QUESTION 1

a) State the criteria for an item of property, plant and equipment to be recognised as
an asset according to MFRS 116 Property, Plant and Equipment.

In order to recognise an item as property, plant and equipment, both the recognition criteria
must be met which is:

1. It is probable that future economic benefits associated with the asset will flow to the entity.

The entity must be certain that economic benefits will flow to the entity. It has to assess the
degree of certainty attached to the flow of benefits. This certainty is evidenced when the entity
is able to enjoy the rewards attached to an asset, and bears the risks associated with the
asset. In other words, risks and rewards have to be transferred to the entity.

2. The cost of the asset to the entity can be measured reliably.

This second criteria can be satisfied where there is an exchange transaction such as the
purchase of an asset for cash. However, the cost might not be clearly evident (but can be
determined) when the asset is acquired for a non-monetary consideration or where the asset
is self-constructed.

b) Identify the initial cost of the machinery on 1 January 2014 and the cost to be written
off into the Statement of Profit or Loss for the year ended 31 December 2014.

The initial cost of machinery is:

RM
Price of machinery (W1) 3,700,000
Less: Trade discount 30,000
3,670,000
Installation costs 200,000
Import duties 60,000
Excise duty 40,000
Insurance on shipment 30,000
Consultancy fee in the acquisition of the machinery 6,000
Testing of machinery in the production of samples 7,000
Delivery costs 5,000
Dismantling costs 52,000
4,070,000

ASSIGNMENT FINANCIAL REPORTING 1 1

 (W1) RM
Payment on delivery 2,000,000
Present value of payment on 31 December 2014 900,000
Present value of payment on 31 December 2015 800,000
PV of purchase price 3,700,000

The cost to be written off into the Statement of Profit or Loss for the year ended 31 December
2014.

RM
General overheads 4,600
Lubricants on machine 4,000
Cleaning of machine 1,000
Salary for machine technician 24,000
Maintenance of the machinery 50,000
83,600

c) Sweet Bhd acquired a machinery for RM1,000,000 on 1 January 2012. The estimated
useful life of the machinery is 10 years with no scrap value. The company adopted the
revaluation model and revalued its machinery on 1 January 2014. The fair value as at that
date was RM750,000 and subsequently disposed for RM780,000 on 31 December 2014.

Required:

a. Prepare the journal entries on the revaluation of machinery on 1 January 2014.

Dr Acc. Depreciation (RM1,000,000/10 x 2) RM200,000

Dr Income Statement - Deficit on revaluation RM50,000
Cr Machinery (RM1,000,000-RM750,000) RM250,000

b. Determine the amount of gain or loss from disposal of machinery on 31 December

2014.
RM
Carrying amount as at 1.1.2014 750,000
Less: acc. depreciation (RM750,000/8) (93,750)
Carrying amount as at 31.12.2014 656,250
Sale proceeds 780,000
Gain on disposal 123,750

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d) i. Prepare the journal entries to record the revaluation of land on 31 December 2014.

Dr Asset Revaluation Reserve RM300,000

Dr Income Statement RM200,000
Cr Land RM500,000

ii. Prepare the journal entries to record the disposal of the machinery on 1 July
2014.

Dr Bank RM179,500
Dr Accumulated Depreciation (RM250,000/20 x 6) RM75,000
Cr Machinery RM250,000
Cr Income Statement Gain on Disposal RM4,500

iii. Discuss the accounting treatment on the service cost and the major overhaul
cost incurred on the equipment for the year ended 31 December 2014.

Major overhaul of RM20,000 is capitalized and added to the carrying amount of the equipment.
While, service cost of RM2,000 is written off as expense to the statement of profit or loss in
each accounting period.

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e) Height Bhd acquired a plant and a piece of land costing RM800,000 and RM1,000,000
respectively on 1 January 2010. On 1 July 2014, the plant was sold for RM730,000, while
land was revalued to RM1,200,000 in December 2014. Height Bhd has adopted the
revaluation model in the subsequent measurement of its property, plant and equipment.
The plant is depreciated at the rate of 5% per annum on a monthly basis.

Required: Construct a note to the account to show the movement of property, plant
and equipment for the year ended 31 December 2014.

Plant Land Total

(RM) (RM) (RM)
At cost 800,000 1,000,000 1,800,000
Surplus on revaluation - 200,000 200,000
800,000 1,200,000 2,000,000
Depreciation
(RM800,000 / 5%) x 4.5 (180,000) - (180,000)
620,000 1,200,000 1,820,000
Gain on disposal 110,000 - 110,000
Disposal on asset 730,000 1,200,000 1,930,000

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QUESTION 2

Cempaka Bhd purchased a building for investment purposes on 1 April 2004. The company
adopts the fair value model for its investment property. Due to the company's expansion
programme, more office space was required and the building was used for the company
operation with effect from 1 April 2011. The fair value of the building on the date of transfer
was RM12,400,000, with a remaining useful life of 2 years. Cempaka Bhd adopted the
revaluation model for its buildings. At the year ended 30 September 2011, the fair value of the
building was RM12,800,000.

Required:

i. Explain the appropriate accounting treatment for the building.

From 1 April 2004 to 1 April 2011, the building will be treated as investment property in
accordance to FRS140 Investment Property. 1 April 2011, the investment property will be
treated as owner occupied property under FRS116 Property, Plant and Equipment. The
propertys fair value at the date of transfer is the deemed cost of the property, plant and
equipment under FRS116 and subject to depreciation. Depreciation charge for the year ended
30 September 2011 is RM3,100,000 (RM12,400,000/2 x 6/12). The difference between
carrying amount of RM9,300,000 of the property and its fair value (RM12,800,000) at the year
end is treated as a surplus in revaluation (RM3,500,000) in accordance with FRS116.

ii. Show the relevant journal entries to record the above transactions as at 30
September 2011.

Since the company adopts the fair value model, there is no asset revaluation reserve and no
depreciation. The difference amount of RM400,000 (RM12,400,000 RM12,800,000) would
be written off to income statement.

Date Debit Credit

(RM) (RM)
1 April 2011 Dr Building 12,400,000
Cr Investment Property 12,400,000

30 Sept 2011 Dr Depreciation 3,100,000

Cr Accumulated Depreciation 3,100,000
(RM12,400,000/2 x 6/12)

Dr Building 3,500,000
Cr Asset Revaluation Reserve 3,500,000

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iii. Explain how the surplus on revaluation should be realised on revalued assets
which are still in use by the company.

The surplus on revaluation should be realized or transferred to retained profit over the
remaining useful life of the asset as the asset is being used and depreciated.

QUESTION 3

Foxtrot Bhd operates one of its factories in a foreign country where there is no environmental
law requiring companies to provide for the cost of environmental clean-up. During the year
ending 30 September 2014, the factory operations have posed a serious threat to the river's
eco-system and the probable clean-up cost has been estimated at RM1,400,000. Foxtrot Bhd
has taken an insurance policy for environmental damages and the insurers have agreed to
pay compensation of RM1,100,000. In January 2015 Foxtrot Bhd has been publicly acclaimed
as a socially and environmentally responsible corporate citizen.

Required:

i. Advise Foxtrot Bhd on the proper accounting treatment for the above situation.

Foxtrot Bhd has no legal obligation to rectify the environmental damage. However, being
socially and environmentally responsible, it has a constructive obligation to clean the rivers
eco-system. Thus, a provision of RM1,400,000 will have to be made and shown as a liability.

The compensation of RM1,100,000 agreed by the insurers should be treated as a separate

asset and the amount of expenses for the current year may be reduced to RM300,000
(RM1,400,000 RM1,100,000) or the revenue RM1,100,000 and the expenses RM1,400,000.

ii. Show journal entries to give effect to the above situation.

Date Debit Credit

(RM) (RM)
30 Sept 2014 Dr Operating Expenses 300,000
Dr Compensation Receivable 1,100,000
Cr Provision for clean-up costs 1,400,000

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QUESTION 4

Vogue Bhd acquired a building ten years ago at the cost of RM2,440,000. The carrying value
of the building at 30 June 2010 was RM 1,830,000. The building was classified as 'held for
sale' in the financial statements for the year ended 30 June 2010. Due to the sudden glut of
the property market, the building was not sold as at 30 June 2011. Vogue Bhd is still committed
to sell the building as the company continue to actively market the building and also reduced
the asking price of the building. On 30 June 2010, the building was classified as 'held for sale'
and measured at fair value less cost to sell of RM1,468,000. As at 30 June 2011, the fair value
less costs to sell was RM1,350,000.

Required:

i. Discuss whether the building that was initially classified as 'held for sale' can
still be classified as 'held for sale' for the year ended 30 June 2011.

The building can continued to be classified as held for sale as all the criteria as held for sale
continue are met. This is evidenced by the activities taken by the company including actively
marketing the property and reducing the asking price. Therefore the one year exception
requirement is acceptable.

ii. Explain the appropriate accounting treatment for the building as at 30 June 2011.

The building should be measure at RM1,350,000 as at and the impairment loss of RM118,000
(RM1,468,000RM1,350,000) should be charged to the income statement.

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