Hutchison Whampoa
Response to the following problem:
In Hong Kong, Li Ka-shing is known as "Superman." Li's personal wealth is estimated to be in excess of $1 billion, and there is a saying in Hong Kong that for every dollar spent, five cents goes into Li's pocket. Li and his family fled from China in 1940 in order to escape the advancing Japanese army. Li dropped out of school at age 13 to support his family by selling plastic trinkets on the streets of Hong Kong. Later, he scraped together enough money to buy a company that produced plastic flowers. His big success came when he bought the real estate surrounding his factory and watched the land skyrocket in value. Today, Li continues his simple lifestyle even though the companies he controls comprise over 10% of the value of the Hong Kong stock market. When asked why his sons have much nicer houses and cars than he does, Li responded, "My sons have a rich father; I did not."
Li is chairman of Hutchison Whampoa Limited. Hutchison has five major business segments: property development, container port operations, retailing, telecommunications, and energy. In 2005, Hutchison Whampoa reported net income of HK$13.554 billion (equivalent to approximately US$1.738 billion).
1. Assume that one of Hutchison Whampoa's overseas subsidiaries earns income of $1,000. The income tax rate in Hong Kong is 15%. When this income of $1,000 is transferred to the parent company in Hong Kong, it will be taxed, but no income tax is owed until then. What journal entry should Hutchison Whampoa make to record the income tax consequences of this $1,000 in income?
2. In 2005, Hutchison Whampoa reported earnings per share of HK$3.36. How many shares were outstanding during the year?
3. Hutchison Whampoa reports that it records as assets the costs it incurs to sign up new subscribers to its cellular phone service network. These signup costs are then systematically transferred to expense over the following three years. What is the theoretical justification for this accounting practice?