Question 4

On 1 January 2015, Star Ltd acquired 75% of the ordinary shares of Shine Ltd in Hong Kong to form Star-Shine Group (SSG). At that date, the balanceon the retained earnings of Shine Ltd was Hong Kong Dollars (HK$) 1,700,000. The non-controlling interest in Shine was measured as a proportionate share of the net assets of thesubsidiary. No shares have been issued by Shine since the acquisition. The summarized income statements and balance sheets of Star Ltd and Shine Ltd as of 31 December 2019 were as follows:

Income Statementfor the year ended 31 December 2019

	Star	Shine
GB	HK$
Sales	37,422,000	9,504,000
Openinginventories	4,158,000	1,259,280
Purchases	20,790,000	5,346,000
Closing inventories	1,485,000	1,021,680
Cost of sales	23,463,000	5,583,600
Gross profit	13,959,000	3,920,400
Depreciation	2,376,000	712,800
Other expenses	629,640	237,600
Interest paid	415,800	118,800
Total expenses	3,421,440	1,069,200
Profit before tax	10,537,560	2,851,200
Taxation	2,673,000	712,800
Profit after tax	7,864,560	2,138,400

Balance Sheet as on 31 December 2019

	Star	Shine
GB	HK$
Non-current assets	8,316,000	5,464,800
Investmentin Shine Ltd Current assets:	267300	-
Inventories	1,485,000	1,021,680
Trade receivables	3,593,700	1,306,800
Shine Ltd	85,950	-
Cash	653,400	47,520

Total current assets 5,818,050 2,376,000 Total Assets 14,401,350 7,840,800 Current liabilities:

Trade payables	3,564,000	1,069,200
Star Ltd		880,988
Taxation	1,188,000	831,600
Total current liabilities	4,752,000	2,781,788
Debentures	2,970,000	950,400
Total assets lessliabilities	6,679,350	4,108,612
Capital and reserves
Share capital	2,922,300	359,750
Retained earnings	3,757,050	3,748,862
	6,679,350	4,108,612
The following furtherinformation is available:

1. The amount of HK$ 200,000 was written off goodwill as an impairment charge in the current year and HK$ 140,000 in the previousyear.

1. On 23 March 2019, Star Ltd sold goods for 2,250,000 to Shine Ltd, making a profit of 20% on cost. At the year end, one third of these raw materials were still in the inventory of Shine Ltd, and the inter-company transactions have not been eliminated from the financial statements. The goods were recorded by Shine at the exchange rate rulingon 23 March 2019.

1. Exchange rateswere as follows:

On 1 January 2015 GB 1= HK$ 15.52

Average for the year ending 31 December2019 GB 1= HK$ 10.05

On 31 December 2018/ 1 January 2019 GB 1= HK$ 9.92

On 31 December 2019 GB 1= HK$ 10.25

Required:

1. If the functional currency of Shine Ltd is HK$, which translation method is applicable to translate Shinesfinancial statements to GB and why?

1. Showing clearly all your workings:

1. Calculate the goodwillarising from the acquisition of Shine Ltd in GB.
2. Compute SSGs retained earningsand non-controlling interestas at 31 December 2019.
3. Prepare SSGs Consolidated Income Statement for the year ended 31 December 2019.
4. Prepare SSGs Consolidated Balance Sheet for the year ended 31 December 2019.

(30 marks)