Joule Ltd ('Joule'), a manufacturer and distributor of electric cars, is based in South Africa. Joule has a rand (R) functional currency. Joule has a foreign subsidiary, Watt Inc ('Watt'), based in the United States of America (US), which is a retailer of electric cars. Watt has a US dollar (US $) functional currency. Both companies have a 31 December financial year end.

Joule acquires ordinary shares of Watt
In the hope of penetrating the US market, Joule purchased 1
600 000 of the 2
million issued ordinary shares of Watt for US $1 million on 1 January 2008.

Following this acquisition, Watt was contractually required to exclusively sell electric cars manufactured by Joule. At the date of acquisition, Watt's inventory of electric cars had been purchased from another supplier. As Watt was not allowed to sell these electric cars, they were duly scrapped in Watt's financial records on 31 January 2008 at a negligible cost.

On 1 January 2008 -

• all Watt's identifiable assets and liabilities, with the exception of its inventory of electric cars, were fairly valued and recognised in its financial statements;
• (at the date of acquisition), Watt's inventory was reflected at US $310 000 in its records;
• the trade value (price at which the electric cars could be sold to another retailer) of the inventory of electric cars was US $460 000. The retail value (price at which the electric cars could be sold to consumers) of this inventory was US $490 000;
• Watt's share capital amounted to US $40 000; and
• the non-controlling interest in Watt had a fair value of US $230 000.

Transactions between Joule and Watt

Joule began selling electric cars to Watt on 2 January 2008. All sales were for cash and were made at a 15% mark-up on cost. Joule sold electric cars to Watt for R1 035 000 in 2008 and R1 690 000 in 2009.
Details of sales of electric cars to Watt
Year ended 31 December 2008
Year ended 31 December 2009
R
R
Opening inventory of electric cars acquired from Joule
-
124 200
Sales to Watt
1 035 000
1 690 000
Closing inventory of Watt
124 200
507 000*
*All inventories on hand at 31 December 2009 were sold during January 2010.

Joule sells ordinary shares in Watt

On 1 January 2010 Joule's management decided to reduce their interest in Watt due to insufficient demand for electric cars in the US. On 31 January 2010 Joule sold 1 million of its ordinary shares in Watt for US $1 200 000 to Edison Plc. The 600 000 ordinary shares that Joule continued to hold had a fair value of US $720 000 on 31 January 2010.
9
Watt issues preference shares

On 1 July 2010 Watt issued 3 000 redeemable cumulative preference shares at US $1 000 each to third parties. The preference shares pay a coupon of 4% per annum and have a redemption value of US $1 000 each. If declared, preference dividends are paid annually in arrears. On redemption any undeclared dividends are added to the redemption price including interest on the undeclared dividends at 4% per annum. The dividends on the redeemable cumulative preference shares are deductible for income tax purposes in the US.
Other information

From 2008 to 2010 Joule and Watt had the following retained earnings balances and profits / (losses) in their individual company financial statements:
Joule
Watt
R
US $
Retained earnings at 1 January 2008
2 250 000
980 000
Profit/(loss) for the year
(60 000)
310 000
Retained earnings at 31 December 2008
2 190 000
1 290 000
Profit/(loss) for the year
90 000
40 000
Retained earnings at 31 December 2009
2 280 000
1 330 000
Profit/(loss) for the year
1 010 000*
540 000**
Retained earnings at 31 December 2010
3 290 000
1 870 000

* An amount of R7 624 000 profit on the disposal of shares in Watt is included in the profit for the year.

** The profit for the year is stated before taking into account the preference dividends on the redeemable cumulative preference shares.
The following spot exchange rates were applicable (R : US $1):

1 January 2008
6,20
31 January 2008
6,40
31 December 2008
6,50
30 November 2009
6,70
31 December 2009
6,80
31 January 2010
7,20
31 December 2010
7,00
The following average exchange rates were applicable (R : US $1):
1 January 2008 to 31 December 2008
6,60
1 January 2009 to 31 December 2009
6,60
1 January 2010 to 31 January 2010
7,10
1 February 2010 to 31 December 2010
7,30
1 July 2010 to 31 December 2010
7,30
The following additional information is applicable:

• Both Joule and Watt earned all their profits evenly throughout each year;
• Neither Joule nor Watt declared any ordinary dividend between 1 January 2008 and 31 December 2010;
• Joule accounts for investments in subsidiaries at cost in its separate financial statements;
• Both Joule and Watt comply with International Financial Reporting Standards (IFRS);
• Joule applied IFRS 3 (revised 2008) to its acquisition of Watt. Joule elected to measure the non-controlling interest in Watt at fair value at the date of acquisition;
• The group's presentation currency is rand;
• Goodwill arising on the acquisition of Watt has not been impaired; and
• The income tax rate is 28% in South Africa and 20% in the US.

You may ignore the effect of deferred tax on the foreign currency translation reserve.