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DPA40093 FINANCIAL ACCOUNTING 4 is a workbook aimed at students and lecturers who are taking and teaching this course respectively. This workbook is written in simple English to enable students to obtain an understanding the accounting standards as stated. Designed in line with the latest syllabus prescribe in Malaysian Polytechnic, its covers five essential topics

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Published by adik412, 2023-08-16 19:46:54

WORKBOOK DPA40093 FINANCIAL ACCOUNTING 4

DPA40093 FINANCIAL ACCOUNTING 4 is a workbook aimed at students and lecturers who are taking and teaching this course respectively. This workbook is written in simple English to enable students to obtain an understanding the accounting standards as stated. Designed in line with the latest syllabus prescribe in Malaysian Polytechnic, its covers five essential topics

Keywords: MFRS16,MFRS108,MFRS123,MFRS136,MFRS101

DPA40093 FINANCIAL ACCOUNTING 4 44 QUESTION 3 You are required to identify the situation is related to change in policies, changes in accounting estimates, prior period error or current period errors. Explain your answer and summarize the accounting treatment in the journal entries. All the situations are not related to each other. Situation 1: On 1 January 2020, Cloudy Bhd purchased a building costing RM5,000,000. The company decided not to depreciate the building since the company purchased it. This was discovered when the financial statements for year 2021 were being finalized. Retained earnings brought forward as at 1 January 2021 was RM3,600,000. The depreciation rate is 5% per year with RM20,000 as residual value. Situation 2: In 2021, Sunny Bhd changes an accounting policy on the valuation of inventory. Retained earnings at 1 January 2021 before changes the accounting policy was RM870,000. The cumulative effect of the change in accounting policy is a decrease of RM52,000 for the inventory. Situation 3: In 2021, after the financial statements for the year ended 2020 of Rainy Bhd were approved for issue, the accountant discovered that there is a computational error for the depreciation expenses. The depreciation expenses for year 2020 was RM22,000 but was recorded as RM20,000. The balance retained earnings at 1 January 2021 was RM136,000. Situation 4: Snowy Bhd provides 5% provision for doubtful debts for all their debtors. On 31 December 2020, Snowy Bhd assessed its debtors totaling at RM220,000. However, in July 2021, the accountant of Snowy Bhd estimates the provision for doubtful debts should decrease to 4% and the total debtors for the year ended 31 December 2021 was RM140,000. Situation 5: On 1 January 2019, Lighting Bhd bought double-storey shop lot amounting to RM2,000,000. The company decided to depreciated the premises at the rate of 5% per annum on cost and the depreciation expenses for the year 2019 have been recorded based on the acquisition cost. During the acquisition, Lighting Bhd did some renovations and recorded the renovation as maintenance expenses. The amount of renovation is RM30,000 and this matter was only discovered in the current year financial year ended 31 December 2020. The opening balance of the retained earnings is RM468,000.


DPA40093 FINANCIAL ACCOUNTING 4 45 QUESTION 4 Camalouge Bhd has a building which it purchased on 1 January 2016. The building has been depreciated on straight line basis over its useful life. On 1 January 2021, the remaining life of the building is 10 years. In 2021, the company’s directors determined, after a review of depreciation rates for similar buildings used in its industry, that the buildings should be depreciated over a longer period which is 20 years. As at 31 December 2020, the building has been used for 5 years and the details of the buildings are as follows: RM Cost 9,000,000 Accumulated depreciation (3,000,000) Carrying amount 6,000,000 You are required to a. Determine whether a change in useful life of the building is a change in accounting policy or a change in accounting estimate in accordance to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors. b. Calculate revised annual depreciation based on the remaining life of the assets for the year ended 31 December 2021. c. With reference to MFRS 108 Accounting Policies, Changes in Accounting Estimates and Errors, discuss the appropriate accounting treatment for this situation. QUESTION 5 The following are independent transaction relating to changes in accounting Policies, changes in accounting estimates and errors. Financial year end for all transaction is 30 June 2021. i. A machinery costing RM60,000 was acquired on 1 July 2017 and depreciation on a straight-line basis at the rate of 10%. As at 1 July 2020, the company decided to changes the depreciation method to reducing balance method at 8%. ii. A sum of RM500,000 collected from trade receivables was misappropriated by one of the senior management staff in May 2020. This was discovered in June 2021 and no adjustment has been made to rectify the losses due to fraud. iii. Payment to trade payables amounted to RM150,000 in April 2020 was wrongly recorded as utilities expenses.


DPA40093 FINANCIAL ACCOUNTING 4 46 iv. A software was acquired in 1 January 2019 at RM40,000 and the economic life was determined as indefinite. However, due to the changes in technology in 2021, the company reviewed the economic life of the software to be 4 years. v. One debtor has become insolvent in 30 April 2021 and the total amount own by the debtor is RM4,000. However, the management have recorded as: Debit (RM) Credit (RM) Bad debts 4,000 Sales 4,000 You are required to: a. Determine whether the above situation is a change in accounting policy or a change in accounting estimate in accordance to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors. b. For each of the above, explain whether application of changes should be done retrospectively or prospectively. c. Prepare necessary journal entries to rectify the situation above. Show the relevant calculations. QUESTION 6 Purple Berhad is involved in the manufacturing of computer chips. For the year ended 31 December 2021, the company encountered several situations which required your attention. i. In 1 January 2021, Purple Bhd discovered that some of the inventories sold in 2020 were included in the inventories for the year ended 31 December 2020. As a result, the inventories on that date were overstated by RM160,000. ii. Purple Bhd acquired a machine costing RM10,000 on 1 January 2018 and depreciated the machine on a straight-line basis over 10 years. In 2021, due to heavy usage, the remaining useful life of the machine was revised to 4 years. iii. Purple Bhd acquired an equipment valued at RM140,000 in the year 2019. Due to proper maintenance of the equipment, no depreciation has been provided. The annual depreciation changes per annum should be 10% on reducing balance method.


DPA40093 FINANCIAL ACCOUNTING 4 47 iv. Purple Bhd changes its method of valuing inventory from First-in-First-Out (FIFO) method to the weighted average method. Therefore, the value of the inventory decreased by RM27,000. v. Purple Bhd decided to increase the warranty obligation from 1% to 2.5% as the claims on warrant from last year increased. The total sales for this year are amounted to RM640,000 whereas the balance of provision for warranty is RM10,800. You are required to: a. Determine whether the above situation is a change in accounting policy or a change in accounting estimate in accordance to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors. b. For each of the above, explain whether application of changes should be done retrospectively or prospectively. c. Prepare necessary journal entries to rectify the situation above. Show the relevant calculations. QUESTION 7 The extract balance of Sahara Bhd before the year ended as follow: Note DEBIT (RM) CREDIT (RM) Retained earnings 2,500,000 Machine i 300,000 Depreciation expenses for machine i 12,500 Accumulated depreciation for machine i 12,500 Transportation expenses i 1,000 Sales ii 1,015,000 Plant iii 400,000 Accumulated depreciation for plant iii 120,000 Creditors iv 94,500 Salaries expenses iv 64,200 Debtors ii/v 116,800 Provision for doubtful debts v 5,840 Bad debts v 400


DPA40093 FINANCIAL ACCOUNTING 4 48 During the financial year ended 31 Mac 2021, the internal auditor of Sahara Bhd had identified the following situations: i. The company acquired and recorded a machine on 1 April 2020 at a cost of RM300,000. However, the transportation cost is RM1,000 was treated as revenue expenditure. The useful life of the machine is 10 years with RM50,000 as scrap value. The depreciation charge of RM12,500 was already recorded for that year. ii. It was discovered that the company had overcharged a credit customer with a sales amount of RM30,000 on 1 January 2021. iii. The company purchased a plant costing RM400,000 on 1 April 2017 and depreciated the plant on straight line basis over 10 years. Starting 1 April 2020, due to conditions of the plant, the estimated useful life was revised to 5 years. iv. Payment made to creditor, Gurun Bhd totaling to RM12,000 for year ended 31 Mac 2020 was wrongly debited to salaries expenses accounts. v. Provision for doubtful debts to be 6.25%. You are required to: a. Determine whether the above situation is a change in accounting policy or a change in accounting estimate in accordance to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors. b. For each of the above, explain whether application of changes should be done retrospectively or prospectively. c. Prepare necessary journal entries to rectify the situation above. Show the relevant calculations. d. Prepare extract financial statements.


DPA40093 FINANCIAL ACCOUNTING 4 49 QUESTION 8 Active Four Bhd is a manufacturer of industrial parts for 6 years ago. As part of the internal audit procedures, the following facts discovered in 2021 before closing entries are prepared. i. On 1 January 2021, the company has changed the scrap value used in calculating depreciation for its office building. The building had a cost of RM600,000 on 1 January 2015 and had been depreciated on a straight-line basis over its estimated useful life of 40 years with RM100,000 scrap value. Declining property values in the area where the building is situated, the company indicated that the scrap value will not be more than RM25,000. ii. On 31 December 2020 the merchandise inventory was found to be overstated by RM10,000 due to mistakes in the physical inventory count. iii. Repairing expenses on 24 August 2021 totalling to RM4,500 was wrongly debited into the salary expenses. iv. Part of the operating expenditure included the cost Research and Development RM10,000 and that Research and Development have proven successfully in the current year. The extract balance of Active Four Bhd before the year ended 31 December 2021 as follow: Note DEBIT (RM) CREDIT (RM) Retained earnings 1,675,000 Building i 600,000 Accumulated depreciation for building i 75,000 Opening inventory ii 124,500 Sales 4,000,000 Repairing expenses iii 14,000 Salaries expenses iii 98,780 Operating expenditure iv 35,000 You are required to: a. Determine whether the above situation is a change in accounting policy or a change in accounting estimate in accordance to MFRS108 Accounting Policies, Changes in Accounting Estimates and Errors. b. For each of the above, explain whether application of changes should be done retrospectively or prospectively. c. Prepare necessary journal entries to rectify the situation above. Show the relevant calculations. d. Prepare extract financial statements.


DPA40093 FINANCIAL ACCOUNTING 4 50 TOPIC 3 BORROWING COSTS: MFRS 123


DPA40093 FINANCIAL ACCOUNTING 4 51 INTRODUCTION Property, plant, and equipment are non-current assets vital to business operations and not easily converted into cash. The acquisition or construction of property, plant and equipment or undertaking of long-term construction may involve large sums of funds. Therefore, entities or companies may borrow funds to finance the construction of these assets MFRS123 Borrowing deals with borrowing costs incurred to acquire, construct or develop an asset. DEFINITION OF BORROWING COSTS Accordingly, to Oxford Accounting Dictionary, borrowing cost is defined as a cost that are incurred when an organization borrows money, examples interest payments. Borrowing costs may be recognized as an expense when incurred or capitalised as part of the cost of an asset. Based on Guidelines for Income Tax for MFRS 123, borrowings costs are interest and other costs that an entity incurs in connection with obtaining loan. MFRS 123 define borrowing costs as the interest and other costs that an entity incurs in connection with the borrowing of funds. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. LEARNING OUTCOMES At the end of this topic, students should be able to: 3.1 Provide the definition of Borrowing Costs and Qualifying Asset 3.2 Determine the initial measurement of Borrowing Costs for a. Commencement of Capitalisation b. Suspension of Capitalisation c. Cessation of Capitalisation 3.3 Summarize the presentation and disclosure required in the extract of Financial Statements for Borrowing Costs


DPA40093 FINANCIAL ACCOUNTING 4 52 Borrowing costs may include: a. Interest expense calculated using the effective interest method as described in MFRS 9: Financial Instruments (such as bank overdraft) b. Finances charges in respect of leases liability recognized in accordance with MFRS 16: Leases; and c. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. DEFINITION OF QUALIFYING ASSETS Based on Guidelines for Income Tax for MFRS 123, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. MFRS123 defined qualifying asset as an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Example of Qualifying assets are: a. Inventories b. Manufacturing plants c. Power generation facilities d. Intangible assets e. Investment properties f. Bearer plant Financial assets and inventories that are manufactured or otherwise produced, over a short period of time, are not qualifying assets. Assets that are ready for intended use or sale when acquired are not qualifying assets. RECOGNITION AND MEASUREMENT Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are included in the cost of the asset. Such borrowing costs are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the entity and the costs can be measured reliably. Basically, there are two ways of recognition of this borrowing costs: a. An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of that asset. b. An entity shall recognize other borrowing costs as an expense in the period in which it incurs them When an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the entity should consider three items: a. qualifying assets b. capitalisation period c. amount to capitalise.


DPA40093 FINANCIAL ACCOUNTING 4 53 There are two types of borrowings costs: a. Specific borrowings b. General borrowings SPECIFIC BORROWINGS Specific borrowing if the borrowings are specific to the acquisition of a qualifying asset. The measurement of specific borrowings is the actual costs incurred less any income on the temporary investment of those borrowings. Example 1: 1 October 2019, Kalut Berhad borrow a loan RM500,000 at 5% for construction a warehouse. At 31 December 2019, the balance from the borrowing was RM400,000 in the fixed deposit at 2.5% per annum. You are required to: a. Calculate the interest charges for borrowings loan b. Calculate the interest income for the fixed deposit c. Identify the borrowing cost that will be capitalised d. Prepare the journal entries, extract of Statement Profit or Loss and Extract Statement of Financial Position. Solution:


DPA40093 FINANCIAL ACCOUNTING 4 54 Example 2 On 1st May 2021 Azril Bhd took a loan of RM4,000,000 from a bank at the annual interest rate of 7%. The purpose of this loan was to finance a construction of a new factory. The construction started on 1st June 2021. Azril Bhd temporarily invested RM3,000,000 in borrowed money during the months from June 2021 to August 2021 at a rate of 4 % per year. You are required to: a. Calculate the interest charges for borrowings loan b. Calculate the interest income for the fixed deposit c. Identify the borrowing cost that will be capitalised d. Prepare the journal entries, extract of Statement Profit or Loss and Extract Statement of Financial Position. Solution:


DPA40093 FINANCIAL ACCOUNTING 4 55


DPA40093 FINANCIAL ACCOUNTING 4 56 GENERAL BORROWINGS General borrowings are those funds that are obtained for various purposes and they are used (apart from these other purposes) also for the acquisition of a qualifying asset. The measurement of general borrowings is calculating as the weighted average (WAAE) of the borrowing costs applicable to general pool. WAAE is also known as capitalization rate Example of calculation of capitalization rate as follows: Loan Amount Interest Total Interest Debenture 1,200,000 12% 144,000 Long Term Loan 600,000 8% 48,000 Preference shares 700,000 6% 42,000 Total 2,500,000 234,000 Example 3: 1 October 2020, Kilat Berhad borrow a loan A at RM500,000 at 5% and loan B at RM200,000 at 6%. Part of the borrowings, RM140,000 were used to purchase material for construction of a warehouse. You are required to: a. Calculate the interest charges for borrowings loan b. Calculate the interest that can be capitalised c. Calculate the interest that can be charged as expenses d. Prepare the journal entries, extract of Statement Profit or Loss and Extract Statement of Financial Position. WAAE = 9.36% WAAE = 234,000 x 100% 2,500,000 x 100% Total Interest Total loan amount WAAE =


DPA40093 FINANCIAL ACCOUNTING 4 57 Solution:


DPA40093 FINANCIAL ACCOUNTING 4 58 Example 4: Core Bhd a property development company has the following loans in place at the beginning of the year 2020. Sources Starting Amount (RM) Interest rate (%) Loan bank 1 January 5,000,000 9 Foreign currency loan 1 April 7,000,000 6 On 1 January 2020, Core Bhd began a project to construct high-end apartment in Bintawa, Sarawak, which is estimated to be completed before 30 Jun 2022. The expenditure draws for the construction was as follows: RM700,000 1 January 2020 RM690,000 1 July 2020 You are required to: a. Calculate the capitalization rate b. Calculate the total borrowing cost for the year ended 31 December 2020. c. Calculate the total borrowing cost that can be capitalized for the project. d. Prepare the necessary accounting treatment for the year ended 31 December 2020. Solution:


DPA40093 FINANCIAL ACCOUNTING 4 59


DPA40093 FINANCIAL ACCOUNTING 4 60 CAPITALISATION PERIOD The capitalisation period is the period of time during which a company must capitalize interest. It begins with the presence of the following conditions: a. Expenditures for the asset are being incurred. b. Activities those are necessary to get the asset ready for its intended use or sale in progress. c. Interest cost is being incurred. Interest capitalisation continues as long as these conditions are present. The capitalisation period ends when the asset is substantially complete and ready for its intended use. COMMENCEMENT OF CAPITALISED The capitalisation of borrowing costs should commence when a. Expenditure for the asset is being incurred b. Borrowing costs are being incurred c. Activities that are necessary to prepare the asset for its intended use or sale are in progress. If the fund is raised before the construction starts, borrowing costs to be capitalized from the date when the construction starts. SUSPENSION OF CAPITALISATION Capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted. Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for its intended use or sale are interrupted. In other word, an entity shall suspend capitalisation of borrowing costs during extended periods in which it suspends active development of a qualifying asset CESSATION OF CAPITALISATION Capitalisation of borrowing costs should cease when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. In other word, borrowing costs are not capitalised once the necessary the qualifying asset for intended use or sale are completed. Usually when physical construction is complete, even though some admin work/decoration of asset is not done.


DPA40093 FINANCIAL ACCOUNTING 4 61 Example 5: On 1 July 2020, Emon Bhd started constructing a plant manufacturing facility at Miri, Sarawak. The plant was expected to have a useful life of 20 years with no residual value. The estimated total costs of construction were RM2,500,000 and it was expected that the construction would be completed on 30 June 2022. In order to finance part of the construction, Emon Bhd obtained a 5-year bank loan on 1 May 2020 and the bank loan was approved on 1 June 2020. The interest rate was 8%. The total costs construction in year 2020 was RM1,000,000. On 1 January 2021, Emon Bhd suspended the construction of the plant owing to the shortage of the raw materials. The construction recommenced on 1 Mac 2021 after the necessary materials were available for construction. The construction of the plant was finally completed on schedule, 30 June 2022 and the plant were ready for its intended use. The total costs of construction were RM1,000,000 and RM500,000 for year 2021 and 2022 respectively. It is the policy of Emon Bhd to capitalise the borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset wherever possible. You are required: a. Identify the commence date, suspension period and cessation date. b. Calculate the amount of borrowing costs incurred for the years ended 31 December 2020-2022 and the amount eligible for capitalisation. c. Prepare the journal entries to record the above transaction (related to borrowings costs) for the years ended 31 December 2020-2022 d. Prepare the Extract of Statement of Profit or Loss for the years ended 31 December 2020-2022 and the extract statement of Financial Position as at 31 December 2020-2022.


DPA40093 FINANCIAL ACCOUNTING 4 62 Solution:


DPA40093 FINANCIAL ACCOUNTING 4 63


DPA40093 FINANCIAL ACCOUNTING 4 64


DPA40093 FINANCIAL ACCOUNTING 4 65 SUMMARIZE THE PRESENTATION AND DISCLOSURE REQUIRED IN THE EXTRACT OF FINANCIAL STATEMENTS FOR BORROWING COSTS An entity shall disclose: a. the amount of borrowing costs capitalised during the capitalisation period and b. the capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation. If the borrowing costs is capitalised, it will increase the asset and will be recorded in the Statement of Financial Position. If the borrowing cost is not capitalised (expensed), it will treat as interest expenses and will be recorded in the Statement of Profit or Loss and Other Comprehensive Income.


DPA40093 FINANCIAL ACCOUNTING 4 66 CHECK YOUR OUTCOMES QUESTION 1 a. Define the definition of borrowing cost from MFRS123 perspective. b. Provide THREE (3) examples of qualifying assets under MFRS 123 perspective. c. Elaborate the meaning of specific borrowings and general borrowings. d. Based on the situations below, identify whether that particular asset can be categorized as qualifying asset or no: i. A Power Plant which will take a substantial period to get ready to generate electricity. ii. A Hydroelectric Dam that serves the needs of a town and will take few years to construct. iii. Inventories that are routine produced in large quantities on a continuous basis. iv. A Toll Bridge which takes a couple of years to construct before can be opened for public v. An expensive private jet that can be purchased from local vendor. vi. A ship that normally takes two to three years to complete. vii. An investment property measured at fair value. e. Indicate the commencement of capitalised date, suspension period and cessation date for the situations below: Situation 1 On 1 January 2020, Padang Bhd started to construct a special made machinery for its own factory. In order to finance part of the construction. Padang Bhd obtained a 3-year bank loan from Bola Bank with 7% interest rate. On 1 Mac 2020 until 31 May 2020, Padang Bhd have to hold the construction due to pandemic. The construction resumes immediately and finally completed the construction on 30 April 2021. Situation 2 On 1 January 2021, Bendang Bhd obtained Bank Loan from Sawah Bank at the rate of 5%. The purpose of the loan was to construct a new branch office. The construction started on 1 Mac 2021 as the loan was only approved on 1 February 2021. On 1 November 2021, the construction has to suspend due to the shortage of materials. The construction recommenced on 1 January 2022 and finally completed the construction on 30 June 2022.


DPA40093 FINANCIAL ACCOUNTING 4 67 QUESTION 2 On 1 Mac 2020, Ferara Bhd took a bank loan of RM1,000,000 at the annual interest rate of 4.68%. The bank loan was approved on 1 April 2020.The purpose of this loan was to finance a construction an office building which will start on the 1 May 2020. Ferara Bhd temporarily invested RM500,000 from June to August 2020 at the rate of 2.3%. You are required to: a. Calculate the interest charges for borrowings loan b. Calculate the interest income for the fixed deposit c. Identify the borrowing cost that will be capitalised d. Prepare the necessary accounting treatment. QUESTION 3 Tiptop Berhad is a property development in Terengganu. In the middle of the year 2017, the company obtained a project to construct 100 units of residential house in Dungun. A 10% interest borrowing term loan of RM45,000,000 was arranged to finance part the project. The term loan was fully drawn down on 1 November 2017 and will be completed on 31 December 2020. From the period of 2017 to 2020, the surplus fund from the loan were invested in the company’s bank account. Below is the information related to the interest costs and interest income: Period Interest costs (RM) Interest income (RM) 1 Nov 2017 – 31 Dec 2017 5,000,000 1,000,000 1 Jan 2018 – 31 Dec 2018 12,000,000 2,000,000 1 Jan 2019 – 31 Dec 2019 10,000,000 3,500,000 1 Jan 2020 – 31 Dec 2020 13,000,000 5,500,000 You are required to calculate the amount of interest that should be capitalised from 2017 – 2020.


DPA40093 FINANCIAL ACCOUNTING 4 68 QUESTION 4 Hondo Bhd had the following loans in place for 2020: i. A RM180,000 bank loan from Rimau Bank at 8% and RM40,000 at 5% debenture were taken on 1 January 2020 for no specific purpose and Hondo Bhd used them to finance general spending and the construction of a new machinery. ii. Hondo Bhd used RM35,000 for the construction of the machinery on 1 Feb 2020 and RM40,000 on 1 September 2020 You are required to: a. Calculate the interest charges for borrowings loan b. Calculate the interest that can be capitalised c. Calculate the interest that can be charged as expenses d. Prepare the journal entries, extract of Statement Profit or Loss and Extract Statement of Financial Position. QUESTION 5 Dogo Bhd get the contract to build a smart cable that will ease wireless network in the city. The cost of the project was estimated to be RM940,000 and is to be completed in 2 years. On 1 January 2020, the company borrowed from various sources for the construction and working capital as follows: Sources / Fundings Amount (RM) Interest (%) Corporate bonds 400,000 8% Bank Loan 300,000 7% Preferences shares 300,000 10% During the year 2020, Dogo Bhd only utilized 80% of the allocated funds and invested the remaining amount. The investment earned an income of RM8,000. You are required to: a. Identify capitalization rate. b. Calculate he amount of interest can be capitalised on 31 December 2020 c. Compute the amount of interest that can be charged as expenses on 31 December 2020 d. Construct Journal entries for the borrowing costs e. Summarize the extract Financial Statements


DPA40093 FINANCIAL ACCOUNTING 4 69 QUESTION 6 Antel Bhd commenced the construction of an equipment on 1 February 2020 and funded it with RM120,000 loan. The interest rate on the funding was 5% per annum. Due to strike, no construction took place between on 1 June to 31 August 2020 and the construction resume on 1 September 2020. 30% of the loan were invested in a temporary investment and received RM650 as interest income. You are required to calculate the amount of interest to be capitalised and expensed for 31 December 2020. QUESTION 7 Esenia Holding a property development company, has the following loans in place at the beginning of the year 2020. Sources / Fundings Amount (RM) Interest (%) Date of Borrowing start Debenture 150,000 6% 1 January 2020 Commercial loan 100,000 9% 1 April 2020 On 1 January 2020, Esenia Holding begin a project to construct a mini stadium in Bintulu, Sarawak. The company will utilize RM110,000 from the existing borrowing for the construction as follows: Date Amount (RM) 1 January 60,000 1 August 50,000 You are required to: a. Calculate the borrowing costs to be capitalizing for the project b. Construct Journal entries for the borrowing costs c. Summarize the extract Financial Statements


DPA40093 FINANCIAL ACCOUNTING 4 70 QUESTION 8 On 1 January 2017, Kemanis Bhd raised finance amounting to RM600,000. The borrowing finance both a construction of a plant and for operations. On 31 December 2020, the outstanding borrowings were RM500,000 with no capital repayment in year 2020. The borrowings were mainly used for the construction of the plant at a cost of RM300,000. Kemanis Bhd wants to capitalise borrowing costs on qualifying assets. The detailed of the borrowings at the end of 31 December 2020 was as follows: Amount (RM) 12% Corporate bonds 120,000 10% Term Loan 200,000 8% Preference shares 180,000 You are required to: a. Calculate the borrowing costs to be capitalizing for the project b. Construct Journal entries for the borrowing costs c. Summarize the extract Financial Statements QUESTION 9 Loopa Bhd constructed a building on 1 April 2020. The building was estimated to complete on 31 October 2022. Construction cost (excluding interest) incurred on the building was RM1,500,000. The useful life of the building was estimated to be 40 years. Loopa Bhd secured a loan of RM1,000,000 from Ariz Finance Bhd to finance the construction costs at 8% interest. Repayment of the loan was 5 years. Since Loopa Bhd did not need the full amount of the loan immediately, she deposited RM400,000 in the fixed deposit in Chutime Bank with 6% interest until 31 December 2021. The construction on hold for two months from 1 February until 31 Mac 2022,due to shortage of materials and the construction resume back on 1 April 2022 and manage to completed on time. The company policy is to be capitalised borrowing costs as part of the cost of assets. You are required to: a. Calculate the total borrowing costs from year 2020 to 2022. b. Calculate the interest income from year 2020 to 2021 c. Calculate the amount of interest can be capitalised from year 2020 to 2022. d. Compute the amount of interest that can be charged as expenses from 2020 to 2022 e. Construct Journal entries for the borrowing costs for year 2020 to 2022 f. Summarize the extract Financial Statements for year 2020 to 2022


DPA40093 FINANCIAL ACCOUNTING 4 71 QUESTION 10 Popeye Bhd had the following loans in place at the beginning and the end for the year ended 31 Mac 2020. FUNDINGS 1 April 2019 31 Mac 2020 8.5% Term Loan Repayable 2022 1,200,000 1,200,000 10% Debenture Repayable 2023 800,000 800,000 6.8% Commercial Loan Repayable 2021 150,000 On 1 April 2019, Popeye Bhd begin a production of hydroelectric plant using existing borrowings. Expenditure drawn down for the production of the asset as follows: Date Amount (RM) 1 April 2019 600,000 1 November 2019 580,000 The 6.8% Commercial Loan was issued on 1 November 2019 to fund in producing of a qualifying asset (mining equipment), the production will begin on 1 Jan 2020. You are required to: a. Identify capitalization rate. b. Calculate the amount of interest can be capitalised on 31 Mac 2020 c. Compute the amount of interest that can be charged as expenses on 31 Mac 2020 d. Construct Journal entries for the borrowing costs e. Summarize the extract Financial Statements


DPA40093 FINANCIAL ACCOUNTING 4 72 QUESTION 11 Tontoro Holdings has three sources of funding as follows: SOURCES LOAN (RM) STARTING DATE 7% Preference shares 300,000 1 September 2019 8% Bank Loan 600,000 1 July 2019 10% Debentures 800,000 1 October 2019 The 7% Preference shares has been specially raised to fund the acquisition of new machinery that be completed in year 2022. The rest of the borrowing sources for a production of a building and other working capital for the year ended 30 June 2020. Date Amount (RM) 1 October 2019 180,000 1 Jan 2020 160,000 1 April 2020 240,000 You are required to: a. Identify capitalization rate for general borrowings b. Calculate the amount of interest can be capitalised for specific and general borrowing on 30 June 2020 c. Compute the amount of interest that can be charged as expenses for specific and general borrowing on 30 June 2020 d. Construct Journal entries for the borrowing costs e. Summarize the extract Financial Statements


DPA40093 FINANCIAL ACCOUNTING 4 73 TOPIC 4 IMPAIRMENT OF ASSETS: MFRS 136


DPA40093 FINANCIAL ACCOUNTING 4 74 INTRODUCTION To impair something is to weaken or damage it. Assets in an organization can have their values impaired from one year to year (beyond the depreciation value). This impairment can be due to technical or market obsolescence or perhaps physical damage or decline in the economic performance of the asset. For example, a machine is able to manufacture 50,000 units of mineral bottle in one month has declined to 30,000 units. This is an indication of impairment as the economic benefits to derived from the use of the machine are reduced. Impairment describes a permanent reduction in the economic benefits that could be derived from an asset Based on prudence concept in accounting, an asset must not be overstated. Therefore, to ensure that the assets are carried at no more than their recoverable amount, MFRS136 were issued. MFRS136 Impairment of Assets deals with the recognition, measurements and disclosure requirement for impairment of most assets. DEFINITION OF IMPAIRMENT OF ASSETS Accordingly, to Oxford Accounting Dictionary, impairment is defined as a reduction in the ‘recoverable amount of a fixed asset or goodwill below it carrying amount. In MFRS 136, Impairment of assets refers to the loss or reduction in the economic benefits that could be derived from an asset. LEARNING OUTCOMES At the end of this topic, students should be able to: 4.1 Explain the objective and scope of MFRS 136 4.2 Provide the discussion on the circumstances of impairments of assets 4.3 Demonstrate the impairment review process 4.4 Provide the discussion on the recognition and measurement of an Impairment Loss 4.5 Discuss the definition of cash generating unit 4.6 Determine the allocation basis of impairment losses 4.7 Demonstrate the reversal of an impairment loss 4.8 Summarise the presentation and disclosure required in the extract of Financial Statements for impairment of assets.


DPA40093 FINANCIAL ACCOUNTING 4 75 OBJECTIVE AND SCOPE OF MFRS 136 MFRS 136 applies to assets that are carried at revalued amount (such as at fair value) in accordance with other MFRSs, hence identifying whether a revalued asset may be impaired depends on the basis used to determine its fair value. The main objective of MFRS 136 is to ensure that assets are reported on the statement of financial position at no more that the entity can recover from their use or sale, that is no more than their recoverable amount. In other word, it means that assets are not carried at above their recoverable amount in the statement of financial position. When an asset’s carrying amount is more than recoverable amount, meaning there is impairment loss. The main accounting issues in MFRS 136 are: a. Determine if an asset is impaired b. Measurement recoverable amount c. Determine the impairment loss d. Determine the reversal of an impairment loss The scope of MFRS 136 shall be applied in accounting for the impairment of all assets as follows: a. Property, plant and equipment and those covered by MFRS 116 and MFRS 117 (e.g. land, building, machinery, ships, aircraft, motor vehicles, furniture and fixtures, office equipment, etc.) used in the business operations and not held for sale. b. Intangibles assets c. Goodwill d. Deferred property development expenditure e. Financial assets classified as investment in subsidiaries, investment in associates and interests in joint ventures


DPA40093 FINANCIAL ACCOUNTING 4 76 TERMS IN IMPAIRMENTS OF ASSETS Terms Definition Carrying amount The amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon. Cash-generating unit (CGU) The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Corporate assets Assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units. Fair value less costs to sell The amount obtainable from the sale of an asset or cash-generating unit in an arms-length transaction between knowledgeable, willing parties, less the costs of disposal. Impairment loss The amount by which the carrying amount of an asset or a cashgenerating unit exceeds its recoverable amount Recoverable amount An asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. Value in use The present value of the future cash flows expected to be derived from an asset or cash-generating unit. CIRCUMSTANCES OF IMPAIRMENTS OF ASSETS An asset may be impaired due to many reasons, such as changes in market value or obsolescence. All assets should be reviewed at the end of each reporting period for any indication of impairment. How to determine whether assets need to be impaired?


DPA40093 FINANCIAL ACCOUNTING 4 77 There are two main indicators as follows: Internal source of information External sources of information Obsolescence or physical damage to an asset (building damaged in a flood) Market value decline significantly more than expected Changes in business operations which negatively affects the use of the asset e.g. asset become idle, segment where asset is used is discontinued) Changes in technology/market/economic or legal environment which adversely affect the entity Economic performance of the asset declines (machinery in a factory not able to produce up to its production capacity) Increases in market rates which reduces the asset’s recoverable amount Indications of impairment of PPE for specialized industries may be different Carrying amount of the NET assets of the entity is more that its market capitalisation Types of assets that can be impaired: a. All tangible assets (in use), carried at cost b. Intangible assets with an indefinite useful life c. Intangible assets not yet available for use d. Goodwill that is recognized from business combination. e. Financial assets (investments in subsidiaries, joint venture and associate) When an asset has an indication of impairment, the useful life or residual value might be revised. IMPAIRMENT REVIEW PROCESS The objective of MFRS 136 is to ensure that assets are carried at no more than their recoverable amount. The impairment review process involves comparing the carrying amount and the recoverable amount. Asset will be impaired if the carrying amount is more than the recoverable amount. Therefore, impairment loss will be recognized whereby the carrying amount needs to be reduced to its recoverable amount If the carrying amount is equal or less than the recoverable amount, no impairment loss.


DPA40093 FINANCIAL ACCOUNTING 4 78 Diagram 1: Impairment review process Diagram 2: Fair value less cost to sell


DPA40093 FINANCIAL ACCOUNTING 4 79 Diagram 3: Value in Use RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS An impairment loss is recognized when the carrying amount is more than the recoverable amount. Recoverable amount is then measured by higher of fair value less costs to sell or value in use. Impairment loss = Carrying amount > recoverable amount The impairment loss is charged in the Statement of Profit or Loss as an expense. Journal entry: Debit Credit Impairment loss – Asset (SOPL) xx Accumulated impairment loss –Asset (SOFP) xx If the carrying amount is equal or less than recoverable amount, no impairment will be written down. For assets carried at cost less depreciation (amortisation), the impairment loss is charged to statement of profit or loss. If the asset is carried at a revalued amount less depreciation, the impairment loss will decrease the Revaluation Reserve.


DPA40093 FINANCIAL ACCOUNTING 4 80 Steps: 1. Calculate the carrying amount (if not given) 2. Compare Fair value less cost to sell with Value in Use, the higher value will be the recoverable amount 3. Compare the carrying amount with recoverable amount Example 1: Assume that Freeze Berhad performs an impairment test for its equipment for the year ended 31 December 2021. The carrying amount of Freeze’s equipment is RM200,000, its fair value less costs to sell is RM180,000, and its value-in-use is RM190,000. You are required to determine the impairment loss and the proper recording in the journal entry. Solution:


DPA40093 FINANCIAL ACCOUNTING 4 81 Example 2: The machine was acquired on 1 January 2016 at a cost of RM50,000 and has a useful economic life of 10 years. At 31 December 2020, an impairment review was performed. The fair value of the machine is RM26,000 and is expected to acquire selling costs at RM2,000. The expected future cash flows are RM5,000 every year for the next 5 years. The current interest rate is 10% and the annuity factor for the period is given at 3.7908 You are required to: a. Calculate the carrying value of the machine b. Calculate the recoverable amount c. Determine the impairment loss (if any) d. Prepare the journal entry and the extract Financial Statements Solution:


DPA40093 FINANCIAL ACCOUNTING 4 82 CASH-GENERATING UNIT (CGU) Cash-Generating Unit is the smallest identifiable groups of assets that generates cash inflows that are largely independent of the cash inflows from other assets or another group of assets. Example: a. Machine can generate income independently from other assets; NOT CGU. b. Transportation with licenses; its CGU (as without licenses, the transportation cannot generate income) An asset or a group of assets which produced an output in an active market should be identified as a CGU.


DPA40093 FINANCIAL ACCOUNTING 4 83 THE ALLOCATION BASIS OF IMPAIRMENT LOSSES FOR CGU Impairment test should be done for the CGU, not the individual assets in the CGU. Impairment of CGU must be allocated to all the assets in the CGU. If there is goodwill or intangible asset in the CGU, a portion of the impairment loss must be allocated first to the goodwill/intangible asset. The balance of the loss is to be allocated to the tangible assets on a pro rata basis. In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of: a. its fair value less costs of disposal (if measurable); b. its value in use (if determinable); and c. zero. The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units). Example 3: Below are the carrying amounts of assets in one of Takir Berhad’s Cash-Generating Units. RM Goodwill 25,000 Property 41,000 Machinery 98,000 Motor Vehicles 70,000 Patents 28,000 Monetary assets 38,000 The recoverable amount of the CGU is RM218,000. The property has a market value of RM70,000. You are required to determine the impairment loss and allocate it within the scope of MFRS 136. Solution:


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DPA40093 FINANCIAL ACCOUNTING 4 85 Example 4: A cash-generating unit has the following assets: RM Building 8,000,000 Machinery 2,500,000 Current Assets 350,000 Goodwill 150,000 One of the machines which had a carrying amount of RM500,000 was damaged and scrapped. The recoverable amount of the CGU is estimated to be RM9,500,000. You are required to determine the impairment loss and allocate it within the scope of MFRS 136. Solution:


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DPA40093 FINANCIAL ACCOUNTING 4 87 REVERSAL OF AN IMPAIRMENT LOSS Always remember that, an entity or organization is required to assess assets at the end of each reporting period for evidence that an impairment loss may have declined or decreased. If that happens, the asset’s recoverable amount should be identified and computed. The reversal of an impairment loss is recognized in the statement of profit or loss unless it relates to a revalued asset. After recording the impairment loss, the recoverable amount is the new carrying amount for that particular assets. What happens if that particular asset is no longer impaired in future when the next recoverable amount of the asset is higher than the carrying value. If this happened, the impairment loss may be reversed. If impairment loss had been recognised previously, the loss may be reversed if, and only if, there has been a change in estimates used to determine the Recoverable Amount since the last impairment loss An impairment loss is reversed only to the extent that it does not increase the carrying amount of an asset above the carrying amount that would have been determined. Impairment loss on goodwill should NOT be reversed. Diagram 4: Reversal of Impairment Loss


DPA40093 FINANCIAL ACCOUNTING 4 88 For individual assets, the Carrying Amount of the asset after reversal of impairment loss should NOT exceed the Carrying Amount had there been no impairment loss been recognized in prior year The Carrying Amount of the individual assets in the CGU after reversal should not be higher than the lower of: a. Its Recoverable Amount (if determinable) and b. Its Carrying Amount had there been no impairment For CGU, the reversal amount of the impairment loss is to be allocated to assets on pro rata basis For assets carried at cost less depreciation (amortisation), the reversal of an impairment loss shall be recognised as income immediately in the statement of profit or loss. If the asset is carried at a revalued amount less depreciation, any reversal of an impairment loss on a revalued asset shall be treated as a revaluation increase.


DPA40093 FINANCIAL ACCOUNTING 4 89 Example 5: The following is the impairment loss for year 2019. RM RM Cost of assets 15,000 (-) ACD (9,000) Carrying amount 6,000 (-) recoverable amount: Fair value less cost to sell 3,000 Value in use 4,200 Higher: (4,200) Impairment loss 1,800 Subsequently, in year 2020, the estimated recoverable amount has increased to RM6,000 due to unexpected increase in the asset’s market value and the depreciation expenses charge on the year 2020 is RM1,000. You are required to determine the reversal of impairment loss and prepare the journal entry and the extract of Financial Statements. Solution:


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DPA40093 FINANCIAL ACCOUNTING 4 91 Example 6: At 31 December 2020, carrying amount RM107,588 and recoverable amount, RM122,072. At the end of December 2019, the recoverable amount was determined RM107,588. The cost of the equipment RM300,000 and accumulated depreciation is RM180,000. You are required to determine the reversal of impairment loss in year 2020 and prepare the journal entry and the extract of Financial Statements. Solution:


DPA40093 FINANCIAL ACCOUNTING 4 92 Example 7: Ginger Bhd conducted an impairment test at 30 June 2019. As part of that exercise, it measured the fair value of the CGU to be RM250,000 and the selling costs is RM4,000 whereas the value in use is RM247,000. The carrying amounts of the assets that considered as CGU as follows: RM Equipment 230,000 Accumulated depreciation (50,000) Inventories 52,000 Receivables account 40,000 Goodwill 10,000 Patents 16,000 All the inventories can be sold and the receivables can be collected. You are required to: a. Identify the carrying value b. Identify the recoverable value for the year 2019 c. Calculate the impairment loss for the year 2019 d. Prepare the journal entry impairment loss and construct the extract Financial Statements for the year 2019 e. Assuming that, in June 2020, the depreciation charge for equipment is RM1,500 and the recoverable amount of the CGU calculated to be RM10,400 greater than the carrying amount. Calculate the reversal impairment loss (if any) for year 2020. f. Prepare the journal entry for reversal and construct the extract Financial Statements for the year 2020 Solution:


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