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QUIZ 1- FAR 510 \/\W-W £

MFRS 120: GOVERNMENT GRANTS AND —
MFRS 123: BORROWING COSTS

PART A

1. Inthe case of grants related to assets, which of these accounting treatments is prescribed
by MFRS 1207?

A Record the grant at a nominal value in the first year and write it off in the subsequent
year.
@ Set up the grant as deferred income or deduct the grant in arriving at the cost of the
asset.
C Credit it to the income statement and disclose it as an extraordinary gain.
D Credit it to a capital reserve and disclose it as part of equity.

2. Which of the following statements is not true about government grants as stated in
(a MFRS120?

A. | Government grants shall not be recognized unless it is probable that the entity
complies with conditions attached to the grant.
@ Government grants shall be recognized in the financial statements using the capital
approach.
C. | Grants related to assets may be presented in the financial statements using the
deferred income method.
D Government grants are credited as income because the grants are considered as
receipts from sources other than the shareholders under the income approach.

3. On 1 January 2019, One Bhd received a government grant of RM500,000 to acquire a

machinery with a fair value of RM1,800,000 with an estimated life of 10 years. The company
adopts the straight-line method on the yearly basis for the depreciation charge and the
grant received as a deduction against assets. The statement of financial position as at 31
December 2020 will show one of the following:

Machinery of RM1,040,000
o|o|=(>)

Machinery of RM1,440,000

O
Machinery of RM1,040,000 and deferred income of RM400,000
Machinery of RM1,440,000 and deferred income of RM50,000

4. Wan Bhd received a government grant of RM500,000 to purchase a machinery for

RM800,000.The useful life of the machinery is 10 years. What will be the carrying value
and depreciation charge in the first year, if the company adopts deferred income method?

A, | Carrying value RM270,000 and depreciation RM 30,000

./| Carrying value RM720,000 and depreciation RM 80,000
C. | Carrying value RM720,000 and depreciation RM 30,000
D. | Carrying value RM300,000 and depreciation RM 36;600

5. Wae Construction received a government grant of RM5,000,000 to purchase an equipment

costing RM50 miillion. The equipment is expected to be used for 20 years. Which of the
following is the proper accounting treatment for the grant received?

WMWM DEC2020

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 A. | Credit to deferred income account and transfer to retained earnings at the end of 20
ears
Y Credit to deferred income account and transfer 1/20th of the grant received to income
statement over the useful life of the equipment
C. | Recognize as income the total amount received in the year it was received
D. | Include the amount received as part of the cost of the equipment and provide
depreciation based on RM55 million

6. The capitalization of borrowing costs should commence when all of the conditions are met
except:

A. | Expenditure for the qualifying asset is being incurred.

B. | Borrowing costs are being incurred.
C. | Activities for intended use or sale are in progress
@ Substantial activities necessary to prepare the asset for its intended use or
sale are completed

7. Accounting for borrowing costs in accordance to MFRS123 Borrowing Costs is limited to the
- borrowing costs incured to construct or develop qualifying assets. MFRS 123 defines
‘ qualifying assets as:

‘ A. | An asset that is purchased with the intention to be sold.

An asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
C. | An asset that is under construction being issued a stop worked order by the
authority.
D. | An asset that is produced on a repetitive manner over a short period of time.

8. MFRS123 defines borrowing costs as “interest and other costs incurred by an entity in
connection with borrowing of funds.” Which of the following is not considered as a borrowing
cost?

A Finance charge in respect of finance leases recognized in accordance with

MFRS117Leases.
B. | Interest on bank overdraft and short-term or long-term borrowings
C. | Amortization of discounts or premiums relating to borrowings
) Interest on short-term or long-term investments and deposits

() 9. On 1 March 2019, WM Bhd obtained RM5 million from Bank Islam at an interest rate of 6% per
year, to finance the construction of a new office building. Construction of the building
commenced on 1 April 2019 and it was expected to be completed on 31 October 2021. Total
construction costs incurred were RM5 miillion, including RM1 million incurred in 2021.
Construction on the building was suspended in August and September 2019. Part of the
proceeds from the loan was invested in a fixed deposit eaming interest of RM25,000 (excluding
suspended period) and RM40,000 in 2019 and 2020 respectively. The borrowing cost incurred,
capitalized and expensed for year ending 31 December 2019 shall be:

A. | RM250,000, RM200,000 and RM50,000 respectively

B. | RM250,000, RM175,000 and RM75,000 respectively
((C.) RM250,000, RM175,000 and RM50,000 respectively
. | RM300,000, RM225,000 and RM75,000 respectively

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PART B
QUESTION ONE

1. Besut Bhd is involved in the agricultural business and is located near Bukit Keluang. To
promote agriculture, the government gives out grants to assist in the acquisition of
machines by qualified entrepreneurs. On 1 July 2019, Besut Bhd received a grant of .
RM500,000 to acquire an agricultural machine with a fair value of RM1,200,000. The
company writes off grant received against the asset acquired, and depreciates the
machine over five (5) years.

Required:

What is the alternative accounting treatment available to the company with regards to
government grant and discuss how this will differ with the policy adopted by the company.
( No journal entries are required)
(5 marks)

2. On 1 April 2018, Muya Bhd. commenced construction of a manufacturing plant costing RM5
million. Estimated useful life of the plant is 20 years with zero salvage value. The construction
is expected to be completed in August 2020. To finance the construction, Maya Bhd. applied
for a loan from CIMB Bank and on 2 March 2018, the bank approved RM5 million loan which
carries an interest rate of 12% per annum. During the year 2018, Muya Bhd invested RM1.8
million of the loan in a 6-month investment, earning interest of 8% per annum. Construction of
the plant was temporarily suspended from 1 October 2019 due to technical problems. On 2
January 2020, construction work recommenced and was finally completed according to
schedule. Muya Bhd has the policy of capitalising borrowing costs in relation to “qualifying
assets” in accordance with MFRS 123 Borrowing Costs.

Required:

Calculate the amount of borrowing costs INCURRED and borrowing cost that can be
CAPITALISED for the years 2018, 2019 and 2020.

(7 marks)
(Total : 22 marks)

GOOD LUCK

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