This examination paper consists of THREE (3) questions. Students are required to attempt ALL questions Question 1 (40 marks) Apple Limited is a company listed on the Hong Kong Stock Exchange. Its financial year ends at 31 December. The following financial information had been summarized from the books of Apple Limited on 31 December 2020. Debit (S) Credit (S) 6,000,000 3,690,000 991,110 380,850 2,120.000 Sales Cost of sales Selling and distribution expenses General and administrative expenses Cash and bank Retained profit at 1 January 2020 General reserve Share capital Trade receivable Provision for bad debts at 1 January 2020 Inventory Right of use asset at 1 January 2020 Trade payable Lease liability at 1 January 2020 1,372,350 240,000 3,900,000 4,684,000 51,600 1,260,000 645,000 Long-term bank loans Total 728,010 645,000 834,000 13.770.960 13.770,960 The above financial data had not taken into consideration of the following issues: (i) The taxable profit for the year ended 31 December 2020 was $850,000. It was estimated that there existed a deferred tax liability of $150,000 as at 31 December 2020. The tax rate was 16.5%. Apple Limited entered into a 3-year lease of an equipment on 1 January 2020. The annual lease payment for Apple Limited was $250,000 payable in arrears, with the first payment on 31 December 2020. The interest rate implicit in the lease was 8% per annum. The right of use asset and lease liability were estimated as both $645,000 at 1 January 2020. The company had not yet recorded the interest incurred and the lease payment for 2020. ACT B332F (2100) Page 2 of 6 From past experience, the management estimated that 5% of trade receivable was uncollectible. The bad debts expense was regarded as part of the general and administrative expenses. (iv) At the inception of the lease, it was certain that Apple Limited would obtain the ownership of the equipment at the end of the lease term, therefore, the right of use asset was to be depreciated over its useful life of 5 years using straight-line method. Depreciation expense was regarded as part of the general and administrative expenses. Required: (a) Prepare journal entries to record the transactions (1) to (iv) for Apple (24 marks) Limited (b) Prepare the statement of profit or loss and other comprehensive income (16 marks) for Apple Limited for the year ended 31 December 2020 in accordance with the requirements of HKAS 1 Presentation of Financial Statements. Question 2 (30 marks) Jacky, a newly employed accountant of Sunshine Limited, encountered the following problems relating to the activities of the company during the year ended 31 December 2020: (a) During the year, there was a large chemical waste leaking into the nearby river in Hong Kong. There was no current anti-pollution legislation enacted in Hong Kong. Each year, Sunshine Limited publishes in its financial statements a comprehensive environmental policy, which outlines the company's dedication to a 'clean and healthy environment'. Sunshine Limited mentioned to the public that the company would take up the responsibility to clean up the river. The company's legal advisors advised that there was no legal liability for the cleaning up which would cost $500,000. (b) The directors of Sunshine Limited determined that the total estimated useful life of a machine should be increased from five years to seven years. The machine was acquired on 1 January 2019 for $6 million and it was estimated that there would be no residual value. Depreciation had already been provided for up to 31 December 2019 based on the original estimated useful life of 5 years. The company adopted the straight-line method to depreciate assets. ACT B332F (2100) Page 3 of 6