CONFIDENTIAL 1 AC/FEB 2021/FAR460/SET 1/SOLUTION

FAR460 | SET 1 | FEB 2021 |SUGGESTED SOLUTIONS

QUESTION 1

a. Indicate whether the machine is an asset of Corona Textiles Berhad

The machine is an asset, as it is a resource controlled by the company as a result of past

events (purchased) √. Future economic benefits are expected to flow to the company, as
it will be used to produce products to be sold by the company√.
(√2 x 1= 2 marks)

b. Explain briefly whether the machine is a property, plant and equipment (PPE) in
accordance with the MFRS 116: Property, Plant and Equipment.

The machinery satisfies the definition of property, plant and equipment due to:
• It is a tangible asset that has physical substance √
• It is held for use in the production line to produce the entity’s product √
• It is expected to be used by the entity for more than one accounting period √

(√3 x 1 = 3 marks)

c. Discuss the initial cost of the machine and the carrying amount in the Statement of
Financial Position as at 31 December 2018.

The cost of the machine comprises:

• Its purchase price√ including import duties and non-refundable purchase taxes√ after
deducting trade discount and rebates√.
• Any cost attributable to bringing the asset to the location and condition√ for its
intended use√.

Initial measurement

RM
Invoice price less trade discount (650,000 x 0.95) √√617,500
Insurance on shipment √18,000
Import duties and taxes √25,000
Delivery and transportation costs √5,000
Wages for offloading and internal delivery to the factory √8,800
Installation charges (32,000-9,300) √√22,700
Start-up and pre-production costs √8,000
Dismantling cost√ √45,000
INITIAL COST 750,000

Note: The machine to be depreciated within 120 months.

Depreciation = (750,000 – 75,000) / 120 = RM5,625 per month.

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 CONFIDENTIAL 2 AC/FEB 2021/FAR460/SET 1/SOLUTION

Carrying Amount in SOFP as at 31 Dec 2018

RM
1 July 2016 Cost √750,000
Acc. Depn (750,000-75,000)/120 X 30 months √√√ (168,750)
31 Dec 2018 Carrying Amount 581,250
(√20 x ½ = 10 marks)

d. Explain the subsequent measurement of the Machine as at 1 July 2019.

There was an indication of impairment√ as there was some technical problems. The
carrying amount of the machine on 1 July 2019 should be compared with its recoverable
amount√, i.e. the higher of value in use (RM515,000) and net realizable value
(RM525,000) √.

The carrying amount of the machine amounted to RM547,500√√ is higher than the
recoverable amount of RM525,000√, therefore there is an indication of impairment loss.
The differences of RM22,500√√ is charged as impairment loss√ in SOPL. √

RM
Cost 750,000
Acc. Depreciation (750,000 -75,00)/120 x 36 (202,500)
Carrying amount as at 1 July 2019 547500
Recoverable amount (525,000)
Impairment loss 22,500
(√10 x ½ = 5 marks)

e. Compute the gain or loss on disposal of the machine and prepare the related journal
entries on 31 December 2019.

Cost 750,000
Acc. Depn (from Jul 2016 to Jul 2019) (202,500)
Acc. Impairment loss (22,500)
Acc. Depn (525,000/84 X 6) – Jul to Dec 2019 √√ (37,500)
Carrying amount as at 31 Dec 2019 487,500
Disposal value √ (485,000)
Loss on disposal√ √ 2,500

DR CR
Bank 485,000√
Acc. Depn (from Jul 16 to Dec 19) 240,000√
Acc. Impairment loss 22,500√
Loss on disposal (SOPL) 2,500√
Machine 750,000√
(√10 x ½ = 5 marks)
(Total: 25 marks)

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 CONFIDENTIAL 3 AC/FEB 2021/FAR460/SET 1/SOLUTION

QUESTION 2

a. Statement of Profit and Loss and Other Comprehensive Income of Ebony Bhd for the year
ended 31 December 2019

RM
Revenues 24,244,812 /
Cost of sales (13,176,688+10,000) (13,186,688) //
Gross profit 11,058,124
Increase in FV IP (1,200+750-2,050) 100,000 // /
Administrative expenses (4,698,000) // // /
Selling and distribution expenses (2,020,000) /
Finance expenses (480,000) //
Profit before tax 3,960,124
Income tax expense (1,000,000) /
Profit after tax 2,960,124

Other comprehensive income:

Deficit on land (15,850 – 15,500) // (350,000)
Surplus on revaluation of building (5,080 – 540) – 4,800 /// 260,000
Total comprehensive income 2,870,124
20/
Workings:
Admin. exp S & Dist. exp Fin. exp
RM RM RM
As per Trial Balance 2,890,000 / 2,020,000 / 380,000 /
Depreciation on building 192,000 /
Depreciation on plant 588,000 /
Depreciation on machinery 140,000 /
Restructuring cost 888,000 /
Interest on bank loan (accrued) 100,000 /
Total 4,698,000 2,020,000 480,000
(20/ x 1/2 = 10 marks)

b. Statement of changes in equity of Ebony Bhd for the year ended 31 December 2019

Ordinary Retained Asset revaluation

shares earning reserve
RM RM RM
Bal as at 1 January 2019 29,540,0000/ 4,129,944/ 729,000/
Profit for the year/ 2,960,124
Surplus on revaluation building 260,000/
Deficit on revaluation land/ (350,000)/
Interim dividend (400,000)/
Bal as at 31 December 2019 29,540,000 6,690,068 639,000
(8/ x ½ = 4 marks)

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c. Statement of financial position of Ebony Bhd as at 31 December 2019 together with Notes to
the Property Plant and Equipment.

Non-current assets RM
Property, plant and equipment / 24,580,000
Investment property (1.2M + 750,000+100,000) 2,050,000 // /
Biological assets 2,990,000 /

Currents assets
Inventories (448,080-10,000) 438,080 //
Trade receivables 1,200,000 /
Tax recoverable (1,050,000-1,000,000) 50,000 //
Bank (13,620,812-750,000) 12,870,812 //
44,178,892

Equity
Share capital / 29,540,000
Reserves / 7,329,068

Non-current liabilities
8% Bank Loan 6,000,000 /

Current liabilities
Trade payables 321,824 /
Provision for restructuring / 888,000 /
Accrued interest on debentures / 100,000 /
44,178,892
20/

Note on PPE
Land Buildings Plant Machinery Total
Cost/valuation RM RM RM RM RM
As at 1 Jan 2019 15,850,000 / 5,080,000 / 5,880,000 / 1,400,000 /
Surplus 260,000 /
Deficit (350,000) /
Elimination of acc. dep (540,000) /
As at 31 Dec 2019 15,500,000 4,800,000 5,880,000 1,400,000

Acc. Depreciation
As at 1 Jan 2019 - 540,000 / 1,380,000 / 700,000 /
Elimination of acc. dep - (540,000) /
Current year depn. - 192,000 / 588,000 / 140,000 /
As at 31 Dec 2019 - 192,000 1,968,000 840,000

Carrying amount 15,500,000 4,608,000 3,912,000 560,000 24,580,000

14/
(32/ x ½ =16 marks)
(Total: 30 marks)

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 CONFIDENTIAL 5 AC/FEB 2021/FAR460/SET 1/SOLUTION

QUESTION 3

a. On 1 September 2019, the compensation is to be disclosed in the notes to account

as contingent asset as the company's lawyer was in the opinion that the company
would probably win the case. √ No recognition of compensation receivable on this
date. However, on 28 December 2019, since the court has ordered the payment of
RM275,000 is to be made by Tool & Tool Bhd, √ the compensation receivable now
becomes virtually certain and can be recognised as an asset√. The amount
RM275,000 shall be recognised as income in SOPL√ and compensation receivable
classified as an asset in SOFP for the year ended 31 December 2019√.
(√5 x 1 = 5 marks)
b. Journal entries

Besi Teguh Bhd

Dr Compensation receivable√ 275,000√
Cr SOPL – compensation receivable√ 275,000

Tools & Tools Bhd

Dr SOPL – compensation cost√ 275,000
Cr Provision for compensation cost√ 275,000
(√5 x 1 = 5 marks)

c. Statement of Profit or Loss (extract) for the year ended 31 December 2019

Other Income√
Decrease in provision for warranty cost (320,000 – 210,000) RM110,000√√

Statement of Financial Position (extract) as at 31 December 2019

Current Liability√
Provision for warranty cost RM210,000√
(√5 x 1 = 5 marks)

d. Non-cancellable rental agreement is an onerous contract√ under MFRS137 Provision,

Contingent Liabilities and Contingent Assets. An onerous contract is a contract in which
the unavoidable costs of meeting the obligation under the contract exceed the
economic benefits expected to be received from it.√ Since it is onerous contract, if
the company proceeds with rental, the company needs to pay RM480,000√ (RM240,000
X 2) for the remaining 2 years period. However, should the company cancel the rental
agreement, the company needs to pay RM300,000 penalty, being the amount agreed
after negotiation. Therefore, as at 30 December 2019, the company needs to make a
provision of RM300,000 √ being the lower amount of not fulfilling the contract, as provision
for penalty (onerous contract) in SOFP and charged the same amount as expenses for
penalty in SOPL. √

(√5 x 1 = 5 marks)
(Total: 20 marks)

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 CONFIDENTIAL 6 AC/FEB 2021/FAR460/SET 1/SOLUTION

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 CONFIDENTIAL 7 AC/FEB 2021/FAR460/SET 1/SOLUTION

QUESTION 4

a. Statement of Cash Flows of Teja Bhd. for the year ended 31 December 2019

CASH FLOWS FROM OPERATING ACTIVITIES / RM RM

Net profit before tax (12,500 + 6,760) 19,260,000 //
Adjustments:
Depreciation expense 4,350,000 /
Loss on sale of plant 2,000,000 /
Amortization of intangible assets 2,400,000 /
Deficit on revaluation of land 400,000 /
Interest income (230,000) /
Finance costs 900,000 /
Operating profit before working capital changes 29,080,000
Working capital changes:
Increase in inventories (5,000 - 4,000) (1,000,000) /
Decrease in accounts receivable (2,000 – 4,180) 2,180,000 /
Increase in accounts payable (3,750 - 2,000) 1,750,000 /
Increase in prepayment (30 – 20) (10,000) /
Cash generated from operations 32,000,000
Interest paid (750+900-1,100) (550,000) //
Taxes paid (250+6,760+155) (7,165,000) // /
Net cash Inflow from operating activities 24,285,000

CASH FLOWS FROM INVESTING ACTIVITIES /

Purchased of PPE (24,434,000) // ///
Proceeds from sale of plant 6,000,000 /
Purchased of investment (1,950 – 2,300) X 90% (315,000) //
Interest income 230,000 /
Net cash outflow from investing activities (18,519,000)

CASH FLOWS FROM FINANCING ACTIVITIES /

Proceeds from issue of shares (31,150-28,150-1,500) 1,500,000 //
Proceeds from issue of 6% debentures (6,000 – 4,000) 2,000,000 /
Received bank loan (6,800 – 5,000) 1,800,000 /
Dividend paid (10,450,000) // // /
Net cash outflow from financing activities (5,150,000)
Net increase in cash and cash equivalents / 616,000
Cash and cash equivalents at beginning of year
(4,334 + (1,950 x 10%)) 4,529,000 //
Cash and cash equivalents at the end of the year
(5,000 + (2,300 x 10%) - 85) 5,145,000 // /
(44/ x 1/2 = 22 marks)
Finance Payable

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 CONFIDENTIAL 8 AC/FEB 2021/FAR460/SET 1/SOLUTION

RM RM
Bank 550,000 b/d 750,000
c/d 1,100,000 / SOCI 900,000 /
Tax payable / Tax Recoverable
RM RM
Bank 7,165,000 b/d 250,000 /
SOCI 6,760,000 /
c/d 155,000 /
PPE
RM RM
b/d 29,316,000 Disposal 8,000,000 /
Ordinary share capital 1,500,000 / Depreciation 4,350,000 /
ARR 1,000,000 / SOCI - Deficit 400,000 /
Bank 24,434,000 c/d 43,500,000
Investment
RM RM
b/d (1,950 x 90%) / 1,755,000 Bank 315,000
c/d (2,300 x 90%) / 2,070,000
Intangible Assets
RM RM
b/d 7,900,000 Amortisation 2,400,000 /
c/d 5,500,000
Retained Earnings
RM RM
Dividend 11,850,000 b/d 5,750,000
c/d 6,400,000/ NPAT 12,500,000 /

Dividend Payable
RM RM
Bank 10,450,000 b/d 1,800,000/
c/d 3,200,000/ Retained earnings 11,850,000 /

Ordinary share capital

RM RM
b/d 28,150,000
PPE 1,500,000 /
c/d 31,150,000 / Bank 1,500,000

b. Interpret the performance of Teja Bhd based on the Statement of Cash Flows prepared
above
• The net increase in cash and cash equivalents shows that the company’s liquidity position
is good. /
• The company has enough cash to meet its obligations. /
• The company’s operating performance shows a positive cash flow and this shows that the
company is doing well in its main activities. /
• The company’s investing activities shows a negative outflow due to large payment on
acquisition of property, plant and equipment. /
• The company’s financing activities shows negative cash flow due to payment made for
dividends. /
(Any 3/ x 1 = 3 marks)
(Total = 25 marks)

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