FINANCIAL ACCOUNTING & REPORTING II

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FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 Part 1: Case Analysis 1. Determination of whether cost incurred subsequent to the acquisition of PPE should be charged to operations or capitalised involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision?

• Capitalised expenditure is an expense where the benefit continues over a long period, rather than being exhausted in a short period. Such expenditure is of a •

non-recurring nature and results in acquisition of permanent assets.

Four type of cost can be capitalised : i. costs that produce benefits. ii. news asset that have useful life substantially beyond one year. iii.

Improvements that prolong the life of the property, [9] restore property to a “like-new” condition, or add value to the property.

Adaptations that permit the property to be used for a new or different

iv.

purpose.

2. Prepare the journal entries to record the expenditure incurred subsequent to the acquisition of building in 2011 and determine the new cost of the building.

Date

Details Dr.

15 March 2015

Expense Cr.

Debit (RM) 1,750

Credit (RM) 1,750

Cash

( Repairs to the building ) Dr.

Building 15 May 2015 Cr. Cash ( Addition to the building )

530,000 530,000

New Building

= RM 5,287,047 + RM 530,000 = RM 5,817,047 3. Calculate the new annual depreciation for the building after the replacement made in 2013.

Years 2011 & 2012

Calculation RM 5,817,047 – [ ( RM 5,817,047 / 10YEARS ) 2 ] = RM4,653,637.60 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 RM 4,653,637.60 + RM 150,000 = RM 4,803,637.60 2013

NEW ANNUAL DEPRECIATION : RM 4,803,637.60 / 10 YEARS = RM 480,363.76

4. Prepare the journal entries to record the revaluation of the building at the end of 2015.

Date

Debit (RM) 2,604,502

Details Dr.

31 December 2015

Accumulated depreciation Cr.

Warehouse Unrealized revaluation

gain

Credit (RM) 367,047 2,237,455

on

5. Prepare the journal entries to record the disposal for part of the building at the end of 2016.

Date

Details Dr.

Dr. 31 December 2016

Depreciation expenses (5,600,000 / 5) Cr. Accumulated depreciation Cash Accumulated depreciation ( 1,120,000 x ¼ )

Debit (RM) 1,120,000

Credit (RM) 1,120,000

1,350,000 280,000 1,400,000

Cr.

Building ( 5,600,000 x ¼ ) Gain on disposal

230,000

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FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 6. a) Calculate the amount of interest to be capitalised in 2013 and prepare the related journal entries.

Date 1 April 2013 30 June 2013 1 August 2013 31 December 2013 Total

Actual Expenditures (RM) 123,000 + 35,000 = 158,000 120,000 116,400 80,000 474,400

Capitalization Period 9/12

Weighted Average Accumulated Expenditures (RM) 118,500

6/12 5/12 0

Actual Interest

= =

RM 400,000 x 8% RM 32,000

Avoidable Interest

= =

RM 227,000 x 8% RM 18,160

60,000 48,500 0 227,000

* Thus, capitalized the Avoidable Interest for 2013 RM 18,160 because lesser than Actual Interest.

Date

Details Dr.

1 April 2013 Dr. 30 June 2013

Warehouse Land Cr. Cash Warehouse Cr.

Dr. 1 August 2013 31 December Dr. 2013 Dr.

Cr.

120,000 120,000 116,400

Cash

Warehouse

116,400 80,000

Cash

Warehouse Interest Expense

Credit (RM) 158,000

Cash

Warehouse Cr.

Debit (RM) 35,000 123,000

80,000 18,160 13,840 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 Cr.

Cash

32,000

b) Calculate the amount of interest to be capitalised in 2014 and prepare the related journal entries.

Date 1 January 2014 1 March 2014 Total

Actual Expenditures (RM) 474,400 + 18,160 = 492,560 50,000 542,560

Capitalization Period

Weighted Average Accumulated Expenditures (RM)

2/12

82,093.33

0/12

0 82,093.33

Actual Interest

= =

RM 400,000 x 8% RM 32,000

Avoidable Interest

= =

RM 82,093.33 x 8% RM 6,567.47

* Thus, capitalized the Avoidable Interest for 2014 RM 6,567.47 because lesser than Actual Interest.

Date

Details Dr.

Warehouse Cr.

1 March 2014

Dr.

Debit (RM) 50,000

Cash

Warehouse Interest Expense Cr. Cash

Credit (RM) 50,000

6,567.47 25,432.53 32,000

7. Analyse whether the company should report an impairment loss of RM 100,000.

• The company should not report an impairment loss of RM 100,000 even though there is happening of demand drop substantially because 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 •

Recoverable amount (RM75, 000 ) > Carrying amount (RM68, 500) The recognized of impairment loss only if the company is not able to recover the

•

machine’s carrying amount either through using it or selling it.

It can be defined as impairment loss is recognized when the carrying amount is greater than the recoverable amount.

8. Explain how the government grant received in 2015 might be reported.

• First, record the opening of deferred grant account when the grant is received.

DR. CASH 2, 000, 000 CR. DEFERRED GRANT ACCOUNT 2, 000, 000 •

Then, A portion of the deferred grant income is transferred to the Income

•

Statement as income, each year over the useful life of the asset.

In this example (RM2,000,000/5years) RM400,000 will be transferred to the Income Statement each year.

Income statement Grant revenue for the year

•

(RM) 400,000

At the end of December 2005 the remaining balance in the deferred grant income account is (RM2,000,000 - RM400,000) RM1,600,000 and this must be recorded as a liability in the balance sheet. This liability must be split between non-current liabilities as RM1,200,000 and current liabilities as RM400,000.

Statement of financial position Non-current liabilities - Deferred grant revenue Current liabilities - Deferred grant revenue

(RM) 1,200,000 400,000

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FINANCIAL ACCOUNTING & REPORTING II BKAR 2023

9. Determine the proper balance in Allowance to Reduce Inventory to Net Realisable Value Account at 31 December 2015.

Inventory

Cost (RM)

Sawn timber Veneer Plywood Total

1,000,000 500,000 250,000 1,750,000

Net Realisable Value (RM) 860,000 480,000 300,000 1,615,000

Inventory cost LCNRV Allowance at 31 December 2015

Lower-of-cost-or-NRV (RM) 860,000 480,000 250,000 1,590,000

RM 1,750,000 (RM 1,590,000) RM160,000

10. For the financial year end 2015, determine the amount of the gain or loss that would be recorded due to the change in Allowance to Reduce Inventory at Net Realisable Value. Prepare the related journal entry.

For the financial year end 2015, the gain that would be recorded due to the change in the Allowance to Reduce Inventory to Market would be RM120,000, as calculated below: Balance prior to adjustment Required balance Gain to be recorded

Date

Details Dr.

31 December 2015

RM 280,000 (RM 160,000) RM 120,000

Allowance to reduce inventory at Net Realisable Value Cr. Recovery on inventory loss

Debit (RM) 120,000

Credit (RM) 120,000

11. Assume that you are an accounting officer at Finewood Bhd, explain to Ms Fina: 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 (i)

What is net realisable value; and •

With regards to inventory, net realizable value (NRV) is the estimated selling price in the ordinary course of business minus any cost to complete and to sell the goods. NRV is one of the amounts considered when determining the lower of cost or market for items in inventory.

(ii)

Explain the rationale for the use of the LCNRV rules it applies to inventories.

•

The use of the LCNRV rule is based on both the matching principle and the concept of conservatism. The matching principle applies because the application of the LCNRV rule allows for the recognition of a decline in the utility (value) of inventory as a loss in the period in which the decline

•

takes place.

The departure from the cost principle for inventory valuation is permitted on the basis of conservatism. The general rule is that the historical cost principle is abandoned when the future utility of an asset is no longer as great as its original cost.

12. With regards to the argument between Ms Allyn and Mr Zamin: (i)

What, if any, is the ethical issue involved?

•

The accountant’s ethical responsibility is to provide fair and complete financial information. In this case, the direct method distorts the cost of goods sold and hides the decline in market value.

(ii)

Is any stakeholder harmed if Mr Zamin’s preference is used?

•

If Mr Zamin’s cost-of-goods-sold method is used, management may have difficulty in calculations that involve the cost of goods sold. For example, 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 these calculations are useful in establishing profit margins and determining selling prices; but from the investors’ and stockholders’ viewpoint, it is not good policy to hide declines in market value.

(iii)

What should Ms Allyn do?

•

Ms Allyn should use the loss method to disclose the decline in market value and avoid distorting cost of goods sold. However, she faces an ethical dilemma if Mr Zamin will not accept the method Ms Allyn wants to use. She should consider various alternatives including the extremes of simply accepting her boss’s decision to quitting if Mr Zamin will not change his mind. Ms Allyn should assess the consequences of each possible alternative and weight them carefully before she decides what to do.

13. Identify subsequent measurement model adopted by Finewood Bhd to account for the patent. Justify your answer. How this model differs from another measurement model provided under MFRS 138 ?

•

Subsequent measurement model adopted by Finewood Bhd is revaluation model because on 31/12/2014, the company revalued the patent from RM 6,000,000 to

•

market value RM 10,000,000.

The different between revaluation model and cost model :

Revaluation model Cost model Revalued amount - Accumulated Cost - Accumulated amortization amortization - Accumulated impairment Accumulated impairment loss loss

-

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FINANCIAL ACCOUNTING & REPORTING II BKAR 2023

14. Prepare journal entries necessary to record the cost of the patent, amortization expense, and increase in market (fair) value of the patent in 2014.

Date

Debit (RM)

Details

Credit (RM)

Cost of patent Dr.

6,000,000

Patent Cr.

6,000,000

Cash

Amortisation Expense Dr. 31 December 2014

1,200,000

Amortization expense (6,000,000/5) Cr.

1,200,000

Accumulated Ammortisation

Increase in market (fair) value Dr.

Accumulated amortisation Patent Cr. Unrealised gain revaluation

1,200,000 4,000,000 on

5,200,000

15. Prepare journal entries necessary to record amortisation expense, gradual realisation of the revaluation surplus, and decrease in market (fair) value of the patent 2015.

Date

Details

Debit

Credit 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 (RM)

(RM)

Amortisation Expense Dr.

Amortisation expense (10,000,000/4) Cr.

2,500,000 2,500,000

Accumulated amortisation

Gradual realisation of revaluation surplus Dr. 31 December 2015

Revaluation reserve (OCI) Cr.

1,300,000 1,300,000

Retained earning (2,500,000 – 1,200,000)

Decrease in market value in 2015 Dr.

Accumulated amortization Unrealised gain on revaluation (5,200,000 – 1,300,00) Loss on impairment Cr. Patent

2,500,000 3,900,000 1,600,000 8,000,000

16. Prepare journal entries necessary to record the cost of the customer list and amortisation expense in 2015.

• Capitalised cost = 40 % x RM 560,000 = RM 224,000

Date

Details

31 December Cost of Customer List 2015 Dr. Customer list Cr.

Debit (RM)

Credit (RM)

224,000 224,000

Cash

Amortisation Expense 21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 Dr.

Amortisation expense (224,000 x 10/12) Cr.

186,667 186,667

Accumulated amortisation

17. Discuss whether the director’s view about the amortisation and impairment test of the trademark in line with the requirements of MFRS 138 or not ?

•

In accordance MFRS 138, An intangible asset with an indefinite useful life should not be amortised. While, the impairment test should be done no matter the

•

intangible assets have finite or indefinite useful life.

When the director’s believes that the trademark should be amortised and an impairment test should only be carried out when the trademark is renewed.

Because of that, the director’s view about the amortisation and impairment test of the trademark is not in line with the requirements of MFRS 138.

18. Prepare journal entries necessary for the trademark in 2015. Discuss whether Finewood Bhd should conduct an impairment test for the trademark on 31 December 2015.

Date

Details Dr.

31 December 2015

•

Trademark Cr.

Cash

Debit (RM) 250,000

Credit (RM) 250,000

(Record the defend and registration cost)

Testing impairment loss - compare the recoverable amount of the intangible asset with the asset’s carrying amount.

•

An impairment loss would only recognized when the recoverable amount is less than the carrying amount.

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 19. Determine the amount of goodwill recognised ( that may arise from the acquisition of Jati Timber ), if any on 31 July 2015 and the impairment loss, if any to be recorded on 31 December 2015.

Goodwill Impairment loss

=

RM 1,100,000 – RM 900,000

=

RM 200,000

=

Carrying amount > Recoverable amount

=

RM 700,000 – RM 300,000

=

RM 400,000

Date

Details Dr.

Impairment loss Cr.

31 December 2015

Debit (RM) 400,000

Goodwill Building (500,000/1,000,000) x 200,000 Equipment (300,000/1,000,000) x 200,000 Inventory (200,000/1,000,000) x 200,000

Credit (RM) 200,000 100,000 60,000 40,000

20. Explain why the company’s senior accountant think that the accounting treatment suggested by the company BOD in allocating the division’s impairment loss is not in accordance with MFRS 136 ? Determine the correct allocation of the impairment loss.

•

MFRS 136 defines recoverable amount as the higher of an asset’s or cash generating unit’s fair value less costs of disposal and value in use. Therefore the recoverable amount suppose should be higher among the fair value less cost to sell less value in use. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 •

The impairment loss is allocated between the asset in the cash-generating unit (CGU) in the following order: 1. To the goodwill allocated to the CGU. 2. To all other assets in the CGU on a pro rata basis.

Part 2 : Financial Statement Analysis a) What is the name of your company?

Padini Holdings Berhad b) What is the nature of it business? Describe.  

The Company is engaged in textile and garment industry.

The Company’s products are carried under the brand names, which include Vincci, Vincci+, Vincci Accessories, Tizio, Padini Authentics, PDI, Padini,



Seed, Miki and P&Co. The Company operates through five segments, which are managed by its subsidiaries:  Vincci Ladies’ Specialties Centre Sdn. Bhd., a dealers of ladies’ shoes and 

accessories; Padini Corporation Sdn. Bhd., a dealers of garments and ancillary

 

products; Seed Corporation Sdn. Bhd.; Yee Fong Hung (Malaysia) Sendirian Berhad, a dealers of garments and



ancillary products, Mikihouse Children’s Wear Sdn. Bhd., a dealer of children’s garments maternity wear and accessories.

c) What is the carrying amount of PPE for both comparative years? How many class of PPE does the company have and what are they?

The carrying amount of PPE for year 2014 and 2015 are RM108,717 and RM123,113

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023

The company have 7 classes of PPE, they are: 1.

2.

3.

4.

5.

6.

Freehold land Freehold buildings Leasehold buildings Motor vehicles Furniture and fixtures Office equipment and tools

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023

d) What is the valuation model for PPE? If the company uses revaluation model, how frequent the company conducts the revaluation? How much the balance of revaluation surplus?

The valuation model for PPE is at cost. e) Does the company purchase new PPE during the year?

The company did not purchased new PPE during the year.

f) What is the policy of the company for interest capitalisation?

Borrowing costs that are directly attributable to the acquisition, or production of a qualifying asset are capitalised as part of the cost of the assets until when substantially all the activities necessary to prepare the asset for its intended use or sale are complete, after which expense is charged to profit or loss when incurred. g) What depreciation methods are used by the company for PPE? Straight-line method is used by the company for PPE to write-off the cost of each category of assets to its residual value over its estimated useful life.

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 h) Does the company report impairment loss/reversal of impairment loss during the year? How does the company determine the recoverable amount for the reported impairment loss?(If any).

i) What is the cost flow method for the company’s inventories?

Cost is determined on a weighted average basis. The cost comprises all costs of purchase plus other costs incurred in bringing the inventories to their present location and condition.

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 j) Does the company apply the practice of writing inventories down below the cost to NRV? Yes. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. k) What method the company use to record the loss of writing down inventories, if any?

The company just directly deduct the write-down value from inventory account l) Does the company has an account of Allowance to Reduce Inventory to NRV or the company just directly deduct the write-down value from inventory account?

No, the company does not have an account of Allowance to Reduce Inventory but the company just directly deduct the write-down value from inventory account

m) What are the other disclosures made by the companies in regards of its inventories?

The inventories only being disclosed in financial statement of the company.

n) Identify intangible assets with finite and indefinite useful life (if any).

21

FINANCIAL ACCOUNTING & REPORTING II BKAR 2023 o) What is the measurement basis used by the company to measure its intangible assets? if the company uses revaluation model, how frequent the company conducts the revaluation ? How much the balance of revaluation surplus ?

• Intangible assets are initially measured at cost

p) What type of amortisation method used to amortise the intangible assets with finite useful life (if any) ?

q) How frequent the company conducts the impairment test for its intangible assets with indefinite useful life (if any)?

The company only have finite useful life. Thus, there are no impairment test for its intangible assets with indefinite useful life conducted by the company.

r) Does the company report impairment loss/reversal of impairment loss during the year? How does the company determine the recoverable amount for the reported impairment loss? (If any).

Yes, the company do report impairment loss/reversal of impairment loss during the year at the end of accounting period.

21