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 (NCI) 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 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 (NCI) 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