Homework answers / question archive / Question 1 (67 marks) P Limited (P) acquired S Limited (S) and A Limited (A) and the details are as follows:   S Limited A Limited Date of acquisition 1 January 2018 1 January 2019 Shares acquired 80% 25% Non-controlling interests at fair value $155,000     The statements of financial position of S and A as at the date of acquisition were as follows:   Statement of Financial Position as at 1 January     2018   2019   S   A   Book value      Fair value   Book value Fair value   $          $   $          $ Fixed assets, net 350,000     350,000   57,000             59,000 Intangible assets -           67,000   -           - Inventory 120,000     135,000   3,000   3,000 Accounts receivable 190,000     160,000   4,000   4,000 Cash 88,000     88,000   8,000   8,000 Accounts payable (130,000)        (130,000)   (9,000)            (9,000) Total identifiable net assets 618,000           670,000                      63,000             65,000             Share capital 500,000     36,000   Retained earnings   118,000     27,000   Total equity   618,000                                   63,000                                                                                                                                       The financial statements of P, S and A for the year ended 31 December 2020 are as follows:   Income Statement and Partial Statement of Changes in Equity for the year ended 31 December 2020               P                      S          A             $                      $                      $ Sales 1,523,000                    720,000                       330,000 Cost of sales (609,000)                    (288,000)                    (132,000)   Gross profit 914,000    432,000    198,000  Dividend income 39,000          Operating expenses (523,000)    (235,000)    (94,000)  Profit before tax        430,000                       197,000                      104,000  Tax expense (69,000)                      (32,000)                      (17,000)  Net profit after tax 361,000    165,000    87,000  Retained earnings, 1 January 482,000    260,000    37,000  Dividends declared (70,000)    (45,000)    (12,000)  Retained earnings, 31 December      773,000                       380,000                        112,000  Statement of Financial Position as at 31 December 2020     P   S   $   $ Fixed assets, net 750,000   542,000 Intangible assets 38,000   - Investment in S 620,000   - Investment in A 20,000   - Inventory  92,000   138,000 Accounts receivable 35,000   60,000 Cash     168,000   220,000 Total assets    1,723,000                    960,000          Accounts payable 50,000    80,000  Share capital  900,000    500,000  Retained earnings    773,000    380,000  Total liabilities and equity    1,723,000                    960,000    Additional information:        (1)    The intangible assets of S had a remaining useful life of 5 years from the date of acquisition

Question 1 (67 marks) P Limited (P) acquired S Limited (S) and A Limited (A) and the details are as follows:   S Limited A Limited Date of acquisition 1 January 2018 1 January 2019 Shares acquired 80% 25% Non-controlling interests at fair value $155,000     The statements of financial position of S and A as at the date of acquisition were as follows:   Statement of Financial Position as at 1 January     2018   2019   S   A   Book value      Fair value   Book value Fair value   $          $   $          $ Fixed assets, net 350,000     350,000   57,000             59,000 Intangible assets -           67,000   -           - Inventory 120,000     135,000   3,000   3,000 Accounts receivable 190,000     160,000   4,000   4,000 Cash 88,000     88,000   8,000   8,000 Accounts payable (130,000)        (130,000)   (9,000)            (9,000) Total identifiable net assets 618,000           670,000                      63,000             65,000             Share capital 500,000     36,000   Retained earnings   118,000     27,000   Total equity   618,000                                   63,000                                                                                                                                       The financial statements of P, S and A for the year ended 31 December 2020 are as follows:   Income Statement and Partial Statement of Changes in Equity for the year ended 31 December 2020               P                      S          A             $                      $                      $ Sales 1,523,000                    720,000                       330,000 Cost of sales (609,000)                    (288,000)                    (132,000)   Gross profit 914,000    432,000    198,000  Dividend income 39,000          Operating expenses (523,000)    (235,000)    (94,000)  Profit before tax        430,000                       197,000                      104,000  Tax expense (69,000)                      (32,000)                      (17,000)  Net profit after tax 361,000    165,000    87,000  Retained earnings, 1 January 482,000    260,000    37,000  Dividends declared (70,000)    (45,000)    (12,000)  Retained earnings, 31 December      773,000                       380,000                        112,000  Statement of Financial Position as at 31 December 2020     P   S   $   $ Fixed assets, net 750,000   542,000 Intangible assets 38,000   - Investment in S 620,000   - Investment in A 20,000   - Inventory  92,000   138,000 Accounts receivable 35,000   60,000 Cash     168,000   220,000 Total assets    1,723,000                    960,000          Accounts payable 50,000    80,000  Share capital  900,000    500,000  Retained earnings    773,000    380,000  Total liabilities and equity    1,723,000                    960,000    Additional information:        (1)    The intangible assets of S had a remaining useful life of 5 years from the date of acquisition

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Question 2 (23 marks)

On 31 December 2019, Pearl Company, whose functional and presentation currency is the dollar ($), acquired the entire ordinary share capital of Silver Company, a foreign company whose financial statements are prepared in local currency, the LC. 

Silver’s financial statements for the year ended 31 December 2020 are shown below:

Silver Company

Income Statement and Statement of Changes in Equity (partial) for the year ended 31 December 2020

Retained earnings, 31 December      98,800 

Silver Company

Comparative Statement of Financial Position 31 December 2019 and 2020

Total assets    451,000                       515,600 

Total liabilities and equity    451,000                       515,600 

Additional information:

1. Silver was incorporated on 1 January 2018. The long-term loan was obtained from a local bank on the date of incorporation. There are no changes in the share capital and long-term loan payable since the date of incorporation. 

2. Fixed assets comprised plant and equipment that were acquired as follows:

                                    Net book value           Net book value 

Date purchased     Cost     as at     as at 

31 Dec 2019    31 Dec 2020

                    LC       LC                   LC

1. 1. 1. January 208             200,000           60,000                       40,000
      2. July 019       50,000             47,500                         4,500

           20 July 2020   120,000           -                       114,000

                                   207,500                       296,500

 Plant and equipment were measured at historical cost and depreciated over 10 years on a straight-line basis with no residual value. A full month’s depreciation was recorded in the month of purchase.

3. The patent was acquired on 2 July 2019 at a cost of LC60,000. The estimated life of the patent was 5 years from the date of purchase.

4. Silver used the FIFO inventory valuation method. Purchases were made evenly throughout the year. 

5. The insurance premium for a two-year policy was paid on 1 October 2019.

6. Dividends of LC20,000 were paid on 31 March 2020.

7. Relevant exchange rates are as follows:

           Date                LC1 =

1. 1. January 208                      $.15

           31 December 2018                 $1.13

1. 2. July 019                $1.10

           1 October 2019                       $1.12

           Average rate when 2019 closing inventory was acquired                $1.09

           31 December 2019 (date of acquisition)                    $1.08

           31 March 2020                        $1.03

           20 July 2020               $1.07

           31 December 2020                 $1.04

           Average rate for 2020                         $1.06

           Average rate when 2020 closing inventory was acquired                $1.05

Required:

1. Assume the functional currency of Silver Company is the LC. Translate the financial statements of Silver Company for the purpose of consolidation into Pearl Company’s presentation currency ($) for the year ended 31 December 2020.  (14 marks)

2. Assume the functional currency of Silver Company is the dollar ($). Translate or calculate the following items of Silver Company for the purpose of consolidation into Pearl Company’s presentation currency ($) for the year ended 31 December 2020: 
   1. Cost of goods sold       (2 marks)
   2. Fixed assets (net)         (2 marks)
   3. Prepare a schedule to calculate the translation gain or loss.  (5 marks) Question 3 (10 marks)

1. Investor A has 30 percent of the voting rights of the investee as well as an option to acquire additional 35 percent of the investee’s voting rights. The option is currently exercisable at a fixed price, that is deeply out of the money and is expected to remain so in the next two-year period. 

In accordance with HKAS 28 (Investments in Associates and Joint Ventures, 2011), determine if investor A has significant influence over the investee and discuss in general what factors should be considered in assessing the existence of significant influence.      (4 marks)          

2. Contrast the recognition and impairment of goodwill in consolidation with that under equity method.            (6 marks)