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:
(i) 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.
(ii) 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.
(iii) 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:
(a) If the functional currency of Shine Ltd is HK$, which translation method is applicable to translate Shine’s financial statements to GB£ and why?
(b) Showing clearly all your workings:
(i) Calculate the goodwill arising from the acquisition of Shine Ltd in GB£. ( please show the details)