate share
of the net assets of Ubomi.

Ubomi sold computer equipment to Cultivate for R4,7 million on 1 July 2024. The computer equipment
had cost Ubomi R5 million on 1 January 2024 and on that date had a total useful life of six (6) years
(with no residual value). Cultivate started depreciating the computer equipment over the remaining
useful life on 1 July 2024.

Ubomi (company) earned profit of R7 million for the 12-month period to 30 November 2024. Ubomi
did not declare any dividends during FY2024.

On 30 November 2024, Cultivate sold 8% of Ubomi’s total number of ordinary shares to a third party
for R3 million (cash).

Summer

Ubomi acquired 35% of the ordinary shares of Summer for R17,5 million (cash) on 1 August 2024. On
that date, the net assets of Summer amounted to R40 million and were considered fairly valued.
Summer earned profit of R3,2 million for the period 1 August 2024 to 30 November 2024 and declared
and paid ordinary dividends of R1 million on 30 November 2024.

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Additional information

• All companies have a 30 November financial year-end.

• All companies prepare financial statements in accordance with IFRS Accounting Standards.
• All companies have correctly accounted for all transactions.
• All transactions and amounts are considered material.
• Cultivate accounts for investments in subsidiaries and associates at cost in its separate financial
statements.
• Cultivate (company) incurred a loss of R25 million during FY2024 and did not declare any dividends
during FY2024. On 30 November 2024, Cultivate Ltd had a tax loss carried forward to future years
of R21 million. Cultivate did not recognize a deferred tax asset for R6 million of the tax loss at
30 November 2024.
• The Cultivate group policy is to account for all classes of property, plant and equipment (including
land) and intangible assets on the cost model. This policy is consistently applied by all companies,
unless otherwise evident.
• A company tax rate of 27% and an effective capital gains tax rate of 21,6% always apply.
• For income tax purposes, the South African Revenue Service (SARS) allows capital allowances on
new equipment based on 40%/20%/20%/20% (not apportioned for partial years). SARS allows
capital allowances on used equipment at 20% per annum (apportioned for partial years).
• SARS allows capital allowances on computer equipment at 20% per annum (apportioned for
partial years) in calculating income tax.
• SARS does not allow any deductions for trademarks in calculating income tax.
• Where applicable, the Cultivate group includes earnings from associate in profit before tax.

Tutorial 2.1 Required …/

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 Tutorial 2.1 Required Marks
(a) Based on the information provided, calculate the deferred tax asset or liability 8
that should be recognised by Bosch (the company) on 30 November 2024.

Your answer must include all the assets and liabilities of Bosch that are evident
from the information provided. Where there is no related deferred tax, clearly
state so with a brief supporting reason(s).

(b) Prepare all the pro-forma journal entries to correctly account for all events and 32
transactions relating to Bosch that arose in FY2024 in the Cultivate group
financial statements.

• For this question, you may assume that all the pro-forma journal entries
arising from the acquisition date of Bosch up to and including 30 November
2023 have already been correctly processed.
• Ignore closing entries, dates and narrations.

(c) Prepare the non-controlling interest column as it should appear in the 19

statement of changes in equity of the Cultivate group for FY2024.

• Ignore comparatives and note disclosure.

• Ignore the heading to the statement of changes in equity.

X1(c): Communication skills 1

(d) Based on the information provided, identify five reconciling items that should 10
appear in the tax rate reconciliation of the Cultivate group for FY2024. Include
a brief reason why each item is a reconciling item.

• Ignore calculations, amounts and comparatives.

Y3(e): Problem solving 1

Total for Tutorial 2.1 71

Source FRIII Jan 2025 Q1

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Tutorial 2.1

Part (a)

Workings CA TB TD D/T (SFP)

Owner-occupied land 1, 2 13,000,000 4,000,000 9,000,000 21.60% 1,944,000
Equipment 3, 4 4,166,667 - 4,166,667 27.00% 1,125,000
Trademarks 5 10,000,000 - 10,000,000 0.00% - para 15
Investments 6.7 14,800,000 7,750,000 7,050,000 21.60% 1,522,800
4,591,800 liability

1 Given
2 Given - cost
3 R10 000 000 x 25/60
4 Full deducted
5 Given
6 Given
7 R7 500 000 + R250 000

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