Module A (September 2006 Session)
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SECTION A – CASE QUESTIONS (Total: 50 marks)
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:
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.