IFRS3

CABBAGE Itd is a ZSE limited listed company that grows and distributes vegetables. On 1 January 2019 CABBAGE Itd acquired the TOMATO division of ABC Ltd. The main reason for this acquisition was so that CABBAGE ltd could get access to a supply contract between the TOMATO division and Veg & Fruit Ltd, a national greengrocer. The purchase consideration consisted of an immediate cash payment of $260 000 and an additional cash payment of $150 000 payable on 1 January 2020. The TOMATO division constitutes a business and CABBAGE ltd obtained control over the business from 1 January 2019 in terms of IFRS 10 Consolidated Financial Statements.

The assets and liabilities of the tomato division on the acquisition date were as follows:

Fair value C.A

Dr/(Cr) S Dr/(Cr) S

Assets 380,000 400,000

Liabilities (130,000) (110,000)

The supply contract between the TOMATO division and Veg & Fruit Ltd had a fair value of $80 000 on 1 January 2019 and the contract will expire on 1 March 2021. The TOMATO division did not recognise an asset in its accounting records in respect of the contract.

The following information is also available:

1. Assume a market related pre-tax interest rate of 12% per annum, compounded annually. 2. Assume a normal income tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore Value Added Tax (VAT) and Dividend Tax.

Required:

a) Discuss, with reference to amounts, how the purchase transaction of the TOMATO division should be accounted for on 1 January 2019 in the Separate Accounting Records

of CABBAGE htd. [20 Marks] NB: Round off all amounts to the nearest S; comparative figures are not required: notes are not required; show all workings complying with IFRS.