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 Coffees profitability.

(6 marks)

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