On 1 January 2015, Star Ltd acquired 75% of the ordinary shares of Shine Ltd in Hong Kong to form Star-Shine Group (SSG). At that date the balance on the retained earnings of Shine Ltd was Hong Kong Dollars (HK$) 1,700,000. The non-controlling interest in Shine was measured as the proportionate share of the net assets of the subsidiary. No shares have been issued by Shine since acquisition. The summarised income statements and balance sheets of Star Ltd and Shine Ltd as at 31 December 2019 were as follows: Income Statement for the year ended 31 December 2019 Star Shine GB£ HK$ Sales 37,422,000 9,504,000 Opening inventories 4,158,000 1,259,280 Purchases 20,790,000 5,346,000 Closing inventories 1,485,000 1,021,680 Cost of sales 23,463,000 5,583,600 Gross profit 13,959,000 3,920,400 Depreciation 2,376,000 712,800 Other expenses 629,640 237,600 Interest paid 415,800 118,800 Total expenses 3,421,440 1,069,200 Profit before tax 10,537,560 2,851,200 Taxation 2,673,000 712,800 Profit after tax 7,864,560 2,138,400 Balance Sheet as on 31 December 2019 Star Shine GB£ HK$ Non-current assets 8,316,000 5,464,800 Investment in Shine Ltd 267300 - Current assets: Inventories 1,485,000 1,021,680 Trade receivables 3,593,700 1,306,800 Shine Ltd 85,950 - Cash 653,400 47,520 Total current assets 5,818,050 2,376,000 Total Assets 14,401,350 7,840,800 Current liabilities: Trade payables 3,564,000 1,069,200 Star Ltd 880,988 Taxation 1,188,000 831,600 Total current liabilities 4,752,000 2,781,788 Debentures 2,970,000 950,400 Total assets less liabilities 6,679,350 4,108,612 Capital and reserves Share capital 2,922,300 359,750 Retained earnings 3,757,050 3,748,862 6,679,350 4,108,612 The following further information is available: An amount of HK$ 200,000 was written off goodwill as an impairment charge in the current year and HK$ 140,000 in the previous year. On 23 March 2019, Star Ltd sold goods £2,250,000 to Shine Ltd, making a profit of 20% on cost. At the year end, one third of these raw materials were still in the inventory of Shine Ltd, and the inter-company transactions have not been eliminated from the financial statements. The goods were recorded by Shine at the exchange rate ruling on 23 March 2019. Exchange rates were as follows: At 1 January 2015 GB£ 1= HK$ 15.52 Average for the year ending 31 December 2019 GB£ 1= HK$ 10.05 At 31 December 2018/ 1 January 2019 GB£ 1= HK$ 9.92 At 31 December 2019 GB£ 1= HK$ 10.25 Required: If the functional currency of Shine Ltd is HK$, which translation method is applicable to translate Shine’s financial statements to GB£ and why
On 1 January 2015, Star Ltd acquired 75% of the ordinary shares of Shine Ltd in Hong Kong to form Star-Shine Group (SSG). At that date the balance on the
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Income Statement for the year ended 31 December 2019 |
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Star |
Shine |
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GB£ |
HK$ |
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Sales |
37,422,000 |
9,504,000 |
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Opening inventories |
4,158,000 |
1,259,280 |
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Purchases |
20,790,000 |
5,346,000 |
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Closing inventories |
1,485,000 |
1,021,680 |
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Cost of sales |
23,463,000 |
5,583,600 |
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Gross profit |
13,959,000 |
3,920,400 |
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2,376,000 |
712,800 |
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Other expenses |
629,640 |
237,600 |
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Interest paid |
415,800 |
118,800 |
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Total expenses |
3,421,440 |
1,069,200 |
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Profit before tax |
10,537,560 |
2,851,200 |
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Taxation |
2,673,000 |
712,800 |
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Profit after tax |
7,864,560 |
2,138,400 |
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Balance Sheet as on 31 December 2019 |
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Star |
Shine |
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GB£ |
HK$ |
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Non-current assets |
8,316,000 |
5,464,800 |
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Investment in Shine Ltd |
267300 |
- |
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Current assets: |
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Inventories |
1,485,000 |
1,021,680 |
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Trade receivables |
3,593,700 |
1,306,800 |
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Shine Ltd |
85,950 |
- |
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Cash |
653,400 |
47,520 |
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Total current assets |
5,818,050 |
2,376,000 |
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Total Assets |
14,401,350 |
7,840,800 |
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Current liabilities: |
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Trade payables |
3,564,000 |
1,069,200 |
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Star Ltd |
880,988 |
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Taxation |
1,188,000 |
831,600 |
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Total current liabilities |
4,752,000 |
2,781,788 |
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Debentures |
2,970,000 |
950,400 |
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Total assets less liabilities |
6,679,350 |
4,108,612 |
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Capital and reserves |
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Share capital |
2,922,300 |
359,750 |
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Retained earnings |
3,757,050 |
3,748,862 |
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6,679,350 |
4,108,612 |
The following further information is available:
- An amount of HK$ 200,000 was written off
goodwill as an impairment charge in the current year and HK$ 140,000 in the previous year.
- On 23 March 2019, Star Ltd sold goods £2,250,000 to Shine Ltd, making a profit of 20% on cost. At the year end, one third of these raw materials were still in the inventory of Shine Ltd, and the inter-company transactions have not been eliminated from the financial statements. The goods were recorded by Shine at the exchange rate ruling on 23 March 2019.
- Exchange rates were as follows:
At 1 January 2015 GB£ 1= HK$ 15.52
Average for the year ending 31 December 2019 GB£ 1= HK$ 10.05
At 31 December 2018/ 1 January 2019 GB£ 1= HK$ 9.92
At 31 December 2019 GB£ 1= HK$ 10.25
Required:
- If the functional currency of Shine Ltd is HK$, which translation method is applicable to translate Shine’s financial statements to GB£ and why?
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