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Professional Solutions Limited (PSL), having its shares listed on the Hong Kong Stock Exchange, is engaging in the manufacture and distribution of high-quality cameras. PSL,

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Professional Solutions Limited ("PSL"), having its shares listed on the Hong Kong Stock Exchange, is engaging in the manufacture and distribution of high-quality cameras. PSL, together with its subsidiaries, (the Group") is having a basic strategy of maintaining market share in the photographic industry through technical innovation and product quality. ACCOUNTING POLICY OF THE GROUP Properties, plant and equipment are measured using the cost model in accordance with HKAS 16 Property, Plant and Equipment. The items are depreciated over their respective useful lives. Depreciation is recorded on a monthly basis. Investment properties are measured using the fair value model in accordance with HKAS 40 Investment Property. Intangible assets are measured using the cost model in accordance with HKAS 38 Intangible Asset and are amortised over their respective useful lives. 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 IN SHARP IMAGING LIMITED On 1 July 2011, PSL acquired 90% of the ordinary shares of Sharp Imaging Limited ("SIL") at a cost of HK$ 560,230,000, when SIL had retained earnings of HK$ 295,000,000 and no other reserves. SIL is a engaging in the manufacture of compact system cameras ("CSCs). Since the inclusion of SIL into the Group, PSL has been focussing on the manufacture of professional and premium digital single-lens reflex cameras ("DSLRs") while SIL manufactures CSCs which are less sophisticated. On 1 July 2011, the book values of SIL's assets and liabilities approximated their fair values. However, SIL owned a research project named as Project Focus. This project, aiming at improving the quality of the lens, had a fair value of HK$ 900,000 as at 1 July 2011. In accordance with AKAS 38, SIL did not recognise Project Focus on its statement of financial position. As at 31 December 2012, because of the emergence of new technology, the recoverable amount of Project Focus was determined to be nil. SIL has not issued any shares since 1 July 2011. In accordance with HKFRS 3 (Revised) Business Combinations, PSL chose to measure the non-controlling interest in SIL at its fair value at the acquisition date. For this purpose, PSL measured the non-controlling interest at HK$ 62,230,000 on 1 July 2011 On 1 March 2017, SIL sold a number of inventory items to PSL at a transfer price of HK$ 2,200,000 at a 10% mark-up on Cost 50% of these items were sold to the customers during the year ended 30 June 2012. Half of the remaining items were sold in the year ended June 2018 On January 2012. PS sold a piece of equipment ("Model Lens") to Si at a transfer price of HKS 465,000. Model Lens was purchased by PSL on Huly 2011 at a cost of HKS 1.200.000 PSL estimated that Modellenes would have a useful life of years with no residual value There has been no change in the remaining useful life upon transfer to SIL On July 2017. purchased a property in Tsim Sha Tsui ("Property IST"), at its fair value HKS 18.000.000. It was estimated that Property IST would have an economic life of 60 years on the same day, SIL entered into a two-year lease of Property IST with PSL Since then, SIE has been using Property TST as its office. Such lease was assessed, based on the criteria in EKFRS 16 Le to be an operating lease to PSE The lease payments were fixed at HKS 600.000 per year during the two-year term. payable on June 2013 and June 2019. The interest rate implicit in the lease was 4.5% pa The lease transaction was properly accounted for in the financial statements of Stand SIE ISL included the rental received in other income". Sit has settled the payment for the year ended 30 June 2018. The companies in the Group have an early adoptie of HRERS 16 since July 2017 The fair value of Property TST at 30 June 2013 was HKS 18,050,000, which has been properly reflected in PSE'S separate financial statements INVESTMENT IN ACTIVE GO LIMITED PSE acquired 41% of the ordinary shares of Active Go Limited ("AGE") on July 2015 by paying HKS 240.100.000 in cash. AGL was established just a few years prior to ISL's acquisition and has been engaging in the manufacture of action cameras for outdoor activities such as hiking and surfing. After acquisition, PS has a right to appoint two out of eight directors in AGE. At the date of question AGL had retained earnings of HKS 27,200,000 and no other reserves. On the same date, it was assessed that the carrying amounts of assets and liabilities of AGL were the same as their fixir values except that the fair value of AGL's trade receivables was HKS 800.000 abowe its book value. All trade receivables at this date were either settled or written off in the finiturafter PSE acquisition AGli has not included such fair value adjustment in its own books. AGI. has not issued any new shares since July 2015 PSE transferred machinery items to AGE at a transfer price of HKS 1.440.000 on January 2016. These machinery items cost ISL. HKS 3.000.000 which was purchased on January 2013. It was estimated that these machinery items had a useful life of 5 years as at January 2013 with the residual value There has been to change in the remaining useful life of these items upon transfer On May 2017 AGL sold a number inventory items to PSE at a transfer price of HKS 1.200.000 at a 20% mark-up an cost. 10% of these items were sold to the customers during the year ended June 2012 An the remaining items were then sold in the year ended 30 June 2018 An inter-company balance of HKS 49.000 remained in both ISL and AGES financial statements as at 30 June 2018 Subsequent to the end of this currenean as the accounting manager of the Group you are required to prepare the consolidated financial statements to be presented to the board of directors for discussion and approval You can ignore any taxation implications in this question DRAFT FINANCIAL STATEMENTS OF THE COMPANIES Statements of profit or less for the year ended 30 June 2014 PSE HKS DOO AGI HKS 100 42 (209 210) 213.790 1495) 40:49 Cost of sale Gus profit Other income/san (Infoding divided inime Other expe/ feling and administratives Profities and France Protit before an Income tax charte Pocit for the year interim dividends declamland paid Retained coming 1 July Retained caming 30 June 21,309 (852.30 37,550 M 31.130 (5.00) 26.11.30 (7.1.30) SIL HKSO 721200 (199) 341400 790 25.400 (I an? 990) 30.90 (3 27.000 (URO) 4.90 2 2.990 (2.000) 900 (1) 254.000 254.710 923.230 372.000 399.000 Statements of financial pis at 10 June 2016 PSE HKSO SIL HKS100 AC HKS W10 2.000 { Property, plant and equipment Right-of-use asset Intangibile assets westment properties Tewestments 48400 562 13641 314930 0,320 80,000 1.57930 421,60 325.000 35,200 10.10 Twentones Trade and tables Cach Total 163 200 32.000 103 200 220 97.000 32.000 187 1.72620 460,000 Share capital Betained in Totalities $26.000 399.000 725.000 125.000 254710 579,710 1.312 13 167.000 420 Nancurabile Loan payable Cumartabat Trade and other payables Total quities and libiti 21 1.726200 28.000 $20.000 22.200 544 Required: (1) Analyse the lease transactions from the perspectives of PSL (as the lessor) and SIL (as the lessee) and prepare the appropriate journal entries in their financial statements. You can present your answers to the nearest thousand dollars for this lease transaction. (Note: The effects of these entries Je heen properly included in the financial statements howe. (2) Analyse the classification of Property TST from the perspective of PSL and prepare the appropriate journal entries relating to Property TST in PSL's financial statements. (Note: The effects of these entries have been properly included in the financial statements above.) (3) Prepare the necessary correction journal entries (if any) and consolidation adjustment journal entries to include Sharp Imaging Limited in the consolidated financial statements for the Group. (Hints: You are advised to consider: (i) the consolidation procedures for intra-group transaction regarding the lease transaction of Property TST in part (1) above; and (ii) the classification of the Property TST from the perspectives of PSL (in its separate financial statements, from part (2) above) and of the Group (in the consolidated financial statements).) (4) Prepare the adjustment journal entries to include Active Go Limited in the consolidated financial statements for the Group. Include an analysis of the components arising from this investment as at the acquisition date. Further, perform a reconciliation of the balance of this investment in the consolidated statement of financial position at 30 June 2018. (5) Prepare the consolidated statement of profit or loss for the year ended 30 June 2018 and the consolidated statement of financial position at 30 June 2018 for the Group, using the worksheet attached. (6) Prepare the consolidated statement of changes of equity for the year ended 30 June 2018 for the Group (Note: Conduct a research on any listed company in Hong Kong for drafting the proper format of a consolidated statement of changes in equity. Remember to fit in appropriate figures for the Group in this part.) Statements of profit or loss for the year ended 30 June 2018 PSL SIL HK$ 000 HK$ 000 Revenue 880,300 723,200 Adjustments Dr. (HK$000) Cr. (HK$ 000) Consolidated HK$ 000 Cost of sales (475,380) (329,800) Gross profit Other income/gain 404,920 6,230 393,400 790 Other expense/loss (21,300) (23,400) Selling and administrative expenses (352,300) (330,000) Profit before interest and tax Finance charge Profit before tax Income tax charge Profit for the year 37,550 (6,420) 31.130 (5,000) 26,130 40,790 (9,900) 30,890 (3,890) 27,000 Interim dividends declared and paid Retained earnings, 1 July (7,130) 904,230 372,000 Retained earnings, 30 June 923,230 399,000 Statements of financial position as at 30 June 2018 PSI HK$ 000 $ Non-cument assets Property, plant and equipment 391,680 SIL HKS000 Adjustments Dr. (HKS000) Gr. (HK$'000) Consolidated HK$ 000 484,600 Right-of-use asset Intangible assets 314,930 562 136,438 Investment properties 80,320 Investments 801,000 1,587,930 621,600 Current assets Inventories Trade and other receivables Cash Total assets 35,200 10.800 92,300 1,726,230 163,200 32,000 103,200 920,000 Equities Share capital Retained eamings 650,000 923,230 326,000 399,000 Total equities 1,573,230 725,000 Non-current liabilities Loan payable 130,000 167,000 Current liabilities Trade and other payables Total equities and liabilities 23,000 1,726,230 28,000 920,000 Professional Solutions Limited ("PSL"), having its shares listed on the Hong Kong Stock Exchange, is engaging in the manufacture and distribution of high-quality cameras. PSL, together with its subsidiaries, (the Group") is having a basic strategy of maintaining market share in the photographic industry through technical innovation and product quality. ACCOUNTING POLICY OF THE GROUP Properties, plant and equipment are measured using the cost model in accordance with HKAS 16 Property, Plant and Equipment. The items are depreciated over their respective useful lives. Depreciation is recorded on a monthly basis. Investment properties are measured using the fair value model in accordance with HKAS 40 Investment Property. Intangible assets are measured using the cost model in accordance with HKAS 38 Intangible Asset and are amortised over their respective useful lives. 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 IN SHARP IMAGING LIMITED On 1 July 2011, PSL acquired 90% of the ordinary shares of Sharp Imaging Limited ("SIL") at a cost of HK$ 560,230,000, when SIL had retained earnings of HK$ 295,000,000 and no other reserves. SIL is a engaging in the manufacture of compact system cameras ("CSCs). Since the inclusion of SIL into the Group, PSL has been focussing on the manufacture of professional and premium digital single-lens reflex cameras ("DSLRs") while SIL manufactures CSCs which are less sophisticated. On 1 July 2011, the book values of SIL's assets and liabilities approximated their fair values. However, SIL owned a research project named as Project Focus. This project, aiming at improving the quality of the lens, had a fair value of HK$ 900,000 as at 1 July 2011. In accordance with AKAS 38, SIL did not recognise Project Focus on its statement of financial position. As at 31 December 2012, because of the emergence of new technology, the recoverable amount of Project Focus was determined to be nil. SIL has not issued any shares since 1 July 2011. In accordance with HKFRS 3 (Revised) Business Combinations, PSL chose to measure the non-controlling interest in SIL at its fair value at the acquisition date. For this purpose, PSL measured the non-controlling interest at HK$ 62,230,000 on 1 July 2011 On 1 March 2017, SIL sold a number of inventory items to PSL at a transfer price of HK$ 2,200,000 at a 10% mark-up on Cost 50% of these items were sold to the customers during the year ended 30 June 2012. Half of the remaining items were sold in the year ended June 2018 On January 2012. PS sold a piece of equipment ("Model Lens") to Si at a transfer price of HKS 465,000. Model Lens was purchased by PSL on Huly 2011 at a cost of HKS 1.200.000 PSL estimated that Modellenes would have a useful life of years with no residual value There has been no change in the remaining useful life upon transfer to SIL On July 2017. purchased a property in Tsim Sha Tsui ("Property IST"), at its fair value HKS 18.000.000. It was estimated that Property IST would have an economic life of 60 years on the same day, SIL entered into a two-year lease of Property IST with PSL Since then, SIE has been using Property TST as its office. Such lease was assessed, based on the criteria in EKFRS 16 Le to be an operating lease to PSE The lease payments were fixed at HKS 600.000 per year during the two-year term. payable on June 2013 and June 2019. The interest rate implicit in the lease was 4.5% pa The lease transaction was properly accounted for in the financial statements of Stand SIE ISL included the rental received in other income". Sit has settled the payment for the year ended 30 June 2018. The companies in the Group have an early adoptie of HRERS 16 since July 2017 The fair value of Property TST at 30 June 2013 was HKS 18,050,000, which has been properly reflected in PSE'S separate financial statements INVESTMENT IN ACTIVE GO LIMITED PSE acquired 41% of the ordinary shares of Active Go Limited ("AGE") on July 2015 by paying HKS 240.100.000 in cash. AGL was established just a few years prior to ISL's acquisition and has been engaging in the manufacture of action cameras for outdoor activities such as hiking and surfing. After acquisition, PS has a right to appoint two out of eight directors in AGE. At the date of question AGL had retained earnings of HKS 27,200,000 and no other reserves. On the same date, it was assessed that the carrying amounts of assets and liabilities of AGL were the same as their fixir values except that the fair value of AGL's trade receivables was HKS 800.000 abowe its book value. All trade receivables at this date were either settled or written off in the finiturafter PSE acquisition AGli has not included such fair value adjustment in its own books. AGI. has not issued any new shares since July 2015 PSE transferred machinery items to AGE at a transfer price of HKS 1.440.000 on January 2016. These machinery items cost ISL. HKS 3.000.000 which was purchased on January 2013. It was estimated that these machinery items had a useful life of 5 years as at January 2013 with the residual value There has been to change in the remaining useful life of these items upon transfer On May 2017 AGL sold a number inventory items to PSE at a transfer price of HKS 1.200.000 at a 20% mark-up an cost. 10% of these items were sold to the customers during the year ended June 2012 An the remaining items were then sold in the year ended 30 June 2018 An inter-company balance of HKS 49.000 remained in both ISL and AGES financial statements as at 30 June 2018 Subsequent to the end of this currenean as the accounting manager of the Group you are required to prepare the consolidated financial statements to be presented to the board of directors for discussion and approval You can ignore any taxation implications in this question DRAFT FINANCIAL STATEMENTS OF THE COMPANIES Statements of profit or less for the year ended 30 June 2014 PSE HKS DOO AGI HKS 100 42 (209 210) 213.790 1495) 40:49 Cost of sale Gus profit Other income/san (Infoding divided inime Other expe/ feling and administratives Profities and France Protit before an Income tax charte Pocit for the year interim dividends declamland paid Retained coming 1 July Retained caming 30 June 21,309 (852.30 37,550 M 31.130 (5.00) 26.11.30 (7.1.30) SIL HKSO 721200 (199) 341400 790 25.400 (I an? 990) 30.90 (3 27.000 (URO) 4.90 2 2.990 (2.000) 900 (1) 254.000 254.710 923.230 372.000 399.000 Statements of financial pis at 10 June 2016 PSE HKSO SIL HKS100 AC HKS W10 2.000 { Property, plant and equipment Right-of-use asset Intangibile assets westment properties Tewestments 48400 562 13641 314930 0,320 80,000 1.57930 421,60 325.000 35,200 10.10 Twentones Trade and tables Cach Total 163 200 32.000 103 200 220 97.000 32.000 187 1.72620 460,000 Share capital Betained in Totalities $26.000 399.000 725.000 125.000 254710 579,710 1.312 13 167.000 420 Nancurabile Loan payable Cumartabat Trade and other payables Total quities and libiti 21 1.726200 28.000 $20.000 22.200 544 Required: (1) Analyse the lease transactions from the perspectives of PSL (as the lessor) and SIL (as the lessee) and prepare the appropriate journal entries in their financial statements. You can present your answers to the nearest thousand dollars for this lease transaction. (Note: The effects of these entries Je heen properly included in the financial statements howe. (2) Analyse the classification of Property TST from the perspective of PSL and prepare the appropriate journal entries relating to Property TST in PSL's financial statements. (Note: The effects of these entries have been properly included in the financial statements above.) (3) Prepare the necessary correction journal entries (if any) and consolidation adjustment journal entries to include Sharp Imaging Limited in the consolidated financial statements for the Group. (Hints: You are advised to consider: (i) the consolidation procedures for intra-group transaction regarding the lease transaction of Property TST in part (1) above; and (ii) the classification of the Property TST from the perspectives of PSL (in its separate financial statements, from part (2) above) and of the Group (in the consolidated financial statements).) (4) Prepare the adjustment journal entries to include Active Go Limited in the consolidated financial statements for the Group. Include an analysis of the components arising from this investment as at the acquisition date. Further, perform a reconciliation of the balance of this investment in the consolidated statement of financial position at 30 June 2018. (5) Prepare the consolidated statement of profit or loss for the year ended 30 June 2018 and the consolidated statement of financial position at 30 June 2018 for the Group, using the worksheet attached. (6) Prepare the consolidated statement of changes of equity for the year ended 30 June 2018 for the Group (Note: Conduct a research on any listed company in Hong Kong for drafting the proper format of a consolidated statement of changes in equity. Remember to fit in appropriate figures for the Group in this part.) Statements of profit or loss for the year ended 30 June 2018 PSL SIL HK$ 000 HK$ 000 Revenue 880,300 723,200 Adjustments Dr. (HK$000) Cr. (HK$ 000) Consolidated HK$ 000 Cost of sales (475,380) (329,800) Gross profit Other income/gain 404,920 6,230 393,400 790 Other expense/loss (21,300) (23,400) Selling and administrative expenses (352,300) (330,000) Profit before interest and tax Finance charge Profit before tax Income tax charge Profit for the year 37,550 (6,420) 31.130 (5,000) 26,130 40,790 (9,900) 30,890 (3,890) 27,000 Interim dividends declared and paid Retained earnings, 1 July (7,130) 904,230 372,000 Retained earnings, 30 June 923,230 399,000 Statements of financial position as at 30 June 2018 PSI HK$ 000 $ Non-cument assets Property, plant and equipment 391,680 SIL HKS000 Adjustments Dr. (HKS000) Gr. (HK$'000) Consolidated HK$ 000 484,600 Right-of-use asset Intangible assets 314,930 562 136,438 Investment properties 80,320 Investments 801,000 1,587,930 621,600 Current assets Inventories Trade and other receivables Cash Total assets 35,200 10.800 92,300 1,726,230 163,200 32,000 103,200 920,000 Equities Share capital Retained eamings 650,000 923,230 326,000 399,000 Total equities 1,573,230 725,000 Non-current liabilities Loan payable 130,000 167,000 Current liabilities Trade and other payables Total equities and liabilities 23,000 1,726,230 28,000 920,000

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