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HKICPA QP Exam (Module a) Sep2006 Question Paper

HKICPA QP Exam (Module a) Sep2006 Question Paper

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Published by: cynthia tsui on Feb 11, 2010
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Module A (September 2006 Session)
Page 1 of 7
Answer the following ONE compulsory question which relates to the Case below. Marks will be awarded for logical argumentation and appropriate presentation of the answers.
Assume that you are Mr. David Lee, the accounting manager of Ultimate Holdings Limited(“UHL”). UHL is a company incorporated in Hong Kong and is principally engaged in thetrading of toys in Hong Kong.On 31 March 2005, UHL acquired 20 per cent of the issued share capital of Successful ToysLimited (“STL”), a retail chain store incorporated in Hong Kong. The cost of the investmentwas seven million Hong Kong Dollars (HKD7,000,000), which UHL paid all in cash. This20 per cent shareholding enables UHL to exercise significant influence on STL. On31 March 2005, the fair value of STL’s identifiable assets was HKD20,000,000, and thecarrying amount of those assets was HKD15,200,000. STL had no liabilities or contingentliabilities at that date. The following shows STL’s balance sheet at 31 March 2005 togetherwith the fair values of the identifiable assets:
Carrying amounts 
Fair values 
HKD’000 HKD’000 
 Plant and equipment (net) 11,200 16,000Net current assets 4,000 4,00015,200 20,000Issued equity:1,000,000 ordinary shares 10,000Retained earnings 5,20015,200During the year ended 31 March 2006, STL reported a profit of HKD12,000,000 but did notpay any dividends. In addition, the fair value of STL’s plant and equipment furtherincreased to HKD20,000,000.On 31 March 2006, UHL acquired a further 50 per cent of the issued share capital of STLthereby obtaining control. The cost of investment was thirty million Hong Kong Dollars(HKD30,000,000), which UHL paid all in cash. At 31 March 2006, STL had a contingentliability of HK$1,000,000 regarding a lawsuit with a supplier. STL expects to settle the caseby March 2007.
Module A (September 2006 Session)
Page 2 of 7
The following shows the balance sheets of UHL and STL at 31 March 2006 together with thefair values of STL’s identifiable assets at that date:UHL STL STL
Carrying amounts Fair values HKD’000 HKD’000 
 Land lease premium 10,000 - -Property, plant and equipment (net) 21,000 9,800 20,000Investment in a subsidiary 37,000 - -Net current assets 9,000 17,400 17,40077,000 27,200 37,400Issued equity:Ordinary shares 65,000 10,000Retained earnings 12,000 17,20077,000 27,200UHL has adopted an accounting policy to depreciate and amortise plant and equipmentusing the straight-line method over a 10-year life with no residual value.UHL has no investment other than STL.The fair values of STL’s assets at 31 March 2005 and subsequent changes in the fair valueshave not been reflected in STL’s financial statements.
Module A (September 2006 Session)
Page 3 of 7
You have a draft consolidated financial statements of UHL for the year ended 31 March 2006.After you have sent them to UHL’s directors for review, one of the directors, who is not acertified public accountant, sends you an e-mail as follows:To: David LEE, Accounting Manager, UHLFrom: Danielle WONG (Director)c.c.: Crystal HO, Stephen LEE, Christopher YUNG (Directors)Date: 18 May 2006Consolidated financial statements of UHL as at 31 March 2006Could you please clarify the following points relating to UHL’s draft consolidated balancesheets which I have just reviewed.(A) So far as I understand, the company owns a warehouse in the New Territories and anoffice in Kowloon. I am not aware that we have purchased or leased any land.Why is there an item “Land lease premium” in the consolidated balance sheet?(B) In last year’s financial statements, I see an item “Investment in an associate” of anamount of HK$7,000,000 in the balance sheet. This item disappeared in the currentyear’s “consolidated” balance sheet as at 31 March 2006. Interestingly, I find an item“Share of profit of an associate” in the “consolidated” income statement for the currentyear. Is there something wrong with the financial statements? What does the term“consolidated” mean?(C) In your notes to the consolidated cash flow statement describing assets and liabilitiesacquired in business combination, there is an item “Provision for contingent liabilities”of HK$1,000,000 under current liabilities assumed. I recall that in the financialstatements of some listed companies I have read, contingent liabilities are in fact notliabilities. They are only disclosed in the notes. Why do we treat them as a liabilityin our accounts?(D) What is “Goodwill”?I would appreciate your clarification in time for the upcoming board meeting.Best regards,Danielle

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