FINANCIAL ACCOUNTING 2 PREPARED BY Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat
Writer Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat Designer Jidarulaila Binti Salleh Hakcipta © 2021, Politeknik Sultan Haji Ahmad Shah Hakcipta terpelihara. Tiada bahagian daripada terbitan ini boleh diterbitkan semula, disimpan untuk pengeluaran atau ditukarkan ke dalam sebarang bentuk atau dengan sebarang alat, sama ada dengan cara elektronik, gambar dan rakaman serta sebagainya tanpa kebenaran bertulis daripada pemegang hakcipta. FINANCIAL ACCOUNTING 2 Diterbitkan oleh: Politeknik Sultan Haji Ahmad Shah Semambu 25350 Kuantan, Pahang eISBN: 978-967-0778-94-5
ACKNOWLEDGEMENTS Special thank you to all our authors who have contributed to this book. This book would not have come together without all the efforts and hard work from all the authors. We would also like to extend our gratitude to Head of Department and Head of Programme, Commerce Department and Polisas ELearning Committee for the support and guidance. Thank you all. Wan Maimunah Binti Wan Ishak Jidarulaila Binti Salleh Hazman Bin Mat i
PREFACE The objective of this book is to provide source of information and knowledge especially for students who enrolled for Diploma in Accountancy or any students who may require to refer for any topic relevant to them. This book entirely based on the Polytechnic MOHE syllabus for Diploma in Accountancy. As Financial Accounting 2 is a core subject, students need to have comprehensive understanding of this subject with the updated knowledge of Malaysian Accounting Standard Board (MASB) and Malaysian Financial Reporting Standards (MFRSs) regulation. This will help them to understand concepts and relevant knowledge of financial accounting. This book will cover all the topics consist of Accounting for Cash and Cash Equivalents, Accounting for Inventories, Accounting for Property, Plant and Equipment, Accounting for Trade Receivables, Accounting for Trade Payables, Provisions & Contingent Liabilities/Assets, Accounting for Revenues & Expenses and Accounting for Partnership. We welcome any constructive suggestions and comments from lecturers and students. Such feedback is given careful consideration and very helpful for future improvement. ii
Introduction .................................................................... 83 Nature of revenue and expenses .................................... 83 Recognition and measurement of revenues under MFRS 15 (MPERS: Section 23) .............................. 84 Recognition and measurement of expenses .................. 85 Identify the presentation of revenues and expenses in financial statements .................................... 89 Exercise ........................................................................... 91 06 ACCOUNTING FOR REVENUES AND EXPENSES 04 ACCOUNTING FOR TRADE RECEIVABLES Introduction ................................................................................. 63 Nature of trade receivables under MFRS 9, MFRS 132 and MFRS 139 .............................................................................. 63 Recognition and measurement of trade receivables ................... 63 Presentation of trade receivables in financial statements .......... 69 Exercise ........................................................................................ 70 05 ACCOUNTING FOR TRADE PAYABLES, PROVISIONS AND CONTINGENT LIABILITIES/ ASSETS Introduction ................................................................................ 73 Nature of trade payables, provisions and contingent liabilities/assets under MFRS 132 and MFRS 137/MFRS 17 (MPERS : Section 21 and 22) ....................................................... 73 Recognition and measurement of trade payable under MFRS 139 (MPERS : Section 22) .................................................. 75 Recognition and measurement of provisions, contingent liability and contingent assets under MFRS 137/MFRS 17 (MPERS : Section 21) ................................................................... 76 Presentation of trade payables, provisions, contingent liability and contingent assets in financial statements ................ 80 Exercise ........................................................................................ 81 CONTENTS FINANCIAL ACCOUNTING 2 01 ACCOUNTING FOR CASH AND CASH EQUIVALENTS Introduction.................................................................................... 2 Nature of cash and cash equivalents under MFRS 107 (MPERS: Section 7) ......................................................................... 2 Recognize records under cash books ............................................. 3 Bank reconciliation statement ....................................................... 8 Presentation of cash and cash equivalents in Financial Statements ..................................................................... 13 Exercise .......................................................................................... 14 Introduction .................................................................................. 18 Nature of inventory under MFRS 102 (MPERS: Section 13) .......... 18 Recognition and measurement of inventories .............................. 19 Measurement of profit and value of closing inventories .............. 20 Presentation of inventories in financial statements ...................... 29 Exercise .......................................................................................... 30 02 ACCOUNTING FOR INVENTORIES Introduction .................................................................................. 34 Nature of property, plant and equipment under MFRS 116 MPERS: Section 17) ....................................................................... 34 Recognition and measurement of property, plant and equipment under MFRS 13 and MFRS 116 ................................... 34 De-recognition of property, plant and equipment under MFRS 13 and MFRS 116 ................................................................ 45 Presentation of property, plant and equipment in financial statements under MFRS 116 ........................................................ 56 Exercise ......................................................................................... 59 03 ACCOUNTING FOR PROPERTY, PLANT AND EQUIPMENT Introduction .................................................................... 94 Nature of partnership business according to Partnership Act 1961 ...................................................... 94 Types of accounts for partnership .................................. 97 Accounting treatments on admission new partners and retirement or death of partners ............................... 103 Dissolution of partnership ............................................... 115 Exercise ............................................................................ 122 07 ACCOUNTING FOR PARTNERSHIP References ....................................................................... 125 Acknowledgements ........................................................................ i Preface ............................................................................................ ii
CHAPTER 1 Accounting for Cash and Cash Equivalents a. State the nature of cash and cash equivalents under MFRS 107 (MPERS: Section 7). b. Recognize record under cash books. c. Prepare bank reconciliation statement. d. Show the presentation of cash and cash equivalents in financial statements. Learning Outcome
CHAPTER 1 2 1.0 INTRODUCTION Cash and cash equivalents is a line item on the balance sheet, stating the amount of all cash or other assets that are readily convertible into cash. Any items falling within this definition are classified within the current assets category in the balance sheet. Cash and cash equivalents information is sometimes used by analysts in comparison to a company's current liabilities to estimate its ability to pay its bills in the short term. However, Cash and cash equivalents help companies with their working capital needs since these liquid assets are used to pay off current liabilities, which are short-term debts and bills. 1.1 THE NATURE OF CASH AND CASH EQUIVALENTS UNDER MFRS 107 (MPERS: SECTION 7) MFRS 107 applies to cash and cash equivalents in providing useful information of financial statements with a basis to assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilise those cash flows. Users require an evaluation of the ability of an entity to generate cash and cash equivalents from operating, investing and financing activities. The purpose of cash and cash equivalents base on the three main activities: a) Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities. Such as, Cash receipts from the sale of goods, the rendering of services, royalties, fees, commissions and other revenue. b) Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Such as, cash payments to acquire property, plant and equipment, intangibles and other long-term assets. c) Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity. Such as, cash proceeds from issuing shares or other equity instruments and cash payments to owners to acquire or redeem the entity’s shares.
CHAPTER 1 3 1.1.1 Definition of cash and cash equivalents. Cash, comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. In other words, cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be subject to an insignificant risk of changes in value. 1.2 RECOGNIZE RECORD UNDER CASH BOOKS. Cash book is a book of prime entry, a part of the double-entry system where the cash and bank accounts brought together. The cash book is set out so that the: debit columns for cash and bank are side by side credit columns for cash and bank are also side by side This column is used to identify the name of the ledger and account number where the corresponding part of the double entry has been entered. Using a folio column speeds up the process of finding the opposite entry in the ledgers. The folio column: This column is used to identify the name of the ledger and account number where the corresponding part of the double entry has been entered. Using a folio column speeds up the process of finding the opposite entry in the ledgers.
CHAPTER 1 4 Date Details Folio Cash Bank Date Details Folio Cash Bank Figure 1 : Two Column Cash Book EXAMPLE 1.0 Complete the two-column cash book for the following: June 1 Balance brought down from last month: cash RM325; bank RM8,640. 2 Paid insurance RM2,000 by cheque. 3 Cash sales RM600. 4 Purchases by cheque RM3,250. 5 Rahim paid us RM4,250 by cheque. 6 Bought stationery RM40, paying by cash. 7 Paid wages by cheque RM1,350. 8 Piah paid us RM600 for goods previously bought on credit. 9 Received RM2,000 owing from Amin. 10 Paid rent RM300 by cash. Cash book Date Details Folio Cash Bank Date Details Folio Cash Bank 01/03 Bal b/d 325 8,640 02/03 Insurance GL6 2,000 03/03 Sales GL1 600 04/03 Purchases PL2 3,250 05/03 Rahim SL2 4,250 06/03 Stationery GL4 40 08/03 Piah SL3 600 07/03 Wages GL9 1,350 09/03 Amin SL5 2,000 10/03 Rent GL3 300 11/03 Bal c/d 585 8,890 925 15,490 925 15,490 SOLUTION
CHAPTER 1 5 1.2.1 Discounts Trade discounts, these are discounts given to companies who trade in the same area or for bulk buying. They are not recorded in the double-entry system. EXAMPLE 1.1 Goods normally sell at retail price of RM250 each. The manufacturer sells them to the retailer at a 20% trade discount for buying 10. The discount is recorded on the invoice RM250 × 10 = 2,500 – 20% (RM500) = RM2,000 RM2, 000 is the figure that is used in the double-entry books. Cash discounts, these are discounts given for early settlement of an invoice. They are given to encourage early payment. These discounts are recorded in the double-entry system as: a) Discounts allowed – discounts given to debtors when they pay their accounts early. b) Discounts received – discounts received by a business from its suppliers when they pay their accounts quickly. The discount columns in the cash book are memorandum columns. At the end of the period they are totalled and the total is transferred into the discounts allowed account and discounts received account in the general ledger. The three-column cash book Discount columns = memorandum columns. The discount columns are not part of the double-entry system. These columns are totalled and transferred to the discounts allowed account and discounts received accounts in the general ledger. Format of three-column cash book
CHAPTER 1 6 Cash Book Date Details Folio Disc. Allowed Cash Bank Date Details Folio Disc. Received Cash Bank EXAMPLE 1.2 Enter the following transactions in the three-column cash book of William Buck. Balance of the cash book and show the discounts accounts in the general ledger. June 1 Balances brought forward: Cash RM230; Bank RM4,560. 2 Cash sales RM450.. 3 The following debtors paid their accounts by cheque each deducting a 5% cash discount: R Jenn RM460, S Benny RM620 and J Hacker RM540. 4 Paid rent by cheque RM700. 5 Paid wages by cheque RM1,300. 6 Paid the following accounts by cheque, in each case deducting a 2% cash discount: F Jepson RM300, D Hudson RM400, E Butler RM600. 7 Transferred RM500 cash to the bank account. 8 Bought stationery RM60, paying cash. Cash Book (Debit Column) Date Details Folio Discount Allowed Cash Bank 1/7 Balances b/d 230 4,560 2/7 Sales GL 1 450 3/7 R Jenn SL3 23 437 3/7 S Benny SL4 31 589 3/7 J Hacker SL8 42 498 7/7 Cash C 500 96 1,180 6,084 SOLUTION
CHAPTER 1 7 Cash Book (Credit Column) Date Details Folio Discount Received Cash Bank 4/7 Rent GL 2 700 5/7 Wages GL3 1,300 6/7 F Jepson PL2 6 294 6/7 D Hudson PL5 8 392 6/7 E Butler PL6 12 588 7/7 Bank C 500 8/7 Stationery GL8 60 9/7 balance c/d 620 2,810 26 1,180 6,084 Recording in Ledger Discounts Allowed RM RM 9/7 Cash book 96 Discounts Received RM RM 9/7 Cash book 26 1.2.2 Bank overdraft A bank overdraft exists when a business has taken more money out of its bank account than it has deposited. If this has occurred, then the balance b/d will be shown on the credit side of the account. EXAMPLE 1.3 If a business on 1 November has a bank overdraft of RM1,200, and a cash balance of RM330, then the opening balances in the cash book would appear as follows: Cash Book Date Details Folio Cash Bank Date Details Folio Cash Bank 1/11 Bal b/d 330 1/11 Bal b/d 1,200
CHAPTER 1 8 1.3 BANK RECONCILIATION STATEMENT Every month, individuals and businesses maintaining a Current Account with a bank statement received from the bank. Upon receiving the bank statement, the focus is normally on the ending balance besides the transactions on whatever deposits and payments made. The business expects the ending balance appearing in the bank statement is the same as the amount in the Cash Book (bank column). Thus, the purpose of Bank Reconciliation is to do necessary adjustments to our records in the cash book and come up with the same ending balance as recorded by the bank. It is an analysis explaining the difference between a business’s book balance of cash and its bank statement balance. The Bank Reconciliation Statement must be prepared monthly to justify amounts reported in the Bank Statement and the Bank account kept by the business. 1.3.1 Bank Statement Bank Statement is normally debited for payments or charges, and credited for receipts by the business. Examples of payments and charges cheques drawn in favor of creditors or suppliers, bank charges, direct debits and standing order/instructions. Examples of receipts: deposits of cash or cheques, dividend, interest on current account and bank GIRO credits or credit transfer. EXAMPLE 1.4 Poli Bank Shah Alam Statement of Account Account No. 654321 Date: 30 April 2019 Date Particulars Debit Credit Balance April 1 Balance b/f 800.50 Cr April 3 Cash deposit 7,000.00 7,800.50 Cr April 4 Transfer from branch 2,500.00 10,300.50 Cr April 6 Cheque book 5.00 10,295.50 Cr April 8 70010 550.00 9,745.50 Cr
CHAPTER 1 9 April 10 70011 700.00 9,045.50Cr April 12 70012 430.00 8,615.50 Cr April 15 Bank GIRO Credit 645.00 9,260.50 Cr April 20 Direct Debit 574.00 8,686.50 Cr April 25 Interest 166.70 8,853.20 Cr April 28 Bank Charges 10.00 8,843.20 Cr 1.3.2 Cash Book (Bank Column) Cash book or bank account is normally debited with receipts (deposits of cash or cheques). credited with payments (cheques drawn in favour of creditors or suppliers) of the business. Sample of Bank Account RM RM Balance b/d Cash deposit Credit transfer Ilham Co. 800.50 7,000.00 2,500.00 200.00 Bank charges Amin Trading-70010 Kuat Bhd-70011 Aris-70012 Iwan-70013 Balance c/d 5.00 550.00 700.00 430.00 350.00 8,465.50 10,500.50 10,500.50 1.3.3 Differences Between Bank Statement Balance and Bank Account Balance Three reasons why the balance in bank statement and the balance in the company’s cash book (bank) could be different. The reasons as follows: a) Items recorded in the Bank Account but not recorded by the bank: i. Uncredited lodgement: Or deposits not yet credited. This happens when a business deposits money or cheques but the amount does not appear in the bank statement since the deposits has not yet been processed by the bank; but has already been recorded by the business.
CHAPTER 1 10 ii. Unpresented cheques: Cheques drawn for payment to creditors or others have not been cashed or banked, i.e., when cheques are drawn for payment and sent to creditors, the record in the business books has been made, but for some reasons the creditor is still carrying the cheque around and have not presented it to the bank for clearance. b) Items recorded in the Bank Statement but not recorded by the business: i. Direct debit: The bank debited the account of the business for payments such as insurance premiums, rates, fees, subscriptions etc. ii. Standing instructions order: This is quite similar to the direct debit in that the bank will debit the account of the business for payments such as insurance premiums, rates, subscriptions, etc. iii. Bank service charge: This is a fee charged by the bank for operating the account for the business and or issuing the cheque book. iv. Bank GIRO credit or credit transfer: The business account is credited with amount paid by creditor or other organization direct into the business bank account. v. Interest revenue on current account: This interest is credited to the account of the business and is paid by certain bank based on large enough balance of cash in the account. vi. Dishonoured cheques: A cheque, that the bank will not honor upon presentation by the business for clearance. However, the business has already accepted the cheque for the cash book settlement of a debt. c) Errors: i. Errors made by the bank: A cheque payment by a debtor had been debited to the business account by the bank, or a bank may make an error in recording the amount to be debited or credited. ii. Errors made by the business: Error in recording the amount to be debited or credited, or transactions are being debited to the cash book instead of being credited.
CHAPTER 1 11 1.3.4 Preparation of Adjusted Bank/Cash Book Account Step 1 Updating the Bank Account i. Matching of entries on the bank statement with those in the bank account. This is done by ticking items that appear both in the bank statement and in the bank account. ii. Items appearing in the bank statement but not in the bank account are transferred to the bank account. iii. There would still be items in the bank account left unticked and they would be treated as either uncredited lodgment (if it is a debit item) or as unpresented cheques (if it is a credit item) and these items would be dealt with in the bank reconciliation statement later on. iv. Any errors relating to the bank account would be dealt with at this stage. v. Complete the necessary double entry and carry down the balance of the bank account. Step 2 Preparing the Bank Reconciliation Statement i. Start with balance as per updated bank account balance Bank Reconciliation Statement as at ….. Balance as per updated bank account xxx Add: Unpresented cheques xxx Less: Uncredited lodgements (xxx) Balance as per bank statement xxxx ii. Start with balance as per bank statement Bank Reconciliation Statement as at ….. Balance as per updated bank account xxx Add: Uncredited lodgements xxx Less: Unpresented cheques (xxx) Balance as per bank statement xxxx
CHAPTER 1 12 Step 3 Treatments of Error, Overdraft and Opening Balance Disagreements The explanation below are meant for bank reconciliation statement that starts with the updated bank account balance: i. Opening balance disagreements: the normal procedure is to account for the opening difference, i.e. by matching and ticking against the entries in the previous period’s bank account. ii. Errors made by the bank: if as a result of the error, the bank balance has been understated, for example, if the bank had wrongly debited the bank statement, subtract the amount, the reverse treatment is necessary if the bank had wrongly credited the bank statement and as a result the bank statement balance had been overstated. iii. Overdraft: for such cases the uncredited lodgment will be added whilst the unpresented cheques subtracted. EXAMPLE 1.5 Use example 1.4 Bank Account RM RM Balance b/d 8,465.50 Direct Debit 574.00 Bank Giro Credit 645.00 Bank Charges 10.00 Interest 166.70 Balance c/d 8,693.20 9,277.20 9,277.20 Bank Reconciliation Statement as at April 2019 Balance as per bank account (updated) 8,693.20 Add: Unpresented cheques 350.00 9,043.20 Less: Uncredited lodgements (200.00) Balance as per bank statement 8,843.20 SOLUTION
CHAPTER 1 13 1.4 PRESENTATION OF CASH AND CASH EQUIVALENTS IN FINANCIAL STATEMENTS Cash and cash equivalents
CHAPTER 1 14 1. Which of the following is not an internal control activity for cash? a. The number of persons who have access to cash should be limited. b. The functions of record keeping and maintaining custody of cash should be combined. c. Surprise audits of cash on hand should be made occasionally. d. All cash receipts should be recorded promptly. 2. A RM200 petty cash fund has cash of RM32 and receipts of RM172. The journal entry to replenish the account would include a a. debit to Cash for RM168. b. credit to Petty Cash for RM168. c. credit to Cash Over and Short for RM4. d. credit to Cash for RM172. 3. The following information was taken from Hurumi Company cash budget for the month June Beginning cash balance RM69,000 Cash receipts RM93,000 Cash disbursements RM117,000 If the company has a policy of maintaining an end of the month cash balance of RM60,000, the amount the company would have to borrow is a. RM36,000. b. RM15,000. c. RM24,000. d. RM0. EXERCISE
CHAPTER 1 15 4. Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund. b. Commercial paper. c. Treasury bill. d. Restricted cash. 5. If a check correctly written and paid by the bank for RM628 is incorrectly recorded on the company's books for RM682, the appropriate treatment on the bank reconciliation would be to a. add RM54 to the book's balance. b. subtract RM54 from the book's balance. c. deduct RM54 from the bank's balance. d. deduct RM628 from the book's balance. 6. Enter the following transactions in the three-column cash book of Wee Jack. Balance off the cash book and show the discounts accounts in the general ledger. Required: Prepare Cash Book. July 1 Balances brought forward: Cash RM230; Bank RM4,560. 2 Cash sales RM450. 3 The following debtors paid their accounts by cheque each deducting a 5% cash discount: Renn RM460, Senny RM620 and Jacker RM540. 4 Paid rent by cheque RM700. 5 Paid wages by cheque RM1,300. 6 We paid the following accounts by cheque, in each case deducting a 2% cash discount: Fepson RM300, Dudson RM400, Eutler RM600. 7 Transferred RM500 cash to the bank account. 8 Bought stationery RM60, paying cash.
CHAPTER 1 16 7. The cash book of Amlas showed a balance at the bank of RM570 in hand on 31 January 19X1. At the same date, the bank statement balance of Amlas account was RM446 overdrawn. The difference was accounted for as follows: a) Cheques for RM1 555 sent to creditors on 30 January were not paid by the bank until 8 February. b) Cheques amounting to RM2 520 paid into the bank on 31 January were not credited by the bank until 1 February. c) A standing order for a charitable subscription of RM60 had been paid by the bank on 21 January but no entry had been made in the cash book. d) A cheque paid by Amlas for rent on 15 January for RM345 had been entered in his cash book as RM354. Required: Prepare the bank reconciliation statement.
CHAPT ER 2 Accounting for Inventories a. State the nature of inventory under MFRS 102 (MPERS: Section 13). b. Discuss the recognition and measurement of inventories. c. Compute the measurement of profit and value of closing inventories. d. Show the presentation of inventories in financial statements. Learning Outcome
CHAPTER 2 18 2.0 INTRODUCTION The accounting for inventory involves determining the correct unit counts comprising ending inventory, and then assigning a value to those units. The resulting costs are then used to record an ending inventory value, as well as to calculate the cost of goods sold for the reporting period. The raw materials, work in progress and finished goods are the example of inventories in the business. 2.1 NATURE OF INVENTORY UNDER MFRS 102 (MPERS SECTION 13) MFRS102 applies to companies holding inventories in their course of business. These inventories came from transactions which involving the business and the supplier. It can be transacted either by cash, cheque or on credit. 2.1.1 Definition of Inventories Inventories are defined as assets which: a) Held for sale in the ordinary course of business; b) In the process of production for such sale; or c) In the form of materials or supplies to be consumed in the production process or in the rendering of services. Inventories are classified as current assets in the financial statements when: a) It expects to realize the asset, or intends to sell or consume it in its normal operating cycle. b) It holds the asset primarily for the purpose of trading. c) It expects to realize it within twelve months after the reporting period. An example of an entity purchases flour for its biscuit factory. The flour is raw material purchased by the entity and used in the production of biscuit in the factory. The raw material is an inventory at current assets in the financial statements because it expects to sell the biscuits in its normal operating cycle within twelve months after the reporting period.
CHAPTER 2 19 2.2 RECOGNITION AND MEASUREMENT OF INVENTORIES Cost of the inventory includes all costs incurred to bring the inventory to its present location and condition. It will include all costs of purchase, conversion costs and all other costs. The following costs should be included as inventories costs: a) Invoice cost b) Shipping c) Cash discounts d) Purchases allowances Inventories should be measured at the lower of cost and net realisable value. Net realizable 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. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See MFRS 13 Fair Value Measurement) EXAMPLE 2.1 An entity purchases 200 units of finished goods from supplier costing of RM3, 000 for resale to its customers. The net realizable value of the inventories is RM3, 200. The finished goods are inventories because they are purchased for the purpose of trading and the inventory RM3,000 is measured at cost. The cost of inventories would be: Dr Inventories/ Purchase Account RM3,000 Cr Bank Account RM3,000 SOLUTION
CHAPTER 2 20 2.3 MEASUREMENT OF PROFIT AND VALUE OF CLOSING INVENTORIES Ending inventory is the total unit quantity of inventory in stock or its total valuation at the end of an accounting period. The ending inventory figure is needed to derive the cost of goods sold, as well as the ending inventory balance to include in a company's balance sheet. You may be unable to count the amount of inventory on hand at the end of an accounting period, or cannot assign a value to it. This situation can arise when there is too much shipping activity at month-end to conduct a physical count, or because the counting process is too labor-intensive, or when the staff is too busy to take the time to conduct a physical count. To evaluate the cost of ending inventories there are three methods can be use. Which is: a) First In First Out (FIFO) Assumes that items of inventory purchased or produced first are sold first. Items remaining in inventory are those most recently purchased/produced. b) Last In First Out (LIFO) Assumes that items of inventory purchased/produced last are sold first. Items remaining in inventory are those most lastly purchased/produced. c) Average Cost (AVCO) The cost of each items determined from the cost of similar items purchased during the period. Maybe a weighted average or a moving average.
CHAPTER 2 21 2.3.1Inventory Evaluation System There are two inventories system commonly used in estimating the ending inventory. The flows can be described as flowchart below: 2.3.2 Periodic System Inventory will always be evaluate from time to time and recorded in stock cards. Inventory value can be determined at any time because this card records the movements of inventory all the time without having to wait for the accounting period to end. Perpatual system can improved the ability of mass merchandisers to maintain perpetual systems because the company knows the cost of sales and ending inventory figure from their books perpatualy. Inventory Evaluation Periodic System FIFO LIFO AVCO Perpatual System FIFO LIFO AVCO
CHAPTER 2 22 a) Periodic System – FIFO The steps to be follow: 1) Find the ending inventory (units) = Beginning inventory (units) + Purchase (units) - Sales (units) = 10 + (12+11+7+14+7+11+6) - (10+19+9+12+8) = 10+68-58 = 20 units EXAMPLE 2.2 1 December 2019 Opening balance is 10 units@ RM3.60 each Date Purchase Sales Dec 2 12 @ RM3.50 6 10 @ RM6.00 10 11 @ RM2.50 11 7 @ RM 4.50 14 19 @ RM7.50 19 14 @ RM3.90 20 7 @ RM4.60 22 9 @ RM8.20 23 12 @ RM9.00 24 11 @ RM3.50 25 6 @ RM3.30 29 8 @ RM8.90 Using the periodic system, show the differences in ending inventory value using: a) First In First Out (FIFO) b) Weighted Average (AVCO) Next, state the profit or loss for two methods above. SOLUTION
CHAPTER 2 23 2) Calculate cost of ending inventory * In FIFO, the initial (old) inventory will be sold first compared to the newly bought inventory. = ([email protected]) + ([email protected]) + ([email protected]) = RM19.80 + RM14.00 = RM19.80 + RM38.50 + RM 13.80 = RM 72.10 3) Determine gross profit Sales = ([email protected]) + ([email protected]) + (9 @ RM8.20) + (12 @ RM9.00) + (8 @ RM8.90) = RM60.00 + RM142.50 + RM73.80 + RM 108 + RM71.2 = RM455.50 Cost of goods sold = Beginning Inventory + Purchase – Ending Inventory = ([email protected]) + [(12 @ RM3.50) + (11 @ RM2.50) + (7 @ RM 4.50) + (14 @ RM3.90) + (7 @ RM4.60) + (11 @ RM3.50) + (6 @ RM3.30)] - RM 72.10 =RM36.00 + [RM42.00 + RM27.50 + RM31.50 + RM54.60 + RM32.20 + RM38.50 + RM19.80] – RM72.10 = RM210.00 Gross Profit = Sales – Cost of goods sold = RM455.50- RM210.00 = RM245.50 b) Periodic System – AVCO The steps to be follow: 1) Calculate cost per unit of inventory * In AVCO, the cost per unit will be average for initial (old) inventory, purchase and ended inventory. Cost per unit = Beginning Inventory (RM) + Purchase (RM) Beginning Inventory (units) + Purchase (units) = ([email protected]) + [(12 @ RM3.50) + (11 @ RM2.50) + (7 @ RM 4.50) + (14 @ RM3.90) + (7 @ RM4.60) + (11 @ RM3.50) + (6 @ RM3.30)] 10 + [12 + 11 + 7 + 14 + 7 + 11 +6)] = RM282.10 78 units = RM3.62 per unit
CHAPTER 2 24 2) Find the ending inventory (units) = Beginning inventory (units) +Purchase (units) - Sales (units) = 10 + (12+11+7+14+7+11+6) - (10+19+9+12+8) = 10+68-58 = 20 units 3) Calculate cost of ending inventory (RM) = 20 units x RM3.62 = RM72.40 4) Determine gross profit Sales = ([email protected]) + ([email protected]) + (9 @ RM8.20) + (12 @ RM9.00) + (8 @ RM8.90) = RM60.00 + RM142.50 + RM73.80 + RM 108 + RM71.2 = RM455.50 Cost of goods sold = Beginning Inventory + Purchase – Ending Inventory = 10 + (12+11+7+14+7+11+6) - 20 = 58 units = 58 x RM3.62 = RM 209.96 Gross Profit = Sales – Cost of goods sold = RM455.50- RM209.96 = RM245.54 2.3.3Perpetual System Inventory is evaluate based on total sales and purchase for certain period such as after six month or a year according to accounting period. Inventory quantity and value will be determined through physical calculation at the end of the period and inventory value cannot be determined before the period ends. The system can reduces record keeping but also decreases the ability to track theft, breakage, etc., and prepare interim financial statements.
CHAPTER 2 25 a) Perpetual System – FIFO Date COGS Sales Balance Dec 1 10 @ RM3.50 2 12 @ RM3.40 10 @ RM3.50 12 @ RM3.40 6 10 @ RM3.50 12 @ RM3.40 10 10 @ RM2.50 12 @ RM3.40 10 @ RM2.50 11 8 @ RM4.45 12 @ RM3.40 10 @ RM2.50 8 @ RM4.45 14 12 @ RM3.40 7 @ RM2.50 3 @ RM2.50 8 @ RM4.45 19 18 @ RM3.90 3 @ RM2.50 8 @ RM4.45 18 @ RM3.90 20 5 @ RM5.60 3 @ RM2.50 8 @ RM4.45 18 @ RM3.90 5 @ RM5.60 22 3 @ RM2.50 6 @ RM4.45 2 @ RM4.45 18 @ RM3.90 5 @ RM5.60 23 2 @ RM4.45 9 @ RM3.90 9 @ RM3.90 5 @ RM5.60 24 10 @ RM3.48 9 @ RM3.90 5 @ RM5.60 10 @ RM3.48 25 4 @ RM3.35 9 @ RM3.90 5 @ RM5.60 10 @ RM3.48 4 @ RM3.35 EXAMPLE 2.3 Use Example 2.2, by perpetual system, show the differences in ending inventory value using a) First In First Out (FIFO) b) Weighted Average (AVCO) Next, state the profit or loss for two methods above. SOLUTION 1 2 Sold=10 1 3 2
CHAPTER 2 26 Date COGS Sales Balance 29 8 @ RM3.90 1 @ RM3.90 5 @ RM5.60 10 @ RM3.48 4 @ RM3.35 RM247.80 RM202.70 RM80.10 Ending Inventories = RM80.10 COGS = RM202.70 Sales = RM455.50 Profit = Sales – COGS = RM455.50 – RM202.70 = RM252.80 b) Perpetual System – AVCO Date COGS Sales Balance Dec 1 10 @ RM3.50 2 12 @ RM3.40 22 @ RM3.45 6 10 @ RM3.45 12 @ RM3.45 10 10 @ RM2.50 22 @ RM3.02 11 8 @ RM4.45 30 @ RM3.40 14 19 @ RM3.40 11@ RM3.40 19 18 @ RM3.90 29@ RM3.71 20 5 @ RM5.60 34@ RM3.99 22 9 @ RM3.99 25 @ RM3.99 23 11 @ RM3.99 14 @ RM3.99 24 10 @ RM3.48 24 @ RM3.78 25 4 @ RM3.35 28 @ RM3.72 29 8 @ RM3.72 20 @ RM3.72 RM247.80 RM208.66 RM74.40 Cost per unit = Total inv (RM) Total inv (units) = (10x 3.50)+(12x3.40) 10+12 = RM3.45/unit Ending Inventories = RM74.40 COGS = RM208.66 Sales = RM455.50 Cost per unit
CHAPTER 2 27 Profit = Sales – COGS = RM455.50 – RM208.60 = RM246.90 2.3.4 Stock Value Cost vs. Net Realizable Value (NRV) • Inventory is valued at the lower cost between cost price and NRV, which means an inventory should be value at either the cost price or NRV. • NRV – MFRS 102 Is the estimated selling price less the estimated cost of completion and the estimated cost necessary to make sale EXAMPLE 2.4 Syarikat Indah, list details of their inventory as follows: ITEM COST (RM) NRV (RM) SALES PRICE (RM) A 900 810 1,500 B 550 600 900 C 1,000 930 1,400 D 1,200 1,100 1,600 Calculate the ending inventory for all items. Ending inventory = 810 + 550 + 930 + 1,100 = RM3,390 KEY POINT NRV = SALES PRICE – INVENTORY COMPLETION COST SOLUTION ITEM COST (RM) NRV (RM) SALES PRICE (RM) Lowest Value A 900 810 1,500 810 B 550 600 900 550 C 1,000 930 1,400 930 D 1,200 1,100 1,600 1,100
CHAPTER 2 28 Method under NRV Three (3) methods to determine ending inventory under NRV a) Item b) Category c) Aggregate EXAMPLE 2.5 The inventory data below were extracted from Syarikat Mummy on 31 December 2019. Calculate the ending inventory value at the same date by item, category and aggregate. Product Cost (RM) NRV (RM) Radio Panasonic 510 600 Elba 2,250 1,980 Air Condition Panasonic 400 450 Hitachi 850 815 PRODUCT COST (RM) NRV (RM) METHOD OF EVALUATION (COST VS. NRV) ITEM CATEGORY AGGREGATE Radio Panasonic 510 600 510 Elba 2,250 1,980 1,980 Total (RM) 2,760 2,580 2,580 Air Condition Panasonic 400 450 400 Hitachi 850 815 815 Total (RM) 1,250 1,265 1,250 Total 4,010 3,845 3,845 Inventory Value (RM) 3,705 3,830 3,845 SOLUTION
CHAPTER 2 29 We can conclude that if: 1. the company used the item method, ending inventory value is RM3,705 2. the company used the category method, ending inventory value is RM3,830 3. the company used the aggregate method, ending inventory value is RM3,845 2.4 PRESENTATION OF INVENTORIES IN FINANCIAL STATEMENTS Financial statement disclosures provide information regarding the accounting policies adopted in measuring inventories, the principal uncertainties regarding the use of estimates related to inventories, and details of the inventory carrying amounts and costs. This information can greatly assist analysts in their evaluation of a company’s inventory management. Inventory also is an asset and its ending balance is reported in the current asset section of a company's in the statement of financial position. Inventory is not an income statement account. However, the change in inventory is a component in the calculation of the Cost of Goods Sold, which is often presented on a company's income statement. Under MFRS 102, the following matters must be disclosed as part of financial statement reporting relating to inventory accounting. a) Accounting policy for inventories b) Carrying amount, generally classified as merchandise, supplies, materials, work-in-progress and finished goods, as appropriate c) Carrying amount of any inventories carried at fair value less costs to sell d) Amount of any write down of inventories recognized as an expense in the period e) Amount of any reversal of a write down to NRV and the circumstances that led f) to such a reversal g) Carrying amount of inventories pledged as security for liabilities, and h) Cost of inventories recognized as expense (cost of goods sold)
CHAPTER 2 30 EXERCISE 1. In a perpetual inventory system, a. LIFO cost of goods sold will be the same as in a periodic inventory system. b. average costs are based entirely on unit cost simple averages. c. a new average is computed under the average cost method after each sale. d. FIFO cost of goods sold will be the same as in a periodic inventory system. 2. Company Man has the following inventory data: August 1 Beginning inventory 20 units at RM10 8 Purchases 130 units at RM15 17 Sale 80 units 25 Purchases 30 units at RM20 30 Sale 60 units Assuming that a perpetual inventory system is used, what is ending inventory (rounded) under the average cost method for August? (DO NOT ROUND INTERMEDIATE CALCULATIONS). a. RM641.33 b. RM611.11 c. RM800.00 d. RM500.00 3. Simpon Co. purchased inventory as follows: Jan. 5 500 units at RM10.00 15 1,000 units at RM15.00 25 200 units at RM20.00 What is the average unit cost of inventory? a. RM14.12 b. RM15.00 c. RM13.00 d. RM15.83
CHAPTER 2 31 4. Deli Cakes has the following inventory data: Nov 1 Inventory 30 units @ RM6.00 each 8 Purchase 120 units @ RM6.45 each 17 Purchase 60 units @ RM6.30 each 25 Purchase 90 units @ RM6.60 each A physical count of merchandise inventory on November 30 reveals that there are 100 units on hand. Ending inventory under LIFO periodic inventory system is a. RM657 b. RM632 c. RM1, 269 d. RM1, 295 5. Baker Company just began business and made the following four inventory purchases in June: Date Unit RM June 1 150 1,040 10 200 1,560 15 200 1,680 28 150 1,320 5,600 A physical count of merchandise inventory on June 30 reveals that there are 210 units on hand. Using the FIFO periodic inventory method, the amount allocated to ending inventory for June is: a. RM1,456 b. RM1,508 c. RM1,824 d. RM1,848
CHAPTER 2 32 6. Razif commenced a business on 1st September 2018 as a computer part supplier in Kuantan. Below are the movements of stocks in October 2018: Stocks on 30 September 2014 was 25 [email protected] Date Purchase Sales October 3 40 units @RM190.00 5 45 units 8 30 units @RM200.00 10 30 units 15 50 units @RM220.00 19 50 units 20 20 units 22 20 units @RM220.00 28 30 units @RM230.00 29 40 units The sales price is based on the quantities below: Less than 30 units = RM250 (normal price) 30 units to 49 units = 5% discount from the normal price 50 units and above = 10% discount from the normal price Required: a) Calculate the ending stock and gross profit as at 31st October 2014 by using Average Cost (AVCO) method if Razif use perpetual system. b) Calculate the ending stock and gross profit using Last in First out (LIFO) method if Razif use periodic system.
CHAPTER 3 Accounting for Property, Plant and Equipment a. State the nature of property, plant and equipment under MFRS 116 (MPERS: Section 17) b. Provide the discussion on the recognition and measurement of property, plant and equipment under MFRS 13 and MFRS 116 c. Provide the discussion on the de-recognition of property, plant and equipment under MFRS 13 and MFRS 116 d. Show the presentation of property, plant and equipment in Financial Statements under MFRS 116 Learning Outcome
CHAPTER 3 34 3.0 INTRODUCTION Property, plant, and equipment (PP&E) are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate. PP&E fall under the category of non-current assets, which are the long-term investments or assets of a company. Non-current assets like PP&E have a useful life of more than one year. Property, plant and equipment is recorded on a company's financial statements, specifically on the balance sheet. Property, plant and equipment is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use. 3.1 NATURE OF PROPERTY, PLANT AND EQUIPMENT UNDER MFRS 116 (MPERS: SECTION 17) Property, plant and equipment is a non-current, tangible capital asset shown on the balance sheet of a business and is used to generate revenues and profits. 3.1.1 Definition and Category of Property, Plant and Equipment According to MFRS 116, property, plant and equipment are tangible items that are: a) Held for use in the production or supply of goods or services. b) For rental to others, or for administration purposes c) Expected to be used for more than one period. 3.2 RECOGNITION AND MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT UNDER MFRS 13 AND MFRS 116 This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred.
CHAPTER 3 35 3.2.1 Initial Recognition of Plant, Property and Equipment According to MFRS 116, plant, property and equipment are recognize an asset when: a) That future economic benefits associated with the item will flow to the entity. - The purpose to acquire property, plant and equipment usually generates income directly. Example: Using machine to manufacture goods for sales or indirectly an entity’s computer equipment used by the administrative staff from their use. b) The cost of the item can be measured reliably. - The cost of an item property, plant and equipment can be measure precisely. Example: Acquired a new furniture for office used. The furniture was paid in cash for RM52,000 on delivery. The value of the item can be measured reliably because the equipment is exchanged for a cash payment of RM52,000, which was paid at the time the entity received the equipment. Items such as spare parts, stand-by equipment and servicing equipment are recognized in accordance with this section when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. If the major components of an item of property, plant and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life. 3.2.2 Initial Measurements of Property, Plant and Equipment According to MFRS 116, property, plant and equipment is initially measure at its cost include: a) The purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. b) The initial estimate of costs for dismantling and removing the items and restoring the site on which it is located. c) Any cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner as intended by the management.
CHAPTER 3 36 Examples of directly attributable costs are: a) Costs of employee benefits (as defined in MFRS 119 Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment b) Costs of site preparation; c) Initial delivery and handling costs; d) Installation and assembly costs; e) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and f) Professional fees EXAMPLE 3.1 On 1 Jun 2019, Flexiss Sdn Bhd purchased a machine and spends the following cost: Item RM Purchase cost 50,000 Other administration cost to purchase this machine 500 Cost of initial delivery 500 Site preparation cost 1,000 Cost of installation and assembly 2,500 Calculate the cost of machine. SOLUTION Item RM Purchase cost 50,000 Cost of initial delivery 500 Site preparation cost 1,000 Cost of installation and assembly 2,500 Cost of machine 54,000 Journal entries: Dr Machine RM54,000 Cr Bank RM54,000
CHAPTER 3 37 3.2.3 Subsequent Costs to be Capitalized or Written Off Additional costs that relate to services and maintenance are treated as expenses in the statement of profit or loss. Costs which relate to additions and improvements that meet the asset recognition criteria are capitalized as assets. Therefore, subsequent costs are capitalized as an asset when this cost can be measure reliably and it is probable that obtain future economic benefit. Future economic benefit includes: a) Increase useful life b) Increase in quality of product c) Increase in quantity of product produced d) Decrease in operational cost Parts of some items of property, plant and equipment may require replacement at regular intervals (for example, the roof of a building). The cost of replacing the item will increase the carrying amount of the property, plant and equipment if the replacement parts is expected to provide additional benefits in the future. Costs of the day-to-day servicing of the item does not recognise in the carrying amount of an item of property, plant and equipment and must be recognise in profit or loss. A condition of continuing to operate an item of property, plant and equipment (for example, an aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant and equipment. The carrying amount is the value of an asset as reflected in a company’s book or balance sheet, minus the depreciation value of the asset. It is also called as a book value.
CHAPTER 3 38 EXAMPLE 3.2 Glow Ent. own lorry which was acquire two years ago. The carrying value of the vehicle RM240,000. For the current year the following expenditure were incurred: Item RM Road tax and insurance 3,600 Petrol 200 Rustproof treatment that will extend the lifespan of the car for several years 3,500 Painting business name and logo 1,000 Calculate total carrying amount. SOLUTION Road tax and insurance, petrol and painting business name and logo total RM4,800 written off as expenses in the statement of comprehensive income. Rustproof treatment RM3,500 capitalized and added to the carrying amount of the lorry. Total carrying amount for vehicle are RM243,500 (RM240,000 + RM3,500). 3.2.4 Subsequent Measurement Based on Cost Model and Revaluation Model Property, plant and equipment are measured using cost model or revaluation model as its accounting policy and the policy should be applied to an entire class of property, plant and equipment. a) Cost Model All items of property, plant and equipment shell measured after initial recognition at cost less any accumulated depreciation and any accumulated impairment losses. The fair value of property, plant and equipment is not taken into consideration.
CHAPTER 3 39 b) Revaluation Model Property, plant and equipment are carried at a revalue amount (if the fair value can be measured reliably) less any subsequent accumulated depreciation and subsequent accumulated impairment loss. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Adoption of revaluation model will produce more relevant information for capital providers in making useful decision. EXAMPLE 3.3 Mezz Sdn. Bhd. acquired a freehold land on 1 January 2019 for RM1,000,000. On 31 December 2019, the fair value of the land was RM1,750,000. Show the carrying amount of the land as at 31 December 2019 if the company use policy: a) Cost model b) Revaluation model SOLUTION a) Cost model The carrying amount is the cost of the land which is RM1,000,000. b) Revaluation model The carrying amount is the fair value of the land which is RM1,750,000. 3.2.5 Depreciation, Depreciable Amount, Residual Value and Useful Life Depreciation commences when the asset is made available for use and to continue depreciating till de-recognition, depreciating even during idle period. Depreciation charge is determined separately for each significant part of an item of property, plant and equipment. Table 3.1 show the differences in terms used:
CHAPTER 3 40 Item Description Depreciation Systematic allocation of the depreciable amount of an asset over its useful life (MFRS 116). Depreciable Amount The cost of an asset, or other amount substituted for cost less its residual value. Residual Value The estimated amount that would currently obtain from disposal of the asset, after deducting the estimated costs of disposal. If the asset was already of the age and in the condition expected at the end of its useful life. Useful Life Period over which an asset is expected to be available for use or the number of production or similar unit expected to be obtained from the asset. Figure 3.1: Depreciation, Depreciable Amount, Residual Value and Useful Life EXAMPLE 3.4 On 1 March 2019, a motor vehicle was bought at RM180,000 by cheque. Total depreciation until 31 December 2019 is RM15,000, show the journal entries for this transaction. SOLUTION Journal entries: Dr Motor vehicle RM180,000 Cr Bank RM180,000 Dr Depreciation RM15,000 Cr Accumulated Depreciation RM15,000
CHAPTER 3 41 3.2.6 Methods of Depreciation A variety of depreciation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method and reducing balance method. Straight Line Method Straight Line method is a very common, and the simplest method of calculating depreciation expense. In this method, the depreciation expense amount is the same every year over the useful life of the asset. EXAMPLE 3.5 An equipment at cost RM25,000 with an estimated useful life of 8 years and a RM2,000 residual value. Calculate the depreciation expense per year for this equipment. SOLUTION Depreciation = Cost – Residual Value Useful Life = 25,000 – 2,000 8 years = RM2,875 per annum KEY POINT Depreciation Expense = (Cost – Residual value) / Useful life or Depreciation Expense = Cost of asset x Rate of depreciation
CHAPTER 3 42 Year Depreciation Expenses (RM) Accumulated Depreciation (RM) 1 2,875 2,875 2 2,875 5,750 3 2,875 8,625 4 2,875 11,500 5 2,875 14,375 6 2,875 17,250 7 2,875 20,125 8 2,875 23,000 Figure 3.2: Depreciation expenses and accumulated depreciation by straight line method Journal entries for Year 1 to Year 8: Dr Depreciation RM2,875 Cr Accumulated Depreciation RM2,875 EXAMPLE 3.6 A machine at cost RM500,000 is depreciate at 10% per annum. Show the depreciation for 5 years. SOLUTION Depreciation = 500,000 x 10% = RM50,000 per annum Year Depreciation Expenses (RM) Accumulated Depreciation (RM) 1 50,000 50,000 2 50,000 100,000 3 50,000 150,000 4 50,000 200,000 5 50,000 250,000 Figure 3.3: Depreciation expenses and accumulated depreciation at 10% per annum Journal entries for Year 1 to Year 5: Dr Depreciation RM50,000 Cr Accumulated Depreciation RM50,000
CHAPTER 3 43 EXAMPLE 3.7 The information below is extract from the book of Emma Sdn. Bhd. On 1 January 2019. Buildings RM650,000 Accumulated depreciation RM200,000 Book Value RM450,000 The company policy is to depreciate at rate 15% per annum using straight line method. Show the accumulated depreciation account for year ended 31 December 2019. SOLUTION Depreciation = 650,000 x 15% = RM97,500 per annum Accumulated Depreciation Account RM RM Balance c/d 297,500 Balance b/d 200,000 Depreciation 97,500 297,500 297,500 Reducing Balance Method A fixed percentage is discharged in each accounting period to the net balance of the fixed asset (book value). Thus, the rate percent is not calculated on cost of asset but on the book value of asset, which in turn is calculated by subtracting depreciation from its cost. KEY POINT Depreciation Expense = (Cost – Accumulated Depreciation) x Rate of depreciation or Depreciation Expense = Book Value x Rate of depreciation
CHAPTER 3 44 EXAMPLE 3.8 A company buy a van for RM155,000. It is depreciate at 20% of its value each year. Calculate the first four years of depreciation using the reducing balance method and accumulated depreciation account. SOLUTION Year Book Value x 20% Depreciation Expenses (RM) Accumulated Depreciation (RM) 1 (155,000 – 0) 20% 31,000 31,000 2 (155,000 – 31,000) 20% 24,800 55,800 3 (155,000 – 55,800) 20% 19,840 75,640 4 (155,000 – 75,640) 20% 15,872 91,512 Figure 3.4: Depreciation expenses and accumulated depreciation by reducing balance method Accumulated Depreciation Account RM RM Y1 Balance c/d 31,000 Y1 Depreciation 31,000 31,000 31,000 Y2 Balance c/d 55,800 Y2 Balance b/d 31,000 Depreciation 24,800 55,800 55,800 Y3 Balance c/d 75,640 Y3 Balance b/d 55,800 Depreciation 19,840 75,640 75,640 Y4 Balance c/d 91,512 Y4 Balance b/d 75,640 Depreciation 15,872 91,512 91,512
CHAPTER 3 45 EXAMPLE 3.9 The following information at Jovein Sdn. Bhd. on 1 January 2019. Machinery RM820,600 -) Accumulated Depreciation RM310,000 Book Value RM510,600 All machine are depreciate at the rate 20% annually. Show the accumulated depreciation account for the year ended 31 December 2019. SOLUTION Depreciation Expense= (Cost – Accumulated Depreciation) x Rate of depreciation = 510,600 x 20% = RM102,120 Accumulated Depreciation Account RM RM Y2 Balance c/d 412,120 Balance b/d 310,000 Depreciation 102,120 412,120 412,120 3.3 DE-RECOGNITION OF PROPERTY, PLANT AND EQUIPMENT MFRS 13 AND MFRS 116 An item of property, plant and equipment is derecognised when it is disposed of or when no future economic benefits are expected from its use. 3.3.1 Disposal, Gain or Loss on Disposal and Revaluation When asset is disposed, it should be removed (derecognised) from the statement of financial position. The gain or losses arising from de-recognition of an item of property, plant and equipment shall be included in income statement but not treated as revenue. Gain or loss on disposal is the difference