SECTION A CASE QUESTIONS (Total: 50 marks)

Transcription

1 SECTION A CASE QUESTIONS (Total: 50 marks) Answer ALL of the following questions. Marks will be awarded for logical argumentation and appropriate presentation of the answers. CASE Ruby Limited ( RUBY ) is a company incorporated in Hong Kong and is principally engaged in the production, distribution and marketing of electronics products. RUBY has grown significantly over the last few years through merger and acquisition. Sapphire Limited On 1 January 2012, RUBY acquired a 70% interest in Sapphire Limited ( SAPP ) for HK$190 million when the equity of SAPP was: Share capital 44,000 Retained earnings 85,000 Other comprehensive income 70, ,000 The carrying amounts of assets and liabilities of SAPP were the same as their fair values. The control premium for the controlling interest was considered to be minimal and thus ignored. Diamond Limited On 1 January 2013, RUBY acquired a 25% interest (with a right to appoint one out of five directors) in Diamond Limited ( DIAM ) for HK$50 million when the equity of DIAM was: Share capital 55,000 Retained earnings 42,000 Other comprehensive income 33, ,000 The carrying amounts of assets and liabilities of DIAM were the same as their fair values except for plant and equipment for which the fair value was HK$8 million greater than the carrying amount. The plant and equipment had a remaining economic life (same as useful life) of 5 years and depreciation of plant and equipment is charged to expenses. The relevant tax rate is 16.5%. Module A (June 2016 Session) Page 1 of 9

2 Additional information (c) (d) RUBY and its subsidiary (the Group ) have a financial year end date at 31 December. It is the Group s policy to measure the non-controlling interests as the proportionate share of the fair value of the identifiable net assets of the subsidiary at the acquisition date. Included in the plant and machinery of RUBY was a machine sold by SAPP on 1 January 2013 for HK$13 million. The machine had an original cost of HK$22 million and its carrying amount was HK$10 million on 1 January RUBY had depreciated the machine on a straight-line basis over 5 years, with no residual value. The depreciation of the machine is charged to cost of sales. During the year ended 31 December 2015, RUBY has sold to SAPP some inventory, which cost RUBY HK$5 million, for HK$6 million. SAPP still had 10% of these inventory on hand at 31 December The following is the financial information in relation to RUBY, SAPP and DIAM as at 31 December 2015: RUBY SAPP DIAM Sales 920, , ,500 Cost of Sales 610, , ,500 Expenses 288, ,800 86,000 Profit for the year 21,900 17,200 24,000 Tax 2,900 1,200 3,000 Profit after tax 19,000 16,000 21,000 Opening retained earnings 127,000 98,000 54,000 Closing retained earnings 146, ,000 75,000 Other non-current assets 511, , ,000 Investment in SAPP 190, Investment in DIAM 50, Current assets Inventory 115,500 34,500 36,000 Accounts receivable 62,300 15,200 22,000 Cash 21,200 2,100 1,000 Total assets 950, , ,000 Share capital 362,000 44,000 55,000 Retained earnings 146, ,000 75,000 Other comprehensive income 200,000 70,000 33, , , ,000 Non-current liabilities 152,500 90,000 39,500 Current liabilities 89,500 10,000 5,500 Total equity and liabilities 950, , ,000 Module A (June 2016 Session) Page 2 of 9

3 Acquiring a new subsidiary RUBY plans to acquire 100% of the share capital of Begame Limited (BEGA). The date of acquisition is determined to be 30 June BEGA is engaged in the provision of webgames and mobile games development service ( Game Product ). BEGA s revenue is principally derived from the sales of in-game virtual items from its Game Product. Game Product Revenue BEGA provides its Game Product service through third party web-based and mobile platforms (collectively Platforms thereafter). BEGA is responsible for hosting the games, providing on-going updates of new contents, sales of in-game virtual items, technical support for the games, as well as preventing, detecting and resolving in-game cheating and hacking activities, etc. The Platforms are responsible for distribution, marketing, payer authentication and payment collections related to the games. BEGA is in control of the games and BEGA is not a joint operation. Upon the sales of virtual items, BEGA typically has an implied obligation to ensure that the virtual items to be displayed and functioned in the respective games. BEGA categorised its virtual items into two types: Consumable virtual items represent items that will be extinguished shortly after consumption by a specific game player s action (usually within one day), and Durable virtual items represent items that are accessible and beneficial to game player over an extended period of time, usually 3 to 6 months ( Player Relationship Period ). Revenue Sharing Arrangement The revenue of the virtual items sold is shared between BEGA and Platforms, according to the pre-determined ratio agreed in individual revenue sharing arrangements ( Revenue Sharing Arrangements ). These Platforms collect the payments made by game players and remit the cash to BEGA according to the Revenue Sharing Arrangements. Although games developed by BEGA are hosted at third party platforms, BEGA has the primary roles and responsibilities in the delivery of game experience to the game players and BEGA takes the primary responsibilities in the rendering of service. BEGA s mobile games are published through a limited number of mobile platforms and the marketing discounts offered by these platforms have not been significant, thus BEGA is able to track the marketing discounts reliably to make a reasonable estimation for the related gross revenues. However, BEGA s webgames are published through a large number of web-based Platforms, while the marketing discounts vary from platform to platform. As such, BEGA is not able to make a reasonable estimation for the gross revenue derived from webgames. Module A (June 2016 Session) Page 3 of 9

4 Relocation of head office RUBY owns the following properties as at 31 December 2015: Carrying amount Original cost Office building King s Building 89, ,000 Investment property Queen s Tower 248, ,000 RUBY adopts the cost model for property, plant and equipment and the fair value model for investment property. Both properties were acquired on 1 January 2009, with an expected useful life of 40 years and depreciation is calculated on a monthly basis. Due to expansion, RUBY plans to move its head office from King s Building to Queen s Tower because the space at Queen s Tower is larger. RUBY will move its head office to Queen s Tower upon the expiry of the lease with the existing tenant of Queen s Tower on 30 April RUBY will refurnish King s Building at a cost of HK$1 million in May 2016 and rent it out to earn rental income starting from 31 May RUBY has engaged an external valuer to perform a valuation for both properties and the estimated fair values at 30 April 2016 and 31 May 2016 are as follows: 30 April May 2016 Office building King s Building 180, ,000 Investment property Queen s Tower 254, ,000 Module A (June 2016 Session) Page 4 of 9

5 Question 1 (26 marks approximately 46 minutes) Prepare the consolidated statement of financial position of 31 December RUBY as at (26 marks) Note: Consolidation adjustments are to be presented in the form of a worksheet. You may use the template in green paper provided and/ or the script booklet for Case Questions to prepare your answers. You have to show the detailed calculation of each figure, but journal entries are not required. Question 2 (12 marks approximately 22 minutes) Assume that you are Cindy Lee, the accounting manager, and you are required to draft a memorandum in response to the questions raised by Mr Kenneth Lam, a Director of RUBY, as below. I don t know how the Game Product Revenue and Revenue Sharing Arrangement work. I only know that we should recognise the revenue immediately upon the sales of the virtual items. Also, for both the mobile games and webgames, I think that we should recognise the gross revenue amount as our revenue. Required: Advise Mr Lam on: how and when BEGA should recognise its Game Product Revenue; and (7 marks) whether BEGA should recognise the gross or net revenues of the mobile games and webgames according to the Revenue Sharing Arrangement. (5 marks) Question 3 (12 marks approximately 22 minutes) Advise as to the accounting implication of RUBY s office move regarding the classification and determine the carrying amount of the two properties as at 31 May In addition, you should calculate the amount of income and expense to be recognised in the profit or loss and other comprehensive income for the five months ended 31 May 2016 for King s Building and Queen s Tower. (12 marks) * * * * * * * * Module A (June 2016 Session) Page 5 of 9

6 End of Section A

7 SECTION B ESSAY / SHORT QUESTIONS (Total: 50 marks) Answer ALL of the following questions. Marks will be awarded for logical argumentation and appropriate presentation of the answers. Question 4 (18 marks approximately 32 minutes) On 1 January 2014, Goodness Company Limited ( GCL ), a Hong Kong incorporated company, granted 10,000 share options to each of its 15 senior management and 1,000 share options to each of its 200 staff. Each option entitles the holder to subscribe to one share of GCL at HK$9. The share options granted to senior management were immediately vested while the share options granted to staff would be vested on 31 December 2017 when they complete a service period of four years. The market price of GCL s shares at 1 January 2014 was HK$9.1. At the grant date, GCL estimated that the fair value of each share option is HK$1.0 and it is expected that 20% of the senior management and 25% of the staff will leave GCL during the four-year period. The share options will be forfeited upon departure of the senior management and staff. At 31 December 2014, all senior management and staff remained with GCL. GCL has determined not to revise its estimate of departure rate of both senior management and staff. The total number of shares in issue as at 1 January 2014 is 3,000,000. On 1 July 2014, GCL issued 220,000 new shares for cash to investors. The average market price of one GCL share during the year ended 31 December 2014 was HK$9.9. Required: (c) (d) Prepare the journal entry(ies) for the issuance of share options by GCL during the year ended 31 December (5 marks) Calculate the weighted average number of shares outstanding during the year ended 31 December (3 marks) Calculate the basic and diluted earnings per share ( EPS ) attributable to ordinary equity holders of GCL for the consolidated financial statements of GCL for the year ended 31 December 2014, on the basis that the profit attributable to ordinary equity holders of GCL for the year ended 31 December 2014 is HK$18,120,000. (7 marks) Explain the effect on a diluted EPS if the market price of one GCL share was at HK$9 or below throughout the year ended 31 December (3 marks) Module A (June 2016 Session) Page 7 of 9

8 Question 5 (20 marks approximately 36 minutes) Quality Manufacturing Limited ( QML ) is a manufacturer of aluminum products. In order to reduce the initial capital investment and to increase the productivity to meet the market demand for its products at the same time, QML has entered into the following leases: (i) (ii) (iii) A machine (Machine A) was rented from a supplier for a fixed term of 6 years at a monthly rental of HK$18,000 with a lump sum payment of HK$200,000 at the end of the lease period. The estimated fair values of Machine A at inception of the lease and at the end of the lease are HK$3,500,000 and HK$2,000,000 respectively. The machine s estimated useful life is 15 years. The lease is non-cancellable and there are no rights to extend the lease term or purchase the machine at the end of the lease term. The machine is required to be returned to the supplier upon expiry of the lease term. Another machine (Machine B) was rented from a supplier under a 4-year non-cancellable lease. The monthly rental for Machine B is HK$20,000. The estimated fair values of Machine B at inception of the lease and at the end of the lease are HK$920,000 and HK$20,000 respectively. At the end of the lease term, QML has an option to buy Machine B from the supplier at HK$1,000. The machine s estimated useful life is 5 years. During the year ended 31 December 2012, a machine (Machine C) was rented from a supplier for a fixed term of 5 years at a monthly rental of HK$25,000. The estimated fair values of the Machine C at inception of the lease and at the end of the lease are HK$5,000,000 and HK$3,500,000 respectively. The machine s estimated useful life is 20 years. The lease is cancellable at a penalty of HK$50,000 with two months notice. There are no rights to extend the lease term or purchase the machines at the end of the lease term. The machine is required to be returned to the supplier upon expiry of the lease term. QML has recognised all the rental payments under the lease as an asset and a liability at the inception of the lease. Machine C is also depreciated using the straight line method over the lease term of 5 years. Required: Advise as to whether Machine A and Machine B are under an operating lease or a finance lease. (10 marks) (i) Advise as to whether Machine C is under an operating lease or a finance lease; and (4 marks) (ii) Advise as to the accounting implication of Machine C in preparing the financial statements of QML for the year ended 31 December Calculation is not required. (6 marks) Note: Ignore any discounting effect. Module A (June 2016 Session) Page 8 of 9

9 Question 6 (12 marks approximately 22 minutes) Robust Ground Limited ( RGL ) is incorporated in Bermuda and listed on the Stock Exchange of Hong Kong Limited. The board of directors is considering to buy back the company s shares from the stock market by RGL itself or by a subsidiary of RGL ( Subsidiary ) as RGL s shares are trading at a discount to the net asset value per share and the repurchases would increase the net asset value per share of RGL. Mr Kong, the financial controller of RGL, has advised the board of directors that the shares of RGL held by the Subsidiary have to be recognised at fair value through profit or loss if the Subsidiary acquires the RGL s shares with a view to earn a trading gain. Taking into account the advice from Mr Kong, the board of directors has chosen to repurchase RGL s shares by the Subsidiary. To avoid the recognition of a fair value loss on RGL s shares, Mr Kong asked Ms Lee, the accountant of RGL, to record the RGL s shares using a higher share price at year-end compared with the actual market price at year-end. Mr Kong told Ms Lee that he would be in a big trouble if the company makes losses due to his advice and they could also receive a large bonus if they can recognise a fair value gain in reporting the result of RGL to the board of directors. Both Mr Kong and Ms Lee are members of the Hong Kong Institute of Certified Public Accountants. Required: (c) Explain the accounting implication for the repurchase of shares made by RGL itself or made by the Subsidiary in the consolidated financial statements of RGL in accordance with relevant accounting standards. (3 marks) Comment on Mr Kong s advice that the shares of RGL held by the Subsidiary are recognised at fair value through profit or loss if the Subsidiary acquires the RGL s shares with a view to earn a trading gain in the context of the financial statements of the Subsidiary and the consolidated financial statements of RGL and its Subsidiary. (3 marks) Advise as to the ethical issues involved in this case in accordance with the Code of Ethics for Professional Accountants. (6 marks) * * * END OF EXAMINATION PAPER * * * Module A (June 2016 Session) Page 9 of 9