Question

Question 1: (20 Marks)

Part A: (10 Marks)

Lucky Ltd. whose registered office is in Hong Kong, conducts operations and transactions both in Hong Kong and overseas.  HKD is its functional currency.  During the year ended 31 December 2018, Lucky was involved in various transactions in foreign currencies.

Lucky Ltd. purchased merchandises for resale purpose amounting to Australian dollar $150,000 on 1 October 2018, in which 80% of these merchandises were sold before the year-end.

There were no other purchases of merchandises during 2018. Lucky settled 75% of the merchandises purchased amount on 15 December 2018 and the balance was paid on 20 January 2019.

On 31 December 2018, the estimated net realizable value of the ending inventories was at A$24,000.  In complying with HKAS 2 “Inventories”, the inventory should be recorded by the lower of the cost and net realizable value.

Relevant exchange rates were as follow:

Spot rate

1 October 2018                                   A$1 = HK$8.2

15 December 2018                              A$1 = HK$7.8

31 December 2018                              A$1 = HK$8.3

20 January 2019                                  A$1 = HK$8.1

(Note: A$=Australian dollar)

Required:

Prepare ALL journal entries for the years 2018 and 2019 relating the acquisition of merchandises, settlement of debt, exchange difference, and ending inventories (if any).                                                                                                                                                                (10 marks)

Part B: (10 Marks)

Below is the financial information for Fresh Coffee Ltd., which is a coffee chain store in Hong Kong.

	Fresh coffee	Industry average for firms with similar size
Return on sales (ROS)	10%	8%
Return on assets (ROA)	10%	12%
Return on equity (ROE)	10.5%	18%

Required:

1. Interpret the financial ratios above and comment on Fresh Coffee’s profitability.

(6 marks)

2. Based on the ratios provided, suggest how Fresh Coffee could improve its profitability?                                                                                                                        (4 marks)

Answer 1

1) Part A

Part A Transaction in HSD Date Particulars Hong Kong Dollors Australian Dollor conversion of AD C=D*F D HKD AD 1-Oct-18 Purchase of Merchandies 1230000 $ 150,000.00 15-Dec-18 75% Settlement of Debts 877500 $ 112,500.00 20-Jan-1925% Settlement of Debts 303750 $ 37,500.00 31-Dec-18 Closing Stock (20% of Purchase) 246000 31-Dec-18 NRP of Closing Inventory 199200 $ 24,000.00 b=A*75% C=A*25% d=A*20% Journal Entries S. No Date Particulars Debit HKD Credit HKD 1230000 1-Oct-18 Purchase A/C Sundry Debtors 1230000 aC+75% 922500 bc (Being Purchase of Merchandies) 15-Dec-18 Sundry Debtors Bank Exchange Difference (Being First Installment of Debts) 877500 45000 307500 aC+25% CC 20-Jan-19 Sundry Debtors Bank Exchange Difference (Being Second Installment of Debts) 303750 3750 ес | 199200 46800 31-Dec-18 Inventory A/C Profit & Loss A/C Closing Stock (Being Inventory Adjusment) dc 246000

1) Part B) A

Particulars Fresh Coffe Industrial Average Comments Return on Sales 10% 8% Return of Sales = Profit/Sales, in this scenario shows, fresh coffe earn 2% higher margin then others companies in same industries, so increase the sales enough to compatite with other companies Return on Assets 10% 12% Return of Assets = Profit/Average Operating Asset, in this scenario shows, fresh coffe earn 2% lower margin then others companies in same industries, so Decrease unnessery assets will lead to increase ROI to compatite with other companies Return of Assets = Profit/Owners Capital, in this scenario shows, fresh coffe earn 8% lower margin then others companies in same industries, so Decrease owners capital and lend some loans will lead to increase ROE to compatite with other companies Return on Equity 10.50% 18%

1) Part B) B

To Increase ROS Fresh Company need to Increase the Sales

To Increase ROI Fresh Company need to Decrease Operating Assets

To Increase ROE Fresh Company need to Decrease Owner Capital & Increase Debts instead of it