ACTB407F

Specimen Examination Paper

December 20XX Examination

ADVANCED FINANCIAL REPORTING AND ANALYSIS I

(December 20XX)

xx December 20XX Time Allowed: 3 hours xx:xx-xx:xx

THIS PAPER MUST BE RETURNED

Material/Stationery Material to be
provided to returned to the
Admissible/Inadmissible materials in this examination:
candidates invigilator at the end
(standard items) of the examination
1. Calculators are allowed. (Please refer to the OUHK 1. 1 Examination 1. Examination
Approved List.) Paper Paper
2. Dictionaries are NOT allowed. 2. 1 Answer Book 2. Answer Book
Violation of the above may lead to disqualification from
the examination.

Instructions:

1. Answer this examination paper in English.

2. Read the rubric(s) in the examination paper carefully and write your answers in the
answer book as specified. Answers recorded elsewhere will not be marked. Begin
each question on a new page and write the question number at the top of each page you
have worked on.
3. Write any rough work in the answer book or this examination paper and cross it through
afterwards. Rough work will not be marked.
4. Write clearly. It may not be possible to award marks where the writing is very difficult
to read.

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5. After the invigilator has announced that the examination has started, write your
examination number, student number and course code on the cover of the answer book
or other sheet as distributed by the invigilator. Failure to do so will mean that your
work cannot be identified.
6. At the end of the examination, hand over the answer book and examination paper to the
invigilator.
7. Do NOT open this examination paper until you are told to do so, otherwise you
may be disqualified.

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 Important
This specimen examination paper serves solely as an illustration of the
types of questions which may be contained in the examination.
Students should not construe the questions in this exercise as the
actual examination questions or section of the actual examination
paper. In addition, this exercise does not purport to represent the
complete scope or coverage of the course and the distribution of the
topics to be examined.

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This examination is divided into TWO (2) sections. You must answer ALL two
sections. The total marks for this paper are 100. You have THREE HOURS to
complete this examination. Write all the answers in the answer book provided unless
otherwise specified.

Section A: Answer TWO (2) COMPULSORY questions. Total marks for Section A
are 50 marks.
Section B: Answer any TWO (2) of the three questions. Each question is worth
25 marks and total marks for Section B are 50 marks.

Section A (50 marks)

This section is COMPULSORY. Answer ALL questions in this section.

Question 1 (35 marks)

You are the accounting manager of P Ltd, a listed company in Hong Kong. To achieve
growth, P Ltd purchased 1,200,000 shares in S Ltd and 720,000 shares in A Ltd on 1
January 2009.

The summarized income statements of P Ltd, S Ltd, and A Ltd for the year ended 31
December 2009 are set out below:

P Ltd S Ltd A Ltd

$000 $000 $000
Sales 2,800 1,800 1,200
Cost of sales (1,200) ( 800) (500)
Gross profit 1,600 1,000 700
Expenses (200) (100) (100)
Profit before tax 1,400 900 600
Profits tax (236) (420) (250)
Profit after tax 1,164 480 350

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 Statements of Financial Position as at 31 December 2009

P Ltd S Ltd A Ltd

$ 000 $000 $000
Property, plant and equipment 2,000 2,500 3,200
Loan to A Ltd 400
Investment at cost – in S Ltd 2,100
In A Ltd 1,100
Current assets 2,000 1,200 1,300
7,600 3,700 4,500

Share capital 5,000 2,000 2,400

Retained earnings 1,500 1,000 1,250
6,500 3,000 3,650
Loan from P Ltd 400
Other current liabilities 1,100 700 450
7,600 3,700 4,500

The following information is available:

(i) On 1 January 2009, the assets and liabilities of S Ltd and A Ltd were carried at
their fair values, except for an item of equipment owned by S Ltd, which has a
fair value of $300,000 in excess of its carrying amount on 1 January 2009. The
equipment has a remaining useful life of 5 years. Depreciation is charged to
cost of sales.

(ii) S Ltd sold goods to P Ltd during the year ended 31 December 2009 amounting
to $100,000 which represents cost plus a mark-up of 25%. P Ltd held $50,000
in value of these inventories at year end.

(iii) An impairment review at 31 December 2009 reveals that goodwill has been
impaired by $30,000.

(iv) No dividends were paid by the three companies.

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Required:

(1) Prepare the consolidated income statement for the year ended 31 December 2009
and the consolidated statement of financial position as at that date in accordance
with the requirements of currently effective financial reporting standards in Hong
Kong. (19 marks)

Show consolidation journal entries. ( 9 marks)

(2) One of the directors, who is in charge of marketing department, raised the
following questions relating to the financial statements you prepared in (1) above:
The sales and costs of sales of P Ltd and S Ltd simply do not add up to the
corresponding figures shown in the consolidated financial statements. Why?

Prepare a memorandum in response to the query raised by the marketing director.

(7 marks)

Question 2 (15 marks)

Discuss:
(i) the need for interim financial reporting; (6 marks)
(ii) the purpose of interim financial reporting; and (5 marks)
(iii) the frequency of financial reporting as required for listed companies in Hong
Kong (4 marks)
[End of Section A]

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Section B (50 marks) Answer any TWO questions in this section. Each question
carries 25 marks

Question 3 (25 marks)

The following are summarized accounts of XYZ Ltd:

Consolidated Income Statement for the year ended 31 December 2009

$000
Operating profit before tax 2,670
Share of associates’ profit 890
Profit before tax 3,560
Income tax expense (1,420)
Profit for the year 2,140

Attributable to:
Owners of the parent 1,744
Non-controlling interest 396
2,140

Consolidated Statements of Financial Position as at 31 December

2009 2008
$000 $000 $000 $000
ASSETS
Non-current assets
Property, plant and equipment (net) 4,500 3,300
Goodwill 165 195
Investment in associates 2,340 1,557
Current assets
Inventory 1,690 738
Trade receivable 3,037 2,880
Investments 534 338
Cash at bank 540 5,801 670 4,626

Total assets 12,806 9,678

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 EQUITY AND LIABILITIES
Equitable to owners of the parent
Ordinary shares of $1 each 2,950 1,575
Share premium 800 390
Retained earnings 3,400 2,076
7,150 4,041
Non-controlling interests 450 215
7,600 4,256
Non-current liabilities
10% debentures 2,250 3,600

Current liabilities
Bank overdraft 603 -
Tax payable 960 802
Trade payable 1,393 2,956 1,020 1,822

Total equity and liabilities 12,806 9,678

The following information relates to 2009:

(i) Dividend paid during the year amounted to $420,000.

(ii) Machinery with a written down value of $195,000 was sold during the year for
$138,000.

(iii) The operating profit before tax was arrived at after charging:
$000
Depreciation 288
Goodwill impairment 105
Interest expenses 158

(iv) $1,350,000 10% debentures were redeemed at par by issuing 1,000,000 ordinary
shares.

(v) On 1 January 2009, XYZ Ltd acquired 80% of the share capital of S Ltd. The net
assets of S Ltd at the date of acquisition were:

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 $000
Non-current assets 675
Inventories 345
Trade receivable 450
Cash 270
Tax payable (735)
1,005
Consideration
30,000 ordinary shares of $1 each 60
Cash 819
879

(vi) The company purchased shares of a listed company for investment purpose.
The cost of the investment was $196,000 and the fair value of the investment
was also $196,000 on 31 December 2009.

Required:
Prepare a consolidated statement of cash flows for XYZ Ltd for the year ended 31
December 2009, using indirect method to ascertain the cash flows from operating
activities. (25 marks)

Show your workings

Question 4 (25 marks)

H Ltd acquired 80% of the share capital of a foreign subsidiary, F Ltd, on 1 January
2009. The functional currency of F Ltd is FC. The summarized income statement and
balance sheet of F Ltd are as below:

Income statement for the year ended 2009

FC000
Profit before tax 350
Tax (168)
Profit for the year 182

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 Statements of Financial Position as at 31 December 2009
FC000 FC000
Property, plant and equipment 992
Less: depreciation (32)
960
Current assets
Inventories 400
Receivables 208 608
1,568
Equity and liabilities
Ordinary share (FC1 per share) 500
Retained profit 462
962
Loan-term loans 320
Current liabilities 286
1,568

The following information is available:

(i) There was no loan repayments or movements in non-current assets during the
year.
(ii) The exchange rates are:
1 January 2009 HK$1 = FC4.0
31 December 2009 HK$1 = FC3.2
Average for the year HK$1 = FC3.5

(iii) The functional currency of H Ltd is HK$, which is also the presentation
currency for the consolidated financial statements of H Ltd.
Required:

(1) What are the primary factors that an entity should consider in determining its
functional currency? (4 marks)

(2) Subsequent to initial recognition, what exchange rates should be used to

translate foreign currency monetary items, non-monetary items measured in
terms of historical cost in a foreign currency, and non-monetary items measured
at fair value in a foreign currency into the functional currency of an entity in its
statement of financial position? (7 marks)

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(3) Translate the financial statements of F Ltd into HK$ (8 marks)

(4) Analyze the reasonableness of the exchange difference; (6 marks)

Question 5 (25 marks)

(a) HKAS 31”Interest in Joint Ventures” uses joint control as the characteristics of
joint venture. Discuss what is meant by joint control. (5 marks)

(b) Discuss if joint control exists in the following situation:

A, B and C own shares that entitled them to 20%, 31% and 49%, respectively of
the voting rights in entity X.

The article of association and an agreement between all three parties require that
decisions of the board of directors in connection with the key financial and
operating policies of the company require a 75% majority. The article and the
agreement provide for A to appoint one director, but B and C to each appoint two
directors. (10 marks)

(c) Explain the difference between the two accounting methods as recommended by
HKAS 31, proportionate and equity method. (10 marks)

[End of Section B]
[END OF EXAMINATION PAPER]

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