Question 2 (8%) Har Kona Taxation Flying Kite Ltd. has been carrying on an import and export business in Hong Kong for many years. The company's profit and loss account of the company for the year ended 31 March 2019 is as follows: Gross profit from sales of goods $4,000,000 Exchange gain (Note i) 31,000 Interest income (Note ii) 3,000 Profits on disposal of fixed assets 20,000 54,000 4,054,000 Less: Expenses Audit fee 50,000 Compensation and penalty (Note iii) 215,500 Depreciation 130,000 Interest (Note iv) 73,000 Legal fee (Note v) 30,000 Provision for doubtful debts (Note vi) 38,000 Rent (Note vii) 850,000 Repairs and maintenance (Note viii) 280,000 Salaries 2,000,000 Travelling (Note ix) 267,000 Net profit 3.933,500 120.500 Page 2 Notes: (i) Exchange gain Exchange gain on settlement of trade creditors $31.000 (ii) Interest income of $3,000 received from a Hong Kong dollar fixed deposit and the deposit was used to secure the company's bank overdraft facilities for the operation of the business. (iii) Compensation and penalty Compensation to customer for faulty goods Penalty for late delivery of goods Traffic fines $150,000 $62,500 $3,000 $215.500 (iv) Bank overdraft interest of $73,000 was paid to a local bank and the facility was secured by the company's own fixed deposit maintained with the bank. (v) Legal fee for the preparation of banking facilities for the preparation of contracts made with customers for initial leasing of director's quarters for recovery of bad debts (vi) Provision for doubtful debts $12,000 $7,000 $6,000 $5,000 $30,000 Increase in general provision for doubtful trade debts Decrease in specific provision for doubtful trade debts Trade debts written off $52,000 ($18,000) $4,000