Question 1On 1 January 2019, Garfield Ltd paid Arlene Ltd $38,400,000 to acquire 70% voting right of Arlene
Ltd. This cost of investment represents the payment for the purchase of 70% ordinary shares of
Arlene Ltd on 1 January 2019 and its retained profit of $9.6 million at the acquisition date. The
acquisition related cost is $1.36 million. The following information relates to the statements of
financial position as at 31 December 2020 and the statement of profit or loss and other comprehensive
income for the year ended 31 December 2020 of Garfield Ltd and its subsidiary Arlene Ltd.
Statements of financial position
As at 31 December 2020
Garfield Ltd
$’000
$’000
Arlene Ltd
$’000
$’000
228,533
38,400
266,933
81,853
81,853
ASSETS
Non-current assets
Property, plant and equipment
Investment in Arlene Ltd
Current assets
Inventories
Accounts receivable
Receivable from Arlene
Cash and bank
4,312
5,967
1,980
3,226
Total assets
EQUITY AND LIABILITIES
Equity
Ordinary Shares of $1 each
Retained profit
Non-current liabilities
10% Debentures
Current liabilities
Accounts payable
Payable to Garfield
Dividend payable
Tax payable
Total equity and liabilities
1,945
2,468
4,411
15,485
282,418
8,824
90,677
43,762
198,092
241,854
40,000
34,650
74,650
30,794
9,882
5,005
388
4,377
2,214
1,814
450
1,667
9,770
282,418
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6,145
90,677
Statement of profit or loss and other comprehensive income
For the year ended 31 December 2020
Garfield Ltd
$’000
89,622
Revenue
Arlene Ltd
$’000
37,122
Opening inventories
Purchases
Closing inventories
Cost of sales
(5,088)
(38,647)
4,312
(39,423)
(1,838)
(16,777)
1,945
(16,670)
Gross Profit
Profit on disposal of assets
Distribution costs
Administrative expenses
Profit before tax
Income tax expense
Profit for the year
50,199
(6,861)
(13,254)
30,084
(4,377)
25,707
20,452
750
(3,124)
(6,781)
11,297
(1,667)
9,630
Retained profit, 1 January 2020
172,773
25,470
Notes: Both Garfield Ltd and Arlene Ltd did not recognise any components of other comprehensive
income in the year presented.
The following information is relevant:
(a) Arlene Ltd sold a piece of equipment to Garfield Limited at cost plus 30%. The cost of the
machine is $2,000,000 for Arlene Limited. ,WLVWKHJURXS¶VSROLF\WRGHSUHFLDWHHTXLSPHQWDW
10% per annum (straight line), with zero scrap value.
(b) During the year 2020, Garfield Ltd sold inventory to Arlene Ltd at a price of $180,000 with a
markup of 20%. One-third of these goods were unsold by Arlene Ltd at 31 December 2020.
(c) On 30 December 2020, Garfield Ltd and Arlene Ltd declared dividend for $388,000 and
$450,000 respectively and properly recognized it as a liability. Garfield Ltd has not
accounted for any dividend receivable from Arlene Ltd.
(d) On 31 December 2020, Arlene Ltd had remitted $166,000 to Garfield Ltd to settle part of their
outstanding balance but Garfield Ltd has not yet received this until 3 January 2021.
(e) Goodwill arising on acquisition is accounted for in accordance with HKFRS 3 ³%XVLQHVV
&RPELQDWLRQV´ The management of Garfield Ltd believed that there is an impairment of
$1,020,000 for the goodwill in the year of 2020.
Required:
Prepare the consolidated statement of profit or loss and other comprehensive income of Garfield Ltd
for the year ended 31 December 2020 and the consolidated statement of financial position as at that
date. Show all your workings and appropriate journal entries.
(Total 70 marks)
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Question 2
Odie Limited is a manufacturer of electronic products. It sells goods to wholesalers and retailers and
also directly to customers both through its retail network comprising self-operated stand-alone retail
shops and concession counters in department stores and through internet sales. Determine when
control of the goods has transferred to customers and when revenue is recognized for the following
transactions.
(i) For sales of goods to the wholesalers and retailers (including department stores). Following
delivery, the wholesalers and retailers have full discretion over the manner of distribution and
price to sell the goods, have the primary responsibility when selling the goods and bear the risks
of obsolescence and loss in relation to the goods.
(ii) For sales of goods to end customers through its retail network comprising self-operated
stand-alone retail shops and concession counters in department stores.
(iii) For internet sales of goods, customer pay online when order is placed and delivery occurs when
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(Total 30 marks)
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