BKAR2023 FINANCIAL ACCOUNTING AND REPORTING II (A231)

MINI CASE 3:
INTANGIBLE ASSETS

DUE DATE: 18 NOVEMBER 2023

Guidelines for submission:

1) Please answer all questions.

2) Please write your name, matric number, group on the header and page number on
the bottom of your answer document.

3) The mini case is an individual task; however discussion is allowed, but copying other
student’s answer is forbidden.

4) Your answer should be handwritten and subsequently scanned with a scanner or

mobile scanner apps in a combined PDF file. The scanned document must be clear,
easily readable, and complete. Photo is not allowed.

5) Submit your scanned answer via Online Learning portal →

within the allotted time and period, before 12.00 mid night, 18 November 2023
(MYT). Only one submission will be accepted.

1
QUESTION 1
During the year 2021, Palma Bhd developed a green technology that helps to cultivate oil
palm planting sustainably. Due to the positive response from the market, the company
applied and successfully defended a patent at the cost of RM600,000 on 1 April 2021 to
protect the exclusive right to the technology. The useful life and legal life of the patent are
twelve and ten years, accordingly. It is expected that the economic benefits of the patent will
be consumed evenly throughout its useful life. At the end of the year 2021, there is no
indication of impairment on the patent.

Unfortunately, at the end of the year 2022, an impairment test indicates a significant drop in
the price of oil palm. This issue may affect the cash flows generated from using the assets,
including the patent. On 31 December 2022, Palma Bhd estimated that the patent’s value-in-
use was RM380,000 based on the discounted expected net future cash flows at its market rate
of interest, while the net fair value was RM420,000.

Additionally, the company also assessed the value of its cash-generating unit of the RipTide
division at the end of the year 2022. The company acquired RipTide Sdn Bhd on 1 July 2020
and treated RipTide as a division (cash-generating unit) of Palma Bhd. At the acquisition
date, the difference between the fair value of the identifiable net assets of the RipTide
division with the cash consideration paid was RM150,000. During the financial year 2022,
RipTide experienced operating losses. It is expected that the RipTide division will generate
substantial losses for the foreseeable future. On 31 December 2022, the carrying amount of
RipTide division’s net assets (including the goodwill) is RM1,750,000. Meanwhile, the
present value of expected future cash flows of RipTide division’s net assets is RM1,625,000.

Palma Bhd’s financial year ends on 31 December.

REQUIRED:
(Show all workings)

(a) Prepare the relevant journal entries related to the patent on 31 December 2022.

(b) Determine the impairment loss (if any) of the RipTide division on 31 December 2022.
Prepare the journal entry to record the impairment loss (if any).

(c) Assume that the recoverable amount of the RipTide division’s net assets in year 2023
improves and exceeds the carrying value of the RipTide division’s net assets. Discuss the
accounting treatment according to MFRS 136 Impairment of Assets.

(d) Residual value of an intangible asset is assumed as zero. State TWO (2) conditions that
contribute to the existence of residual value according to MFRS 138 Intangible Assets.

2
QUESTION 2
Presented below is information related to patent owned by Nanti Disana Bhd at 31 December
2020.
Cost RM2,750,000
Accumulated Amortization 1,675,000
Recoverable amount 850,000
Assume that Nanti Disana Bhd will continue to use this patent in the future. As at 31
December 2020, the patent is estimated to have a remaining useful life 5 years.

REQUIRED:
(a) Prepare the journal entry for Nanti Disana Bhd to record the impairment of the asset
on 31 December 2020.

(b) Prepare the journal entry for Nanti Disana Bhd to record amortization expense for
2021 related to the patent.

(c) The fair value of the patent on 31 December 2021 is RM856,500. Prepare the journal
entry to record the increase in fair value.