CHAPTER 1: ACCOUNTING FOR AGRICULTURE

QUESTION 1

Farm Fresh Bhd began a business to grow deer at Bukit Tinggi on 1 January 2018. On 1
March 2018, the company purchased 40 deer at cost of RM250 each by cash. The deer aged 3
years old on the day it was purchased. The company plan to sell the deer when they reach 5
years old.

The market prices of the deer from an active market on 31 December 2018 are as follows:
Fair value RM
3 year old 250
4 year old 350
5 year old 500

The total cost to sell deer is estimated to be RM500 as at 31 December 2018. Other operating
cost incurred to manage and feed the deer amounted to RM3,000 during year 2018.

The company apply for a grant from the government to buy a machine to feed the deer. On 1
April 2019, the company successfully received a conditional grant from the Ministry of
Agriculture amounting to RM20,000 to buy the machine. The company utilized the grant to
buy the said machine on 1 May 2019.

Farm Fresh Bhd accounting year ends every 31 December each year.

REQUIRED:

(a) Prepare the journal entries for the above transactions during year 2018.

(b) Prepare the journal entries to record the government grant.

(c) Discuss TWO (2) advantages and TWO (2) disadvantages of the fair value measurement
method as compared to the historical cost method in agriculture industry.

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QUESTION 2
Syarikat Perladangan Jaya Bhd. reported the following information in the year 2020.
No. of hectares Estimated FV/ hectare
2020 2019
Immature oil palm trees:
1 year 250 180 RM5,300
2 years 300 200 RM6,500
3 years 500 600 RM7,500
Mature oil palms trees:
5- 8 years 600 700 RM8,000
9-14 years 400 300 RM9,000
15 – 25 years 200 150 RM8,500

Sales of the oil palm product for the year 2020 amounted RM5 million. The opening and
closing stocks of the palm oil and their market price are as follows:
Closing stock (2019) 1,200 metric tons at RM2,500/metric tons
Closing stock (2020) 1,500 metric tons at RM2,000/metric tons
Required:
Determine the total income of the Syarikat Perladangan Jaya Bhd. for the year 2020 by
assuming the company uses the fair value income model as suggested by the MFRS 141.

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CHAPTER 1: ACCOUNTING FOR AGRICULTURE

QUESTION 1

(a) Dr Cr
RM RM
1 March 2018
Biological assets- deer (40 x RM250) 10,000
Cash 10,000

31 Dec 2018
Biological asset – deer 3,500
Fair value gain of biological asset 3,500
[(350-250) x 40 deer – 500]

Operating expenses 3,000

Cash 3,000

(b) 1 April 2019

Dr. Cash 20,000
Cr. Deferred grant 20,000
1 May 2019
Dr. Deferred grant 20,000
Cr. Grant income 20,000

c. Advantages of fair value measurement

1. By using the current fair value, the changes in physical attributes and the unit price
of biological assets will be included in the statement of comprehensive income.
a. Fair value changes have a direct relationship to changes in expectation of future
economic benefits.
b. Fair value provides more relevant information about the future prospects and
performance of a business entity engaged in agricultural activity,

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 Beside the advantages, fair value model however have several disadvantages. There
are these disadvantages of fair value measurement model.
a. Comparatively, fair value technique is more difficult to measure as compared to
historical cost model. Calculating the income under the fair value method requires
more data and steps.
b. Fair value may cause false volatility. A bigger concern might be the suggestion
that the accounting model captures only some of the effect of the market price
changes and that this will cause false volatility.
c. Fair value also can mislead the financial statement uses because it is sometimes
not measured reliably.

Question 2

1. Fair value measurement method is based on the agreed price between the seller and the
buyer. Normally it is based on the market price. There are several advantages of the fair
value method in agriculture industry. They are as follows:

a. Fair value represents the present value of future cash flows and therefore that value
can show directly the potential contribution of an asset to future cash flows of a
business entity. By using the current fair value, the changes in physical attributes and
the unit price of biological assets will be included in the statement of comprehensive
income throughout the period from planting to harvest, or from birth to maturity.
However, under the historical cost accounting, a wine producing business entity will
for example, report no income until the first grapes are harvested.
b. Fair value changes have a direct relationship to changes in expectation of future
economic benefits. It is also increasing the reliability of the market value as an
indicator of fair value because of availability of market prices.
c. Fair value provides more relevant information about the future prospects and
performance of a business entity engaged in agricultural activity, as compared to the
historical cost model in measured the profits and assets. Some agricultural activities
may involve many years from initiation to harvest; for example, rising livestock or
growing timber. Because the biological assets change through growth and are also
subject to, inter alia, climate changes and disease, the historical cost-based
measurement are often on questionable reliability and usefulness. The change in fair
value includes two main components, growth and price change, and agricultural
business entities are encouraged, but not required to disclose these separately.

Beside the advantages, fair value model however has several disadvantages. There are these
disadvantages of fair value measurement model.
a. Comparatively, fair value technique is more difficult to measure as compared to
historical cost model. Under the historical cost model, the figures are unambiguous,
and the method is easily to apply. This situation happens when there is deal with a

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 non-marketable asset. Calculating the income under the fair value method requires
more data and steps.
b. Fair value may cause false volatility. A bigger concern might be the suggestion that
the accounting model captures only some of the effect of the market price changes and
that this will cause false volatility.
c. The historical cost method applies the result of an arm’s length transactions; thus, it is
more reliable, objective and consistent.
d. Fair value also can mislead the financial statement uses because it is sometimes not
measured reliably.

Syarikat Perladangan Jaya Bhd.

i. Determination of income using the fair value model for the year 2020:
Sales revenue oil palm product RM5,000,000
(+) Changes in biological assets (note 1) RM796,000
(+) Changes in stock value (note 2) 0
Total income of the year RM5,796,000
ii. Using historical cost model
Sales revenue from oil palm product RM5,000,000.
Note 1(Changes in biological assets) 2020 2019
1 year 250 – 180 x RM5,300 = RM371,000
2 years 300 - 200 x RM6,500 = RM650,000
3 years 500 – 600 x RM7,500 = (RM750,000)
5- 8 years 600 – 700 x RM8,000 = (RM800,000)
9-14 years 400 – 300 x RM9,000 = RM900,000
15- 25 years 200 -150 x RM8,500 = RM425,000
RM796,000
Note 2 Changes in stock value
(1,500 x RM2,000 – 1,200 x RM2,500) RM 0