2017 ~ 2018 SEMESTER 2 (SESSIONS A AND B) g. ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES t GFE "LS ASSIGNMENTI his assignment aims at consolidating students’ understanding on the preparation of consolidated financial statements, in particular the application of HIKFRS 3 (Revised), HKFRS 10 and HKAS 25 | (2011), The assignment involves calculation exercises. i Students are required to complete all the questions below and submit the completed assignment on or before 21 November 2017 (Tuesday, 10:00 a.m. This assignment accounts for 6% towards the final grading ofthe course. Students are expected to answer al the questions individualy inorder to fet your own knowledge inthe topics discussed inlectures. BacKGROUND, Pasture Dairy Limited ("PDL"), having its shares listed on the Hong Kong Stock Exchange, is engaging in the manufacture and distribution of quality dairy products. PDL, together with its subsidiaries, (the “Group”) has become one of the leading daii Group's diversified product range includes liquid ice-cream and other dairy products. y product manufacturers in Hong Kong. The nilk products (such as UHT milk and yogurt), ACCOUNTING POLICY OF THE GRouP Properties, plant and equipment are measured using the cost model in accordance with HKAS 16 Property, Plant and Equipment, The items are depreciated over their respective useful lives. Depreciation is recorded on a monthly basis. Investment propertis Property. ‘are measured using the fair value model in accordance with HKAS 40 Investment Intangible assets are measured using the cost model in accordance with HKAS 38 Intangible Asset and are amortised over their respective useful lives. Amortisation is recorded on a monthly basis Depreciation and amortisation charges are it statement of profit or loss, uded in selling and administrat ppenses in the IT INVESTMENTIN SwLEY Yoourr LimrreD On 1 April 2004, PDL acquired 55% of the ordinary shares of Smiley Yogurt Limited ("SYL"). SYLis a Hong Kong incorporated company engaging in the manufacture and distribution of yogurt products. PDL. paid HKS 277,200,000 for this acquisition on 1 April 2004. On 1 April 2008, SY had retained earnings of HK$ 400,000,000 and no other reserves. At the date of acquisition, the book values of SYL’s assets and liabilities approximated their fair values except that SYL had a preliminary research project on producing yogurt in the form of ice cubes ("Project Cube"), Project Cube, which was not recognised in the statement of financial position of SYL. in accordance with HIKAS 38, hada fair value of HIKS 3,000,000 at 1 April 2004, Project Cube did not eventually reach commercial production and was therefore not amortised. During the year ended 31 March 2006, SYL concluded that Project Cube was a failure, In accordance with HKFRS 3 (Revised) Business Combinations, PDL chose to measure the non-controlling interest in SYL at its proportionate sh: ssetsat the acquisition date. ()|,) SYL has not issued any new shares since 1 April 2008 apstrtaim Included in PDI’s property, plant and equipment was a property located in Sheung Wan ("Property 5") . which was transferred from SYL at a transfer price of HIKS 24,000,000 on 1 April 2007. SYL acquired 11" Cyn Property $ on 1 April 2002 ata cost of HKS 30,000,000. On 1 April 2002, SYL estimated that Property Sj», would have a useful life of 15 years with no residual value. ‘There has been no change in the remaining useful life of Property S after such transfer actionRervite ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 2 (SESSIONS A AND B) SEF *35 ASSIGNMENT 1 On 1 Apsil 2016, PDL purchased a flat in Kowloon Tong (“Property T*) at a cost of HKS 7,200,000. Since purchase, Property T has been leased to SYL as SYLs office, The monthly rental charge is HK$ 15,000 and SYL has settled all the rental fee prior to year end, It was assessed that the fair value of Property T was FKS 700,000 at 31 March 2017. I was estimated that Property T has a usefl life of 30 years since 1 April 2016. Trpsemect > bveahant 2 INVESTMENTIN AROMA FRINGE LIMITED, PDL acquired 40% of the shares of Aroma Fringe Limited ("AFL") on 1 April 2009 at a cost of HKS 137,700,000 in cash. AFL is engaging in the manufacture and distribution of ice-cream products. After acquisition, PDL has a right to appoint one out of seven directors in AFL. At the date of acquisition, AFL had retained earnings of HK$ 100,000,000 and other reserves of HKS 90,000,000. On the same date, it was assessed that the carrying amounts of assets and liabilities of AFL were the same as their fair values except for certain machinery items for which the fair value was HK$ 20,000,000. greater than the carrying amount. These machinery items had a remaining economic life (same as ‘useful life) of 8 years as at 1 April 2009 with no residual value. APL has not issued any new shares since 1 April 3009. APL started exploring new markets since March 2016. In order to speed up the production process, PDL sold raw materials to AFL for further processing. On 21 March 2016, PDL transferred dairy products to AFL at a price of HK$ 7,700,000 at a 10% mark-up on cost. Due to its perishable nature, 90% of such dairy products were used up during the year ended 31 March 2016 while the remaining, 10% were used up in the production in April 2016. To financially assist AFL’s expansion, PDL. provided an interest-free short-term loan to AFL amounting to HK$200,000 since 1 January 2017. Such Toan was still included in current assets and liabilities of PDL and AFL respectively. From January 2017 onwards, AFL experienced a drop in profits due to substantial increase in the production costs. PDL performed an impairment review for its investment in AFL and concluded that it was impaired by HK$400,000 during the year ended 31 March 2017. Extracted from APL’s individual financial statements, it was noted that the other reserves as at the acquisition date dropped to HK$ 85,000,000 and HK$ 83,000,000 respectively on 31 March 2016 and 2017 respectively, Darr FINANCIAL STATEMENTS OF THE COMPANIES ‘Statements of profit or loss for the year ended 31 March 2017 PDL Sy AFL, Fis 000- TKS000 Revenue 320,000 (Cost of sales (310,00) ‘Gross profit 10,000 ‘Other income/gain (including dividend income) 2,000 Other expense loss (25.000) ‘Selling and administrative expenses 69,000) Profit before interest and tax 78,000 Finance charge (3.000), Profit before tax z 10,000 Income tax charge (10,000 2,000) Profit/(loss) fr the year 5,000 8.000 Interim dividends declared and paid (6.000) (1.500), Retained earnings, 1 Apel 752.000, 380,000, Retained earnings, 31 March 789,000 468,300, 136,100,2017 ~ 2018 SEMESTER 2 (SESSIONS A AND B) g ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES Se SEEES*S5 ASSIGNMENT 1 ‘Statements of financial position as at 31 March 2017 ppt svt AFL TKSO0, TAKS 000 TEKS000 ‘Non-current assets Property, plant and equipment 410,000 295,900 Intangible assets 2,000 Investment properties Investments Current assets Inventories ‘4000 38,000 2.000 Trade and other receivables 8,000 $3,000 24.000 cash 54,000 55,000 24,000 Total assets 353.200 379,500, 351,900, gullies Share capital 350,000 10,000, 132000 Retained earnings 789,000 469,300, 186,400 Other reserves 83,000 Total equities 900 369300 1400 Nonscurrent liabilities ‘Loan payable 40,000 : 70,000 ‘Camron ails ‘Trade and other payables 34,300 30,500 : ‘Total equities and liabilities 393,200, 481,900 fooow 25 x25 On 1 January 2017, PDL made a fully subscribed one-for-five rights issue of shares at HKS25 each. ‘The number of shares of PDL prior to this rights issue was 100,000,000 shares (which was issued at HK$1 each). This rights issue has already been incorporated in PDL's financial statements above. ‘Subsequent to the end of this current year, as the accounting manager of the Group, you are required to prepare the consolidated financial statements to be presented to the board of directors for discussion and approval. You can ignore any taxation implications in this question, Required: (@) Prepare the necessary correction journal entries (if any) and consolidation adjustment journal ‘entries to include Smiley Yogurt Limited in the consolidated financial statements for the Group. 2) Prepare the adjustment journal entries to include Aroma Fringe Limited in the consolidated financial statements for the Group. (@) Prepare the consolidated statement of profit oF loss for the year ended 31 March 2017 and the consolidated statement of financial position at 31 March 2017 for the Group, using the ‘worksheet attached. (4) Prepare the consolidated statement of changes of equity for the year ended 31 March 2017 for the Group. (Note: Do a research on any listed company in Hong Kong for drafting the proper format of a consolidated statement of changes in equity. Remember to fit in appropriate figures for the Group in this part) END {:] 2 BooACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 2 (SESSIONS A AND B) ASSIGNMENT 1 ‘Workshest ‘Statements of profit or los for the year ended 31 March 2017 Revenue Cont of sales Gross profit (Other income/zain (Other expence/loss Selling and administrative expenses Profit before interest and tax Finance charge Profit before tax Income tax charge Polit forthe yeor Inter dividends declared and paid Retained earnings, 1 Apel Retained earnings, 31 March PDL Tixsoo 742,000 (490,000 252,000 2.000 (000, (182,00) (000) 752,000 (32.000) (194700) re) Tm) ra} 7000 Adjustments Consolidated De GIRS 00) Ce. (HSU)Statements of financial positon as at 31 March 2017 PDL svt Adjustments Consolidated ixsooo TKS 000 De HIRS'000) Ce (RSD) HKSOO ‘Non-cumentasscis Property, plant and equipment 10000 «0000 Intangible nscets 200 000 Investment properties 15200 4300 Investments 0,000 : S72) 63500 —l (Cunent asses Tventories 00 15.000 ‘Trade and other receivables sao 600 Cosh 4000 ssc0n Total assets 330 5.50, Fates Sharecaital 150000 1on000| Retained earnings 70m00 49300 (Other reserves . “oval equities amo 500 ‘Nonscurent nis Loan payable aco “Trade and other pavables 4200 30205 Total equiies and lbilies 355.200 9.500VA ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 1 (SESSIONS A & B) ASSIGNMENT 2: SOLUTIONS ‘SYL) Consolidation: Si: Fair value differentials ~ Intangible asset Dr. Retained earnings, 1 April 3,000K Cz. Business combination valuation reserve 3,000K 82 & 3A: Pre-acquisition elimination entries Dr. Share capital 100,000K Dr. Retained earnings, acquisition date 400,000K Dr. Business combination valuation reserve 3,000K Dr. Goodwill 550K Cx. Investments 27,200K Cr. Non-controlling interests 226,350K (HIK$400,000K + FIK$100,000K + HK$3,000K) x 45% S4A: Upstream transfer of property Dr. Retained earnings, 1 April 4,000K (HKS24,000K - (FIKS30,000K ~ HKS30,000K x5/15)) Cr. Property, plant and equipment (net) 4,000 Dr. Accumulated depreciation 4,000K Cr. Depreciation expense (HKS4,000K / 10) 400K Gr, Retained earnings, 1 April (HKS4,000K / 10x9) 3,600K ‘SAB: Reclassification of investment property to property, plant and equipment Dr. Property, plant and equipment 7,200K Cx. Investment property 7,200K Dr, Investment property (HKS7,200K - HK$7,100K) 100K Cr. Loss in fair value change of investment property (1/S) 100K Dr. Depreciation expense (HKS7,200K / 30) 240K Cz. Accumulated depreciation 240K ‘S4C: Intra-group rental fee Dr. Rental income (HKSI5K x 12) ? » BOAR @ » Cx. Rental expense ) a Ahbidiaty ‘83B: Share of net assets to NCI for previous period IKE Dr. Retained earnings, 1 April Cx, Non-controlling interests (B/S) Calculations: Change in retained earnings (HK$470,000K ~ HK$400,000K) 70,000K Less: Excess impairment (from S1) @.000k) Less: Unrealised profit from upstream transfer of PPE (rom S4A) (4.0006) ‘Addi: Realised profit from upstream transfer of PPE (from S4A) 3,600K ‘Adjusted change in retained earnings 166,600K x_45% Share to NCI 29,970K '83C; Share of net assets to NCI for current period Dr. Non-controlling interests (B/S) 135K Cr. Non-controlling interests (1/S) 135KACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 1 (SESSIONS A & B) ASSIGNMENT Calculations: Loss for the year ‘Add: Realised profit from upstream transaction (from S4A) Adjusted loss for the year Share to NCI (AFL) Equit Step 1: Initial acquisition ~ Reclassification required (see below) Step 2: Capitalisation of profits - See below for the entry Step 3: FV adjustment: excess depreciation of machinery items (F3KS20,000K/8) Step 4: Goodwill impairment Step 5: Dividend reclassification (HK$1,600K x 40%) Step 6: Inter-company sales Unrealised gain upon sale (HKS7,700K - HK$7,700/1.1) For the year ended 31/3/2016, realised profit (HKS700K x 90%) For the year ended 31/3/2017, realised profit (HKS700K x 10%) Step 7; Movement in other reserves (HK$83,000K - HK$90,000K) metho: AJ: Reclassification of investments Dr. Investment in associate Cr. Investments A2: Share of profits Calculations: ‘Movements of Retained earnings from acquisition date to beginning of current year (HK$180,000K - HK$100,000K) Less: Excess depreciation (step 3) (HKS2,500K x 7) Less: Unrealised profit (step 6) Ada: Realised profit (step 6) Dr. Investment in associate Cz. Retained earnings, 1 April Dr. Investment in associate Cr. Share of associate's profit / loss Calculations: Profit for the year Less: Excess depreciation (step 3) ‘Add: Realised profit (step 6) ‘Ad: Impairment Dr. Share of associate's profit / loss Cx. Investment in associate (700K) 400K (200K) 45% 735K 137,700K 2,500K per year 400K 640K (700K) 630K 70K (7.000K) 137,700K 80,000 (17,500) (700K) 830K 62,430K 40% 24,972K 24,972K 2,228K 8,000K (250K) __70K 5570K x40% 2,228K 137,700K 24,972K 2,228K% ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 1 (SESSIONS A & B) ASSIGNMENT 2: SOLUTIONS AS: Dividend reclassification Dr. Dividend income 640K Ce. Investment in associate 640K AT: Share of associate's other reserve movement Dr. Share of associate's other reserves 2,800K x. Investment in associate 2,800K PDL Group Consolidated statement of changes in equity For the year ended 31 March 2017 Attributable to owners of the parent Attributable Share Retained other controlling capital ceamings reserve Subtotal interest Tox $000 HRS000, TKS 7KS000 S000 TKS000, Balance att April 700,000 513602 (2.00) 911802 256300 1167s Profit forthe year : 45883 45883. 035) 5748 Rights sue/share issue ‘50000 - a 50,000 : 50,000 (Other comprehensive income : : (0) (G00) = (200) Dividends - (6.000) : (8,000) (6.00, ‘Balance at 31 March 500 Bias. a 335,085, as 254870ACCT 4011 ADVANCED FINANCIAL ACCOUNTING STUDIES 2017 ~ 2018 SEMESTER 1 (SESSIONS A & B) ASSIGNMENT 2: SOLUTIONS ‘Statements of profit or loss forthe year ended 31 March 2017 POL su Adjustments Consolidated Tacsuoo xs De ROO) Ce TON TiK5000 Revenwe 7,000 655,00 7395000 Cost of sles 490000, 452.00 00 Gross profit 252000 201,000 75300 Other ncome/ gin ‘2.000 2500 asf 66180 sic 180 ier oxpense/oss 3106) G06) Tw erm 180 Seling and adminisuative ewpenses 18200) 94700) Si 2 00 Share of associa’ profit a “0 Tak Frofit before interest and tx sa Tih inane charge on 5 Profit before tax 55,000 (700) Income tx charge 20,00 oft for the year 45.00 Tay Profit attbetabe to NCI (NCI YS) Bs sc oft attibtableto parent Inverim dividends decared and paid (8,000) 5 (6.000) Retined earnings, 1 Apr 7200 a7oq00 Sif TOA]QA set sasal~—ano00 sia 4,000 : 2 7970 7 Retained eamings St March Tae, wD zo ETS Sas Statements of financial postion a at 31 Mach 2017 PDL sw Adjustments Consolidated Tacso0o —Hixsw De GAR) cr. CHE STOO Nonsumsntassis Property, pant and equipment ‘10000 sano iA ToT S88 66.960 si 20 [sas Intangibe ass 2,000 000 100 Investment properties 35200 4500 Stl ro 7s 12600 Investments 560,000 5 Branr|s23a #5100 13770 Tvestment in ansocite xia ‘0 sips a 00 [AS 225 3.800 Goodwill 523A 350 7a Taz inventories 4.000 18000 2.000 Trade and other eceivables #000 48,000 51,000 Cash 54,000 55,00 109000 Total assets Baz 373500 T1270 POL svi. Adjustment Consolidated Tixseo aks wo De R000) Ce. CSTD TSO Eguitics Sar cept 150000100000 s23A____1onano 10000 Retained earnings 79000 469300 eua0 15 ss.a85 Neues) scl aes SERA 250185 23,97 |s3B Other reserve x Tao (260) cv S23 5,000 3,000.1 “otal equities am Ta Non-current liabilities Loan payable 4900 - Cunt ibis Trade and other payables 14200 i000 “otal equities and abies 3300. 379500