Question 1 (50 marks) Kate Cake Company is a Hong Kong listed company. Its main operation is manufacturing of cake, bread, chocolate and cookies food products in Hong Kong, South Asian and European countries. Due to the continuing effort put on quality control and market research, the company was renowned for its diversification and high quality of food products. One of the missions of Kate Cake is to become the industry market leader. Upon approval by its Board of Director, the management team has carried out its implementation plan to fulfill the mission. In recent years, Kate Bread has adopted the following strategy in the areas of supply chain and market diversification. In order to enhance the supply chain network, Kate Cake has entered into a franchise agreement during the year ended 31 December 2021, giving Orange Taste Company, which is a Hong Kong company, to operate as a franchisee of Kate Cake for six years. As part of the arrangement, Kate Cake helps Orange Taste to locate the site, negotiate the lease or purchase of the site, supervise the construction activity, and provide employee training and the equipment necessary to be a distributor of its products. Similar training services and equipment are sold separately. Orange Taste promises to pay ongoing royalty payments of 4% of its annual sales, payable each March 31 of the following year. To further capture and develop the market in North America, On 1 January 2020, Kate Cake had acquired 65% of the shares of Billy Bread Company, which is a foreign subsidiary of Kate Cake. The main operation of Billy Bread is in Canada. The local currency of Kate Cake is HKD, abbreviated as $. The currency of Billy Bread is CAD, abbreviated as C. Kate Cake has paid C420 million in the acquisition of Billy Bread. It is the company policy of Kate Cake to measure the Non Controlling Interest (NCT) at the NCP's proportionate share of the equity of the acquiree. It is assumed that there is no difference between the fair value and book value of the equity of Billy Bread on 1 January 2020. The Statements of profit and loss for Kate Cake Company and Billy Bread Company for the year ended 31 December 2021 are as follow- Kate Cake Billy Bread $'000 C'000 Sales 103,000 Cost of goods sold 66,000 62,000 Gross Profit 37,000 36,000 Operating expenses 9,000 13,000 Operating Profit 28,000 23,000 Rent Revenue 5,000 1,000 Interest Income 3,000 Interest Expense 1,000 2,000 Profit before tax 35,000 22,000 Income Tax expense Profit for the year 6,000 29,000 4,000 18,000 The statements of the financial position of Kate Cake Company and Billy Bread Company at 31 December 2021 are as follows- Kate Cake S'000 Billy Bread C'000 950,000 180,000 66,000 30,000 2,352,000 3,578,000 451,000 90,000 4.000 2,000 547,000 Non-current assets Land Plant Equipment Notes Receivable Investment in Billy Bread Company Current assets Inventories Supplies Prepaid Rent Prepaid Insurance Prepaid Advertising Interest Receivable Notes Receivable Accounts Receivable Cash 99,000 60,000 81,000 58,000 20,000 27,000 15.000 45,000 189,000 594,000 57,000 24,000 16,000 6,000 2,000 1,000 9,000 13,000 99,000 227,000 100,000 600,000 199,800 899,800 250,000 359,900 609,900 Equity Preference Share Ordinary Share Retained Earnings Long Term Liabilities Pension Liability Deferred Tax Liability Bonds Payable Current Liabilities Accounts Payable Wages Payable Uneamed Service Revenue Uneamed Sales Revenue 29,600 1,600 1,500,000 1,531,200 60,000 1,100 30,000 91,100 1,298,000 310,000 67,000 66,000 1,741,000 40.000 18,000 9,000 6,000 73,000 Please note the information below- (1) Kate Cake reported net profits of $17 million for the year ended 31 December 2020. It has paid dividend $900,000 and $400,000 in the years ended 31 December 2020 and 2021 respectively. (2) There was no change in Preference Share and Ordinary Share of Kate Cake for both years ended 31 December 2020 and 2021. (3) The retained earnings of Kate Cake on 1 Jan 2020 was $855.1 million. (4) The net profits of Billy Bread for year ended 31 December 2020 was 13 million. It had no dividend declared or paid for the years ended 31 December 2020 and 2021. On 1 Jan 2020, the retained earnings of Billy Bread was C328.9 million. There was no change in Ordinary Share of Billy Bread for both years ended 31 December 2020 and 2021. (5) For the year ended 31 December 2020, there was no impairment of goodwill. But on 31 December 2021, Kate Cake determined that the acquisition of Billy Bread was not a good one. In view of this, 26% on the impairment of the goodwill (before taking into account the exchange difference) should be made. (6) During the year ended 31 December 2021, Kate Cake has made the following transactions, which had not been reflected in the Statement of Financial Position and Statement of Profit and Loss for the year 2021: On 27 April 2021, it had signed a contract to purchase a piece of land from QJ Land Limited, which was a Japanese Company. The ownership of land had been transferred to Kate Cake on 31 May 2021. The currency of QJ Land is Yen. Based on the contract term, the cost of land was Yen 13million 35% deposit must be made one week after the contract is signed, and 50% must be made two weeks after the contract is made, and the remaining 15% should be made 3 months after transfer of ownership of land. (Hint: Open an account "Prepayment" for the advance consideration) Apart from this, it had purchased supplies from WX Supplies Limited on 11 October 2021 and the supplies were delivered on the same date. WX Supplies was a Malaysian Company and its currency is abbreviated as M. The cost of the supplies was M460,000. Half of the bill was settled on 18 October 2021, and the remaining half will be settled on 2 February 2022. The supplies from WX Supplies remained unused as at 31 December 2021. On 8 June 2021, rental service was provided to Mr. Robinson who was a French Customer and its currency is Euro, abbreviated as E. The price of the rental service is E900,000. Two third of the payment was received on 8 August 2021, and the remaining one third was still outstanding as at 31 December 2021. (Hint: Use the Accounts Receivable account instead of Rent Receivable account) In relation to the franchise agreement with Orange Taste, the contract was signed on 31 December 2021. Kate Cake charged Orange Taste an initial franchise fee of $700,000 to operate as a franchisee. Of this amount, $340,000 was payable upon signing of contract, and the note payable will be payable in six annual payments of $60,000 each on 31 December, starting from 31 December 2022. The crediting rating of Orange Taste indicated that the money can be borrowed at 9%. The transaction price (at present value) was allocated as $340,000 to rights to the trade name, market area, and proprietary know how, $180,000 to training services and the remaining amount to equipment. Training will be completed in February 2022, and the equipment will be installed in February 2022, and Orange Taste will hold a grand opening on 5 March 2022. (Hint: The present value factor of annuity of six receipt discounted at 9% is 4.48592) (7) During the year 2021, Kate Cake sold goods to Billy Bread for C4.9 million. None of the items remained in inventory on 31 December 2021. (8) Exchange rate are as follow: CAD (C): HKD On 1 January 2020 1: 5.6 Average rate for the year 2020 1: 5.7 31 December 2020 1: 5.9 Average rate for the year 2021 1: 6.2 31 December 2021 1: 6.3 11 October 2021 18 October 2021 Average rate for the year 2021 31 December 2021 Malaysian (M): HKD 1: 2.4 1: 2.2 1: 2.5 1: 2.7 27 April 2021 4 May 2021 11 May 2021 31 May 2021 31 August 2021 Average rate for the year 2021 31 December 2021 Yen: HKD 100: 7.9 100: 7.6 100: 7.7 100: 7.2 100: 8.1 100: 8.0 100: 8.5 8 June 2021 8 August 2021 Average rate for the year 2021 31 December 2021 Euro (E): HKD 1: 9.4 1: 9.0 1: 9.1 1: 8.8 Requirement (a) Prepare the journal entries for Kate Cake in relation to the transactions in (6) above. (7 marks) (b) Translate the Income Statement of Billy Bread for the year ended 31 December 2021 to HKD, abbreviated as $. (3 marks) (c) Prepare the Consolidated Income Statement for the Group of Kate Cake for the year ended 31 December 2021. (4 marks) (d) Translate the post acquisition earnings of Billy Bread to HKD, abbreviated as $. Calculate the Cumulative exchange gain in the exchange rate reserve and the exchange difference from goodwill. Show workings. (6 marks) (e) Translate the Statement of Financial Position of Billy Bread on 31 December 2021 to HKD, abbreviated as $. (4 marks) (1) Prepare the consolidated journal entries on 31 December 2021. (6 marks) (9) Prepare the Consolidated Statement of Financial Position for the Group of Kate Cake on 31 December 2021. (7 marks) (h) Upon reviewing the accounting record and the related documents, the accountant found the following errors - The price of rental service (E900,000) provided to Mr. Robinson in the related document is wrong, as the price has been overstated. The average exchange rate for the year 2021 for CAD (C): HKD is wrong. Actually, one CAD(C) should value less than 6.2 HKD on average for the year 2021. Discuss the accounting implication of the errors above on the Consolidated Statement of Financial Position and Consolidated Income Statement for the Group of Kate Cake for the year 2021. Do not show any calculation or figures. If you are the accountant, what will you do? (13 marks)