ACCOUNTING POLICY OF THE GROUP Properties, plant and equipment and intangible assets are measured using the cost model in accordance with HKAS 16 Property, Plant and Equipment and HKAS 38 Intangible Assets respectively. The items are depreciated/amortised over their respective useful lives. Depreciation/amortisation is recorded on a monthly basis. Depreciation and amortisation charges are included in selling and administrative expenses in the statement of profit or loss.

Investment properties are measured using the fair value model in accordance with HKAS 40 Investment Property.

INVESTMENT IN SAIGA APPAREL LIMITED

On 1 July 2019, POL acquired 60% of the ordinary shares of Saiga Apparel Limited (SAL). SAL is engaging in the manufacture of hiking and trekking clothing and backpacks. POL paid HK$ 522,600,000 for this acquisition on 1 July 2019. On 1 July 2019, SAL had retained earnings of HK$ 527,700,000 and no other reserve. At the date of acquisition, the book values of SALs assets and liabilities approximated their fair values. Yet, SAL had an internally-generated customer list. It was assessed that the fair value of such customer list, on 1 July 2019, was HK$ 300,000 and it was expected to have a useful life of 18 months from 1 July 2019 onwards. In accordance with HKFRS 3 (Revised) Business Combinations, POL chose to measure the non-controlling interest in SAL at its proportionate share of net identifiable assets as at the acquisition date. SAL has not issued any new shares since 1 July 2019.

During the six months ended 31 December 2019, SAL sold hiking and trekking clothing to POL at a transfer price of HK$ 3,300,000, which included a 20% mark-up on cost. 60% of such inventories were sold to customers during the six months ended 31 December 2019 while the remaining inventories were all sold during the year ended 31 December 2020.

On 1 October 2019, POL sold a piece of equipment (Model A) to SAL at a transfer price of HK$ 464,000. Model A was purchased by POL on 1 October 2017 at a cost of HK$ 600,000. POL estimated that Model A would have a useful life of 6 years. There has been no change in the remaining useful life upon transfer to SAL.

On 1 January 2020, POL purchased a property in Kowloon Bay (Property KB), at its fair value HK$ 20,000,000. It was estimated that Property KB would have an economic life of 50 years. On the same day, SAL entered into a two-year lease of Property KB with POL. Since then, SAL has been using Property KB as its office. Such lease was assessed, based on the criteria in HKFRS 16 Leases, to be an operating lease to POL. The lease payments were fixed at HK$ 500,000 per year during the two-year term, payable on 31 December 2020 and 31 December 2021. The interest rate implicit in the lease was 5% p.a. The lease transaction was properly accounted for in the financial statements of POL and SAL. POL included the rental received in other income. SAL has settled the payment for the year ended 31 December 2020. The fair value of Property KB at 31 December 2020 was HK$ 20,320,000, which has been properly reflected in POLs separate financial statements.

Requirement:

1. (1) Analyse the lease transactions from the perspectives of POL (as the lessor) and SAL (as the

lessee) and prepare the appropriate journal entries in their separate financial statements. You can present your answers to the nearest thousand dollars for this lease transaction. (Note: The effects of these entries have been properly included in the financial statements above.)

2. (2) Analyse the classification of Property KB from the perspective of POL and prepare the appropriate journal entries relating to Property KB in POLs financial statements. (Note: The effects of these entries have been properly included in the financial statements above.)