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Extra exercises for Financial Accounting & Reporting III Exercises
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1
BKAF 3063 FINANCIAL ACCOUNTING AND REPORTING III
SEMESTER FEB SESI 2012/2013
TUTORIAL 1: ACCOUNTING FOR FINANCIAL LIABILITIES
DUE DATE: 3/3/2013 BEFORE 12.00PM
QUESTION 1
On 1 July 2008, Amtena Company issued RM3,500,000 face value, 8%, 10-year bonds to
Ambra Company. The price resulted in an effective-interest rate of 9% on the bonds.
Amtena Company uses the effective-interest method to amortise bond premium or discount.
The bonds pay semiannual interest on 1 July and 1 January.
REQUIRED:
(Show all calculations and round the figures up to the nearest RM)
(a) Prepare the journal entries to record the following transactions.
(i) Calculate present value of the bonds at the issuance date.
(ii) Prepare the amortization schedule for each period until 1/1/2010
(iii) The issuance of the bonds on 1 July 2008.
(iv) The accrual interest and the amortisation of the discount on 1 December 2008.
(v) The payment of interest and the amortisation of the discount on 1 July 2009,
assuming no accrual interest on 30 June 2009.
(vi) The accrual of interest and the amortisation of the discount on 31 December 2009.
(b) Show the proper balance sheet presentation for the liability for the bond payable on 31
December 2009, balance sheet.
QUESTION 2
P14-2 , page 758, Keiso et al (2011), Intermediate Accounting, Volume 1.
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ACCOUNTING FOR FINANCIAL LIABILITIES
EXERCISES
1. Bernama Bhd issued a five (5) year bond at RM600,000 at a coupon interest of 12% to Eco Bhd on 1 January 2006. The prevailing market rate of interest having a similar risk class of bonds is 10%. The interest for the bonds will be paid on every 31 December of the year-end accounting period.
REQUIRED:
a. Calculate the present value of the bond at the issuance date.
b. Prepare the amortisation schedule for each period until the maturity period by using effective interest method.
c. Prepare the relevant journal entries in Bernama Bhd for the first year issuance of shares.
Table 1:
Period
(n)
Present value of 1 Present value of
ordinary annuity of 1
10% 12% 10% 12%
5 0.62092 0.56743 3.7908 3.6048
6 0.56447 0.50663 4.3553 4.1114
2. Merbau Bhd issued RM3,800,000 of 10%, 5-year bonds. The bonds are dated 1 January
2009 and were issued on 1 March 2009. Interest is payable semiannually on 1 January
and 1 July. The market interest rate at the date of issuance was 12% and the company
used the effective interest method to amortize bond premium/discount. Merbau Bhd
also paid RM80,000 in bond issue cost related to the bond and treated as deferred
charges.
REQUIRED:
(a) Prepare the journal entries to record the issuance of the bonds on 1 March 2009.
(b) Prepare a bond amortization schedule until 31 December 2009.
3. Prepare all the necessary journal entries to record the retirement of the bonds. On 1
January 2009, Jaya Bhd issued RM6,000,000, 8%, 5-year bonds with a selling price of
RM6,617,280. Interest payable and premium amortization per year were RM480,000
and RM123,456, respectively. The interest is payable on 1 January each year. On 31
May 2012, Jaya Bhd retired RM4,000,000 face amount of the bonds at 102 plus accrued
interest.
REQUIRED:
(a) Determine the carrying amount of the bonds on 31 May 2012.
(b) Prepare the journal entries to record the retirement of the bonds.
3
BKAF 3063 FINANCIAL ACCOUNTING AND REPORTING III
SEMESTER FEB SESI 2012/2013
TUTORIAL 2: ACCOUNTING FOR LEASES
DUE DATE: 18/3/2013 BEFORE 12.00PM
QUESTION 1
Teloi Bhd leased a new bulldozer to Jitra Bhd under a 7 year non cancelable contract starting
January1, 2013. Terms of the lease require payments of RM52,000 each January 1, starting
January, 2013. On January 1, 2013, Teloi Bhd paid insurance RM1,500, taxes RM2,500 and
maintenance charges RM1,450 on the bulldozer, which has an estimated life of 15 years, a
fair value of RM380,000, and a cost to Teloi Bhd of RM380,000. The fair value of the
bulldozer is expected to be RM70,000 at the end of the lease term.
No bargain purchase or renewal options are included in the contract. Both Teloi Bhd and Jitra
Bhd practice similar accounting policies with regard to depreciation of fixed assets, whereby
all fixed assets would fully be depreciated in the acquisition year, regardless of the
acquisition dates, using straight line method and both having accounting year end on each 31
December. Salvage value of the asset is estimated at RM25,000. Jitra Bhds incremental borrowing rate is 10% and Teloi Bhds implicit interest rate of 9% is known to Jitra Bhd.
REQUIRED:
(a) Identify the type of lease involved and give reasons for your classification. (b) Prepare all the entries related to the lease contract and leased asset for the year end
2013 for Jitra Bhd.
(c) Prepare all the entries related to the lease contract and leased asset for the year end 2013 for Teloi Bhd.
(d) Prepare a condensed Statement of Financial Position for Teloi Bhd at 31 December 2013.
QUESTION 2
Temin Bhd on January 1, 2013, enters into a five-year non cancelable lease, with four
renewal options of one year each, for an equipment having an estimated useful life of 10
years and a fair value to the lessor, Gagah Bhd at the inception of the lease of RM3,000,000.
Temin's incremental borrowing rate is 8%. Temin uses the straight-line method to depreciate
its assets. The lease contains the following provisions:
1. Rental payments of RM219,000 including RM19,000 for executory costs, payable at the
beginning of each six-month period.
2. A termination penalty assuring renewal of the lease for a period of four years after
expiration of the initial lease term.
3. An option allowing the lessor to extend the lease one year beyond the last renewal
exercised by the lessee.
4. A guarantee by Temin Bhd that Gagah Bhd will realize RM100,000 from selling the asset
at the expiration of the lease.
4
REQUIRED:
(Show all calculations and round the figures up to the nearest RM)
(a) What kind of lease is this to Temin Bhd? Support your answer.
(b) Calculate the period that should be considered as the lease term?
(c) What are the minimum lease payments?
(d) What is the present value of the minimum lease payments? (PV factor for annuity due of
20 semi-annual payments at 4% annual rate, 14.13394; PV factor for amount due in 20
interest periods at 4% annual rate, .45639.)
(e) What journal entries would Temin Bhd record during the first year of the lease? (Include
an amortization schedule through 1/1/14.)
5
BKAF 3063 FINANCIAL ACCOUNTING AND REPORTING III
SEMESTER FEB SESI 2012/2013
TUTORIAL 3: ACCOUNTING FOR HIRE PURCHASE
DUE DATE: 24 MARCH 2013 (12.00 NOON)
QUESTION 1
Tania Bhd sells electrical appliances either by cash or by hire purchase scheme. On 1 March
2012, Sara Sdn Bhd bought a refrigerator under hire purchase scheme from Tania Bhd. The
cash price of the refrigerator on that date was RM7,000 and the cost was RM5,900. Sara Sdn
Bhd paid deposit of RM1,560.The hire purchase period was 12 months with monthly
installment of RM500 due at the end of each month. The first installment due on 31 March
2012. The interest rate charged by Tania is 8%.
On 1 December 2012, Tania Bhd discovered that Sara Sdn Bhd defaulted on payments for
October and November 2012. After serving the notice of intention to repossess to Sara Sdn
Bhd, the company repossessed the refrigerator on 1 January 2013, with repossession cost of
RM600. Sara Sdn Bhd opted for the refrigerator to be repossessed. The best price for a
repossessed refrigerator is RM3,000.
Tania Bhd recognizes the interest at the end of accounting period and uses sales method to
account for hire purchase sales, while gross profit is realized based on the collection. Tania
Bhd employs sum of the years digit to compute interest revenue. The financial year end for
Tania Bhd is on 30 September.
REQUIRED:
(e) Prepare the relevant journal entries for Tania Bhd on the following dates: (i) 1 March 2012 (ii) 31 March 2012
(f) Compute the amount need to be paid to or received by from Sara Sdn Bhd in order to settle the repossession on 1 January 2013.
QUESTION 2
Mimi Enterprise hired a photocopy machine from Sari Sdn Bhd on 1 January 2011. The cash
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price of the machine on that date was RM18,000 and the cost was RM15,800. Mimi
Enterprise
paid a deposit of RM3,500 on 1 January 2011. The hire purchase agreements needs Mimi
Enterprise to pay monthly installment of RM1,300 at the end of month for the next 11
months and last installment of RM1,130.
Sari Sdn Bhd found that Mimi Enterprise failed to make payments for September and
October 2011. The company repossessed the photocopy machine on 1 December 2011 with
repossession cost of RM900, after giving a notice of repossession on 7 November 2011.
Mimi Enterprise allowed that machine to be repossessed and the best price for a repossessed
machine was RM7,800.
Sari Sdn Bhd employs sum of the years digit to compute interest revenue which is recognized
at the end of accounting period and uses sales method to account for hire purchase sales,
while gross profit is immediately realized. The financial year end for Sari Sdn Bhd is on 31
December.
REQUIRED:
a) Prepare the relevant journal entries on 1 January 2011 in the book of Sari Sdn Bhd
b) Determine the amount that needs to be paid or received by Sari Sdn Bhd in order to settle the repossession on 1 December 2011.
c) Prepare the relevant journal entries on 1 December 2011 in the book of Sari Sdn Bhd.
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EXERCISE
TOPIC 4 INVESTMENT PROPERTY
QUESTION 1
PPS Bhd acquired a 10-floor building for RM50 million on 1 September 2007. Legal fees
incurred amounted to RM3 million. Nine of the floors were rented out to third parties and the
remaining floor was used by PPS Bhd for storage. None of the portions could be sold
separately.
The fair values of the building as at 31 December 2007 and 31 December 2008 were RM58
million and RM60 million, respectively. The estimated useful life of the building is 35 years.
PPS Bhd adopted the fair value model.
On 1 March 2009, PPS Bhd decided to terminate the tenancy with the third parties and used
the whole building as its main office. The fair value of the building on that date was RM55
million and PPS Bhd changed its accounting policy to cost model.
REQUIRED:
(a) Determine whether the whole building could be classified as investment property as at
31 December 2007.
(b) Explain the accounting treatment for your answer in (a) as at 31 December 2007.
Prepare the related journal entries on the date.
(c) Discuss the accounting treatment for the changes made by PPS Bhd on that building
in year 2009.
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BKAF3063 FINANCIAL REPORTING III TUTORIAL 4
INVESTMENT IN EQUITY AND DEBT SECURITIES DUE DATE:15 APRIL 2013 (MONDAY) BEFORE 4.00 PM
Question 1 On 1 January 2009, Acar Bhd purchased 20,000 shares of Ellis Bhds ordinary shares at RM32.50 per share plus commission RM1,980. The outstanding ordinary shares of Ellis Bhd were 80,000 units with par value of RM20. For the year 2009, Ellis Bhd made profits of RM60,000 in 2009 and paid dividend of RM0.70 per share. Companys policy is to use cost method for other investment and equity method for the investment of 20% - 50%. Financial end for both companies is 31 December. Required: (a) Prepare journal entries of Acar Bhd for the year 2009.
(b) Determine the Investment in shares in Ellis Bhd as at 31 December 2009.
(c) On 1 January 2010, Acar Bhd sold 5,000 shares at RM34.00 per share. Profits of Ellis
Bhd in year 2010 was RM50,000. Ellis Bhd paid dividends RM0.40 per share. Prepare
related journal entries.
Question 2 AXE Bhd, which is situated in Kangar, Perlis, deals with property development and
construction projects. On 31 December 2009, the investment account balances for ordinary
shares are as follows:
WHY Bhd (9,000 unit of shares) at cost RM90,000
ZECK Bhd (12,000 unit of shares) at cost RM144,000
The following transactions occurred during the year 2010 that related to the investment
holdings:
15 January ZECK Bhd had previously issued of 48,000 units of ordinary shares and declared share dividend to the shareholders in the ratio 1:3 of acquired ordinary shares.
20 Mac WHY Bhd took the opportunity to issue one (1) unit of right shares to five (5) acquired shares, which is held by AXE Bhd. The company can exercise the rights before 31 December 2010. The market value of the shares and the rights are RM14 and RM5 each respectively. Under the plan for exercising the rights, 2 rights are required to purchase one (1) additional ordinary share at a price RM12.
31 July ZECK Bhd recorded the net profit of RM300,000 for the half-year term and extraordinary items of RM50,000. ZECK Bhd paid cash dividend to the shareholders amounting RM90,000 based on equity method.
15 August AXE Bhd had utilised 50% from the right shares to acquire additional shares
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of WHY Bhd.
31 August AXE Bhd sold the balance of the rights issued to WHY Bhd at RM5.00 per unit.
1 November AXE Bhd acquired additional ordinary shares from WHY Bhd of 1,000 units at RM10.00 each. Through this transaction, the percentage of ownership in WHY Bhd is 20%.
31 December WHY Bhd recorded its net profit of RM200,000 and paid cash dividend totalling RM0.60 per share.
Required: Prepare the journal entries for the transactions throughout the year 2010 by using equity method. Please show all the calculations required for each transaction.
10
SCHOOL OF ACCOUNTANCY
COLLEGE OF BUSINESS
UNIVERSITI UTARA MALAYSIA
BKAF3063 FINANCIAL ACCOUNTING AND REPORTING III
QUESTION 1
Tujuh Laut Bhd acquired 75% of ordinary shares of Istana Api Bhd on 31 December 2008.
On this date, the balance sheets of Tujuh Laut Bhd and Istana Api Bhd before the acquisition
are as follow:
TUJUH LAUT BHD
(RM)
ISTANA API BHD
(RM)
ASSETS
Current Assets:
Cash 2,835,000 825,000
Marketable Securities (net) - 150,000
Accounts Receivable (net) 596,625 377,250
Inventories (net) 607,125 522,750
Non-current Assets:
Intangible Assets (net) 150,000 -
Fixed Assets (net) 7,500,000 1,911,000
Total Assets 11,688,750 3,786,000
EQUITY AND LIABILITIES
Shareholders Equity:
Ordinary Shares 7,500,000 2,250,000
Share Premium 1,350,000 375,000
Retained Earning 2,250,000 975,000
Revaluation Reserve - 37,500
Liabilities:
Accounts Payable 213,750 81,000
Notes Payable 375,000 67,500
Total Equity and Liabilities 11,688,750 3,786,000
To finance the acquisition, Tujuh Laut Bhd issued 350,000 new ordinary shares for RM1.80
per share with par value RM1.00. The purchased consideration was satisfied as follows:
An immediate cash payment of RM1,365,000
An amount of RM1,050,000 to be paid on 31 December 2010
The related cost that were directly attributable to the acquisition totaled RM25,000 and these amount have not been paid
Other related costs involved in issuing the new shares was RM13,500 and these amount had been paid by cash
The incremental borrowing interest rate for Tujuh Laut Bhd is 8% per annum
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All identifiable assets and liabilities of Istana Api Bhd are stated at fair value. The remaining
25% no-controlling interest is fair valued at RM958,000 at acquisition date.
REQUIRED:
(a) Prepare journal entries to record the acquisition of Istana Api Bhd for Tujuh Laut Bhd.
(b) Prepare the consolidation journal entries for Tujuh Laut Bhd as at 31 December 2008 using both methods for the treatment of NCI.
(c) Prepare the consolidated statement of financial position for Tujuh Laut Bhd as at 31 December 2008 (NCI is measured at FV).
12
BKAF 3063 FINANCIAL ACCOUNTING AND REPORTING III
SEMESTER FEB SESI 2012/2013
TUTORIAL 5: INTRODUCTION OF GROUP ACCOUNTS
DUE DATE: 28 APRIL 2013
QUESTION 1
Aiman Qasa Bhd. acquired a 60% interest in the equity capital of Bina Kasturi Bhd. on 31
December 2011. In exchange for the shares in Bina Kasturi Bhd., Aiman Qasa Bhd. issued 8
million of its ordinary shares valued at RM3.00 each and paid RM4,000,000 cash to the
former shareholders of Bina Kasturi Bhd. In addition, Aiman Qasa Bhd. agreed to assume a
liability to pay RM2,000,000 as compensation to a supplier of Bina Kasturi Bhd. as a result
of the acquisition. Aiman Qasa Bhd. paid RM1,000,000 professional fees to the accountants
and lawyers for their services rendered in relation to the acquisition.
Below are the statement of financial positions of Aiman Qasa Bhd. and Bina Kasturi Bhd.
before the acquisition took place.
Aiman Qasa
Bhd.
RM000
Bina Kasturi
Bhd.
RM000
EQUITY AND LIABILITIES
Share capital of RM1.00 each 32,000 20,000
Share premium 16,000 4,000
Revaluation reserves 10,000 -
Retained profits 20,000 16,000
78,000 40,000
LIABILITIES
Non-current liabilities 14,000 10,000
Account payables 15,000 20,000
Deferred taxation 5,000
34,000 30,000
TOTAL 112,000 70,000
NON CURRENT ASSETS
Property, plant and equipment 16,000 8,000
Land 10,000 9,000
Other fixed assets, at NBV 50,000 23,000
76,000 40,000
CURRENT ASSETS
Inventories 4,000 3,000
Account receivables 15,000 14,000
Cash and bank balances 17,000 13,000
36,000 30,000
TOTAL 112,000 70,000
At the acquisition date, the freehold land and inventories of Bina Kasturi Bhd. had a fair
value of RM12,000,000 and RM2,500,000 respectively. No adjustment had been made for
this value. In addition, Aiman Qasa Bhd. and Bina Kasturi Bhd. agreed that Bina Kasturi
Bhd. had a brand name with a fair value of RM500,000 which was not recognized in its
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book. Bina Kasturi Bhd. has disclosed in its notes to financial statement a contingent liability
involving a pending lawsuit in which the lawyer advised that there was a high probability that
a company would lose the case and would then have to pay RM100,000.
It is the policy of the group to measure non-controlling interest at the acquisition-dates fair value. The non-controlling interest was fair valued at RM20,000,000.
REQUIRED:
Prepare the consolidated statement of financial position of Aiman Qasa Bhd. as at 31
December 2011.
QUESTION 2
Naga Bhd acquired an 80% interest in Garuda Bhd on 31 December 2012. The acquisition
was paid in cash RM300,000 and issued 600,000 new ordinary shares of Naga Bhd for
RM1.50 per share with par value RM1.00. The balance sheet of both company before the date
of acquisition are as follow:
Naga Bhd
(RM)
Garuda Bhd
(RM)
Assets:
Cash 460,000 70,000
Account Receivable 200,000 100,000
Inventories 180,000 120,000
Land 800,000 400,000
Building net 900,000 600,000 Equipment net 640,000 280,000
3,180,000 1,570,000
Equity and Liabilities: Ordinary Shares 1,800,000 600,000
Share Premium 300,000 300,000
Retained Profit 880,000 480,000
Long-term Loan - 120,000
Account Payable 200,000 70,000
3,180,000 1,570,000
All Identifiable assets and liabilities of Garuda Bhd are stated at fair value except land which
was revalued at RM450,000. The non-controlling interest was fair valued at RM300,000.
REQUIRED:
a) Calculate the cost of investment in Garuda Bhd and prepare the related journal entries to record the cost of investment.
b) Calculate the goodwill on consolidation when the NCI is measured at fair value.
14
c) Prepare the consolidation journal entries as at 31 December 2012.
d) Prepare a consolidated statement of financial position as at 31 December 2012.
15
TOPIC 6 : INTANGIBLE ASSETS
EXERCISE
Earth Corp. developed a trademark and copyrights with total cost of RM50,000. The
company spent RM35,000 for the trademark and RM15,000 for copyrights. This amount
includes the general administrative cost of 10%. On 1 March 2009, the company registered
the intangibles with Intellectual Property Corporation Malaysia (IPCM) and paid registration
fee of RM5,000 each. The company also paid RM8,000 and RM3,000 for the cost of
defending the trademark and copyrights respectively. Copyright has a legal life of 50 years
whereas trademark has unlimited useful life.
At the end of the financial year on 31 December 2009, the company carried out an
impairment test on its intangibles. It is found that the recoverable amount of the trademark
and copyrights are RM40,000 and RM25,000 respectively. It is the policy of the company to
amortize its intangibles using the straight line method.
On 10 January 2010, the company decided to sell the trademark to another company at
RM55,000.
Required:
(a) Determine the cost of Earth Corp.s intangibles on 1 March 2009. (b) Determine the carrying amount of the companys intangibles as at 31 December 2009. (b) Prepare the statement of comprehensive income and statement of financial position
(partially) for Earth Corp. as at 31 December 2009 to show the expenses and carrying
amount of the intangibles.
(c) Prepare journal entry to record the disposal of trademark on 10 January 2010.
16
TOPIC 7 IMPAIRMENT OF ASSETS
EXERCISE
OPTEL Bhd has adopted FRS 116 Property, Plant and Equipment and FRS 136
Impairment of Assets since 1 January 2006. The company elects to adopt revaluation model
for all fixed assets and the valuation has been done by independent professional valuer. The
company closes its accounts on 31 January every year.
On 1 July 2006, OPTEL Bhd acquired a piece of land by issuing 100,000 units of ordinary
shares. The market price of share on that day was RM2.30 per share. Legal cost incurred for
the acquisition was RM12,500. On 31 January 2009, OPTEL Bhd revalue this asset at
RM265,000. A new factory building has been built on the land in order to expand its business
operation. The total cost incurred to build the factory was RM467,000. The construction of
the factory completed on 1 August 2009 and immediately starts its operation. The factory is
estimated to have a useful life of 20 years with residual value of RM10,000. OPTEL Bhd
depreciates all fixed asset using straight-line method.
On 31 January 2010, OPTEL Bhd performed an impairment test to all of non-current assets
due to significant changes in economic condition. Based on information given by
independent professional valuer, the estimated market value of land and factory building
were RM280,000 and RM450,000 respectively. Estimated additional cost incurred to dispose
the factory is RM8,500. The company has also calculated the value in use for both properties.
The present value of estimated cash flow for the land and the factory were RM260,000 and
RM425,000 respectively.
To expand its business operation, OPTEL Bhd acquired 100% interest in Sucbiz Bhd on 1
July 2009 by paying cash of RM250,000. Sucbiz Bhd owns two main stores- Utara Store and
Timur Store. The fair value of Utara Store at acquisition date was RM170,000 and the
goodwill allocated to Utara Store was RM5,000. On 31 January 2010, the recoverable amount
of Utara Store is expected to be RM165,000.
REQUIRED:
(a) (i) Calculate the impairment loss (if any) for land and factory building to be
reported in statement of comprehensive income for the year ended 31
January 2010.
(ii) Prepare the relevant journal entries.
(b) Briefly explain the process to determine the recognition of impairment loss for
goodwill acquired to be reported for the year ended 31 January 2010. Support your
answer with relevant calculation.
17
BKAF 3063 FINANCIAL ACCOUNTING AND REPORTING III
SEMESTER FEB SESI 2012/2013
TUTORIAL 6: INTANGIBLE ASSETS
DUE DATE: 8 MAY 2013 BEFORE 4.00PM
QUESTION 1
PAM Bhd is in the process of developing a bio-diesel oil as an alternative to the current gas
and petrol power source using palm oil. During the year 2012, a team of researchers were
employed at a cost of RM500,000 to develop this new power source. For the year ended 31
December 2012, the team had not identified any particular product or bio-diesel oil could be
extracted from the activity.
REQUIRED
Show the journal entries to record the above transactions.
QUESTION 2
During 2010, ASM Resources Bhd spent RM170,000 in research and development cost. As a
result, a new product called the Brand New Drives was patented. Legal and other related
costs related to the patent was RM18,000. The patent was obtained on 1 October 2010 and
had a legal life of 15 years and useful life of 10 years.
REQUIRED:
Prepare all the journal entries required in 2010 and 2011 as a result of the transaction above.
QUESTION 3
In January 2011, Applied Resources Bhd applied a trade name and incurring a legal cost of
RM16,000. On 14 February 2012, Applied Resources incurred RM7,840 of legal fees in a
successful defense of its trade name.
REQUIRED:
i. Compute 2011 amortization expenses and book value as at 31 December 2011.
ii. Compute 2012 amortization expenses and book value as at 31 December 2012.
(Assume the company amortizes the trade name over 50 years)
18
QUESTION 4
On 1 January 2011, GAB Bhd developed a new machine for industrial products. The
company registered its patent because the machine is considered very valuable. The
following expenditures were incurred in developing the machine.
Purchases of special equipment to be used solely for
development of the new machine
RM152,000
Research salaries and fringe benefits for engineers and scientists RM18,200
Cost of testing prototype RM22,500
Overhead costs related to developing that machine RM30,000
Legal costs for filing the patent RM10,200
Patent application fees paid to authority RM4,400
Plan drawings required by authority to be filed with patent
application
RM5,300
The company decided to amortize the patent over 10 years. On 1 January 2012, the company
paid RM25,000 to successfully defend the patent in an infringement suit. On 31 December
2012, the company determined that the remaining estimated useful life of the patent was five
years.
REQUIRED:
Prepare the journal entries for the transactions related to developing and registering patent of
the machine, include any amortization or depreciation for year 2011 and 2012.
QUESTION 5
HMS Bhd incurred the following costs for the research and development activities as part of
its strategic planning program in creating a new product for the company:
RM Salaries & wages paid to the R&D team 2,500,000
Cost of materials used in the R&D activities 500,000
Depreciation of equipment 200,000
Additional information:
1. 70% of the salaries and wages were paid during the research activities and the remaining was on the development stage.
2. Cost of materials is 60% attributed to the development activities and the rest is to the research.
3. Depreciation of equipment is allocated 50% to research and development activities respectively.
19
In determining whether the development cost qualified as a capital expenditure or not, the
companys accountant is in the opinion that all the criteria set out in the paragraph 57, MFRS 138 Intangible Assets was met and all the cost should be capitalized with the
amortization period of five (5) years.
REQUIRED:
(a) Calculate the cost of: i. Research, and
ii. Development
(b) Prepare the journal entries to record the both activities. Assume all transactions are made in cash.
(c) Calculate the amortization rate per year for the development cost.
(d) Prepare the journal entry to record the amortization expenses.
20
BKAF3063 Financial Accounting & Reporting III
Tutorial: Investment Property & Impairment of Asset
Due Date: 12 May 2013 Before 12.00PM
QUESTION 1
On 1 January 2009, Ikhlas Bhd. bought a building to be rented out at RM2,000,000. The
company paid legal fees of RM180,000. The estimated useful life of the building was 40
years with no salvage value. The companys policy is to depreciate its fixed assets using the straight line method. Financial year-end of the company is on 31 December.
The market value of the building was as follows:
31 December 2009 RM1,900,000
31 December 2010 RM2,200,000
On 31 December 2010, the company stopped renting out the building and used it for
companys operation. The recoverable amount of the building at 31 December 2011 was RM2,100,000.
REQUIRED:
(a) Prepare related journal entries for the year 2009 until 2010 by assuming Ikhlas Bhd.
has been using the fair value model.
(b) Prepare related journal entries for the year 2011 if Ikhlas Bhd. used the cost model to
measure its property, plant and equipment.
QUESTION 2
In April 2008, Jaya Nusantara Company bought two office buildings at two new developed
commercial areas in Putrajaya and Cyberjaya. The management has decided to hold the
properties with a purpose of generating income.
The cost for the office building in Putrajaya was RM15 million and was estimated to have a
useful life of 25 years. Due to the highly renowned area, the office buildings fair value at the end of 2008 has increased by RM2.5 million. However, due to slow economic growth in the
area, the value of the building fall down by RM3 million at the end of the following year.
The office building in Cyberjaya is still under construction and it is expected to complete by
2010. Due to that, the fair value of the buiding is not reliably determinable until the
construction is completed.
It is the policy of the company to use the fair value model on its investment properties. The
companys financial year ends on 31 December. REQUIRED:
(a) Prepare the related journal entries for the office building in Putrajaya in the year of
2008 and 2009.
(b) Briefly explain the accounting treatment regarding the office building in Cyberjaya
according to paragraph 53 Amendment to MFRS 140 Investment Property.
(c) Assuming the management of the company had decided to convert the office building in
Putrajaya to become the new headquater by December 2009. However, the plan was
postponed and the management only move in the building in March 2010. Based on
MFRS140 Investment Properties, discuss the appropriate accounting treatment on the
said building for year 2009 and 2010.
QUESTION 3
AB Bhd acquired a property comprising freehold land and building for RM20 million on 1
January 2007. The cost of land was RM5 million. The estimated useful life of the building
21
was 50 years. The management has decided to let out the building space to other parties and
received monthly rental income from the tenants.
The fair values of the building as at 31 December 2007 was RM17 million. However, due to
slow economic growth in the area, the value of the building fall down by RM1 million at the
end of the following year.
On 1 February 2009, the company decided to terminate the tenancy with the third parties and
used the whole building as its main office. The fair value of the land and building on that date
were RM5.3 milion and RM16.5 million respectively. At the end of 2010, AB Bhd performed
an impairment test to all of non-current assets due to significant changes in economic
condition. Based on information given by independent professional valuer, the estimated
market value of land and building were RM5.5 million and RM16 million respectively.
Estimated additional cost incurred to dispose the building is RM10,000. The company has
also calculated the value in use for both properties. The present value of estimated cash flow
for the land and the factory were RM5.4 million and RM15.5 million respectively.
It is the policy of the company to use the fair value model on its investment properties and the
cost model for fixed assets. The companys financial year ends on 31 December.
REQUIRED:
(a) Prepare the necessary journal entries to record the transaction or event on the following dates:
(i) 1 January 2007 (ii) 31 December 2007 (iii) 1 February 2009
(b) Calculate the impairment loss (if any) for land and building at 31 December 2010 and prepare the relevant journal entries.
(c) What is the difference between fair value model and revaluation model?
22
EXERCISE TOPIC 8 RECONSTRUCTION
Sepadu Bhd has been incurring losses since 2000 and by the end of 2003, its accumulated
losses moved up to RM4 million. Sepadu Bhd has drawn up a restructuring scheme and
expects to implement this scheme sometime in mid 2004.
The accounts listed below appeared in the trial balance of the Sepadu Bhd before the
restructuring being implemented:
RM
Cash and bank balances 60,000
Trade debtors 150,000
Other debtors 40,000
Inventory 90,000
Land 1,800,000
Building (net) 500,000
Plant equipment (net) 1,900,000
Patent 50,000
Bank overdrafts 185,000
Short term loans 255,000
Long term loans 250,000
Trade creditors 90,000
Interest due 55,000
Tax payable 45,000
Share capital* 3,500,000
Reserves 50,000
Retained profit 10,000
Debenture, 8% 150,000
*Share Capital:
Authorised: RM
5,000,000 ordinary shares of RM1 per share
100,000 5% preference shares of RM5 per share
5,000,000
500,000
Issued and fully paid:
3,000,000 ordinary shares of RM1 per share 3,000,000
100,000 5% preference shares of RM5 per share 500,000
The following restructuring scheme has been approved by the court. This scheme has been
implemented on 25 July 2004 as planned:
1. i) The company proposes to cancel 75 cents from every RM1 share held.
23
ii) The company decides to consolidate every 4 shares of 25 cents each into 1 share
of RM1 each.
iii) The company decides to offers a 4:1 right issues of ordinary shares at RM1 on
par. All the right issues are expected to be exercised. A portion of the proceed
equals to RM120,000 will be used to settle bank overdraft.
2. The debenture holders (8%) agreed to accept a piece of land (cost RM40,000) at an agreed value of RM60,000 as payment for the principal, while the remaining amount
of 8% debenture is to be converted into 9% debenture.
3. An accrued interest of RM30,000 and all taxation obligations are to be paid immediately. The remaining interest due will be paid within three months. Trade
creditors are to be paid 30% of the amount due immediately and the remainder will be
settled after twelve months.
4. The following values are adopted for the assets:
Land (remaining) RM1,900,000
Building (net) RM200,000
Plant equipment (net) RM850,000
5. The patent is now believed to be worthless. The company will also write off RM15,000 from the inventory.
6. The creditors of long-term loan have agreed to accept 150,000 ordinary shares at par of RM1 each in place of part of their loan.
REQUIRED:
(a) Show the necessary journal entries to effect the reconstruction scheme.
(b) Prepare the balance sheet for Sepadu Bhd immediately after the reconstruction. (Show all the calculations).
24
TOPIC 9 : EXERCISE
On 10 April 2011 the court ordered the winding up of Nilam Bhd which had been
incorporated many years ago. The following information was available:
Trial Balance as at 10 April 2011
RM RM
Ordinary shares:
A 90,000 shares RM1 fully paid B 60,000 shares RM1 paid to RM0.50
90,000
30,000
Paid up 6% cumulative preference shares of RM1 fully
paid
37,500
Retained profit 1,500
Land 27,750
Buildings 51,000
Accumulated depreciation- buildings
10,500
Investments 61,500
Inventory 91,500
Bank 750
Trade debtors 43,500
Bill receivable 36,000
Mortgage on land & buildings 52,500
Debentures (secured by a floating charge)
22,500
Provision for income tax 3,000
Trade creditors 67,500
Sales 60,000
Cost of goods sold 45,000
Sundry expenses 18,000
Total 375,000 375,000
Additional information:
1) Arrears of cumulative preference dividend RM9,000.
2) The preference shares are not preferred as to return of capital.
3) The liquidator discovered that;
a) Trade creditors were understated by RM2,250 b) Salaries & wages of RM1,050 had not been paid and were not reflected in the
trial balance.
25
c) Bills receivable amounting to RM15,000 had been discounted and there was some risk that two of them, totalling RM4,950, would be dishonoured.
4) Assets were expected to realise:
Inventory RM78,000
Trade debtors 34,500
Bills receivable 28,500
Land & buildings 45,000
Investment 40,500
5) At the completion of the winding up, on 30 September 2011, the following additional
information was available:
o Interest accrued on mortgage 1,500 o Interest accrued on debenture 900 o Liquidators cost 3,600 o Land and buildings realised 56,250 o All other assets realised at the estimated amounts o No bills receivable was dishonoured o All other creditors were paid the amounts reported in the statement of affairs.
Required:
a) Prepare the Statement of Affairs
b) Prepare the Accounts of Receipt & Payments
c) Prepare the Accounts of Liquidation and close the books of the company.
26
STATEMENT OF AFFAIRS Nilam BHD
Statement of Assets and Liabilities as at
Cost or Book Value
(BV)
Estimated Realisable
values (RV)
1)ASSETS NOT SPECIFICALLY CHARGED
2)ASSETS SUBJECTS TO SPECIFIC CHARGES, LINES, MORTAGAGES, BILL OF SALES OR HIRE
PURCHASE
BV RV
TOTAL ASSETS
Total estimated realisable assets
3) Less: PREFERENTIAL CREDITORS
4) Less: AMOUNTS OWING & SECURED BY DEBENTURES OR FLOATING CHARGE
5) Less: PREFERENTIAL CREDITORS
ESTIMATED AMOUNT AVAILABLE FOR UNSECURED CREDITORS
6) CREDITORS (UNSECURED)
7) BALANCES OWING TO PARTLY SECURED CREDITORS
8) CONTINGENT ASSETS
9) CONTINGENT LIABILITIES
ESTIMATED DEFICIENCY/SURPLUS (Subject to costs of administration/liquidation)
SHARE CAPITAL:
Issued
Paid up
27
BKAF3063 Financial Accounting & Reporting III
Tutorial Chap 8 Reconstruction
Due Date: 19 May 2013 Before 4.00PM
Question 1
The following is a trial balance at 31 December 2012 extracted from the books of Goodwood
Property Bhd.
RM000 Ordinary Shares of RM1 each 200,000
5% cumulative preference shares of RM1 each 70,000
8% debenture 80,000
Revaluation reserve 50,000
Interest payable on debenture 12,800
Trade payables 96,000
Loans from directors 16,000
Bank overdraft 36,960
561,760
Land 200,000
Building (net book value) 27,246
Equipment (net book value) 16,754
Goodwill 40,000
Investments 47,000
Inventories and work in progress 120,247
Trade receivables 70,692
Accumulated loss 39,821
561,760
The authorized share capital is 200,000,000 ordinary shares of RM1 each and 100,000,000
5% cumulative preference shares of RM1 each.
During a meeting of shareholders and directors, it was decided to carry out a scheme of
internal reconstruction due to the financial difficulties faced by the company. The following
scheme has been duly passed and the approval of the court obtained:-
1. Each ordinary share is to be reduced to 50 sen each. The ordinary shareholders are to accept a
reduction in the nominal value of their shares from RM1 to 50 sen and to subscribe for new issue on the basis of 1 for 1 at a price of 60 sen per share.
2. The existing 70,000,000 preference shares are to be exchanged for a new issue of 35,000,000 8% cumulative preference shares of RM1 each and 70,000,000 ordinary share of 50 each.
3. The debenture holders are to accept 10,000,000 ordinary shares of 50 sen each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the nominal value of the shares issued. The interest rate is to be increased to 9.5%. A further RM9,000,000 of this 9.5% debentures is to be issued and taken up by the existing holders at RM90 per RM100.
4. RM6,000,000 of directors of directors loan is to be cancelled. The balance is to be settled by issue of 16,500,000 ordinary share of 50 sen each.
28
5. Goodwill and accumulated losses are to be written off.
6. The investment has a market value of RM60,000,000
7. RM46,000,000 is to be paid to trade creditors now and the balance at quarterly intervals.
8. RM7,298,000 of the trade receivables are to be written off.
9. The remaining assets were professionally valued and could be included in the books and accounts as follows:
RM000 Land 163,566 Building 50,000 Equipment 11,000 Inventories and work in progress 50,000
10. The asset revaluation reserve is to be utilized for the scheme.
REQUIRED:
(a) Show necessary journal entries to effect the reconstruction scheme.
(b) Prepare the Statement of Financial Position of the company immediately after the reconstruction.
29
QUESTION 2
Shabra Bhd is principally involved in housing development in Northern region of Malaysia.
As the demand for properties shrink tremendously started in the last three years, Shabra Bhd
has recorded a net loss of RM3.5 million in the current financial year with an accumulated
loss of RM53.5 million. In response to this, the company immediately hired a financial
consultant to deal with the companys current situation.
Based on the initial meeting, the consultant is very optimist that the company would not be
liquidated as he already had something about capital rearrangement in mind after reviewing
the companys current financial statement.
Presented below are the company financial statements for the year ended 31 December 2009:
RM'000 RM'000 2009 2008
NON CURRENT ASSET
Plant, properties and equipments 167,850 185,500
CURRENT ASSET
Cash and bank balances 42,386
19,350
Account receivables 57,879 64,310
Inventory 2,835 3,150
103,100 86,810
CURRENT LIABILITIES
Trade creditors 85,000 83,000
Interest payable 5,950 5,810
90,950 88,810
NET CURRENT ASSETS 12,150 (2,000)
NET TOTAL ASSETS 180,000 183,500
FINANCED BY:
Share capital
Authorized, issued and full paid:
RM1.00 Ordinary shares 150,000 150,000
4% RM1.00 Convertible Preference Shares 8,000 8,000
7% RM1.00 Redeemable preference shares 500 500
158,500 158,500
Share premium 11,000 11,000
Reserves 8,500 8,500
30
Beginning retained earnings (53,500) (49,000)
Current year net profit/(loss) (3,500) (4,500)
Shareholders fund 121,000 124,500
Long term loan 29,000 29,000
8% Bond payable 30,000 30,000
TOTAL EQUITY & LONG TERM LIABILITIES180,000 183,500
The proposed capital rearrangement scheme drafted by the consultant was as follows:
1) Wrote off the company accumulated loss according to Section 64 of the Companies Act,
1965.
2) The company major creditor of RM50 million agreed to convert 1/4 of the amount into
ordinary shares and forgive overdue interest of RM50,000.
3) Disposed a 2 year old operating equipment to raise additional cash. The equipment
carried a net book value of RM17 million and the company received RM18.7 million
from the sales proceed.
4) Convert half of the convertible preference shares into ordinary shares (at new par value).
5) To redeem all the redeemable preference shares at par. The redemption will be exercised
by issuing the ordinary shares at par.
6) The company spent RM250,000 as the cost of capital rearrangement scheme including
fees paid to the consultant.
7) Issue additional 100 million units of ordinary share at par.
8) Any balance in capital reduction account would be written off against reserves.
REQUIRED
(a) Perform the journal entries to record the above capital rearrangement scheme for
Shabra Bhd assuming that all necessary authorization has been granted.
(b) Prepare the Statement of Financial Position for Shabra Bhd for the post implementation
of the scheme.
31
TUTORIAL 9
BKAF3063 Financial Accounting & Reporting III
Tutorial Chap 9 Winding Up
Due Date: 27 May 2013 Before 10.00am
QUESTION 1
BUMI Bhd is principally involved in property development in East Coast region of Malaysia.
As the demand for properties shrink tremendously started in the last three years, BUMI Bhd
has recorded an accumulated losses of RM107 million. In response to this, the company
immediately hired a financial consultant to deal with the companys current situation. Presented below are the company statement of financial position after an implementation of
the reconstruction scheme:
RM'000
NON CURRENT ASSET
Plant, properties and equipments 318,700
CURRENT ASSET
Cash and bank balances 120,450
Account receivables 125,000
Inventory 41,200
286,650
CURRENT LIABILITIES
Trade creditors 157,500
Interest payable 11,850
169,350
NET CURRENT ASSETS 117,300
NET TOTAL ASSETS 436,000
FINANCED BY:
Share capital
Authorized, issued and full paid:
RM0.62 Ordinary shares 269,500
4% RM1.00 Convertible Preference Shares 8,000
7% RM1.00 Redeemable preference shares 0
277,500
Share premium 22,000
Reserves 18,500
Beginning retained earnings 0
Current year net profit/(loss) 0
Shareholders fund 318,000
Long term loan 58,000
8% Bond payable 60,000
TOTAL EQUITY & LONG TERM LIABILITIES 436,000
32
However, should the company being liquidated (after capital rearrangement scheme
completed), information below might be useful for the company to take such action:
Additional
Information:
1) Property 1 is specifically
secured against the bond payable.
2) Plant is secured against the long term loan.
3) Other liabilities are unsecured.
4) Dividends for the convertible preference shares are cumulative. To date, the amount due is equal to one year dividend for the remaining shares.
5) Wages and salaries owed to the employees are RM620,000
6) The estimated cost of liquidator remuneration and other costs of winding up would be RM40,000.
7) According to the companys Articles, there is no preference in term of the capital refund.
8) Account receivables and inventory are expected to be realized at 20% and 40% of its value respectively.
REQUIRED:
BUMI Bhd cannot avoid from being liquidated, prepare the statement of receipts and
payments together with distribution to shareholders.
Property, plant and equipment
Net Book Value
(RM'000)
Net Realizable Value
(RM'000)
Property 1 62,000 58,000
Property 2 16,200 18,000
Other Properties 123,000 119,500
Plant 67,000 60,000
Equipment 50,500 50,000
Total 318,700 305,500
33
QUESTION 2
Padang Pasir Bhd is a Malaysian corporation listed on the Malaysian stock exchange. The
company principal activities encompass the entire chain of the local construction industry. In
recent years, the company experienced an unprecedented operating loss which the company
attributed it to the global economic turmoil. During the previous Board of Directors (BOD)
meeting, the members unanimously agreed that the company to undergo the capital
rearrangement scheme.
Presented below are the company statement of financial position after an implementation of
the reconstruction scheme:
RM'000
NON CURRENT ASSET
Property, Plant and equipment 297,500
CURRENT ASSET
Cash and bank balances 91,800
Account receivables 205,000
Inventory 14,500
311,300
CURRENT LIABILITIES
Trade Creditors 290,000
Interest payable 4,000
294,000
NET CURRENT ASSETS 17,300
NET TOTAL ASSETS 314,800
FINANCED BY:
Share capital
Authorized, issued and fully paid:
RM0.25 Ordinary shares 82,500
7% RM1.00 Redeemable preference shares 8,000
90,500
Share premium 11,000
Reserves 155,800
Shareholders fund 257,300
Long term loan 29,000
8% Bond payable 28,500
TOTAL EQUITY & LONG TERM LIABILITIES 351,000
However, should the company be liquidated (after the completion of the above scheme), the
following data is relevant in implementing the liquidation process:
34
PPE
Net Book
Value
(RM'000)
Net Realizable
Value (RM'000)
Property 1 30,000 32,500
Other Properties 150,000 152,500
Plant 50,000 55,000
Equipment 67,500 50,000
Total 297,500 290,000
Additional Information:
1) Property 1 is specifically secured against the long term loan.
2) Other liabilities are unsecured. The company has no preferential creditors as stated under section 292(1), Company Act.
3) RM 40,000 is estimated for the cost of winding up, including liquidators remuneration.
4) According to the companys Articles, preference shareholders are preferred over ordinary shareholders in terms of capital refund but cannot participate in any surplus.
5) It is expected that 60% and 50% of the account receivables and inventory will be realized respectively.
REQUIRED
Padang Pasir Bhd cannot avoid from being liquidated, prepare the statement of receipts and
payments together with distribution to shareholders.
Recommended